Foreign entrepreneurs flying solo in China
A local partner is no longer required for many businesses
Joanne Lee-Young
Vancouver Sun
April 18, 2005
When Harry Yu set out to sell Bikram and Ashtanga yoga to yuppies in Shanghai, he followed all the usual steps that foreigners have traditionally taken when starting a business in China, except one: finding a local business partner.
On his own, Yu scoured the city for a studio location, navigating a maze of zoning regulations to finally nail down a beautiful, colonial-style home in the city's historic French concession area where he could install showers. He then hired staff and renovated the interior to look like a New York-style loft.
"Doing business there is easier now," says Yu, a Hong Kong-born, ex-investment banker who went to high school on the North Shore, studied business at Ryerson in Toronto and did his MBA at the University of Western Ontario.
Increasingly, entrepreneurs such as Yu are skipping what was a required cornerstone, but often just a big headache, to doing business in China. Instead of spending time and money to identify contacts and nurture business relationships with Chinese companies, they are flying solo into the market. Forgoing "joint-venture" partners, they are establishing so-called wholly owned foreign enterprises (WOFEs) or more colloquially, "woofies."
Woofies "have become the investment vehicle of choice for the international investor in China ... as they negate the need for a Chinese partner," according to Beijing-based accountancy firm Dezan Shira.
Partly, these woofies have emerged following China's joining of the World Trade Organization. Official policy measures to open the market happened in tandem with a maturing business environment, says Bruce McLaughlin of Hong Kong-based Sinogie Consulting Ltd., which helps companies assess China business plans.
The old joint venture still exists. And in certain industries that involve significant government planning, such as telecom, they remain a very strict requirement. "Joint-venture partnerships generally are only used now for special circumstances. For example, if the Chinese partner has very good distribution channels or owns buildings or has a huge staff that you need," says Sabrina Zhang, a Beijing-based regional partner at Dezan Shira.
Still, the rise of woofies could be an important milestone. China's large and low-cost market has promised riches since it was opened to foreign interests in the late 1970s. Unfortunately, the track record of overseas companies making money there is blighted with many cases of bungled and bitterly contested joint-venture partnerships. Individual entrepreneurs and weighty corporations alike have been duped by everything from phantom partners who turn out not to exist or not to have certain connections or assets, to very real partners who use local know-how not to pave the way, but to strongarm deals and siphon off profits, according to McLaughlin.
Technically, overseas interests can't register as wholly owned foreign companies until 2006. In reality, however, the government is already allowing companies to function like this ahead of full liberalization of the rules next year.
This advanced green light has led to a mini-boom of braver, more nimble and experimental overseas entrepreneurs in China.
They are thriving, but the looser leash isn't without some of the same old challenges of trying to figure out how to do business locally.
First, says Yu, it was difficult to sign up real estate. "I thought, I have capital and a business plan. How difficult can it be to get some real estate agents and start renovations? It took me nine months and a lot of formal and informal channels."
Another problem is copycats. Local investors, flush with private capital, don't have many channels because they are restricted to the local stock market and limited other options. So they like to back small businesses.
"Many aren't too innovative; they just imitate and pour cash," says Yu.
Competing with multinationals who pay big salaries for skilled staff trained in Western-style service and management is also tough. "We are going after the same staff that hotels and spas want," says Yu.
Still, the 35-year-old entrepreneur isn't looking back. He chose Shanghai because, as China's most international city, it "embraces Western ideas quickly."
In July, his Y+ Yoga Centre will open a second studio in Shanghai. This one will be 10,000 square feet, three times the size of his current one.
The building will include retail space, a Thai massage outlet and a health deli.
© The Vancouver Sun 2005
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