by David Dayton in 'Silk Road International'
A few months ago I was talking with a Korean lawyer friend of mine about where Korean companies are locating in China. He talked of how Qingdao and Dalian were still really popular with his Korean clients, but that some of them were looking at Chengdu and a few other places "more inland." They were looking to cut costs. I told him of how very few of our clients were seriously looking to inland China.
Boy was I wrong.
Within about a week of that conversation, we were hit with a flurry of companies looking to move out from places like Suzhou and Shenzhen and Dongguan to places like Yantai, Chengdu and Datong. Two of these companies have already begun the process. Note though that I intentionally used the ambiguous term "move out from" as opposed to "leave" because in none of the cases is the company going to shut down any operations. At least not yet. Their plans are to open ancillary facilities elsewhere, see how those go, and then, based on that, decide what to do with their existing facility or facilities.
These companies are reluctant to shut down their existing operations entirely, in part out of a concern about how the local government at their existing locations will respond. Though the local government is not legally entitled to prevent these companies from leaving, it is "entitled" to make things difficult on them by making very sure that they are caught up on all of their obligations to the government (i.e. taxes, etc.) and to their employees.
So in both instances, rather than moving the WFOE (Wholly Foreign Owned Entity) from one place to another or shutting down the WFOE in one place and opening a new WFOE in another place (or even trying to open in the new place as a branch of the old WFOE), both companies have chosen to keep their old WFOEs and form new ones in their new locales. Both are of the view that if they reach a point where moving their operations fully to the new locale makes sense, they can at that time consider whether to close down their old WFOEs or merge the old and new into one WFOE.
What do you think?
Dan Harris is founder of the Harris & Moure law firm, a boutique international law firm focusing on small and medium sized businesses that operate internationally. China is the fastest growing area for the firm. Dan writes ChinaLawBlog.com as a source of China legal and business information.