How to set up your factory in China in 2023: Process and tips.

Angel Ho, CEO of Hongda Business Services in Shenzhen, gives us a view from on the ground in China today about what the business environment for foreigners seeking to do business there is really like right now. She also explains the process and timelines of setting up a manufacturing facility in China for foreigners, the legal and administrative points you’ll need to take care of, and provides a warning of some of the key mistakes that foreign businesses make when setting up their factories.

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What’s the general business environment in China after ‘Zero-Covid’ really like for foreign businesses now?

We hear about the Chinese economy being bad and lots of foreign companies trying to get out of China but how accurate is that picture on the ground right now?

Since the pandemic, the way that foreign investors do business in China has changed and many more are setting up companies remotely and managing them from abroad, outsourcing essential activities like QC to companies like Sofeast, and accounting to companies like Hongda.

In the past foreign businesses often used China solely for manufacturing and export, but now they’re increasingly trying to sell into the Chinese market and take advantage of the 1.4 billion population and the large purchasing power of the growing middle class there. (02:21)

The Chinese economy is less vibrant than before now. What is the government doing to encourage foreign investment?

Everyone has heard about the post-Covid struggles of the Chinese economy. This has perhaps had a dampening effect on foreign investment in the country. What are the government’s policies to help combat this?

Now we are in post-Covid times the Chinese government has sent delegations worldwide to introduce the Chinese market and encourage foreign investment by demonstrating the infrastructure, investment environment, supply chain, etc, available there.

In August ’23 the government introduced 24 methods of support for foreign investors, and then soon after in October ’23 they introduced a policy for manufacturers allowing investment into previously restricted markets such as book printing and traditional medicine manufacturing…this shows that their attitude towards manufacturing has changed and is more relaxed towards foreign businesses now.

On a provincial level, certain provinces seek to attract foreign manufacturing investment and are offering generous tax refunds and grants to businesses that set up operations there.

So, from a business perspective, despite the economy, the government is taking a lot of positive steps to encourage and support foreign investment. (07:40)

How easy is it to hire foreigners in China today?

China has three foreign work permit categories, A, B, and C given on a points-based assessment. A and B are given to workers with experience and are the easiest to obtain, whereas C is for workers with less experience and is harder (as China prefers better-qualified foreigners to come in to work). Unlike other Asian countries, China doesn’t have an actual quota for businesses to hire a number of local staff per foreign staff member. The nature of your business is related to the number of foreigners you can hire and this will be considered by the authorities. Hongda has helped companies hire up to 40 foreign staff locally in China which is a reasonably large number for one business.

The visa application process is now ‘back to normal,’ but during the pandemic, some foreigners had to set up a business and hire themselves as an entrepreneur in order to have a work permit and remain in China because not many foreigners were granted work permits during this time. (11:55)

If a Western company wants to start their own manufacturing company in China, what’s the process?

There are different steps for a foreign business in this situation:

Investigation. China is a huge country, so you need to visit different areas to decide on the best location not only for your manufacturing facility but also for access to the components and materials you need to buy.
Discuss the project with the local government. This is especially relevant if your investment is very large as by building a relationship with local authorities you may be able to get government support on the land and tax relief, etc, as they will obviously welcome a new employer in town.
Compliance and company formation. You will need to provide a notarized copy of your head office’s business license and this will also be used when leasing the premises and obtaining the business license for China to open the company – this only takes around 5 working days.
Local business bank account. This takes around 2 weeks to open once you can provide the company formation articles to the bank.
Environmental protection license. You will need to provide your manufacturing processes, how you handle waste, etc, to the authorities and it takes about a month to issue this license and then you can start operating.

The whole process should take up to around 3 months from start to finish. Of course, you will also need to decorate and equip the facility, hire staff, purchase machinery and equipment, purchase materials and components, start using an ERP, manage stock, etc. Some of these activities could be done during the process above in order to be able to start manufacturing without delay.

SMEs usually prefer to find an existing commercial building and move into it rather than building their own factory from scratch, and that’s an efficient way to handle the process if you want to be able to set up the business promptly. (16:41)

Selecting the right area and getting government support for manufacturers.

You may get more generous government support if you are prepared to set up your operations away from the coastal cities inland in provinces like Hunan and Jiangxi because local governments there are hungry for investment and job creation, but choosing areas like this depends on if they’re advantageous to your business.

For many electronics brands, there is no better alternative than the ‘Greater Bay Area’ of the Pearl River Delta and Hong Kong in Guangdong province (where Sofeast is headquartered), even though labor and property rental costs are high because this area has so many of the suppliers. However, for other products like cut & sew manufacturing of apparel and textiles, inland areas with a lower labor cost will be more suitable as the labor cost forms a large proportion of the product cost.

It may be better to select smaller cities near to larger more high-profile ones if you appreciate lower costs and space to grow. For instance, instead of Shenzhen in Guangdong, you may look at places like Zhongshan or Huizhou which are nearby, but less costly in terms of rent and salaries required as they’re still developing. You may also get more support from local government in these smaller cities. (21:30)

7 Common mistakes foreign businesses make when setting up a manufacturing facility in China.

Not registering the company with the right capital investment. In the West, it might be common to register a business with, say, just a $1 investment. But China is a foreign capital control environment and you can only invest the amount of money that you state when forming the company. So for a manufacturer, you probably need to register the amount of capital needed to set up the business and run it for a couple of years. That could be millions of dollars in some cases, but you do not need to invest it all immediately. In the company formation documents, you can state that it is to be invested over, say, a 20-year period, so there is no reason to be worried about stating that your initial investment is a high number. More capital investment can be better as it will give you the funding you need to grow the business and get it running smoothly. It is also not taxed in China, so it makes more sense financially to use the investment on startup costs, etc, rather than raising revenue in China which is also taxable to spend on the same thing.
Choosing to be based near to a port you export from instead of your suppliers. For manufacturers in China, it is important to be based near where your supply chain is located so you can communicate with suppliers, send back defective components, etc, but it is not so important to be based near a port where you can export products from. For example, you can produce products in Guangdong and export them from Shanghai’s port, that’s not an issue at all.
Making the wrong hires for your first staff. You need to be very careful to hire really capable staff as your first hires, as your production manager, etc, will shape your company culture in China quite heavily.
Letting cliques form. Some manufacturers had groups of people from different countries form into cliques and fight against each other, leading to a lack of harmony in the organization that prevented progress and normal operations. This needs to be discouraged, so maybe it’s better to discourage a manager from hiring a bunch of staff from his own country or even city.
Choosing the wrong area or even building. You need to do your research and make sure that you don’t end up in, say, a flood plain and be affected by extreme weather in future.
Not laying out the processes properly. You need to consider the workflows at all times and not start small and add equipment in a haphazard way as this will affect productivity. This will require experienced process engineers to work on the manufacturing processes in a professional way and they will also be involved in making sure that staff are properly trained to do the job well.
Going for a big bang production launch. Not ramping up production incrementally is a common mistake because by going all in with multiple lines at full speed immediately you increase the risks of things going wrong. Better to start slowly with just one line and stress test the processes, going faster and introducing more lines over time. (25:55)

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