Doing Business in China. Paul Gillis PhD CPA Jeffrey Towson MD Guanghua School of Management Peking University

Transcription

1 Doing Business in China Paul Gillis PhD CPA Jeffrey Towson MD Guanghua School of Management Peking University

2 ONE WORD Form small groups of four Introduce each other Come up with ONE WORD that best describes doing business in China Appoint group spokesperson March 19,

3 Wechat Group

4 DBIC This class is a nuts and bolts course on issues facing foreigners doing business in China Lectures, speakers, case studies Objective is to arm students with knowledge of important regulatory and cultural issues connected with operating a business in China.

5 Course grading 20% class participation 40% short quizzes on readings and homework assignments 40% business plan for import/export business

6 Business Plan Prepare a business plan for an import export business Prepare plan on Power Point Maximum of ten slides Teams of up to three students Present for 15 minutes in last two class sessions March 19,

7 Contents of Business Plan Select a product that is manufactured either in China or another country. Prepare a market analysis of demand for the product and determine the price at which it will be sold. Determine how to source the product, identifying source and price. Determine capital required. Address regulatory issues related to the export and import of the product including product labeling, import taxes, licenses required. Determine the platform on which the product will be sold. Determine logistics to fulfill orders for the product. Address how to get paid. Prepare a projected income statement for three years. March 19,

8 Grading Degree of difficulty Import harder than export Completeness of evaluation Success of venture not relevant March 19,

9 About Paul Gillis American in China for 22 years Three careers: Partner for 28 years in USA, Singapore, China PhD Macquarie University 11 years as Professor of Practice at Peking University News analyst for Chinese state media Frequent contributor to WSJ, NYT etc. Big screen debut in China Hustle March 19,

10 Course website March 19,

11 Who is Professor Towson? Jeff is a private equity investor, Peking University professor, best-selling author and speaker. His writing and speaking are on Chinese consumers and digital China. According to LinkedIn, he is the #1 followed professor in China (+2.5M followers). He was a LinkedIn Top Voice for 2016 and the #1 Top Voice for Finance globally for He was also one of Alibaba s 15 Global Influencers in

12 Rising Growth Expectations Across Industry Sectors 12

13 Still Three-Quarters of Companies Feeling Less Welcome 13

14 Regulatory Interpretation/Unclear Laws Still No. 1 Challenge 14

15 Hope That US-China Ties Will Improve 15

16 US China Trade China enters WTO in 2001 Most investment and trade restrictions relaxed Foreign direct investment soars China becomes manufacturer to the world Many MNCs move manufacturing to China from USA, EU, Korea, Japan March 19,

17 US Issues with China Trade deficit too large China steals technology Joint ventures Acquisitions of US companies Cybertheft China markets not open for US investment March 19,

18 What do MNCs consider the problem to be? Not the same as the Trump administration. IP issues come in 12 th. March 19,

19 What are the real problems? Made in China 2025 is China s industrial policy China s growing international influence Goals of MIC 2025: 70% of materials and parts to be made in China by 2030 Lead in artificial intelligence Provide substantial government funding to achieve this. It is about the battle for global leadership between the US and China. March 19,

20 How should American companies respond? Reevaluate supply chains Expect administrative retaliation in China March 19,

21 In war, the victorious strategist only seeks battle after the victory has been won. make your way by unexpected routes and attack unguarded spots. Military tactics are like water. For water, in its natural course, runs away from high places and hastens downwards. So, in war, the way is to avoid what is strong and strike at what is weak. March 19,

22 Think big Protect the downside and the upside will take care of itself Maximize your options Know your market Use your leverage Enhance your location Get the word out Fight back Deliver the goods Contain the costs Have fun March 19,

23 Approaches to international expansion High Pressure for control Representative office Licensing, exports WFOE Joint venture Low 23 Need for local presence/capital intensity High

24 Foreign investment in China Catalogue of Foreign Investment amended in 2015 Encouraged, restricted and prohibited areas Negative list approach 24

25 Restricted to foreign investment 25

26 Prohibited to foreign investment 26

27 Source for foreign investment English catalogue ert_foreign_investment_catalogue_redlin e_comparison.pdf Chinese 3/ shtml 27

28 Revised foreign investment law Currently being rushed through Will update 1979 laws. Greater protection for foreign investors Intended to reduce tensions with US 28

29 Factors influencing entry method Regulatory What entity choices are available? What business scope is permitted? Is local ownership required? Tax Which structure minimizes worldwide tax? Can local manufacturing reduce indirect taxes? Corporate governance Legal liability control Alignment of strategy 29

30 Licensing Authorize Chinese company to use intellectual property of foreign company to manufacture and sell within China in exchange for royalty. Subject to Chinese withholding tax on royalty Generally precludes other entry methods (direct imports, setting up manufacturing). 30

31 Exporting to China Selling directly to Chinese customers (or a distributorship in China) Goods shipped directly to customer from abroad Subject to VAT and import duties on arrival Limited customer relationship No customer service or inventory on location Distributors may sell competitors products Exclusive distributorships may limit future opportunity 31

32 Operating illegally Many companies set up China operations without registering an entity. Employees use business or tourist visas. Can be shut down at any time Severe Penalties Ways you get caught No fa piao Not paying employee taxes Business cards 32

33 Variable Interest Entity Use legal entity owned by Chinese individual Attempt to control with contracts Often used in hybrid structure with offshore company and WFOE Extensively used to circumvent foreign investment restrictions Risks of VIE structure Local partner steals business Difficult to insert capital Difficult/impossible to get profits out 33

34 Representative offices Simplest way to establish a legal presence in China Tens of thousands of rep offices opened, but have faded in popularity due to restrictions and availability of WFOE. Many foreign entrepreneurs set up Hong Kong company and China representative office in order to get residence permit for entrepreneur and family. 34

35 Setting up Representative Office 35

36 Restrictions of representative offices Even though Rep Offices are not permitted to earn income in China, they are subject to taxation. Taxes are usually based on 15% deemed profit based on expenses. A Rep Office is not permitted to hire Chinese nationals directly; such hiring must be done indirectly through contracting with a Chinese employment agency such as FESCO. Such contracts are generally unattractive for foreign companies. A Rep Office is limited to four foreigners, each of whom is called a representative. The Rep Office hires these people directly and they are treated as normal employees under China s employment law system. That is, they are to be hired pursuant to a written contract and their taxes and social benefits must be paid. Cannot have sales revenue or issue fa piao. 36

37 Representative offices There must be a lease on an approved space for a period of at least one year beyond the approval date of the Rep Office. Since many jurisdictions accept leases only from a small group of approved office buildings, care is required. Shanghai, for example, is one such jurisdiction. The lease must be registered, which also can cause problems in some jurisdictions. There must be a designated Chief Representative to manage Rep Office affairs. There must a foreign entity (typically a limited liability company or a corporation) for the China Rep Office to represent. Private individuals and partnerships cannot establish a Rep Office in China. In addition, most jurisdictions in China do not allow newly formed entities to form a Rep Office. 37

38 Sino-Foreign joint ventures Equity Joint Venture (EJV) Profits and losses are distributed between partners in proportion to their respective equity interests. Foreign partner typically owns at least 25% equity. Limited liability Cooperative Joint Venture (CJV) Profits and losses are distributed between partners in accordance with CJV contract. Usually operates as a limited liability company. 38

39 Foreign invested enterprises (FIE) Joint Ventures Equity joint ventures Contractual joint ventures Wholly foreign owned enterprises (WFOE) Foreign invested partnership enterprise (FIPE) Variable Interest Entities 39

40 Steps to set up WFOE 1. WFOE name approval. 2. MOFCOM online registration. 3. Application to form WFOE submitted to local Administration if Industry and Commerce (AIC). 4. Issuance of business license by AIC. 5. Start of business processes: a) open bank accounts, b) cut and register chops, c) open tax and other government accounts, d) set up daily bookkeeping and reporting to the local government, e) execute written employment agreements with employees and open employee tax/social benefit accounts, 40

41 WFOE Setup Procedure 41

42 WFOE Names Official WFOE names are in Chinese in the following format: ABCD. A is the location. B is the company name. C is the type of WFOE, typically either consulting or trading. D is the type of corporation: typically Company Limited. In English: Universal Pictures (Beijing) (Consulting) Company Limited. 42

43 Business Scope One-sentence description of companies activities in China. Operations outside of business scope are illegal and may be subject to fines. Will be printed on business licences. Expansive business scopes unlikely to be approved. 43

44 WFOE Capitalization Registered capital is capital required to get WFOE established. No formal requirement for amount Must be sufficient to cover operations. Illegal to start business with inadequate capital. Rule of thumb is two years of expenses But lower amount can be justified Contributions in excess of registered capital are taxed Contributions must be made within 20 years. 44

45 Business License 45

46 Trading WFOEs Customs Registration Certificate Import-Export License Foreign trader Operator filing with MOFCOM Quality inspection registration with the Entry-Exit Inspection and Quarantine Bureau. Obtain E-port IC card, software, and card reader from China Electronic Port. 46

47 Foreign Invested Commercial Enterprise Special category of WFOE or JV. Used for retail, wholesale and franchising. Perhaps faster to set up than conventional WFOE. 47

48 Thank March 19,