In the past few decades, China has grown to become a significant economic power. Much has changed for the country since the government decided to allow international trade and embrace the global market. China’s economic wheel began to turn very fast. These days, China is a giant, not only in terms of manufacturing but also in purchasing power. The country’s GDP is expected to reach $17.2 trillion in 2023. China’s large population plays a crucial role in both aspects. The large workforce means relatively inexpensive wages and a huge market to sell products.
It is not surprising, then, that even the most significant most reputable brands in the world have been shifting manufacturing to Chinese factories for a long time. They get the benefits of low production costs and, in many cases direct market access to Asian consumers.
China’s outsourcing market is $23.3 billion with growth as fast as 30% in 2014. Many companies from other countries have moved their own headquarters to China to establish a business. Compared to many of its neighboring countries, China retains its place in the low-end industry segment better. The government has hugely supported this, introducing subsidies, incentives, and good infrastructure to keep local companies in a highly competitive global market.
However, this does not mean that China excels only in manufacturing low-end products. There has been an ongoing effort to make higher-value products. HSBC reported that China’s transport equipment and machinery industries grew 46% in 2015 (a significant increase from 21% in 1995) even when its lower-value exports declined.
The main reason to consider manufacturing in China is the lower manufacturing cost. Low production cost, especially for mass-market products, means you have enough supply to maintain competitiveness in the market. Some companies also choose to outsource to manufacturing facilities in China to ease the distribution process to other countries. When the manufacturing process is properly handled elsewhere, your company can focus its resources on research and development for future products.
Here’s a more detailed explanation of some of the biggest advantages of manufacturing in China.
Working with a manufacturing facility in China means reducing the production cost without reducing volume output. This is by far the primary reason why U.S. firms and entrepreneurs put up with the disadvantages of manufacturing on the other side of the world.
Some domestic factories in the U.S. are limited in capacity and time, but this is never the case with their Chinese counterparts. Once again, cheap labor costs play a crucial role in this aspect. You can hire more people to complete volume-demanding production while requiring less money than domestic facilities. There are certainly ethical considerations regarding the low labor cost in China, but not all facilities are exploitative. Do your due diligence.
When you have products made in China, you can also market the goods to the local market. Companies that outsource production do more than oversee the manufacturing process. They follow up by establishing a supply chain and local marketing efforts. They hire local employees and acquire equipment to support their ventures.
There is no need to ship the goods overseas because the factories are already in China. With over 1.3 billion potential consumers, you get the promise of good returns. This is a big advantage if you plan to sell your product abroad.
The biggest caveat is that manufacturing overseas typically only makes sense if you deal with large production runs. Manufacturing in China also comes with many drawbacks, which can only be offset when you take advantage of bulk ordering. Depending on the type of products you plan to make, overseas outsourcing may not be a viable option at all. Weigh the benefits of cheaper labor against the following significant disadvantages:
The first challenge is the difficulty finding the right factory that’s willing to manufacture your products. It takes extra effort to develop relationships with facilities on the other side of the planet.
It’s critical that you do your due diligence here, not only so you know you’ll receive good service but also to make sure that the facility you’re considering is reliable and above board. You should make at least one trip over to visit them for yourself if you can.
You can look for companies online or visit tradeshows. This involves added costs, stress, and time. It can also be challenging to find factories in China interested in dealing with you unless you’re looking to manufacture hundreds of thousands of units.
Here’s a worst-case scenario that’s more common than you’d believe. A factory will agree to take you on as a client, but because they are typically dealing with multi-million-unit orders, you barely register on their radar at all, and your product order is delayed and neglected.
China has opened itself up to international trade, but that doesn’t mean everyone is proficient in English, and you probably don’t know much Mandarin or Cantonese. Hiring a translator can make the business run smoother, starting from the initial negotiation to the production process. There are a lot of things you’ll want to discuss with your Chinese partners, making a translator necessary. But, again, this is a cost that you need to weigh against the savings in labor costs.
Shipping can be a real pain. Shipping from China means having your products packed up and put on cargo ships that sail around the globe. This leads to long lead times and significant shipping costs. Depending on your distribution network, these costs can vary. How you deal with the items once they arrive state-side is also an important consideration.
It is usually much easier in this regard to deal with local manufacturers. Inventory management becomes very important when you’re dealing with international lead times. If your items are out of stock, your customers will go elsewhere. The added time spent in transit means you always need to think two or three steps ahead when dealing with overseas manufacturers.
There is a certain stigma attached to the ‘Made in China’ label and a certain prestige attached to products ‘Made in the U.S.’ Whatever you might think about the validity of these notions, the reality is that many consumers value domestically manufactured products and are often willing to pay a premium for them.
This is something to consider if the margins you would make by manufacturing in China are marginal. Once all the shipping, travel, and translation costs are taken into account, consider that you might be able to sell your product at a higher price point with that coveted “Made in the U.S.” label.
We’ve all seen those knock-off purses and sneakers that are made in China out of shoddy materials and are quick to fall apart. However, manufacturing in China isn’t necessarily a death sentence for your product. In fact, Chinese manufacturers produce good products more than they do bad ones.
There is one caveat to that, which is that you shouldn’t manufacture complex, sophisticated items in China like electronics or clothing with intricate designs. If your product is a simple textile or gadget with just a few parts, you shouldn’t come across any problems as long as you vet your manufacturer. Make sure to routinely check the factory for quality. If you do go with the Chinese manufacturer, connect with an agent who can ensure the factory is always following best practices and that the goods are being produced accurately and on time.
Because Chinese workers typically work for less (meaning lower profit margins), the factories require very high minimum orders. If you’re looking for small-batch manufacturing or one-offs, you’ll have trouble getting your needs met in China.
One of the concerns associated with manufacturing in China is the risk posed to intellectual property (IP). The enforcement of IP protection is an issue consistently raised by the US-China Business Council (USCBC), and fortunately, the Chinese government has recognized this concern and IP protection is improving. For example, the Chinese government has begun to increase the number of IP courts to help manage IP issues.
However, there are still challenges. With long-standing issues in terms of uneven enforcement, trade secrets, and procedural barriers, it’s important for companies to be aware of the level of IP protection that they’ll need and to then develop corporate protection strategies to combat these risks.
Ways to Counteract Intellectual Property Risks: Patenting is a simple way to reduce the risk to your IP. Before manufacturing, you should register your IP with a trademark, brand name, copyright, or domain. This prevents copycat manufacturers from stealing IP without consequence and preventing someone else from patenting your IP. You don’t want to be in a position where you have to buy the rights for your own IP to continue manufacturing.
Changing the value chain of a product’s development can also help protect IP. One way to do this is by splitting research and development tasks between departments in the US and China. Compartmentalization can help keep critical components of the manufacturing process out of China, reducing the risk of copycat manufacturers employing reverse engineering tactics. Without the full picture, there is less risk to IP.
Alternatively, a company can establish a Chinese research and development department to strengthen its relationship with Chinese partners. Creating a level of trust with your manufacturing partners creates a greater incentive to avoid leakage. In addition, developing a good relationship between your company and the Chinese workforce is essential. If employees feel secure and wish to build a long-lasting career with your company, they will be more loyal, reducing risks to IP.
Whether you compartmentalize your company or expand research and development, the most straightforward tactic to protect your IP is to be proactive. Browse Cad Crowd’s patent services for more information on how to begin the patenting process so you can start protecting your IP.
The advantages and disadvantages of manufacturing in China need to be balanced out. You can’t have only one without having the other. The key to a stable manufacturing process is to consider your options carefully and take precautions.
Regarding rapid manufacturing and prototyping, you want to work with U.S. companies. U.S. manufacturing has seen a bit of an upswing in recent years as manufacturing becomes increasingly automated and labor costs gradually become less important. Starting with Trump’s presidency, the US government’s promise to penalize American companies manufacturing overseas is also something to consider. However, many of these promises have yet to come to fruition.
If you’re looking for U.S.-based manufacturers, Cad Crowd can help. Take advantage of our contract manufacturing services to connect with 3D printing, molding, or CNC providers in the United States. In you need help with design and engineering, you can launch a design contest or get a free quote today.
Shenzhen is a rapidly developing city located in the southern region of China that has become a global business hub and one of the largest and most innovative cities in China. Due to its strategic location at the border of Hong Kong and the Pearl Delta, favorable policies, and modern infrastructure, Shenzhen is a popular destination for entrepreneurs looking to start a business in China.
Shenzhen has emerged as a top destination for entrepreneurs, particularly those in the technology and trading industry, looking to establish a new business in China. The city has witnessed the rise of several influential private companies, including the telecom equipment giant Huawei.
Shenzhen avoided an economic contraction throughout the global covid pandemic between 2020 and 2022, as a strong rise in investment offset weaker consumer spending and exports. Nevertheless, like other regions in China, it is not easy to completely understand how to effectively start a business and how to reduce the costs of setting up a company.
In this article, we will explore the benefits of opening a business in Shenzhen, including the city’s supportive ecosystem, and opportunities for growth. We will also discuss the key considerations for entrepreneurs looking to establish their business in Shenzhen, including legal and regulatory requirements, cultural differences, and the competitive landscape. Doing business in Shenzhen is an objective for many companies and entrepreneurs that want to enter China.
Shenzhen’s transformation from a small fishing village to a bustling metropolis is a relatively recent one. In the early 1970s, the Chinese government launched a series of economic reforms and open-door policies aimed at modernizing the country and attracting foreign investment. In 1979, the government designated Shenzhen, a sleepy fishing village at the time, as China’s first Special Economic Zone (SEZ).
The SEZ status granted Shenzhen a significant degree of autonomy and flexibility to experiment with market-oriented economic policies. The government also provided significant investment and infrastructure support, including building roads, bridges, and ports, to attract foreign investors and stimulate economic growth.
As a result, Shenzhen experienced rapid development and transformation over the next few decades. Its population exploded from around 30,000 in 1979 to over 13 million today, and it has become one of the world’s most important centers of manufacturing and innovation, with a significant portion of the world’s electronics and high-tech products manufactured there.
The year 1980 marked a period of extraordinary expansion in the city, fueled by a substantial influx of foreign and domestic capital. Shenzhen’s special economic zones offered improved living standards and higher wages than other areas in China, attracting a large number of skilled professionals and laborers to work in various industries, including chemicals, electronics, textiles, and processed food production.
This swift and extensive growth was dubbed the “Shenzhen speed,” and its success prompted the Chinese government to convert additional coastal cities into special economic zones in order to further promote modernization.
Shenzhen, situated on the central coast of the southern province of Guangdong, is a significant sub-provincial city and one of China’s special economic zones. The city is bordered by Hong Kong to the south, Dongguan to the north, and Huizhou to the northeast, and it lies on the eastern bank of the Pearl River estuary.
With a population of 17.56 million people as of 2020, Shenzhen ranks as China’s third most populous city by urban population, trailing only Shanghai and Beijing. Known for its prominence in technology, research, manufacturing, business and economics, finance, tourism, and transportation, Shenzhen is home to the world’s fourth busiest container port, the Port of Shenzhen.
In 2021, Shenzhen’s gross domestic product (GDP) totalled 3.8 trillion yuan (588 billion USD) which was at the third number after Shanghai and Beijing. Shenzhen has been regarded as one of the most economically dynamic cities in China, surpassing Zhuhai and Xiamen in terms of GDP growth. The city’s exceptional economic progress is attributed to the implementation of reform policies, resulting in significant benefits for its development.
Often described as China’s Silicon Valley, Shenzhen is a rapidly developing and expanding city that has undergone a remarkable transformation from a small fishing village into a major commercial hub, thanks in large part to the influx of capital from its neighbor Hong Kong. This has attracted numerous individuals to relocate to Shenzhen in search of employment opportunities and to reap the benefits of its substantial investments.
Shenzhen is one of the major cities serving as a developing machine in the region as per the Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area (GBA).
Shenzhen’s economy is primarily driven by the manufacturing and technology industries. The city is home to a large number of factories producing a wide range of products, including electronics, telecommunications equipment, textiles, and chemicals. It is also a major center for research and development, with numerous high-tech companies and startups based in the city.
In terms of budget allocation, the Shenzhen government invests heavily in infrastructure development and innovation. The city has allocated significant funds to support the construction of new roads, bridges, and public transportation systems to improve connectivity and ease traffic congestion. Shenzhen also invests heavily in science and technology research, with the government providing funding for numerous research institutes and universities, as well as supporting the development of technology startups. Additionally, the city has launched a number of initiatives to promote entrepreneurship and innovation, such as providing tax incentives and access to venture capital.
Shenzhen’s GDP in 2020 was 2.8 trillion yuan (about 430 billion US dollars), making it the fourth-largest city economy in China after Shanghai, Beijing, and Guangzhou.
Shenzhen’s total industrial output value reached 3.3 trillion yuan in 2020, with the manufacturing sector accounting for over 70% of that value.
Shenzhen has more than 14,000 high-tech companies, including some of the world’s leading tech firms such as Huawei, Tencent, and DJI.
Shenzhen’s budget for research and development was over 100 billion yuan (about 15 billion US dollars) in 2020, accounting for around 4% of the city’s GDP.
In 2020, Shenzhen ranked first among Chinese cities in terms of the number of new patent applications, with over 140,000 applications filed.
As of 2021, Shenzhen has over 20 million registered residents and is projected to grow to 25 million by 2035.
Shenzhen is considered a global market for several high technology sectors such as financial sectors, industries, and manufacturers, logistics, metamaterials, etc.
Some of the leading companies which are headquartered in Shenzhen include Tencent, IBM, Huawei, ZTE, Baidu, along with financial institutions such as HSBC, China Merchants Bank, Standard Chartered, and Citigroup.
In 2010 Shenzhen’s Special Economic Zones were expanded from 4 districts to the whole city. Enterprises that come under the SEZ of Shenzhen take benefits of the wide range of exemptions in tax, loans, grants, and also enjoy the reduced rates. Following are some of the policies that are implemented in Shenzhen related to the tax benefits:
The transformation of Shenzhen from a small fishing village to a great hub of electronic manufacturing is no less than magic. In 2010, Chinese President Hu Jintao called the city a “Miracle” on the 30th anniversary of the developing economic reforms.
For nearly 4 decades, Shenzhen was one of the fastest-growing cities in the world, going from a population of under 100,000 in 1980 an estimated 15 million residents by 2020. The former angler’s paradise along the Pearl River Delta is home to the Shenzhen Stock Exchange, many massive tech firms, and startups.
Considered as the Silicon Valley of China, Shenzhen is a start-up hub for various industries, such as electronics, biotech, healthcare, manufacturing, pharmaceuticals.
If you’re a start-up for manufacturing a product, you won’t be able to find another city in the world that is better equipped to manufacture your goods in a cost efficient and timely manner. The city’s established supply chain, skilled workforce, and favorable government policies make it an ideal location for foreign companies seeking to set up manufacturing operations.
As one of China’s fastest-growing cities, Shenzhen has emerged as a top destination for startups. Historically, the city was known for its ability to efficiently manufacture and ship products, but in recent years it has become an epicenter for high-quality technology development and a skilled workforce capable of producing and selling cutting-edge products.
Shenzhen’s top startups are closely monitored worldwide for any new developments. The following is a list of some of the startups that are experiencing rapid growth:
Tencent
Shenzhen is the home to the company behind WeChat. Tencent is now one of the biggest internet companies in the world. It offers internet, mobile, telecom, and other advertising services.
Huawei
Huawei is a Chinese multinational technology company that specializes in telecommunications equipment and consumer electronics. Huawei is a world leading smartphone manufacturer.
OnePlus
OnePlus is a technology startup that is providing the market with affordable quality smartphones and bringing innovation to the technology sector.
DJI
DJI is a Chinese company that produces commercial and unmanned aerial systems. It is a leader in the commercialization of drones.
SeedStudio
It is a hardware innovation platform that helps businesses to upscale from prototype to mass production.
Makeblock
Makeblock, an open-source construction platform, which provides mechanical parts and electronic modules to construct robots.
UBTech Robotics
UBTech Robotics is a humanoid robotics company that is among the top Shenzhen startups.
Shenzhen is smaller in size as compared to Shanghai and Beijing, but the city reported a GDP of ¥3.8 trillion in 2021. Continuously closing the gap with the top 2.
There are four state-level development zones consisting of the Shenzhen trade free zones:
Outlined below are several reasons why conducting business in the Shenzhen Free Trade Zone can be a profitable venture:
Shenzhen offers numerous financial benefits and tax incentives that make conducting business in the city significantly more profitable. For instance, while the average corporate tax rate in China is 30%, the Shenzhen Free Trade Zone provides a substantially reduced corporate tax rate of only 16.5%.
This implies that there are no import taxes applicable for storing your imported goods within the Shenzhen Free Trade Zone. Therefore, you do not need to spend hours calculating the import taxes or paying for the goods to be transported to the zone. Companies can directly transport their goods to the mainland and deliver them to their respective warehouses without any import tax obligations.
To entice foreign investors, the Chinese government offers incentives and grants. Companies that conduct business in the Shenzhen Free Trade Zone are eligible for special bonuses and grants, which serve as remunerative monetary incentives to encourage investment and continued operations in the zone.
Shenzhen is a great choice for companies that are specialized in computer software, IT, microelectronics and components, video and audio products, electromechanical integration, and key projects of light industry and energy.
But other industries like pharmaceuticals, biotechnology, and medical equipment are also on the rise in Shenzhen.
When setting up a company in Shenzhen, there are numerous things to consider and hence it is important to seek appropriate legal help.
Registering a company in Shenzhen can also be referred to as Shenzhen company incorporation.
The following are the 5 steps needed to be taken while setting up a new business in Shenzhen:
The first step in opening a company in Shenzhen is to determine the type of business structure you wish to establish. China offers several options, including a Wholly Foreign-Owned Enterprise (WFOE), Joint Venture (JV), and Representative Office (RO). Each option has its advantages and disadvantages, and the choice largely depends on your business needs and goals.
For example, a WFOE is a popular choice for foreign investors as it allows them to have full control of the company and profits, while a JV allows for collaboration with a local partner and can be advantageous for certain industries. A Representative Office, on the other hand, is a suitable option for companies looking to establish a presence in China without engaging in direct profit-generating activities.
You need to pick the right location for your business. There are 7 administrative districts in Shenzhen – Futian, Luohu, Nanshan, Baoan, Longgang, Longhua, and Pingshan. Hence, it is really important to familiarize yourself with such a big city so as to have numerous options.
During the process of registering your company, having a legal representative can be immensely beneficial. They can assist you with obtaining the necessary documentation and provide important information required for the registration process. The legal representative must reside in China and must be present for the bank account opening.
Failing to trademark your intellectual properties before launching your business can be a costly mistake. Therefore, it is crucial to identify the appropriate agency that can assist you with this process, such as FDI China!
You need to ensure that the people operating the business in China possess the necessary knowledge and skills to do so. It’s essential to identify an agency that can assist you with hiring the right staff if you don’t already have candidates. The required expertise may vary depending on the industry, ranging from young and energetic to experienced professionals.
Once your business goal is set and everything is planned and you decide to deliver a promising product in (or out of) China’s market, foreigners can set up branches in China which should be in accordance with the Companies Act and the Commercial Code.
Also, the important thing to note for the investors is that documents of the parent company are necessary for establishing a branch in China.
In China, you have four options to choose from for your company setup:
Deciding to set up your business as a joint venture will have you to declare that you will run your company with a local partner from China. In this setup, the company is controlled by both foreign and Chinese partners.
Compared to establishing a WFOE, opening a representative office is a relatively straightforward process. However, it comes with its own set of limitations. An RO does not have the option to generate revenue as its purpose is primarily for market testing and promoting products or services. Therefore, while setting up an RO can be an effective way to establish a presence in China, it is not a suitable option for companies looking to generate profits in the country.
For companies established as an RO, the only way to pay for expenses is by transferring money from abroad. It’s important for investors to note that even though an RO may not generate any profits, they are still required to pay taxes, which are typically calculated as a percentage of the company’s expenses.
The most popular option for foreign investors looking to establish a presence in China is a WFOE, which is a legal entity that is fully owned by foreigners. Limited Liability Company (LLC) is a commonly chosen type for WFOE in China. With a WFOE, investors have the freedom to engage in any profit-generating activities, pay taxes in China, and repatriate all profits earned back to their home country.
On the other hand, an umbrella company, also known as PEO/EOR, provides a service of hiring employees on behalf of your company in China. Essentially, they host employees or teams for your company. Unlike WFOEs, umbrella companies do not establish a separate legal entity in China. Instead, they act as a liaison between foreign companies and their employees in China, providing a range of services such as HR management, payroll, and legal compliance.
Depending on the type of industry, the regulations and guidelines for foreign companies looking to conduct business in China can be perceived as strict. However, it is possible for foreign companies to conduct business in China without establishing a WFOE or any other type of entity. These companies can engage in activities such as importing and selling goods, manufacturing their products in China, and offering their services in the country.
Nevertheless, there are several considerations that must be taken into account, which can make doing business in China a complex process. Various issues such as legal compliance, cultural differences, and language barriers may arise, requiring foreign companies to exercise caution and seek appropriate guidance to ensure smooth operations in China.
These issues are explained below:
Issue 1: a local entity is required for issuing ‘fapiao’
When selling goods and/or services in China, local companies need to issue a ‘fapiao’ which is an official Chinese invoice. This document is important since, without this, local companies won’t be able to deduct Corporate Income Tax and deduct input VAT from their output VAT.
Issue 2: employees can only be hired by a local entity in China
Both Chinese citizens and expats are only allowed to work for companies registered in China.
Issue 3: it is difficult to receive payments from the client without a local entity
Since there are strict Foreign Exchange controls in China and all exchanges in China are administered by the State Administration of Foreign Exchange (SAFE), if you don’t have a local entity, it is complicated to receive payments.
Establishing a WFOE in China is an effective solution for resolving the aforementioned issues. By establishing a local entity, foreign companies can engage in profit-generating activities while complying with local regulations and guidelines.
Companies have the option of utilizing a cost and time-effective solution known as PEO or employment outsourcing, which eliminates the requirement of establishing a local entity in the country. Essentially, investors can rely on local experts in employment and labor law to legally recruit employees on their behalf.
These employees will continue to work for the company, while the PEO agency will manage all HR and employment relationships. Employment outsourcing is a dependable, efficient, and compliant method of recruiting employees to work in Shenzhen.
PEO agencies act as an employer of record (EOR) for the company’s employees, directly hiring staff to work on their projects.
In conclusion, starting a business in Shenzhen can be a highly profitable and cultural experience with the correct foundation. With the right knowledge and guidance, foreign investors can navigate the regulations, laws, and cultural differences to establish a successful venture in one of China’s most dynamic and prosperous cities.
From selecting the appropriate business entity to registering for taxes and finding a reliable PEO agency, this guide covers all the essential aspects of starting a business in Shenzhen. By following these steps and seeking expert advice when needed, investors can overcome the challenges and reap the benefits of doing business in Shenzhen.
FDI China offers a low-risk and expedited approach to establishing your business in Shenzhen. With our market entry solutions, you can commence your business operations without the need for a local company, ensuring a smooth and efficient process. Allow us to assist you in kickstarting your business venture in Shenzhen with our expertise and resources.
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