Choosing the right business structure for trade in China depends on many factors, including the nature of the product and the market in which it will be sold. There are four basic models.
The chances for success are improved by working with lawyers and other professionals who are fluent in both written and spoken Chinese, familiar with the culture, and in a position to maintain regular communications to monitor progress and relationships.
1. Wholly foreign-owned enterprise (外资企业)
A wholly foreign-owned enterprise (“WFOE”) can be formed in China without any need for local Chinese investment. As a first step a foreign investor needs to secure premises.
The process of then incorporating a WFOE takes several months and involves fees and filing various official documents translated into Chinese.
2. Joint venture with a Chinese entity (中外合资)
A joint venture with a Chinese entity is another option. It should involve careful due diligence to identify and assess the suitability of the Chinese entity.
Following selection, a joint venture agreement should be carefully sketched, negotiated and drafted. Note carefully the order of those three steps. Doing them well will clarify each party’s expectations, resolve differences of view quicker and provide a legal safety net if things don’t go to plan.
3. Distribution agreement (经销协议)
For some, trade in China does not require direct local presence as is involved in option 1 and 2 above.
Successful market entry may still need access to various resources, for example administrative and product support people, dedicated marketing services and warehouse facilities and personnel. For all this, consider appointing a local distributor under a distribution agreement.
It is a myth to think that distribution agreements are generic. They should be customized adopting suitable commercial and legal details. The same mantra applies, as an overview a good distribution agreement will clarify each party’s expectations, resolve differences of view quicker and provide a legal safety net if things don’t go to plan.
4. Online marketplace (网购平台)
Online trade is a final low-cost option for market entry. In contrast to options 1, 2 and 3 above it involves no need for direct presence in China.
Although Chinese import regulations and procedures still apply, online marketplaces allow an Australian business to reach Chinese consumers. Available ecommerce platforms include:
Australia Post Flagship Tmall Store (澳洲邮政海外旗舰店) – Tmall is China’s dominant business-to-consumer online marketplace operated by the Alibaba Group.
Whichever option is suitable, local Chinese practices and laws, including intellectual property protection, should be reviewed and action taken. The action may be something to do before trade begins. It may be as basic as securing a trade mark registration, putting in place an intellectual property licence or assignment agreement, or checking contractor or employee agreements.
Rosana She was born in Hong Kong, went to high school in England, and graduated from Sydney University with degrees in law and arts (media and communications). She is a lawyer with Dilanchian Lawyers & Consultants specialising in trade with China, intellectual property, information technology and general business law.