Forming a company in China is almost always difficult and expensive. Operating a company in China is also almost always difficult and expensive.
Operating a company in your home country of England, the United States, Canada, Australia or wherever is itself plenty difficult, would you not agree? Now take what you have to do in your home country and add in the inherent complexity of having to do essentially the same things in a foreign country with a foreign language with a different culture and under different laws.
China company formations are more difficult and expensive today than they were five years ago, and the same holds true for operating a company in China. Add to this that China’s consumers are getting wealthier and savvier and you can see why there has been a rapid increase in companies seeking to sell their products in China without establishing a company in China to do so.
One of the more common ways companies seek to sell their products in China without forming a company is by having a Chinese company act as their distributor. For more on this, check out Selling Your Product To China Through A Distributor. Just The Basics.
A few months ago, I was contacted by an American company that had been approached by a Chinese company wanting to be “the China distributor” for the American company’s fairly well known consumer product. At one point during our conversation, I talked about some of the issues we address in our China distribution contracts. I talked about how we put in provisions dealing with the intellectual property. I talked about how we like to see provisions that set out the Chinese distributer’s sales requirements.
I then talked about how critical it was that we conduct due diligence on the Chinese company. The client responded by pointing out that the distribution agreement would allow it to quickly replace its Chinese distributor if it turned out not to be a good fit, and so it did not seem like any real due diligence should be necessary. I then quickly reeled off a number of things the Chinese distributor might do in the first few weeks of the arrangement that could jeopardize the U.S. company’s reputation worldwide. The U.S. company instantly understood.
Bottom Line: What happens in China does not stay in China. If your Chinese counter-party does something disreputable in China that some people would link to your company, your company’s reputation likely will suffer. This “something disreputable” could be anything from a product defect to paying a bribe. Even if your company’s connection to the “disreputable something” is extremely tenuous, if your company name is in any way attached to it, your company will likely suffer. The best way to prevent that sort of problem is to choose your partner wisely and the best way to choose your partner wisely is to know as much as you can about it by engaging in appropriate due diligence.