Simplifying Trade

When importing from China, you must decide how you want to deal with the Chinese. Do you want to find a Chinese buying agent to work on your behalf, or do you want to ‘skip’ the middle man and enquire directly with trading companies and factories yourself? Ultimately, there are advantages to both, but also some pitfalls that can catch you out. Importing from China is not often a simple task. Finding the right supplier(s) is one of the hardest things you will do for your importing business and the most crucial. Without a reliable trustworthy supplier sending you correctly manufactured products to your quality specification, on time and without issue, can be very important. Here is a rundown on the options you may have when sourcing/importing product from China.


The options There are 3 main ways to source your products overseas. They are

1. Visiting tradeshows, suppliers, and making contacts yourself (traditional)
2. Using websites like Alibaba.com, Globalsources.com and establishing contact (gaining popularity) or
3. Using a buying agent in the originating country.

Lets have a look at each option, its pros and cons.

Tradeshows can be a great way to source product from China or any other country. Tradeshows are often run for particular product verticals (furniture, FMCG, electronics etc) and you can find tradeshow information (when and where they are being held) online.

Pros

• You get to see a range of the suppliers products in person
• You can compare many different supply options at once
• Saves a lot of time in communicating, as you are face to face
• Great for establishing a relationship (very important)
• You get to travel and see the world!

Cons

• More expensive (flights, accommodation)
• More potential downtime for your business while you travel
• Not all of the biggest suppliers attend these shows

Online Product Sourcing, using sites like Alibaba or Globalsources can be very good. These sites have grown enormously over the past number of years as international trade restrictions have dropped, and more and more retailers start buying product direct from the source. Alibaba currently quotes on their front page they receive over 56,000 new product listings every day, and they have suppliers from all over the world, not just China.

Pros

• Huge range of suppliers (more than a trade show)
• Can more often find the top tier/largest suppliers online
• Tools and information provided to help you through the process
• Easy to contact many suppliers at once, quickly.

Cons

• Risk of fraud (some businesses may not be what they seem…)
• Takes a lot of time and effort to communicate back and forth by email
• Less of a ‘relationship’ is established, compared to meeting in person
• Mistakes and easily made on the behalf of the supplier for non standard request

Using a Buying Agent, when you can find a good one, can be a great way to organise and purchase new products and categories. Finding a trustworthy agent might take some time, and some experimentation, but if you find a good one, that has good contacts, then this can really open the doors for you.

Pros

• Buying agent does the legwork for you
• You have someone on the ground for quality checks
• There are lots of agents that can be found online.

Cons

• Are they boosting their commission somehow?
• Hard to regulate performance and commission
• Might be hard to find trustworthy agents

In Summary, each option has its merits. For someone looking at small, low values items, lower transaction values, then using the internet to source suppliers might be the best option. For companies with bigger budgets for purchasing and higher quality standards and demands, then either visiting suppliers regularly in person and managing the relationship yourself, or via an agent, will be the best option for you.

Generally speaking, there are three types of corporations for any foreign investor to establish in China, namely, WFOE, EJV, and CJV. To know which one is more appropriate for you, you should have a profound understanding of the strong and weak points among them. Here JyS presents you the article for this topic. Any discussion or doubt when you plan to invest in China, please feel free to contact us.

Wholly Foreign Owned Enterprise (WFOE)

WFOE is a Limited liability company wholly owned by the foreign investor(s). The amount of registered capital, which is subscribed and contributed solely by foreign investor(s), is dependent upon such factors as Business Scope and Location. For instances, the minimum registered capital in Beijing, Shanghai, Guangzhou, and Shenzhen, for various industries are given below:

It is worth mentioning that USD$140,000 is an ideal registered capital for all kinds of WFOE. With USD$ 140,000 investment, it’s easy to get approved from local Chinese government. Initial Paid-up would be 20% of the registered capital; the balance should be remitted within 2 years.

Advantages of WFOE

1. Independence and freedom to implement your own strategies without having to consider the involvement of the Chinese partner

2. Greater efficiency in operations, management and future development

3. Better protection of intellectual property and technology

4. Full control of human resources

Disadvantages of WFOE

1. Lack of Chinese partner and local contacts (A Chinese partner may have the necessary relationship (”Guan Xi”) to secure authorization of certain projects, or have particular know-how, technology, assets or resources which would not otherwise be available)

2. More time and effort would be taken to hire high-caliber professionals or to build sale’s distribution in China.

3. Unable to obtain cheaper alternatives of land acquisition (for joint ventures)

4. Huge investment involved implies higher risks.

5. More tougher to obtain Chinese government support

Joint Venture (JV)

A joint venture is a business arrangement in which the participants create a new business entity or contractual relationship and share investment and operation expenses, management responsibilities, and profits and losses.

The Chinese authorities encourage foreign investors to use JV in order to obtain advanced technology and management skills. In return, foreign investors can enjoy low labor costs, low production costs and a potentially large Chinese market share.

Advantages of joint venture:

1. Compared to Wholly Foreign Owned Enterprise (WFOE), joint venture reduces capital expenditure as well as manpower, so lowers your business risk.

2. With joint venture, it’s easier to obtain capital, technology as well as local society and government support.

3. Joint venture allows the firm to enjoy a higher degree of marketing control which would shorten the time to access local market.

Disadvantages of joint venture

1. Compared to OEM, joint venture requires the foreign investor to pump in more funds which results in higher risks

2. Negotiation on cooperation may take a long time before an agreement is settled.

3. Due to culture differences, misunderstandings and conflicts between two parties might happen from time to time. Therefore, communication and coordination are important.

4. Both parties involved do not have the autonomy of a sole proprietorship in the decision making process.

There are two types of Joint venture, Equity Joint Venture (EJV) and Contractual Joint Venture (CJV).

Equity Joint Venture (EJV)

Equity joint ventures are the second most common way of investment in China and also the preferred manner as Chinese government is concerned. Joint ventures are usually established to exploit the market knowledge, preferential market treatment, and manufacturing capability of the Chinese side along with the technology, manufacturing know-how, and marketing experience of the foreign partner.

An equity joint venture is a partnership between an overseas and a Chinese individual, company or enterprise. Companies in an equity joint venture share both mutual rewards and risks. In general, profit and risk sharing in a joint venture are proportionate to the equity of each partner in the joint venture.

There are specific requirements for the management structure of a joint venture but either party can hold the position as chairman of the board of directors. Investors are restricted from withdrawing registered capital during the duration of the joint venture contract.

PRC laws governing joint ventures require that the foreign party contribute no less than 25% of the registered capital. There is no minimum investment for the Chinese partner(s).

Contractual Joint Venture (CJV)

In a Contractual Joint Venture (CJV), the parties involved may operate as separate legal entities and bear liabilities independently rather than as a single entity. A CJV may also be registered as a limited liability entity resembling an EJV in organization and operation.

There is no minimum foreign contribution required to initiate a CJV, allowing a foreign company to take part in an enterprise where they preferred to remain a minor shareholder. The contributions made by the investors are not required to be expressed in a monetary value and can be in form of labor, resources, and services, which are excluded in the EJV.

Profits in a CJV are divided according to the terms of the CJV contract rather than by investment share, allowing a more flexible schedule for return on investment.

To summarize, CJV enjoys greater flexibility in registered capital, cooperation, organization, management, and profit sharing, etc.

Differences between EJV and CJV

For an EJV:

1. Each party must make cash or permitted contributions in proportion to its subscribed percentage of the EJV’s registered capital.

2. Profit must be distributed strictly in accordance with the parties’ respective percentage shareholding of the registered capital of the EJV.

3. Upon dissolution of the EJV at the expiry of the term of operation, the EJV’s net assets are to be distributed to each party in accordance with its respective shareholding of the EJV’s registered capital.

For a CJV:

1. A party (typically but not always, the Chinese party) may contribute non-cash intangibles as “cooperative conditions”. Such “cooperative conditions” may consist of market access rights, plant or office owned or leased by the party that are not subject to clear valuation, etc.

2. Profit sharing in a CJV need not be made strictly in accordance with the parties’ respective percentage shareholding of the registered capital of the CJV, but can be made in accordance with the agreement of the parties.

3. Upon dissolution of the CJV at the expiry of the term of operation, the CJV’s net assets may be transferred to the Chinese party without compensation