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Posted: February 01, 2010

Guest Column: Expanding into China in 2010

What you should consider

Jill Brehm and Tina Cheng

As the Chinese economy develops, more Colorado businesses are looking to China's large population and friendly business environment as a market to grow their sales. In fact, China is currently Colorado's third-largest export market, with Colorado businesses exporting $508 million of products to China in 2008.

While a large portion of Colorado exports to China are by the state's largest and best-known businesses, smaller companies can also benefit from expanding into the China market.

"Now that numerous multinational companies have established successful operations, we are seeing similar opportunities for small- to mid-sized companies," says Don Pangburn, a senior principal at GHP Horwath P.C. who has been providing accounting services in China since the 1980s. For those companies that decide to expand into China, the next issue to deal with is how to best distribute one's products to the Chinese.

DIRECT TO CONSUMER INTERNET SALES

While the Chinese have historically been wary of purchasing goods on the Internet, it appears that young people in China are becoming more willing to trust online buying. This is best illustrated by the success of Taobao.com, the Chinese equivalent of eBay, which is currently one of the hottest websites in China and the biggest e-commerce site in Asia. However, it should be noted that while e-commerce in China is thriving, the older generations have generally not adopted it as a means to obtain goods. While selling over the Internet may be a good option for those Colorado businesses whose products appeal to young people, it is probably not as good an option for others.

RETAIL SALES

Chinese laws and regulations issued in 2006 now allow companies foreign to China to establish wholly owned distribution entities through which they can distribute imported products. Although government-imposed limitations exist for certain products, this option can work for most industries. Setting up one's own distribution entity should be done with caution, however, because Chinese business regulations can be extremely complex.

We would advise that Colorado businesses entering the Chinese market this way only do so if they have an agent or trusted person in China who can help them communicate appropriately with the government and comply with all laws and regulations.

WHOLESALE DISTRIBUTION THROUGH A TRADING COMPANY

Because of the complexities of doing business in China, a popular choice for distributing products in China is to use a Chinese trading company for both importing the product and marketing it within China. Some of the larger trading companies can be authorized to deal in a wide range of products and may have offices in the U.S. and other countries in addition to their Chinese selling networks.

While using a trading company is a good option for those businesses that do not wish to try to deal with Chinese regulations on their own, one trading company will often not be able to provide thorough coverage throughout China. Colorado companies may find it necessary to use several trading companies to get adequate distribution coverage.

MANUFACTURING IN CHINA

For those who anticipate a large volume of sales, or for those who have already established themselves in China, local manufacturing though a wholly foreign-owned enterprise may be the best way to get products into the hands of Chinese consumers. By manufacturing the products in China, a company can take advantage of the Chinese factory labor rate, which is approximately one-tenth of the current U.S. rate. Local production also will allow a company to avoid import restrictions and tariffs.

These are only a few of the issues Colorado businesses need to consider. Each option has its own complexities and may not work for all businesses. Companies thinking about expanding into the Chinese market should contact their independent business advisers to determine which distribution strategy will work best for them. {pagebreak:Page 1}

Jill Brehm, CPA, tax senior, and Tina Cheng, CPA, audit manager, work for GHP Horwath P.C., an independent certified public accounting and business advisory firm that has offices in Denver and Shenzhen, China, and has been providing accounting services in China for more than 20 years. Brehm and Cheng can be reached at (303) 831-5000. For more information, visit ghphorwath.com.

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