China Routes to Market

So you've decided to expand a business to China and researched the Chinese market. Now it's time to decide how you will establish a business in China. What is the best, most viable option for your company, your products, and yourself. Which is the path of least resistance?

Here are your typical options:

Representative Office

A Representative Office represents the interests of a foreign company overseas. It is generally not recognised as a legal entity, and is not used to further the operational aspirations of the parent. Instead, it is employed for overseas liaisons, promotion, technological exchange, market research and other non-profit generating activity.

In China, a Representative Office is the most economical means of incorporation. However, this form of business presence can only be determined through a basic market and product research. Shanghai, Beijing and Guangzhou are popular locations for Representative Offices. Foreign businesses are allowed to open more than one Representative Office in China.

Joint Venture

A collaboration of resources and knowledge between two existing businesses to achieve a common goal. The advantages of a joint venture are: local company can provide market knowledge, skills, resources, distribution channels, brands name, access to established customers. Other benefits are less investment and the potential to learn.

Disadvantages include: weakening of control; greater risk than exporting / licensing; difficult to manage; conflict of interest.

Wholly-Owned Foreign Enterprise

This is the complete establishment of a business in China. Advantages include: import barriers; high sales potential; low political risk; small cultural distance; greater understanding of the market.

Disadvantages include: higher risk; necessitates more resources, high initial capital and commitment; possible conflict with duties, regulations and trade restrictions.

Franchising

Franchising is the licensing out of a business name, product, technique, philosophy, trademark, etc, for a percentage of the income. Instead of setting up new outlets as part of your expansion, you license your existing business blueprint out to franchisees who then set up and manage it for you.

The benefits include: more freedom, as the franchisee takes on major responsibilities; minimal expense; lower cost and higher profits; potential for fast growth; brand building.

Disadvantages, although few, rely predominantly on your franchisees. They include: poor quality franchisees; franchisees not declaring all income; poor performance.

The doors are open for franchising in China. Its gold-rush pace of economic development has meant a full embrace of Western business models: it demands franchising.

Licensing

Licensing in China is the permission for someone else to use your intellectual property rights: either a patent, trademark, trade secret, or copyright.

Different types of license include:

Non-Exclusive License: A non-exclusive license implies that your intellectual property rights can be awarded to more than one licensee.

Exclusive License: A little more complex because, although the license may not be exclusive to one licensee, it may be exclusive to a geographic location, a certain product, or limited area of use. For instance, you may grant a licensee exclusive use of the rights in France, yet grant another licensee its use in Germany.

Patent License: The allowance of another party to use your patented product, design or process.

Trademark License: Trademark licensing means permission is awarded to a licensee to sell a product or service. However, the licensor retains more control in order to ensure that quality is maintained. Quality control is in place to uphold the image of the brand / product / service / licensor, and therefore sustain customer confidence and satisfaction.