Setting up a shop in China

[Spindrift]

I know some people here have some experience with setting up a business in China.

If I wanted to move to China and set up a small software development company (5 to 10 programmers) to outsource to the US, any idea how difficult it would be?

Are there any specific regions in China that might be better than others?

If I was a naturalized Chinese citizen would it be easier?

[Francesca R]

http://forums.randi.org/showthread.php?t=104017

/helpful-link-dept

[Wolfman]

Originally Posted by Spindrift

I know some people here have some experience with setting up a business in China.

If I wanted to move to China and set up a small software development company (5 to 10 programmers) to outsource to the US, any idea how difficult it would be?

Are there any specific regions in China that might be better than others?

If I was a naturalized Chinese citizen would it be easier?

I think pretty much everyone expects me to jump in on this one

Francesca gave a link to some discussion on this, but I want to address your questions more specifically. As to my credentials (my apologies to those who've seen me say this many times, but just in case Spindrift isn't familiar with my background), I'm Canadian, have lived/worked in China since 1993, am currently living in Beijing, and in the process of setting up my third business here. In my previous business, a consulting company, I worked for eight years as a consultant to advise people doing business in China.

So, to your questions:

China is, potentially, a great place to do business, and make tons of money. It is also, potentially, a great place to lose tons of money. You must know what you are doing; few countries are as hard on ignorance as China is (and few countries reward intelligence more).

Do you speak any Chinese? Have any previous experience with China? My very first advice to anyone seeking to do business in China is that, before they start that business, they should spend a minimum of one year living here. Several reasons for this.

First, you can use the time to begin learning Chinese, and the culture. This will be crucial, particularly as you plan to run a company where all your staff will be Chinese, and knowing how to lead/motivate/manage them will be absolutely crucial to your company's success. Absolutely do not underestimate the huge impact that cultural differences will have on your bottom line.

Second, you'll be doing on-the-ground market research; check out others doing the same thing, and find out what mistakes they made, what problems they had. This information could help you avoid crucial and very costly mistakes as you set up your own company.

Third, you'll be networking. In China, its all about 'guanxi', or relationships...the saying that "It's not what you know, but who you know", is an overused but nonetheless very true saying here. Use the time to meet people in this industry, particularly on the Chinese side...the people who, when you inevitably hit a very big bump in the road, will be able to help you get over it. Without that support network, your job will be ten times more difficult (and ten times more likely to fail).

Fourth, and probably most important -- you'll be finding out how well you can adapt to China. Having been here 15 years, I've seen the same thing happen over and over and over again. People arrive here, and for the first 3-6 months, are just in love with China. Its the most wonderful place they've ever been, every day is fascinating, and life is beautiful.

Then the honeymoon ends, and reality hits. You're in a country where people are constantly pointing at you, and talking about you (well, if you're white or black...if you happen to be Asian, this isn't such a problem). A country where everyone talks different than you, acts different than you. A country where even small problems become much bigger, simply because you don't know what you're doing. A simple cold becomes an exercise in frustration and futility as you try to navigate your way through a Chinese hospital where nobody understands what you're talking about. Or you lose your house keys, and find yourself alone on the streets of a foreign city, not knowing who to call or how to get back inside. You find it easy to make casual friends with the Chinese, but deeper friendships are far more difficult, because of the cultural differences.

By the end of the first year, by far the majority of these people are feeling ready to leave China. Oh, they might hang on for one or two years...but they'll be complaining all the time, and counting the days until they can finally get out. I'd say that well over 90% of the foreigners I see who come to work here fall into this category.

If you're planning to set up your own company, you'll have far more stresses than the average foreign employee. You'll have to deal with all the Chinese gov't bureaucracy for setting up your company. You'll have all the additional stress and difficulty of managing Chinese staff (not to say that Chinese staff are difficult, but that the cultural differences can lead to a lot of problems on both sides).

So if you come over here, and make a significant investment, only to discover 6 or 12 months later that you simply don't enjoy living here, you're gonna' find yourself in a very difficult and unhappy position.

So take the time...come here first, before you make a serious commitment to business, and see how you do. Acclimate yourself, learn the language and the culture, make friends, build connections. Then, after all that is done, and if you still feel that China is the place you want to be -- jump in with both feet, and go for it!

I do not at all mean to depict China as a hell hole. Personally, there is no place I'd rather be, this is home to me now, and I have neither desire nor intent to leave. I have other friends who feel very much the same. But we are very much the minority...it takes a very particular kind of temperment and personality to do well here over the long term.

Now, I will say that your business plan has a significant advantage over many other businesses in China, in that you're not planning to try to sell to the Chinese market at all. You'll be outsourcing software development to the U.S. The reason this is important is that there's far less danger of local Chinese just copying/stealing your business model, and pushing you out of business. If you do business within China, they will have a huge advantage over you, and you really need to know what you are doing. But in your case, your business is targeted outside of China, where you have better connections than them, and know better how to approach and deal with your customers. So in this regard, it is a much safer plan than many others.

However, you also need to consider the hidden costs...the costs that are not so obvious. I'm not sure how you plan to run the company, if you will run it yourself, or if you plan to have other managers. But at the start, because of both language and cultural differences, you'll likely find it necessary to hire a foreign manager to run things at first. That person can train your staff, to give them the knowledge/skills/experience to eventually take over...but while that is happening, you'll be paying expat wages that are higher than what you'd pay back home (if you plan to take this role yourself, that could reduce these costs significantly).

Also, besides technical computer and programming skills (which are very easy to find in China), you also will need staff who speak decent English. After all, they need to correspond with the clients, to understand the clients' needs; and they need to communicate with you regularly. The problem is, the majority of Chinese who are good at software are not terribly good at English. So you'll need to invest time and money to train them. But, once they're trained, they'll become targets for poaching from other companies, who will try to steal them away from you. If you're not careful, and don't know what you're doing, you'll end up in a vicious cycle where you basically just end up constantly spending money to train staff, just so that they can find better jobs elsewhere.

Next is the question of how you set up your company. You basically have three choices -- a Wholly Foreign Owned Enterprise (WOFE), a joint venture, or a Chinese company.

WOFEs are by far the preferred way to go. You retain full control of your company, and repatriation of profits (that is, getting your profits out of China and back to your home country) is far easier. However, to do this, you have to have a foreign company already set up and legally registered in another country, and have to provide official bank documents to confirm that you have sufficient funds dedicated for investment to get the company going in China. The amount that is required for investment is determined by the government, according to the industry that you are in (not according to how much you think it will cost to get the company started). This can be anywhere from US$20,000 to US$2,000,000 (or even higher, for really major operations, but that wouldn't really concern you). Since I'm not involved in this specific sector, I don't know what the minimum investment required by the government would be...one of many areas you'll have to do research on.

The second option is a joint venture...a company that is jointly owned by you, and one or more Chinese partners. The advantage of this is that registration is far easier, you don't need to have a company already established in another country, and the amount of initial investment required by the government is much lower. But on the bad side, if you do now know the Chinese partner very well, there is a very, very high chance that they will end up controlling the company. Even if you technically retain the majority of shares, there are a million ways that they can get around that, and force you to do what they want. By far the majority of foreigners prefer to avoid JVs, unless absolutely unavoidable (for example, some industries such as banking and publishing will not allow a WOFE, and are only allowed to be set up with a Chinese partner...but software does not fall in that category).

The third option -- well, unless your wife is a Chinese citizen, and you can set up the company in her name, I'd very definitely advise against it.

As to specific regions, you definitely want to look at Beijing, Shanghai, or Shenzhen. Wouldn't really recommend anywhere else. This is where you'll find the best people, and have the easiest time setting up. Each of these cities are very different from each other, and foreigners here inevitably end up liking one while hating another -- which is again a good reason to come and live here awhile first, try out each city, and see which one suits you best. For me, I love Beijing, can tolerate Shanghai, and can't stand Shenzhen (but know others with completely opposite opinions).

If you were a naturalized Chinese citizen? Yes, it would be far, far easier. But unless you are already a Chinese citizen, I cannot see any decent argument for becoming one. If you are overseas Chinese, it is easier to obtain citizenship...but in doing so, you must revoke any other citizenship. This means that you are 100% under Chinese gov't control. Travel to other countries is far more difficult. And often the gov't of the country whose citizenship you revoked will refuse outright to grant you visas to go back there to visit. And if you're not Chinese, you have all those same problems, but in addition face far, far greater challenges in even getting citizenship (you'll have to live here at least five years, for example, before they'll even consider you).

So unless you actually are a Chinese citizen now (which I am assuming from your OP that you are not), I really wouldn't consider this to be an option at all.

These are the basics. Hope it helps. If you have more questions (which I'm pretty sure you will), feel free to post them here, or contact me directly by PM.

[Wolfman]

Oh, one other question that is very important...your nationality.

If you're American, you should be aware that Americans are expected to pay taxes on all income both in China, and in the U.S. You get double-taxed.

Now Canadians, and a number of other countries, have tax treaties that make this unnecessary (I only pay taxes in China). But the U.S., and some other countries, don't have such an agreement.

So, if you're American, you might want to look at setting up an offshore company (British Virgin Islands, and Hong Kong, are two of the preferred options). This enables to get profits out of China, without reporting it to your own gov't. It is easy and cheap to do this (I have a holding company registered in Hong Kong), but you run the risk of your gov't discovering this..at which point you can get in trouble.

[Spindrift]

Thank you very much! That was what I was looking for. I should have searched.

[Wolfman]

Oh...and another great resource for you, to find out more industry-specific info, would be the Beijing Linux User's Group.

[H3LL]

Only just seen this.

Everything WM says.

I have a couple of suggestions and WM will jump in and correct me if needed, I'm sure.

Originally Posted by Wolfman

As to specific regions, you definitely want to look at Beijing, Shanghai, or Shenzhen. Wouldn't really recommend anywhere else.

I wouldn't keep my options quite so limited. Although there are advantages to the above they do come with quite high costs and, in my experience, the quality of employees available for the smaller companies is rarely good, leaving you to pick from the multinational corporate rejects.

Many Chinese cities are investing heavily in "Tech Zones" and offer extremely favourable conditions for setting up companies exactly like yours.

The down-side is that some of these are based more on wishful thinking that practical business sense - So how to find good ones?

Checking development and growth and existing success stories (Chinese media does so love a success story) and researching the veracity of those stories would be my only suggestion without knowledge from someone on the ground.

Golden rule - If there are no universities in the area producing graduates in the correct field for you - forget it.


[Dalian advert]
From a personal perspective I would recommend Dalian and with some caution ShenYang (both in Liaoning province).

Dalian has a well established software outsource businesses with perhaps GE's largest Chinese supplier. In addition, the existing businesses are very well connected to both Indian suppliers (Tata invest heavily here) and Japanese and Western customers. Early on you should be able to pick up some tasty crumbs from the big player's table (ask me for a contact).

You should have little difficulty finding English and/or Japanese language and programing skills in the population and from first rate universities. Their Tech Zone is continuing to expand and develop well and still with favourable (but not as good as they were) conditions for new businesses.

WM loves Beijing - It's not my cup-of-tea, too mad - I love Dalian - Cleaner and comparatively sensible.
[/Dalian advert]

Now pay attention to WM's response.

.

[H3LL]

Double post

[Wolfman]

Originally Posted by H3LL

[Dalian advert]
From a personal perspective I would recommend Dalian and with some caution ShenYang (both in Liaoning province).

Dalian has a well established software outsource businesses with perhaps GE's largest Chinese supplier. In addition, the existing businesses are very well connected to both Indian suppliers (Tata invest heavily here) and Japanese and Western customers. Early on you should be able to pick up some tasty crumbs from the big player's table (ask me for a contact).

You should have little difficulty finding English and/or Japanese language and programing skills in the population and from first rate universities. Their Tech Zone is continuing to expand and develop well and still with favourable (but not as good as they were) conditions for new businesses.

WM loves Beijing - It's not my cup-of-tea, too mad - I love Dalian - Cleaner and comparatively sensible.
[/Dalian advert]

Actually, I love Qingdao (which is very similar to Dalian) far more than Beijing. Please note that I also suggested Shanghai and Shenzhen...I'm blah on Shanghai, and don't really like Shenzhen at all.

You are correct that there are various special economic zones that offer great deals that reduce costs for starting/running a business there. However, those reduced costs are really only beneficial if you're a very large operation, and the amount of money saved runs into the millions.

On the other side of the equation, you have much greater hassle and difficulty. Despite the "special status" of these areas, they are notoriously unreliable and untrustworthy. If you don't already have good China experience, and know how to deal with them (and what problems to expect), the problems, delays, and extra costs will more than outweigh the savings that you make (unless, as I said, it is a huge multimillion dollar project).

Finding Chinese staff who know how to do the relevant programming is fairly easy; finding staff who have the relevant skills, and who speak good English, is not so easy. The best ones all tend to run off and get job in...well...in cities like Beijing, Shanghai, and Shenzhen.

An even bigger problem is expat staff. Most special economic zones have very few foreigners, and few facilities (homes, restaurants, shopping centers, etc.) that cater to foreigners. Of course, maybe you get lucky and find someone who actually likes living in that type of area...but they are the exception, not the rule. You can expect that you'll have to offer a much higher expat package in order to keep foreign staff living/working there...which, again, could end up negating any savings you're getting.

Now, I will admit that, in regards to the latter aspects, Dalian (and Qingdao) is a good option. Its a beautiful city, quite developed, and with a rapidly growing expat population. For anyone who has already done business in China, and who knows what to expect, I'd consider it a very viable, and even attractive, option.

But for the first-timer...no, I wouldn't suggest it. In the end, it all comes down to dealing with local gov't officials and bureaucrats. That is what, in many ways, will make or break a new company in China. And while cities like Beijing, Shanghai, and Shenzhen are learning to do business more by international standards, that has not spread significantly to other cities. You will need to deal with the locals on their terms. Know how to build relationships, how to give face (and avoid making them lose face), how to deal with the inevitable problems and misunderstandings in the proper 'indirect' Chinese style, etc.

All of this is based on the assumption that the person doing this is new to China. If that assumption is wrong, and they have previous experience setting up a company in China, and negotiating contracts with Chinese, then I would withdraw my reservations, and heartily join with H3LL in recommending Dalian as a very viable and attractive alternative. Not as good as QINGDAO, of course...but then, not every city can be the host to 2008 Olympic boating events, and home to China's version of Oktoberfest

(Final note -- I actually exchanged a few PMs with spindrift awhile ago, after he started this thread, and I think most of his personal questions were resolved. But that doesn't make the thread itself any less interesting )

[H3LL]

Mrs. H3LL gives it all a 'thumbs up' and I just wanted the last word*.

Word.










* A hopeless proposition

[Foolmewunz]

Lest one be confused due to Pinyin spellings. Qingdao and Tsingtao are the same place, and Tsingtao Beer comes from there. (Which is why the have an Oktoberfest... Tsingtao was originally built by German interests.)

Back on topic as to best cities... Shanghai is a war zone, financially, and the population, now likely to be topping 20 million makes it daunting for many. If you're looking to get access to techies, though, you might want to consider Suzhou. A short-ish drive from Shanghai, and one of the approximately ten cities in China who call themselves, "China's Garden City" (but in the case of Suzhou, it's fairly accurate).

The science parks and export zones are all brand new and thus a temporary blot on the landscape, but they'll green-ify the area as the Chinese have done everywhere, and the old city of Suzhou is really quite beautiful. Plus, with freedom to move around in Chinese employment, now,... picking up talent in IT, EDI, or programming would be fairly easy. The area is replete with CM and OEM businesses, and many of the white collar staff in those organizations have the necessary skills for outsource programming.

Just curious, but why China? Is it just the attraction of the cents-on-a-dollar cost of manpower? The difficulties in infrastructure and communications might far outweigh the savings. I can't see making a killing with a small shop. The people who are buying your programming also know that it's a low-end manpower market and expect massive savings from you.

(Oh, and BTW.... the US gov't taxes expat income of over 85000 usd per year. It's not hard to work out ways around that, though. Chiefly, hire anyone from the USA as a languag-specific administrator or trainee, and only show low salary on the books. It sounds shady, and it is, but it's very common and easily workable. And they count portions of your housing allowance, too... As I've learned the hard way. But it's not really a double tax as you are credited with the amount you pay locally before they hit you with the add-ons...)

[Wolfman]

Not much to add to that, really. I personally tend to consider Suzhou as pretty much a "suburb" of Shanghai...I'd tend to include it as part of Shanghai when discussing doing business there. Perhaps not fairly so, in that Suzhou is quite distinctly different from Shanghai. You can work in Suzhou, yet all the "conveniences" of Shanghai are only a short distance away.

[Hindmost]

Interesting stuff...in a few years, I may be moving to China as my job may taking me there.

a few things...

Wolfman: I was under the impression that the US and China had a standard tax treaty that considered only onshore revenue as taxable. It is very typical of what I was familiar with when I lived in Korea.

A question: when starting a new business, do you need an agent to help you make contacts with the appropriate people?

glenn

[Wolfman]

Originally Posted by Hindmost

A question: when starting a new business, do you need an agent to help you make contacts with the appropriate people?

glenn

Heck, I've been here 15 years, am setting up my third company, and I wouldn't even consider doing it without an agent. Not only are their relationships with the various authorities important, but Chinese rules, regulations, requirements, and restrictions are always changing so often, that you really need someone who is dedicated full time to keeping track of it all.

In regards to tax laws, Foolmewunz would probably be a better authority. I'm Canadian, and have never had to worry about it (if I am resident in China, I do not have to pay any Canadian taxes). I know that I've often heard Americans complaining about being double-taxed, or financial managers complaining about the extra cost involved with American expats because they have to pay part of their taxes so that they aren't double-taxed. But I'm not sure of the specifics of who is or is not taxed in this manner, or of how much it is.

[Hindmost]

Originally Posted by Wolfman

Heck, I've been here 15 years, am setting up my third company, and I wouldn't even consider doing it without an agent. Not only are their relationships with the various authorities important, but Chinese rules, regulations, requirements, and restrictions are always changing so often, that you really need someone who is dedicated full time to keeping track of it all.

In regards to tax laws, Foolmewunz would probably be a better authority. I'm Canadian, and have never had to worry about it (if I am resident in China, I do not have to pay any Canadian taxes). I know that I've often heard Americans complaining about being double-taxed, or financial managers complaining about the extra cost involved with American expats because they have to pay part of their taxes so that they aren't double-taxed. But I'm not sure of the specifics of who is or is not taxed in this manner, or of how much it is.

I assumed an agent was needed...most don't understand the importance of such things when negotiating. When my company--after a few years--tried to go without an agent in Korea, the results were not good. Had to backtract very fast.

With individual taxes, back in my expat days, I had to pay Korean taxes which were covered by my company and US taxes were "equalized" so that I would pay no more than I would had I been living in the states. My company took any exemptions. Essentially, any salary premiums were tax exempt to me personally.

On the corporate taxes, on shore profits were taxed in Korea, but any offshore stuff was only subject to US taxes. We had to keep the onshore and offshore companies separate to aviod paying onshore taxes for the entire contract. The tax treaty with Korea was set up with this type of thing in mind. I would expect it to be the same China. US managers may be complaining about having to pay Chinese taxes.

Foolmewunz: can you add anything?

glenn

[Foolmewunz]

Hindmost,

As I mentioned above, the ceiling is now $85K. It was put in a few years ago. It won't matter if there's a treaty (that's what makes the 85K exempt). If(when) you hit the 85K range, which is almost automatic if you have to have housing provided in any major Asian city (think 4000/5000 p.m. for expat two bedroom apartments...), then the equalization thing sets in as you mentioned in your Korean stay. Prior to about 2002, the housing was not considered income, so that's a big change. (But it's not the entire housing, yet a portion thereof.)

Best source of info.... The AmCham(American Chamber of Commerce) in the city you intend to go to. If I can find some links when I get to work, I'll post them. When the laws changed everyone spent months forwarding various interpretations of the new regs, and I'm not sure I still have them.

[Hindmost]

Originally Posted by Foolmewunz

Hindmost,

As I mentioned above, the ceiling is now $85K. It was put in a few years ago. It won't matter if there's a treaty (that's what makes the 85K exempt). If(when) you hit the 85K range, which is almost automatic if you have to have housing provided in any major Asian city (think 4000/5000 p.m. for expat two bedroom apartments...), then the equalization thing sets in as you mentioned in your Korean stay. Prior to about 2002, the housing was not considered income, so that's a big change. (But it's not the entire housing, yet a portion thereof.)

Best source of info.... The AmCham(American Chamber of Commerce) in the city you intend to go to. If I can find some links when I get to work, I'll post them. When the laws changed everyone spent months forwarding various interpretations of the new regs, and I'm not sure I still have them.

Glad you mentioned AmCham. They were a good source in Korea. They published a book on how to do business that was very helpful.

When I lived in Seoul, our apartment was about 4k US per month. That was in the 91-93 time frame. It was resonable is size. If we decide to go to China in the future, it will most likely be at a nuclear plant...

http://en.wikipedia.org/wiki/Sanmen_Nuclear_Power_Plant

I don't know if I have the energy to do startup another plant.

glenn

[Foolmewunz]

Korea? Nuclear plant?
(I bet you're thinking a bad joke about the North is coming, right? Or, at worst, a rant....)

Were you at one of the Kepco plants? I shipped most of the harmless materials for Boryung 3 and 4 back in the late 80s or early 90s. One of the engineers kept referring to it as Boryung Nuclear Plant #3, but others called it 'Thermal Plant'. All the documents said "nuclear", though. I see it's listed i Korea, though, as a TPP (Thermal Power Plant). Is that just to make it seem more innocuous, or is there a distinction? ( I seem to recall still being in our WTC offices in NYC, so it'd be before '91 when we moved.) I did a lot of project forwarding, heavy lifts, etc.... This was just ancillary material, though... nothing exciting other than a couple of heavy lift pieces of 40 or 50 tons.

/end derail

[Hindmost]

Originally Posted by Foolmewunz

Korea? Nuclear plant?
(I bet you're thinking a bad joke about the North is coming, right? Or, at worst, a rant....)

Were you at one of the Kepco plants? I shipped most of the harmless materials for Boryung 3 and 4 back in the late 80s or early 90s. One of the engineers kept referring to it as Boryung Nuclear Plant #3, but others called it 'Thermal Plant'. All the documents said "nuclear", though. I see it's listed i Korea, though, as a TPP (Thermal Power Plant). Is that just to make it seem more innocuous, or is there a distinction? ( I seem to recall still being in our WTC offices in NYC, so it'd be before '91 when we moved.) I did a lot of project forwarding, heavy lifts, etc.... This was just ancillary material, though... nothing exciting other than a couple of heavy lift pieces of 40 or 50 tons.

/end derail

Boryung actually is a fossil plant site...the Koreans have massive nuclear and fossil projects ongoing.

Actually, most people didn't know there was a difference between the North and south or that there was a north and south...pathetically funny actually. A bit different here...

[/end second derail]

glenn