Should I set up a legal entity in China?

There’s no need to rush into setting up a company before you know where your market is, before you assemble a team that can support your business and before you have enough business to justify a subsidiary in China.

Setting up a remote subsidiary is a big liability: it takes time, money and management resources. After it is established, its management poses an even greater challenge – and requires specific “China” management expertise. For an SME that is just entering the China market, subsidiary management can be a lot to handle and will normally come at the expense of critical factors such as the establishment of stable sales and a proven business strategy. This is a classic chicken-and-egg dilemma; the best answer is often OUTSOURCING services.


So how can I conduct my business in China without an entity?

Operational support companies like PTL Group enable you to attend to almost any aspect of your business without setting up a legal entity: employee recruitment and hosting, importing goods into China and storing them in a front or bonded warehouse, executing local currency sales and warranty contracts, collecting payments and managing credit, sending funds back to the HQ, facilitating purchasing in China and exporting it overseas – and just about any other business activities that you need to accomplish in China.


Why appointing an exclusive distributor is not the best choice in China?

Looking for a distributor is normally the first step a (B2B) foreign company takes when coming to China. This strategy usually feels effective for a limited amount of time since selling and distributing in China is very unique; distributors are selling primarily to their captive market and through their personal connections. Once they have exhausted these connections, they begin looking for additional products to sell to the same channels – rather than seek new channels.

In order to overcome this limitation, it is recommended to set up multiple sales channels in parallel. Successful sales demand a continuous search for potential transactions, which are assigned to newly appointed distributers identified in advance by the clients. Approx. 30% of appointed distributors will also initiate new business. In practice, however, without direct active business development, your appointed distributors will “die out” or over-reach the potential of their captive market within a year or two. In this environment, appointing an exclusive distributor is counter- productive and will significantly delay your successful penetration into the Chinese market. Managing a distribution network of this kind requires local presence (at least one competent local business development manager).


What are the advantages and disadvantages of selling in China using a Letter of Credit?

Selling with a Letter of Credit is a safe control mechanism that helps the overseas seller ensure he gets his money before the products arrive to the Chinese client.

However, for the local client, issuing a Letter of Credit (L/C) is a major hassle and a cash flow problem, as local banks require cash guaranty for the entire period the L/C is effective. As a result, most local companies prefer buying with local currency from local stock. If your competition sells locally, being a foreign supplier insisting on L/C terms will place you at a disadvantage.

4th party logistics companies such as PTL Group serve as a “collection agent” in such transactions, allowing you to sell at RMB while conducting effective risk management by collecting payments before the product leaves our warehouse. This way, the full local market price system become transparent and VAT rebates are available too. This transparency is critical for effective management of distribution channels, as well as brand stabilization.


How do I recruit good employees in China?

The very competitive Chinese market makes talent recruitment quite challenging, especially when compared to most western markets. While locally established companies can use diverse channels to find capable employees, newcomers have fewer options. The first employee you need to recruit is usually a sales or business development manager. This position is critical to your success. The fact that you’re a newcomer makes recruitment especially challenging for both the candidates and your company. Many capable candidates from leading international companies will be concerned with the stability and commitment of an SME entering china for the first time. However, a capable recruitment company could help you by:

  1. Introducing several candidates (5-6) and not just the best 1-3.
  2. Allowing you to interview candidates so that you can get acquainted with the market situation and candidate expectations before interviewing the best candidates.
  3. Performing reference checks, which is not an easy task in China. Requesting the last social payments slip is a good way for verifying the current salary and previous employer. We also suggest asking for references only from past direct managers or general managers.

Many questions considered politically inappropriate in Western countries are acceptable in China: family status, plans regarding marriage and childbirth, occupation and health status of parents, salary expectations etc.


I am selling in the Chinese market. Should I start manufacturing in China? What are the advantages?

Many companies that sell in China feel the pressure of having to start manufacturing in China. With local competition getting better and operational factors (price, lead time, credit, support) impacted by the narrowing technological gap, foreign companies are risking losing their market share as they become less and less competitive. Starting a manufacturing operation can also make sense for financial reasons – if you have a stable and growing sales pipeline.


If so, do I need to set up a full-scale factory in China?

An industrial incubator could host your production or assembly line. Incubators work very well for companies that don’t necessarily need a full-scale factory from day one. Sometimes, all you need is 200-1000 sqm. As your sales volume increases, the company can incrementally expand production under this model. The Incubator will register a full subsidiary of the parent company in China and obtain all the relevant licenses. After the production volume increases, moving to a new and larger independent building will be easier, as all the employees and assets are registered under the full subsidiary of your company.


How do I control a Chinese subsidiary?

The basics: hire good people, provide training, design good work flows and ensure that your employees follow them. Written regulations are a must in China. Many “given” western concepts in the workplace will not be so obvious here.

Get your C-Level HQ managers involved in their respective disciplines in the Chinese operation as much as possible. Using a single contact at headquarters and a single contact in China will deprive you of key departmental professional wisdom and critical “knowledge transfer”.

Books and financials are not the only things that require auditing – so do general business operations, including the relationships between departments, employees and management. Set up control mechanisms over your operations in China, e.g. an external company that can audit diverse business aspects.


How do I make sure that my supplier(s) and my customer(s) in China don’t find each other?

If you manufacture your product in China and wish to sell it in China, it helps tremendously to have a local company with a buying and selling license that separates the customer from the supplier. This protects and maintains the control of the foreign company. If you’d like an OEM to manufacture for you, it’s best to break down your design/product into several parts or sub-products, in order to prevent the OEM from using the complete product in other production ventures and with other customers, for its own personal gain.

Generally, IP protection in China is complicated, risky and comes with many challenges.


Why do I need to formally hire my employees? Why do they need an office? Aren't they busy running around anyway?

Aside from the fact that it is illegal to employ people outside a formal Chinese employer, most employees in China prefer formal employment that entitles them to important social benefits. The higher the position seniority, the better employment terms you should offer.

Formal hiring of your employees gives them a sense of security (their employer is serious, the employer is not going to vanish from the Chinese market, etc.). This also gives the company in China “a face”, and helps salespeople show their clients that a serious overseas company is backing their operations.

Establishing normal working processes within a proper working environment will assist in conducting optimal operation supervision in China.

An office can also serve the overseas managers when they arrive in China, providing them with a proper working area and meeting place.

All this can be accomplished via hosting services from day one, with no need to register your own entity.


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