Grancrete, Inc. production facility in Morehead City, North Carolina
Top 10 Findings: Creating a Winning Business in China
Published in the News & Observer
http://www.newsobserver.com/2011/09/25/1512399/burts-bees-saw-opportunity-challenges.html
New entrants may also want to consider whether to establish local partnerships, such as joint ventures. The traditional benefits of this option is that it allows a firm to leverage existing government relationships, market intelligence, hiring experience, and manufacturing expertise rather than developing these resources and capabilities internally. Currently, there are two types of joint ventures permitted in China, either a cooperative joint venture (“CJV”) or an equity joint venture (“EJV”).
The joint venture decision is company specific and should be researched carefully because the Chinese government mandates that the Chinese partner own at least 51% such that the foreign company cannot take back the technology and know-how. JVs are hard to unwind, and while Chinese companies love them, for U.S. companies, it is something they should think twice about. Those JVs which are currently ongoing are those which were started way back when that was one of the only options (or which carried preferential treatment/benefits).
Jia did not consider a JV, rather is pursuing the status of wholly owned entity. "Most U.S. companies would like to set up wholly-owned for control and IP protection. Certain industries such as telecom, natural resource related projects, and finance require JV. China publishes a catalog of when a JV is required." He expands, "Historically, JVs have always had problems. In a recent WTO commitment, China is requiring fewer JVs."
A wholly foreign-owned enterprise (“WFOE”) is now the most common way that foreign companies invest in China. This alternative requires the firm to establish a separate Chinese subsidiary. Jia explains their current China entry status, "We have applied for a direct selling permit and only 2 or 3 get it per year. 27 companies including Avon and Amway already have. We may have to wait 5 years. We are willing to be patient."
Despite the array of options, new entrants should be cognizant of the fact that a substantial investment is required prior to operations because the approval, permit, and hiring process may take up to a year or longer to complete. FIEs will need approval from the Ministry of Commerce of the People’s Republic of China (“MOFCOM”), which will conduct a foreign investment review. They must also register with the State Administration of Industry and Commerce (“SAIC”), which will issue a business license. However, these are not the only legal requirements for establishing a FIE, and new entrants would be wise to consult an attorney about these issues.
In addition to legal issues, companies also need to make business choices, such as: (1) decision-making hierarchy between corporate and China operations, (2) importing or local manufacturing, (3) channels of distribution, and (4) marketing strategy.
Grancrete does not have its own offices in China, but sells its products into the market through partners. No one partner is going to have reach into their three target industries, so they need multiple partners. "Each wants exclusivity, which is challenging for us, so we must shy away since this is limiting," said Melton. "Finding the right partner has been absolutely critical." They have a long list that didn't make the cut including those that had sense of inability to move forward, with whom they had same conversation over and over, and with those who wanted all of China for nothing."
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