Doing Business in China with a PEO
A Professional Employment Organization (PEO) provides the quickest, most cost-effective and efficient means of expanding one’s business overseas. This is why those who have heard about PEOs for the first time thought them to be too good to be true. The reason it is highly popular today can found that it brings high value to companies expanding on a global scale, offering them a high degree of flexibility.
As the second largest economy worldwide according to the World Bank, China has been the choice of many organizations as the perfect place to expand their business. The country was also deemed to have been the biggest contributor to world growth since the 2008 financial meltdown and continues to assert itself firmly as a global growth engine. Figure 1 shows China’s position.
While it is quite understandable for anybody with business acumen to pick China as the place of doing business and take advantage of its growing market, creating a new company in this country is far from easy. For startups
Challenges Confronting Businesses
From 1949 up to today, China is a one-party socialist nation. As such, business, government and politics are highly interconnected. Whether the company is private or public, there will be some level of government control that will exist. This is why doing business in China may prove challenging for investors.
However, this involvement of the Chinese government in businesses is far from being the only issue. Various obstacles confront foreign companies in China including the following:
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- HR Issues – a new company should immediately know the labor laws in relation to such matters as hiring, retention, firing, and termination of employees. It should also know where to get highly skilled and talented employees, along with the appropriate remuneration and benefits to offer them;
- Administrative Licensing and Company Registration – not only are the laws on putting up foreign businesses in China highly procedural, it is also quite stringent, thus making the processes and delays very costly. Permits and business applications do not only take time but there is also the risk of being denied;
- Cultural Differences and Language Barrier – these issues makes the various processes and requirements involved even more difficult to achieve;
- Limited Knowledge on Local HR Regulations – necessary processes such as taxation, payroll, insurance, etc. are implemented based on laws and regulations. Without the appropriate know-how, business and legal problems could arise;
- Costs and Time Involved in Creating a Subsidiary – it is necessary for a business to have a legal entity established in China to do business in the country. Given the mentioned requirements, along with others that come along the operation of a business, it becomes necessary for the foreign investor to have the funds, time and even the right contacts in China to be successful;
- Compliance Issues – foreign companies are required by the Chinese government to provide regular/annual compliance reporting and meet established standards. Merely learning them can already prove time-consuming; and,
- Competition with Local Businesses – as if the obstacles are not enough, there are also the issue of having to compete with local businesses.
While doing business in China is promising and potentially profitable, it is clear from the foregoing obstacles that it is difficult to implement. For smaller companies with lesser capital, it may even be impossible. The good news is, a solution to these problems is now available with the use of a PEO.
Legal Business Entities in China
To better understand how a PEO works, it is best to compare it with the typical entry vehicles utilized by foreign companies in China, as follows:
- Wholly Foreign-Owned Enterprise
- Joint Venture
- Representative Office
Wholly Foreign-Owned Enterprise (WFOE)
A WFOE is the most common form of Foreign Invested Enterprise (FIE) in China. As the term suggests, it is 100% foreign-owned, thus a favorite choice among foreign investors. However, as part of the process of the application for registration of a WFOE, it needs to go through and be approved by the following government agencies in China:
- State Administration for Industry and Commerce (SAIC);
- National Development and Reform Commission (NDRC);
- Ministry of Commerce (MOC); and,
- Other local authorities.
The process ideally takes a couple of months to accomplish. However, in actuality it can run as long as 6 to 18 months. At times, it may not even be approved. To top it off, there are standards to be met, statutory compliance required and annual financial report to be submitted. For businesses under the regulated industries, a minimum capital is imposed. Clearly, putting up a WFOE as a subsidiary in China could prove lengthy, capital-intensive, and highly procedural.
Joint Venture (JV)
Similarly, putting up a JV fundamentally requires the same time and effort. The main difference is that the foreign investor will have a Chinese partner in the business. In this type of business entity, fewer restrictions are imposed and more industries can be explored. Such problems as cultural differences and language barriers are mitigated.
However, many foreign companies are adverse to the thought of having a partner in the business instead of getting full control. The success of the management, marketing, finance, operation and other business processes lie in the hands of the foreign counterpart, if the foreign investor is not always present. There is also the risk of exposing trade secrets.
Representative Office (RO)
Unlike the WFOE and JV, an RO is inexpensive and faster to register in China. However, it is quite limited in what it can do for the business thus rendering it an impractical option. If the intention is simply to make the Chinese subsidiary a marketing and promotions vehicle, a customer service arm or just to study the market, then the RO is the wise choice.
Otherwise, an RO is not viable as it is restricted from doing any of the following:
- Manufacture products;
- Offer services;
- Incur profit or revenues;
- Accept payment;
- Perform trading operations, e.g. import/export; and
- Execute contracts.
Doing Business in China with a PEO
The business model offered by a CEO is the perfect vehicle for any company that wants to expand their business in another country, particularly in China. It is the solution to all the challenges that will be faced by the foreign investor when it decides to put up a Chinese subsidiary.
The Professional Employment Organization, or more appropriately, a Global PEO, is a company that manages the administrative and HR activities of the company. In this case, the PEO is an entity in China that already exists and has been previously established.
Hiring a PEO is similar to having a ready-made HR department in China that can immediately start operating for the foreign business. This means all the lengthy and costly registration, as well as all the problems confronting business applicants, are eliminated.
The partnership existing between the PEO and the client company is referred to as a co-employment relationship as illustrated in Figure 2. Under this arrangement, the PEO shares employer responsibilities with the client company depending on the terms of their contract. With this relationship, the employees serve as the workforce of both the PEO and the client company, thus giving the latter access to a ready-made HR, payroll, benefit, taxation and compliance infrastructure.
Figure 2. The Co-Employment Relationship
The Global PEO also serves as the “employer of record” of the employees in China. As an employer of record, it is legally liable for the workforce it employs. It effectively implements employment laws, best practices and compliance in relation to recruitment, management, termination, and other HR legal matters. This considerably decreases the foreign company’s legal risks and liabilities, leaving it free to focus on the business and in making profit.
The Global PEO provides numerous basic services as HR and Payroll services, employee benefits, and risk and compliance services. It can also provide customized services as may be required by the client company, including such activities as marketing, branding, sale network implementation, immigration tasks, etc. Figure 3 shows all the services a PEO can provide an organization.
Figure 3. Services Offered by a Global PEO
By hiring a PEO, all the following advantages can be acquired by a foreign company:
- Having an instant HR/administrative department overseas;
- Allows for immediate expansion abroad;
- Ideal for testing a new market by reducing the costs and risks involved;
- Acquiring immediate expertise in the relevant Chinese labor laws; and,
- Winding down and termination issues are handled better considering the complex laws involved on these issues.
Clearly, a PEO is the quickest, most efficient and cost-effective means of expanding and doing a business in China. All these services are offered by New Horizons Global Partners, a Global PEO with a strong presence in China, besides Germany and France. NH Global Partners customizes its global services depending on the organization’s specific expansion needs.