Red China, Red Tape: How to Start a Business There
Entrepreneur's New Year’s Guide
According to the World Bank Group, China ranks 90th in the world for ease of doing business and 128th in the world for starting a business. That puts China behind Seychelles and just ahead of Nigeria for entrepreneurs The good news is that this number is up 23 spots from 2014; the bad news is that it is still exceedingly difficult to get a new business up and running in the Middle Kingdom.
For aspiring American entrepreneurs to get started in China, there are really only two options: the hard way and the risky way.
The hard way
For people who don’t know a lot about starting a business in China, that task is almost impossible to do. There are a total of 11 procedures to complete in order to legally start a company in China. That compares with an average of 4.8 for OECD countries. A complete list of the procedures can be found here. But what you won’t see on the list are the hidden barriers to market entry.
Even seemingly simple things will bog you down. One example is the signing of documents. The signature on each has to be exactly the same, or the authorities will reject whatever it is you’re trying to do. By “exactly the same,” I mean it needs to be a perfect match.
Because of this signature issue, you can expect everything on the list above to take twice as long as stated. For instance, the list says 30 days; but that assumes everything goes as it is supposed to. And from what I’ve seen with foreigners starting companies in Mainland China, that 30 days typically extends to 45.
Stumbling blocks include the application for registration certification, registration with the statistics bureau, the opening of a bank account, authorization to print or purchase financial invoices, the filing of recruitment registration and registration with with the Social Welfare Insurance Center.
Making the hard way easier
The best thing you can do if you choose the hard way is to find a consultant. A consultant will reduce the time and money required to get through the registration process. Consultants may be found via AmCham China, AmCham Shanghai, Shanghai Expat and AsiaExpat. They will help you decide whether you want to do a joint venture with a Chinese company or file as a wholly owned foreign enterprise (WOFE) -- or just have a representative office.
The problem with joint ventures is that they have an extraordinarily high failure rate and many times result in technologies being transferred to the Chinese firm that then becomes the competition.
WOFEs allow you 100 percent ownership of the Chinese entity but are very difficult to set up. They do, however, allow a U.S.-based company almost the same rights as a Chinese-owned corporation. If you choose a good consultant, he or she will become your partner in China.
The last option of having just a representative office is the least favored. Representative offices are allowed to do only what the name implies: represent your company in China. The company cannot sell or earn profits and is very limited in scope.
No matter which type you choose, a consultant will help you through the process. One great consulting option that I can personally recommend is JCK & Associates, a Greater China accounting and consulting group, with offices in Beijing, Shenzhen, Shanghai, Hong Kong and Taiwan. This is a firm I’ve used for over 10 years. They have been a great partner in navigating the bureaucratic maze that is entrepreneurship in China. I would highly recommend JCK to any business operating in China, from startup to Fortune 500 companies.
The risky way
In most cases it is far easier for Chinese nationals to start a business. If you can find a business partner that you trust, have that company start the business in China. This option, however, is a huge risk. It's easier to get up and running, but if the business takes off and then the relationship sours, you’ve got no legal recourse. I’ve done this and luckily have been very fortunate.
In China the relationship is king and if you have a good relationship, chances are your partner will live up to its end of the bargain. If not, especially for small businesses, contracts between you and your partner almost don’t matter. I have had friends who have had this option backfire on them. Here is an example:
China was once better known for eating dogs than “dog guardianship.” Now, China is one of the top dog-owning countries in the world. One of my friends wanted to take advantage of this trend and began manufacturing designer dog collars.
The design and branding was all his own work. He had a Chinese friend from college who had moved back to Shanghai, so he thought he had a partner he could trust. My friend started his U.S.-based company while his friend started up the company in China. They found a manufacturer, began selling the product on Tmall in China, and the product was a hit!
Money was coming in and everyone was happy -- until the partner in China went dark. My friend could not locate the partner and realized he had been cut out of the loop. His partner had the relationship with the factory and control of the supply chain in China. The brand, and the company, were both trademarked in registered China. There was nothing my friend could do.
Do it the hard way
My strong recommendation, then, is to do it the “hard way.” The reason being: I believe I have been very fortunate in choosing my business partners but know that the majority of these types of relationships fail. This is not because, as many Americans like to believe, “that you can’t trust the Chinese,” but because of the universal problem of greed. As I have said in numerous speeches, articles and interviews, you can be cheated anywhere, and you can find trustworthy people everywhere.
However, it is easier to be cheated in cultures you don’t know or understand. That is why it is wise to get a consultant if you don’t know the culture. It is a good idea to also take a few short trips to China to familiarize yourself with and understand the environment better. There is also a lot of change taking place within Mainland China. As much as I think of myself as a “Zhongguo Tong,” or China expert, the more I learn, the less I truly understand that culture.