The last couple of weeks we have been discussing making a business plan that would include opening new markets in the developing world. We are using my experiences in opening a sales office in China as an example of one way this can be done.
The sales office that we opened in Nanjing was an instant success. By the time of our third year, about 30% of our corporate profit was made in China. This was way beyond any of our original expectations. But now our major competitors from both the U.S. and Europe were setting up manufacturing facilities to lower their costs and expedite deliveries. Such an operation, which in China can now be 100% owned by the foreign company, is called a Wholly Foreign Owned Enterprise (WFOE).
To get this done, we had to make a number of changes. First, we had to find a building where we could manufacture, after which we could apply to the local government for the necessary permits. We also decided that we would install a version of our company’s business operating system in our China plant to better coordinate records. We hired a local accounting firm to handle all the required tax filings and our own accountant to coordinate these activities.
To make this really work, however, we knew we had to have a company-trained executive knowledgeable about our manufacturing and products to handle this work. Fortunately, I had an engineer with years of experience on staff who was willing to relocate to China for a number of years to get this under way. Coming up with a pay package for such an expatriate because of the tax consequences is no simple exercise. We had to hire an outside tax expert to calculate the adjusted net income to keep the employee whole since he would owe taxes in both the U.S. and China.
Since parts of the final product would be manufactured in both the U.S. and China, we also created an engineering part-number system to identify the country of origin. Key components, which would be critical to the products’ performance, would continue to be made in the U.S. to prevent the Chinese from gaining the technology to make those parts. All final assembly and quality control would be handled in China.
This all takes much more time than you would expect, but we finally got everything under way. We put one of our better engineers from our Chinese sales office in charge of all the manufacturing operations under the expatriate after bringing him to the U.S. for training in our own factory.