So Many Choices for Selling Your Products into China

Selling Your Products into China

I recently spoke with a client, a successful manufacturer of specialized industrial equipment, who was wrestling with a familiar dilemma: how to best engage with the Chinese market. They’d been exploring various options, from joint ventures to wholly foreign-owned entities, but felt increasingly overwhelmed by the complexities and risks involved. Their concerns reflect a broader trend: the landscape of doing business in China has dramatically shifted, demanding a fundamental reassessment of traditional market entry strategies.

What was once perceived as a land of boundless opportunity is now viewed with a more cautious eye, tempered by concerns about rising costs, escalating geopolitical tensions, increasingly stringent regulations, and the ever-present challenge of intellectual property protection.

Expanding into the Chinese market is no longer a straightforward decision. Companies must now weigh geopolitical risks, regulatory challenges, and evolving business dynamics before making their move. This post explores:

The Changing Business Landscape in China – How rising costs, geopolitical tensions, and shifting regulations are reshaping market entry strategies.
Market Entry Strategies – A breakdown of options, including joint ventures (JVs), wholly foreign-owned entities (WFOEs), distribution agreements, licensing, and e-commerce.
Geopolitical Risks & Lessons from Recent Events – Why companies are re-evaluating their China strategies in light of global instability.
Legal & IP Considerations – Why intellectual property protection and contractual safeguards are more critical than ever.

With these factors in mind, let’s dive into how businesses can best approach selling into China today.

Recalibrating Business Strategies in a Changing World

The impact of geopolitical events on business decisions is becoming increasingly clear. The war in Ukraine and the subsequent disruptions to global supply chains have served as a stark reminder of how quickly the international landscape can shift, prompting many companies to reassess their global presence and strategies.

This reassessment is particularly acute when it comes to China, where rising tensions and increasing uncertainty are forcing businesses to re-evaluate their long-term commitments.

From Hamburgers to High Stakes: A Wake-Up Call

When Russia invaded Ukraine, I briefly considered my own small investment in McDonald’s, assuming that their Russian presence was primarily franchise-based – a common and seemingly prudent strategy for mitigating risk in volatile markets. It turned out that McDonald’s actually owned a significant number of units, a factor that ultimately played into their difficult and costly decision to exit the Russian market. This example serves as a cautionary tale for businesses operating in politically sensitive regions.

Now, let’s examine how these risks are shaping strategies for companies considering China.

The assumption that a market is “safe” simply because it’s large and profitable is no longer valid. Years ago, in a world that seemed far less volatile, many companies, particularly in markets like Russia and China, moved towards licensing or franchising models. This was often seen as a way to minimize risk, reduce capital expenditure, and leverage local expertise.

While these models still have a place, the current geopolitical climate demands a more nuanced approach. The trend towards licensing and franchising reflected a desire for stability and predictability.

However, the world has become less stable and predictable. What was once a sound strategy for risk mitigation may now expose businesses to new and unforeseen vulnerabilities. A crisis in one region can  ripple across the globe, impacting supply chains, consumer sentiment, and even political relationships.

China in the Crosshairs: Navigating a Complex Landscape

We’ve recently seen a surge in clients approaching our firm for assistance in scaling back their operations in China. They’re seeking to proactively reduce their exposure to potential risks, recognizing the increasing uncertainty surrounding US-China relations, the possibility of future geopolitical instability, and the growing assertiveness of China on the global stage.

These companies aren’t necessarily looking to exit China entirely, but they are seeking to diversify their operations, reduce their reliance on a single market, and develop contingency plans for various scenarios. They are asking themselves hard questions: What if trade relations deteriorate further? What if there is a conflict in the region? What is the long-term viability of our current business model in China.

Given these uncertainties, businesses need to build adaptability into their global strategies. Let’s explore why flexibility is now a critical factor in operating internationally

The Need for Flexible Strategies: Preparing for the Unexpected

This trend underscores the need for businesses to have flexible and adaptable strategies for navigating the complexities of the global landscape. A “set it and forget it” approach to international business is no longer viable. Companies must be prepared to pivot quickly, adjust their operations, and even exit a market if necessary.

This requires constant monitoring of geopolitical developments, a deep understanding of local regulations and business practices, and a willingness to embrace change. It also requires a realistic assessment of the risks and rewards associated with operating in different markets. The allure of high-growth potential must be balanced against the potential for political instability, regulatory changes, and reputational damage. In today’s world, businesses must be prepared for the unexpected.

The JV Question: Proceed with Extreme Caution

Joint ventures (JVs), once a popular entry point, are now generally viewed with appropriate skepticism. While the promise of local connections, shared market knowledge, and potentially lower initial investment can be tempting, the reality usually falls short. See China Joint Ventures: Everything You Should Know.

Foreign companies frequently find themselves at a disadvantage, navigating a complex regulatory environment and facing potential conflicts with their Chinese partners. Concerns about forced technology transfer, intellectual property theft, and unequal power dynamics are paramount.

The dream of a mutually beneficial partnership can quickly turn into a costly and frustrating experience. It’s crucial to remember that in a JV, you’re essentially marrying your business with another, and divorces, especially in China, can be messy and expensive. I wrote about this for the Wall Street Journal.

Beyond Joint Ventures

With JVs presenting significant risks, what alternatives exist? Here’s a look at other potential market entry strategies.

1. Representative Offices (ROs): A Diminished Option

Historically, Representative Offices (ROs) provided a relatively low-cost way for foreign companies to establish a presence in China, primarily for liaison, market research, and networking activities. They were a good way to “test the waters.” However, recent restrictions on their scope of operations have severely curtailed their usefulness.

ROs are now suitable for only a narrow range of businesses, primarily those not directly engaged in sales or profit-making activities within China. They are a less viable option for most companies seeking to actively engage with the market. They are now more suited for maintaining relationships than actively pursuing business. From 2005 to 2015, I estimate that our law firm set up 50 Representative Offices. From 2015 to 2025, I estimate that we set up five such companies.

For more on China Representative Offices, check out China Representative Offices: Think Before You Leap.

2. Wholly Foreign-Owned Entities (WFOEs): Greater Control, Greater Complexity

WFOEs offer greater control and autonomy than JVs, allowing foreign companies to operate independently in China. However, they come with their own set of challenges, especially since COVID.

Setting up and operating a WFOE in China requires significant investment, navigating a complex bureaucratic landscape, and a deep understanding of local regulations, labor laws, and business practices. The process can be time-consuming, expensive, and fraught with potential pitfalls.

Furthermore, recent increases in regulatory scrutiny, operational costs (including rising labor costs), and heightened competition have made WFOEs a less attractive option for many businesses. WFOEs are best suited for companies committed to a long-term presence in China and willing to make the necessary investment. From 2005 to the onset of COVID, I estimate that we set up around ten WFOEs a year. Since COVID, it’s been closer to one.

3. China Distribution Relationships: Stepping Stone or Long-Term Strategy?

Instead of setting up a legal entity in China, many companies have opted to sell their products through Chinese distributors. This model allows businesses to access the Chinese market while avoiding the regulatory and financial risks of direct investment. It can be an excellent way to initially penetrate the market and test product viability.

From a legal standpoint, distribution agreements are relatively straightforward, requiring clear terms on pricing, exclusivity (or lack thereof), intellectual property protections, payment terms, and dispute resolution mechanisms. However, businesses should be cautious and ensure robust contractual safeguards to protect their interests. Finding the right distributor is crucial. They become your face in the market.

Having a China-centric distribution agreement is crucial. Your distribution agreement is your roadmap. See Managing China Distribution: Best Practices for Protecting Your Interests.

For companies hesitant about using distributors, licensing agreements offer another way to tap into the Chinese market while retaining greater control over branding and intellectual property.

4. Licensing and Technology Transfer Agreements: Monetizing IP Without Direct Investment

Another viable approach is licensing your intellectual property (IP) to a Chinese company . This strategy enables companies to monetize their technology or brand while mitigating operational risks. Licensing deals can be structured to provide revenue streams without the regulatory burden of a direct presence. This can be particularly attractive for companies with valuable IP but limited resources for direct investment.

However, this approach requires careful negotiation to prevent IP theft or contract breaches. Critical considerations include geographical limitations, restrictions on sublicensing, performance metrics and royalty structures, and strong enforcement mechanisms.

For what is required in China licensing agreements, please check out Negotiating A China Licensing Agreement.

5. Exporting to China: Direct Sales from Afar

For some companies, the best solution is to remain entirely outside China while selling products directly into the country. With the right logistics, customs brokers, and partnerships, exporting goods to China can be an effective strategy, particularly for businesses in specialized industries with strong global brand recognition or unique products. This approach is usually much simpler and less risky than establishing a presence in China.

While this approach circumvents many regulatory challenges associated with operating within China, it still requires thorough compliance with Chinese import regulations, tariffs, product standards, and local business customs. Understanding the intricacies of Chinese customs and logistics is essential. For more on this, check out What you Need to Know to Sell Your Product into China.

6. E-commerce

In today’s digital age, e-commerce offers a powerful and increasingly viable way to reach Chinese consumers directly without establishing a physical presence.

China’s e-commerce market is the largest in the world, and platforms like Tmall, JD.com, and Pinduoduo provide access to hundreds of millions of online shoppers. This approach can be particularly effective for consumer goods and brands with a strong online presence or those seeking to build one. It’s not just about setting up a digital storefront; it’s about understanding the nuances of the Chinese online landscape.

Efficient logistics are essential for fulfilling online orders in China. This involves:

• • Warehousing and Fulfillment: Deciding whether to use a third-party logistics provider or set up your own warehousing and fulfillment operations.
  • Cross-Border E-commerce: Navigating the complexities of cross-border e-commerce regulations and customs procedures if your products are shipped from outside China.
  • Delivery and Returns: Ensuring fast and reliable delivery and providing a hassle-free returns process.