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Country Commercial Guides for FY 2000:
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IV. MARKETING U.S. PRODUCTS AND SERVICES
A. Distribution and Sales Channels
Trading Companies: Generally, foreign companies are not permitted to directly engage in trading in China, with the exception of the direct marketing of a portion of the products manufactured in China, or the establishment of wholly owned foreign trading companies in some free trade zones with limited access to markets outside these zones. Accordingly, U.S. exporters need to use a domestic Chinese agent for both importing into China and marketing within China. Only those trading companies authorized by the central government to handle exports and imports are permitted to sign import and export contracts. Since the beginning in 1998, some private and collectively-owned enterprises in the manufacturing sector have been granted this authorization. Some import/export trading firms extend their scope of business to represent foreign manufacturers as their distributors, in arrangements similar to a "manufacturers representative".
With careful selection, training and constant contact, a U.S. exporter can obtain good market representation from a Chinese trading company, many of which are authorized to deal in a wide range of products. Some of the larger companies have offices in the U.S. and other countries around the world, as well as a network of offices & affiliates in China. However, given transportation and communication difficulties as well as regional peculiarities, most of these trading companies cannot provide diversified coverage throughout China.
Local agents: In addition to trading companies, China is witnessing an explosion in local sales agents who handle internal distribution and marketing. Most of these firms do not have import/export authorization. They are the next layer down the distribution chain, buying imported products from those that do. They may be representative offices of Hong Kong or other foreign trading companies, or domestic Chinese firms with regional or partial national networks.
Given China's size and diversity, as well as the lack of agents with wide-reaching capabilities, it makes sense to engage several agents to cover different areas, and to be cautious when giving exclusive territories. China can be divided roughly into at least five major regions: the South (Guangzhou), the East (Shanghai), the Central/North (Beijing-Tianjin), West China and the Northeast.
The U.S. Foreign Commercial Service's (USFCS) Agent/Distributor Service (ADS) program was designed to help U.S. exporters find appropriate sales agents and representatives in China. This service may be ordered through any U.S. Department of Commerce district office or U.S. Export Assistance Center. For a fee of $250, USFCS searches for potential agents or distributors for your product in a specific geographical area. Regional ADSs are available from the USFCS offices in Beijing, Shanghai, Guangzhou, Shenyang, and Chengdu, but nation-wide searches are not available. An ADS is an excellent way to gauge interest in your product and begin the process of finding a suitable representative.
Establishing a Representative Office: Representative offices are the easiest type of offices for foreign firms to set up in China, but these offices are limited by Chinese law to performing "liaison" activities. As such, they cannot sign sales contracts or directly bill customers or supply parts and after-sales services for a fee, although most representative offices perform these activities in the name of their parent companies. Despite limitations on its scope of business activities, this form of business has proved very successful for many U.S. companies as it allows the business to remain foreign-controlled.
China's Company Law, which has been in effect since July 1, 1994, permits the opening of branches by foreign companies but, as a policy matter, China still restricts this entry approach to selected banks, insurance companies, accounting and law firms. While representative offices are given a registration certificate, branch offices obtain an actual operating or business license and can engage in profit-making activities.
Establishing a representative office gives a company increased control over a dedicated sales force and permits greater utilization of its specialized technical expertise. The cost of supporting a modest representative office ranges from $250,000 to $500,000 per year, depending on its size and how it is staffed. The largest expenses are rent for office space and housing, expatriate salaries and benefits.
Establishing a Chinese Subsidiary: A locally incorporated equity or cooperative joint venture with one or more Chinese partners, or a wholly foreign-owned enterprise (WFOE), may be the final step in developing markets for a company's products. In-country production avoids import restrictions -- including relatively high tariffs -- and provides U.S. firms with greater control over both intellectual property and marketing.
The role of the Chinese partner in the success or failure of a joint venture cannot be over-emphasized. A good Chinese partner will have the connections to help smooth over red tape and obstructive bureaucrats; a bad partner, on the other hand, can make even the most promising venture fail. Common investor complaints concern conflicts of interest (e.g., the partner setting up competing businesses), bureaucracy and violations of confidentiality. American companies should bear in mind that joint ventures are time-consuming and resource-demanding, and will involve constant and prudent monitoring of critical areas such as finance, personnel and basic operations in order for them to be a success.
Some companies prefer to establish a WFOE rather than a joint venture, with a view to retaining greater management control, due to concerns over intellectual property rights (IPR) protection, desire for simplicity, or for other reasons of corporate policy. The law on WOFEs requires that they either provide advanced technology or be primarily export-oriented, and restricts or prohibits them in a number of service and public utility sectors. However, an increasing number of U.S. companies find WOFEs, which now account for roughly 20% of all foreign-invested enterprises (FIEs), to be a viable entry vehicle to the China market, taking much less time and money to set up than a joint venture (see Chapter IV).
Licensing: Technology transfer is another initial market entry approach used by many companies. It offers short-term profits but runs the risk of creating long-term competitors. Due to this concern, as well as intellectual property considerations and the lower technical level prevailing in the China market, some firms attempt to license older technology, promising higher-level access at some future date or in the context of a future joint venture arrangement.
Licensing contracts must be approved by and registered with the Ministry of Foreign Trade and Economic Cooperation (MOFTEC). A tax of 10-20% (depending on the technology involved and the existing applicable bilateral tax treaty) is withheld on royalty payments (see Section F of this Chapter).
Franchising: China has no laws as yet which specifically address franchising, but many foreign companies are beginning to establish multiple retail outlets under a variety of creative arrangements, including some which for all practical purposes function like franchises. Virtually all of the foreign companies who operate multiple-outlet retail venues in China either manage the retail operations themselves with Chinese partners (typically establishing a different partner in each major city) or sell to a master franchisee which then leases out and oversees several franchise territories within the territory.
Direct selling: Major U.S. direct selling companies entered the China market in the early- to mid-1990's, when China's legal and regulatory framework for this industry was not very clear. Direct selling was quickly modeled after by domestic Chinese companies, some of whom abused this legitimate format of doing business and operated scams to rip off consumers and evade taxes. In early 1998, the Chinese government started implementing a series of strict controls over this industry, culminating in the re-licensing of all direct selling companies. Although a few major U.S direct selling companies were re-issued the business license, restrictions are severe and requirements many, resulting in difficult business environment. The U.S direct selling industry is working pro-actively with various Chinese government departments and agencies, as part of an overall effort toward China's WTO accession, to construct a fairer business climate in this industry.
E-commerce: The Chinese government has adopted an open attitude towards the advent of E-commerce in China. There is considerable amount of interest among both Chinese and international businesses in establishing a sales channel on-line. Investment environment, however, is still premature due to the lack of clear defined regulatory powers over the industry, an effective Chinese certificate authentication system, secure and reliable on-line settlement system, and an efficient physical delivery system. Many U.S. IT sector companies have been actively engaged in jointly developing these systems in China.
B. Selling Factors/Techniques
Relationships: Personal relationships in business are critical. The Chinese feel more comfortable dealing with "old friends," and it is important for exporters, importers, and investors to establish and maintain close relationships with their Chinese counterparts and relevant government agencies. It is equally important that American exporters encourage strong personal relationships between their Chinese agents or distributors and the buyers and end-users. A web of strong personal relationships will help ensure smoother development of business in China.
Foreign Currency: Chinese companies are not permitted to retain foreign exchange. In business deals with Chinese companies, U.S. companies have been asked to keep a portion of the Chinese companies hard currency earnings in foreign bank accounts to avoid reporting and turning it over to the foreign exchange control authorities. As part of an effort to clamp down on corruption and tighten foreign exchange control, the Chinese government is coming down hard on such practices.
In contrast, FIEs are permitted to retain foreign exchange contributed to or earned by the enterprise. On December 1, 1996, China made its currency convertible on the current trade account. However, foreign exchange balancing requirements remain in effect in other Chinese laws and regulations and in joint-venture contractual arrangements.
Chinese companies are, however, able to purchase the foreign currency necessary for authorized imports and foreign-currency obligations such as licensing fees, royalties, and loans by authorized entities.
C. Advertising and Trade Promotion
Advertising: Advertising is an effective way to create product awareness among potential consumers in China. Channels for mass advertising include publications, radio, television and billboard displays, as well as sports sponsorship. There are many advertising companies in China, including Chinese, foreign and Chinese-foreign joint ventures.
China's 1995 Advertising Law contains guiding principles that set broad requirements. For example, one of the requirements is that advertising should "safeguard the dignity and interests of the State." Comparison advertising is not allowed, nor is use of superlatives. Prices for advertising are regulated by the State, and are higher for foreign than local companies, although the Chinese government has promised to eliminate such price discrimination.
Trade Shows and Missions: Hundreds of exhibitions are now held annually in China. Most are sponsored or co-sponsored by government agencies, professional societies, or the China Council for the Promotion of International Trade (CCPIT). Shows are also organized by U.S., Hong Kong, state trade departments, and other professional show organizers. Show participation costs are high and many reach only a local audience.
Electronic Commerce and the Internet: The rapid growth of the Internet raises interest in using "e-commerce" in China. Users will grow by a factor of ten times in two years, from two million in 1998 to a projected twenty million in the year 2000. Though China remains a developing country, the ambitious use of high technology has made inroads with the growth of governmental and business-to-business forms of e-commerce. Government at all levels seeks to use technology to inform the public about laws, deal with customs and simplify procedures, and businesses are beginning to conduct bidding, process sales and handle contacts on-line. In addition, direct marketing and sales-on-line have begun despite the lack of credit card usage and distribution difficulties. Despite the nascent stage of e-commerce, China offers a growing market for firms using or selling related information technology products.
Major Publications in China
China Daily 15 Huixin Dongjie, Chaoyang District Beijing 100029, China Tel: (8610) 6492-4488 Fax: (8610)6491-8377 Website: http://www.chinadaily.com People's Daily #2 Jintai Xilu, Chaoyang Menwai Beijing 100733, China Tel: 6509-2216 6509-1016 Fax: (8610) 6509-1816 Website: http://www.peopledaily.com.cn Economic Daily #2 Bai Zhi Fang Dong Jie, Xuanwu District Beijing 100054, China Tel: (8610) 6351-0762 Fax: (8610) 6353-9408 Website: http://www.economicdaily.com.cn Beijing Youth Daily #66 Dong San Hua Nan Lu Beijing 100021, China Tel: (8610) 6731-7711 Fax: (8610) 6733-3704 Website: http://www.bjyouth.com.cn International Business Building 14, Block 3, Fang Xingyuan, Fangzhuang Beijing 1000078, China Tel: (8610) 6762-8419 Fax: (8610) 6762-6878 Website: http://www.moftec.gov.cn International Trade News #28 Dong Hou Xiang, An Ding Men Wai Beijing 100710, China Tel: (8610) 6425-0466 Fax: (8610) 6421-1398 Website: http://www.itn.com.cn Renmin Youdian (People Post) #11 An Yuan Lu, Chaoyang District Beijing 100029, China Tel: (8610) 6496-2936/6496-2969 Fax: (8610) 6496-2945 Website: http://www.chinainfo.com.cn Beijing Business Bai He Hall, 2/F Scitech Hotel 22 Jiangguomenwai Dajie Beijing 10004, China Tel: (8610) 6512-3388 ext 2338/2358 Fax: (8610) 6512-3415 Website: http://www.cbw.com/busbj Jie Fang Daily 300 Hankou Road Shanghai 200001, China Tel: (8621)6352-1111 Fax: (8621)6351-6517 Website: http://www.jfdaily.com.cn or www.jfdaily.com Wen Hui Daily 50 Huqiu Road Shanghai 200002, China Tel: (8621)6321-1410 Fax: (8621)6323-9748 Website: http://www.whb.online.sh.cn Shanghai News 300 Hankou Road Shanghai 200001, China Tel: (8621)6227-8800 Fax: (8621)6322-5073 E-mail: focus1@public6.sta.net.cn Xin Min Evening News 839 Yan-an Zhong Road Shanghai 200040, China Tel: (8621) 6279-1234 Fax: (8621) 6247-3808 Website: http://www.xmwb.sh.cn Guangzhou Daily Add: 10 Tong Le Rd., Ren Min Zhong Rd Guangzhou 510121,China Tel: (8620) 8188-3088 Fax: (8620) 8188-2345 Website: http://www.asia1.com.sg/gzbao Yang Cheng Evening News Add: 733 Dong Feng Zhong Rd Guangzhou, 510085 Tel: (8620) 8777-6211 Fax: (8620) 8776-5103 Website: http://www.ycwb.com.cn GD-HK Information Times Add: #1, 733 Dong Feng East Rd. Guangzhou, 510085 ,China Tel: (8620) 8761-0127 Fax: (8620) 8776-5797, 8766-5240 Website: http://www.gd-hk.deyin.com Information Times 99 Si You Xin Rd Guangzhou, 510600 China Tel: (8620) 8738-1168 ext. 8406, 8407 Fax: (8620) 8738-1557 Website: http://www.cninfotimes.com Guangdong Commercial News Add: 50 Dong Hua North Rd. Guangzhou 510080, China Tel: (8620) 8767-9981 Fax: (8620) 8765-4020 Asian Pacific Economic Times Add: 369 Tian He North Rd. Guangzhou 510610, China Tel: (8620) 3880-0217, 3880-3185 Fax: (8620) 3880-0445 Website: http://www.china-newspapers.com/asia-p-news Nanfang Daily Add: 289 Guangzhou Da Dao Zhong Guangzhou, 510601, China Tel: (8620) 8737-3998 Fax: (8620) 8737-5203 Nanfang Weekend 289 Guangzhou Da Dao Zhong, Guangzhou 510601, China Tel: (86-20) 8739-6882 Fax: (86-20) 8737-0368D. Product Pricing and Customer Service
Most Chinese consumers are sensitive to price and will usually choose the less expensive product unless they can be swayed by better after-sales service or clearly better product quality. For larger purchases, attractive financing that lowers the effective price is offered by Japanese, European and other foreign governments companies of these countries respectively, and may make some U.S. products less competitive.
Foreign companies are normally not permitted to directly provide after-sales service and customer support for their products sold into China. FIEs can provide such services on products that they manufacture in-country. Foreign firms some times engage authorized Chinese entities to provide service, often on a contractual basis, or to establish service centers jointly that can provide both spare parts and after-sales service. American companies complain that such arrangements give them inadequate control over the quality of customer service and result in the loss of customer confidence. Some companies opt to provide regular servicing from bases outside of China, such as Hong Kong. American firms, with the support of the U.S. government, are pressing for relaxation of these restrictions.
E. Sales to the Government
Government procurement is a decentralized process with each Ministry or other government body establishing their own procurement guidelines. Business with China's Government is usually conducted through state-owned/controlled companies affiliated with a particular ministry. China's government procurement practices are often not consistent with open and competitive bidding. Chinese government procurement is, for the most part, non-transparent. Purchases for virtually all projects in China are subject to at least one, and usually several, approvals from governments at various levels. While tenders for projects funded by international organizations are usually openly announced, most government procurement is by invitation only. Competition is by direct negotiation rather than by competitive bid. Goods and vendors for large projects that are covered in the annual state plan are frequently designated during the planning process. All information, from solicitation to award, remains secret and is known only to those companies involved or to officials in the planning and industrial ministries. Direct sales to the Chinese Military are also a possibility. While restrictions on this type of business exist both in the United States and in China, U.S. manufacturers have successfully sold a wide variety of products to the Chinese Military through the General Logistics Department of the People's Liberation Army (PLA).
F. Intellectual Property Rights (IPR) Protection
The U.S. and China signed an IPR Memorandum Of Understanding (MOU) in 1992, pursuant to which China improved its laws governing IPR protection over the following two years and joined the Berne Copyright and Geneva Phonograms Conventions. The March 1995 extension of the IPR MOU sets out a plan for enforcing IPR and grants market access to certain products. In 1998, in an effort to improve IPR coordination and enforcement, China established a new organization, the State Intellectual Property Office (SIPO). As envisioned, SIPO will eventually have authority over the Patent Office, the Trademark Office, and the National Copyright Administration. At present, however, SIPO only controls the Patent Office, with which it is co-located. The Trademark Office falls under the authority of the State Administration of Industry and Commerce, while the National Copyright Administration is controlled by the State Printing and Publishing Administration.
Enforcement: Large-scale violations of intellectual property rights in China, including counterfeiting and smuggling, often overwhelm enforcement efforts. In recent years, China has had considerable success in closing down factories that produced illegal optical disks (CD's, VCD's, and CD-ROMs) computer software products - only to see an increase in such products smuggled across its borders. The authorities have also conducted thousands of raids at both the manufacturing and the retail level, resulting in the confiscation of counterfeit or smuggled products. In 1999, the State Council issued a decree admonishing government agencies to purchase only legal computer software.
At the same time, in 1998, in reaction to continuing IPR violations, over twenty U.S. companies in China formed an informal coalition to draw the attention of Chinese and U.S. Government authorities to the counterfeiting problem, and to propose ways of strengthening enforcement. These companies estimate their annual losses due to counterfeiting at over USD 1 billion. Severely limited market access for products such as foreign movies and computer software provides an additional incentive for smugglers and counterfeiters. Some U.S. companies have devoted considerable on-the-ground resources to combating IPR violations, with mixed results.
Enforcement options: The Chinese government agencies most often involved in enforcement actions are the Quality and Technical Supervision Bureau (TSB) and the State Administration of Industry and Commerce (SAIC). U.S. companies have also reported success in registering trademarks, patents and copyrights with the Customs General Administration, which can then confiscate infringing products. The Trademark Office and the National Copyright Administration also can take action in cases involving trademark and copyright infringement. In addition, China's court system can be utilized to enforce IP rights. In fact, China has established special IPR chambers in the Supreme Court and in many Intermediate Courts, whose judges have had special training in IPR protection. Compared with the administrative agencies (such as the SAIC and the TSB), which reportedly sometimes conduct raids within hours of receipt of a complaint, the court system is relatively slow.
Patents: Under China's patent law enacted in 1984, domestic and foreign patent applications have increased steadily. Patent protection was extended in January 1993 to pharmaceutical and chemical products, as well as processes; the period of protection was lengthened to 20 years. The amendments also provide the patent-holder the right of importation and expand the scope of patent infringement to include unauthorized sale or importation of products manufactured with the use of patented processes. Under the provisions of the MOU, China extends transitional administrative protection to some U.S. pharmaceutical and agrichemical products for up to seven-and-a-half years.
China acceded to the patent cooperation treaty on January 1, 1994, and will perform international patent searches and preliminary examinations of patent applications. Under the patent law, foreign parties must utilize the services of a registered Chinese agent to submit the patent application. Preparation of the application may be done by foreign attorneys or the Chinese agent.
Copyrights: In March 1992, China established bilateral copyright relations with the U.S. and in October 1992 acceded to both the Berne Convention and the Universal Copyright Convention. China also joined the Geneva Phonogram Convention in April 1993. Following accession to the Berne Convention, China explicitly recognized computer software as a literary work and extended protection to computer programs for 50 years without mandatory registration requirements.
Trademarks. Although problems remain with enforcement, China's trademark regime basically conforms to world standards. In October 1989, China joined the Madrid Pact for protection of trademarks; the latter grants reciprocal trademark registration to member countries. China amended its trademark regime in February 1993 to add special regulations for criminal prosecution for trademark infringement.
Legal framework: As of mid-year in 1999, China was engaged in revising its basic IPR laws - patent, trademark and copyright - in an apparent effort to bring their provisions more into accord with international practice. No drafts have been released to the public as yet.
China has a "first-to-register" system that requires no evidence of prior use or ownership, leaving registration of popular foreign marks open to anyone. The Unfair Competition Law extends IPR protection to trade dress. Under the trademark law, foreign parties must utilize the services of registered Chinese agents to submit the trademark application. Preparation of the application may be done by foreign attorneys or the Chinese agent.
Trade secrets: In September 1993, the Chinese government adopted the Law Against Unfair Competition. This law defines unfair competition to include conduct that infringes the "lawful rights" of another business operator, including acts that violate "commercial secrets" rights. Commercial secrets which can bring economic benefits to the authorized users and which are protected by taking appropriate security measures are defined to include technical and operational information not available to the public. Sanctions under the law include civil remedies such as damages, administrative sanctions such as fines, and criminal penalties for "serious violations." China is further obligated to protect trade secrets under the Paris Convention for the Protection of Industrial Property, to which it is a signatory.
Regulation of Technology Licensing: Technology transfer by foreign companies is governed by 1985 regulations on technology import contracts, which include contract-licensing patents, trademarks, know-how or trade secrets; contracts for technical services; and other technology import contracts. Contracts transferring intellectual property as part of the foreign equity contribution to FIEs are generally regulated by laws concerning foreign investment. Technology licensing contracts must be approved by MOFTEC or its provincial commissions. Some of the issues of particular concern to U.S. companies include:
* The licensor cannot require confidentiality beyond the duration of the contract, except where the supplier provides improvements to the technology, and most technology contracts are not to extend beyond 10 years.
* The licensor cannot restrict sales channels or impose unreasonable restrictions on the export of products produced with the licensed technology. * Special approval is required for extended confidentiality, export restrictions, and preferential treatment for payment of royalty tax.
G. Local Professional Services
Licensing technology, opening a representative office and establishing a subsidiary in China all involve Chinese tax and other laws, as well as complex questions on structuring and business practices that necessitate the use of attorneys, accountants and consultants familiar with Chinese requirements.
Chinese law requires representative offices and FIEs to retain the services of accountants registered in China to prepare for official submission of annual financial statements and other specified financial documents. To date, only Chinese accountants and joint-venture accounting firms may provide these services. However, all the major international public accounting firms have offices in China and operate a thriving practice providing services to foreign firms, from advice on tax matters to assistance in setting up accounting systems and preparation of feasibility studies.
Only attorneys licensed in China may appear in court and advise on questions of Chinese law. At present, foreigners are not permitted to qualify to practice Chinese law, nor are foreign law firms permitted to form joint ventures with Chinese lawyers. Registered foreign law firms in China are restricted to advising on the law of their own jurisdictions. Nonetheless, many U.S. and international law firms which have had years of experience in doing business in China are an invaluable source of advice and guidance in setting up ventures, drafting agreements and resolving disputes. As of mid-1999, there were 105 foreign law firms registered with the Ministry of Justice, including 26 firms from Hong Kong, and 27 firms from the United States. Foreign law firms are allowed to open only a single office in China, and may not employ Chinese attorneys in that office.
Commercial Service posts in China maintain lists of U.S. law, accounting and consulting firms with offices in China, as well as of Chinese firms with which the office or its customers have had favorable dealings.
H. Due diligence
Doing business in China is not easy. Chinese bureaucratic organizations may have unclear or overlapping authority. Laws may be vague or contradictory. For U.S. companies, the single most prevalent cause of trade and investment disputes has been the joint venture partner. For this reason, there is a trend towards wholly-owned foreign enterprises. At the same time, in many cases there are good reasons for U.S. companies to seek a Chinese joint venture partner: a Chinese company can assist by providing advice, local experience, and connections, as well as plant and equipment. Due diligence is the key to locating a reputable company. Both Chinese and U. S. firms with offices in China conduct due diligence investigations; the latter include Dunn & Bradstreet, Kroll Associates, and Pinkerton Consulting Services. Investigations are done for a fee, of course, but companies should measure this fee against the possible costs of attempting to cooperate with a local company which turns out to be unreliable. The U.S. Commercial Service's International Company Profile (ICP) service is not offered in China.
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[end of document] Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title17, United States Code.
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