The logistics business is a global affair, as cargo sources come from all around the world, China as the world’s largest exporter is an appealing prospect for foreign logistics service providers. Starting a logistics company in China is a long process, but so is the process in other developing or developed nations. Hence, we believe that starting a logistics company in China is a worthwhile endeavor. Here in this article, we will cover the basics to consider when venturing into China, but ultimately, the key to a profitable enterprise lies with you. We hope that this general guide will give you the right tools to start.
Should You Even Start a Logistics Company in China?
Perhaps you have already made up your mind to start a logistics company in China, but for those who need further convincing, we have found out 2 key information that may sway you to consider starting that business.
1. Ease of Business Operation
Apart from the obvious language and cultural differences that may seem intimidating, we find that many people consider that opening a business in China would have many barriers. It’s worth pointing out that The Republic of China is a “Socialist Consultative Democracy”. Therefore, it is not accurate to classify China into the false dichotomy of either a democratic country or a socialist country. The truth is, the political structure of China lies in between that spectrum.
The data presented by the Organization of Economic Co-operation and Development (OECD) persuades us that China is, quite receiving towards foreign investors. FYI, The OECD Service Trade Restrictive Index (STRI) measures the extent of trade restrictiveness of the service sectors.
These are the variables that is tabulated by the OECD STRI Index: –
- Restrictions of Foreign Entry
- Restrictions of movement of people
- Other discriminatory measures
- Barriers to Competition
- Regulatory Transparency
Looking at the depiction above, it shows that among the transport and distributor supply chain sectors, courier services has the highest administrative barriers to entry.
According to the OECD’s STRI index, from the scale of 0 to 1, with 0 being the least restrictive and 1 being the most restrictive, the Logistics and Cargo Handling service sector of China records at 0.39. When compared to other country’s STRI index, we notice that a figure of 0.39 is akin to a developing country’s STRI Index.
Here is a graph showing various country’s STRI index: –
What a foreign business entrepreneur such as yourself should contemplate is that: –
if the relative ease of doing business is no different from any other developing nations such as India, Indonesia, Thailand or Malaysia, why wouldn’t you start a company in the world’s most industrious country?
With that being said, we argue that starting a business in China is relatively a worthwhile effort.
2. China Total Value of Export
It is no longer a secret that China’s total value of export is the highest in the world. In February 2020, during the dawn of the COVID-19 pandemic, the total value of export is reported at 292 billion USD. In comparison, the USA has a reported 136 billion USD in total exported value, which is roughly half of China’s total export value.
Merely looking at the figures of the total value of export only shows part of the full story. If we factor in the 700,000 registered logistics company in China, we reach a figure of roughly 417,000 USD worth of cargo handled per logistics company per month.
Another perspective that is worth a look is that China’s logistics cost accounts for 14.6 percent of the GDP. Once we punched the numbers, in 2017, the average revenue per logistics company is USD 2.5 million per year (China’s GDP in 2017 is USD 12.143 trillion). Of course, this is a gross estimation of how much revenue a logistics company can make in China, as there are many different types of logistics companies and service providers that have different revenue potentials.
Nevertheless, knowing that the rough estimate of USD 2.5 million in revenue per year for a logistics company in China is a decent enough incentive to venture into starting a small logistics business in China.
Which Area of China Should You Start?
A study by PWC gives us an in-depth look at where the logistics companies in China are clustered. Although the survey study is dated in 2008, we believe that this information is still useful today. Since by and large, logistics companies generally are either located near the seaports or inland waterways, or near industrial manufacturing areas.
These locations are grounded by the fact that seaports and inland waterways do not change over time due to geographical restrictions, and industrial manufacturing companies tend to populate locations that are strategically close to transportation facilities to reduce the logistics costs.
PWC studies show that the logistics companies mainly are situated in China’s eastern coastal areas around the Yangtze River Delta and Shanghai. Apart from that, locations in Northeastern China such as Beijing and Changchun also house many logistics companies, although the companies clustered in the northeastern side are relatively smaller.
The third area of interest lies south of China, where Shenzhen, Hong Kong, and Xiamen are the primary seaports that service that area.
Of the world’s top 20 seaports in terms of container throughput, 9 of the ports are ports of China. As an individual looking into the viability of starting a logistics company in China, it is wise to operate your business close to those ports.
Busiest Ports in China: –
- Hong Kong
One caveat however that has to be mentioned is that a geographical area with a higher revenue potential may pose any benefits: –
- Relative ease to hire experienced personnel
- Efficient port operation
- Huge market potential
But those places mentioned are highly competitive, and the business operating cost is, on average, relatively higher than less competitive areas.
Before starting a business, the best way to canvass the business potential in China is to personally visit the area of interest. No amount of research is enough to make an informed decision of starting a logistics business in a foreign country.
1. Process of starting a company in China
Before getting into details about the process of setting up a business in China, we want to point out that when we were surveying logistics entrepreneurs that actually started a business in China, we noticed that the start-up procedures are constantly changing.
The changes in the start-up processes may not skew far off from the rough guidelines per se, but the changes could discourage foreign investors altogether. Remember, China is a Socialist Consultative Democracy, what this means is that government policy changes may happen more quickly when compared to changes made in a democratic system.
When we were interviewing foreign business entrepreneurs in China, they did mention that some changes can be within 3 months. Policies such as tax incentives, land incentives, foreign tax incentives, and investment incentives are policies that the People’s Republic of China may introduce or cease.
There are several choices of business setups a foreign investor looking to start a logistics company can choose from: –
- Joint Venture Enterprise中外合资企业
- Wholly Foreign Owned Enterprise外商独资企业
- Foreign Invested Limited Company (Share Limited) 外商投资股份有限公司
There are other business setups to choose from, such as: –
- Foreign Cooperative Enterprise
- Representative Office
The way these two businesses are setup may not appeal to an enterprise of a small to medium scale.
For a foreign cooperative enterprise, the conditions of the setup are discussed before the setup. Conditions such as risk and loss split, management and operation duties, and ownerships of the asset, all have to be formalized beforehand. The reason for such a detailed arrangement is that the foreign investors are not allowed to have share-ownership in the business, moreover, the nature of the business and the industry sector are all predetermined by the Chinese authority.
The Representative Office setup does not allow any revenue generated by that company. The setup is purely to provide a presence for foreign companies in China by doing marketing research and promotions, among other things. Fundamentally speaking, representative offices cannot issue tax invoices for revenue generated in China.
Joint Venture Enterprises is set up by the combined efforts of foreign and local investors. Its liability for business operation is limited by shares in the company. Similar to most countries, foreign investors take the position of a minority shareholder whereas the local investors are required to be the majority shareholder. Other aspects of business operation are similar to any limited liability enterprises, where the company is required to pay tax and maintain accounting reports for audit.
Wholly Foreign Own Enterprise, by contrast, is set up entirely by the foreign investor, with no local interests involved. It is also a share limited enterprise where the company operates as a sperate entity from the shareowners.
The catch is, however, that wholly foreign-owned enterprise has a smaller playing field in which foreign investors can operate in. Meaning to say, a wholly foreign-owned enterprise may only operate in selected industry sectors approved by the Chinese authority.
A joint venture enterprise has lower barriers to setup when compared to a wholly foreign-owned enterprise. Adding to the fact that a joint venture enterprise has a wider choice of industry to choose from, the easiest way to put a foot in the Chinese market is via a joint venture enterprise.
Unless you have secure trade receivables in line in China, where profitability is guaranteed, and you have the patience in the administrative burden of a wholly foreign-owned enterprise, we think that a joint venture enterprise is the best way to start.
2. Requirements for an enterprise set up in China
Pre-requisites for registration of business: –
- Personal Bank Account
- Local landline
- Proof of address of business
From our interviews, the registration of business is not a straightforward affair. The pre-requisites for business registrations are more cumbersome. Setting up a personal bank account has a list of requirements in of itself, so do the applying of landlines and leasing an office space.
Registration requirements: –
- Registration application form for companies;
- Branch company’s application for joining the group;
- Articles of association of the enterprise group;
- Certificate of being qualified as a legal person of the new member of the enterprise group;
- Parent company’s shareholding certificate or investment certificate issued by the member enterprise of the group;
- Approval document issued by the relevant authority;
- Other relevant documents.
The approval process will take 15 days to 6 weeks. Once approved, there will be a company stamp sent to your business residence. To our knowledge, all company tax invoices have to be stamped to be a legal document.
According to interviews with business owners who have successfully set up an entity in China, they did stress that the administrative process may change from time to time, and it is best to engage a consultant that has experience in business administration to take care of it for you.
3. NVOCC License in China
NVOCC licenses are important for logistics businesses that require issuing a house bill of lading. Since operating as a freight forwarder/NVOCC has the lowest barriers to entry, it is fair to say that foreign investors seeking to set up shop in China are predominantly freight forwarders.
The Chinese authorities has done a great job in ensuring that any freight forwarders issuing a house bill of lading, will have the necessary financial backings to fund house bill of lading’s risks and responsibilities.
Additional Reading: What is a House Bill of Lading?
A house bill of lading is a contract of carriage in which the issuer undertakes the risks and responsibilities of shipping the cargo to the agreed destination. More importantly, the house bill of lading carries a liability clause which the issuers undertake when unforeseen damages or loss that occurred during transit.
To prevent irresponsible issues of house bill of lading, for the additional profit from the issue, the Chinese authorities made it a requirement that issuers of house bill of lading, or an NVOCC has to possess FMC Bond, to the tune of USD 125,000 or RMB 800,000.
There is a way to circumvent this requirement, since the NVOCC license is only required for an issue of house bill of lading, as a logistics consultant, you can just opt not to issue a house bill of lading.
A contract of carriage made by VOCC (Vehicle Operated Common Carriers) or an original bill of lading is acceptable by exporters and importers of the trade.
Unless there are any specific requirements by the importer such as a Letter of Credit requirement, cargo owners, in our experience, prefer an original bill of lading as opposed to a house bill of lading.
The reason is simple, the cargo owner perceives that a large enterprise operating its asset carriers are generally more trustworthy than third party logistics providers (3PLs) in honoring the terms of the contract.
Of course, once your business operation has reached a global scale in terms of size and profitability, applying for an NVOCC license is much more rational as the 3PL operator has much more control over the conditions of the contract.
The good news is, reports by the American Shipper by Carlo Rodriguez and Zheng Xie mentioned that U.S. NVOCCs no longer are required to adhere to the required FMC Bond and application process.
Nevertheless, polices are fluid and changes from time to time, especially in China. Therefore, we believe that before issuing a House Bill of Lading, it is best to confer with local China ministry of transport for the most recent policy in the NVOCC license. The penalties for non-compliance can be severe, and as business owners, it is best to avoid them.
Other Prerequisite to Start a Logistics Company in China
This goes without saying, even with the best market conditions, it does not equate to having the most profitable business.
Arguably, what we have discussed above are only 10% of what makes a business successful, in fact, the most important factor to master before starting a logistics business in China are business acumen, knowledge and experience.
We judge that the readers of this blog post are well-informed, experienced logistics service providers, or entrepreneurs who has the guts and gumption to venture into the logistics business in China.
Therefore, we believe that it is a sore insult to you if we were to list down any other factors to consider before starting a business in China, but just to juggle your mind, here are a few key factors to contemplate: –
- Having a reliable business partner or vendor
- Firm grasp of local tradition and customs
- Vast knowledge of the logistics niche you serve
- Master in business positioning in light of your competitors