Is Your WFOE in China Optimized? Find Out Where You’re Exposed

So you’ve set up a Wholly Foreign-Owned Entity in China and things are humming along fine. Sales are growing, your employees seem happy and eager to come to work, and the relations between your entity and Chinese tax authorities is in its honeymoon phase — you’re dotting all the “i”s and crossing your “t”s. Or so you think.

The more time a company spends operating and conducting business in China, naturally the more comfortable and lax its managers become. What starts with great attention to detail and appreciation for the bureaucracy that is China, often the excitement of acquiring new clients and earning more revenue causes overseas managers to lose control of the WFOE’s optimization.

Take Active Steps Now to Reduce Future Risk and Exposure:

The more time a company spends operating and conducting business in China, naturally the more comfortable and relaxed its managers become. What starts with great attention to detail and appreciation for the bureaucracy that is China, often the excitement of acquiring new clients and earning more revenue causes overseas managers to lose the entity’s optimization on the ground.

Operational Audit

To review your company’s current level of risk, it’s usually beneficial to start with a general audit of the operations and work flows of the business. Often times these audits uncover very important missteps that, if it were the Chinese authorities doing the audit, could land you a hefty fine or worse. What are the relationships like between local managers and local employees? Are your business licenses, import/export licenses, etc. all valid and up-to-date? Has your scope of business changed? Finding the answers to these questions and others — and more importantly, solving the issues before it’s too late — can make or break an entire operation in China. This point cannot be stressed enough.

Click here for a case study of an Operational Audit.

Finance and Accounting

When it comes to finance and accounting practices, China is one of the last major jurisdictions where you’d want to be careless. In addition to the extra layers of bureaucracy and compliance, it’s also just simply harder to make a profit here and margins must be monitored closely. With that said there’s probably something your CFO could be doing more efficiently and saving the business from eating unnecessary costs. Is your A-grade office space really necessary to impress C-levels visiting once a year? Is there a more efficient way to file payroll taxes? Do you outsource bookkeeping because it’s cheaper or more convenient?

Click here for a case study for Financial Management.

HR Management

The first question you should really start with in this area is: Who is the manager of the local Chinese entity? The best approach to HR management really depends on who your leader is and where they’re from. Typically we see these main groups:

1. New arrival foreign managers (less than two years in China)
2. China veteran foreign managers
3. Mainland Chinese managers
4. Singaporean, Hong Kongese, or Taiwanese managers

In most cases, there are accurate assumptions and associated risks we can make that are based on years of first-hand experiences with each of these categories of managers. As a result, your HR management framework should be built around these risks and will allow you to better prepare for contingencies, and optimize the efficiency of your office environment.

New Arrival Foreign Managers

For better or for worse, new arrival foreign managers are usually clueless about how things are done in China. They are busy with adjusting to life here and arranging their personal life; family, managing culture shock, etc. Typically during this initial transition period, whether they admit it or not, the main focus for them is not on the business.

China Veteran Foreign Managers

Unfortunately, the selection of experienced managers is still very small. Indeed these managers’ biggest asset is to manage people in China which is definitely very important, yet many times they are lacking the experience in the relevant industry and therefore cannot lead the company to success. In many cases, they are managing the sales operation and later move on to manage other areas of the business such as manufacturing, resulting in sub-par KPIs.

Mainland Chinese Managers

In almost all the cases we’ve seen, the Chinese GM was previously the company’s best sales person, who delivered great sales numbers. HQ then decides to push their sales all-star to become the newest GM of the whole operation. This is one of the most common, big mistakes we see, as in most cases they take a successful sales person and turn them into an unsuccessful GM — a lose, lose.

Singaporean, Hong Kongese, or Taiwanese Managers

Mandarin-speaking Asian managers have a clear advantage: communication. But in many cases this is their only advantage, and along with any other foreign manager they can be just as clueless — especially if they have little or no experience of managing staff and running a foreign operation in China. What’s more, local Chinese staff (especially in Shanghai) are often times resentful to these managers and don’t get along very well. The SHkT managers are well known in China for their tough way of managing people that does not always mesh well with the Western business cultures and values of the HQ. The clash can arrive on two fronts: with the overseas HQ and with local Chinese employees.