Superpower 5: The importance of protecting your most valuable company assets
Superpower number five is all about protection. Fraud exists in China as much as it does in the rest of the world. Evaluating your most valuable assets and developing a system to protect them is key to the longevity and success of your business.
Foreign professionals tend to be too trustworthy, too soon, when it comes to China. In many cases, they lack the proper education on how to do things on the ground and end up trusting the wrong people.
Loyalty and trust must be earned overtime. It will not happen in a few days. It takes time to get to know your employees, your suppliers, and your customers, especially when you are launching a new business in a foreign country such as China, where cultural aspects and interactions in the business world can be extremely different than the West.
Knowledge is power. You have educated yourself, you have written your business plan, you have created an ecosystem of people who can help you and guide you. Now, it is time to identify your most valuable assets and protect them.
It is not a good idea to solely rely on the experience and knowledge of others around you. They may misguide you unintentionally or may not have your best interest at heart. It is crucial that you understand the importance of due diligence and follow it.
It may take years until you feel comfortable trusting people, but there are a few simple things you can do to protect your business from fraud. Over time, you will be able to build a circle of trust and delegate some of the responsibility to others.
Start by making a list of all the assets you need to protect, such as your company's intellectual property -trademarks, domain registrations, marketing materials, copyright, patents-. Ownership of marketing tools is vital.
Practicing corporate governance, whether you are established in China or not, will allow you to keep a close eye on your company. You should develop due diligence procedures as well to help you run things smoothly and catch risky mistakes early.
Learning how to evaluate and choose employees is crucial. When you employ someone, you should always run a background check. Do not rely only on headhunters to select and interact with the people you will hire.
If you establish an entity in China, ensure how the company chops will be used. This is an extremely vital asset. In China, company chops – sometimes referred to as a seal or stamp – are mandatory for doing business and replace signatures that are used in Western countries.
The company’s person-in-charge or other management personnel authorized to hold the seal is only the temporary custodian of the seal. As such, the rights and obligations arising should be borne by the company, not the holder or custodian. For this reason, the chops should be protected and used correctly.
Foreign-invested enterprises (FIEs) must produce the company chop after registering with the Administration for Market Regulations (AMR). The company chop contains the full registered name of the company in Chinese and must be filed at the Public Security Bureau (PSB).
Beyond the official company chop, a firm will likely need several chops – each for a different purpose and used on different types of official documentation – depending on its business scope. Regardless, every business should consider diversifying their use of chops.
For some chops, any person could be deemed as authorized to use it if it is in their possession. However, this will not be the case for every type of chop, and warrants the need for clear internal controls to supervise their responsible use.
Another crucial step to protect your company is to develop system processes, so that you know no kickbacks can be made.
Regarding your supply chain, decide how will your inventory be managed, and which warehouse systems will be used.
When it comes to choosing a business partner in China, due diligence is a must. This is probably one of the most important things you will do before setting up a running business in the country. A local partner with good standing will surely be of great help to you, while a bad one could ruin your reputation.
However, many foreign companies or professionals looking to start a business often fail to do even the most basic research on their potential Chinese partners and later find themselves dealing with legal and logistic complications. Running a basic reference check, even preliminary, on the Chinese business partner being considered could help avoid future unpleasant surprises.
Local lawyers may do a comprehensive company search and provide a report in English, which normally contains the basic registration information (such as domicile, registered and paid-in capital, business scope, senior management), the credit references (such as mortgage, pledge, other encumbrance over assets), the effective rulings or judgments involving the target company as a litigant and the courts’ enforcement records (if any).
As a foreign company doing business in China, it is fundamental to have a trustworthy accountant who can not only help you with your financial decision making needs, but most importantly will guide you efficiently through the complicated Chinese tax and legal system.
The relationship with your accountant in China should be one that is built on a foundation of trust and transparency. You will need his or her expertise to understand cultural differences and to navigate the regulatory system successfully.
Your accountant can be a key partner to help you develop a system to protect your company's assets. One of the main purposes of hiring an accountant is to receive guidance on how to move forward with investments, maximize ROI, and boost income, throughout the year. They should be able to help steer your business in the right direction and should not be there only to put out fires.
After you have evaluated the assets that are critical to your business, you should implement a system to protect them, such as creating an intranet, internal operational guidelines, management directives, frequent health checks, internal audits, and appointing the right directors and senior management personnel.
Make sure you have on speed dial all the members of your China ecosystem, the people who can help and advise you.
It is critical not only to identify your assets, but to execute the guidelines and directives that will protect them.
Your brand is one of your company’s most valuable assets. Your company’s reputation and image stand behind the name that identifies who you are and what you do. But when entering China, your brand may be exposed to unexpected risks and dangers.
It is in your company’s best interest to have a solid strategy and follow the correct steps to protect your brand in China. The local trademark regime follows a first-to-file system and does not recognize international trademarks if they are not registered in the mainland, even if they are famous abroad.
If the brand is well known around the world, it will most likely become the victim of trademark squatters, counterfeiters, or grey market suppliers.
Having your brand registered in Chinese characters is crucial as well to avoid copycat goods. This process is complicated and requires a combination of choosing characters that will communicate the right message and establish a specific image associated with the brand that is culturally acceptable.
Having a Chinese trademark protects businesses from grey market suppliers and knock-off sellers online and enables the seizure of copycat goods by Chinese customs.
China respects the International Classification of Goods and Services under the 1957 Nice Agreement, but it has its own set of classes and subclasses. For this reason, it is vital for foreign companies to register their products under the correct class and subclass.
The mark must be available for registration. The CTMO’s official trademark database is available online and can be used to search existing trademarks. The database covers preliminary approvals, final approvals, renewals, and modifications of all trademarks and is available in Chinese and in English.
The same goes for all other marketing material and intellectual property, such as website domain registration.
Understanding your business scope, the capital investment, and the term of validity of your operation is crucial. You should also choose carefully who will have access and operate your bank accounts.
Foreign companies eager to exploit the opportunities offered by the Chinese market rush sometimes to launch their platforms and do not pay attention to certain important details such as financial and pricing guidelines or contract details with local partners. Many find themselves later paying more to fix mistakes that could have been avoided from the start.
Once you master Superpower 5, your business will operate on solid ground and will be on a safe path to grow and succeed in China.
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DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.