Managing a business in China is like managing JELLO on a hot summer day. The rules are constantly changing, the ethics are fluid, and “getting your hands” around the best path to success is difficult.
Chinese enterprises that are owned by foreigners or have foreign participation are described as Foreign-Invested Enterprises (FIEs). FIEs can take the form of Representative Offices (RO), Wholly Foreign Owed Enterprises (WFOE) or Joint Ventures (JV). Each of these entities has specific capitalization, funding, profit remission, applicable labor laws, operating practices, and corporate tax obligations defined under Chinese law.
In order to register your business you will need a local attorney, a registration agent, an accounting firm, and a business consultant experienced in creating business entities in your target China industry sector. The business consultant should help you in developing a China entry strategy, sourcing and managing support resources, handling logistics, purchasing office equipment, furniture, and if necessary, contracting for office renovation. In parallel with your company registration, you should be making arrangements for your facility, business equipment, and the required external services necessary to run your business.
As an expatriate manager of a foreign operation in China, you will find the success of your operation depends on your sales manager and your chief financial officer (CFO). Your CFO should be the first position that is filled in your operation. You and the CFO should set up the finance and accounting systems (F&A systems) necessary to operate your operation. These F & A systems will be your primary management tools for your operation. Foreign Invested Firms operating in China will have to maintain accounts for the Chinese government, and assuming these firms our multinational companies, for their home country. Company accounting practices, country standards, and financial IT systems will all determine this process.
In 1980 China accepted the Generally Accepted Accounting Principles (GAAP). In January 1, 1997 The China National Accounting Institute (CAS) was founded .On February 5, 2006 China’s Ministry of Finance announced new auditing and accounting standards revised according to the International Financial Reporting Standards (IFRS) for all public listed companies.
Both WFOEs (Wholly Foreign Owned Enterprises) and JVs (Joint Ventures) get tax advantages in China. JVs were popular because they enabled foreigners to participate in certain protected market segments. Presently WFOEs are allowed in most sectors and have become the business entity of choice.
Foreign enterprises utilize a variety of methods to move funds from China to their parent company. These methods include: dividend remittance, royalty payments, transfer price, and fronting loans. A practice called unbundling relies on combining more than one of these methods. By combining methods no one method piques the interest of the host country. A WFOE is free to select the funds remittance method that best serves the parent organization. A JV local partner may limit the ability of the foreign partner’s remittance methods.
好运道
Sunday, February 10, 2008
Saturday, September 29, 2007
Intellectual Property Protection in China
Changing your business practices.
Intellectual property piracy is a worldwide problem. Changing your business practices in China to address the problem of piracy is a prudent strategy. Intellectual Property Protection (IPR )policies and procedures should be consistent worldwide, formal, measured, and appropriately managed. Leaving the management of IPR protection to sales management is a foolish policy. Sales managers are only concerned with meeting this quarter’s budget and IPR policies can interfere with the achievement of budget goals. The results of lack of IPR protection has long term effects and most sales managers feel they live or die with this quarters sales results.
For proprietary software sales consider offering application software with a “live” web based ASP model in place of licensing object code. (See the postings on the experience of Kingsoft). All licensed object code should have an embedded security system that monitors number of users and enabled modules. Do not distribute source code in China unless absolutely necessary. Source code release, if distributed at all, should be closely monitored, and only the necessary portions of source code should be given to groups who have an absolute need for such code.
Local support services should not only be offered as a normal marketing practice but to increase the attractiveness of purchasing legitimate products versus counterfeit products. The Chinese will pay a premium for legitimate products that are supported locally. As far as we can determine our large software systems (priced in the $100,000 to $300,000 price range) that absolutely required our local services to implement were never pirated (the licensing of the products by distributors were mismanaged). The control of software security license keys should remain with the home office.
The transfer of corporate technology information should be a formal, measured, and well managed practice. If it is your corporate practice to make intellectual property freely available to trusted partners change that practice with regard to China. Only that information essential to the operation of the China operation should be shared with that operation. Your firm should target market segments that are less likely to violate Intellectual Property Rights - markets such as multinational corporations and certain China government agencies.
Intellectual property piracy is a worldwide problem. Changing your business practices in China to address the problem of piracy is a prudent strategy. Intellectual Property Protection (IPR )policies and procedures should be consistent worldwide, formal, measured, and appropriately managed. Leaving the management of IPR protection to sales management is a foolish policy. Sales managers are only concerned with meeting this quarter’s budget and IPR policies can interfere with the achievement of budget goals. The results of lack of IPR protection has long term effects and most sales managers feel they live or die with this quarters sales results.
For proprietary software sales consider offering application software with a “live” web based ASP model in place of licensing object code. (See the postings on the experience of Kingsoft). All licensed object code should have an embedded security system that monitors number of users and enabled modules. Do not distribute source code in China unless absolutely necessary. Source code release, if distributed at all, should be closely monitored, and only the necessary portions of source code should be given to groups who have an absolute need for such code.
Local support services should not only be offered as a normal marketing practice but to increase the attractiveness of purchasing legitimate products versus counterfeit products. The Chinese will pay a premium for legitimate products that are supported locally. As far as we can determine our large software systems (priced in the $100,000 to $300,000 price range) that absolutely required our local services to implement were never pirated (the licensing of the products by distributors were mismanaged). The control of software security license keys should remain with the home office.
The transfer of corporate technology information should be a formal, measured, and well managed practice. If it is your corporate practice to make intellectual property freely available to trusted partners change that practice with regard to China. Only that information essential to the operation of the China operation should be shared with that operation. Your firm should target market segments that are less likely to violate Intellectual Property Rights - markets such as multinational corporations and certain China government agencies.
Wednesday, September 26, 2007
Saturday, September 22, 2007
Kingsoft China
(See Randy Tan’s Comments regarding software piracy in China, September 21, 2007, China Business Blog, Larry DeAngelo)
Kingsoft, one of the leading China software companies, was founded in 1988. Their initial product offerings were anti-virus and word processing software. In 2003 they added online gaming products to their product line. Headquarted in Beijing, they employ over 1400 employees. They have development centers in Zhuhai, Beijing, Chengdu, and Dalian. In 2005 they established a J.V. in Japan. Their Online Communities include www.iciba.com, an English learning site, and www.xoyo.com an online gaming site. Investors include JAFCO, Lenovo, GIC, Intel Capital, and New Horizons. In August 2006, they received a $72M investment from Tetrad Ventures Pte. Ltd, a wholly owned subsidiary of the Singapore Government. Currently they are involved in a Hong Kong IPO with plans to raise $98 million.
Kingsoft’s products include WPS Office, which Kingsoft describes as “coded in China .. and Microsoft Office compatible.” Their Chinese – English translation software PowerWord is often pirated. In 2003 Kingsoft released its first Chinese martial arts game JX Online, and in 2004 they released the game “The First Myth.” In 2005 “JX Online II” was introduced. Their Microsoft Office compatible suite of applications can be downloaded from the Kingsoft web site and used free for 180 days.
References:
Pacificepoch.com:
Capital Raising September 17, 2007
Capital Raising August 18, 2006
http://www.pacificepoch.com/newsstories?id=P91364
Zero/Paid.com:
Piracy Hurting China
http://www.zeropaid.com/news/6731/Piracy+hurting+China%27s+own+industries
Kingsoft, home page:
Kingsoft, http://en.kingsoft.com/whoarewe.htm
Kingsoft Online Games:
http://www.kingsoft.com/en_test/products/game.shtml
Kingsoft, one of the leading China software companies, was founded in 1988. Their initial product offerings were anti-virus and word processing software. In 2003 they added online gaming products to their product line. Headquarted in Beijing, they employ over 1400 employees. They have development centers in Zhuhai, Beijing, Chengdu, and Dalian. In 2005 they established a J.V. in Japan. Their Online Communities include www.iciba.com, an English learning site, and www.xoyo.com an online gaming site. Investors include JAFCO, Lenovo, GIC, Intel Capital, and New Horizons. In August 2006, they received a $72M investment from Tetrad Ventures Pte. Ltd, a wholly owned subsidiary of the Singapore Government. Currently they are involved in a Hong Kong IPO with plans to raise $98 million.
Kingsoft’s products include WPS Office, which Kingsoft describes as “coded in China .. and Microsoft Office compatible.” Their Chinese – English translation software PowerWord is often pirated. In 2003 Kingsoft released its first Chinese martial arts game JX Online, and in 2004 they released the game “The First Myth.” In 2005 “JX Online II” was introduced. Their Microsoft Office compatible suite of applications can be downloaded from the Kingsoft web site and used free for 180 days.
References:
Pacificepoch.com:
Capital Raising September 17, 2007
Capital Raising August 18, 2006
http://www.pacificepoch.com/newsstories?id=P91364
Zero/Paid.com:
Piracy Hurting China
http://www.zeropaid.com/news/6731/Piracy+hurting+China%27s+own+industries
Kingsoft, home page:
Kingsoft, http://en.kingsoft.com/whoarewe.htm
Kingsoft Online Games:
http://www.kingsoft.com/en_test/products/game.shtml
Wednesday, September 19, 2007
They're stealing your software in China
China is a major economic force that will continue to grow in importance. All major foreign software vendors operate in China and dominate the market. In this fast growing software market, the major concern for software vendors is piracy. The Business Software Alliance (BSA) says that in 2006 82% of the packaged software that runs on PCs in China was pirated. (www.bsa.org/ May 15, 2007)
The Chinese government has made the development of a local software industry a priority and has made e-government a national goal. IBM, Microsoft, Oracle, and Sybase are market leaders. Chinese software firms such as The Founder Group (Chinese language electronic publishing, system integration), Kingdee (Enterprise Resource Management), and UFSoft (financial software) are local company market leaders. International Data Corporation(IDC) estimates the China software industry sales in 2006 was $1.2 billion an increase of 88% from 2005 (www.bsa.org/ May 15, 2007)
For nine years, as a country manager for my own software firm and as a country manager for multinational corporations, I sold software in China. Most years we were profitable. Every year was a struggle. I learned not to believe Chinese government statistics, to mistrust China market research reports, but to believe that China will one day be an economic superpower, and its information technology industry will equal the US in size and importance. I know that every major software company operates in China. These companies are investing heavily in building local organizations, localization, and marketing. And I know your competition is operating in China. So if you are there or want to be in China how can you protect your software?
Business Software Alliance (BSA) in cooperation with IDC estimate 92% of the software used in China is obtained illegally. Piracy is more of a problem with desk top software, and operating systems and less of a problem with enterprise software. Every major software vendor is operating in China. They operate in this market despite the high piracy rates for the following reasons:
- Huge corporations such as Microsoft are in China for the long term business potential (Windows is frequently pirated).
- In the enterprise software market segment software piracy is not a major problem.
- Many foreign vendors are profitable in China. (How to repatriate profits is a subject of another article).
- Most vendors decide that to deter piracy they are better off in the market rather than out.
- Software vendors can protect their software.
Piracy occurs whether you are present in the market or not, and you can do a better job to discourage piracy if you are present. In China the pirating of Microsoft's products occurred before Microsoft entered the market and continues after they have entered the market. However, the presence of Microsoft in China has made Microsoft more aware of violations, and better able to lobby for local government enforcement. Since Microsoft products are well supported in China, end users are becoming more concerned about obtaining a licensed copy of the software to ensure Microsoft's support. One major reason the Chinese government has made some effort to minimize piracy is the fact that Microsoft has become an economic force in China.
Software Piracy rates may be a misleading. Software piracy is a problem in China. However piracy rates are difficult to track since vendors are reluctant to give exact sales numbers, and software shipments reach customer in a variety of ways: downloading, embedding, carried to the customer site. In general, software that requires substantial support such as Enterprise Software is less likely to be pirated than software that requires little support such as Desktop Software. Enterprise Software applications requiring vendor consulting, implementation, and support are generally not pirated.
There is both short-term and long-term business potential despite piracy.
Foreign vendors dominate the market. IBM, Hewlett Packard, Microsoft, Oracle, Sybase, Informix, Computer Associates, SAP, IFS, Novell, Lotus, Macromedia, Informix, Symatec and other foreign vendors operate in China. China piracy rates are high because software pricing relative to individual incomes is extremely high, a culture exists that supports piracy is acceptable, and government enforcement is lax. The situation will improve as the government moves more aggressively against piracy (new laws recently changed the penalties from civil to criminal), local software companies understand that piracy hinders their growth, and enterprises increasingly see software applications as mission-critical, requiring reliable well supported products.
You can protect your software:
- Be present in the market. Your local team is better able to ascertain the situation regarding the piracy of your software in that country. End users will want your support and will prefer legitimate purchases rather than purchasing pirated copies. Your company will be in a better position to persuade the local government to protect your software.
- Use electronic means to protect your software. The use of some form of electronic protection is essential. If you use user pricing and/ or component pricing a software license manager is required. The home office should control the keys necessary to enable the software.
- Contracts can be an effective method of protecting your software. Large, responsible local companies will honor software-licensing agreements. A periodic review of the software license agreement is advisable. (Contracts in China are viewed as the first step in an infinite negotiation)
- Register Copyrights locally. Most Asian countries have intellectual property laws similar to the US laws. The issue is one of enforcement. In Japan the laws are enforced; in China the enforcement is spasmodic but growing in severity. Most countries honor US Copyrights. The registering of your copyright in each country may be helpful in seeking government relief from violations. One must weigh the value of such registration against the requirement to include a copy of the source code with the registration application and the need to upgrade this source code. (The China copyright law allows you to 'black out' certain areas of source code)
- Protect your source code. In most situations your end users do not require source code. A program of scrupulously managing copies of the source code should be enforced. Where distributors require source code, a source code management program needs to be carefully executed.
-Think about an entire new way of doing business in China. If you offer embedded code consider selling applications over the internet. If you always sell through resellers perhaps you should sell direct.
The growing popularity of Open Source software in China further complicates the piracy issue. The Chinese government speaks highly of and is very supportive of the Open Source initiative. The Open Source initiative creates increased market demand for proprietary software firms to make source code available to end users.
In summary:
1. China is an important long term software market. You can be sure your competition is operating in China.
2. Piracy is a major issue for Desk Top and Operating System suppliers. Despite piracy the market is growing.
3. You can protect your software through market presence, electronic protection, local registration of copyrights, and good source code management.
4. Business Practices are different. You may have to completely change how you do business as compared to our home country.
5. The Chinese government is pursuing a local software industry protectionist policy. However, foreign products are needed, highly valued, and continue to be purchased by government entities. Guanxi continues to be important in government sales.
6. Despite market challenges foreign vendors operate successfully and dominate the market.
And in China they continue to steal your software.
Larry DeAngelo
The Chinese government has made the development of a local software industry a priority and has made e-government a national goal. IBM, Microsoft, Oracle, and Sybase are market leaders. Chinese software firms such as The Founder Group (Chinese language electronic publishing, system integration), Kingdee (Enterprise Resource Management), and UFSoft (financial software) are local company market leaders. International Data Corporation(IDC) estimates the China software industry sales in 2006 was $1.2 billion an increase of 88% from 2005 (www.bsa.org/ May 15, 2007)
For nine years, as a country manager for my own software firm and as a country manager for multinational corporations, I sold software in China. Most years we were profitable. Every year was a struggle. I learned not to believe Chinese government statistics, to mistrust China market research reports, but to believe that China will one day be an economic superpower, and its information technology industry will equal the US in size and importance. I know that every major software company operates in China. These companies are investing heavily in building local organizations, localization, and marketing. And I know your competition is operating in China. So if you are there or want to be in China how can you protect your software?
Business Software Alliance (BSA) in cooperation with IDC estimate 92% of the software used in China is obtained illegally. Piracy is more of a problem with desk top software, and operating systems and less of a problem with enterprise software. Every major software vendor is operating in China. They operate in this market despite the high piracy rates for the following reasons:
- Huge corporations such as Microsoft are in China for the long term business potential (Windows is frequently pirated).
- In the enterprise software market segment software piracy is not a major problem.
- Many foreign vendors are profitable in China. (How to repatriate profits is a subject of another article).
- Most vendors decide that to deter piracy they are better off in the market rather than out.
- Software vendors can protect their software.
Piracy occurs whether you are present in the market or not, and you can do a better job to discourage piracy if you are present. In China the pirating of Microsoft's products occurred before Microsoft entered the market and continues after they have entered the market. However, the presence of Microsoft in China has made Microsoft more aware of violations, and better able to lobby for local government enforcement. Since Microsoft products are well supported in China, end users are becoming more concerned about obtaining a licensed copy of the software to ensure Microsoft's support. One major reason the Chinese government has made some effort to minimize piracy is the fact that Microsoft has become an economic force in China.
Software Piracy rates may be a misleading. Software piracy is a problem in China. However piracy rates are difficult to track since vendors are reluctant to give exact sales numbers, and software shipments reach customer in a variety of ways: downloading, embedding, carried to the customer site. In general, software that requires substantial support such as Enterprise Software is less likely to be pirated than software that requires little support such as Desktop Software. Enterprise Software applications requiring vendor consulting, implementation, and support are generally not pirated.
There is both short-term and long-term business potential despite piracy.
Foreign vendors dominate the market. IBM, Hewlett Packard, Microsoft, Oracle, Sybase, Informix, Computer Associates, SAP, IFS, Novell, Lotus, Macromedia, Informix, Symatec and other foreign vendors operate in China. China piracy rates are high because software pricing relative to individual incomes is extremely high, a culture exists that supports piracy is acceptable, and government enforcement is lax. The situation will improve as the government moves more aggressively against piracy (new laws recently changed the penalties from civil to criminal), local software companies understand that piracy hinders their growth, and enterprises increasingly see software applications as mission-critical, requiring reliable well supported products.
You can protect your software:
- Be present in the market. Your local team is better able to ascertain the situation regarding the piracy of your software in that country. End users will want your support and will prefer legitimate purchases rather than purchasing pirated copies. Your company will be in a better position to persuade the local government to protect your software.
- Use electronic means to protect your software. The use of some form of electronic protection is essential. If you use user pricing and/ or component pricing a software license manager is required. The home office should control the keys necessary to enable the software.
- Contracts can be an effective method of protecting your software. Large, responsible local companies will honor software-licensing agreements. A periodic review of the software license agreement is advisable. (Contracts in China are viewed as the first step in an infinite negotiation)
- Register Copyrights locally. Most Asian countries have intellectual property laws similar to the US laws. The issue is one of enforcement. In Japan the laws are enforced; in China the enforcement is spasmodic but growing in severity. Most countries honor US Copyrights. The registering of your copyright in each country may be helpful in seeking government relief from violations. One must weigh the value of such registration against the requirement to include a copy of the source code with the registration application and the need to upgrade this source code. (The China copyright law allows you to 'black out' certain areas of source code)
- Protect your source code. In most situations your end users do not require source code. A program of scrupulously managing copies of the source code should be enforced. Where distributors require source code, a source code management program needs to be carefully executed.
-Think about an entire new way of doing business in China. If you offer embedded code consider selling applications over the internet. If you always sell through resellers perhaps you should sell direct.
The growing popularity of Open Source software in China further complicates the piracy issue. The Chinese government speaks highly of and is very supportive of the Open Source initiative. The Open Source initiative creates increased market demand for proprietary software firms to make source code available to end users.
In summary:
1. China is an important long term software market. You can be sure your competition is operating in China.
2. Piracy is a major issue for Desk Top and Operating System suppliers. Despite piracy the market is growing.
3. You can protect your software through market presence, electronic protection, local registration of copyrights, and good source code management.
4. Business Practices are different. You may have to completely change how you do business as compared to our home country.
5. The Chinese government is pursuing a local software industry protectionist policy. However, foreign products are needed, highly valued, and continue to be purchased by government entities. Guanxi continues to be important in government sales.
6. Despite market challenges foreign vendors operate successfully and dominate the market.
And in China they continue to steal your software.
Larry DeAngelo
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