China is the land of opportunity for many international retailers. Starting a retail business in China requires attention to detail, especially to the legal ones. “When it comes to legal challenges, an international company should be able to avoid big surprises”, says Maarten Roos, Founder and Principal of R&P China Lawyers. There are at least 8 challenges, Roos and his colleagues at the firm insist.
Challenge 1: Corporate structuring - In order to operate in China a firm will need to incorporate a legal entity. If it is to be a wholly-owned subsidiary of a foreign entity, a ‘wholly foreign-owned enterprise’, or WFOE, may be appropriate. While a liberalisation of the rules and steps in establishing a WFOE has taken place over the past few years, it may still take 4-6 months for the subsidiary to be fully operational. One noteworthy point is that the office lease will need to be signed before the company can be formally established. Important: think about your business scope, selling certain products may require special licences.
The company name will be in Chinese, and should consist of a location indicator, an industry indicator, and the trade name. For retailers in particular, a good Chinese trade name (and its registration as a trademark, see below) is crucial, but the location and industry indicators can also contribute to the success of the business.
Challenge 2: Opening branches - While technically the first branch can be opened at the location of the company, it is much more common to keep the company’s address as office and establish the first store at a retail location elsewhere. Subsequent stores will normally require the registration of separate branches. There is no limit to the number of branches that a single company can have.
The store can only open for business when all licenses, permits and approvals are in place. Be aware that, for stores selling food and certain other products, it will take time to obtain relevant licenses so professional expertise and guidance is crucial.
Challenge 3: Lease Contracts - In China just as it is the case elsewhere, picking a good location is vital. This is especially important for retailers who are relatively new to China and are unknown to the average Chinese consumer. “It is never advisable to directly sign the landlord’s version of a lease contract – at least some level of negotiations is recommended. An analysis of the legal risks should be made to understand your legal position, especially when it comes to crucial clauses such as term, termination and renewal, competition and confidentiality”, says Simon Robertson, Director of R&P.
Challenge 4: Ensuring Legal Compliance - For retailers, compliance with the laws, regulations and rules applicable in China is especially important given that China has communicated a clear focus on health and safety issues that may impact consumers. As rules and standards that apply in China are often unique to the market and may be different from elsewhere it is vital that firms obtain professional advice with regards to compliance.
Challenge 5: Product Quality & Local Standards - China has established extensive standards for all kinds of consumer products, not only for food but also for clothing, electronics etc., and these standards may be stricter than in other jurisdictions. For food products, these standards may extend to store organization and supplier management systems. Failure to meet legal standards may lead to large financial penalties and even (in the most serious circumstances) criminal liabilities.
Challenge 6: Advertising, pricing, labelling – A special compliance risk relates to advertisement and pricing; areas that are regulated, include discounting and minimum pricing. Violations of these rules are often used by professional buyers to extort money from retailers and producers. In the case of complaints, companies must balance between giving in too easily (encouraging more professional buyers to target it), and the cost of defending claims and even lawsuits, whether or not of a frivolous nature.
Correct labelling is crucial. Labels should state expiration dates, the composition and type of ingredients/materials. Violations may result in fines and potential lawsuits by professional buyers.
Challenge 7: Staff - Chinese employment laws are strict and tend towards protecting the employee. Lawful termination of employees is challenging. A retailer who hires employees should pay special attention to whether employees will be subject to standard working hours, or whether flexible working hours or comprehensive working hours should apply. These are subject to conditions and require special approval.
Challenge 8: Corporate governance and other matters - There are other matters to consider when establishing an operation in China, such as corporate governance, the level of registered capital, obtaining Branch Business Licences and ensuring Data Privacy for consumers/buyers. One particularly important issue to take care of is the protection of intellectual property such as trademarks. This is of the utmost importance to retailers. Robin Tabbers, Principal of R&P China Lawyers, advises: “Reviewing the trademark portfolio for China and making sure that all relevant brand names are protected in the correct classes and subclasses is therefore an important part of a retailer’s due diligence when operating in China.”