You can’t just strut to China and start a business; a lot of planning, paperwork, and procedures is required for entering this highly-attractive market! Your decision of starting a joint venture or a WFOE in China should be rational and not based on impulse. Meaning, you need to invest time in research and learning.
China may be a land of opportunities, but a small settling and resonating to the market may become difficult, if you neglect important cultural, demographic, and socio-economic differences. Here are some common reasons why China attracts so many entrepreneurs.
China has developed infrastructure, technology and established financial institutions to encourage economic growth and development. With respect to its business sophistication, market size, financial institutions, and innovation, China holds the 28th position out of 138 countries. This growing economy is full of potential and opportunities.
Potential customer base
There’re multiple untapped markets available in China. The local companies aren’t sufficient enough to meet the growing and complex need of the modern customers. The Chinese population is moving into big cities and urbanizing at a fast pace, businesses can tap into this opportunity to offer Chinese population with the goods and services they are looking for.
The manufacturing sector provides employment to 130 million people and is a major contributor to the Chinese economy. This means that the manufacturing sector is highly favored and encouraged by the government, which makes it attractive to foreign investors.
Economies of scale
One of the major causes of business failure is increasing costs. China is known for its cheap land and labor resources. China has a much larger talent pool and lower cost of utility and lease, which makes it ideal for running a business operation.
Special Economic Zones
With an objective to liberalize the business community, the Chinese government has introduced multiple Special Economic Zones in China. It provides them with a free area to test policy, attract business and boost their economy. These economic zones are a clear signal for foreign investors to start investing in China.
Yuan is getting stronger
This emerging economy has proved itself over the years. Its economic and political stability has allowed the Chinese currency to experience new highs compared to the US dollars. The growth of Yuan is a clear indicator for businessmen to start setting up businesses in China for a steady income stream.
In the past 20 years, China has earned a note-worthy spot on the globe with its stellar economic growth and growing influence in the international market. As venturing into the Chinese market becomes more and more appealing to the foreign investors, keep in mind that you need to fully understand the market, before taking any kind of business decision.
The Need to Know About Doing Business In China
What role does the state play in the Chinese Economy?
Earlier, the state used to run the Chinese economy. They owned and controlled major sectors and industries, creating huge monopolies. The economy faced inefficiencies and redundancies duet to these government-owned operations, but the new social and economic reforms introduced in the 1970s, altered the economic structure considerably. Businesses were provided with more control, ownership, and ability to take part in the international business economy.
In 2016, China experienced the slowest growth rate in 26 years, around 6.7 percent of yearly economic growth. Although the growth was slow, the government was still able to meet its annual targets. In reality, the Chinese economy is doing far better, than the rest of the world.
Most of the countries, including the US, are still trying to recover from the financial crisis in 2008. China was also impacted, but its growth and stability restricted the most adverse impact that the crisis brought to the other economies.
After signing an agreement with WTO, Chinese government encouraged and facilitated complete ownership of foreign business operations, but before entering the Chinese market, you need to get several state approvals and learn the relevant China company registration process.
You need to define your business scope, the type of activities you will partake and register your business in a location, after getting special permits and complying with various governmental regulations.
The new Foreign Investment Industries Guidance Catalogue identified 4 major groups of industries that businesses can operate in:
Encouraged industries are facilitated by the government. Entrepreneurs who invest in this sector enjoy tax incentives, lower land cost, ease of registration process and various other perks and benefits. Here is a list of encouraged industries:
Accounting and auditing services
Operation of subways
Air transportation companies
Aged care institution
If foreign investors want to participate in restricted industries in China, they need to follow strict guidelines regarding shareholding, ownership, and control of the company. Although the numbers of restricted industries have been reduced to 35 industry sectors, foreign investors have to follow multiple requirements before entering the restricted sectors. Automobile, education and medical industries are some of the restricted sectors of China, but over the years some of the restrictions have been eased.
Permitted industry sectors are open to entry and exit, whereas, prohibited industry sectors are off-limits to foreign investors.
Understand the Chinese Culture
Next, understand the social and business settings, rules and customs of China. This will show your local Chinese partner your willingness to change and accept new things.
Keep in mind China is a diverse country, with multiple sub-cultures, ethnicities and social practices. The Chinese government recognizes 56 different ethnicities within China, and most of these groups have their own languages.
Business practices, values and customs of these ethnicities differ, and businesses who fail to be culture sensitive experience many difficulties in getting commercial permits, negotiating contracts and advertising their services.
There is a huge culture difference between Chinese consumers and westerns consumers. Marketing tactics that were a huge success in the US may be a total failure in China. Know what you’re dealing with and only then develop a communication plan.
Unlike western consumers, Chinese consumers are quality and brand conscious. They want value for money and this need for superior quality sometimes takes precedence over brand loyalty. An average Chinese consumer is looking for affordable and quality products, they survey the market and cross-reference different websites for price and quality and then make a purchase.
In addition to this, Chinese consumers prefer buying products that offer superior after sales services.
Less materialistic than western customers
Chinese consumers want higher wages and better social status, but family and health and equally important for them. They want to strike a healthy balance between family and fortune. According to research conducted by McKinsey, Chinese consumers still considered shopping with the family as the best way to spend some quality family time.
Importance of word-of-mouth
Marketing tactics are different in every corner of the world and word-of-mouth seems to work for the Chinese market. This shows the importance of community within the Chinese culture. Online reviews and comments serve as a great source of marketing for products and services in China.
The saving and spending paradox
Western culture has penetrated many Asian economies, but till this date, China remains a collectivist culture that follows the relevant hierarchy in its society. Chinese use goods and services as a way to define their status. Things like clothes, mobiles and jewelry differentiate people from the average consumers. Even after following this pattern of spending, many Chinese consumers have a higher saving ratio, than most of the western consumers.
Chinese are conservative
Asian population evades extreme behavior and prefers moderation and tradition over risky situations. International business owners will also find their domestic business partner as more risk-averse and traditional in business decisions.
Consumer behavior remain positive
Although Chinese growth rates are slowing down, consumers still have a positive feeling about their future. But the economic bubble created in the market, has made the consumers more selective and particular about their spending on product and services.
Invest in children
Chinese family dynamics is very children-centric. Parents are highly vested in the upbringing, education, and career of their children. The one-child policy (1979-2015) made children the prime focus of parents.
From mass to premium products
Chinese markets were mass producing products earlier, but the consumers are now demanding complex products and services and are moving from mass to luxury products.
The Chinese market is evolving. Foreign companies need to understand the consumer’s psychology in order to run a successful business in China.
Connect with the right people
Running a successful business operation requires collaboration and support of right corporate connection. As mentioned earlier, setting up a company in China requires a lot of approvals and paperwork, knowing the local authority or collaborating with a well-established domestic company can open better opportunities for your business.
It’s very important to build a corporate connection in the Chinese economy. The popular way to interact with the business community and governmental bodies is workshops, business conferences, corporate dinners, and networking events, etc. Foreigners have to go an extra mile to network with local authorities.
In western cultures partnerships are limited to the project at hand, business dealings are very professional and are free of emotions. The Chinese tend to develop a rapport and personal understanding, before getting into a business contract with another company or individual.
Therefore, socialize and develop strong business relations to gain success in the Chinese market. Another important factor that you need to keep in mind is guanxi – social or business connections. Guanxi is constructing business networks for mutual gains and benefits. Meaning, if someone is helping you out now, they will expect the same favor later. So, don’t forget this reciprocating principle.
Possible obstructions in the Chinese market
In the 1990s, China was a young emerging economy with multiple opportunities. Entrepreneurs use to enter the market, earn fast money and exit the market. But times are changing; earlier consumers were demanding basic products, which foreign companies could easily provide at low cost. Now Chinese consumers have evolved, they have complex needs and want superior after-sales services, multiple features, luxury products, and innovative designs.
The market for basic products and services have saturated, foreign companies need to come up with new and dynamic product offering to meet the demands of modern consumers. Needless to say, the Chinese market has a lot to offer.
Just make sure to conduct a market survey, before developing a business plan for your company. Make sure your business plan isn’t limiting your scope of business. Firstly, determine what product or service you want to offer; will you manufacture it in China or just supply it to a local distributor? Secondly, define the scope or type (manufacturer, consultant or trading) of your business, will your business operate as a manufacturer or will it take part is supply and retail process as well.
Once, you’re done setting the scope, determine the location of your business. Will your business be near the port or w3ill it be located in a special trade zone. Next, determine the human capital, raw material and investment capital required to keep the business running. Develop a five-year plan to prove the operational viability of your business.
Lastly, remain farsighted and keep your business scope as wide as possible for future growth and development. Getting approval or entering a new business activity is a long hectic process that requires countless approvals from local and state authorities. Therefore, incorporate expansion possibilities from the get-go.
A business plan is the first step towards opening a business entity in China. Business China can help you with the registration proces s for your business.
We make sure our clients can set up WFOE, Joint Venture, or a Registered Office without experiencing any hassle or red tape. We will do all the paper-pushing and help you gain approval from concerned local and state authorities.
us your dynamic business plan and we will get back to you with a comprehensive setup process within 24-hours.
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