By Ling Valentine Tuesday, 15 November 2011

Global Entrepreneurship Week: How to do business in China

For foreign entrepreneurs, China is not as frightening as it once used to be but doing traditional business is still difficult, says LingsCars and Go London founder Ling Valentine.

Fundamentally, there are three choices for people who want to start a business dealing with China. The first two are quite serious in terms of investment and effort: to build a Wholly Owned Foreign Enterprise (a WOFE, rhymes with "toffee"), or to start a Joint Venture (a JV) with a Chinese firm. Both of these routes involve a major investment, finding local workers, premises, paying local taxes (which differ wildly depending on location) and entrusting the running of the Chinese business to locals.

Returning money to the UK in these circumstances can be a challenge, as the Chinese currency (RenMinBi – 'people’s money' – also known as the Yuan) is not transferrable currency. In this instance, if any significant sums are to be repatriated, you would probably create a shell company in Hong Kong and route the cash in that direction, (as Hong Kong dollars can be converted to UKP at a market rate).

HINT: If you are serious about growth and want to develop a traditional business in China with a "planned exit" (ie: sale or float at some stage), you would probably build these Chinese businesses with ownership via a cut-out - an offshore shell company (eg in the British Virgin Islands) in order to avoid UK Capital Gains tax on the eventual sale or transfer of equity.

All this is a bit complicated, expensive and frightening and is beyond most UK 'SME' entrepreneurs’ comfort zones. You can budget £25,000 for the set up including a good commercial lawyer, even before you invest a penny in the actual business/premises/staff in China.

In contrast, a third route to a successful business in China is the web-sales route. I will describe what, in my view, is the best way to proceed.

You cannot just open a website in China. It’s difficult and there is a state firewall. If a foreign-based business manages to buy .cn domains – and it is almost impossible to do it legally – the domains will (at some stage) be grabbed back by the Chinese Internet Police. You can’t build a business on that basis.

But, think eBay, remove the auction element and in China you get: TaoBao. (I suggest you install Chrome and set it to automatically translate or press the translate button on each page, to view Chinese web pages).

Taobao is a controlled sales platform with massive buyer confidence thanks to its escrow money handling (like Paypal), protecting the buyer, which is unusual in China. It’s a massive marketplace – we are talking £40bn in sales this year - and is owned by the Alibaba Group.

Best of all, it operates inside the Great Chinese Firewall. It enables B2C and C2C stores to be opened, easily and cheaply (albeit there are some small complications operating abroad). The scale and opportunity of TaoBao is very hard for a UK business to contemplate.

TaoBao is better than eBay in many respects: first, listings are free. This means you have no overhead, like on eBay. There is a strict 'seller rank' system which is impossible to fudge and sellers are scored in volume and quality of service, from 'hearts' through 'diamonds' to 'crowns'. A heart is a starter, sales will be slow. A diamond seller is trusted and sales come from that confidence, and a crown seller is massive and is implicitly trusted.

The overwhelming majority of the products on Taobao are brand new merchandise sold at a fixed price. The whole system is completely trustworthy and is biased in favour of buyers.

The payment mechanism for TaoBao is called "AliPay" – effectively you consider this to be Chinese Paypal. The beauty is that both TaoBao and Alipay are owned by the same (massive) firm and work seamlessly, and unlike PayPal there are no stupid payment charges… this enables micro-payments. An English AliPay guide for establishing cross-border website payment, is here.

A buyer selects an item, pays for it via their AliPay account (to your AliPay account) and AliPay hold that cash in escrow until the seller receives the goods. There are various mechanisms to deal with trust, non-deliveries and complaints, all work well. Foreign owned businesses would advertise goods on TaoBao in (say) UKP and RMB (approx 1:10 exchange rate), and Chinese customers would buy using the RMB figure.

A distinctive feature of shopping on Taobao is the pervasive communication between buyer and seller prior to the purchase through its embedded proprietary instant chat program, named AliWangWang. It has become a habit among Chinese online shoppers to 'chat' with the sellers or their customer service team through AliWangWang to inquire about products, engage in bargaining prior to purchase products. So, you need Chinese 'employees' in China, usually girls, who chat all day and sell your products to shop visitors, who ask constant questions.

These people can be paid at a piece-rate and offered commission, and you can recruit them via TaoBao’s many forums and communities. Frankly, that’s cheap. They often have basic English as they are "modern young people", and they refer customer questions to you and you instruct them in shop policy etc. They are, in fact, shop assistants.

At this stage, a business in the UK should have taken the first step of employing a trusted, internet savvy, Chinese (simplified and mandarin – ie mainland) speaking person who is familiar with TaoBao and Alipay. Unless you can speak Chinese, you are not going to get far, you are not going to learn Chinese characters, and you will become incredibly frustrated. So you need a Chinese-Brit person (or a couple of them) who can muddle you through. It’s not easy, it drives people insane to work via a translator/operative… but then you want a 'Chinese' business! No one suggested it was easy!

This is not simple, but it is achievable: A TaoBao shop can be opened after a degree of ping-pong with AliPay, the registering of bank accounts etc, and an inspection of a UK company’s bona-fides -  and remittances can be transferred to your UK bank (commission free) when they hit a £3,000 level.

Order to customer delivery often takes three weeks via post services, so you need to be able to fund (say) a £5,000 to £10,000 cashflow. That’s not onerous for many, and bear in mind you reclaim any VAT you paid on products, and you sell in China net of UK VAT (of course). So you have 16% extra profit margin, against which to offset your costs.

I don’t want to suggest that this is all terribly easy, but it’s certainly the easiest route I know about. Chinese consumers want to buy from .cn websites, in .cn currency. Buying from foreign websites is fraught with difficulty and danger for them, they would need international credit cards… and imagine these Chinese customers trying to negotiate a non-delivery, damage or return, in English. Imagine a UK company crediting money back to a Chinese bank account.

However, there is a massive middle-class of people with real money, far more liquid cash than in Western society and the potential is absolutely massive as the economy is not yet fully mature. I would encourage any UK entrepreneur with a taste for crazy turnover and profits to "go for it". This is truly an internet gold-rush situation, but so few UK businesses realise it.

Your first step; call in your local University and find a clever, articulate, computer and internet and TaoBao/AliPay savvy Chinese person and employ them - instantly.

Ling Valentine is the founder of car leasing specialist www.lingscars.com. You may also remember her from Dragons' Den.

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