Choosing to enter the Chinese market via a WFOE is still very much a viable business decision for many companies. See Why NOW Is a Good Time to Double Down on Doing Business in China. The purpose of this post is to provide guidance to facilitate a quick and effective China market entry.
I will primarily focus on those areas a company can control in the market entry process, recognizing there are also steps in the process that cannot easily be controlled and are to a greater or lesser extent at the mercy of the Chinese bureaucracy.
Many mistakenly act as if forming a WFOE and successfully acquiring a business license to operate in China are the major objective of the market entry process. But, China market entry is really only a means to an end. Your objective in entering China should be to become operational as quickly and efficiently as possible and creating a WFOE and obtaining a business license are just parts of that process. Toward that end I offer the following five suggestions for a faster and more successful market entry.
1. Have a strategic China long-term plan and detailed operating plan with realistic financial and staffing plans.
Doing business in China typically requires a greater commitment of upfront resources than almost any other market and that should not be underestimated. Having a realistic grasp of your China WFOE’s business scope, financial and capital needs, and staffing requirements before you get started on your WFOE formation will save you a great deal of pain later on. All of this presumes your company has done appropriate due diligence in understanding the China market opportunity and risk.
2. Have a China knowledgeable project manager with recent in-country experience to lead the process.
This person must be a credible individual with sufficient gravitas, influence, and access to senior company leadership and the board, if necessary. This can be an internal or external resource (I have operated in both capacities), but your market entry process needs to have effective project management to ensure all the balls in the air are being tracked and moving in the right direction at the right time. Just pulling in someone you know in China is not going to cut it.
3. Parallel process as much as possible.
Your company’s best outcome will to be operational as close to receiving your business license as possible. This means working on naming your Chinese WFOE (which is always harder than it sounds), working on securing trademark and other IP protections, leasing and building out an office, hiring staff and identifying a local payroll provider, engaging a local accounting firm, developing a banking relationship, all of which need must be completed for your WFOE to be fully operational. Most of these activities (and more not listed) are best done concurrently during the licensing application process. A few things need to be sequential, but the more you can parallel process, the more likely you will hit the ground running when your license is approved.
I have too often seen companies complete the minimum steps required to set up their WFOE and receive a business license, only to waste months of precious time and resources because they were not prepared to actually conduct business once their WFOE was formed. A useful question to ask at the beginning of your China WFOE process is: “What do I need to have in place to be able to conduct business on day 1?” That is your target at the end of the business license process.
4. Be prepared to make decisions quickly and delegate as much as is feasible to the project manager.
Your company will need to make many decisions during its China market entry process, any of which could derail or delay your desired timeline, often for extended periods. For example, I have seen companies agonize and debate over office location decisions for months on end while the clock on their WFOE formation continues to tick. Even something as simple as agreement on the Chinese company name can create unnecessary delays. An experienced project manager can help you understand what decisions need to be made and when they will need to be made. They can also help prepare your company in advance for these key decisions so they do not come to you as a surprise.
5. Have a trustworthy local Chinese representative/liaison to follow-up with local government officials on the business license application.
Having someone credible on the ground in the city in which you will be forming your WFOE is essential. This person is necessary to bird-dog your application process and maintain regular contact with local officials so as to keep your WFOE application on track and so as to give early warnings when something needs to be addressed. Many district governments have business development staff that can be helpful in running the WFOE formation gauntlet. An effective local liaison can help bring a problem to light that may have sat on a government official’s desk for months without the company knowing anything about it. If you do not have your own such person (and most companies do not), be sure your WFOE formation lawyers have access to such a person.
These above five suggestions are not meant to be exhaustive, by any means. But they together make for a good starting point to help you control the things you can control and accelerate the time it will take for your China WFOE to become fully operational.
The above is a guest post by Patrick O’Hara, an international business consultant with 25 years of high-level China business experience, with big public companies and private equity funded tech companies. I asked Patrick to write this post because our law firm’s China lawyers have worked with Patrick on many China matters and we view him him as one of the smartest and best prepared and easiest to work with clients ever. Our China WFOE lawyers worked with Patrick on setting up a WFOE in China and getting that WFOE operational and that WFOE set-up was easily one of the two or three smoothest, best run, and fastest WFOE formations we’ve ever done, and I attribute that largely to Patrick. He he had lined up and prepared the right people to help every single step of the way in forming the WFOE and getting it operational Our China WFOE lawyers are always asked: how long does it take to form a WFOE? Our answer invariably includes stating that the biggest factor in how long it takes to set-up a WFOE is you, the client, not us the WFOE lawyers, nor the Chinese government. A prepared client able to make quick decisions is key. I asked Patrick to write the above because I figured our readers could learn a lot from Patrick. I have.