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Selling In And Into China. Four Good Tips And Mine.

Posted in China Business

The New York Times has an excellent article on doing business in China. The article is entitled, “New Path for Trade: Selling in China,” and it is replete with good advice.  Except mine.

Let me explain.

The article is on selling goods in or into China and it talks of the great opportunities there and of how to do it well.  It presents the following good advice:

  • Bilingual is not bicultural.  Lou Hoffman of The Hoffman Agency notes something I am always saying: do not mistake language for culture.  Someone can speak your language and still have no clue about how you want to conduct your business.
  • Let others open the door.  Ric Cabot of Cabot Hosiery Mills/Darn Tough Socks tells of how his company “edged into the Chinese market” by testing it with a Chinese distributor.  “But if it gets to the point where we see we’re leaving too much money on the table, we might consider doing something different.”
  • Don’t get knocked off.  Earl Kluft, owner of E.S. Kluft & Company talks of the knock-off problems his company had in its first foray into China and of how things are going better this time due to a better a better China-based partner. Kluft found its new partner “through a friend” and with that partner it has “cautiously re-established a sales channel with minimal upfront investment.” The Chinese partner pays royalties and is able to buy Kluft’s mattresses at “a special discount.” I then chime in, advocating finding “reliable partners on the ground…. through people you know, and then pay for whatever due diligence is necessary to make sure that you have made the right choice.” And to do all of that “before you start doing business with them.”
  • Look locally before leaping.  The article talks of how some states have government-run international trade programs that offer counsel. Samar Ali, Tennessee’s assistant commissioner of international affairs then discusses the sorts of issues his group raises with those seeking to do business with China.  “We’ll help them see if there’s a need for their product in China and to think it through: Do they need to set up a WFOE? Do they need to have a presence or not? Should they go the e-commerce route? And tell them how much they should budget going forward.” This assistance includes help with business-to-business matchmaking through already vetted Chinese companies.
And then there is the one I do not like so much and it’s mine.
  • Set up shop as a WFOE.  The article notes that “it is possible to scout opportunities with a so-called rep office and to do business in China by selling through distributors or by licensing products to a Chinese company, most American businesses that are serious about selling in China invest the time and money to establish themselves as a wholly foreign-owned enterprise, or what is known as a WFOE (pronounced WOOF-ee).” It then adds this: “We do probably 100 WFOEs for every rep office,” said Dan Harris, a lawyer with the Seattle firm Harris & Moure who writes a blog about Chinese law and business.

What I do not like about this is that I am concerned that it will be read as my saying that setting up as a WFOE is virtually always the best way to sell to China and I did not say that because I do not believe it. I was asked about what it takes to set up a company in China and what sort of entity usually makes sense.  To that, I unequivocally answered with “WFOE.”  But what I was not asked was whether one can or should consider selling to China without any entity at all and had I been asked that, I would have unequivocally answered, “yes, that is often the best way so long as it is possible.

We are actually big believers in getting product into China via distributorship or licensing arrangements:

What is so funny about the NYTimes article coming out when it did is because we received some criticism of our last blog post, Getting Your WFOE Approved In China. What It Really Takes, in which we had this to say about forming a WFOE in China:
No wonder I use words like “slog” and “excruciating” and “unending” to describe to our clients what it is going to be like as we secure their WFOE registration in China.
The New York Times article rightly discusses the difficulties in registering a WFOE in China:
And think months, not weeks, to get all of the paperwork approved. “In China, you can’t do anything last minute,” said Savio S. Chan, president and chief executive of U.S. China Partners, which is based in Great Neck, N.Y., and which helped Vision Quest move its light fixtures out of regulatory limbo. “It can easily take up to six months to set up a WFOE.”
Mr. Chan has it right, which is one of the many reasons why anyone looking to sell their product to China needs to consider all options, not just a WFOE.
WFOEs, distributorships, licensing deals and yes, sometimes even a Rep Office can all make sense, depending on the specific situation.  When it comes to China (and just about anything else), there is no one size fits all.  I just hope that nobody thought I was saying otherwise.
What do you think?
  • http://twitter.com/theeastasiaco East Asia Co.

    Bilingual is not bicultural:
    Mr Hoffman’s point seemed to be that speaking the same language is important but it is more important that you have someone who understands your business and is on the ground in China working actively with your partners/suppliers. I completely agree but at the same time think language is extremely important and should not be discounted. And that is why Mr. Hoffman’s firm hired a Chinese national for their office in China.

    I would also argue that if someone has achieved fluency in a second language they usually are pretty knowledgable about the second language culture. In this sense then, bilingual is often bicultural. The exception would be those who grow up in one country in bilingual households and have little or no exposure to a second country.

    Let others open the door:
    Makes sense to go with a distributor, as long as you have a good distributor. There are a lot of bad distributors out there who will just let your products sit on the shelf. You would really need to do your due diligence here before you entered into any agreement with a Chinese distributor. I think the best piece of advice in this whole piece was that you should, if possible, partner with someone who comes with a recommendation. Parternering with someone who comes up to your booth at a trade show is risky unless you do all your due diligence and more.

    Don’t get knocked off:
    I really think this is in some ways unavoidable. If you have the resources, like a luxury matress maker that sells 70K mattresses would, then you have a better chance of protecting your IP in China. If you are a small toy company with a limited budget, on the other hand, I don’t think you could do much. And you have to remember that winning a court decision is one thing. Getting it to stick is another.
    Hollywood has sunk a lot of money into its IP protection in China over the years but you can still walk down many streets in Shanghai and buy a pirated version of a Hollywood movie. Better advice might be to be concerned about being knocked-off, try to prevent it by working with your Chinese partner, but don’t get bent out of shape if it happens.
    Look locally before leaping:
    A very good piece of advice. Talk to a lot of people and make a couple trips to China if you can, just to see for yourself.
    As far as WFOEs go, it just takes a lot of money, as you say in the article. Some companies can afford it but most cannot. Is it good advice ? Yes, but only if you can afford it.

  • http://twitter.com/GrowBizinChina Wayne Hsu

    Thank you for recommending such a great article!

    It is so true that there is no one “best” way to set up shop in China (as in any other markets), and it so happens that people’s comments get taken out of context all the time on newspapers and magazines.

    Whether you decide to form a WFOE, joint venture, rep office, or partnering with a third party distributor depends on how financially committed you are, as well as how prepared your business is on expanding to this new territory.

    It is totally understandable that “WFOE” comes to the top of the mind when asked which sort of entity usually make sense, since it boast advantages over setting up rep offices such as being able to collect payments inside China and over using third party distributors such as being able to develop your own sales force, giving you more control over the presence of your company in China. However, it has disadvantages such as difficulty in registration and requirement of capital.

    I’m sure any constant readers of China Law Blog will not read this article and think you believe WFOE is “virtually always the best way to sell to China”.