Posts

Manufacturing in China pros and cons: Compare your options here!

Manufacturing in China Compare some proscons of your options here

Time to compare your options for manufacturing in China

When it comes to manufacturing in China there are a number of options for companies to choose from such as registering a WFOE, dealing with a sourcing agent or partnering with a contract manufacturer. Finding the right manufacturing solution for your company and its specific needs is certainly possible, but the question you have to ask yourself before you risk wasting your time, your money and possibly losing your nerve is, “Which of these solutions fit in best with what my company needs?”.

Knowing the pros and cons of each of these options all of this and how each different option may fit in with your specific needs is the very first step in deciding how you want to take on manufacturing in China. To this end, PassageMaker has compiled an infographic that provides a head-to-head of the pros and cons of some of the available options for companies looking to manufacture in China. Our infographic covers:

  • WFOE
  • Contract Manufacturer
  • Trading Company/Agent

Take a look below to discover what the manufacturing in China pros and cons are…

shenzhen_infographics1

An insider’s look at options for manufacturing in china today!

An insiders look at options for manufacturing in China

Manufacturing in China from my perspective

During my 20 years living in Asia, I’ve owned or operated a number of different business entities in China, ranging from manufacturing WFOE’s to US-China joint ventures to trading companies to buying offices. I’ve also dealt with agents, factories and service providers of every variety imaginable, from professional companies to total scam artists.

China is not only a massive market but it changes rapidly, so I don’t claim to be an expert on all aspects of your China business. And anybody that claims to know “everything about China” should not be taken seriously! I’ve had my share of success as well as failure, and this has prompted me to compile a whitepaper where I’d like to share some of the key lessons, pitfalls and best practices that I learned the hard way when answering the deceivingly simple question of “what are the options for manufacturing in China?”.

Read on to find out what you can expect from this whitepaper and how it will benefit you…

“What can you expect?”

This whitepaper covers each of the following options for manufacturing in China:

  • WFOE
  • JV
  • Contract Manufacturer
  • Sourcing Agent

For each of the above mentioned supply options, as well as some of their lesser known variants, I go over the pros and cons in great detail, share information on their costs and divulge insider information based on my experience.

How can you benefit from this whitepaper?

My goal is to help the reader identify the best option for their particular needs as selecting the right partner is the single most important step in the overseas manufacturing process.  And the “right” supply option is highly depending on the buyer’s particular mix of order size, budget, available time, quality level, intellectual property exposure and general China understanding.

Below you can see the 5 key criteria I have used to help readers make a decision about which production option is best for their particular needs:

1. Level of Chinese Expertise Required
How well do you need to know the language, business culture & legal systems.

2. Typical Order Size
Does the buyer have to be a certain size?

3. Control over Lead-times, Intellectual Property, Quality Standards, Social Compliance & Price
How exposed is the buyer to non-confirming goods and are there additional costs needed to ensure quality standards are achieved? How hard is it to be a responsible corporate citizen in terms of workplace safety, labor practices and environmental protection? How exposed is the buyer to having their ideas ripped off?

4. Transparency
Does the buyer get to know the true identity, compensation and motives of the key players in the supply chain?

5. Tax Complications
What’s the impact on global taxes and the costs of filing at home or abroad?

 

Contract manufacturing in China: No need to set up a WFOE or JV

assembly line

Ben, representing a venture capital firm, writes PassageMaker to ask:

I’m trying to help a venture backed company whose supplier’s factory is missing some licenses that are imperative given that the product contains batteries.

These guys are 100% committed to doing everything above board – do you have any ideas for who could help them? Might need to set up a WFOE but I’m not an expert by any stretch.

Setting up a WFOE (wholly foreign owned entity) is certainly possible (I own 3 of them in China) but it takes time and investment to get all the licensing in place, as you have discovered.

The headache is that you can’t use the WFOE to import/export until all details of the registration are complete.

It’s a bit of a catch 22. On one hand, you want to do things in accordance with the law, and you want to set up a WFOE. On the other hand, WFOE set up takes significant registered capital and you even need to have staff trained up and on payroll to pass the audits to get the license to import-export. That process can take months to years (in some cases) and most investors don’t want to hire a team and set up a factory to have people sitting around on their hands for months at a time waiting for the paperwork to legally produce a product.

What you need to set up a WFOE in China

What you need to set up a WFOE in China

Setting up a WFOE in China

WFOEs usually take the form of limited liability companies and the liability of the foreign investor in respect of the WFOE is limited to the amount of capital it agrees to contribute. The risk of proceeding with a WFOE structure is that a foreign investor will not have the assistance of a domestic partner when obtaining government approvals, premises and land, and cannot benefit from the existing sales and distribution channels of a domestic partner.

However, many foreign investors using WFOE structures have found that doing business in the PRC is becoming less difficult over time and is less dependent on local connections.

Furthermore, the WFOE structure enables a foreign investor (or multiple foreign investors) to have complete freedom to implement the operational, investment and managerial strategies of the foreign parent company, without having to take into consideration the interests, needs and agenda of a domestic partner.

This makes WFOE easier to manage. In addition, it is easier for a foreign investor to protect its know-how and technology, as the WFOE structure makes it easier to limit access. For these reasons, WFOE have become favored to EJV [Equity Joint Venture].

Documents required for setting up WFOE in China

  1. 3x Certificate of Incorporations, or Equivalent document authenticated by Chinese embassy or consulate or notarized by a HK lawyer authorized by Chinese Department of Justice(If the parent company is incorporated in HK).
  2. 3x Bank Reference Letters from investor’s bank to declare a good standing
  3. Passport copy of WOFE’s Legal Representative
  4. WOFE’s Legal Representative provides 6 photos (2 inches size), brief resume signed by the Legal Representative.
  5. Statement of registered capital and business Scope of WOFE for us to prepare documents.
  6. Office address in China, 3x leasing contracts, 2x certificate of real estate ownership, and 2x landlord identification).

*Note: WFOEs are prohibited from being established in industries where there is an express requirement for a joint venture, or where a domestic party is required to hold a controlling interest under the Catalogue.