Doing Business In China 22609


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  • China became the largest consumer market in 2004. For example, more than 5 million automobiles were sold in 2004: third behind US and Japan. Most were made in China.
  • This is the most economically developed part of China. Most overseas Chinese you meet will be from here.
  • This is what I will talk about. Most of my time will be on the last topic: Starting and running a business in China.
  • It is possible to launch a business within a few weeks -- but it is wise to take one’s time and to do “due market diligence.” This means actual on-site investigative visits and long conversations with persons who can be trusted to tell the truth. .
  • It takes very little capital to start a business in China.
  • This is what one looks like. The stamp is called a “CHOP.” Nothing is official until it has been chopped.
  • Do not be surprised when a crook steals from you and tells police everything was your idea and you made him commit illegal acts.
  • Business income tax is like the American Corporate tax. Americans use LLC and “”S” corporations to avoid this tax.
  • Some businessmen keep two sets of books: an official set for tax purposes and books that tell the truth. That is illegal and is prosecuted when discovered. Chinese tax revenues are increasing rapidly so there must be compliance with tax laws.
  • China is a collective society and relationships are very important.
  • Americans give gifts during certain holidays, birthdays and so on. This is the same thing. Gifts are used to cement relationships.
  • People who only show up when they want something are not trusted.
  • Chinese Christmas
  • At the very least send a card.
  • Stories from 5 years ago may have no relevance to today.
  • There is no single Chinese market. China has a many cultures and languages. Identify a specific market and to then develop products and services that meet the needs of that market segment. Look for niches.
  • Young people expect to succeed in their new China. They are very proud of what China has become. They feel the same way about China that Americans feel about America.
  • When a manager brings his own staff with him realize that his staff will be loyal to him -- not to you or your company. Make sure all new hires understand who hired them and who controls their salary and benefits. Guanxi can destroy a company if a manager leaves and takes his staff (and your proprietary information) with him.
  • Communication is the key. This is complicated by the fact that China has many different languages and no one speaks them all. People who do not speak the local dialect must associate with trusted persons who do or they will not know what is happening.
  • Foreign companies that set unrealistic goals replace the first manager because he can’t meet those goals. The second manager also gets fired. It takes a third manager before foreigners understand the truth of the matter. By then it may be too late. Western type performance appraisals may not have the desired effect. They may cause key employees, and their friends and all your proprietary information, to leave. In China it is necessary to save the face of key employees if you want them to remain loyal to you and your organization.
  • This Audi was developed for the China market. Audi did not assume that an Audi designed for unlimited speeds on German autobahns would appeal to Chinese customers who drive slowly and carefully for short distances.
  • If there are sharks in the shallows the first swimmer into the water will be eaten. In an emerging market it is often the “Near-Follower” who makes the most money. A near follower does not have to pay the cost of market research, knows what does and does not work and has customers who know about and want the product and service.
  • Confrontational in-your-face negotiation is how many Chinese begin discussions when buying everything from food to major appliances. They are not being rude -- they are establishing their status as a person who will not be cheated. Things are getting better. Chinese negotiators are becoming more sophisticated. Many now have a better idea of what is reasonable. This not America and if conditions change in a way that gives unfair advantage to one party the courts may void the contract.
  • Good detailed notes are essential. People remember what they wanted to hear -- not necessarily what was agreed to. Patent law is a major problem. While it will be impossible for Chinese businessmen to export things you have patented to America, Europe or Japan they may only want to produce and sell in China. Make sure all patents are registered in China as otherwise you may have to buy your patent back. Your option will be to make a slight change and immediately patent your “new” product in China.
  • The one thing each of us can do is control our personal attitude. No one can control the attitude of anyone else. Make sure you have trustworthy partners who speak the local dialect. Otherwise you may not know what is really being said. Family is an issue. Coming home to an unhappy family can make it impossible for anyone to do their best.
  • Guanxi is important. Guanxi is based upon mutual trust and respect.
  • Corruption is severely punished. Make it difficult for an honest person to steal. Know how much revenue ought to result and how much things ought to cost and question discrepancies.
  • The Chinese government is trying to bring economic development to the interior of China. Tax concessions are used to make it economically advantageous to move locate there. Local officials may be so eager to land a foreign invested enterprise that they make promises they later learn can not be delivered. You need to check this yourself.
  • Having good documentation is important in China because the need is to hire good people in the beginning and to keep them long-term. Continuity of management is very important given the reliance on Guanxi.
  • All Wuyi graduates speak, read and write English and that is becoming the norm at major Chinese universities. The need now is find people with good management skills or at least a management degree.
  • American “At-Will” employment and location does not legally exist in China. Some foreign-invested enterprises have found that they could not hire some of their very best casual employees. These “go-getters” were working two jobs and therefore illegal.
  • A person can live well in China on these salaries.
  • The cost of living is low except for automobiles. They cost about the same as in America.
  • Many American expatriates come to love China and want to stay. That is laudable but not making it possible for competent locals to move into top management positions is not. Mentoring is essential. The ideal situation is to groom a local until they can take over.
  • The greater Asian market, that is China and Japan together, are much larger than America or Europe. Chinese leaders are trying to establish Sino-Japanese harmony but it is hard to do. At this time Japanese GDP is much larger than that of Greater China (includes Hong Kong and Taiwan).
  • Reform of State Owned Enterprises is a very big concern. Businesses with competition thrive – but Chinese leaders know most of the State Owned Enterprises in Russia were taken over by organized crime and most former employees, and the nation are worse off. More than 30% of all SOEs have been privatized.
  • Counterfeiting is a problem. In a collective society, like China, keeping good things to oneself is considered selfish so many people do not consider copying things like software from wealthy foreign companies to be stealing. Joining the WTO is changing this view of the world – but it is difficult to change culture. Chinese leaders are very aware of pollution and things are getting better. Polluters are now being punished.
  • One child means there are going to be a lot of old people depending on their one spoiled child for support after mandated retirement. Everyone is forced to retire at 60 and people are living longer.
  • All national leaders remember the excesses of the Cultural Revolution and famines it produced. They will not tolerate any behavior that might return the nation to that chaos. Decisions are very hotly and publicly discussed. For example, sexual harassment has been identified as a problem and laws are being debated and written to make it a crime. The military was recently forced to quit interfering with private enterprise. China has reduced the size of its military 50%.
  • Many people believe the growing crime rate is a direct result of unemployed former State Owned Enterprise employees trying to obtain enough food and money to survive. Small property crimes make big news because they are so rare. We hope that doesn’t change.
  • Many families devote almost half their total income to purchase of additional education for their children. They “make do” with what they have to give their children an opportunity to do better than them. People will spend more on themselves when their children are grown and when they have faith in their long-term economic prospects. Big projects, like the Three gorges dam and Expressway construction, are near completion.
  • It has been said that “A rising tide raises all boats.” Economic development is a Chinese is a rising tide.
  • One reason people come to China is these amounts are very small compared to what it will cost in most other places. Keep everything above the table.
  • The key to success is to have a sound business plan and common sense.
  • Doing Business In China 22609

    1. 1. The Largest Consumer Market in the World Doing Business in China
    2. 2. Brought to You by Wuyi University and the Maricopa Community Colleges
    3. 3. Jiangmen City
    4. 4. Presentation <ul><li>1. Governmental issues. </li></ul><ul><li>2. Minimum required registered capital. </li></ul><ul><li>3. The Chinese accounting system. </li></ul><ul><li>4. Guanxi. </li></ul><ul><li>5. Starting and running a business in China. </li></ul>This presentation will discuss…
    5. 5. How to establish overseas investment enterprises in China <ul><li>Step 1: Application (Letter of Intent) </li></ul><ul><li>Step 2: Feasibility Studies </li></ul><ul><li>Step 3: Develop Contract and Articles of Association </li></ul><ul><li>Step 4: Application for Approval Certificate </li></ul><ul><li>Step 5: Registration with governmental authorities </li></ul>
    6. 6. Minimum Registered Capital for Foreign-invested Enterprises <ul><li>The minimum amount of required registered capital </li></ul><ul><li>varies with the type of business. </li></ul><ul><li>$8 Rmb = $1 US </li></ul><ul><li>Production enterprises: Rmb500,000 ($62,500 US) </li></ul><ul><li>Commodity/wholesale enterprises : Rmb500,000 ($62,500 US) </li></ul><ul><li>Commodity retailing enterprises: Rmb300,000 ($37,500 US) </li></ul><ul><li>Technology development, consulting: Rmb100,000 ($12,500 US) </li></ul><ul><li>Legal entities other than an LLC: Rmb30,000 ($3,750 US) </li></ul>
    7. 7. Invoice Management
    8. 8. Invoice Management <ul><li>All legal transactions are registered with an official Invoice. </li></ul><ul><li>Only “Running Ghosts”* do business without an Invoice. *Illegal merchants who take your money and run when police arrive. </li></ul><ul><li>Invoices provide an audit trail for taxation purposes. </li></ul><ul><li>Dealing “under-the-table” can create serious problems. </li></ul>
    9. 9. Major Taxes <ul><li>Value-Added Tax: (No US Equivalent) </li></ul><ul><li>Consumption Tax: (US Sales tax) </li></ul><ul><li>Business Income Tax: (US Business tax) </li></ul><ul><li>Individual Income Tax: (US Income tax) </li></ul>
    10. 10. Financial Reporting and Tax Compliance <ul><li>The Chinese accounting system is similar to that of the United States of America. </li></ul><ul><li>Financial accounting and reporting is directly linked to the tax return. </li></ul><ul><li>Business management has little freedom over choice of accounting system </li></ul><ul><li>like in the United States. </li></ul>
    11. 11. Guanxi is Important Guanxi stands for any type of relationship Guanxi is also the network of business relationships that supports one another The Chinese are not for sale.
    12. 12. How Guanxi is Established First: Guanxi is NOT based on money. Treating someone with decency while others treat him/her with disrespect will create good Guanxi. Second: Always being trustworthy no matter what happens establishes good guanxi. Chinese are much more inclined to do business with people they trust.
    13. 13. How Guanxi is Established Third: Frequent contact with each other fosters understanding and emotional bonds. The Chinese feel obligated to do business with their friends. Gifts Reinforce Relationships It is natural to give small gifts to people we like. Such gifts are not bribes.
    14. 14. Building Guanxi Honor and observe traditional Chinese Holidays.
    15. 15. Spring Festival: Only retail businesses and restaurants remain open. <ul><li>The Spring Festival is the most important festival for the Chinese people. Family members get together, just like Christmas in the West. </li></ul>
    16. 16. Honor your Friends <ul><li>The first five days after the Spring Festival are a good time for relatives, friends, and colleagues to exchange greetings, gifts and chat leisurely. </li></ul><ul><li>This is not the time to talk business. </li></ul>
    17. 17. Mid-Autumn Festival Chinese Thanksgiving. It falls on the 15th day of the 8th lunar month, usually in October. Contact your friends!
    18. 18. Don’t believe everything you hear <ul><li>Construction cranes </li></ul><ul><li>are known as the national bird. </li></ul><ul><li>Things are changing so rapidly stories more than a few years old may not be relevant. </li></ul>
    19. 19. China is Huge <ul><li>What </li></ul><ul><li>works in </li></ul><ul><li>one province </li></ul><ul><li>or city might </li></ul><ul><li>not work </li></ul><ul><li>in another. </li></ul>
    20. 20. Things are changing <ul><li>Young </li></ul><ul><li>college educated </li></ul><ul><li>Chinese are much more aggressive </li></ul><ul><li>than their elders. </li></ul><ul><li>Many Chinese </li></ul><ul><li>now understand </li></ul><ul><li>international business. </li></ul>
    21. 21. Guanxi alone will not guarantee success. <ul><li>Guanxi is based on mutual respect – not favors. </li></ul><ul><li>Guanxi is usually a personal relationship between individuals. </li></ul><ul><li>Use in-house staff to develop Guanxi. </li></ul><ul><li>Consultants who promise Guanxi may be loyal to someone else. </li></ul>
    22. 22. Language <ul><li>Language alone is not enough. Many successful foreigners speak Chinese, many do not. </li></ul><ul><li>China has many dialects. The Yuan alone lists Mongolian, Tibetan, Uygar and Zhuang. </li></ul><ul><li>The closer an employee is to the customer the more important it is to speak the customer’s dialect. </li></ul>
    23. 23. Consistency <ul><li>Guanxi is personal. Frequent top management changes destroy Guanxi and wreak havoc. </li></ul><ul><li>Set and work towards reasonable goals. </li></ul><ul><li>Be sensitive. Causing loss of face may cost a customer, an employee or a market. </li></ul>
    24. 24. Flexibility <ul><li>Do not over standardize. Develop products and services that meet local needs. </li></ul><ul><li>Chinese customers do not care about powerful engines. </li></ul><ul><li>This Audi was designed for Chinese customers. </li></ul>
    25. 25. Patience <ul><li>Being a “Near-follower” may be better than being a “first-mover.” </li></ul><ul><li>Have a sound business plan and detailed understanding of the market. </li></ul><ul><li>Do “Due Market Diligence.” </li></ul>
    26. 26. Think Win-Win <ul><li>Develop Guanxi before negotiations begin. </li></ul><ul><li>Chinese negotiators may make unreasonable first demands to find out what is reasonable. Walk away! </li></ul><ul><li>Chinese courts may not enforce unfair contracts. </li></ul>
    27. 27. Contract Development <ul><li>Jargon and slang will be misunderstood. </li></ul><ul><li>Take detailed notes to record what was decided. </li></ul><ul><li>Anything that will affect the bottom line must be clearly detailed in the contract. </li></ul><ul><li>Protect patents: </li></ul><ul><li>In China a patent belongs to the first person to file in China – not the inventor. </li></ul>
    28. 28. Attitude <ul><li>“ Many Chinese will never admit they are wrong. This rarely fazes a person who wants to succeed in China.” </li></ul><ul><li>Make sure the entire family is well situated and engaged. </li></ul>
    29. 29. Government Relations <ul><li>Know government policies and procedures. </li></ul><ul><li>Develop relationships with key officials. A good reputation is at least as important as having good written documentation. </li></ul><ul><li>Do not assume bribes are needed to make things happen . </li></ul>
    30. 30. Graft <ul><li>The Chinese culture is not corrupt. The Lt Governor of a nearby Province was recently executed for corruption. </li></ul><ul><li>Have more than one person involved in all major transactions. </li></ul>
    31. 31. Property <ul><li>There may be significant economic advantages to locating in an Economic Technical Development Zone (ETDZ). </li></ul><ul><li>Make sure the zone is officially recognized by the central government. Local tax concessions may be illegal. </li></ul>
    32. 32. Staffing <ul><li>Make sure there are accurate and detailed job descriptions and selection criteria before advertising for help. </li></ul><ul><li>Guanxi is personal and takes time to develop. </li></ul><ul><li>Put the right team in place and make it attractive for them to stay. </li></ul>
    33. 33. Staffing <ul><li>Choosing language skills over job skills may be a crucial mistake. </li></ul><ul><li>There are many University educated Chinese who have language skills, job skills and relevant business education and experience. </li></ul>
    34. 34. Staffing <ul><li>Using an employment agency may be helpful given the need to comply with Chinese law. </li></ul><ul><li>Everyone is issued a hukou that allows them to receive benefits in a specific location and a dang’an that enables them to work for a specific company. </li></ul>
    35. 35. Salary Ranges <ul><li>Salaries for white-collar workers </li></ul><ul><li>in Beijing, Guangzhou, Shanghai and Shenzhen shows a remarkable range. </li></ul><ul><li>Foreign invested firms average 58,539 Yuan </li></ul><ul><li>($7,079 US) </li></ul><ul><li>MBAs average 70,654 Yuan </li></ul><ul><li>($8,543 US) </li></ul><ul><li>Computer-related industries average 44,102 Yuan ($5,333 US) </li></ul><ul><li>_______ </li></ul><ul><li> english/2001/Jul/15731.htm </li></ul>
    36. 36. Salary Ranges <ul><li>Registered lawyers, accountants and medical doctors averaged 42,995 Yuan ($5,199 US) </li></ul><ul><li>Secretaries and administrative assistants, translators and office managers average 26,017 Yuan </li></ul><ul><li>($3,146 US) </li></ul><ul><li>Men earn 1.2 times more than women </li></ul><ul><li>A nice home costs about 160,000 Yuan ($20,000 US) </li></ul><ul><li>_______ </li></ul><ul><li> english/2001/Jul/15731.htm </li></ul>
    37. 37. Localization <ul><li>Local control is a major goal of most multi-national firms. </li></ul><ul><li>Promoting someone from within before they are ready disrupts progress. </li></ul><ul><li>Mentoring is the key to successful localization. </li></ul>
    38. 38. Perspective <ul><li>America, China and Europe are about the same in size and market potential. </li></ul><ul><li>America and China are alike in terms of national identity. Both use betterment of their citizens as proof they have the best political system. </li></ul><ul><li>China is more like Europe than America in cultural and language complexity. </li></ul>
    39. 39. Macro Issues <ul><li>WTO implementation and compliance are increasing Chinese economic opportunities. </li></ul><ul><li>Reform of State Owned Enterprises is increasing productivity. </li></ul><ul><li>. </li></ul>
    40. 40. Macro Problems <ul><li>Counterfeiting and Intellectual Property compliance are recognized as problems and the government is trying to enforce these laws. </li></ul><ul><li>Controlling pollution vs. economic development. Citizens are starting to demand a safe and clean environment. </li></ul>
    41. 41. Macro Problems <ul><li>The one-child policy will make it difficult to support an aging population. </li></ul><ul><ul><ul><li>Privatization of the healthcare system has made it difficult for some persons to obtain good healthcare. </li></ul></ul></ul>
    42. 42. Government <ul><li>Stability is the central theme of all central government policies. </li></ul><ul><li>All major decisions are hotly debated. </li></ul><ul><li>The military is under firm control of the civilian government. </li></ul>
    43. 43. Risks <ul><li>Growing unemployment as State Owned Enterprises are privatized. </li></ul><ul><li>Rising crime rates as disenfranchised people try to survive. </li></ul><ul><li>Growing urbanization and the growing rural-urban income gap. </li></ul>
    44. 44. Risks <ul><li>Pension reform may “break the bank” as the population ages. </li></ul><ul><li>Lackluster public consumption limits economic growth. </li></ul><ul><li>Lessened government spending might limit economic growth. Some of the biggest projects are done . </li></ul>
    45. 45. Opportunities <ul><li>China has an 80% rate of literacy. Citizens are employable. </li></ul><ul><li>Development of Western China will create new economic opportunities. </li></ul><ul><li>Chinese people save a large percentage of their money and will spend it once they believe prosperity will continue. </li></ul>
    46. 46. Summary <ul><li>It takes five steps to establish a foreign-invested enterprise. </li></ul><ul><li>Minimal registered capital is required. </li></ul><ul><li>Invoices are important and corruption is punished. </li></ul><ul><li>Chinese accounting standards are very similar to those in the United States of America. </li></ul><ul><li>Guanxi is an important part of doing business in China. </li></ul><ul><li>Enterprises that succeed have done “due market diligence” and have followed a sound business plan. </li></ul>
    47. 47. Most of All <ul><li>Most foreign invested enterprises make money in China. </li></ul>
    48. 48. <ul><li>Thank you very much. </li></ul><ul><li>This presentation was developed by Tang Tang of Wuyi University in Jingamen City, China and John Bradley of Estrella Mountain Community College in Phoenix, United States of America </li></ul>