By Wei Hsu, Managing Director of INS Global
The idea of wanting to create a presence in China is a businessman’s dream. The domestic consumer market has unlimited potential as wages rise and Chinese consumers have more disposable income to buy consumer products such as a smartphone, computer, automobile, and other desirable goods. The cost of labor is relatively cheap although that has changed significantly over the past fifteen years as it has tripled by some conservative estimates across the economic spectrum and has increased much more in the highly competitive high-tech labor force.
However, once you’re over the initial euphoria, business is still business, and you have to perform some due diligence to decide if establishing a business in China is right for your company. At the highest level, consider these three important factors. If you pass through these gates on a positive note, then digging deeper is warranted although a difficult path to follow.
Chinese Law and Business Regulation
International trade integration into Chinese culture is still a maturing environment. The Chinese seek to protect native Chinese companies while still encouraging foreign businesses to set up shop in China with the idea of getting Chinese-owned business exposure to Western technology and business practices. The People’s Republic of China (PRC) is also a political entity that wants to have positive control over everything that happens within their borders. Thus, business regulations are dynamic and pervasive. This occurs because the Chinese use abductive reasoning as the basis for what they do while Western cultures use deductive reasoning in most of their business pursuits.
The differences are subtle but powerful and explain why Chinese law changes so often. According to Wikipedia, “Abductive reasoning (also called abduction, abductive inference or retroduction) is a form of logical inference which goes from observation to a theory which accounts for the observation, ideally seeking to find the simplest and most likely explanation. In abductive reasoning, unlike in deductive reasoning, the premises do not guarantee the conclusion.” Thus, as they observe International and Western business in action, they continually adjust their business regulations to exercise greater control over the process.
So, as a foreign-owned business wanting to enter the Chinese market, you must observe and understand the current Chinese business law, learn from it in an abductive reasoning sense, and anticipate what the next iteration of those laws will be in the near and far term. Will these rules of law remain conducive for the survival and growth of your company? It’s not an easy task and is counter to deductive logic nature of Western cultures.
From the wholly foreign-owned point of view, you may not be required to join with Chinese investors and business partnerships, but you will have to integrate with the Chinese culture which will need some native Chinese business consulting relationships.
Business Consolidation in China
The financial strength and consumer trust enjoyed by domestic Chinese companies make it a very challenging competitive market. Does your product offer enough of a unique and differentiated product from other competitors in the market? The battlefield of Chinese competition is littered with International corporations that have come and gone from China.
The difficulty of doing business in China and the resulting increase in investment required has led a reversal of American companies setting up shop in China. According to Siva Yam of the Chicago-based U.S.-China Chamber of Commerce, “We have seen a lot of U.S companies struggling [with] their China” operations, said Siva Yam, president of the Chicago-based U.S.-China Chamber of Commerce on December 8, 2016. “The market is much more mature. We have seen a significant drop of U.S. companies going to China. … On the contrary, they are coming back here.” The lesson learned is to do a robust and thorough sanity check on the viability of being competitive in the Chinese market before you jump into the fray.
This is where things get fascinating and absorbing. It’s a marketing issue and an examination on how to reach the Chinese masses if domestic integration and selling of services and products are the reason you’re setting up a WFOE. You must use the Chinese equivalents of services like Google, Facebook, and other Internet resources to reach the Chinese market because these services are blocked in China. VPN alternatives exist but are spotty and routinely tracked down and blocked by the Chinese government. Additionally, the Chinese masses don’t use VPN. You must integrate through services like Baidu, Alipay, and WeChat which the Chinese government has significant influence over.
The only thing that will get you through the creation of a WFOE in China with your sanity intact is to prepare for the exercise thoroughly, be patient and respectful with Chinese authorities both national and local and most of all, follow the rule of law in China. Your Chinese legal sponsor can be your best friend if you respect his value and knowledge and put your best guanxi foot forward in developing a lasting relationship to help you over the WFOE speed bumps.