After your first study visit to China, you may realize that doing business in China requires a local presence of your firm to facilitate business communications, or you may wish to further assess a better understanding of the size and potential of the China market before investing committed resources.
The next step is to consider setting a representative office, which is the fastest and the most economical way to competitively position your firm’s presence in China. But first of all, you need to understand if a representative office’s structure is the most appropriate for your firm’s China’s market entry strategy.
A representative office’s primary function is to conduct China market research, and to coordinate parent firm’s activities in China. This includes liaison with local contacts, contract negotiations, warranty and after sales service, lastly import, export and distribution services.
However, a representative office is not allowed to conduct profit making activities which includes collecting payments or issue product or service invoices. Besides, the representative office can only represent its parent company for its existence in China. It is important to note although there is no with no profits, taxes to are still payable to the Chinese government. Furthermore, recruitment of staff cannot be done directly through your office but has to go through a local human resource agency.
Depending on your nature of business and its intended operations in China, the location of your representative office cannot be overlooked in your market entry process. Most representative offices are often located in major cities like Beijing, Shanghai, Guangzhou and Shenzhen as these cities offer higher agglomeration of the same industry players. However, 2nd or 3rd tier cities should also be considered for an early mover advantage into China market.
In addition, your representative office portrays your commitment and business operation in China and therefore an above average office furnishing will aid to leave a good impression on your Chinese partners or clients when they visit your office for discussion.
A representative office in China not only demonstrates your firm’s commitment to stay competitive in China, it also helps to improve communication between partners and in turn building up the much needed “Guan Xi” (Relationship) for more business opportunities and cooperation.
However if you are considering to set up a manufacturing or processing facility in China, a wholly foreign owned enterprise (WFOEs) will be of a better option, but would require a higher capital injection.
A point to note is that, even if you have set a WFOE in a city where your manufacturing facility is based, you may want to consider having a representative office in your target sales cities to facilitate business operation. On the other hand, a good distribution partner with regional coverage can help to rectify this problem.
Setting up a representative office in China primarily requires 4 stages and this entire process can take up till 4-5 months time.
Stage 1 - Pre-approval Stage
Once you have decided to base your representative office in which city, the next thing is to approach the local Ministry of Commerce (MOFCOM) for contacts of a local designated foreign enterprise service company (FESCO) who will be in charge of your representative office application process. You should be paying approximately US$800 to $1000 to a designated FESCO for their service of notifying you on the relevant upcoming deadlines and administrative procedures. In addition, a signed lease agreement is one of the pre-requisite for the approval; therefore it is vital to secure a lease for a “grade A” office space before submitting the application.
Stage 2 - Application Stage
Generally your application approval should be done by MOFCOM, but if your industry is specific to banking, insurance, law, accounting and media, you may have to approach the relevant authority which has jurisdiction over your industry sector. Once approved, you should have the Certificate of Approval certifying your legal presence for the next 3 years which can be further extended.
Stage 3 - Registration Stage
This stage is to register for your representative office’s business license which must be renewed annually. It is important to note that you must complete the registration within 30 days of your approval from stage 2. The application together with the supporting documents is required to be submitted to the local State Administration of Industry & Commerce (SAIC and the process normally takes about 1-2 months time.
Stage 4 - Post Registration Procedure
Firstly, In China, it is expected for your representative office to register the office location with the local police (Public Security Bureau) and to register with local and national tax bureaus. Secondly, you should make financial and corporate seals as it is a practise in China to use them on official documents. Thirdly, opening a foreign exchange bank account will aid to facilitate overseas fund transfer. Fourthly, to import the relevant equipments or materials, remember to complete the relevant customs registration. Lastly, get a FESCO to assist you in recruiting of Chinese staff.
Once all this is done, your representative office is set to establish its presence in China. However before getting to this stage, a good market research study is required to ensure that your products or services are viable in the Chinese market.
About the Author:
Desmond Wong is a consultant of Starmass International. Starmass provides full professional consulting services to assist overseas companies in China market research, competitor study and China market analysis till export to China