The challenges of starting a business in China – Part 2 (Business Operations)
In my previous blog entry I laid out some of the obstacles and challenges when choosing to open a business in China. In this post I will get into some of the deeper details of opening a new Chinese-based company and things you should expect to deal with during the process.
Any new company will require a capital injection once the company is formed. The capital amount must be decided at the beginning of the process and has to be transferred into the company within a two-year time frame or you risk being blackballed from ever doing business in China again. This number is a bit of a double-edged sword. Naturally you would want this number to be as low as possible, but the number shows up on some informational resources and companies use this number to determine your commitment to China. If the number is too low they might not take you seriously. This means the number can’t be based on potential success and must be guaranteed. There is also a floor level to guarantee approval, although approval can never be guaranteed. You must have capital amount of at least $140,000 to start a WFOE. If the injection is below this amount you are at the mercy of the Chinese review personnel to decide if your application will be accepted or not. Another situation that really complicates things is Hitcents U.S. can buy airplane tickets just as easily as Hitcents China can, so what account do you purchase the tickets from? If you purchase from China, you will be spending potential capital but the process of buying tickets from a U.S. based airline from China is complicated and foreign. When looking at an overall budget for the endeavor you have to determine what will be paid from the US company and what will be paid from the China company. This has to be taken into consideration with deciding on your initial capital amount.
As if starting a new company in China wasn’t challenging enough, without a temporary business license it is very hard to hire someone to work for you in China. In China, employees are accustomed to having a labor contract with their employer. Without a labor contract they do not feel secure and cannot guarantee payments into their insurance and other government funds. It’s possible to pay someone to work for you before you receive your business license, but they will have to really trust the company. Then you still have the difficult task of determining how to pay them for their services. This means a lot of the work has to be done between consultants and government officials, which leads to many lags in time waiting for communication between time zones and languages. To help bridge this gap there are many companies that can hire the employees temporarily until the temporary business license is obtained, but there will be VAT (value added tax) added to the salary plus a service fee by the company to cover their exposure and expenses.
At this point in the process I realized that I was going to have to move to China to see this process through. Originally I thought I could do it remotely and just handle most things through email and snail mail. I quickly realized this was not going to be possible. If you are reading this and want to start a company in China be prepared to live there for at least six months or a year. If this does not sound like the road for you then this is a good point to change course. There are just too many meetings and face-to-face appointments that have to be accomplished to make this process successful. If this time investment can’t be made then it’s a waste of money to try to move forward. In working with Chinese government officials, the common answer to all questions is “Yes we can” or “This is not a problem”. From my experience it seems that most Chinese people would prefer to tell you “Yes” and not follow through with it than to tell you “No” on the spot. Just remember, until something is completed it hasn’t happened and don’t necessarily expect it to.