Archive for March 25th, 2010

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protection in China

Thursday 25 March, 2010

I attended this presentation organized by the Chicagoland Chamber of Commerce DOING BUSINESS IN CHINA: HOW TO PROTECT YOUR INTERESTS IN DOING BUSINESS IN CHINA featuring Caroline Berube, Managing Partner of HJM Asia Law & Co. LLC.  Caroline 1st noted that many foreign companies don’t highlight their successes in China because it won’t appear politically correct at home. She then took us through a few forms that her firm publishes on legal & credit searches.  She brought up what might seem like simple issues that can become problems, i.e. make sure you have counterpart’s names in Chinese characters to be legal in China; the legal representative must have legal power to sign & get it sealed with a corporate seal.

Starting out-The Chinese government will deny access to the Chinese market if you don’t prove that you have a viable plan & the money to fund it.  If you change the scope of your business in China, you have to file forms with 20 different authorities.  Business licenses are usually valid for 20-30 years.  (On government forms, everyone is married…apparently no 1 gets divorced there & all business card titles are General Manager or Vice-Chairman.)  Some industries are foreign investment restricted-real estate, insurance, banking, /prohibited-exploitation of natural resources.  It takes 3-5 months to obtain a business license, 4-6 months for a WOFE-(wholly owned foreign enterprise).  Start-ups typically take 3-5 years to show their 1st profits.

Financing-Profits can be repatriated as long as you can show that all taxes & customs have been paid.  Foreign shareholders must contribute at least 25% of registered capital in cash or technology transfer to an equity joint venture.  Corporate taxes are 25% as of 2010, but can be negotiated in smaller cities with less FDI.  Hire a Chinese CPA with big 4 & multinational experience, but they are not cheap.  There is stiff competition among mayors in China to attract foreign direct investment so that they can earn big bonuses.

Outsourcing is low risk commercially & financially & a good way to test the Chinese market, but requires a proper contract.  You need to dig to find the details on Chinese partners, i.e. a manufacturer was considering outsourcing a $3M order & digging deeply found that the Chinese company was capitalized with only 30,000 RMB only 2 weeks before the deal was agreed-upon.  You need to find the right city for your industry.  Free trade zones were abolished in 2008 because they were unfair competition to the locals.  Not all Chinese companies have import & export rights-you must get approval from the government.

Legal Structures-If you have a joint venture or WOFE, including privately-owned companies, you have to file financial reports every month or 1/4.    WOFE’s & JV’s have strict & time-consuming, although not difficult, auditing & reporting requirements.   Representative offices are not equivalent to the same here.  They cannot carry on “major business activities” (sales & manufacturing), & cannot earn a profit-they are for promotion only.  They are puppet companies with no signature authority.  They pay taxes on expenses as well as income.  Rep offices must hire its staff through the Foreign Employment Services Corporation & pay a $150-250/employee/month fee to the government.

Legal issues-There is no national database for court filings-they are maintained in every city.  Trademark/patent law did not exist until 2001, so the Chinese are still very new to enforcing these laws.  Beware of negotiation partners registering your trademark if negotiations don’t work out.  It takes 3 years to register a trademark.  Protection is with registration, not use.   Registration with the customs bureau will prevent unauthorized exports from leaving China.  In joint ventures, Chinese contracts & law prevail. It’s best not to involve 3rd parties, i.e. ship to 1 party & pay another.

Labor-Foreign companies/WOFE’s/JV’s pay 150-300% of what local companies pay for labor & it’s difficult to fire employees in China.  Social responsibility is important if you’re acquiring a Chinese company, although most Chinese companies don’t pay the 40% additional social costs.

Safeguards-It’s important to have feet on the street.  Success often comes from having American staff on the ground to monitor operations/partners to keep them on their toes-planned visits don’t cut it.  They need to know you can be in their factory in 2 hours to keep them honest.  The biggest nightmares come as a result of having no presence.

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