CNBC recently quoted me in a fascinating article entitled, More and more American companies have decided their big China opportunity is over. The article is by Evelyn Cheng, who consistently writes excellent pieces on China.
The article starts out by noting how China may no longer be “the world’s biggest business opportunity” for American companies. It then cites McDonald’s being in talks to “sell its China unit and license its name to a Chinese company instead, following Yum Brands’ decision to do something similar.” It then (100% accurately) quotes me saying the following:
“The trend is that opening retail business on the ground in China as a foreigner is difficult and expensive,” said Dan Harris, lawyer at Harris Bricken and author of the China Law Blog.
We have for years tried to push a lot of our clients not to do that, but instead do what McDonald’s and Yum Brands are doing, which is … monetize your name and your knowledge without actually being the one who does all the work to make it work in China,” Harris said. “China is a tough, tough market.”
Except, and just to be clear, the China lawyers at my law firm do not believe there is a one-size-fits all solution for going into China in the retail industry, or in any industry for that matter. And — again, just to be clear — I would not in a million years claim to know better what is right for McDonalds or for Yum Brands in China, as I am quite certain both of those companies know 1000 times better than I do what is right for them.
So, yeah, not going into China with 5-200 retail outlets makes a lot of sense a lot of the time, but a lot of the time it does not. Yeah, our China attorneys oftentimes try to steer (or “push”) some of our retail clients to get away from the idea that the only way for them to make money from China is to set up their stores in Shanghai, Shenzhen and Suzhou, just as they have done in Palmdale, Portland or Peoria. Our goal (indeed our job) as China attorneys is to explain the various options to our clients and to give them the pros and cons of each. The key thing we want them to know is that they have choices and that they should analyze their choices and not just do what some similar company down the street from them did two years ago in China, nor even necessarily what their China consultant is telling them to do.
So let’s talk about some of the options for a Western retail company that is looking to profit from China by doing business in China, and the pros and cons of each.
- Go into China Full-On as a WFOE. Under this scenario, the Western company forms a WFOE in China (for all that entails, check out How to Form a WFOE in China). The benefits of doing this are that you are in full control of your China operations because you 100% own your China operations and you can operate them as a subsidiary of your US or your European operations. This way of going into China makes sense if 1) you cannot — for whatever reason — relinquish control of your stores or your product to another company or 2) you eventually want to franchise your stores in China as China requires that you first own your own stores there before you can franchise them out. The negatives are that setting up a WFOE is time consuming and expensive. See Forming a China WFOE: The Method and the Madness. And going all into China as a WFOE in the retail sector can be particularly difficult because your WFOE in Shanghai does not entitle you to just start doing business in Shenzhen. No, to get into Shenzhen, you typically will need to set up a new WFOE or a branch office there, and then figure out all of the issues that come with that, including even whether. Is your company truly ready to navigate China? I cannot urge you enough to read this post from 2012: Are You China Ready, which details a speech on this topic given by Ben Shobert.
- Go into China as Part of a Joint Venture. The big plusses of China joint ventures are that you typically share in the costs with another company and you have a Chinese company as your partner in China. For the big negatives, of which there are many, check out China Joint Ventures: The Tide is Out.
- Go into China Via a Distributor Relationship. A great thing about distribution relationships in China is that you have a lot of flexibility in how you structure that relationship. See China Distribution Agreements in Real Life. You can give your China distributer exclusive rights for all of China, or for just one city, or no exclusivity at all. You can set all sorts of sales requirements for your China distributor, ranging from sales amounts to exactly how your product will be placed on store shelves. But better than this is that you can usually get your retail products into China cheaply and quickly via a distributor. The downside of this is that by sharing the risks with your distributor, you will also need to share in the profits.
- Go into China Via a Licensing Agreement. Under a licensing agreement, you can license your product name and other attributes to a Chinese company, and you can even add in many of the same requirements you might put into your distribution contract. The upsides and the downsides of a licensing agreement are very similar to those of a distribution contract. For more on China licensing agreements, check out China Licensing Agreements: The Extreme Basics and Fear The China Joint Venture And Front-Load Your China Licensing Agreements.
Bottom Line: The one right way to start doing business in China is to work on figuring out the best way for you and your company.This article was written by Dan Harris and published on China Law Blog. Original Post: http://www.chinalawblog.com/2016/12/the-one-right-way-to-start-doing-business-in-china-or-not.html