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China WFOEs: Can’t Live With Them, Can’t Live Without Them

Lifetime employment

Andrew Hupert at ChinaSolved did a post, WOFE Managers & the Law: Know ‘em, Live ‘em, Love ‘em, [link no longer exists] on WFOEs and complying with Chinese law. Summary: “follow the law”:

I’ll break down the main idea for you right now: China has a comprehensive body of business law, and if you break those laws you stand a very good chance of having a very bad time.

What about your old-hand friends who tell those hilarious stories about making buckets of cash without filing a form or leaving a corner uncut? Talk to them when it’s time to sell, move or cash out. Those stories tend to be a lot less amusing then.

Andrew is absolutely right. More particularly Andrew suggests the following for your business:

1. Not everyone breaks the rules. If you are a foreign business in China, you are going to be scrutinized by a wide range of governments, bureaucracies and regulators who all hope to catch you doing something illegal. Those fines, penalties and overdue fees show up on their P&L statements, so good luck trying to squirm your way out of them. Oh — and if you are still having your receptionist negotiate with government officials, you may want to consider raising your game a little and investing in a relationship with a qualified China lawyer, accountant or consultant.

2. It’s your responsibility to know the laws. If it is going to take six months to set up your WOFE or move the HQ from Beijing to Shanghai, that is YOUR problem – not China’s. You can’t win in court by claiming ignorance. You can’t claim that the contract shouldn’t be binding because you can’t read Chinese. You can’t say you didn’t know you needed permission or approval to do business here. Those days, unfortunately, seem to be over.

3. China’s new HR rules cover western companies AND WESTERN EMPLOYEES in China. Yes, that’s right, all your expat managers need contracts, must receive some form of benefits, pay taxes, and do everything else listed in the new HR law. Will your Senior VP of Marketing who earns $150 k per year sue you for a badly worded contract? Probably not. Will the pissed-off salesman with the Chinese wife sue when you fire him for non-performance? Hmmm. Better make sure your paperwork’s all in order.

4. You have to spend your registered capital within a set amount of time. Yes, I know how clever you felt when you started your WOFE and banked 75% of the required capital. That was great. Now invest the funds or plan on explaining to some VERY humorless bureaucrats why you didn’t. It won’t be a problem, unless you plan on expanding, moving, selling or getting audited by the government (which should be happening every year).

5. You need government permission to move, expand, open new branches or make significant changes to your business plan. Furthermore, if you want to dissolve your WOFE or rep office, you had best follow official procedures (which sound quite involved and time-consuming) if you ever plan on doing business in China again. China loves paperwork.

I agree with all of the above, but would add that doing things right early makes it much cheaper and easier than starting off incorrectly and then having to clean up.

4 responses to “China WFOEs: Can’t Live With Them, Can’t Live Without Them”

  1. I haven’t checked recently how China ranks comparatively or how it scores on the World Bank’s “doing business” or its “investment climate” indeces or any of their specific indicators. But with the sort of business culture for foreign businesses that you seem describe above it’s amazing to me that anyone wants to be in there at all. I guess it’s the 1.3 billion real or mythical customers, or the cheap labour costs or something? Or maybe it’s the Chinese food? Or the clean air of Beijing?

  2. To “Admitting ignorance about the finer points”:
    “it’s amazing to me that anyone wants to be in there at all” – ask Ford, GM, VW, Caterpiller, Coca-Cola.

  3. …and so yet a bit more ignorance now about “Ford, GM, VW, Caterpillar and Coca Cola” (and also Microsoft and a few other tiny start ups)
    Whether that particular cast of puny characters with puny pockets and short term visions and hordes of performance-paid and promoted managers to spare ….all paid out of revenues made elsewhere to navigate through the highly conducive labyrinth of Chinese business culture …has made or has lost billions it probably isn’t exactly a very representative set of performance facts even for that particularly representative sample?
    Long live (or die) small and medium enterprises too? Who until yesterday were the main creators of jobs, employment, innovation and longer term local rootedness and linkages everywhere….or is it instead only long live the lean and mean high labour productivity multinationals and the unemployed everywhere and may these all become new shareholders in Coca Cola and GM China?
    And as their profits go up (after negative cash flows for about a quarter century) may all of their progressive and authentic CSR programs also help to clean up the various messes they are contributing to?
    But I do admit that this is ignorance on a whole other level!

  4. There is no doubt that lots of foreign companies are making plenty of money in China. Otherwise even the most optimistic and determined ones would have left by now, and they haven’t.
    But it’s somewhat worrisome that the particular companies mentioned above almost all happen to be in sectors or industries that -at least under their present operating conditions- are all unsustainable.
    The often heard nightmare scenario is: “what if all the Chinese and Indians each end up driving a gas guzzler (or even a 50 mile per gallon car) as Americans do? We would need 10 planets and we only have one” And then such statements typically fade into vague optimistic notions of “change over time” or “market solutions”.
    Corporate social and environmental responsibility and the environmental footprint of any business and the assorted diverse impacts of companies large or small, private or public and foreign or domestic all should become a standard and even more mainstreamed topic than they are at present and all will need to start “cutting across” ALL discussions of business models, business strategies and the business environment and its related public policies.
    Of course a “business case” also needs to be made for any business strategy or model but someone (everyone) also should be thinking about the “business case” for the environmental sustainability of not only companies, but also nations and the planet.

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