Setting Up a Business in China: Before and After

You may have heard of many success stories and the benefits of setting up a business in China. And we know that you want to be as successful too. No doubt, China is an opportunity-laden country, with an enormous manufacturing base, a massive supply of natural resources, and certainly, a huge consumer market. On top of that, China has made foreign investments more accessible with the constant revisions of its Negative List for allowing foreign businesses.

Read our previous article on Foreign Investments Opening in China’s Major Industries

As much as we are excited to help you set up your company in China, we also want you to carefully assess and plan your road to business success. Considering the complexity and alienability of the business operating environment in China, we want to give you our top recommendations before and after setting up a business in China.

Before setting up a business in China

Our years of experience working with foreign clients on managing and solving their issues have helped us formulate practical advice on doing business in China. Hence, following these recommendations will ensure a smooth flow of your business before you even know it.

1. Do your homework – 3 things you need to get right!

• Business scope

It can be costly and time-consuming to add anything to the business license after incorporation. So, make sure that you have everything planned out with regard to the scope of your business activities.

• Laws and regulations

Be aware of the impact of the local laws and regulations, local competitors, local partners, and so on.

• Cost analysis

Always carry out a detailed analysis of your overall costs including sales revenue. Furthermore, you must define the capital injection amount accordingly.

2. Conduct due diligence.

By conducting due diligence on your prospective partners and employees, you will get rid of your trust issues. Doing business, like any other relationship, is built on trust. Without verifying the credibility and trustworthiness of your partners and people you will be working with, doing business will be much harder than it already is.

Read more: Due Diligence in China: Why & How You Should Conduct It

3. Finance your project sufficiently.

There are two reasons why you should finance your own project sufficiently and not rely too much on refinancing within China. Firstly, China’s strict control of foreign exchange limits loans coming from parent companies. Secondly, local and foreign banks require a high level of securities before lending money to a new company.

Allocate generous financing for your project but do not get caught in a cash trap.

Due to foreign exchange control in China, it will be difficult for you to repatriate your capital especially if you do not have a clear business objective.

Learn more about profit repatriation here: Dividend Distribution to Foreign Shareholders

4. Ensure stable and highly-qualified management and staff.

As a foreign company, hiring an expatriate to manage the company can be a lot easier in terms of operational control, transparency, and even trustworthiness. Foreigners in China may share the same sentiments as an outsider and that can instantly build the connection that you need for a longer period of working relationship. However, expatriate packages are often more costly. Nevertheless, more and more companies are offering local contracts to foreign employees and more foreigners are also working this way.

On the other hand, hiring a local manager may also give more advantage in terms of contacts with suppliers, customers, staff, or government agencies. Getting a highly qualified local manager would be an asset to the company.

Whether Chinese or foreign, a highly competent manager gets the same level of salaries. A person with the right combination of experience, proven ability to work with diverse cultures, and trustworthiness will be the right person for the job.

5. Dedicate plenty of time to support the local team.

The implementation of all aspects of your business needs plenty of organization which includes getting your team ready. During this critical stage, it is important to devote your time to reconciling all differences and problems that may occur within your team. In short, be 100% supportive of your local team.

What happens after your business set up?

Deciding and planning on your business set up and running business activities are equally challenging. Even if you think you have already prepared for potential difficulties, the business environment especially in China is always evolving and you cannot put your guard down. Hence, we also provide you with practical recommendations on what to do after setting up your company.

1. Always monitor your balance sheets.

Double-check assets in your balance sheets mainly stocks and receivables to maintain good cash flow. Furthermore, control your cash by looking at bank reconciliations, e-banking authorizations, expense claims, etc. Consistency should be a top priority of the management.

If you want to experience full control of this aspect of your business, invest or capitalize in Kwikdroid, a company management tool integrated with accounting software. It standardizes all your daily operatons and runs through the Cloud which means that all your data is fully secure and protected.

2. Have a qualified, sufficient workforce.

Behind the seemingly limitless pool of workers in China, retaining managers or employees is challenging over the long term. Thus, get your HR team to find people who are qualified as well as committed. The right HR manager will be keen on the motivating factors for the local employees to either stay or leave their positions.

3. Watch out for the red flags.

In relation to maintaining a sufficient workforce, inconsistency in staff changes is a clear sign of disloyalty to the company. But sometimes the supervisor might be eliminating the manager and looking to replace a manager with another one whom he can control more easily. If the financial staff is leaving the company, it may be because he or she does not want to cover the irregularities required by the management.

4. Never lose control.

As in your personal life, keeping in control of your business is an absolute method of success. Here are some aspects of your business that you should never lose control of.

• Quality control

Enforce and maintain drastic quality control to reach the exportable quality standards or to expand in a more and more demanding local market. The quality culture is improving but not yet common in the manufacturing operations.

• IP control

In this era of technological adaptation, companies should have a strong intellectual property strategy to protect IP rights. Especially, do not assume that these rights are automatically protected under Chinese law.

• Accounting control

The accounting culture in China is much more oriented to tax reporting than management reporting. Hence, you should maintain strict vigilance on accounting procedures from day one. These include the allocation of revenues and expenses to the right period.

• Internal control

This refers to the protection of your company’s assets. The potential weakness in the accounting system entails clear and transparent internal control procedures for company items such as expenses, purchases, receivables, and inventory. To do this, the internal control system should consist of a trusted management team locally and a recurrent involvement of the headquarters.

Read more: The Importance of Internal Control in Accounting

5. Never relax support.

Problems do arise when headquarters bothered by other important issues relax control on and support to their China subsidiary. The China subsidiary is far from the headquarters. To keep it loyal and efficient, provide generous support, quick answers to their problems, and survey at a group level.

Conclusion

As a foreign business owner, your benefit lies in maintaining a mixed culture. Localizing your personnel may be your first impulse to the success of your business in China. However, we have found that most foreign companies that tried an accelerated localization were later obliged to reverse after expensive losses in results, sales, and talents (including local talents). Therefore, planning how you can best operate your business with the right human resources is most vital to your business success story.

On the other hand, never “play” with legal or tax regulations despite what you may have heard about the practices of some companies in China. The truth is, it needs the network, knowledge, and sensitivity to playing this game safely.

So before and after setting up your company in china, research, plan, finance, control, and support your subsidiary at all times.