In this write up we will discuss advantages and disadvantages of various China entry methods including distribution and LLC, Joint Venture and Representative office formation.
Distribution
Best for: Companies looking for a quick and low-risk entry method, especially in the fast-moving consumer goods (FMCG), electronics, and fashion sectors.
Distribution offers foreign businesses a cost-effective and quick way to enter China for those looking to sell products without establishing a legal entity.
Pros:
- Fast and low-cost market entry.
- Local distributors have established networks, knowledge, and relationships with Chinese retailers.
- No need to establish a legal entity in China.
Cons:
- Less control over pricing, marketing, and brand positioning.
- IP risks.
- Potential for conflicting interests between the foreign company and distributor.
- Reliance on the distributor’s performance may affect the success in the market.
Distribution agreements with local partners (distributors) offer a cost-effective and flexible way to enter the market without setting up a physical presence. The local distributor is responsible for product import, marketing, and sales within China.
From a legal perspective, distribution in China works the same way as in the rest of the world. However, there are a few things to consider. Hire a lawyer specializing in China distribution agreements to help you protect your intellectual property (IP). Consider working with a different distributor for every major region, such as South China, North China, etc.: each region has its specifics regarding consumer behavior and approach to business. Also, it is wiser not to commit to a single distributor.
Online platforms such as Alibaba or Made-in-China could be advantageous for finding a supplier but not a distributor. Participating in trade shows, exhibitions, and industry conferences and building local connections will give your business the exposure to identify a distributor. Alternatively, to find and manage distributors through a single point of contact, consider signing with a local partner specializing in such services or a partner that operates a network of distributors/retailers based on location or product range.
Foreign-invested enterprise
Previously WFOE (Wholly Foreign-Owned Enterprise), now a foreign-invested enterprise (FIE) or simply an LLС.
Best for: Companies with long-term commitments and sufficient capital to operate independently in China.
An LLC establishment is one of the most common and straightforward ways for foreign companies to establish a presence in China.
Pros:
- Increased competitiveness
- Full control over business operations, strategy, and profits.
- Ability to hire local and foreign staff directly.
- Stronger legal protection for intellectual property (IP) rights.
- Straightforward company incorporation process, no capital requirements
Cons:
- Maintenance costs.
- Full responsibility for compliance with the Chinese regulations.
- Foreign executives are not keen on coming to China (as of 2024).
A WFOE will allow complete control over China operations, direct sales, and invoice (fapiao) issuance. At the start of their China journey, many international brands choose to be present in the market via a distributor or an e-commerce platform to later, after gaining some footing, establish a local trading company.
More articles on various China investment vehicles and compliance:
Joint Venture
A Joint Venture (JV) is an LLC formed through a partnership with a local investor.
Best for: Companies looking to enter a restricted sector.
Some market sectors in China such as telecommunications, finance, and certain manufacturing areas are only accessible to foreign investors via a JV establishment.
Pros:
- Access to a restricted sector.
- Access to local partner’s knowledge, network, and resources.
- Shared operational costs and risks.
Cons:
- Higher risk for the foreign investor.
- Control issues.
- Intellectual property concerns.
- Difficulties managing the JV due to communication problems and differences in culture.
There are plenty of successful JV examples where a foreign firm benefited from forming a joint venture with a local company (Apple and China Unicom, BMW Brilliance, General Motors and SAIC, etc.). Nevertheless, for every success story, you can find several failed cases. We urge you to read this article to learn more about JV structure and pitfalls or contact our experts.
Representative office
Best for: Companies looking to understand the market before committing or those focused on non-commercial activities like marketing or research.
A Representative Office (RO) is a cost-effective and straightforward way to gain a foothold in China, perform market research, build partnerships, and have China brand representation. However, it does not allow direct business operations such as sales or manufacturing.
Pros:
- Relatively quick and straightforward registration process.
- Ideal for exploring the market before committing to a larger investment.
- Provides a legal entity for local representation.
Cons:
- Cannot engage in direct profit-making activities (e.g., sales or production).
- Limited business scope.
- Subject to stricter operational regulations than other business structures.
Contrary to popular belief, RO cannot be transformed into a trading or manufacturing company later. The initial structure will have to be dissolved, and an LLC will have to be registered from scratch. See also Is Representative Office the Best Choice for China Expansion? to learn more.
Note: this paragraph does not apply to the representative offices of foreign NGOs. Click here for more information on compliance for the Foreign NGOs in China.
Key Considerations When Entering the Chinese Market
Regardless of the entry method you choose, there are a few overarching considerations for success in China:
- Study the market
Before venturing into China, comprehensive market research is essential. Studying consumer behavior, trends, market demand, and competition is crucial to tailoring your product offering and marketing activities.
- Understand the Regulatory Environment
China’s regulatory landscape is complex, with frequent changes. Partnering with legal or consulting experts to navigate compliance is essential.
- Protect Your IP
While China has improved its IP laws, enforcement can be challenging. Make sure to register trademarks and patents early in the process.
- Localize
Success in China often depends on how well your product, service, and marketing are localized. Chinese consumers have different preferences, so adapting to local tastes and culture is key.
- Network
In China, business relationships (光系 guangxi) are vital for success. Networking and building trust with local partners, suppliers, and the government can significantly smooth your entry.
- Create Digital Presence
China’s digital ecosystem is unique: presence on social media such as WeChat/WeCom, Little Red Book （小红书), and Douyin (抖音 – Mainland version of TikTok) and e-commerce platforms as well as cooperation with local influencers and KOLs (Key Opinion Leaders) is crucial.
Invest in China Safely
For professional advice on China entry and to find the best option for your business – reach out to our experts at contact@sjgrand.cn
