I received an email today from a China consultant with whom we have worked in the past. This consultant has a client who wants to lease a factory in China:
We have a client whose business is exporting ___________ materials from China mostly to Eastern Europe. His clients are big __________ plants who always have plenty of potential suppliers in line, so quailty for him is crucial.
His current Chinese suppliers often try to reduce costs by buying bad quality raw materials and their equipment is not really up to date either.
His sales are growing rapidly and he wants to rent a factory somewhere in China, put in top of the line equipment and implement high quality production.
I remember somewhere in China Law Blog you or Steve mention your firm often deals with factory rent.
What process will be client need to go through to accomplish this in China?
We responded as follows:
The only legal way a foreign company can rent and operate a factory in China is to create a legal entity like a Wholly Foreign Owned Entity (WFOE) or Joint Venture (JV) to do so. Creating a WFOE is by far the most common way and this is a common next step for companies in your client’s position.
Creating a WFOE is a standard process and we do those all the time.
The factory lease is a separate matter from WFOE formation. It can be quite a complex process, though we do those all the time also. The details depend on where the factory will be located. The main problem our clients encounter in leasing a factory in China is that they often try to rent factory space that cannot be used for a WFOE. For factory space to qualify legally for a WFOE, the factory space must be legally owned by the landlord and it must have all proper documentation. On top of that, the lease must be registered with the local government real estate office.
Though this sounds relatively simple, we find that many companies are looking for cheap space. Cheap space definitely exists in China, but cheap space usually comes with documentation issues that make its use in a WFOE impossible. There are many other issues related to factory leases. Often additional work must be done on the factory space and provision must be made for installation of equipment. This can often be quite complicated, requiring additional care in the lease process. Finally, many of the details on WFOE formation depend on the location of the factory.
If you would like to discuss further, please let us know.
For more on what it takes to form a WOFE in China, check out Forming a China WFOE: Ten Things to Consider.