Why set up a production or assembly activity in China?
In the first decade of the 2000s, it was common for French companies to benefit from very attractive investment policies. Industrial zones granted exemption or strong reduction of corporate taxes in the first 2 to 5 years. Investors also benefited from relatively low wage costs, especially for labor-intensive manufacturing or assembly processes.
In recent years, the evolution of domestic consumption, the evolution of environmental requirements but also the increase in production costs have changed the objectives of foreign investors who manage a production center or assembly plant in China. There is a clear increase in salaries, factory rents or the cost of acquiring building land.
If the purpose of producing in China to re-export in Europe, USA or in other countries is not necessarily proven anymore, advantages remain when it comes to producing to sell on the Chinese market.
What are the advantages of producing in China to sell on the Chinese market?
30% of foreign companies in China are involved in assembly, production or transformation for domestic or export sales. More and more US and European SMEs are setting up in China to be competitive and sell locally. Consumer goods are essentially, if not exclusively, manufactured in China in order to be sold locally. We think of household appliances, home equipment, games/leisure, etc.
|Producing locally with components sourced in China often allows good economies of scale. It also avoids the costs of international transport, taxes and customs duties that importing for resale entails. Entire sections of the commercial activities of French companies, especially luxury products, are based on an export activity from France, import and sale in China. Their presence in China allows them to better manage a network of online and offline Chinese distributors or agents.
Often, these companies are not directly involved in production on Chinese soil. However, foreign car manufacturers (such as Audi, BMW, or Mercedes Benz) offer two ranges of vehicles: local productions for standard models and imported models, more luxurious and more expensive. There are also examples of Western brands of leather goods or cosmetics.
The ones that have taken the step are also foreign companies that have developed a good customer base in China and a promising turnover based on an import activity. More and more of them are setting up a local production center. It can take the form of an assembly workshop that incorporates imported and Chinese components. Or it can be a production center that integrates a majority or all of Chinese components to complete a range of imported products. In this case, opening a factory in China becomes a reason for competitiveness and sustainability of development. For these companies, the competition in China comes from known foreign competitors, installed locally but also from Chinese industrialists having acquired a know-how, reputation and recognized quality.
How to set up a factory in China: with or without a local partner?
An increasing number of small and medium-sized companies are setting up in order to become or remain competitive and sell their products locally.
A persistent idea remains that it is still compulsory to associate with a local partner to set up a company in China. This is no longer the case, except in sectors considered strategic. Before 2000, most foreign companies had to set up a joint venture (JV) with a Chinese partner. At that time, regulations did not allow them to operate an industrial or commercial activity alone. Among the first investors were Western car manufacturers who set up JVs with Chinese car manufacturers. To this day, the automobile production sector remains accessible only to Sino-foreign joint ventures. On the other hand, for a majority of other sectors, it has been allowed for more than 15 years to set up a 100% owned foreign company (WOFE or WFOE) in China.
The regulations governing foreign investment were set out in a foreign investment catalog which, since 2018, has been replaced by a "negative list". In principle, if the targeted business sector is not included in this list, the investment is allowed as a 100% foreign-owned company or subsidiary. You can check here the updated negative list of foreign investments valid in 2022.
For quick access to local expertise, manpower, customers and distribution channels, entrepreneurs consider a joint venture with a Chinese partner. Often, this is done with a partner with whom they are already in business and in a relationship of trust. A well-chosen joint venture partner gives them what they need to get started. In addition, it saves time and expense to start operations ex-nihilo.
To date, mainly for one-off project activities (construction, infrastructure, nuclear), large foreign companies continue to form Sino-foreign JVs. They are more precisely "Cooperative Joint-Ventures" (CJV), with Chinese partners who are state-owned companies.
When the sector allows it, the installation of a WOFE type subsidiary is preferred by French companies to start a production, assembly or manufacturing activity.
We observe that these production units not only satisfy the needs of their parent company for markets outside China, but also have an increasing tendency to successfully develop sales on Chinese territory.
A fully foreign owned company (WFOE) has full management independence from its Chinese partners. It is allowed to sell directly products made in China or imported. Their dividends can be converted into USD or EUR and repatriated to the headquarters, to the accounts of the parent company. Companies wishing to keep full control over their operations and who need the highest level of protection of intellectual property rights (patents, trademarks) should consider this legal form.
Where should a production or assembly center be located?
In a country which represents geographically 10 to 15 times the size of most european countries, where to settle to produce in China? From the outset, the criterion of proximity to suppliers and subcontractors or proximity to customers allows an initial targeting of potential regions, provinces or cities. Because of an initial vocation to produce locally in order to export, managers tend to choose coastal regions located near international ports and airports to set up their production subsidiary. The cost of logistics approach has a significant impact on the time and cost of export delivery.
| Factory buildings under construction in a Chinese industrial zone in 2019 |
Historically, the regions hosting foreign industrial investment are the coastal provinces of:
- Guangdong (Canton, Shenzhen, Dongguan, Zhongshan, Zhuhai)
- Fujian (Xiamen, Fuzhou)
- the triangle Shanghai + Zhejiang (Ningbo, Hangzhou, Yiwu) + Jiangsu (Suzhou, Taicang, Kunshan)
- and the northern provinces of Shandong (Qingdao, Jinan), de Tianjin et du Liaoning (Dalian).
More recently, the central megalopolises of Chongqing and Chengdu, located more than 1000km from an ocean port, have developed high-tech service and production activities in the aeronautics industry, for example. High value-added products can be exported either by air (direct flights to Europe) or by the gigantic rail network that now links these regions to Europe in 2 to 3 weeks.
Since 2005, we notice that many French and German companies have set up a production base in China in order to manufacture, deliver and invoice - in Chinese currency - the Chinese subsidiaries of their global customers. Many cases in the aerospace, medical, chemical and automotive sectors. In this case, the choice of location for a production unit is dictated by the location suggested by the main client. These new companies are often subcontractors of large Western industrial groups. Often, these large companies were able to provide visibility, or even guarantees, on a minimum business volume. This was essential for subcontractors setting up their first international production subsidiary in China. It also enabled them to obtain aid and financing from public authorities (via Business France or the BPI) and investment banks. By analogy, large foreign banks have been established in China for 20 or 30 years already to follow their largest foreign industrial clients.
Moving a factory from an industrial park to another in China
Many foreign industrial companies have settled 10 or 15 years ago in industrial parks adjacent to large urban centers. We can mention Beijing, Shanghai, Qingdao, Tianjin or Guangzhou. These companies have established a stable production activity. Nevertheless, they are sometimes forced to consider relocating to another industrial zone. What is the reason for this?
Evolution of urban planning in China: The very large municipalities (10 to 20 million inhabitants) continue to develop their urban planning and continue to build highways, residential and office buildings. Some industrial areas have either become too expensive (rent, consumables, salaries) or are announced to disappear in several years. As a result, tenants have to consider relocating their production facilities to another area of their province or to an adjoining province. The consequences have an impact on the stability of the activity, on the personnel and sometimes on the supply or distribution chain. There are other more traditional reasons for companies to move and relocate their production facilities in China, from one industrial park to another. Here are some of them hereafter.
To increase production capacity: need to increase the production, assembly or installation area when the business park in which the company is located does not allow the extension of industrial buildings. It is frequent that no suitable premises are available for purchase or rent. For additional temporary or permanent storage needs, a separate room from the main production site can also be considered.
Compliance with new safety and environmental guidelines
: Industrial or assembly activity involves processes that are becoming highly controlled, especially from the point of view of health and safety regulations (FDA and NMPA)
and environmental protection. They have become a major consideration pointed out by Beijing. Since 2017, in the Suzhou region of Jiangsu province, 60km from Shanghai, all printing ink production companies have had to relocate because local regulations no longer allow the operation of activities considered too polluting. In the Ningbo region, chromium plating and coating operations were affected.
Reducing structural costs and fixed costs : the level of increase in labor costs and the cost of industrial land have also prompted companies to leave industrial zones that are too close to large urban centers. It should be remembered that in China minimum wage levels are set at the provincial level and not at the national level. Outside of the minimum wage thresholds legally in force, it is often the shortage of labor that pushes wages up, beyond the legal minimum. Why? workers simply sell themselves to the highest bidding employers. For example, Guangdong province and its large industrial areas (Shenzhen, Dongguan, Foshan, Shunde, Zhongshan) have historically lacked a labor force. Many migrant workers come from the central provinces of the country. When they can, they return to their home provinces.
Securing and better controlling procurement costs
: the Covid-19 context of 2020 and 2021 has weakened the quality and procurement costs of many importers. China manufacturers
are no longer able to deliver on time or at stable or predictable prices. Or local suppliers are going out of business or going bankrupt. This situation also affects consumer products imported by major trading companies in France. Some of these companies have decided to set up their own assembly or textile manufacturing facilities in China.
In which industrial zone or business park should I set up a Chinese factory?
There are several categories of industrial zones in China which can be classified as follows:
Industrial zones with a national status: these are large industrial parks that have quality infrastructures. Integrated administrations, on-site customs offices or bonded areas, offices for the recruitment of workers and technicians, integrated or adjoining residential and commercial areas. These zones build factory premises ready for rent or prepare land for large-scale buildings (several tens of thousands of square meters per building).
Industrial zones with provincial status: under the direct supervision of a province, these areas also have good quality infrastructures. They are also designed to accommodate Chinese and foreign SMIs with more modest infrastructure needs (usually 1000m2 to 10,000m2). For a simple assembly workshop, it is difficult to find areas smaller than 1,000m2
Industrial zones with a local status: under the direct supervision of a municipality. These areas are often smaller in size and have fewer integrated services. They are also often less demanding in terms of investment conditions, especially in terms of statistical ratios (capital / area) and fiscal profitability (annual taxes / occupied area). In these areas, finding premises to rent for very small areas of only a few hundred square meters can also be difficult.
Among these zones, we can also mention the Special Economic Zones (SEZ):
Free Trade Zones (FTZ): Due to the particularities of their Customs and Tax status, they allow companies registered within to import products duty and tax free. Duties are payable only if the finished or assembled products enter China outside the zone. FTZs also welcome companies that do not have industrial activities. For example: forwarding agents, transport companies, warehousing and storage companies, e-commerce platforms. The Shanghai FTZ is the most developed. It covers an area of 240 km2 and hosts industrial and trading companies. Since 2013, it includes the Waigaoqiao, YangShan (which hosts the new deepwater port), Pudong airport, and a portion of the Lujiazhui financial zone. Learn more about Free Trade Zones in China.
High-Tech Zones: by nature reserved for research and development (R&D) activities, they also host companies with industrial production or assembly activities. They prefer to host activities that are "clean" in terms of environmental regulations. These zones reflect the Chinese government's policy of migrating the country from being a world factory to being a center of R&D and innovation. The most technological and innovative activities benefit from support, preferential tax measures and even subsidies, to be negotiated.
The search for a good location in an industrial zone is conditional on the completion of the general urban plans for the factory sites. The local government or the operator of an industrial park will need from you a plan for the construction or development of the production facility. They will also require a presentation of the target business process before confirming the feasibility of the desired operations.
| Interior of a new factory building for rent in a Chinese industrial park |
Environmental and safety regulations for industrial activities
Globally, the evolution of Chinese environmental protection regulations means that more and more industrial zones are reluctant to host or continue to host industrial production, assembly or textile manufacturing activities that have highly polluting emissions. Each new company that sets up in an industrial investment park must fill in an environmental impact report. This report must describe the processes of the target activity in great detail. The content of the report is binding as it is subject to review for approval by the Chinese regulatory authorities.
The forecast of a yearly turnover and taxes to be evaluated
In addition to the environmental aspects, during meetings with the Chinese management of the industrial zones, it is also necessary to present the desired activity in a broader way. That is to say: the production process, the resources (machines, men), the means (investment, capital and release plan), the objectives of activity in sales volume and turnover.
This will lead the management of an industrial park to deduct or ask you to estimate annual tax amounts. These taxes include corporate income tax, VAT, customs duties, etc. Tax performance ratios in relation to the industrial area operated are at the discretion of each zone.
In most countries, keeping jobs and creating employment opportunities are major criteria that are put forward to assess and approve new investment projects. In China, taxes, statistics (injected capital), security and environmental criteria are the most important.
Budget: which cost items to set up a factory in China
For factory premises to be rented: in order to prepare a realistic provisional budget of the installation costs, budget in your business plan realistic costs:
- Monthly rent + deposit to be paid to the factory owner (the area itself or a private owner)
- security and management costs of the site
- consumables related to the production activity (water, electricity, steam, gas)
- waste disposal or recycling costs
- sometimes, the costs of installing power cables to a new building
- office space within the factory building
- If applicable, the need for a test room, clean room, temperature controlled room, EMC room, etc.
- depending on the layout of the room, the need to add fire protection facilities complementary to those that brought the empty room up to standard
- Company registration fees and the cost of obtaining all required licenses and permits
- Legal fees for reviewing the facility and plant lease agreements.
For industrial land purchased by foreign investors: the cost of acquiring the land and associated taxes, the cost of construction and qualification and upgrading of buildings and equipment.
All these aspects must be part of the initial negotiations with the target area(s).
Our advice for setting up a production center or assembly workshop
Identify one or several regions of establishment coherent with your project and obtain advanced comparisons of availability for renting suitable factory premises or, according to the preference of the managers, industrial land to be bought and built.
Also conduct comparisons on the investment conditions in several industrial zones in order to identify the possibilities offered for the infrastructures around the site, the required implantation conditions. This concerns tax and customs regimes, possible advantages, availability of qualified manpower for your needs, living conditions if you plan to send expatriates.
The availability of industrial premises
within 100km of major Chinese ports is accompanied by highly variable investment conditions. They take into account the premises and land still available, the reputation of the investor and the size of the project. Several weeks or months of discussions and negotiations are required to submit and revise a realistic business plan that is acceptable to the authorities in exchange for hard-negotiated preferential investment conditions.
Setting up your production or assembly center in China? Our core business is to assist Western companies in the set-up, registration and licensing of commercial and industrial enterprises in China. As an agency approved by the Chinese Administration of Commerce and Industry, we submit directly to the authorities all the registration files and license applications of our clients. Preparation of files & business plans and presentation to the Chinese authorities, comparison of industrial parks, search for factory buildings to rent or to build. Follow-up of discussions and final negotiations until installation and obtaining of licenses and permits.