American companies have been successfully manufacturing high quality OEM products in China for decades. Many of the goods produced at their Chinese partner factories are immediately exported back to America or other international markets for outside consumption. With China’s ever-growing middle class and government policies aimed specifically at increasing domestic consumption, it is a great time for American companies to capitalize on the opportunity to expand into the Chinese market. This blog post is meant to provide some useful tips to help companies transition from an export-only relationship with its partner factory in China to one that allows for domestic consumption as well.
In most cases, the facilities contracted to manufacture American products in China are licensed only to export these goods (or send them to a bonded warehouse in China that acts in the same vein) and not to distribute them for domestic consumption. Their reasoning for not having the domestic license or at least telling American companies they do not have the appropriate license, most likely comes down to high export subsidies provided to the factories by the Chinese government.
For instance, the export subsidy on some types of furniture can be 15% or more of its cost. This subsidy is quite substantial and is enough of a motivator for many factories to specialize only in the production of goods for the export market.
While applying for a domestic sales license is not overly complicated, only a legally registered entity in China can apply for one.
Companies currently without a legal entity in China have a few options if they want to sell in the domestic market, which are as follows:
- Find a local agent in China who has the domestic license and authorize them to sell your goods. One issue with this option, the American company does not avoid paying the import taxes that will be charged once its goods are collected from the bonded warehouse as these items will still be considered imported goods even though they technically never left China. The other issue is that in authorizing this third party, the company will essentially be giving legal control over its brand and the way it is represented, distributed, and priced in China to a third party.
- A company’s second option is to hire a third party to renegotiate a mutually beneficial price with the factory to make it worth its while to produce the goods for the domestic market. After a new price is determined, the factory or an agent you have authorized can apply for a domestic license and sell your company’s goods in China. As in the first option, this relationship will not provide the American entity control over how its products are distributed or represented domestically.
- Another option that will provide the American company the most control over its operations in China, would be to set up its own legal entity, otherwise referred to as a Wholly Owned Foreign Enterprise (WOFE). Given the American company is interested in selling its products in China for the long term, setting up a WOFE will allow it to enter into contracts and apply for any and all domestic and export licenses on its own behalf, ultimately remaining in control of its brand, distribution, and business dealings within China. If the company wants to minimize its investment, it can register a WOFE and still subcontract its manufacturing and distribution, while still maintaining control of its operations. Additionally, companies with a WOFE are in prime position to penetrate the Chinese market. In the absence of import/export duties, companies can competitively price their products for the market and continue to bank on their international brand awareness. Regardless of where the goods are actually produced, Chinese consumers innately trust international brands to be of higher quality, and that quality makes them worthy of a higher price.
The above information was provided by US-Pacific Rim International, Inc. (http://www.us-pacific-rim.com), a Maryland corporation providing market entry consulting services for the China market.
