Using a Hong Kong Company for Your Chinese Factory

This article is originally found here: https://www.globalfromasia.com/hkcompanyforchina/

Tired of sourcing from factories and want to setup your own manufacturing operation? Searching for the best corporate structure for a new Chinese factory?

Look no further, today we will dig into Hong Kong being a great place to open your factory under.

How To Open A Factory?

I remember when I first visited a factory in China. I became shocked to think it isn’t as complicated as I had thought. There are three main factors:

  •  Big Open Space

    Need a big building with lots of open space to set up the operations.

  •  Machines

    You’ll need the equipment to prepare the materials. This can be all sorts of machines but let’s stick to the most common: plastic injection machine. These are the most common in a Chinese factory. They will take the manufacturing mould, and then inject the plastic inside and pop out a bunch of the plastic parts. Significant size and definitely a big upfront investment.

  •  Labor

    You’ll need people to put together the plastic parts once they came out of the machines. Debur, check for any defects, assemble. Check the quality. Package. You get the idea.

Of course there is a lot more skill and magic to the process, but these are the main pieces of the puzzle you’ll be dealing with.

Is Hong Kong A Good Place For Your Factory Business?

A lot of people ask me when they’re searching on Alibaba should they pick companies that are in Mainland China or Hong Kong. Yet I don’t know any factories still located in Hong Kong – they are all in China. What is in Hong Kong is the sales office, or even just a virtual office for the parent company.

That’s not to say having your factory established in Hong Kong as a business entity isn’t viable. It is something common. It can be with anyone, Americans, Europeans, Local Hong Kong people, or Mainland Chinese who open the HK limited company. It will not be too easy for the general public to know the nationality of the owners (though there are ways to do company research in Hong Kong). Once you’re a Hong Kong company, you can then open a Mainland Chinese WFOE (Wholly Foreign Owned Entity) that will be where the factory operates from.

You can have a local Chinese partner in the factory with you, and you can both own the shares in Hong Kong. Once that is setup, you will then be “foreign” to the Chinese government even if half the company is Mainland Chinese owned. So you’ll open a Chinese subsidiary that is the fully owned by Hong Kong company. Have the IP owned by the HK parent company, and now you have the benefits of HK’s English legal system while able to operate inside China.

While any company could be the foreign owner of a WFOE in China, Hong Kong is a good choice as it is so close and so common. Hong Kong banks, and other banks and legal entities will be familiar with how to file the documentation. Thus the WFOE won’t have as much of a headache as having it owned by a company elsewhere.

Make sense?

What Things You’ll Need For a Hong Kong Parent of a Chinese Factory

So what are you going to need for this Chinese factory owned by an HK limited company?

It depends, will you have a physical office in Hong Kong? To do sales, meeting clients, trade shows, etc? Or will you work close with a serviced office in HK that will help with the mail from the governments and banks.

I’m going to assume you’ll be living and working in the Chinese factory, and that will be your base. You won’t need the overhead of a Hong Kong office and will instead invest in Mainland China operations.

Thus, you won’t need many things in the Hong Kong company, most operations will happen in Mainland China.

But you’ll definitely need:

  • Hong Kong Bank – Goes without saying. Any company operating needs to have a bank account. You’ll use this to receive money from customers, and send in money to Mainland China for the production and the rent and staff costs.
  • Hong Kong Credit Card – To keep your life a bit more simple, you’ll need a credit card to put the expenses on. You’ll be traveling to trade shows, clients, and having certain online software packages.
  • Paypal. If you’re selling B2B (manufacturing orders) then I don’t recommend having clients paying you by Paypal. But you may like to have this to buy things online and for small sales. This could also come in handy buying things online if you don’t get a credit card.
  • RMB (Chinese Yuan) Currency Option – Make sure you tell the bank you’ll need a RMB currency account. This will come in handy for managing the risk in currency fluctuations. Plus you can save time at the Chinese bank when you send over Chinese Yuan instead of USD or other foreign currency. It’s much easier to convert to RMB in Hong Kong than it is in Mainland Chinese banks. You can test for yourself, and you can thank me later 🙂

So Here’s How Operations Will Go

So now you did it, you setup a Hong Kong company and then a Chinese WFOE subsidiary. Good job! That took at least 4 months, but more likely 6 months. You may have done some operations already, but now you’re fully legal to do it.

You’ll rent a big space in the outskirts of Shenzhen or in Dongguan. You have your sales team there – and the internet speeds are reasonable for dealing with foreign clients. You have orders coming in. Once the money is in Hong Kong, you can either wire the money on demand to China. A lot of companies work out a monthly invoice for costs of operations and production.

Once you send the money to your Chinese bank from your Hong Kong bank, you order the raw materials and get the factory workers trained up to handle the production. You may need to hire more staff or scale down when production is low. I hope you have a core manufacturing team in place with good experienced factory management.

You process the order. You finish mass production and then send remaining funds to your Hong Kong parent company’s bank from the client. You need to get more cash over to China to finish the deal and get it to the port, FOB Shenzhen.

You will keep some money in China, but you hold your money and IP in the parent company in Hong Kong.

This is the basic idea. Sure the factory can be over in Shanghai, or deeper into Mainland China as well. Where you choose the factory location should base on the type of product and industry you’re in. There are cities who specialize in certain areas.

So What Do You Think? Hong Kong Perfect For Your Factory?

Hope this guide was helpful for you! Where are you opening up your own factory. Often the order of events is a USA import and export company grows bigger and bigger. Getting more clients and specializing more, they want to go even more direct. Since they know their product so well and their customers too, they can invest in a factory themselves.

Sure, this will have more fixed costs and more risky, but you’ll have full control. The trickiest part is to managing the staff and the quality control. All that complaining you did to those factories you bought from before will now be your headache! Its not always the factory owner who does the bad quality on purpose. It takes good management skills to keep things in order and deliver top quality.

So I’d love to hear your experiences and tips about Chinese factories from a Hong Kong company. Please leave comments and questions below!

Published by Mike Michelini

Global From Asia (GFA) is about the current shift in the world as Asia as the center for doing international business – more specifically called cross border business.