Specifics of Doing Business in China - Essay Example

 Doing Business in China The Chinese follow various customs and traditions not only in religion but also in business. They also have their own business culture and etiquette, given their unique history and background of following customs which they believe help them prosper and achieve success in the business. The Chinese business practice is vastly different from western methods and with the back drop of the Chinese economy opening up many Chinese business practices are now beginning to get aligned with conventional methods. Being a successful businessman requires a combination of skills, individual entrepreneurial zeal and access to bureaucratic power. Before one visits China or starts doing business in China, it’s always a good idea to learn about the culture, tradition and history of the country. For instance, when a foreigner tries to speak Chinese, they will appreciate the effort made and the initiative taken. Ability to understand the language will help to establish a better ‘Guanxi’ with the Chinese business people. ‘Guanxi’ meaning ‘relationship’ is an extremely important Chinese business element. By getting the right Guanxi, the organization reduces the risks and the barriers involved in setting up the business. For this reason Guanxi is a good business strategy that everyone follows in China in order to be successful. This is an ongoing process and every company has to have a good Guanxi if it wants to do more business in China (1) Chinese follow confucianism which is a system of behavior, ethics that stresses the obligations of people towards another based on the relationship. Confucianism emphases on sincerity, duty, loyalty, respect for age and honor. Another concept that the Chinese follow is ‘Xinyong’ which means personal trust, this is a concept of pivotal significance for doing business in China. Instead of focusing on the business deal, the Chinese attempt to develop a Xinyong. This is definitely a time consuming process but the Chinese business community operates on the basis of limited and bounded trust. Chinese businesses are mostly through referrals and essentially a business relationship is struck based on another business associate’s recommendation. The Chinese are very particular about the companies that they work with and hence the role of an intermediary is very important to vouch for the reliability of the company or an individual. For Foreign business people to conduct a business in China, requires great patience and determination. The lengthy exchange of pleasantries, draw out negotiation where minor points are discussed and reluctance to close the deals are some of the business traditions that can be frustrating. The Chinese business culture may appear disciplined, domineering and slow moving to Westerners. Unlike the western business culture where business relationships remain professional, Chinese believe that prospective business partners should build a relationship and if successful, commercial transactions will follow. This way any difference and misunderstanding arising from business discussions can be sorted out. The more one shares their personal life, political views and aspirations with the Chinese, the more closer the relationship and this helps the business to develop. Decisions on the deal will be taken after determining if relationships can develop to a stage where both the parties are comfortable with each other. (1) Seniority is extremely important in Chinese culture as such especially when dealing with a state owned or a government body. The Chinese have a stick hierarchical system and place emphasis on rank and it is extremely important in business relationships and the communication should be very formal and official while dealing with the higher rank. Treating them informally may ruin the prospective potential deal. Chinese prefer face to face meetings rather than written or telephonic communications. Business protocols for negotiations are done only by senior members and it usually happens at a very slow pace as they require careful review and consideration. (1) Chinese do not prefer discussing about business at social events and meals and there is a clear demarcation between business and socializing in China. Chinese view punctuality as a virtue and one should always be on time or slightly earlier as arriving late is considered as an insult and could negatively affect the relationship. Business attire is usually conservative and unpretentious and Chinese men always wear dark colored conservative suits. Doing business always involves meeting and greeting people In China, meeting starts with shaking hands and a slight nod of the head. Exchanging business cards and using both hands while receiving and giving the business card is very essential and it is tradition that is followed. The cards are printed in Chinese in one side and English on another side. Chinese are well known for being tough negotiators. Their primary objective in negotiations is concessions. While formulating strategy, one must ensure that their negotiators have gained some concession. (3) There are some fundamental changes that have taken place by Beijing which is ‘Socialist market Economy’ under which market mechanisms are introduced to attract foreign investment. Foreign companies are encouraged to start joint ventures in China and also to sell products in China.(1) The legal forms of doing business in China and trade and the ways of establishing a business 1. Representative Office (RO) This is a common practice through which a foreign company can easily establish their business presence in China. RO is prohibited from entering into any direct business operations and they are allowed to conduct only indirect operational activities for businesses such as product launch, market research, conduct negotiations on behalf of parent enterprises and co-ordinate visits of delegates and personnel. They are not recognized legally and are not allowed to operate as sole proprietorship or partnerships in China. The basic requirement for establishing a representative office in China is that the foreign enterprise should hold a good reputation and should be able to provide authentic documentation and other paper work to government authorities. They must be legally registered in the country of origin for at least a year. They will be held legally liable for any business transactions arising out from any of their representative offices in china. They should open an office in China displaying the company name and address and also open bank accounts. The government authorities may also insist that the applicant should have been in the business for more than a year and would have to provide evidence for the prior business dealings if stated. In May 2004, Chinese foreign RO regulations were simplified and consolidated to one single step. The previous 2 step application process involved preparation and filling of the application. In the new one step process, the local SAIC (State administration of Industry and Commerce) handles both application and registration which makes it easier for the applicants. It is mandatory to get approvals and it is better if the Chinese agent can accredit in order to save time and have successful registration. This process takes about two weeks and RO set out would be done within two months. The total cost charged by the government for RO registration is about RMB 11,400 in Beijing and in Shanghai about RMB 8000 (3) There has been a new legislation by the Beijing Tax Bureau as there has been number of foreign companies using RO as a legal form to conduct business without paying tax. The new rule stated that all the activities are subjected to a business tax of 5% on gross income and income tax of 33% of profit. According to the new legislation, the RO’s in service businesses such as consultancy, tax and accounting should maintain books of accounts and they should be audited and filed to the tax department. Ro’s in trade, advertisements and tourism should adopt expenditure converted method in determining the tax amount (3) 2. Sino-Foreign equity joint venture or Contractual Joint venture enterprise This takes the form of a limited liability company registration and this is the most common form of foreign investment in China. Here the measures followed are, the partners create a business entity and share operational and investment expenses, management responsibilities and share all operational profits and losses. This is most widely used form of business as the foreign investor can share the risks and losses with their partners and enjoy a large portion of the Chinese market share. The Chinese authority also encourages foreign investors to establish this form of business as this provides more exposure. There are 2 types of Joint Ventures (JC), the equity joint venture (EJV) and Contractual Joint Venture (CJV). Both the ventures require a joint venture contract between the foreign partner and the Chinese partner specifying the responsibilities, rights and obligations of each partner. The division of profits will be based on the ratio of equity interest for EJV but for CJV, this would be decided by the partners. (4) Equity Joint Venture is the most common of the foreign investments in China. EJV must be established as limited liability companies and hence the legal partners are distinct from the investors with the liability of the partners limited to the investment made to the capital of EJV. Capital contribution must be made by cash, materials, equipment, land use rights or property. The EJV law requires the foreign partner to the venture contribute atleast 25% of the registered capital. (4) The first phase to establishing and implementing the JV in China is the partner selection. The foreign investor would first set the criteria and this would usually include ownership structure, revenue, production parameters, location of establishment, profitability, management and continuity. This is not an exhaustive list and the foreign investor looks at a target company that would meet the criteria. Once the target company is selected, the approval process along with registration will be done with the trademark registration. The company name should then be sent to the state administration of Industry and Commerce (SAIC). Trademark registration process would take 6 to 12 months to complete and hence it must be commenced as soon as the foreign investor settles in China. The partner would be required to prepare the Letter of Intent (LOI) and once that is established the proposal for the project will be sent across to MOFCOM for approval. Meanwhile the feasibility study on the project should also be sent to MOFCOM for approval. JV partners would then be required to locate a building or land for starting the business and they can conclude the Joint venture contract by negotiation and having a consensus. The JV partners would then be required to submit the articles of association, feasibility study, and Joint venture contract to the respective MOFCOM for approval and once this is approved by the relevant authority, the JV partners should then apply for business license to become legally active in China. This entire process would take 3 months once the relevant documentation are prepared and sent. The registration costs will be 1/1000 of the registered capital. The registered capital required for trading enterprises is RMB 5,00,000 and in manufacturing enterprises it is RMB 1 million. In Beijing China, the registered paid up capital should be finished in 2 years. (4) 3. Wholly Foreign owned Enterprises (WFOE) In this form of business, there is no Chinese ownership participation and the foreign investor should be either an enterprise or an individual. They are also likely to set up a Limited Liability company and are identified as separate legal people. Many foreigners are attracted as they have complete control over the company. But there is always a need for Chinese partners in the business trade as they can provide support in terms of obtaining government approvals, labor recruitment, rented office space, sourcing raw materials which a foreign investor would not be able to do as they won not be used to the Chinese business environment. (2) Before permitting one to carry out business in any new area, approvals are required which is very time consuming. The first procedure in the establishment of WFOE and compliance with relevant Chinese law and regulations is to apply for a pre-approval of the WFOE Chinese name at a local administrative office. In Beijing, only Chinese names are officially used while English names are only for reference. Not all names are accepted by the company Registry. For some sectors, special pre approved license is required. The feasibility report and articles of association need to be submitted to the Chinese authorities (bureau of Commerce) for approval. The business license to legally do business transactions should be applied for with the local administration. Enterprise code certificate should also be applied from the local technology supervision bureau. WFOE then must register for the company seal, financial seal and legal representative seal with the public security bureau. Once this is obtained the WFOE should then apply for foreign exchange registration certificate from the local administration of foreign exchange. WFOE should also apply for tax registration and also obtain tax registration certificate. They should also register with the local customs admin for carrying out legal import and export business. They should also open foreign currency and RMB capital account. This whole process would take 4 months for completion. WFOE should then apply for finance registration certificate and statistics certificate with the local bureau. After obtaining the WFOE’s name from the local administration of industry and commerce and before engaging in the business establishment the lease contract for renting a building should be finalized. (2) In Beijing, The minimum registered capital is US $ 2, 00,000 payable within 6 months from the business license date. The total cost for establishing WFOE is around 3000 RMB annual membership Although most of the preferential policies in Beijing have been abrogated there are few sectors within free trade zone or hi-tech development zone which require tax benefits. (5). There are other businesses that foreign investor can also invest in Barter system- Under this system, china imports equipment, machinery, food items in return for other products exported. Compensation Trading- Under this trade, the foreign trading partner will supply all the raw materials and goods and receive the manufactured product in return for payment. Chinese ministries and state commission handle negotiations for large scale compensation trading while middle sized trading is done by the Chinese Bureaus. Works cited 1. Bucknall B.Kevin, Chinese business Etiquette and Culture, Raleigh NC, Boson Books, 2002, 12-70 2. Brook & Harvest, Establish WFOE in China 3. Dahles Heidi, Harry Wels, ’Culture, Organization and Management in East Asia- Doing Business in China’, New York, USA, Nova Science Publishers, 2002, 1-10 4. Establishment of Joint Venture (JV) in China, 2001 5. ‘Wholly Foreign Owned Enterprise (WFOE) in Beijing’ Linda[Ed] 14th Nov 2009, ATA, 17 Jan 2010 < http://www.for-beijing.net/about.aspx?id=6&tid=9> Read More