A case study of an international company in China facing common challenges, and how this might be helpful for your business as well
A decade ago, a North European company in the retail business set up their sourcing operation in China and hired a seasoned Chinese General Manager to run this office. Last year, I got contacted by their CEO sharing with me their struggles doing business here. We quickly connected and understood each other. Fast forward several months, a few days ago, a gift arrived at my desk, with a hand-written note: «Hope you enjoy this box of mooncake, thank you for all the support in this last year». This is the journey of how this client solved their challenges with A) their General Manager in China, B) Human Resources matters, and C) the Business structure complexity; and a final reflection.
1.Their China General Manager
As it often happens to foreign companies, there is usually a communication gap between the overseas headquarters and the China office , due to reasons related to business practices, cultural differences, market changes and especially lack of common strategy. My client hired a local GM 10 years ago to set up the sourcing office in China to oversee the development and manage their supply chain for their global retail business.
Over the past few years, the company has experienced much success globally. As a result, the client has become increasingly reliant on the China office, however, the Chinese GM was not able to follow the pace as the company grew bigger. The client has been constantly requested by the GM to inject more funds to China. Local employees were not satisfied with their conditions, and the headquarters were not receiving accurate reports and filings.
We sent our financial advisory team to conduct a financial health check in their Dongguan office for several days to collect further information and found out that: 1. Minor internal control loopholes were not detected by the headquarter, 2. Their financial reporting was not in line with the standards due to lack of expertise of the in-house bookkeepers, and 3. They have been stuck with a double taxation issue for several years, costing them several dozens of thousands of EURO per year.
The client was about to take extreme decisions, instead, I suggested implementing three solutions: 1. Update the internal control system and engage an external accountant to review it regularly; 2. Provide training to in-house bookkeepers; and 3. Help the client understand the double taxation agreement and how to apply for tax refund. My personal and professional comment is that their China GM was not acting in a malicious manner on purpose, she was just not being fully trained for the new requirements of this growing company. So in this situation, keeping her and providing training was a safer option than hiring a stranger or promoting someone internally.
2. Human Resources matters
They had difficulties with employment contracts. Two people wanted to leave, one lady needed to be relocated, and one foreign senior manager was having tax complications. Our HR team advised them on how to solve these matters separately and case by case. We suggested them real businesses practices that would speed up this process, in a way that in the end would save the company money and avoid future litigations. Then, we suggested two alternatives: 1. Have her as a self-employed person signing a service contract and paying her own social insurance, or 2. Temporarily hiring her through a third party company during the transition. We discarded the option of setting up a new entity for a commission based relationship, because that would be costly for the headquarter.
Regarding the foreign manager, we offered also three different alternatives after conducting a tax planning exercise, combining his base salary, commission, bonus, percentage in HK, and other benefits, he chose the one that was most fair to both the company and himself, and now we helped him solve this issue that had been there for several years. To finish this, I assigned a legal counsel to give an online training about Personal Information Protection Law. This company was managing personal data from retail clients and staff that had to be sent overseas, so we provided a training to their managers, drafted an agreement for their staff to sign, and coached them how to protect themselves in such situation
3. Business structure
Due to some big changes in their strategy, big modifications needed to be done in their structure. Their headquarter had some situations that affected their HK company, thus we helped them make changes in their China Foreign Invested Enterprise and their corporate governance, where the legal representative had to be changed. We helped them set up a new company in Mainland through their HK holding, did the notarization, moved the existing employees to the new location in a nearby district, and assisted them in registering the new trademark. With this, it became easier for them to manage this structure, save in costs, and not having to become excessive dependent.
After several months of videocalls and difficult decisions, now my client has an office that is doing what the headquarter in North Europe needs, the GM is delivering well, they kept almost the same employees, improved the internal control system with regular checking, and it is fulfilling its compliance requirements. This client invested less than 100,000 RMB in our advisory but got to save several times this amount. Sometimes, clients tend to focus on short terms benefits and procrastinate with problems, they end up with a big snowball and a costly process ahead. As a China business advisor, I cannot stress this enough, minimize risks from the beginning and mitigate them by implementing effective systems.