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Tips for Starting a Business in China

For those with even small amounts entrepreneurial tendencies, moving to China will be fascinating. After that initial fascination wears off a bit and you have a moment to ponder what you are looking at on the street everyday in terms of business, it will change into an intense curiosity about the system and where opportunities may lie.  Many expats choose to open a business in China and find it a rewarding experience. Those who consider their ventures a success in hindsight, often do so as a result of managing their expectations prior to taking the plunge. A big part of that is understanding where you and your idea fit into the broader business landscape in Shanghai.

 

Entrepreneurs versus small business owners

Modern entrepreneurs tend to open ‘start-ups’ rather than simply a ‘business.’ They plan to seek rounds of investment from friends and family, venture capitalists or angel investors in order to divest the high initial risk of starting a company from scratch, with the ultimate goal of selling their shares or reducing their involvement in the business – this is generally how the business community differentiates the entrepreneur from the small businessperson who is simply seeking to start business operations and turn a profit.  

While the definitions are essentially the same everywhere, the scale of things in Shanghai means that the numbers are bigger and companies are too.  In addition, the financial barriers to traditional entry to the market are much higher in in terms of registering a local business in order to legally conduct business and issue the required official invoices called ‘fapiao’ as well as initial capital investment.

If your goal is starting a small business venture, then registering a limited liability company in Hong Kong is a good option as the path is well-worn and straight forward.  There are restrictions that come with this option however, in terms of financial transactions and allowed scope of legal business activities on the mainland. The regulations are constantly evolving so finding up-to-date advice will be an important aspect to choosing the best path for you.

As a small business person with a trusted local partner, choosing a favorable jurisdiction within China can lessen set up costs and red tape significantly.  Different cities and regions vary in the policies in place to promote small business or to control it as in cities like Shanghai.  There are many agencies that specialize in facilitating the set up and registration of companies and their fees vary wildly.  Your local partner will be central in organizing this aspect of your company registration in China.

 

Risks and rewards

Whichever path you choose, all business ventures start with an idea and the goal to bring that idea to the market. When starting a business in an expat market and particularly in China, it’s essential to manage your own expectations from the outset as it will affect how you run your business and whether you consider the venture a success or failure after having spent considerable resources attempting to bring your idea or plan to fruition. 

The numerous pitfalls that necessarily accompany starting a business are multiplied and exacerbated for expats, and while this can be interpreted as an invitation to pass on the opportunity to start a business abroad, it can also be seen as lowering of the bar for success. In other words, if you manage to build a viable small business at all in an expat market, you would be fully justified in seeing that as a success.

On their home turf, entrepreneurs and small businesspeople alike face daunting odds. About 75% of start-ups fail, while two out of three small businesses do not make it past three years in business. Now adjust those odds for a foreign culture in a highly competitive and crowded marketplace of which you know little to nothing about in a real sense, and the risks become even clearer.

For all ventures, the real question you need to ask yourself prior to committing to your idea or business plan is, “What is the worst case scenario if I start this business?” If complete failure means you will lose your life savings and survival becomes an issue, you might want to reconsider. If, on the other hand, you are a trailing spouse with a reliable breadwinner in the household and time on your hands, the risk is minimal, aside from your effort and ego of course. This is particularly true in the case of non capital-intensive ventures such as consulting, or other service-related enterprises where you will be doing most of the labor yourself based in a home office.  It’s also true in cases where you give up a stake in your company to initial investors who assume a large burden of the financial risk in exchange for owning a piece of a company that requires little else in terms of labor or time commitments.

 

What are the odds? 

You will not find reliable statistics on the success rates of foreign invested businesses as it relates to the prospects of starting your business in Shanghai.  The only useful fact is that it is going to be harder – in most cases much harder.

Notable success stories of foreigners coming to China and building a successful, scalable business are relatively rare. That is not to say there aren’t any expats who have built successful businesses in China, because there are, but they are considered successful for the most part because they survived and, if they were lucky, found a buyer for their business prior to their return home (or at least turned a profit while their business was in operation). Starting a small business in an expat market – even one as big as Shanghai - is still only comparable to a smaller North American or European city. That said, there are examples of multi-million dollar businesses built by expats in China in the hospitality industry (most notably) but also the retail and service sectors. 

 

Some rules of thumb

Tip# 1  Stick to what you know

Given the fact that most entrepreneurs and newly minted small business people don’t have formal business training, it’s critical that you know your market and customers in addition to having a strong set of skills that correspond to the business you plan to open. In the case of knowing your market, choosing to sell your product or service to expats first, given that you are one yourself, is a wise choice, even if it seems counter-intuitive to disregard the massive local market.

Tip# 2  Find a trusted local partner

First, ‘local’ does not mean ‘looks Chinese’, it means born and raised in China and it’s helpful if they are from the city in which you plan to set up your company. Particularly if you are a newcomer to China, you may not realize that if you are doing business in Shanghai, then having a true Shanghainese local partner will be of enormous benefit when dealing with local government agencies.

Furthermore, ‘trusted’ does not mean the person you sat beside on the plane on your flight to China. More than one fortune 500 executive has made the mistake of ‘trusting’ one of the first ‘locals’ they met to help set up their China operations – with predictably disastrous results.

Tip #3  Bring the best of the West with you

There are competitive advantages to building a refined western company culture when doing business in China when it comes to recruiting and retaining key staff, which is a challenge for all businesses everywhere. Staffing issues, even if it’s just an assistant, often make or break small businesses. 

For many, these tips should seem obvious. This should not, however, diminish their importance given the odds of success.  If you manage your expectations of what you define as success, particularly at the outset, the outcome will be more satisfactory.   Most successful entrepreneurs, no matter where they start their business, will tell you that in every success story there is an element of good luck. Nowhere is this truer than in China.