Having the largest consumer population and the second-largest economy globally, China is an attractive choice for many businesses around the world. The Chinese market is on the rise, and international companies are benefiting from this growth. Global aspirants also look towards China to set up their brand in the country and pursue numerous market opportunities.
When it comes to business expansion to China, there are different channels to set up your business. The three popular options chosen by most international entities are WFOE, Joint Venture, and Representative Office.
However, when it comes to the actual pros and cons, Joint Ventures are considered the riskiest option. This article talks about Joint Ventures (JVs) in China, the problems associated with JVs, and alternative routes. Also, know about how PEOs can simplify setting up your business in China.
Concept of Joint Ventures (JVs) in China
Joint Ventures or JVs are business structures where two or more entities combine their capital, know-how, assets, and other resources. JVs help businesses achieve their common objectives and gain insights and entry in unknown markets. Similar to partnerships, joint ventures form an alliance between two entities for the long-term. In most cases, a foreign entity creates a joint venture with a local business to enter an overseas market.
JVs in China are formed by laying down a JV contract for a fixed term between a local Chinese entity and an international entity. However, JVs cannot be created for industries like real estate, natural resource exploitation, etc. The complete list of industries is stated in the Catalogue of Industries for Guiding Foreign Investment in China.
A foreign entity has to rely on a local entity for its existence in China. Since it may not know the Chinese rules and regulations, local culture, consumer habits, etc., its operations, decision-making, profits, and leadership are also reliant on the local partner. It leaves the foreign business open to numerous threats and risks. A small disagreement with the local partner may threaten its operations.
Advantages of Joint Ventures
- Through a JV, a foreign business can enter Chinese industries where the entry of WFOEs and other business models is restricted.
- The Chinese partner brings in local expertise and cultural know-how.
- The Chinese partner can take care of all the local formalities on behalf of the joint venture.
- The foreign company gets the benefits of an already established workforce.
Disadvantages of Joint Ventures
In brief, JVs in China come with the following disadvantages:
- A high cost of documentation to form a JV.
- Division in leadership and decision making authority.
- Issues relating to Intellectual Property.
- Reduced profits.
- High risk of disputes over management, profit-sharing, and other such issues.
The fundamental error committed by foreign partners is considering a JV in China to operate as per the Western design of this business model. However, in most cases of Joint Ventures in China, foreign companies are at a significant disadvantage. They are vulnerable to not only losing their existence in China but also to legal disputes.
The best way to avoid these risks is to look for other, better options to start a business in China.
Options to Reduce the Risks Associated with JVs in China
Many companies are looking for alternatives to JVs for their global expansion. Let’s look at the other forms of businesses in China that come with lesser risks and higher ease of doing business:
Representative Office (RO)
A foreign entity can open its representative office in China to carry out activities relating to its marketing and advertising. However, an RO cannot perform or engage in profit-making or manufacturing activities. It is suitable only for businesses requiring a presence in the country for their R & D, customer support, or marketing needs. The foreign company must also have continuous activities for a minimum of two years before starting an RO in China.
Wholly Foreign-Owned Enterprise (WFOE)
WFOEs or Wholly Foreign-Owned Enterprises are among the most preferred and safest options to start a business in China by foreign companies. A WFOE comes with 100 percent ownership and no entry barriers, an advantage over the JV model.
An international company can start a WFOE in China to execute its manufacturing, investment, or trade activities in China without restriction.
The requirement to have the capital and registered capital for WFOE incorporation is also removed, and a foreign business can set up a WFOE in China without any upfront capital. Unlike Joint Ventures, a WFOE also comes with the benefit of having complete ownership on the intellectual property, 100 percent profit-making, and decision making freedom.
Professional Employer Organisation (PEO) Services
Another unconventional way to avoid the hassles relating to JVs in China and still have complete authority and efficiency is to opt for PEO services. Entering a new market can be costly and time-consuming for a small business. A PEO provides a cheaper option to hire employees in China and start operations without setting up a legal entity.
A PEO takes care of the hiring and employee management needs of a business for its global expansion. It works as an employment partner and takes over the responsibilities relating to recruitment, payroll, and employee benefits.
Using a PEO, a foreign company can shift its burden of employment management in China while it takes care of its business operations. A PEO also provides its clients with a team of local experts who can help them with their legal and taxation compliance. With a PEO like Horizons, a company can also form its contractual relationships with its employees as per the Chinese laws.
In summary, the functions of a PEO are:
- Employee onboarding
- Market entry strategy
- Drafting and vetting of employment contracts
- HR management and administration
- Payroll management
- Tax and Legal compliance as per the Chinese laws and regulations
- Employee termination and exit
Which Businesses Associate with PEOs?
PEO services are most suitable for businesses that do not want to get stuck in the complexities of setting up a legal entity in China, especially a JV. PEOs enable the company to test out a market before it invests its funds for its expansion. Small businesses and startups also associate with PEOs to save time and expenses otherwise spent on a legal entity.
Horizons provides you with an option to mitigate the risks of setting up a business in China with its personalized PEO services. We offer end-to-end services for market entry, HR management, legal compliance, incorporation, etc.
We also provide legal assistance for setting up a Representative Office and registering a WFOE in China.
Contact us to simplify your business procedures, avoid the hassles associated with business models like joint ventures, and focus on your global aspirations to leverage China’s rapidly growing market.