Posts Tagged ‘China Consulting’

HKTDC Research Department 1-1

1.1 Application Procedures for Establishment of Sino-Foreign Equity JV and Contractual JV Enterprises (in the case of Guangdong)

Step 1: Application for Establishment
Upon reaching agreement by the parties to an equity or contractual JV after negotiation, the Chinese party should submit the project proposal to the local foreign trade and economic cooperation department. For projects under the encouraged and permitted categories with an investment exceeding US$100 million as well as projects under the restricted category with an investment exceeding US$50 million, report has to be made to the local development and reform commission, and projects that require approval from the relevant industry department have to be reported to that industry department also.
Documents required: Project proposal approved by the competent Chinese authorities; preliminary feasibility study report; letter of intent or agreement signed by the parties to the JV; and credit report on the foreign party.

Step 2: Submission of Feasibility Studies for Approval
After the project proposal is approved, parties to the JV should work together to compile a feasibility study report for submission to the local foreign trade and economic cooperation department by the Chinese party for approval. For projects under the encouraged and permitted categories with an investment exceeding US$100 million as well as projects under the restricted category with an investment exceeding US$50 million, report has to be made to the local development and reform commission, and projects that require approval from the relevant industry department have to be reported to that industry department also.
Documents required: Application letter to the competent Chinese authorities; feasibility study report duly signed by all parties to the JV; JV agreement or draft contract; proof of the Chinese party’s source of funds; and credit report on the foreign party prepared by the bank.

Step 3: Submission of Contract and Articles of Association for Approval
After the feasibility study report is approved, parties to the JV should sign the contract, articles of association and other relevant legal documents for establishing the JV. The Chinese party should then submit the documents to the local foreign trade and economic cooperation department where the JV is located for approval.
Documents required: Application letter to the competent Chinese authorities; feasibility study report and approval documents for the project; application for registration of the name of the enterprise approved by the provincial or municipal administration for industry and commerce; written comments on the project by various government departments such as environmental protection, fire services, health and land administration; business licences of the parties concerned and certificates of their legal representatives; contract and articles of association duly signed by the legal representatives of the JV parties; and list of board of directors.

Step 4: Application for Approval Certificate
After the contract and articles of association are approved, the Chinese party should apply to the provincial or municipal foreign trade and economic cooperation department for an approval certificate.
Documents Required: Ratification documents (on project proposal, feasibility study report, contract and articles of association) from the relevant authorities; project proposal, feasibility study report, contract, articles of association and list of directors duly approved by the competent authorities.

Step 5: Registration
Upon collection of the approval certification issued by the relevant authority, an application for business licence should be filed with the provincial or municipal administration for industry and commerce within 30 days. Subsequently, the JV should complete such procedures as applying for official seal and enterprise code, opening bank account, and registering for tax

payment and customs declaration with the local public security, technical supervision, taxation, Customs, finance, foreign exchange administration, banking, insurance and commodity inspection departments.

Notes:
1. The above procedures are applicable to both production enterprises and service providers.
2. Guangdong currently practises a system under which project proposals, feasibility study reports, contracts and articles of association for national and provincial level foreign investment projects under the non-restricted category are examined and approved together.

This is a great article which summarizes areas to look out for while doing business in China.

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China lends itself to sweeping statements about the nature of doing business there. Most are unfounded.
Jonathan R. Woetzel

How does a multinational company take advantage of opportunities in China without getting burned? One of the biggest hurdles is coming to terms with the real China, a land of great geographical, social, political, and industrial diversity. As a starting point, it’s essential to cut through the thicket of misunderstandings and misinformation about doing business there. Clearing them up won’t guarantee the success of investments, but it will at least increase the chances of getting the foundations right, particularly at a time when fears that the country’s economy is overheated are further complicating decision making.

China lends itself to sweeping statements. Here are a few making the rounds: China will be the next economic superpower; its economy is still state run; foreigners don’t make money there; relationships count, so a partner is needed. These provocative claims can start a conversation, but they are hyperbolic, misleading, out-of-date, or just not true.

An economic superpower?

Let’s look more closely at the observation that China will become the next economic superpower. The country does have a gross domestic product of $1 trillion and will probably continue to grow quickly. But it will remain a midsize economic power for the next decade. China now has a GDP roughly the size of the United Kingdom’s. It may pass Germany in the next few years. But it isn’t likely to catch up with Japan until 2020 and, if current trends hold, won’t surpass the United States until 2040. It is, however, an important source of growth. The economies of both Japan and South Korea are expanding largely as a result of exports to China. From sectors such as power plants to packaged goods, its share of global growth makes it number one in the world.

Macroeconomic hype can obscure actionable microeconomic trends. Fast economic growth, for example, will put home ownership within reach of hundreds of millions of people; in the past five years, more than five million new homes have been sold. Foreign companies can serve this population by stepping back from the premium segment, to which many are naturally attracted, and selling better-tailored value goods, as the South Korean conglomerate LG Electronics has done in air-conditioning. Increasing numbers of Chinese can afford locally produced durable goods (for instance, refrigerators, cookers, and washing machines). The market penetration of these items is now above 70 percent even in second-tier cities, such as provincial capitals. And although the middle class is a small percentage of the total population, in China that is a big number. Only 4 percent of the country’s people have household incomes of more than $20,000 but that translates into a market of more than 50 million, who are spending increasing amounts of money on things such as services, education, health care, and travel as well as on processed and packaged foods.

China’s importance in the world economy clearly varies greatly by sector. In some, the country plays a critical role in the global balance of supply and demand (basic materials and energy), the supply chain (personal computers), or the growth of demand for consumer products (automobiles and mobile phones). Infrastructure-focused multinationals that sell products from elevators to subway systems are finding China to be their most important market for growth. In other fields, the country is not yet a significant factor in global trade, because sophisticated customers are lacking (for high-performance fibers, to give one example) or regulatory barriers impede competition (as in the financial-services and media industries).

In some sectors, late-arriving foreign companies may have already missed the boat: market-shaping positions have been claimed in the manufacture of automobiles, consumer electronics, processed foods, and pharmaceuticals. Here, bigger and bigger commitments are needed to shape the industry structure and so lay a path for sustainable, superior returns. Many companies with the resources and skills to make those commitments are already in China and have been there for as long as 20 years. Volkswagen’s partnership with the Shanghai Automotive Industry Corporation and Shanghai’s government, for instance, began in the mid-1980s and has since grabbed the dominant position in the Chinese automobile market and a handsome payback. Motorola has invested $3 billion in eight joint ventures and 26 local subsidiaries over the past 15 years. Nonetheless, China’s government is open to proposals that bring new technologies, capabilities, and business models to the country. Multinationals will not be prevented from investing if they can show that they have leapfrog opportunities.

For some, the opportunity in China lies no farther than Beijing, Guangzhou, and Shanghai. Foreign executives concentrate on these big eastern cities primarily because the country’s coast represents 58 percent of the economy, though only 37.8 percent of the population. Average GDP per capita in coastal areas is about $2,100 in Shanghai, it is nearly $5,000 far higher than that of the rest of China (Exhibit 1). In fact, China’s smaller cities and rural areas, far into the interior, already account for more than 50 percent of consumption of many consumer goods. Now that the populations of these areas are becoming more active economically, their markets are growing faster than those of top cities.

Some consumer goods multinationals, such as Procter & Gamble (see “Understanding the Chinese consumer”) and Groupe Danone, have recognized this opportunity by adjusting their marketing and product strategies to serve the more modest income brackets typical of such regions. (The recent battle between Anheuser-Busch and SABMiller for control of Harbin Brewery Group, located in the large but poor second-tier city of Harbin, also exemplifies this trend.) Meanwhile, Coca-Cola has introduced flavors and products to capture local tastes across the country, and so have Uni-President Enterprises and Tinghsin International, the world’s two largest noodle makers. Industrial multinationals that want to enter the smaller cities and rural markets have had to follow a different approach, with more emphasis on financing and distribution.

The role of the state

Executives who make investment decisions about China believing that its economy is dominated by the state, and is thus sclerotic, are in for a shock. Government ownership is declining rapidly; today only about one-quarter of China’s industrial output is generated by state-owned enterprises (Exhibit 2). Springing up in their place are private companies and companies with foreign investment. Except in a few sectors defense, telecommunications services, and energy, for example much of the economy is now in private hands. The rationale is straightforward: China’s leaders recognize that state enterprises are inefficient and must be stimulated from the outside to compete in the marketplace. A corollary is that China’s government now relies far more on taxes from private commerce and less on revenues from the declining state sector. Over the past five years, tax receipts have risen to 17 percent of GDP, from 11 percent.

Even more important, financing has started to move toward the capital-markets model. In the past, more than 70 percent of all investment funds in China were channeled through the state banking system. Recognizing its inherent inefficiencies, the government has both initiated banking reform and encouraged the growth of a more robust equity and debt market. China’s stock market is already the second largest in Asia, after Japan’s. By 2005, capital markets will probably generate more than 35 percent of corporate investment, and bank lending will have declined (Exhibit 3). With this shift, the government hopes that Chinese enterprises will respond to shareholder expectations.

What does it mean for foreign companies that so much of the economy is in private hands? For one thing, it suggests that local competitors are economically rational. That conclusion comes hard to multinationals facing low-price Chinese competitors, but an analysis of their costs shows that many can be profitable at price points far below those global companies require. The main driver of this profit differential is the locals’ much greater efficiency in capital usage. In some industries, the use of local equipment, design, and construction firms allows the Chinese to build factories and install machinery for just 30 to 50 percent of what their foreign rivals would pay. Moreover, Chinese entrepreneurs have succeeded by expanding their companies, over a decade or more, mostly in competitive sectors of the economy, not through sweetheart privatizations. Some of China’s most successful entrepreneurs compete in relatively low-tech sectors: auto components, furniture, steel, and textiles.

Multinationals that fail to take advantage of local resources, preferring instead to stick to a global formula, run the risk of creating uneconomic cost structures. But multinationals that don’t make this mistake can benefit from China’s unrivaled potential as a global sourcing center. General Electric, for example, has more than 300 purchasing agents in the country who certify suppliers for global sourcing. The company’s stated goal is to have $5 billion in Chinese sales and to source $5 billion worth of products in China by 2005. Samsung also has a large presence. Winners also harness China’s human-resources pool as a global advantage. GE, for instance, has set up its North Asia customer-service center in Dalian, Intel and Microsoft have R&D centers in China, and HSBC does much of its back-office work there.

Foreign executives may not understand the extent to which the Chinese economy is now open to the world. No other economy built on scale has allowed foreign participation in the way China has; what other country, for example, let foreign companies dominate its auto industry before domestic competitors really got started? Much the same thing has happened in telecom equipment, modern retailing, and logistics. In China, fast economic growth is generally regarded as more important than local ownership. Government leaders are distinctive in recognizing the value of foreign capital in accelerating the pace of the country’s development and in their willingness to experiment with different ways of introducing foreign capital. China thus attracts more than $50 billion a year in foreign direct investment, second only to the United States. The technology, energy, and automotive sectors are the major fields (other than real estate) for foreign investment, and companies such as BP, Motorola, Royal Dutch/Shell Group, and Samsung rank among the leading investors.

Making money in China

Some businesses have resisted taking the plunge into China because they fear that foreign investors can make money only in the long term, if at all. In fact, the profits of multinationals in China are up sevenfold since 1990, and it is one of the largest sources of overseas profits for many companies. Dozens of consumer-oriented multinationals, with sales running into many billions of dollars, have profitable businesses in China and are rolling out coverage to 30 to 50 cities. P&G and Yum! Brands (a PepsiCo spin-off that owns restaurant brands such as KFC and Taco Bell) say they are making money in China. Other profitable investors include AIG, Alcatel, Carrefour, Motorola, Nestlé, and Siemens. Goldman Sachs estimates that Volkswagen has generated higher profits in China than in Germany during recent years, and in 2004 more Buicks will likely be sold in China than in the United States. These investors would be unlikely to go on plowing billions of dollars into the country if they were not getting a reasonable return.

According to the US Department of Commerce, the net income of US foreign affiliates based in China and Hong Kong rose from $1 billion in 1990 to more than $6 billion in 2002. A survey of China by the American Chamber of Commerce (Exhibit 4) and other data indicate that more than 65 percent of US companies in China are profitable and that their margins in China are equal to or greater than their global margins. This market’s challenge is that profits must often be reinvested to maintain market position. The sheer size of China, coupled with its rapid growth and competition, means that even market leaders must continually invest to maintain share.

Furthermore, interested foreign companies must stake a considerable claim now if they want to be in China at all. Its markets evolve quickly, and the best deals take place before the competitive free-for-all starts. The right way to proceed depends on the sector and, in particular, on how well China adheres to its commitments to the World Trade Organization. Consumer goods and pharmaceuticals, for instance, are already very competitive, so the WTO-induced opening has had a minimal impact. In more capital-intensive industries, such as automotive and energy, China’s entry into the WTO increases competition through lower tariffs but is unlikely to change the industry structure dramatically given the incumbents’ strong position.

WTO membership will have its greatest impact in financial services, retailing, and distribution. In financial services, the deregulation of banking, insurance, and securities makes competition likely by 2006. The time is thus right for leading companies to secure their initial positions and to build brands and local workforces. HSBC’s preemptive investments “before the arrival of competition” already exceed $1 billion. Citibank has a credit card joint venture, with Shanghai Pudong Development Bank, that will allow it to capture a profitable early-mover opportunity, and AIG has built an early lead in insurance in Shanghai.

In retailing, the market is developing quickly, but opportunities remain to introduce modern trade formats such as hypermarkets, discounters, and specialty stores. (Carrefour, though, was developing hypermarkets even before the coming of deregulation.) In distribution, the expansion of big local companies and of nationwide highways creates opportunities to build logistics businesses, which have so far been largely the preserve of local and Asian companies, though a few European ones are starting to arrive. Finally, the media industry historically has been among the most protected in China, but rising consumer demand and the restructuring of domestic media groups will create opportunities for foreign companies through joint content development, distribution ventures, and even multimedia. News Corporation and Viacom have been among the most aggressive companies in defining their position through ventures with China Netcom, Shanghai Media Group, and other state enterprises.

Relationships

Many executives are convinced that relationships are the key to doing business in China. That was certainly true in the early days of its economic opening to the outside world, when its decision makers had few ways of determining which companies could truly deliver what they had promised. Accordingly, lengthy discussions, often accompanied by extensive socializing, were the norm as the country’s negotiators strove to understand their foreign counterparts. Now the Chinese, with more than 20 years of investment experience under their belt, are looking at the tangible business track records of foreign companies. Those that fail to bring tangible advantages, such as new capabilities, technologies, or business models “as well as a record of success” are unlikely to win the deal, no matter how good their relationships.

Foreign companies that fail to bring tangible advantages are unlikely to win the deal, no matter how good their relationships.

Nevertheless, a strong government-relations program remains an important factor for success in China, where, as in other emerging markets, the state uses its influence over market access and business rights to shape how far foreign companies can go. Unfortunately, for many of them the management of government relations often takes a backseat to other business operations and, most important, lacks long-term consistency. Such companies have government-relations departments in China but plan and execute less systematically in this respect than business units usually do.

Finally, joint ventures are less important as a success factor in China. In fact, true 50-50 joint ventures are increasingly rare as foreign investors realize that their Chinese partners can’t add the expected business value, particularly in go-to-market access. In response, investors are going it alone; wholly owned enterprises already account for more than 50 percent of annual investment in China. Partnerships, including long-established ones, are being restructured as the foreign and Chinese parties resolve inequalities in performance by buying out the other side. Even government-driven deals can be restructured if the price is right: after cooperating with the Ministry of Information Industry for more than a decade, Alcatel moved from minority to majority control of its venture, having persuaded the ministry that its technology had great value. Fuji Xerox and Unilever likewise have purchased their partners’ share of their joint ventures. In the future, wholly owned enterprises and acquisitions will dominate foreign investment in China, much as they do in the rest of the world.

Generalizations about China may be interesting conversation starters but are potentially dangerous distractions for companies considering investments there. The best advice is to focus on your own industry and operating issues. Performance in China varies greatly within industries, and the market operates on the winner-takes-all principle. The main concern is to become that winner by responding nimbly to fast-changing market dynamics and by relying as much as possible on skilled local managers, who are still rare in China. For companies operating in sectors that are not yet fully deregulated, the focus should be on creating a competitive advantage before the gloves come off. Merely transferring Western business approaches that fail to match China’s reality won’t work.

About the Authors

Jonathan Woetzel is a director in McKinsey’s Shanghai office.

China is the fastest growing consumer economy in Asia and unless conditions change will soon surpass Japan as the largest Asian economy and the second largest world economy.  With GDP growth averaging 8% throughout the last 20 years; and 1.3 billion potential customers who doesn’t want to do business in China? With its brand loyal centric market many companies are stumbling to form joint ventures with Chinese organizations to have a presence and a piece of the moon cake.  What foreign investors don’t realize is how difficult it is to build that market share and maintain it. In the Chinese business economy, it is necessary for foreign companies to have a strategic plan.
Having a stringent plan is not what will make you successful but your ability to follow along and adjust your preparations along the way.
Constructing a strategic plan like Nestle wasn’t a simple task and took much market research to ensure a successful venture (see case study at the end). Areas which Nestle focused on in creating a reputable brand was having comprehensible contract conditions, making sure the venture was economically feasible, knowing who to partner with, understanding the rules and regulations in China, coming up with solutions for possible problems, completing systematic risk analysis, paying attention to profit margins, forecasting and keeping a watchful eye on potential competition, pricing, splitting profit margins between the ventures, following the Intellectual Property (IP) Rights and finally instituting a Presence in China.
Comprehensible contract conditions are important in an evolving country like China. With China’s consistent 8 % economic growth it is leading itself to continuous swift alterations in the domestic economy. Because many things are not predetermined, when commencing into a contract agreement with a Chinese partner you must be cautious to plan for all practical possibilities. One should not attempt to start an agreement without reasonable legal advice. It is a good idea to have your own legal guidance. It is worth it to compensate your legal representative a slight more to make certain you will have clear contract terms; or you will have to worry about paying your attorney at a later time if you have a dispute. In your legal agreements, specify precise terms of imbursement, and performance standards. Set cut-off dates for projects. It is important to pay attention to details, such as initialing pages of contracts and signing properly. Meticulously follow the agreement yourself – or be ready to pay a high fee. Legal advice from your Chinese partner should not be taken and beware of which Chinese laws require specific provisions in your agreement. Do not commit to provisions in a contract that are not under you have no power over. For example, if your client or partner wants you to specify in the contract that they will be able to visit your production facilities in the USA, remember that you cannot assure that they will receive a visa for entry. A visa rejection could annul your contract. Also, do not presume that all local or provincial officials have the ability to give you permits and permissions. Confirm their claims of authority from independent sources.
Making sure the venture is economically feasible for profitability is another detail to pay close attention to. Do not rely on guarantees of funding, encouragement, special considerations, or non-market associated sources of income to create a profit. If enticements are offered, they should be used to supplement profit, not create it. Make sure your partner has the power to offer such enticements and assure yourself from independent sources that the enticements will actually be compensated. Look for company examples of who have received such benefits. When doing business, feasibility may look very different over the short, medium and longer term. Many Chinese partners will insist you look at the longer term potential of the market and sacrifice your profit in the early stages. This is very risky. Your ground becomes their roof. In China, as in any fast growing economy, it is difficult to forecast the future, so, make sure that you are able to attain profitability in the projected future and are able to construct a sustainable model for the intermediate and immediate term.
Knowing who to partner with, Do your “due diligence,” and do it well. Make certain that your partner is not a shell subsidiary of a larger company. If they default, do you have the ability to collect from the parent company? Specify this in your contract. Remember that the best contracts are those that do not have to be enforced i.e both partners have the same motivations. Be sure that your negotiating partner has the authority to make a decision. Establish ground rules at the outset of negotiations, including keeping minutes. Be prepared for protracted negotiations. Make certain your partner is able and willing to do all they say they will do in the contract. Assure yourself that it is in their best interest to perform as agreed. If the project is not “win-win” you can expect that enforcement of your contract will be difficult – regardless of your legal rights. If you have to go to court to enforce your contract, it is already too late. Is it in their interest to assist you to protect your brand and/or other intellectual property rights? Be careful that your partner is allowed by law to fulfill the promises in the contract. Check the reliability of the data on your partner or customer from independent sources. Avoid being “stovepiped” – talking only to those people to whom your partner or buyer directs you. You can lose a lot of money if you make a great deal with the wrong partner.
Understanding the rules and regulations in China, coming up with solutions for possible problems, Beware of offers to bend them in your favor. American companies have often entered into agreements with promises from local officials that central government rules will not be enforced in the provinces. Indeed, often they are not. Problems arise when these regulations are suddenly applied – sometimes retroactively – leaving the company with little recourse. You must be ready to obey all Chinese laws and regulations, even if you initially can successfully avoid them. Seriously question any agreement where you are told you can ignore or avoid the law. Also, make sure that your managers (or agents and distributors) know all relevant American laws such as the U.S. Foreign Corrupt Practices Act (FCPA). You should be aware that China is also cracking down on corruption. You do not want your business to be associated with corrupt officials or illegal practices. Many American companies have reported that their Chinese partners respect their requirement to be in compliance with the FCPA and do not expect American companies to pay bribes. Also, be aware of U.S. Bureau of Industry and Security (BIS) regulations on the transfer of dual use technology to China. American law prohibits transfer of some sensitive technologies without a license. For more information on BIS regulations, please check http://www.bis.doc.gov/.
Completing systematic risk analysis, In addition to creating pro forma balance sheets, spend some time at the beginning of a project to create scenarios of what you will do if things go wrong. Try to anticipate possible problem areas. If you can’t find any, you are not looking hard enough. Create a strategy to deal with potential problems. Know your limits on losses as well. Be sure to limit your exposure. Set milestones in the project for performance. Have an escape strategy for each stage of the project, even though you do not plan to use it. In China, personal relationships are very important and sometimes partners may not be completely truthful about problems or potential problems if they feel it may have a negative impact on the personal relationship. Chinese partners may also be under pressure from government or party bureaucrats (as well as business associates) to compromise ethical standards. When problems arise, you should have excellent contacts among officials at the local, provincial and central level governments to manage the issue.
Paying attention to profit margins, Be realistic about how much risk you are willing to accept in your business venture. Make sure you use reliable sources for this assessment. Use more than news media sources or your immediate partners to evaluate the market. Do not have a corporate risk analysis policy for China that is different than you would have for any other country. If a project is too risky, do not do it – even though it is in China. The majority of American companies currently in trouble in China have been caught up in “Chinaeurhoria” and have not performed a thorough risk analysis, assuming that China is, somehow, different. When it comes to taking undue risk, it is not.
Forecasting and keeping a watchful eye on potential competition, Projects and sales in China require constant attention and clear lines of communication. Do not assume they will run themselves. There is often a gap between perceptions of the individuals managing your product or project and headquarters in the United States. U.S. based managers must visit often to evaluate the situation on the ground. Developing and nurturing personal relationships are important. Be prepared to provide good training and technical assistance to assure product and management quality. Keep an eye on the company’s account books, or if licensing, on the licensee’s account books. Neglect of oversight can result in compromised product quality and lead to a struggle for management control as well as possible unethical activity. When things go wrong, you cannot rely on the court to offer a clear or consistent legal settlement in a manner that would be consistent with U.S. practice and or other parts of the developed world.
Pricing, Recent economic analysis suggests that over 80 percent of China’s industrial markets are in oversupply. There are terrible competitive pressures. Chinese brands are strong and getting stronger in many sectors. In many Chinese markets there is a constant downward trend on prices. Chinese competitors, particularly those from the state-owned sector, often enjoy a very low cost of capital. Thus, they can enter markets quickly and they can expect to receive strong encouragement from the government for their efforts. The Chinese government makes no secret of its support for state owned enterprises (SOEs). Foreign companies should not expect a level playing field. Rather, the field is downward sloping for SOEs. It is level for private Chinese companies. The field is upward sloping for all foreign firms.
Splitting profit margins between the ventures, A contract with an insolvent partner or customer is worthless. Pay careful attention to how you get paid, when you get paid, and in which currency. Check with legal counsel to determine the specific payment terms that are customary for a certain type of transaction. If you want to be paid in U.S. dollars, be certain you are able to convert profits and remit funds. Use letters of credit with international banks, and other financial instruments to protect yourself. If you do not want to use a letter of credit, require your partner to make advance payment. Remember that Chinese companies usually do not use terms that allow unsecured payments after delivery of the product. For example, payment terms of “30%letter of credit, 70% payment 120 days after delivery,” would not be customary in China. For most large projects, terms of “70% advance payment, 30% letter of credit,” would be common. Offering payment after delivery tells your partner that you do not know how business is done in China and makes you look easy to deceive. NEVER agree to unsecured payments after delivery.
Following the Intellectual Property (IP) Rights It has been said that, in China, if a product or service can profitably be copied; it will be. Also, foreign IPR holders (whether they are in the China market or not) suffer enormous losses to Chinese pirates in the China market and, increasingly, in third country markets. It behaves all traders and investors to take aggressive measures to minimize their potential IPR vulnerability in the market. For trademarks, at you must file with the State Administration of Industry and Commerce to receive protection. You should also notify Customs. For patents, you must file with the State Intellectual Property Organization (SIPO) to receive protection. At a minimum, it is advisable to register copyrights in China, even though you may theoretically receive protection under the Berne Convention. Confirm this with your legal counsel, as the copyright treatment across industries is not identical. You should also notify customs. Taking the above procedural steps is insufficient. You must also closely monitor the markets on a constant basis. Monitoring and enforcement in China require considerable expense. IPR infringing goods also flooding out of China to all regions of the world and therefore vigilance in third countries is also strongly advised. Many foreign companies have lost their IPR with the active connivance of employees of their partner. To the extent possible, make sure that your partner’s interests and yours are fully aligned.
Instituting a Presence in China. Representative offices are the easiest type of offices for foreign firms to set up in China, but these offices are limited by Chinese law to performing “liaison” activities. As such, they cannot sign sales contracts or directly bill customers or supply parts and after-sales services for a fee, although most representative offices perform these activities in the name of their parent companies. Despite limitations on its scope of business activities, this form of business has proved very successful for many U.S. companies as it allows the business to remain foreign-controlled.
China’s Company Law, which has been in effect since July 1, 1994, permits the opening of branches by foreign companies but, as a policy matter, China still restricts this entry approach to selected banks, insurance companies, accounting and law firms. While representative offices are given a registration certificate, branch offices obtain an actual operating or business license and can engage in profit-making activities.
Establishing a representative office gives a company increased control over a dedicated sales force and permits greater utilization of its specialized technical expertise. The cost of supporting a modest representative office ranges from USD 250,000 to USD 500,000 per year, depending on its size and how it is staffed. The largest expenses are rent for office space and housing, expatriate salaries and benefits.
On May 19, 2004, the Chinese State Council published its decision to cancel and adjust the administrative approval on organizations. Starting July 1, 2004, foreign trading companies, manufacturers, forwarding companies, contractors, consulting firms, advertising firms, investment companies, leasing companies and other economic and trade organizations can register their representative offices directly with AICs without prior approval from the Foreign Economic Relation and Trade Commission.
Establishing a Chinese Subsidiary A locally-incorporated equity or cooperative joint venture with one or more Chinese partners, or a wholly foreign-owned enterprise (WFOE, often pronounced “woofy”), may be the final step in developing markets for a company’s products. In-country production avoids import restrictions – including relatively high tariffs – and provides U.S. firms with greater control over both intellectual property and marketing. The establishment of a WFOE in China has gained in popularity among U.S. firms as a result of an easing of restrictions, directly attributed to China’s accession to the WTO.
The role of the Chinese partner in the success or failure of a joint venture cannot be over-emphasized. A good Chinese partner will have the connections to help smooth over red tape and obstructive bureaucrats; a bad partner, on the other hand, can make even the most promising venture fail. Common investor complaints concern conflicts of interest (e.g., the partner setting up competing businesses), bureaucracy and violations of confidentiality). The protection of intellectual property, no matter the form of cooperation, is one of the most pressing matters for U.S. firms doing business in China. American companies should bear in mind that joint ventures are time-consuming and resource demanding, and will involve constant and prudent monitoring of critical areas such as finance, personnel and basic operations in order for them to be a success.

Case Study (Nestle in China)
Nestlé (NESN) a company we have all come to love and depend on for the variety of products. It has more than 225,800 employees, 495 worldwide factories, sells over 8,500 products and has a presence in over 70 countries.
Not many people know the rich history of this major contender of goods. It all started in the mid 1860’s when a pharmacist named Henri Nestle was trying to develop an substitute for infant nutrition for mothers who was not capable of breast feeding.  With the success of this formula it guided the rivalry between Nestle and the Anglo Swiss Condensed Milk Company which were fiercely competitive for approximately 40 years before merging in 1905 creating the steps for its exponential growth. From there, Nestlé started producing chocolate candies from the creative concoction which Henri’s neighbor Daniel Peter who figured out how to cleverly combine milk and coco powder. After the successful creation and distribution of chocolates, Nestle merged in 1929 with Peter-Catiller-Kohler Chocolate Suisses. As things progressed in 1947 Nestle completed its third successful merger with Alimentana company because Julius Maggi’s created a staple that was easy to prepare and consume for World War One.  After the war and availability of milk, many consumers resumed to fresh milk and food products which ended up hurting Nestle’s bottom line.  After the war, the company was also in fear that remaining in Switzerland would leave them targeted for any potential bombings so they moved many of their offices to Connecticut.
Presently Nestle is Switzerland’s largest industrial company and runs many subsidiaries such as Calisoga; Coffee-mate; Alcon; and L’Oreal Cosmetics. As this food giant grows it stresses that it’s Swiss headquarters should not be the center of the ‘Nestle Universe’ as each of the headquarters should treat it’s employees and products as being more significant than the systems in place.  With more than 100 years of business established in China it is the leading foreign food distributor in the Asian market currently.  What put Nestle in that position was decentralization.  Although Nestle is headquartered in Switzerland it allots responsibilities to local branches.  For example in 1933 Nestle entrusted a Japanese firm for manufacturing its products in Japan.  This successful model has minimized the threats of exploiting cheap labor and raw materials as it moved into Asian markets like China.
When moving into China Nestle considered the availability of raw materials so it would be cheaper to convert them into usable products. Availability of large labor pools which aides it in providing lower cost products and finally the ability to decentralize and find staff to manage the organization acting hastily for change in trends, tastes, and prices of products.  It made this move to China after the economic reform in the 1980’s. and worked 12 hard years to open a factory in Shuangcheng. The location of this plant was determined by the Chinese government and construction of this plant in China took a small toll on this transnational company though.  A partnership with Shuangcheng giving them 15.5% of shares and Chinese Society for Development and Investments in Beijing relieving 20.5% leaving with Nestle with 64% and ownership of 3 people of a 5 member board 2 being Chinese partners who was also chosen by the government.  Left with a burden of the expenses of starting up the operations and expanding technology of creating, storing, supplying milk still made approximately $700 million in 2000.
In close, although it may seem like a daunting, incomprehensible task, doing business in china in manageable and profitable, just look at Nestle.  Confucius once said “The mechanic, who wishes to do his work well, must first sharpen his tools.” Just as a Mechanic a company who wishes to do their work well must first sharpen their minds to one of the greatest developing countries.