Since tomorrow marks the first anniversary of our public launch, I wanted to share some things I’ve learned in the past year. Not about how to learn Chinese so much as on the business side of starting and operating an Internet business in China as a foreigner. There is not a lot written about this since it does not seem to be a very common thing to do. I think that will change.

For all of you considering taking the plunge, here are the five most important things I’ve learned in the past year:

1. Hong Kong is your friend: in addition to being a truly first-class city, Hong Kong is your best choice for incorporating your new company assuming you can’t do it in the States. Having a legal Hong Kong address will make it easier to set up a corporate bank account, integrate Paypal, and even brand into the mainland. It also gives you access to the new quasi-legal systems sprouting up that offer RMB billing for international companies. We incorporated in the British Virgin Islands and while it’s been great for some things, it was a nightmare when it came to setting up our payment systems. Which brings me to the next point….

2. China is Crazy: but you still shouldn’t let that delay your launch. At risk of sounding negative, setting up our payment systems took more time and money than I’d expected. We ended up in a situation where everything was ready for launch but we were waiting on a payment processor.

After a few frustrating weeks in business purgatory, we just launched with an incomplete payment system that looked and behaved like the real thing, but gave anyone who clicked on our Pay button full premium access. We lost some sales before “plugging the leak”, but it was the right move. It also taught me an important lesson: get stuff done and don’t let bureaucratic issues impede you from making progress. This is especially important since you’ll run into a lot of them – international money laundering and other such regulations make life really inconvenient if your business requires handling international payments.

3. The Pacific Ocean Hates You: we’ve had at least one major trans-Pacific Internet backbone disruption every year for the past three years. People in China are aware (and forgiving) when these incidents happen because it affects their access to everything and the entire Internet grinds to a halt.

People abroad aren’t as forgiving. If a decent chunk of your users are outside China keep your servers close to them even if it is slower for you. You can get cheaper hosting locally but it isn’t worth it having to register your server and get hit up by the local government for e-commerce registration (cough: extortion) fees. The only advantage I can think of to hosting in China is if you ever need to take a steel-encased server with red and yellow interior wiring on a cross-country flight. I don’t think they let you do that in the States.

4. Avoid the Temptation to Undercut on Price: you will have costs that are at least an order of magnitude lower than potential competitors. This means you’re going to face the temptation to get business by competing on price. Resist that temptation.

Let me qualify that. Taking advantage of your cost structure is probably a great long term move. We’ve finally built up our business enough to lower our prices to $49.99 for an annual subscription, for instance, which makes our product the cost of a regular textbook and an absolute no-brainer for anyone serious about gaining fluency in mandarin. That said, it took us a year to get to this point.

If you’re going to be operating in China and working for yourself you will have a pretty decisive cost advantage over anyone who is not living and working here, and a decisive cost advantage over most Chinese companies too . But you’ll need to bootstrap your way to profitability, since it’s going to be difficult to impossible to get funding support if you need it. Market rates are your friend. They are why the outsourcing industry exists in Chongqing. Love them.

5. Don’t Count on Investment: I’ve been in China for about seven years and would not count myself an old-hand. Still, almost all of the funded companies I’ve seen here secured funding before coming to China. Couple this with the fact that very few Western investors speak mandarin or really understand what is happening here and you have a situation which is not conducive to starting a free web app that goes for growth first. Twitter won’t happen in China.

That’s it for now since it’s getting late and I’ve got our monthly newsletter to get to. In the meantime, if you’re interested in keeping up on Web developments in China that involve foreigners I think the best site right now is CNReviews.com. On the odd chance you’re looking for outsourced software development, I’d suggest skipping Chongqing and contacting Qingxi Labs too. We’re not affiliated but we do know John and know they do good work.

p.s.a final caveat: none of this is relevant if you want to start a company that is technically registered in China and bills in RMB. If you need to do that find someone who has done it and buy them a drink. No-one posts about their pseudo-legal registration hacks on the Internet but the expat community in both Beijing and Shanghai is pretty supportive and the successful entrepreneurs I’ve met here have been incredibly grounded and very open to sharing their stories and trying to help out others.

http://blog.popupchinese.com/?p=35

Go read it yourself, but I’d just like to make a comment on his first point: “Hong Kong is your friend”. He points out that you should incorporate and bank in Hong Kong. This is easier than in mainland China, but also is a known entity in China so it makes it so much easier to setup payments etc.

From my own experiences these are the things you don’t often think about if you’re coming from the US. But banking, incorporation and payments can be extremely difficult in many companies. Even more so if you’re a foreigner.

Hong Kong works under the British Common Law system and has over the last 50+ years perfected the legal structures and banking for international commerce. I’m sure that there are issues you run into as a foreigner, but they are likely to be a lot less trying than what probably could happen to you in mainland China.

This also brings me to the subject of offshore companies. If you believe the press this is all about tax evasion. However there are many reasons people use them. These may be hard to think of if you’re in a relatively well run country such as the US or Denmark.

In many cases such as the above the red tape in China is too difficult to deal with, so people incorporate offshore in Hong Kong instead. There are other cases where the local financial system is quite literally unsafe, where people have lost their money time and time again. Which is why many people from Latin America store their money offshore in Uruguay, Miami and Panama. Yes, Miami is offshore if you’re from South America.

Another great piece of advice is to avoid the temptation to undercut. This is good advice for anyone following my idea on global bootstrapping. It may be cheaper where you are but use that to your benefit and reach ramen profitability even quicker.

__________________

The Beijing-based China Entrepreneurs professional organization made its debut in Shanghai on May 13, with its first in a series of entrepreneurship-related seminars.

The theme of the event was “The State of Entrepreneurship in China” and was well-attended by both foreign and local entrepreneurs who came to Three on the Bund’s Space by Three meeting facility for networking and a roundtable discussion.

Speaking were China entrepreneur Jack Perkowski, founder of auto-parts supplier ASIMCO and protagonist of the book Mr. China as well as author of his own book, Managing the Dragon [Editor's note: He is also the author of the popular straight-talking blog by the same name]; Taiwanese entrepreneur Raymond Chang, who is bringing a new take to home television shopping in Shandong; and Rocky Lee, an American lawyer with DLA Piper who heads its Asia Venture Capital and Private Equity practice.

While the session was informative, it did not have time to address two issues of the current entrepreneurial environment in China that are on people’s minds: How have recent visa restrictions affected entrepreneurship activities, and have regulatory barriers changed for foreign-run start-ups.

Of the two, the visa situation may be the most worrisome to budding foreign entrepreneurs. As reported in the May 26 Shanghai Star Business Journal article on visa regulations, business visas – long the mainstay of businesspeople traveling to China on business as well as for those with no work sponsorship in China – are now much harder to get due to stricter documentation requirements and come with shorter durations. [Editor's note: Frequent China visa coverage can be found on the excellent China Herald blog, for example here, here, and here]

Foreign Chambers of Commerce and governments have been active in petitioning the Chinese government to clarify the changing visa situation because of its potential to disrupt existing trade, but left out of the debate are the legions of entrepreneurs who come to China on their own to study business opportunities and even launch their own sourcing, Internet, or F&B business. The fact that many entrepreneurs may start without a proper Wholly-owned Foreign Enterprise is the start of the problem.

In practical terms, this means their business has no legal status in China. That usually doesn’t stop a wily entrepreneur, who may have an offshore or Hong Kong-based company to handle the legal transactions. The situation now, however, is that those entrepreneurs may not be able to get business visas to continue working on their company and will face tremendous time and money costs to establish a legal presence. At this stage, many entrepreneurs are in limbo or frantically looking for ways to set up a WOFE quickly to sponsor their own visas. [Editor's note: Another view on this issue, entrepreneur's that used to use L (tourist) visas to do their work in China, can be found in this Forbes article, in which Dan Harris of the China Law Blog also discusses the costs and difficulties of setting up a WOFE and getting a Z-visa with it.]

Nobody said doing business in a foreign country would be easy, but China has had a notable number of loopholes which are now starting to be plugged. Ironically, the post-WTO era in China is becoming stricter as China harmonizes regulations in line with international practices, such as the unified corporate income tax rate starting this year.

After six years of WTO membership, China has implemented almost all of the commitments it made to join the WTO, even finally opening up the banking sector to full competition. So in theory this means, for an entrepreneur, the business opportunities are more numerous that ever before? Wrong. For large companies the playing field is wider, but smaller entrepreneurs need a company too and there is still no suitable vehicle for foreign entrepreneurs.

For example, WOFEs are subject to far greater capital requirements and additional regulations compared to locally-owned firms. For a small restauranteur or Internet entrepreneur, the barriers are still as high as they were several years ago and nowhere near as liberal as, for example, business-friendly Hong Kong.

So, facing these challenges and an extremely competitive high-inflation business environment in China, what should new entrepreneurs do, according to the panel?

Chang said that entrepreneurs needed to get out of the tier one cities, such as Shanghai and Beijing, and focus more on the second, third and even fourth or fifth tier cities: 60 to 70 percent of the sales on his TV home shopping network in Shandong come from the rural areas, he said.

Although more geographically-fragmented, the lower tier cities offer much greater opportunities: China’s National Bureau of Statistics says that the third to fifth tier cities have more than double the population of the first two tiers, approximately 234 million people versus about 118 million as of the last major census in 2005. That leaves the majority of China’s 1.3 billion in the less-developed rural areas.

Incomes in the lower tiers are not necessarily poor, the third to fifth tiers have on average half the salaries of the first and second, and 43 percent of China’s GDP is generated in the third to fifth tiers versus 34 percent in the first and second tiers, so there are plenty of under-served newly-affluent customers.

Lee cautioned not to underestimate local firms, saying management teams here are “extremely competitive” and foreigners must be willing to take local salaries to keep their costs in line.

It is clear from the observations of the panel that foreign entrepreneurs have few advantages that cannot be copied, and with the added pressures of visa and an environment not very friendly to small foreign entrepreneurs, it is a long road to success.

Perkowski, long-time China businessperson and former Wall Street banker, repeated the advice he said he was given numerous times on first coming here, and this is still a takeaway for entrepreneurs today, “China is a marathon, not a sprint…Be persistent.”

* A vast, increasingly high-earning and sophisticated consumer market
* A low-cost manufacturing and product-sourcing hub
* A highly-skilled, well-educated labour pool
* A growing number of outward-looking investors

China is also a complex and rapidly evolving market.  Its business regulatory system is intricate and its tax system has been ranked among the most challenging in the world, according to the World Bank’s Ease of Doing Business Index.

The Free Trade Agreement (FTA) between China and New Zealand is a significant development for both countries that makes bilateral trade in goods and services as well as investment easier.

The FTA opens the door to many new opportunities for New Zealand companies, however it is up to individual businesses to take action and capitalise on the benefits available.

If you are already doing business in China and want to ensure you are well-placed to take advantage of the FTA, or if you are looking to China to help grow your business, visit the China Tax Desk.

CITIC oil in 2010

Hong Kong-listed CITIC Resources Holdings said yesterday that it will start producing its first domestic crude in the second quarter of 2010 in the Bohai Sea off the coast of North China.

The offshore Yuedong oil field would peak at around 36,000 barrels per day (bpd) in 2014, which would account for more than half of their total by then, said Sun Xinguo, president and chief executive officer of the company.

Yuedong was estimated to have probable, possible and proven oil reserves of about 63.5 million barrels, the company said.

Whampoa down 33%

Hutchison Whampoa, Hong Kong billionaire Li Ka-shing’s flagship and also one of the top industrial conglomerates in Asia-Pacific by market capitalization, said yesterday that its first-half net profit fell 33 percent on narrower one-off gains, a steep drop in container throughput and continued losses in its European 3G mobile phone business.

Net profit for January to June was HK$5.76 billion ($738 million), it said, down from a restated HK$8.59 billion a year earlier. The profit beat a consensus forecast for a profit of HK$3.59 billion by six analysts polled by Reuters.

IPhone rumors denied

China Unicom’s branch company in Guangdong Province yesterday denied rumors that it is in talks with retail chain Carrefour in the province.

Rumors saying that China Unicom had paid 10 billion yuan ($1.46 billion) for 5 million iPhones from the Apple company, and will have them displayed in Carrefour hypermarkets this September, appeared on websites and in newspapers after a ceremony held Tuesday by China Unicom and Carrefour.

“But we have never made any comments on iPhone,” said China Unicom on its Web page.

Low emission meeting

A Sino-US low emission economic meeting is set to kick off at the International Finance Center of New York on September 23.

BlueNext, Beijing Environment Exchange, the Energy Research Institute of National Development and Reform Commission, and the US-based Environmental Defense will take part in meeting to be held during Climate Week held during the UN Summit.

The theme of the meeting will be Sino-China low carbon economic cooperation: technology, capital and market.

Agencies

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The president said the company has no plans for acquisitions in the juice business and will develop its own business organically through its existing Minute Maid juice brand.

The company yesterday also inaugurated a new bottling plant in Urumqi, capital of the Xinjiang Uygur Autonomous Region, just a day after it opened its 37th bottling plant in Jiangxi Province. It has an annual capacity of 200,000 tons.

Coca-Cola is also building a plant in the Inner Mongolia Autonomous Region.

China is Coca-Cola’s third largest market after the U.S. and Mexico.

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Consolidated sales in China, which include automotive and industrial technology, consumer goods and building technology, increased 30% to RMB 22.8 billion, slower than earlier proposed RMB 25 billion, said Uwe Raschke, a member of the board of management heading the Asia Pacific region.

The company attributed the slowdown in sales to the sluggish market amid the financial crisis.

The Chinese market contributed EUR 45 billion to Bosch’s global sales in 2008, down 2.8% year on year due to the appreciation of the euro. However, the Chinese market remains a significant contributor to its global sales and the company will not change its investment plan in China even though it is cutting costs worldwide, according to Raschke.

Moreover, Bosch (China) Investment Ltd plans to introduce lithium-ion batteries for hybrid and electric vehicles as early as 2011 as the demand may rise on greener vehicles promotion.
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