Posts Tagged ‘International Business’

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.

What it takes to be a successful multi-national corporation

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. 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.
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.
Knowing who to partner with is another key strategy to be keen about. Do your research well. It is important to make sure that your joint venture is not an affiliate of a larger organization and if they were to default, would you be able to collect from the parent organization?
Understanding the rules and regulations in China is a cumbersome task and even coming up with solutions for possible issues.  It is necessary to be cautious of offers which are bent to 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. ”
Completing systematic risk analysis in conjunction to creating a pro forma balance sheet, spending allocated time during the initial sequence of the project creating possible scenarios of what could go wrong helps tremendously with aftermath shock.
It’s important to have a stratagem for each phase of the project, even though you probably wouldn’t use it.
Paying attention to profit margins is an area to be realistic about. It is important to know how much risk your organization is willing to accept. It is vital to ensure you have reliable sources other than news media sources or immediate associates to assess the market for this evaluation.
Forecasting and keeping a watchful eye on potential competition is important towards projects and sales.  In China teams require stable consideration and clear lines of communication. Often times, there is a gap between the perceptions of the persons administrating the products or projects and headquarters in other parts of the world. Therefore Developing and nurturing personal relationships are important.
Pricing is another vital key that is often times overlooked.  With the recent economic analysis studies “suggests that over 80 percent of China’s industrial markets are in oversupply. ” It indicates that Chinese brands are stronger in many sectors. Within Chinese markets there is a consistent downward trend on the prices and Chinese competitors, predominantly those from the state-owned enterprises (SEO), often benefit from a low fee of capita allowing them to enter markets quickly and receiving strong encouragement from the government. The thing to remember is the field is upward sloping for all foreign firms.
Splitting profit margins between the ventures is an overwhelming task. The contract with an bankrupt associate or client is useless. It is essential to give careful attentiveness on how your organization is paid and the currency. Checking with the legal counsels of the industry sector will help to determine the specific payment terms which are usual for a certain type of business deals.
Following the Intellectual Property (IP) Rights It has been said that, in China, if a service or product could be profitably copied; it will be without a doubt. In addition, foreign Intellectual Property holders suffer enormous losses due to Chinese pirates in the China market which is increasing it in third world country markets.  It is important to closely monitor the market on a steady basis. Keep in mind, examining and enforcement in China require a costly procedure. Intellectual Property rights infringement on goods also flood out of China to all areas of the world and therefore cause vigilance in third world. Documentation shows that many FDI’s have lost their IPR with the active involvement of employees and their partners.
Instituting a presence in China is an expensive process. Having a representative office is the easiest form of office for a foreign firm to have set up in China, but having these offices limit the organization to performing “liaison” activities. For instance an organization with a representative cannot sign a contract for sales or bill customers directly. The representatives would need to do these in conjunction of the parent company. The benefit of establishing a representative office is that it gives the organization an increased power over a devoted sales force and allows greater consumption of its particular technological expertise and growth potential.
The growth potential and opening for new emerging markets in China is limitless . The foreign direct investments (FDI) alone in 2002 surpassed that of the United States, making China, the world’s foremost target for foreign funds. With growing FDI no wonder China has made itself to be the “Hot Pot” of the East. The increase in China’s FDI was from a result of its entry into WTO, Beijing 2008 Olympics, and a push to ramp up the infrastructure. The table below helps illustrate the rise of investments.

Table 1: Foreign Direct Investment in China
2001    2002    % change
Number of Projects Approved    26,139     34,171    30.7
Contracted Investment ($ billion)    69.19    82.77    19.6
Utilized Investment ($ billion)    46.85    52.74    12.5
Source: Ministry of Foreign Trade and Economic Cooperation

This impressive percent of growth was not built overnight. Looking back to the beginning of 19th century, 36% of the world GDP was produced in China. Whereas 22% was of the US.  In 1979 China embarked to make itself more of a market economy.  They have realized astonishing success from this initiative. China’s annual GDP went from 6% to 14% annually. If this type of growth continues at this pace, in the next 10 years China will be the largest economy in the World.
What is it that attracts foreign investors to this ever growing land of potential and what can they do to ensure their investment is vested?
According to the U.S. Office of Trade and Economic Analysis, in 2003 $148.6 billion in manufactured goods were imported from China which was up from $97.3 billion in 2000.  Comparatively to the US, over $126.8 billion of the $21.8 billion of U.S. manufactured goods were exported to China.
Although the YUAN is not pegged at the dollar and has not fluctuated much since 1995, the average wage for civil servants is 15,487 RMB per year (US$1,910),  and the factory workers average around 1,200 RMB per year (US $150)  (actual income varies on city and position). In retrospect, a salary of one United States’ (US) Ford Engineer is equivalent to ninety factory employees.  It is no wonder why so Multinational Companies (MNCs) are expanding here for cheaper labor.

The table below displays the rise of urban and rural per capita disposable income.

Table 5:  Food Expenditure & Disposable Income in China, in RMB    Disposable Income 2001/2002    Food Expenditure 2001/2002    Increase in Disposable Income/Food Expenditure

Urban    6,859.6/7,702.8    2,014.02/2,271.84    12.3%/12.8%
Rural    2,366.4/2,475.6    830.72/872.39    4.6%/5.0%
Source: China Statistical Yearbook, 2002, 2003

With so much opportunity on the horizon and favorable statistics from analysts, many investors are not hesitant in deploying the resources needed to start doing business in China.  But how many of them are actually looking before leaping? Whirlpool shows an example of a MNC who didn’t spend the time to know their market needs . This harsh reality spreads the story an organization that cannot step its foot in this magical “middle kingdom” and sell a product without having established strategic joint ventures, analyzing all potential problems (culturally and fiscally), doing a thorough risk analysis, and most importantly making sure the product / service is economically viable.
A classic example of a company which came in and supplied a growing need was Mexin .  Based out of Chongqing, China, Mexin was established in 1989.  This Joint venture is 25% American owned and 75% is Chinese owned.    The company used a necessary product, doors, to gain entry in the Chinese market, and is now expanding into other areas such as windows, bricks and landscaping materials.  Mexin has already began establishing contracts with developers in the housing push in Beijing and is currently exporting 10% of its products globally. The strategy of the company is such that they import pine from Southeast Asia cheaply, and then develop their products in Chongqing and nearby Beijing in a Free Trade Zone which is tax-free for all exports.
The examples of Ford and Mexin demonstrate to the willing investor the necessity for certain principles to be followed when doing business in China.  A key factor is to be genuinely interested in the cultural differences between the Chinese and the rest of the world.  When working in China it is noticeable that the government and people are much more influenced by the traditional command structures which were set up by the communist party..  It is important to treat China as a blanket and to learn thoroughly how to understand those patches where the MNC will be operating. Finally, finding a coach who can fill your company representative in on everything from wining and dining, to local politics, the power structure, personal feuds, and other cultural norms will assist greatly in the entrance to the Chinese market.
A good example of a Multinational Corporation that has successfully deployed operations in Asia for over 100 years is Nestlé. This MNC was able to share their inexpensive manufacturing process with the Chinese government and decentralize operations so that each product was managed by a case by city basis.
Nestlé (NESN) is 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 consumer goods. It all started in the mid 1860’s when a pharmacist named Henri Nestle was trying to develop a substitute for infant nutrition for mothers who were not capable of breast feeding.  The success of this formula guided the rivalry between Nestle and the Anglo Swiss Condensed Milk Company.  This fierce competition lasted for approximately 40 years before they merged in 1905 thus creating the steps for its exponential growth. After the successful creation and distribution of chocolates, Nestle merged in 1929 with Peter-Catiller-Kohler of Chocolate Suisses. As things progressed in 1947, Nestle completed its third successful merger with Alimentana company.  After the war and greater 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 Calistoga; Coffee-mate; Alcon; and L’Oreal Cosmetics. As this food giant grows, it stresses that its Swiss headquarters should not be the center of the ‘Nestle Universe’ as each of the headquarters should treat its employees and products individually.  With more than 100 years of business established in China, Nestle currently is the leading foreign food distributor in the Asian market.  What put Nestle in that position was decentralization.  Although Nestle is headquartered in Switzerland it allots responsibilities to its local branches.  For example, in 1933 Nestle entrusted a Japanese firm for manufacturing its products in Japan.
When moving into China, Nestlé considered the availability of raw materials so it would be cheaper to convert them into usable products. The availability of large labor pools aides the company in providing lower cost products as well as the ability to decentralize and find staff to manage the organization, performing such tasks as acting hastily for change in trends, tastes, and prices of products. Nestle made the 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 took only a small toll on this transnational company.  A partnership with Shuangcheng gave this business 15.5% of the corporate share, the Chinese Society for Development and Investments in Beijing a 20.5% share, and Nestle with a 64% share and ownership of three people of the five member board.  (The other two 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.
It is no surprise that US $33.9 billion of FDI has settled in China for the first part of this year alone . One can only imagine how long and how far these seemingly infinite investments will go. With the amount of government control decreasing and more positive variables available for MNCs, it no surprise that much is being accomplished.  Nevertheless, many cultural differences still exist.  Solely relying on MBA’s or formal training will not teach you how to deal with the difference in human behavior and Chinese culture effectively.  Business plans are not more than guidelines.  The most important factor is people.  They are what make these numbers come true.
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.

Sources:

http://www.buyusa.gov/china/en/doingbizinchina.html

http://www.chinanews.cn/news/2005/2005-09-19/11142.html

http://www.cpirc.org.cn/en/eindex.htm

http://www.chinanews.cn/news/2005/2005-09-19/11142.html

http://www.fas.usda.gov/gainfiles/200406/146106634.doc

http://www.chinadaily.com.cn/english/doc/2004-07/13/content_348060.htm

Ford Motor Factory China visit

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.