A faster path to getting started in China
To employ people to run your business, traditionally, you require a company to be operational in country, and to meet HR, tax and other compliance regulations. However, setting up a company in China generally requires months to complete. During that period, the intended company is not operational and the venture may require tens of thousands of dollars in running costs and investment capital before the investing company understands the business, financial, consumer, or local culture landscape in the foreign market.
Such a fixed market entry strategy might result in the following mistakes:
- Choosing the wrong pricing model;
- Launching the wrong initial service line or product;
- Setting up in the wrong location, pursuing a misguided business model; or
- Selecting the wrong business partners or suppliers to work with.
It is easy to make avoidable mistakes in the absence of on-the-ground information and practical experience in the market. Yet reversing strategies when investments have been made is more costly, time-consuming, and can even adversely affect the business’ reputation.
Given these considerations, an increasing number of firms today may find it better to first test out or target a smaller or shorter-term presence in China.
A lesser-known model for businesses to hedge against the risks of market entry is available across several Asian markets.
Global staffing solutions and PEO: What is it and how does it work?
Global Staffing Solutions (GSS) is a market entry strategy and suite of services that can make it easier for businesses to operate internationally. Key within the GSS suite, is Professional Employer Organization ("PEO") service.
How can PEO in China help?
PEO services enable a company to put its feet on the ground without having to physically establish a local presence. The service is provided in collaboration with a third-party PEO service provider, who enters into separate contracts with both the foreign company and the foreign employee.
This results in a local firm taking on the burden of day-to-day employee HR management, payroll, and tax compliance, freeing up your critical resources so that you, as an international firm, can focus on your business and explore your options in a new or unfamiliar market.
This means that, while the overseas company and its outsourced hires will maintain normal day-to-day control and working employee relationships, the local service provider in China will handle all the risk mitigation, compliance, payroll, and benefits on the ground.
Advantages of adopting a global staffing solutions strategy
Foreign companies can benefit from the GSS service by hiring full-time employees to work in overseas markets while remaining compliant with local laws, without the time and investment required to set up and operate an overseas legal entity.
It can specifically provide the following advantages to businesses.
Offshore recruitment before setting up an entity
Before establishing an entity in the target country, GSS allows foreign companies to hire full-time local employees. While the employees are paid by a third-party local company, they actually work for the foreign company. Local employees can conduct preliminary business research for the foreign company and test the waters in local markets in this manner.
Employing staff at local labor costs
Through GSS, the foreign company can easily hire employees at reasonable local wages, which avoid unnecessary costs due to lack of knowledge of local wage standards and wrong estimation of manpower budget.
It also gives the opportunity to the foreign investor to test the local person and assess suitability for a hire under a local permanent structure or, determine what additional skillset the “first” employee of the company should possess to deliver results in the country.
Outsourced employee management
Due to the labor relationship between the employees and local provider, the HR team can assist the foreign employer with its salary calculations, social insurance contributions, individual income tax (IIT) declarations, and reimbursements for their local employees. The GSS service frees the foreign company from day-to-day HR and administration, so that it can concentrate on its business activities.
Hiring foreign employees legally and in compliance
Quite a few foreigners and local staff continue to be hired “off the books” in China and are sent money from the overseas company directly into their local Chinese bank account. This is risky from a legal compliance perspective as there is no local social contribution or taxes paid. Moreover, it also does not provide the overseas investor with any leverage or legal control over such asset on the ground.
Under a GSS strategy, the local provider can ensure that the foreign employee remains compliant within China’s law and regulations, and proactively assist with the foreign employee’s visa and work permit application, setting up a bank account, as well as their IIT verification in China.
This has the added benefit of mitigating many of the legal and practical problems that arise when a payment is made into an employee’s overseas private bank account. With a GSS structure in place, the foreign employee can instead receive money directly from the local Chinese company to their local bank account in China.
Getting legal support on labor contract issues
Finally, the legal team in China can also assist with the establishment and determination of labor contracts with employees, according to the local labor laws.
Flexibility in the working relationship
Foreign companies are able to terminate the local working relationship at limited cost if there is a mismatch in skillsets or expectation. In the same vein, they can easily scale-up their staffing solution if the working relationship is proven successful.
Case study: Overseas training company enters China
Challenge: Expansion in China with limited knowledge of market
Entering an unfamiliar market, client A was hesitant to go through the official incorporation process without first testing the market out for itself. Motivated by the size of the education industry and its high growth potential within China, Company A – a renowned training company itself— wished to enter the market quickly.
Solution: Choosing Shenzhen as a point of entry, followed by GSS for market entry assistance
Leveraging Shenzhen’s flexible policies and its position as a frontier city in China’s reform and opening up, Client A chooses Shenzhen as it’s point of entry after initial assessment of the market. Shenzhen has a large number of well-known Chinese enterprises, and many company headquarters have chosen to set up there. Client A chooses Global Staffing Solution (GSS) for their pilot entry as a recommendation by a local professional service advisor to further determine market suitability and formulate an appropriate entry strategy.
Impact: First company set-up in eight months
Client A set up its first company in Shenzhen in eight months after determining market suitability. GSS helped Company A in establishing a formal presence by providing an effective market entry strategy and gaining first-hand knowledge of the local business environment and culture. Company A was able to work out of a local firm, meet Chinese clients and partners, and gradually expand its market influence in China.
Versatile applications for a global staffing solutions model in your business
Traditionally, a successful market entry strategy requires consideration to timing, scale relative to competition, and the ability to leverage complementary assets. However, in this new age of doing business, operational agility has now emerged as a key determinant of success.
In this way, businesses should be prepared to rapidly respond and adapt to changes in the market and environment in both productive and cost-effective ways. In terms of designing a market-entry strategy, this indicates a shifting focus to different markets, quickly and with minimal costs and risks.
More broadly, GSS provides an effective market entry strategy for companies looking to expand into fast-developing countries within Asia, such as Vietnam, Singapore, and Indonesia.
Investors can use this in a new market to gain first-hand knowledge of the local business environment and culture – to determine market suitability and formulate an appropriate entry strategy.
Uncertainty is an inevitable factor of doing business in any economic climate. Yet, recent black swan events like the COVID-19 pandemic illustrates is that, now more than ever, businesses need to plan for the unexpected – disrupted global supply chains, destabilized economies, and / or mass lay-offs.
Businesses should not only be familiar with the market they wish to enter into, but also keep an eye out on competing markets. Besides, they must be willing to test the market for themselves before making significant investments as they may not have the time or capital to engineer wholescale transformations to survive, which the ongoing pandemic has necessitated.