My roommate my senior year in college was a Who fanatic. And when I say fanatic, I mean fanatic. This guy had lived a few years in London and he had the urban trench coat and the British accent down pat. Most annoyingly, the only beer he would buy was Guiness, which he would not even refrigerate. He did this knowing full well that neither I nor our other roommate would ever touch the stuff. He had about 1000 Who albums, and before you tell me that the Who never made 1000 albums, let me tell you that about 990 of those were bootlegs or "European editions," or whatever. He had the Who doing just about every song you can think of. Seriously.
Sorry for the rambling, but I thought of the Who today when a reader sent me a China Daily article, entitled, "HK attracts record investment in 2008," and asked how much of this might be due to an increase in companies investing in China through Hong Kong. I do not know, but I am sure some of it is.
Ten years ago, if you were going to go into China, you went via Hong Kong. I have no percentages on this, but I am guessing that about 90 percent of United States businesses that formed companies in China did so by first forming a Hong Kong company and then using that company to form their China entity. The other ten percent was made up mostly of British Virgin Island (BVI) companies.
Then, maybe around five years ago, the reasons for forming a Hong Kong company to go into China started to disappear. It had become relatively easy to form a Wholly Foreign Owned Entity (WFOE) in China with a US company as parent and the tax benefits of having a company in Hong Kong were not so great because China's corporate taxation of WFOEs had become so low. I would guess that I had to convince about half of our clients NOT to spend the extra time and money to form a Hong Kong company just to go into China. For most of my firm's SME clients, Hong Kong was just added administrative and legal expenses.
But now, when clients talk about forming a Hong Kong company first, I listen. And whereas during the last 3-5 years only around 10-20 percent of our clients formed a Hong Kong company first, in the last six months or so, it has probably been more like half. China's corporate tax rate (commonly referred to as its Corporate Income Tax or CIT) is generally 25, but can be reduced to 15% for qualified enterprises engaged in industries encouraged by the China government (such as high tech companies). Forming a Hong Kong company can, in some instances make sense from a tax perspective.
On top of this, China has now made it marginally easier for Hong Kong companies to register a China WFOE than, say, a U.S. company seeking to register a WFOE directly. I have absolutely no reason to believe that the likelihood of getting approval for a China WFOE will be any higher by going through Hong Kong, but I do know that a few requirements (such as consularization of certain required documents) have been eased for Hong Kong entities.
Hong Kong is now an issue that needs to be addressed by any foreign company looking to do a China company formation.
What are you seeing out there?
Read more: China Company Formation: Meet The New Hong Kong. Same As The Old Hong Kong.
Virtually every week, somebody emails or calls me with the perfect (usually distressed) United States company for me to pitch to "all the people" I know in China. I have even gotten calls from government agencies asking me what they should be doing to lure Chinese businesses.
Here is what I am seeing.
Chinese companies looking to buy American companies are usually looking for a valuable technology or commodity or, to a much lesser extent, a strong brand name. If the company you are pitching has neither, the chances of a Chinese company buying it are really slim. People have told me that Chinese companies "have to be" interested in companies with really good marketing people. They tell me Chinese companies are terrible at marketing and so they obviously will be buying American companies that are good at it. That's true in theory, false in reality.
There are a few oddball purchases and formations out there and those generally consist of the following.
-- The wealthy Chinese businessperson who owns a Chinese company and wants to buy an American company so his son or daughter can go to UCLA. These purchases tend to be more random.
-- Haier. Even though I am convinced Haier's setting up production in the United States is a money losing proposition, I still think it was brilliant. I believe Haier came to the United States despite its doing so hurting the bottom line. I believe Haier came to the United States so as to minimize export/import risk in the long term, so as to improve its reputation in the United States, so as to learn from the United States, so as to improve its marketing in the United States and the West and so as to be better perceived in the United States. In other words, it did what Toyota and Honda did when they built US car plants back in the 1970s. This sort of prescience from a Chinese company has so far been vary rare, but I do see it slowly increasing.
Which brings me to Hummer. I can see a Chery buying Volvo to increase company prestige and to improve their in-house technology. I just never believed a Chinese purchase of Hummer would go through because I never thought it made sense. I did not think it made sense because I could see no logical reason for a Chinese company to buy Hummer with the intention of keeping its production in the United States, especially when the Chinese company is not in the auto business. I therefore never bothered to write about it until now because I did not see it as indicative of anything of much import.
It has now become pretty certain the China deal for Hummer is a non-starter.
I just do not see it. Do you?
Read more: Our First China Hummer Post. Our Silence Said It All.
Stan Abrams over at China Hearsay is (or will be?) speaking on China intellectual property at an IP conference for SMEs in the Netherlands and he has mapped out on his blog what he is going to say. And here it is:
1. Register your IP as early as possible.2. Don’t sacrifice IP protection for speed (i.e. don’t jump into the market before you take care of your IP).
3. Have a well-crafted, reasonable, and feasible China IP plan in place before anything goes wrong.
4. Do your homework (keep your eyes open for infringement and listen to your distributors and agents).
5. Check up frequently on licensees, distributors, agents, and manufacturers.
6. Avail yourself of all reasonable enforcement measures (after doing a cost benefit analysis of course), but understand the obstacles involved.
Couldn't have said it better myself.
I just love this post, "Saying “I love you” with a toilet: of indirect displays of love in Chinese families," over at the Speaking of China blog. I love it because it perfectly illustrates how Chinese express an emotion (in this case love) differently than in the West.
Differently, not necessarily better or worse.
The post is about an American woman, married to a Chinese man, and how her in-laws show their affection for her by first installing a stand-up toilet, and then adding on rooms to their house. A Chinese client of mine (who has been living in the United States for probably 15 years now) told me of how her father never once told her mother that he loved her, but that her mother always knew from the way he acted.
There has to be a way to relate this post to doing business in China and I would love (see how easy we Westerners are with that word) for someone to expound on it.
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