trudat » Business http://trudat.info Thu, 28 Apr 2011 14:57:33 +0000 en hourly 1 http://wordpress.org/?v=3.1.2 Chengdu Office Rental Market http://trudat.info/2010/04/chengdu-office-rental-market/ http://trudat.info/2010/04/chengdu-office-rental-market/#comments Sat, 24 Apr 2010 08:44:01 +0000 trudat http://trudat.info/?p=1054

Q1 2010 Grade A Office Rentals

source: DTZ
City RMB/m2/month
Shanghai 185.54
Beijing 145
Hangzhou 117.71
Guangzhou 117.3
Xi’an 112.32
Chengdu 107.34
Tianjin 102.55
Nanjing 93.38
Qingdao 90.07
Dalian 86.91
Chongqing 62
Wuhan 56.4

Conventional Leased Offices

Normally leased office space require lengthy contracts and comes empty (i.e., you need to furnish the office with furniture and equipment).

According to DTZ, as of Q1 2010, Chengdu has 360,600 m2 of Grade A commercial office space with a 17 percent vacancy rate. Rent averages at 107 RMB/m2/month (this down from RMB115.9/m2/month in Q4 2008) and is projected to rise by 5 percent by the end of 2010.

For an explanation of the difference between Grades A, B & C of office space read “Categorization of office space is flexible“.

Serviced Offices

Executive suites or business centers, where office space is fully furnished and then rented out to other companies, are called serviced offices in China. Serviced offices normally allow for flexible rental terms.

Serviced Office Providers in Chengdu

  • TheMoveChannel
    • South Lippo Tower: 元 3800-8500/workstation/month
    • Times Plaza: 元 2500-4500/workstation/month
    • Shidu: 元 880-1500/workstation/month
  • Regus -
  • serviced-offices.com.cn – four options
    • Times Plaza, Zonfu Road, Jin Jiang District
    • Shangri-La Office Tower, Binjiang East Road, Jin Jiang District
    • Lippo Tower, Kehua Bei Road, Wu Hou District
    • Beixin Street, Jin Jiang District

Chengdu Real Estate Market Studies

News/Trends

Real Estate Companies

]]> http://trudat.info/2010/04/chengdu-office-rental-market/feed/ 0 Chengdu SaaS Startup Feasibility http://trudat.info/2010/04/chengdu-saas-startup-feasibility/ http://trudat.info/2010/04/chengdu-saas-startup-feasibility/#comments Tue, 20 Apr 2010 04:44:30 +0000 trudat http://trudat.info/?p=829 Is it feasible to setup an R&D unit in Chengdu, China as a way to “jump start” my SaaS startup and get it to scale?

A feasibility study is one of the first requirements when submitting an application to the Chinese government to set up a wholly foreign owned enterprise (WFOE) in China. This post is a feasibility study as to whether setting up a SaaS in Chengdu makes business sense.

Reality check requested. I’ve never set up a business before in China and have never even been to Chengdu. If you have information that could help me, please feel free to add a comment.

Table of Contents

Software As A Service (SaaS)

My company provides a website publishing (i.e., a content management system, or CMS) and member database (i.e., a customer relationship management, or CRM) software for organizations. The software is delivered to the customer via a web application, so no installation is needed on the customer’s computers. The software as a service (SAAS) business model provides predictable monthly revenues as customers pay for using the service via a monthly subscription. The software is basically complete and we have paying customers, although as with any software application, upgrades are always needed to stay current with competitors, keep up with technology and to become a market leader.

Benefits of Web-based SAAS

  • access to global market via the Internet
    • customers can access the software from anywhere, anytime
    • developers can code and update server from anywhere
    • customer service agents can be located around the world for complete time-zone coverage
  • quick release cycles of new software features/upgrades to pace with market and competition
  • economies of scale derived from multi-tenant software architecture
  • consumption-based expenditure for customers (pay as you go and scale up or down as needed)
  • subscription model provides predictable monthly revenues

Requirements to a Successful SAAS in Chengdu

  • reliable, high-speed Internet connections at affordable rates with quick connections to international servers
  • stable electricity (infrequent brown outs)
  • access to intelligent, problem-solving software developers
  • available English-speaking employees to serve as customer service agents
  • affordable office rental rates
  • affordable employee salary rates

SaaS Market in China

In 2008, China’s software industry grew by 29.8% to RMB 757.3 billion. China’s SaaS market is targeted to reach US$171 million in 2010. Some SaaS players in China:

Chengdu Software Industry

One of China’s economic goals is to turn from manufacturing to focus on the service sector. Software development and outsourcing is an industry encouraged by the central government.

An excellent article from the ChinaSourcing magazine argues convincingly that Chengdu is an attractive location for software outsourcing.

The Chengdu Municipal Bureau of Commerce has set a goal to USD200 million worth of offshore outsourcing contracts.

Chengdu has one of China’s 11 National Software Parks

China has eleven national level software parks, one of which is in Chengdu. Being that a national level software park exists in Chengdu, it should stand to reason that there would be an ample pool of computer science graduates from which to hire. And once my company grows, a suitable office space might be available in the nearby software park. At first China started off with five national software parks in 2000 and by 2006 they added six more. These software parks can be officially called “National Software Industry Base” and/or “National Software Export Base”.

Links:

Chengdu High Tech Zone

Chengdu Hi-Tech Industrial Development Zone (CDHT) is one of China’s first nationally recognized high-tech zones and ranks fifth among China’s 53 high-tech zones. It has two sections: south and west. CDHT has 16,000 companies, of which 750 have foreign investment. Forty of those are Fortune 500 companies, including Intel (in the West Park) and Microsoft (in the South Park). Software companies that rent an office in the CDHT may qualify for a number of government policy incentives.

  • Hiring a certain minimum number of employees may qualify for subsidized rent.
  • 20-100% rebates on individual income tax for management and technical staff for the first five years.
  • training subsidies
  • exempt from corporate income tax for the first two years after it begins to make profit

TianFu Software Park

Chengdu’s software park is located in the south part of the South Park and is managed by Chengdu Tianfu Software Park Co., Ltd. (LinkedIn profile). Tianfu (天府) means “heavenly province” and is an epithet of Sichuan, especially the area around Chengdu.

Services

Features

  • employee dormitory
  • apartments for singles
  • business hotel
  • shopping center
  • 24 hour restaurant, high-end restaurant, cafeteria
  • wifi throughout the park
  • international school
  • supermarket
  • business center
  • hospital and pharmacy
  • fitness gym and outdoor sports area
  • The municipal government is building Tianfu New City adjacent to the park, to be completed in 2014, and will have a population of about 600,000.
land area floor space date opened
Phase I 226,000 m2 230,000 m2 end of 2005
Phase II 760,000 m2 560,000 m2 Batch 1 – June 2008
Batch 2 – December 2008
Batch 3 – 2009
Phase III 57,000 m2 230,000 m2

Location of the Software Park

It is located directly south of the center of Chengdu with 24 hour shuttle buses that go back and forth from the park to the center of metro Chengdu. The southernmost station of city’s new subway line #1, set to open in October 2010, will be at the New Exhibition Center, just a ten minute walk to the Tian Fu Software Park.

Check out photos of the park from Panoramia, PicasaWeb and Flickr.

Chengdu Universities that Produce Programmers

Computer Companies in Chengdu

Industry Conferences in Chengdu

Industry Websites

Internet

Reliable high speed internet connection speeds are vital to the success of a SaaS company both for quick download and upload access to its servers but also for use with VoIP services such as Skype for sales, inter-office and customer support related voice communications.

Residential

According to this Maxxelli blog post, broadband internet cable service can be obtained from China Telecom. Fees are:

  • Installation: 300 RMB
  • Plans:
    • 1 mbps: 98 RMB/month
    • 2 mbps: 120 RMB/month

Commercial

Are commercial connection speeds much better? The Invest Chengdu government website says that much fiber optic and ADSL connections are available on commercial lines. It cites the following network connections from Chengdu:

Chengdu’s internet bandwidth is 40G/S. China Net, Chengdu 163 net, Chengdu 169 net (Tianfu Hotline) of China public multimedia are main internet players. There are 4020 PSTN dialing ports, 600 ISDN dialing ports and 150 dedicated line ports in the network, which is connected by fast speed interfaces with the International Exit and the country’s eight regional centers. Chengdu is one of China Unicom’s seven key Uninet nodes. So far the bandwidth of the key node is 700M, that of international exit 418M, whereas the bandwidth of direct trunk connection with CHINANET in Beijing, Shanghai and Guangzhou is 2X155M, which is 6X155M of domestic network bandwidth.

ADSL fees are:

  • Installation: 180 RMB
  • Equipment rental: 100 RMB
  • Plans:
    • 1 mbps: 500 RMB/month
    • 2 mbps: 1000 RMB/month
    • 4 mbps: 2000 RMB/month (about USD $293 per month!)
    • uncapped speed: 4000 RMB/month

A slow internet connection in Chengdu is ludicrously expensive when compared to a super fast 100 mbps residential fiber optic connection in Japan which you can get for only USD $11 per month. With Chengdu’s “fast” 4 mpbs commercial connection, you’d pay $73 per mbps. Japan’s fiber optic costs only 11 cents per mpbs! China’s internet is 666 times more expensive than Japan.

Woefully Slow Speed to Servers Outside of China

This might be a show-stopper right here, that is, if I were limited to a residential connection.

However, the city reportedly installed an “International Gateway Data Channel” on December 1, 2009 which Bai Gang, the deputy mayor, says should increase Chengdu’s international internet speed by 30-50 percent.

Providers

Internet Cafes

Telephone

Chengdu is apparently one of eight major telecom hubs in China and has 560 km worth of fiber optic cable laid. CDHT says Chengdu’s telecom infrastructure can fully guarantee international communications via its overseas nodes. Siemens China planned to open its first global call center in China, headquartered in Chengdu’s High Tech Zone, during the first half of 2010.

Tax and Incentives

Both domestic and FIEs pay 25% income tax. However, high-tech companies can qualify for a reduced 15% tax rate and qualified small and thin-profit enterprises can get a 20% tax rate.

VAT Basic rate:17%, lower rate:13%
Business Tax 3% for communication and transportation, 5% for other trades
Enterprise Income Tax Basic rate: 25%
Individual Income Tax 5% – 45%
Dividend and bonus of foreign individuals Exemption
Income protection Subject to the transfer pricing agreement
Other taxable items Consumption tax, real estate tax, stamp duty, land value added tax, tariff

Enterprise Income Tax (企业 所得税法) (EIT Law)

The EIT Law (PDF, 78 KB) went into effect in 2008 and replaced previous tax laws for FIEs. China taxes “resident enterprises” on their worldwide income at rate of 25 percent. “Non-resident enterprises” pay 20 percent income tax on their income earned in China.

  • resident enterprise – set up under Chinese law OR a foreign company headquartered in China
  • non-resident enterprise – a foreign company AND headquartered outside of China (may or may not have a China FIE) and earns income in China

If a company pays income taxes to foreign governments for income earned outside of China, those taxes paid overseas can be deducted from its enterprise tax in China (Article 23) unless otherwise superseded by a tax treaty the PRC has with a foreign government (Article 58). A tax treaty between the US and China (PDF, 111 KB) has been in effect since 1987.

Tax-exempt or partially tax-exempt income types:

  • interest from treasury bonds
  • dividends from qualified resident enterprises
  • income of qualified nonprofit organizations
  • income from agriculture, forestry, husbandry and fishery
  • income from important state-sponsored infrastructure projects
  • income environmental protection, energy efficiency and water saving projects
  • income from transferring technology

The tax year in China is from January 1 to December 31. EIT is to be paid in RMB in advance by month or quarter and is due 15 days after the previous month or quarter ended. Annual returns are due by the end of May or 60 days after an enterprise is shut down and ceases business operations.

Preferential Income Tax for Hi-Tech Enterprises

Article 28 of the EIT Law stipulates a 15 percent income tax rate for important high-tech enterprises.

The second paragraph of Circular 39 (i.e., Circular on the Transitional Preferential EIT Rate or 国务院关于实施企业所得税过渡优惠政策 的通知 … read a machine translation in English) states that the preferential tax policies for Western Development will continue.

Serial number 30 of Circular 39 states that qualified high-tech companies operating in a high tech zone would be exempt from income tax for the first two years.

Circular 40 (i.e., Circular on the Transitional Preferential Tax Treatment for the Newly Established High-Tech Enterprises in the Special Economic Zones and Shanghai Pudong New District (国 务院关于经济特区和上海浦东新区新设立 高新技术企业实施过渡性税收优惠的通知… read a machine translation in English) states that in order to qualify for the 15 percent tax rate, a high-tech enterprise must own core intellectual property rather than simply licensing technology from a foreign parent corporation.

For further information, read the Preferential Income Tax for Hi-Tech Enterprises (PDF, 705 KB)

Read also the analyses of the tax incentives by KhattarWong, Ernst & Young, Deloitte and PriceWaterhouseCoopers.

Registered Capital

A WFOE is required to invest a certain amount of registered capital which is sent into China from a foreign company into the WFOE’s bank account. It doesn’t have to just sit there for the duration of the WFOE. You get to spend it on valid company expenses. According to the new Chinese Company Law (Article 59), a minimum of 100,000 RMB (about USD $14.7K) registered capital required for a single member LLC, depending on your industry. Read the China Law Blog post on this topic.

  • The amount must be listed in your company’s Articles of Association and company register.
  • The company register is a matter of public record and available to the public. Therefore it establishes a company’s “credit worthiness” and reputability.
  • Small amounts of registered capital must be contributed immediately upon forming the company.
  • Large amounts of registered capital can be contributed in installments (over a period, sometimes as long as two years) with the first installment being 20%, called “paid up” registered capital.
  • It is a crime to fail to fully transfer the entire stated amount of registered capital into China.
  • Regulators will evaluate whether the amount of registered capital is reasonably sufficient for operating your company in your chosen industry and location.
  • Registered capital should be enough to cover rents and salaries in advance during the company’s start-up phase.
  • Capital contribution can be in money, equipment or intellectual property. However any non-monetary contributions will be valued at the low-end by the authorities.
  • Capital must be approved prior to transferring it to China otherwise it will not be recognized as part of your registered capital.
  • All companies in China, both domestic and foreign, must have registered capital, although probably foreign companies have higher requirements.
  • registered capital cannot be repatriated, unless perhaps if the WFOE is dissolved

100,000 RMB is the minimum amount of registered capital. But a commenter on this blog post noted that after a WFOE application stalled for 5-7 months, they resubmitted with two times the original amount of registered capital and got the WFOE approved in two weeks. It is important to make sure you have enough registered capital to pay operational expenses for the WFOE during the startup phase until such time as the WFOE can bring in income and positive cashflow. If the WFOE runs out of money (i.e., spends all of its registered capital), you would have to go through a 6-8 week process of applying for permission to increase the WFOE’s registered capital, re-issue business licenses, apply to the approve the transfer and then wire the money.

Human Resources

One of the prime motivating factors for establishing an office in China to do software development is to hire software developers at a much lower cost than in the U.S.

2008 Chengdu Annual Salary/Wages in RMB

low medium high
By Profession Senior Management 13,794 39,468 155,541
Technical Specialists 10,102 23,875 71,437
Clerical Worker 8,085 17,020 49,190
Service Industry Worker 7,743 15,088 40,782
Worker/Operator 7,845 16,560 44,507
By Education Post Doc 31,450 74,474 218,893
PhD 21,638 56,571 213,552
BA 14,839 40,498 132,335
Junior College 11,537 29,408 98,312
High School or Vocation School 8,875 19,780 60,246
Middle School 7,683 16,024 46,615
By Experience 41+ years 11,887 30,302 126,517
31-40 years 11,654 28,872 93,947
21-30 years 10,251 23,777 92,930
11-20 years 9,229 23,739 87,859
6-10 years 8,262 20,527 73,364
>= 5 years 7,943 14,317 49,980

Minimum wage in Chengdu

Minimum wage in Chengdu is based on two sets of geographic regions.

Full-time Workers Part-time Workers
Region 1 650 RMB/month 7.1 RMB/hour
Region 2 550 RMB/month 6 RMB/hour

Chengdu Web Developers Salary: Market Study through Job Ads

Skills Edu. Exp. Monthly Salary Company Industry
PHP, HTML, CSS, Javascript BA 1-3 yrs 2001-4000 TianfuXingkong Hosting, Web Design
Front-end Web & Javascript BA 3 yrs 2000-3000 Sheer Game Development
PHP open 1-3 yrs 2001-4000 Chengdu Chaofa Software Outsouricng
LAMP, jQuery BA n/a 1500-3000 Runzhi Wang
PHP BA 1-3 yrs 2000-4000
PHP BA 3-5 yrs 3000-6000 Small Tree
PHP, MySQL, jQuery BA 1-3 yrs 1000-2000 Chengdu Digital Database
PHP open 1-3 yrs 1000-6000 TechFirst Web, iPhone, Design

Other current job listings for Javascript and PHP developers in Sichuan can be found on Zhaopin. 3000 RMB per month seems to be a valid estimate of salary costs for programmers in Chengdu.

2008 Chengdu Benefits

Percentage of Salary paid by Employer Percentage of Salary paid by Employee
Basic Pension 20% 8%
Medical Insurance 7.5% 2%
Unemployment Insurance 2% 1%
Workers’ Comp 0.6%-1.2% n/a
Maternity Insurance 0.6% n/a
Total ~31% 11%

Source: CDHT The percentage rates for medical insurance payments are prescribed by the Chengdu Municipal Urban Employees Basic Medical Insurance Method.

Employment Agencies or Labor Agents

Representative Offices are not allowed to hire employees. They instead “hire” staff via a labor agent which will serve as the actual employer. This sounds just like outsourced human resources companies (i.e., temp agencies) like Adecco, Kelly Services, or ManPower. The company that requires staff will enter into a labor service contract with the labor agent. However, recent changes in the Chinese labor contract law make such contracts extremely unattractive. Two commonly used labor agents are:

Even though WFOEs or JVs can directly hire PRC citizens, some choose to use a labor agent instead to employ their staff. The labor agent can help you recruit employees or you can recruit your own and later arrange for their employment with the labor agent. Multi-national labor agents have a China presence with offices in multiple cities across China:

Labor Contract

According to China’s Labor Contract Law, the term of a labor contract (see Article 12) may be

  • fixed term
  • flexible term
  • by project

A company may determine its own recruiting process. Once an employee is hired, a labor contract between the employer and employee must be signed within one month. A copy of the contract must be given to the employee (Article 16). Confidentiality and non-compete clauses can be added to the labor contract, but only for senior management or engineers.

Probation

Only one probationary period is allowed per employee.

term of labor contract maximum probation
less than 3 months or project-based none allowed
3-12 months 1 month
1-3 years 2 months
3+ years or open ended 6 months

Wages for employee under probation cannot be less than minimum wage, the lowest pay grade for that job (in the company) or 80 percent of the salary stipulated in the labor contract for that employee.

Termination (regarding full-time employees)

A labor contract may be terminated if mutually agreed upon but both employee and employer. An employer may terminate an employee if he/she :

  • is found lacking during probation
  • seriously violated written company policies (i.e., bylaws)
  • causes serious loss to employer
  • is under criminal investigation

Or the employer may terminate an employee upon providing 30 days written notice or one month’s severance pay if the:

  • the employee is unable to perform duties due to medical reasons, even after treatment, and cannot perform other duties the employer may have need of
  • the employee is unable to perform duties even after significant training
  • situation has changed considerably so that the employee cannot do the work prescribed in the contract and no agreement can be reached in arbitration

During probation, an employee can quit by giving three days notice. After probation, the employee must give 30 days written notice. An employee is allowed to quit if the employer fails to

  • provide work conditions that are safe and stipulated in the contract
  • pay wages on-time
  • pay social security premiums
  • abide by the law

Whenever a labor contract is terminated, for almost ANY reason including when a fixed term contract is completed or an employee is found negligent, the employer must pay the employee severance pay. The only time an employer doesn’t need to pay severance is if the employee dies or starts to get retirement benefits. Severance pay is one month’s salary for every year the person was employed by the company. An employee who worked for less than six months would get half a month’s salary.

The turnover rate of Chengdu’s IT industry is 5-8%.

Part-Time Employees

Part-time workers are paid on an hourly basis, cannot work more than an average of four hours per day and not more than 24 hours per week. No written contract is required and no severance pay needs to be paid. Either employee or employer may terminate the relationship at any time. Hourly wages must not be less than the regional minimum wage.

Labor Law

Expenses

Office Space

The average rental cost in the Tian Fu Software Park is 50 RMB per square meter per month. One company paid two months deposit plus one month rent in advance. Apparently it was possible in the past to set up your company using a residence as your company address. But this is not possible any longer. You must register your company with a commercial address. This requires that you sign a lease with the office landlord prior to submitting your FIE application. WFOE.org recommends adding a clause to your lease agreement that the lease is contingent upon the successful registration of the WFOE and that in the event that the registration does not go through that the landlord should fund the deposit and any rents paid. Moving your office to another location is a complicated process. Your accountant will need to submit a Tax Clearance Declaration Report, which is a difficult as an audit. Then you would need to change all licenses with your new office address.

Startup Costs

  • Office Rental
    • one company paid two months deposit plus one month rent in advance
  • Real Estate Agent Fees (RMB 5,000)
  • Legal Fees (RMB 10,000)
  • Employee Recruitment (i.e., job ad postings, RMB 5,000)
  • Office furniture and equipment (???)

Monthly Expenses

  • Accountant (RMB 400)
  • Office Rental (???)
  • Janitorial Services (RMB 500, service twice a week)
  • Broadband Internet Service (RMB 400)
  • Office Management Fees (RMB 400)
  • Electricity (1.35 RMB/kwh)
  • Sewer (1.5 RMB/m3)
  • Water (3.10 RMB/m3)
  • Gas (2.08 RMB/m3)

Yearly Costs

  • Tax Preparation Fees
  • Various Fees and Insurance charges

Business Entity Options

When starting a foreign invested enterprise (FIE) in China, you have four basic options:

  1. Wholly Foreign Owned Enterprise (WFOE)
  2. Representative Office (RO)
  3. Joint Venture
  4. establish no legal entity in China and just “do business” there

Obviously the first three options are legal while the last one is “risky business” and likely to get you booted out of China and your business given to your “employees”. However, establishing no China company at all might be the way to go for some.

Wholly Foreign Owned Enterprises (WFOE)

Read the excellent China Law Blog post on setting up an WFOE in China. Requirements

  • company to engage in types of business activities approved by China as detailed in the Catalogue for the Guidance of Foreign Investment Industries
  • foreign investor is an approved investor
    • investor is a valid, existing company in its home country
    • documents (along with Chinese translation) to authenticate person representing the company is authorized to sign documents on the investor’s behalf
      • articles of incorporation
      • business licenses
      • Certificate of Status
      • Bank Letter
      • description of investor’s business activities
  • submit documents (in Chinese) for government approval
    • Articles of Association (sample AoA by wfoe.org)
    • Feasibility Study
    • Leases
    • Budget for Employee Salary and Benefits
    • Business plan

The World Bank Group provides an excellent 13 step registration process for starting a business in Chengdu, which includes times and costs to complete each step. They also provide valuable information which compares how easy it is to (1) start a business, (2) register property and (3) enforce contracts in Chengdu as opposed to other parts of East Asia & Pacific. Pros

  • can directly hire Chinese citizens as employees
  • no longer required to export 50% of product … can target the Chinese market
  • freedom to control company without a Chinese partner
  • can earn profits (as opposed to a representative office which is forbidden to do so)
  • can convert RMB to USD for taking out of China

Cons:

  • application process can be lengthy (2-5 months) and expensive (incorporation fees are about one percent of the initial capital)
  • According to the new Chinese Company Law (Article 59), a minimum of 100,000 RMB (about USD $14.7K) registered capital required for a single member LLC, depending on your industry. Read the China Law Blog post on this topic.
    • The amount must be listed in your company’s Articles of Association and company register.
    • The company register is a matter of public record and available to the public. Therefore it establishes a company’s “credit worthiness” and reputability.
    • Small amounts of registered capital must be contributed immediately upon forming the company.
    • Large amounts of registered capital can be contributed in installments (over a period, sometimes as long as two years) with the first installment being 20%.
    • It is a crime to fail to fully transfer the entire stated amount of registered capital into China.
    • Regulators will evaluate whether the amount of registered capital is reasonably sufficient for operating your company in your chosen industry and location.
    • Registered capital should be enough to cover rents and salaries in advance during the company’s start-up phase.
    • Capital contribution can be in money, equipment or intellectual property. However any non-monetary contributions will be valued at the low-end by the authorities.
    • Capital must be approved prior to transferring it to China otherwise it will not be recognized as part of your registered capital.
    • All companies in China, both domestic and foreign, must have registered capital, although probably foreign companies have higher requirements.
  • taxable under the Enterprise Income Tax Law

Types of WFOEs

  • manufacturing
  • consulting
  • trading, wholesale, retail or franchise

Representative Office (RO)

A representative office in China is not itself a separate legal entity but represents the its headquarters (i.e., the foreign company in another country). An ROs purpose is to

  • perform liaison activities
  • conduct research and market studies
  • promote the foreign company
  • establishing and arranging contacts
  • coordinate activities of the foreign company in China

Pros:

  • faster (4-6 weeks, usually 30 days), simpler and cheaper setup than a WFOE
  • can hire staff indirectly via a labor agent
  • accounting and corporate services costs less than for an WFOE
  • useful for building sales, brand and relationships in China
  • no registered capital required!

Cons:

  • cannot hire Chinese citizens as employees directly
  • Must lease an approved office space for an entire year beyond the RO approval date. Some jurisdictions, such as Shanghai, consider only a few designated office buildings as approved to serve as office space for ROs.
  • cannot bill customers, earn any money in China or take payments from a PRC business or individual
  • cannot sign contracts
  • must pay a 10% tax on the gross expenses of the RO
  • the closing down of an RO will be under close scrutiny by tax authorities who will look for every opportunity to get money out of you.

The law firm Harris & Moure recommends not to setup an RO with the intent to convert it later to an WFOE. They say you will save time and money in the long run by just setting up a WFOE at the outset. Converting from an RO to and WFOE required the shutting down of the RO, which itself can take about two weeks and requires a bunch of paperwork, and then creating a brand new WFOE from scratch.

Joint Venture

There are two types of joint ventures:

  • Equity Joint Venture
    • operates in the form of a limited liability company
    • profits are allocated based on the ratio of capital contributions made by partners
  • Cooperative Joint Venture
    • can be organized as an LLC or as a “non-legal person”
    • profit allocation ratios are at partners’ discretion rather than by contribution amounts

Using an offshore holding company

LehmanBrown has some good advice about whether to create a company in another country (e.g, Hong Kong, Cayman Islands, etc.) owned by the parent company and where the offshore holding company owns the WFOE in China. Pros

  • selling the China investment would involve selling the offshore entity rather than the WFOE, saving administrative hassle in China
  • possible tax savings (this could be illegal tax evasion)
  • if you create a Hong Kong holding company, you can get Hong Kong residency status and setup a HSBC account in RMB. Not sure why this is a benefit.

Cons

  • practical difficulties for WFOE in China when opening bank account or verifying documents

Discussion

It seems that Chengdu’s Tianfu Software Park would make a fantastic location in which to set up an R&D office for my company. I would choose to set up an WFOE so that we could hire employees and control the direction of the company. I would prefer to keep our core intellectual property ownership outside of China. However, perhaps the Chengdu WFOE could create and own its own core technology which is different from our existing core technologies. In that case, then the WFOE would qualify as a high-tech company and receive two years tax exempt status, then 12.5 percent during the third, fourth and fifth years, and then 15 percent from then on.

Appendices

Business Registration consultants

Other Links

  • U.S. Commercial Service – Chengdu – mission to assist U.S. business successfully enter the Southwest China market and is art of the International Trade Administration within the U.S. Dept of Commerce.

Chinese Business Law

Acronym Glossary

  • capability maturity model integration (CMMI)
  • domestic enterprise (DE)
  • foreign direct investment (FDI)
  • foreign-invested commercial enterprise (FICE)
  • software as a service (SaaS)
  • State Administration of Taxation (SAT)

Chengdu Business News

]]> http://trudat.info/2010/04/chengdu-saas-startup-feasibility/feed/ 3 Investing in China’s Second Tier Cities http://trudat.info/2010/04/investing-in-chinas-second-tier-cities/ http://trudat.info/2010/04/investing-in-chinas-second-tier-cities/#comments Sat, 17 Apr 2010 05:15:46 +0000 trudat http://trudat.info/?p=814 Setting up businesses in a second tier city, rather than in first tier cities such as Shanghai, Beijing, Guangzhou or Shenzhen, is certainly less-glamorous. But they are certainly not without their benefits:

  • cheaper labor costs (with comparable quality to that of first tier cities)
  • cheaper rent
  • cheaper energy costs
  • favorable local policies
  • steady flow of workers
  • faster city development
  • less chance that employees will quit to get jobs with a competitor
  • if you later wish to move to a first tier city, key employees will be more willing to relocate with you than the other way around (going from a first to second tier city)

It must also be noted that there are drawbacks to setting up shop in a second-tier city:

  • less developed supply chains and logistical services
  • less qualified/educated pool of employees
  • distance from air and sea ports, embassies/consulates, legal services, quality and logistics providers, testing and inspection offices, notary publics, provincial government offices

According to David Dayton, a simple rule of thumb to look for in a second-tier city to determine whether it has developed supply chain resources and a decent middle class is to check that it has an international airport and Starbucks.

Fourteen second-tier city account for eight percent of China’s population but fifty-three percent of its total imports. Here are a list of some of the second-tier cities.

Jones Lang LaSalle published a report in 2009 entitled, China40 – The Rising Urban Stars, highlighted forty of China’s up-and-coming second and third tier cities. The report cites Chengdu as a city with significant logistics potential with both access to large population bases and transportation hubs/ports.

In the year 2000, China launched the “Open up the West” (Xibu da kaifa) Campaign. Its stated goal was to close the gap between the underdeveloped west and the prosperous east. The primary motivation, some believe, however, was to simply develop the west so that it could provide natural resources to the east. In any case, the western interior received massive investment and development by the central government.

Read the very informative November 2008 DTZ report on investment opportunities in China’s second tier cities with case studies on Chengdu, Xiamen and Nanning.

China Expert Recommends Startups Break Into the China Market Through Second Tier Cities

In a Vator News interview from 2008 with James Nysather, then of BASAY International, Nysather advises small tech firms to set up shop in second tier cities (with population of one million or more) that are in the western interior parts of China in order to save on costs. He also suggests early stage foreign startups to use an outsourced sales and marketing firm inside China to represent them in order to enter the Chinese market (i.e., sell products and services to the Chinese in China).

Links to articles:

]]> http://trudat.info/2010/04/investing-in-chinas-second-tier-cities/feed/ 0 Amazon buys Zappos http://trudat.info/2009/07/amazon-buys-zappos/ http://trudat.info/2009/07/amazon-buys-zappos/#comments Thu, 23 Jul 2009 20:28:24 +0000 trudat http://trudat.info/?p=275 Amazon announced last night that it bought Zappos for about 10 million Amazon stock, worth $807 million, and $40 million in cash and stock to Zappos employees.

In the following video, Amazon CEO Jeff Bezos tells an interesting story of what he has learned and why Zappos is a great fit for Amazon. It seems that Amazon bought Zappos because they have the same values (i.e., customer service obsession and innovation) and because their market overlaps.

To summarize, what Jeff Bezos knows is:

  1. Obsess over customers
  2. Invent
  3. Thing long term
  4. It’s always Day 1

Bezos says that the only reason why Amazon still exists today is that they obsess over customers. While they do pay attention to competitors, what really motivates them is customers.

Develop an inventive culture. Invent on behalf of customers. Listen to customers to learn their needs. Then invent solutions that will help customers.

Plan 5 to 7 years out. Invest in that vision. Be prepared to be criticized by others that misunderstand the ideas you are pursuing for tomorrow that aren’t yet accepted today.

There are always new ways to improve customer service and new inventions to pursue.

It seems to me that points 2 and 3 significantly overlap. Adoption of innovation always takes time before inventions are widely adopted. So innovation always requires patience and long term thinking. In summary, run a great company by always giving terrific service to your customers. Part of that service is to always think of better ways to do that … that’s where the creative/inventive culture comes into play.

This totally falls right in line with how Jesus taught people love your neighbor as yourself. If a company really loves the customers they serve they will #1 always be courteous, helpful and friendly with a keen eye for detail to make sure the customers are never failed to be serviced properly. And, #2 the company will be thoughtfully aware, like a butler or waitress ready and waiting to notice when their customer is in need of anything. When it spots a need, the company will launch into a creative process to invent new ways of servicing the customer better.

I like how Bezos makes a distinction between paying attention to competitors and obsessing over customers. If you are driven by competitors, it is like being driven by envy or covetousness. Apparently that’s not productive even in a business environment. The best way is to be motivated by the positive force of wanting to help people … obsess over your customers.

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