Darren Welker, CPA , Principal and Director of Manufacturing & Distribution and International Division recently interviewed Larry Miao, BDO USA’s China Desk Senior Director, to gain a deeper understanding about the dynamics and challenges of doing business in China.
When Doing Business in China…
What are the risks of jumping into this market without performing due diligence?
There are numerous areas that U.S. businesses are not familiar with when entering into an international marketplace. Examples with significantly high impact include Value Added Taxation (VAT), foreign exchange controls, local interpretation and communication with tax authorities. Doing business in China or working with Chinese manufacturers may be frustrating without being prepared and knowing the right information.
What are the biggest cultural challenges that a U.S. company should be aware of?
The first and most significant barrier many investors encounter is the language. Sometimes the phrase, “no problem” does not necessarily mean there is no problem. The answer “yes” is not necessarily an indication of agreement or confirmation. An additional challenge is that there are more than 80 local dialects as well as many cultural differences. Working with experienced professionals before entering the market can help alleviate these language related issues.
Historically, China has been known for inexpensive manufacturing labor, but what other opportunities are emerging?
China’s e-commerce market is currently booming and expected to continue gaining momentum. A recent example is Alibaba’s (similar to Amazon/ebay) 11/11 Singles’ Day sales which eclipsed analyst expectations with over $14 billion processed on the company’s platforms in just 24 hours, as reported by Business Insider. Speaking to manufacturing labor, a fascinating article written by Henry Blodget, “Steve Jobs Freaked Out A Month Before First iPhone Was Released And Demanded A New Screen”, gets to the heart of why it’s not just inexpensive labor that keeps manufacturing in the forefront. Blodget suggests that Chinese factories are far more nimble than American factories. The ability to respond quickly to manufacturing deadlines paired with the industrial skills of Chinese workers solidifies China as the only viable option for many businesses.
Why is the type of international investment structure a company chooses so critical to success?
There are many different types of investment vehicles in China that are worth analyzing, including whether to invest through a holding jurisdiction. Investment structure can have significant impact on your business and conducting research to better understand the implications of each is critical. Multi-national companies can leverage the current global holding structure to plan ahead, especially under the current Base Erosion and Profit Shifting (“BEPS”) environment. The Chinese tax authority is actively participating in the BEPS initiative and also focusing on various new concepts (e.g. indirect equity transfer of Chinese taxable assets, beneficial owner requirements, royalty and service fee deductibility and etc.)
We’ve talked about risks, what about the rewards of expansion into China?
China is a huge country and while it has stabilized to a certain extent, it is a market that continues to show growth. As a result, multi-national companies have many opportunities to grow together with the second largest economy. Key to success is partnering with the right law firm, accounting firm and other agents who can apply their knowledge and experience within China to benefit your company and assist you in reaching your business goals.