The global economy has faced ongoing trade tensions, pandemic woes, supply chain bottlenecks, labor shortages and inflation over the last four years. But recent data from the United Nations Conference on Trade and Development (UNCTAD) shows that, despite these hurdles, China has been particularly resilient in capturing record levels of foreign direct investment (FDI), particularly in the professional services and technology sectors.
However, multinational companies (MNCs) looking to break into the Chinese market face a myriad of regulatory challenges that can make operations costly and difficult. Even setting up a business entity in China, a prerequisite for directly hiring workers locally, is a notoriously arduous process.
For many MNCs, the solution to these challenges can be found in the Employer of Record (EOR) model. We recently sat down to discuss this topic with GoGlobal Senior Manager of Sales Enablement Matthew Rowett, who has first hand experience expanding his own business into China and now helps MNCs leverage GoGlobal’s EOR solutions.
Q: Can you tell us more about your experience establishing a business in China?
Matthew: After I spent three years working for a company that brought students from Western countries to China to complete internships, I started my own business based in Shenzhen to introduce young engineers and business students to China’s innovation economy.
While initially, we ran pilot programs through my Chinese partners, I eventually needed to set up and establish MakerQuest China to ensure my employees were paid compliantly at the local level. As a small bootstrapped startup, we didn’t have the capital for opening a wholly owned foreign enterprise (WOFE). Instead, we created a joint venture (JV) with one of our trusted partners in the region.
These two tracks – the WOFE and the JV – have traditionally been the only ways for a foreign multinational company (MNC) to establish a presence within China. Had I known about the EOR hiring model earlier, I would have gone that route instead to save time and money, as well as the headache of working with local payroll providers.
Q: Are you seeing an increase in businesses looking to test or pilot products in China?
Matthew: While there are reports of manufacturing leaving China due to rising costs, many foreign MNCs – particularly in the hardware space – still seek out Shenzhen and Dongguan in South China as the main hub for innovation, development and manufacturing of their products. And although the COVID-19 pandemic has forced many foreign companies to leave China, business still seems to be thriving in certain sectors and geographies. For example, Shanghai and Beijing remain strong in the service sector and continue to attract the interest of MNCs from around the world.
Q: Is there an increasing interest in engaging talent in China?
Matthew: There seems to be a trend in employing highly-skilled software engineers from different Chinese cities. Although there has been a decrease in foreign MNCs operating direct subsidiaries in China, it still remains one of the top destinations for high-level talent in both the service and technology industries. China has traditionally been viewed as “the world’s factory” and, although it still manufactures a lot of goods, the rise in China’s service sector and service economy is attracting more and more MNCs that want to market their brands to Chinese consumers. Building a local Chinese team familiar with the market is critical to start to establish a brand presence.
Q: What is the top challenge to establishing a business in China and employing a workforce?
Matthew: Knowing local regulations is key. For example, there will need to be an established local Chinese entity (often in each city as well) to operate and pay staff locally. Moreover, each city in China requires a different rate for the housing fund contribution. Specific provisions like these make it particularly difficult for MNCs to hire and build teams in China, especially when they are unfamiliar with the legal framework.
Q: Apart from global business expansion, what other functions can an EOR model serve for MNCs looking to do business in China?
Matthew: The EOR model has great functionality in facilitating cross-border corporate transactions by helping MNCs mitigate underlying HR risks in IPOs, M&As and winddowns. For MNCs that hire expats, the EOR partner can even help them meet China’s very stringent requirements in immigration compliance.
Q: How does using an EOR model in China also benefit workers?
Matthew: While the EOR model is still growing in China and many workers may not be familiar with how it works, there are numerous benefits they too can enjoy.
For starters, workers engaged under the EOR model enjoy the legal protections and the safety net of permanent employment (as opposed to being hired as a contractor). Also, when hired by an EOR, workers do not have to worry about the typical time zone barriers of an overseas HR department – and can communicate about HR and payroll matters in their preferred language.
Most Chinese companies use WeChat (WeiXin) as a method for business communication and oftentimes Chinese workers are used to having HR support via WeChat. An EOR provider with boots on the ground will allow workers to communicate with support staff easily, instead of going through web portals or liaising with a third-party payroll provider.