Market Insights: Entering the Chinese photonics market

Over the past few decades, I have helped found companies in many parts of the world, including Taiwan, Japan, and China. The Chinese market in particular has posed unique challenges but has also offered some excellent opportunities. If you are considering setting up a business in China, then there are some key issues that you should be aware of and hopefully you will find these observations helpful. Specific legal issues should, of course, be handled by a qualified Chinese attorney.

On the international photonics stage, it's obvious that Chinese companies are major exporters and, more frequently now, exhibitors at shows like SPIE Photonics West, OFC, and LASER World of Photonics. These developments reflects the rapid advance of the Chinese photonics industry as a major global competitor, but they also indicate the development of an internal Chinese photonics market driven by technological developments at academic and corporate research facilities. China itself is becoming a major market opportunity for non-Chinese companies.

Given this trend, many photonics companies in North America and Europe are considering setting up their own businesses in China. Large photonics companies have the staff and resources to organize this by themselves, but most of the smaller companies—which actually predominate in our photonics community—lack resources and so this is a far more complex issue.

Essential in this effort is to always keep in mind that China is very different from Western countries, with a culture going back millennia. Chinese society is very hierarchical and the senior person in the company usually holds the highest rank. People under 40 years are commonly less respected. In this structure, picking up the phone to call a Chinese customer is not done—contact is usually made after an initial introduction to the person you wish to meet.

Making the basic decision to expand your business into China requires some intensive soul searching about the wisdom of such a decision. The country is huge, has very different cultural and political systems compared to the West, and the fact that few people speak English makes things even more complicated. So where should you start?

Very few companies will just jump into this market without having any prior exposure to doing business there. More likely such interest was generated because orders or inquiries received from Chinese customers sparked this interest.

Communication

There are three ways to set up or expand your business in China:

1. Selling directly from your home base, but using advertising and attending trade shows in China. It should be obvious that any advertising and trade show activity must be managed by fluent, Chinese-speaking professionals. The most common Chinese language is Mandarin, which is spoken throughout most of the country including Beijing, Shanghai, and Xi'an, but in southeastern cities such as Guangzhou, Shenzhen, and Hong Kong, Cantonese is the common language. Thus, depending on your geographic focus, make sure you have someone who speaks the proper Chinese. Finally, whatever your entry level into the Chinese market, your website is an essential marketing tool given the size of the Chinese market. Make sure your website appeals to Chinese preferences.

2. As in any foreign market where you may expand your business, one option is using a representative. Each rep will need to be carefully screened in terms of markets served, product lines handled, and principals served—but above all the quality of the staff. If the owner or CEO has a limited command of English, then every communication will need to be handled through lower level English-speaking employees not having the necessary knowledge and skills. This will create a barrier to effectively communicating with your Chinese customers. Also, choose an experienced representative that has the right connections with the market you wish to address. Personal contacts are extremely important in Chinese society so using an experienced and well respected representative is essential to achieving success. Your company will be judged by how well your rep does its job for you.

Neither of these choices requires any kind of permit to operate a photonics company in China other than import and export licenses, which normally are handled by the representative.

3. Corporate entity. Should you decide to set up a corporate entity in the country, there are a variety of legal models available. Each has its own benefits and drawbacks, and the most common of these are: representative office (RO), wholly owned foreign enterprise (WFOE), and equity joint venture (EJV).

An RO is the legal entity that is easiest to establish with the least amount of investment. The drawback of this business model is that it severely restricts what such a business will be allowed to engage in. An RO merely enables your company to promote itself, but common business activities are not permitted.

A WFOE is the preferred legal form for most larger photonics companies. It allows 100% ownership by a foreign corporation, which permits total overall control of the business. The downside is that it is much more complicated and expensive to set up, including certain requirements on the minimum amount of funds that need to be deposited into a Chinese bank. This may be a significant barrier for many small to mid-size photonics companies.

The EJV is the kind of legal business model that would be most suitable for small to mid-size photonics companies. but requires the participation of a Chinese citizen as partner. There are no restrictions on how the shares of the business will be owned. However, I recommend that under no circumstance should the Western company accept a minority position. There have been many examples where an EJV failed because of loss of control, with the Chinese partner taking operational control over the business. Keeping control over the EJV includes keeping books with timely and accurate reporting to provide the foreign partner a way of tracking what is happening in the business and, when necessary, being able to make timely corrections.

I also recommend that when setting up a Chinese legal entity, use a properly qualified legal firm to assist in this process. One of the worst things that may happen to any such venture is when authorities come to the conclusion that the venture does not comply with applicable laws, with the risk of shutting the business down. Having a partner who is intimately familiar with the Chinese photonics market, has a good track record of selling to that market, and knows the product line of your company are your best assurances for building a successful joint venture.

Hiring staff

Hiring staff is one other topic that needs careful attention. Because trust is a very large factor in Chinese culture, Chinese business managers often prefer to hire family members. The benefit of this philosophy is that the company is run by a very motivated team that will work hard and long as business and personal interests are closely aligned. The drawback is that non-family talent so necessary for the company's growth often does not get the chance to participate in the management of the EJV, effectively putting a lid on its growth potential. This is the reason why in China the bulk of small to mid-size companies are family controlled.

I believe it is therefore essential that the partners in an EJV reach agreement on a policy that allows outside talent to have a chance of becoming involved in the management of the business. One final note: although labor laws are not yet as complicated as in the West, they do require that each employee has an employment agreement and employee manual without which discharging personnel becomes difficult.