How to Structure my China Presence

This market demands the same level of engagementwith your customers that it does in your core market.

Therefore you have to have, ultimately,if you want to be as successful in China as you possibly can, a presence on the groundthat is perceived and actually is sustainable both from a financial point of view and fromcustomer’s point of view.

So that leaves you a number of options in terms of how youwant to structure that.

You can put in a Wholly foreign enterprise; the level of capital rightnow the lowest level is about ¥ 100,000 RMB or just over close to $18,000 Canadian I thinkwith current exchange rate about $20,000 Canadian.

That is one way of doing it; you can obviouslyhave a larger capital base.

They have spread the amount of time, it used to be 3 years,now it is pretty flexible, that you need to put that money in.

But having an entity inChina allows you to build your customers and service your customers and take RMB payment,which is a lot easier and a lot, from an accounting point of view and the service point of view,and build the team and the organization and facility you need to do your business.

Thetraditional structure which I think was the joint venture where you had a Chinese partnerwith some equity share, is still worth considering for the right industry, especially largercompany where there is maybe a sectorial restriction on ownership, in terms of percentage.

So thatincludes broadcasting financial services, education where you actually need a partnerstill, so you can look at that depending on what your business is.

But I think you alsohave to look at this flexibly and say can we create a new entity offshore? With a Chinesepartner where you might have easier rights of moving shareholder’s obligations andcommitments back and forth, you also have an easier understanding in terms of documentationand flexibility and clarity of shareholder’s agreement compared to joint venture agreement.

And you have an easier access strategy because you can do it without any sort of re-registrationor re-transference in China.

So that is if you need a Chinese partner.

The third optionis to look at, there was an interesting deal done in Canada recently where they have markedon this basis where Harbour Air in Vancouver sold 25% of their company to a Chinese partnerbecause they are about to expand dramatically and they needed the management support andthey needed the commitment of a partner in China, to bring in Canadian airplanes to startdoing small regional routes with the Twin Otter I think it is.

So you can look at sellingoff a company in Canada, in parts bringing in equity partners, you can look at findingequity partners who understand China, they are foreign private equity funds or Chineseprivate equity funds, who are willing to participate and you are trying to start up and have aclear exit strategy, that was a model that Starbucks even used.

When they came in toChina, they again adopted the three different strategies for the North central part of China,the South part of China as per the previous discussion.

They used their Hong Kong franchisepartner for the South China they used the direct strategy for Shanghai I believe, andin the North they had a venture capital partner because they were concerned because they werebeing a large public company but their EPS were in a built mode but they had clear buyoutprovisions in that situation so you can look at finding capital partners either from Canadaor from Hong Kong or from China or other parts of the world that knows this market to helpyou.

So I think you have to step back and look at what your structural options are.

You would obviously have to start a rep office and coordinate marketing and sales dependingon if you are running on distribution network through partners or you just might have yourown personnel on the ground who are there to provide technical support or sales supportor more to the branding side, that is a relatively cheap operations to set up, it is just thecost of your staff and renting an office.

You can even go to a virtual office now moreand more through business centers or look at options in Hong Kong where you are goingto get call back numbers.

So I think you have to look at what you are doing.

You can justhave inventory in China through logistics partners and have that serviced by remotely.

So the same options that exist to service your customers perhaps in the Western partof Canada.

If you are based in Eastern part of Canada in terms of virtual presence isalso an option.

But I think you have to step back and define again what capital you haveand what type of organization you are trying to build, and if you are trying to build manufacturingpartnership then you obviously have to do a lot more research on where you need to bein terms of being able to get to the right labour or to get to the right technical supportin terms of parts and services in China.

So all these things come together and I thinkthere are a variety of options.

From our perspective again, we like to look at the company andwho they are and what they are doing and where they want to go and then come up with workingwith their council, both western and Chinese council to get into the market.

We think thatyou should keep your western council that you use in Canada as the part of the equationbecause they understand you and they understand the business.

And if they do not have theChina presence then you can either hire a foreign council from Canada who have Chinapresence through a number of Canadian law firms or international law firms or you canwork with some good Chinese council but I think it is important to have the right mixin your structure because lawyers are not the total solution from my point of view noris the business advice is going to be the total solution, so you have to come up witha structure that both is legally valid and commercially valid and fits in ultimatelywith your company’s goals and your company’s culture.

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