DirtyPCBs.com China export brokerage pay your vendors get your stuffs

1export-dirtypcbs

 

Exporting small low value orders from China is a challenge to do cost effectively, however proper export of bulk stuff is comparatively simple. After hearing what hardware people are going through to get stuff from China we had to offer a better way. A Dirty Way.

Having trouble paying a Chinese supplier? Did things start off ok for small orders, but you’re facing dodgy payment options when you scale to volume? Let’s take a look at why this happens, and how we can help ease your China payment and export problems!

CNY is a controlled currency

Chinese Yuan (CNY, RMB, kuai) is a controlled currency: the government has strict rules for how and why it can be exchanged for other currencies.

You can’t send a wire to China in local CNY currency because there’s simply no way for your bank to exchange the money for you. The Chinese government doesn’t sell CNY on an open market like US dollars or Euros.

Your Chinese supplier can’t just convert foreign currency to CNY either. The bank will call to notify them of the wire, then they go to the bank in person to show their export license, a goods invoice, proof of tax payment, and proof of export declaration. If this verification isn’t completed in a few days the wire is returned to you less fees (~$50).

Mom and pop shops that give amazing China prices rarely have an export license, and often have no idea how to receive foreign currency legally. Foreign “China Guys” who spend some time in Shenzhen and now peddle services to hacker/Makers have even less of a clue!

How to pay a supplier in China

There are three legal routes to get money into China for CNY transactions:

  • Payment for goods: Requires invoice, VAT tax receipt proof (fapiao), export declaration proof, import/export permit, banking permit, etc. A portion of VAT may be refundable in the following month if all documents are in order
  • Payment for services: Requires invoice. 6% tax charged on incoming payments. If this method is abused to pay for goods without an export declaration the supplier cannot deduct the cost of the goods from their income leading to very high taxes (25% + loss) in addition to the 6% services tax
  • Payment to individuals: Chinese residents may exchange $50,000 USD equivalent of foreign currency per year for personal use. Abusing this method to pay for goods carries the risk of high personal income taxes on the recipient at the end of the year

While the process of exporting goods isn’t too difficult, most of the permits require months long applications and deposits of serious amounts of capital. It just isn’t worth it for a lot of small/medium Chinese manufacturers and suppliers to deal with foreign customers directly (which is why there’s so many agents on Alibaba!)

Things people (who should know better) do:

  • Smuggle backpacks of cash across the border from Hong Kong (not unsafe, surprisingly, but still illegal)
  • Smuggle components in their pants (cargo shorts are not a logistics network…)
  • Hire elderly Chinese to bring in $50,000USD through their personal allotment without fully understanding the tax consequences
  • Black market exchange banks: warehouses with pallets of cash are busted daily in Guangdong Province

Even people with a decade of experience working with China still do some of these really stupid things to avoid using an export broker.
China has come a long way in the last decade: don’t believe that famous hacker with pants full of chips, these things are not tolerated as they were in the past. At the same time, there really hasn’t been an alternative for open hardware hackers: brokerage firms want a high percent fee and pricing is rarely transparent. Often a brokerage isn’t even willing to handle less than a shipping container in size. We’re trying to change that!

Who needs export brokerage
Does this describe you?

  • Have a Chinese supplier lined up and ready
  • Need to make an order > $500
  • Supplier can’t receive large amounts of foreign currency, has no/crappy shipping options
  • You don’t want to go to China personally and pull money from ATM machines

Don’t mess around; we’ll use our Chinese company and licenses to handle the export on behalf of your supplier.

A better way: Big Company export brokerage for dirty prices!

  1. Give us the details of your already arranged purchase, we’ll get back with freight options (you can ask for a full refund of this service if you’re unhappy with our freight options!)
  2. We create official invoices and arrange shipping between you, your supplier, and us
  3. Wire payment for goods, tax (VAT), and freight in foreign currency to our Chinese company or Hong Kong company
  4. We convert the currency to CNY and make payment to your supplier
  5. Your supplier ships to our warehouse with an official VAT tax receipt (fapiao) attached
  6. We export to you with an official export declaration via air freight or sea freight
  7. Depending on the tariff category, we can apply for a refund of all or part of the VAT paid

That’s it! We have all the permits and experience necessary to handle currency exchange and proper export procedures.
Sit back and wait for your stuffs to arrive without anything dodgy messing up your supply chain! Your backers applaud you for a project delivered on time and without drama!

A few notes

Export is a new feature at DirtyPCBs that we’d like to automate further. We’re looking for a few people to help test this service with schedules that allow for our lawyers and accountants review everything at each step. If you’d like our help exporting from China please get in touch!

Absolute Power

We recently noticed a very cool-looking series of power supply modules on a few of the Chinese deal web sites. Depending on the model, they provide a digitally-controlled voltage with metering. You need to provide at least a volt or so over the maximum desired output voltage. You can see a video from [iforce2d] below. The module in the video is rated for 5A at 50V maximum, but there are other sizes available. For those interested in graphs and numbers [lgyte] did a lot of characterization of these modules.

There was a time when importing goods from far away places was somewhat of an art. Finding suppliers, working out payment, shipping, and customs meant you had to know what you were doing. Today, you just surf the web, find what you want, pay with PayPal, and stuff shows up on your doorstep from all four corners of the globe.

There is one problem, though. We see a lot of cool stuff from China and some of it is excellent, especially for the price. Frankly, though, some of it is junk. It is hard to tell which is which. What’s more is even though in theory you might be able to return something, usually the freight charges make that impractical. So when you get a dud, you are likely to just eat it and chalk it up to experience. So the question is: how good (or bad) or these power supply modules?

The video is a good way to see what you are getting. Certainly, you get a better idea of the size of the module. However, what’s it look like electrically? The testing from [lgyte] is very comprehensive and not only includes graphs of key parameters but also IR photos of the circuit board to identify hot spots. There’s also a longer video about a similar module from [neutronstorm], below.

For the low price, the features of these supplies look good. You can set the supply to shut down when you exceed a voltage, current, or power limit. The DPS series modules have a slightly improved user interface compared to the DP series.

We’ve seen digital power supplies before (including some nicely packaged ones), of course. However, these are cheap, look good, and would be dead simple to use. A transformer, bridge rectifier, and filter capacitors on the input of one of these and you are set. For many applications, an old 18.5V laptop power brick would be a great way to feed one of these.


Filed under: tool hacks

Akiba: Shenzhen in 30 Minutes

Multi-talented hacker extraordinaire and electrical engineer [Akiba] is based in Japan, and this makes it just a hop, skip, and a jump over to Shenzhen, China, the hardware capital of the world. He’s led a number of manufacturing tours aimed at acquainting hackers with the resources there, and now he’s giving you the benefit of his experience in a 30-minute video. It’s great.

Sourcing

When [Akiba] is in Shenzhen, he picks up all the same commodity parts that you would, because they’re just so cheap. And Hua Qiang Bei is its epicenter: it’s a gigantic market for components, and they’re all being sold at rock-bottom prices.

cropped_shot_2016-12-07-131042But as [Akiba] mentions, just walking around the Hua Qiang Bei market also gives you a feeling for what’s currently in mass production, and this is useful for planning which parts you’d like to use for your own projects. Parts that are too old may go out of production soon, while the newest chips off the factory floor demand a premium. Walking around Hua Qiang Bei, you can get a feel for what’s in the sweet middle. [Akiba] also likes to do his product sourcing in Shenzhen. If he needs a USB cable to go along with one of his own designs, he’ll need a bunch of them cheap.

[Akiba] also mentions that Hua Qiang Bei is gentrifying. Rents for floor space are going up, and this naturally reflects in the prices. For non-consumer electronic or mechanical parts, he’ll often take an hour’s drive to the DoFu industrial electronics market. If you’re shopping for stepper motors or ball screws, that’s your destination.

Outside of the obvious hacker goods, you can get basically anything else made in or around Shenzhen. For instance, most of the world’s gems go through the jewellery markets of Guangzhou, and if you want to see buckets of rough blue topaz, head on over. You can also get custom jewellery made, so if you want to embed an RFID card in a ring and have it look professional, this is where you can get it done. Need rhinestone t-shirts with your hackerspace logo? Of course you do!

Customizing

Custom USB Drives, Anyone?
Custom USB Drives, Anyone?

The market for customized products lies somewhere between doing a ground-up design and buying already finished goods. In his example, [Akiba] mentions a silicone rubber factory. If you need a custom design, the die and tooling alone can cost you $1,000. If you can use a pre-existing design, and tweak it minimally or add a logo, then you can avoid the tooling costs. For a run of 1,000 silicone widgets, at a per-unit cost of $1 each, using a customized version can save 50% of your bill. The same goes for cell-phone cases, game controllers, or USB keychains. Seeing samples and the possibilities of customization can help inspire you as a designer.

Prototyping

The prototyping resources available in Shenzhen are amazing: nobody bothers owning their own laser cutter because you can just walk down the street and get it done on someone else’s on the cheap. The same goes for 3D printing, fiberglass molding, and of course PCBs. If you’re sitting there with a PCB and parts in your hand, there’s no reason to pick up a soldering iron yourself either. There are assembly houses that will put together five fairly complicated boards for you for around $30 per board, with 24-hour turnaround!

Manufacturing

cropped_shot_2016-12-07-131101The question [Akiba] gets all the time is how to get stuff manufactured in Shenzhen. And he cautions that a ground-up manufacturing run is the most complicated and risky option available, and maybe not for newbies. Visit the factories first, with a physical sample in hand. If they can see a final prototype, they know you’re serious and can even bring in an engineer to start talking manufacturability with you. And this is doubly important for plastic injection molding; you don’t need to know about the intricate details of the art, but you need to be able to talk with the engineer about what needs to change to make it work well and inexpensively.

If you’re going the manufacturing route, consider using a contract manufacturer (CM) intermediary rather than going to the factory directly. The CM will have relationships with multiple factories, and a reputation to uphold. They’ll make everything smoother.

Logistics and Fulfillment

cropped_shot_2016-12-07-131016You’ve built a product, gotten it manufactured, and now 10,000 of your new widgets are sitting on palettes in Shenzhen. What next? [Akiba] thinks that the logistics can be even more intimidating and complicated than manufacturing. Small quantities are easier, and above 20 kg cost about $5 per kilo. (Pro tip: if your package weighs 18 kg, it’s cheaper to put 3 kg of rocks into it than to leave it as-is.)

Bigger product runs get expensive, but [Akiba] breezes through air and sea freight. You’re in for a few thousand dollars here. Air is fast, but sea is cheaper and essentially unlimited in quantity. Get door-to-door service unless you want to drive down to the docks and unload the container yourself.

How do the small sellers on eBay ship internationally for free then? Well, it’s not free. $0.74 is about 5 RMB, which is the cost of a packet by China Post, and is not coincidentally about the minimum price of an item that you’ll ever see shipped “free”. Deals between China Post and the US government mean that it’s sometimes cheaper to ship from China to LA than from San Francisco. And this means that it might even be cheaper for you to do your fulfillment on a per-item basis directly from Shenzhen. Of course, this means hiring a fulfillment firm.

And Next?

[Akiba] has been giving design, prototyping, and manufacturing tours of Shenzhen for a few years now, and has seen several hacker products emerge. What’s he looking forward to? Getting more women involved in the process, and also helping charities and NGOs harness some of Shenzhen’s manufacturing might. If a book can be printed and bound for around $1, and shipped overseas for a few cents per copy, think of how cheaply you could outfit schools in developing countries.


Filed under: cons, Featured

Ask Hackaday: What Should Father Christmas Bring From Shenzhen?

Imagine this, you have a friend who grew up in Shenzhen, China. The place from whence all your really cool electronics come these days. They speak Chinese in a way only someone born there can, and given that you know them through a shared interest in hardware hacking you can assume they know their way round those famous electronics marts of their home town.

Now, imagine that in a rash move, your friend has offered to pick up a few bits for you on their next trip home. A whole city-sized electronic candy store opens up in front of you, but what do you ask for them to seek out?

Before you continue, consider this. Why has Shenzhen become the powerhouse of electronic manufacturing (and everything else) that it is? Economists will give you pages of fascinating background, but if you want a simple answer it is that those electronics are produced for export, and that its citizens are only too happy to export them to you. Therefore if you want to get your hands on electronics from Shenzhen you do not need a friend who is a native of the city, all you need is a web browser and a PayPal account.

We have all become used to seeking out the cool stuff and eagerly waiting for a padded envelope from China Post a week or two later, so there are very few items that are worth putting a friend to the extra task of finding. At which point you realize that it is the candy store rather than the candy itself which is so alluring, and you ask your friend for a video walkthrough with commentary of their travels through the electronics marts. Oh, and maybe a Chinese Raspberry Pi with red solder resist, just for the collection.

If you had a friend about to board a plane to Shenzhen, what would you ask them to find for you that you can’t just buy for yourself online? Remember, nothing that’ll land them with awkward questions at either airport, nor anything that’ll land them with a hefty customs bill. That’s a very good way to end a friendship.

Huaqiangbei skyline image: Edward Rivens (PD) via Wikimedia Commons.


Filed under: Ask Hackaday

HOW TO: Chinese Driver’s License

dl

China has huge factories, but there’s also thousands of tiny factories hidden away on back streets and in garages. During production of The Expressway we had a lot of down time waiting for molds to heat so we explored the neighborhood. On one tiny road there was a compression molding factory, several gauze factories, several cloth factories, a PCP molding factory, and a clothing factory. All very unassuming and tucked away in small garages. You’d never know they were there without getting up close.

Shenzhen is surrounded by these small factories, and they’re a treasure trove of opportunities for small scale manufacturing. On numerous occasions we tried to get our driver to cruise the side streets, alleys, and frontage roads to get a closer look, but drivers seem to find this really annoying. The only thing left to do was rent a car and drive ourselves.

While driving in China isn’t nearly as terrifying as some people would have you think, a Chinese driver’s license is required to get on the road. China doesn’t recognize any foreign licenses nor the international driver permit.

If you have a valid foreign license it’s not too difficult to get a Chinese license. The foreign license needs to be translated and certified, we hired an agent to do this for 1,800RMB ($300USD) which also included all the government fees. When the translation was accepted we scheduled an appointment online to take a computerized knowledge test (available in English).

The license is a great example of China’s major evolution towards squeaky clean government. A few years ago it cost 6,000-10,000 RMB ($1000USD-$1,600USD) to get a license, the major cost was a bribe to have someone else take the written test. There was no non-bribe option so we just didn’t do it. Now it’s not possible to bribe your way out of the test, but it’s a hell of a lot cheaper.

The test is 100 questions, pulled from a bank of 1,200. A passing grade is 90/100. The test is computerized, and a webcam records the entire thing to ensure there’s no cheating. The results are shown instantly, with an automatic do-over if you fail the first time.

Horror stories aside, the test wasn’t as bad as it was made out to be by infamous reports from NPR and the Washington Post. There are some oddities and terms that were unfamiliar. The official practice test in English covers most of it. The real thing is exactly the same, with a couple questions about fines, penalties, and traffic cop hand signals that we only knew from studying this practice exam as well. Most of the questions are dead simple and obvious. The translations are pretty good as of 2016.

dl-fog

There seemed to be an unhealthy obsession with fog lamps. Having never owned or driven a vehicle with fog lamps this was something new.

dl-level

There are lots of British English terms we had to learn. A level crossing is where a train crosses a road at street level. Each red line means 50 meters. The correct answer is C.

dl-tidal

A tidal lane is a narrow road where traffic in both directions share all or part of a single lane.

dl-traverse

The white lines mean slow down. The correct answer is reduce the transverse speed, a term we found in a New Zealand government study of traffic calming measures.

dl-long

This is the only question that truly baffles the mind. The correct answer is A, reduce the longitudinal speed. No idea what that means or how to operationalize it while driving. Just had to memorize this one.

Several questions in the actual test weren’t on the practice test, it wouldn’t have been possible to pass without the additional study guide linked above. For example: how long do you go to jail for killing someone in an accident (3 years), and how long for a hit and run (3-7years, can never drive again)? How many points on a Chinese license (12), and how many points are deducted for various infractions (6 for blowing a red light or light speeding, 12 for everything else)?

The test took around 10 minutes, we passed it with 90% on the first try. The license arrived by courier in 3 days. At times learning the terms on the practice exam was frustrating, but over all it was mostly painless. It was also extremely interesting to see how much the government has changed. Three years ago cheating was mandatory and agents were expensive, now it’s cheap and there’s no hint of corruption.

Very soon we’ll rent a giant SUV with all the safety features and hit the road. We’ll post reports from

 

HOW TO: China import/export permit and company bank

import-export

Last week we described the painful process of opening a Chinese company. That was actually the fast and easy part. There’s still a pile of paperwork and months of waiting ahead. This week we look at the proper, and improper, ways to export from China.

A Chinese import export permit is permission to exchange foreign money to Chinese RMB, and refund sales / VAT tax on exported products. Imports, exports, and foreign currency exchange are attached to your permit number. Any trader operating in China without one is illegally exporting and violating the currency control laws, and is not a reliable supplier in our view.

Our license was handled by an agent, we literally did nothing but hand over the company documents. It took about a month and cost around 5000RMB ($900USD). It isn’t hard to get, but is difficult to use for small scale stuff. Our giant CPA firm even botched our first attempt to get a VAT tax refund. Continue below for more on the right and wrong way to export from China, and a summary of the crisis that almost ended our Chinese company this week.

How to export from China. The legal way. 

This is the biggie. It took lots of trial and error, but to the best of our knowledge this is the proper way to export products from China and receive payment in foreign currency.

1. Receive foreign currency (USD,EUR, etc) payment by wire to the company bank account

2. Go to the bank, show an invoice for products and the import export permit

3. Money is converted to RMB. The amount and purpose is reported to government

4. Purchase products and get the official ‘fapiao’ VAT tax receipt

5. When the products leave China get a stamped export declaration form from the shipper

6. Take the VAT tax receipt and export declaration form to the tax office to rebate the 17% VAT tax. Many people skip this step. It is quite a hassle with very specific timing requirements. Unless you ship a container load of the same thing, or something very expensive, it is generally not worth the effort to get a VAT refund

7. Give the export declaration form to the accountant. The government will audit to see if the amount of currency converted to RMB matches the products exported

The tricky thing is the export declaration form. It is not a simple commercial invoice or proof of shipping. It has to come from an authorized authority with the correct stamp. It costs 300RMB ($50USD), and you need one for each package exported!

export-proof

For example a simple 5x5cm $14 Dirty PCBs order. To convert that payment to RMB to pay the factory and refund the 17% VAT we need an export declaration form that costs $50 for this order alone. Unpossible.

Why are we still doing this?

So how do you deal with this? Hong Kong company to the rescue! Instead of shipping individual orders directly to hackers from China, we export the PCBs in bulk to Dangerous Prototypes Limited Hong Kong. For a while it looked like we had to rent a warehouse in Hong Kong and hire people, but eventually we found a service to do it for us.

Xiao Tang packages PCBs into boxes and puts on all the postage labels in China. A logistics company picks up the boxes, imports them to Hong Kong as a single shipment, and drops them at the post. They charge 300RMB to handle the customs export inspection and prepare an export declaration form. Now we can exchange money to pay suppliers and refund VAT.

It seems like Seeed Studio has had to make big changes to comply with this in preparation to go IPO. Small(er) Chinese companies have a different standard of accounting and compliance requirements, but when you take a bunch of government money and prepare for public listing many more rules apply.

We’ve noticed our stuff go out of stock at Seeed a few times recently, evidently while they move between Hong Kong warehouses. Our guess is they had to ship all or most of their stock to Hong Kong to refund the VAT and get the export declaration form required to exchange currency.

We’re a WFOE, which means we are held to the highest standard from day one.

How to export from China. The wrong way.

There’s a number of loopholes and unsavory practices foreign and Chinese agents use to circumvent the currency control system.

The process we describe above is only to pay for products. Payments for services can be converted with a simple invoice. So a small Chinese company might do a production run of 100 PCBs, but bill the client for consulting services. This seems so widespread for small stuff that bankers and accountants openly encourage it.

Each individual can freely convert $50,000USD to RMB each year. According to our CPA, around 70% of foreign business with Huaqiangbei market traders is paid to the boss’ personal account. This way the boss avoids paying VAT, and they don’t need an export declaration form to convert foreign currency to RMB. We won’t pay suppliers this way until a lawyer says it is actually legal to convert funds for business. Even if it is legal, $50,000 doesn’t go far for any sizable production.

A variant on the above is to recruit Chinese people to “rent” you their yearly allotment. You wire $50,000 to their account and they keep a percentage. This is so fraught with risk and uncertainty it hardly seems like a way to run a company, but it does seem like a good way to have your money stolen…

Importing

No experience here yet, but some general observations.

The import export license can be used to import and pay taxes on stuff coming into China. For example microcontrollers. Tax is generally 17%, and can be refunded when the chips are exported in a finished product. It is a bit of a hassle, especially for a small production run, but it is very doable.

In practice, almost everyone doing production in China has some variant of a story where they smuggle chips into the country in a backpack, pants pocket, etc. Foreign engineers becoming smugglers and tax cheats, over a 17% tax that’s refundable.

Supply chains are delicate enough already, you want to throw SMUGGLING into the mix!?!? Do you want your production held up for a month while you re-source chips because you got busted smuggling them into China to cheat a 17% tax? Then DON’T SMUGGLE!

Always ask your Chinese supplier for a copy of their import export license! It is at least moderate assurance your money won’t be stolen on the way into the country, and that your products won’t be confiscated on the way out.

Open a company bank account

cmb-logo

So after months and months of work we finally have a Chinese company! But wait, it isn’t really useful with out a bank account that can convert foreign currency to RMB. This took nearly three more months.

Here’s the strange thing: Chinese banking rocks. Fees are non-existent or super duper low. Foreigners can walk in off the street, open a personal account, get an ATM card on the spot, and sign up for internet banking, all for free with a small initial deposit (~$20USD, ~120RMB).

Business banking is a whole other thing. First we went to Bank of China, cause, you know, they’re huge and international. They wanted to schedule a call in a week to setup an appointment for next month, not ok. We visited PingAn, ICBC, Communications Bank, and a few other smaller banks that weren’t even licensed to work with foreign owned companies.

Eventually we landed with China Merchant’s bank, simply because they would actually meet with us. Pro tip: choose a bank close to home or office, you or your employees will be spending a day a week there for as long as the company operates. Almost every major transaction needs to happen in person.

bank-cert

After more than a month we received permission to open a bank account from the People’s Bank Of China central banking authority. At this point the import export permit was finished and we entered another month of waiting for approvals before the account was open.

Capital injection

verification

Even with a bank account and import export license we still can’t run the damn company. We have to “inject” the 400,000RMB of capital, then convert it from USD to RMB.

operatingexpenses

The 400,000RMB in foreign currency is wired from the business owner, the HK company, to a special single-use capital injection account. When the money arrives, appear in person to convert up to 300,000RMB per day for operating expenses.

If you want to withdraw and convert capital to pay a supplier, say for PCBs, you have to submit already-paid tax receipts. Our accountant describes this as an “incomplete system”: you can only use company money to buy products, but you can’t get company money until you can prove you paid for the products and taxes. We had pay for stuff with personal money pulled from an ATM machine so we could get the tax receipts so we could get money out of the company. Which came first: the chicken or the fapiao?

Online banking

cmb

China Merchant’s Bank has reasonably workable English (likely Windows only) crapware for managing accounts. It comes with two USB certificates, one for the accounting department and one for the administrator.

Each transfer is first entered by the accounting department login, then the administrator has to login and approve. It’s pretty burdensome for a small business.

enough-fun

At least the developers seem to care about the user experience. “Check if there is enough fun”. Indeed.

For the big ones, not the small ones

One theme that keeps popping up: China is still built for big business. The plus side is a real company with real no-bull expenses and tax deductions. But, while the bank software would be great for an organization of 100+, but it stinks for a couple hackers who want to export a few PCBs. Similarly, it is easy to export a shipping container load of stuff, refund VAT, and convert payment to RMB, but you gotta hack the system to ship a $14 PCB order.

Maybe this is why such a large gray market export economy is allowed to thrive in China. Foreign and local agents are exporting products, which China encourages, but the system is incomplete and overly burdensome for small companies and individuals to be fully compliant.

A blind eye approach could be much more effective than reworking the whole system. After all, currency control largely exists to prevent big (foreign) interests from speculating and manipulating the Chinese economy. The spirit of the law isn’t to bust an eBay Arduino seller for illegal exports.

Wrap-up

For those of you following along on WeChat #shenzhen_hacker_bei, some of this might seem familiar. We reviewed our business plan with the accounting firm multiple times, but still had a moderate crisis last week.

The accountant specifically told us, in writing and on multiple occasions, that a fapiao tax receipt was sufficient to get a VAT refund. We show up with fapiaos from the PCB factory for a refund. They pull out the example export declaration form – no refund without it, and by the way, no currency conversion either. It was obvious our accountant simply had not done it before. Rather than ask the head CPA, she just parroted incorrect conventional wisdom from her colleges. Idiots.

For most of the week we thought we were tanked. After multiple visits with lawyers and accountants we pieced together the full picture described in this post, and it seemed impossible to continue without renting a Hong Kong warehouse.

Yesterday we finally found the logistics agent willing to handle the export for us and provide an export declaration form. Hopefully these extended write-ups save someone anguish in the future.

Company. Check. Import export license. Check. Bank account with money. Check and check! But wait! We still need the work permit and residency permit! Add another 2 months before we can actually run the company. More on that process next week.

 

HOW TO: Start a Chinese Company

foreign-invest-cert

While Shenzhen is becoming “Hollywood for Makers”, and not always in a good way, there don’t seem to be a lot of foreign open hardware/maker/start-up/accelerated/innovated/incubated people starting Chinese companies. As far as we know, we are the first foreign owned open hardware centric Chinese company in Shenzhen. With everything going on here, we definitely wont be the last.

There are three reasons foreigners start a Chinese company: to sell to China’s domestic market, to get legal residency, and to work with small suppliers who can’t accept foreign currency. We are only interested in the latter.

Working with a controlled currency

rmb-note

Chinese RMB is a controlled currency. Money only goes in and out of China for certain purposes, in allowed amounts, with the proper license. Most small Chinese suppliers don’t have an import/export license (and dodge taxes) so they can’t convert payments made in a foreign currency.

compression-molding

That’s why it is almost impossible for you, from abroad, to work with the small, flexible, inexpensive Chinese suppliers we have access to. If you really want to make small scale supply chain mash-ups, say 100 traffic-themed adult novelties, then tiny suppliers are crucial and they must be paid in RMB.

Our solution has always been to partner with a Chinese owned local company like Seeed Studio and FlyLin Consulting to handle our ground operation in China. Now we can pay small suppliers directly.

There are also tons of illegitimate Chinese and foreign agents in Shenzhen who do all kinds of exploitative things to circumvent the currency control system and bring money into the country. We now tell everyone: don’t work with someone in China until you see their import-export license!

Fight zombie lies

HKnotCN

Before we continue, lets take a moment to address a pervasive, zombie myth that rings constantly at every start-up meet-up in town: a Hong Kong company is NOT an alternative to a Chinese company. Despite what agents and drunken foreign start-up groupies tell you, you’re not gonna be wiring RMB into China with your new HSBC Hong Kong account.

This is so obviously false and stupid on every level – if Hong Kong had exemption to the currency control wouldn’t every rich Chinese person setup a  company to funnel money in and out? Yet everyone orbiting the start-up scene will proudly and confidently lay it out like they’re skilled insiders. Morons.

WOOF WOOF WFOE

linlin-office

Officially our company is a WFOE, a Wholly Foreign Owned Enterprise. A simpler, cheaper structure called a FIPE is becoming more common with young entrepreneurs, but we understand it to lack liability protection. Foreign Owned doesn’t refer to us, it actually refers to the Hong Kong holding company that owns the WFOE.

fapiao

WFOE is a massive beast of a company. It files a full audit report every month, it must have a minimum size office, and every single penny of expense must have a government tax receipt (fapiao, above) attached.

Its a real company and its does have some cool advantages over an US-based LLC. We draw actual salary, and personal housing is a 100% tax deductible expense for the company. Profits can be remitted to Hong Kong as dividends and taxed as capital gains, if you’re into that kinda thing. While it may take a year to setup and cost as much as a small car, there are advantages if you actually live and work and run a company in China.

Hold me tight – start a holding company

You can own a WFOE personally, but it is seriously difficult to sell shares or take on partners, and there are massive tax issues.

hong-hong-city

Instead, open a Hong Kong company first, then the Hong Kong company starts the WFOE. There are certain tax benefits for remitting profits back to the Hong Kong company, but we haven’t done it and can’t comment yet. This is our structure, and we understand it to be the same structure Seeed is now using while preparing for IPO. Image source.

The Hong Kong company is quick and easy. Setup takes a week and costs around $700-$1000USD. Supposedly you can DIY, but we tried and eventually used an agent. Beware – the Hong Kong company requires an annual audit by a CPA ($500-$1000) and a registered secretary to file the annual report ($700).

HSBC

Opening the Hong Kong company bank account is simple, but you’ll need an appointment and it will take 2-3 weeks to be approved. We use Hang Seng, but would prefer to have gone with HSBC cause, you know, they print the freaking Hong Kong money. It is helpful to take some invoices or contracts to prove you’re a real company. Monthly fees around $60.

hangseng-onlinebank

The account can hold any currency, and you can exchange between almost any currency online, pretty cool. International wires are done online and cost about $35-$40USD.

Prove you understand basic tax principals

Hong Kong has a reputation as a tax haven. Sure, if you’re a legal resident personal taxes are pretty low, but that’s not much use to a foreigner with a small business.

Corporate tax is 16.5%, but your accountant won’t let you leave profit in the company so you’ll never pay corporate tax anyways! Same with Dangerous Prototypes’ US LLC, a pass-through entity isn’t even taxed! You’ll pay personal income tax in your country of residence, however much that is. Americans are also taxed on world wide income even when paying taxes as a legal resident of a foreign country. Get it?

If someone tells you about low tax Hong Kong companies just walk away, they’re a moron.

Choose your sleazebag agent

Agents are incompetent, sleazy, misinformed, and the absolute worst part of starting a Chinese company. There’s really very little opportunity to DIY a WFOE, so you’ll have to deal with them.

We interviewed 6 agents. Initially we hired the Chinese firm that did the Hong Kong company, but they hadn’t really done a WFOE before and the requirements are too numerous and fluid to leave it in the hands of an amateur. We fired them.

Next we hired a foreign guy who always seemed to have the answers we needed. He was super slimy and went on about having face (connections) and being the fastest in town, a total turn off, but he did seem to know the process.

Our agent misguided us multiple times, delaying the formation and costing money. The agent messed up really obvious and stupid stuff. We felt like he had never done a WFOE before either. Turns out, that was close to the truth. He subcontracted the paperwork to another local agent (Aaron Best), who actually presented at the first Hacker Camp…

sz-credit-registration

Eventually we looked up the agent’s company registration. It isn’t even a WFOE. It appears he had two Chinese people start the company so he wouldn’t have to put up the 10 million RMB capital he registered. If you’re talking to an agent in Shenzhen, be sure to look up the company on the official SZ government business listing to confirm who you’re working with. Here’s our registration.

The agent said the company could be done in a month, but in all it took 4-5 months to complete this initial setup phase. Much of the delay was our own complicated situation because we’re an existing, functioning company. A competent agent would have foreseen and guided, instead ours made everything much, much worse. We paid the guy $7000, which includes lots of government fees.

Get your stuff together

Capital

capital-injection

Up until this year you needed 500,000RMB ($81,000USD) of actual cash to start a trading WFOE. There are no hard limits now, but you have to convince the government you can run your company for a year with that amount.

Everyone says minimum 100,000RMB if you want a work visa. Agents terrified us with likely untrue anecdotes about being deemed unfeasible, so we put up 400,000RMB fully paid. Supposedly this is enough to get 4-5 work permits for foreign hackers to work in our Shenzhen office, but who knows if that’s really true.

You need to prove that you have the full amount, but only 20% needs to be transferred up front. The remaining 80% can be paid over the next 2 years. At least that’s what they say, it seems really unfeasible for a small company because each payment takes weeks of processing documents and updating licenses.

bank-reference

A bank reference letter and a certified balance statement prove you have the capital. Hang Seng’s phone bank sent us to the nearest branch to apply in person, somewhat conveniently located in the bank district of a dusty little boarder town called Sheung Shui. The first Hong Kong metro stop outside China.

The banker insisted, INSISTED, there was no such thing as a bank reference letter OR certified balance statement. After 10 minutes of begging, they uncovered the form for the reference letter, but not the balance statement.

More begging and pleading, but they insisted that there was no such thing and threw us out.  The next day the phone banker sent us the form by email to print and take to the branch. Got the same guy, but no apology for making us schlep back to Hong Kong a second time.

Both letters run about $50 each, and are available for pickup after 10 business days.

Director documents

secondpassport

The director of the company needs to supply a passport. The passport will be out of reach for a reasonably long time, many months, so it is absolutely critical that you get a second valid passport if allowed in your country. It is quite easy in the US, all the Shenzhen regulars seem to have them.

The passport will need to be authenticated. The deal here is that China is not part of the Apostille Convention that defines how most countries translate and verify documents.

Authentication is a 1900s era flair of ribbons and wax stamps. The US State Department verifies the passport and makes a copy. The Chinese embassy in the US verifies the State Department copy with a ribbon.  Back in China the government verifies the embassy ribbon with a wax stamp. Or something like that. $1000USD for this frilly anachronism.

Hong Kong company documents

hk-greenbox

All the Hong Kong company “green box” stuff needs to be authenticated by a lawyer (7000HKD/$1000USD). If you have a brand new Hong Kong company the documents are already authenticated, but ours was a year old and it all had to be redone.

hk-greenbox-hack

Speaking of green box, we added a magnetic reed switch and RGB LEDs to ours. Nothing says “business” like a company box with a party mode to celebrate the signing (chopping) of a contract. So far bankers and lawyers don’t seem to find it as amusing as we do.

hkvisa

Expert tip: when signing documents in Hong Kong a copy of your entry visa slip is required. If you’re smart and have the second passport you MUST enter Hong Kong on the passport used to register the Hong Kong company. Our agent neglected to tell us about this, so we had to make two trips.

audit-report

If the Hong Kong company is more than a year old China wants to see an audit report completed by a CPA. Hong Kong companies are required to file an audit report with the Hong Kong government every year anyways, but as a little perk the first is due after 18 months. Everybody knows this, all the agents use it as a selling point.

Dangerous Prototypes Limited (HK) fell into the gap – not old enough to need a report in HK, but old enough to need one in China. Instead of pointing this out and helping us deal with it, our idiot agent said our accountant had failed to file the report on time and we would have to pay fines and could even go to jail. He got us whipped up into a frothy lather and scared the hell out of us.

Nope, just needed to get the audit report done early. The audit took two weeks and cost about $500USD from a Chinese accounting firm with an office in Hong Kong. Submit a Google-translated Chinese copy of the report as well.

Officespaced

office-door

A WFOE office must be at least 30 square meters in commercial zoned space, not an apartment. Agents terrified us with myths about inspections, verification, losing visas, and bribing inspectors, so we were needlessly married to having a big office in Huaqiangbei.

HQB-map

We looked at a lot of offices in three buildings. SEG at the south, the Mr. Goodluck Buy building (not actual name) mid-market, and Galaxy Stars building at the North of the market. Offices run about 100RMB per square meter, plus building fees and tax.

seg
The office is going to sit empty for half a year while the company is formed, so we wanted to pay about $1000USD per month (6000RMB). There were lots of too small offices in the 4000RMB range, and there were lots of really big multi-room offices for 10,000RMB+, but not a whole lot for us.

mrgoodluckbuy

The Mr. Goodluck Buy building is unique. Its owned entirely by one company. That’s easier for a WFOE to work with, and there’s no charge for upgrading to a bigger office in the same building later.

qunxin

We ended up in Galaxy Stars Plaza, the building at the very north end of the market with a helicopter landing pad. No, we haven’t been to the helipad. Yes, we’ve tried. Several times.

Galaxy Stars is the Chung King Mansion of Huaqiangbei offices, a Mos Eisley Cantina of little Chinese trading companies. Perfect place for us, and our logistics company is just a floor below.

office

Initially we had rental agents show us space, but they run you all around unable to get inside any of the offices. Its a joke. Asking the security guard on duty to show us around was much more effective. He found us a perfect 52 square meter office for 6000RMB/month including fees and taxes.

building-tax

The contract needs to say that the owner allows the office to be used for a WFOE. Everyone exchanges ID copies, and they hand over a copy of the building tax license. The contract needs a realtor stamp to be official, the guard found someone to provide it.

China’s clean government

National_Emblem_of_the_Peop

One theme throughout the formation process is that agents tell myths, stories, legends, “conventional wisdom”, and seemingly outright lie about stuff. One agent came into our office and said it wasn’t big enough, he was confident the work visa officer would review the floor plan and ask for a bribe. Image source.

Never, during this entire process, was there even a HINT of corruption in the Shenzhen government. Absolutely everything was by the books and squeaky clean. Follow the rules, file paperwork, wait, repeat. There wasn’t even a remote opportunity for something improper to happen.

Part of our motivation for writing this in such long form is to show how clean the experience was. The only corruption and incompetence we experienced was from agents.

The numbers man

An accounting firm is mandatory. The amount of paperwork they file monthly is epic.

China has two levels of sales tax/VAT. A small tax payer pays 3% VAT on everything purchased, and it cannot be refunded when things are exported or sold.

A general tax payer owes 17% VAT on everything they buy, but the tax is refunded when the stuff is exported out of China.

We have been both, currently we’re general tax payers and that was a horrible, horrible mistake. We haven’t done a VAT refund from exporting PCBs yet, it will be interesting to see what happens.

Accounting prices are the same all over town. 400RMB ($70USD) per month for a small tax payer, 1100RMB ($180USD) for a general tax payer. 50RMB ($9USD) per month per Chinese employee, and 150RMB ($29USD) per month per foreigner. Our accounting firm is acceptable, if a little lazy.

The process

complete-docs-pile

Got all that stuff now? It took us 3 months to get everything in order before filing the first document with the government.

Name check (2 weeks)

name-search

Submit a bunch of Chinese names, the government will pick their favorite. There are all sorts of naming rules. Ours shook out to Shenzhen Hanging from the Cliff’s Edge Electronics Technology Limited Company. “Hanging from the Cliff’s Edge” is the actual translation of Xuan Yaun, which is a close as we could get to “Dangerous”.

Foreign Ownership Certificate (4 weeks)

foreign-invest-cert

Here’s where that Foreign Owned part really clicks. The Hong Kong company applies to the government for permission to open a company in China. China gives us this giant certificate redeemable for one Chinese company. Now we’re getting somewhere.

foreign-invest-details

Notice it says for investors from Hong Kong, Macau, and Taiwan? That’s because it belongs to the Hong Kong company, not us.

Business license (10 days)

cn-company-license

All the documents and the company coupon go the local government. 10 days later we get a business license and a copy. These giant papers will have to be folded and carried a ridiculous number of places over the next several months.

company-permission

We also get a half dozen permission letters from the local government. They want one every time we get permits, a bank account, visas, etc, etc.

The problem with stamps

stamps

So, China enjoys stamps. You need them endlessly. The company has three stamps: general stamp, financial stamp, and customs stamp.

KNOW IT: Domestic company stamps are round, WFOE stamps are oval. Are they really a WFOE? Check their stamp!

personal-stamp

We each have name stamps as well. Literally just a stamp with English names.

During the next phase everyone needs the stamps: accountants, permit and licensing agents, visa agents, the bank. Of course you’re gonna need a little stamp time of your own too.

Here’s the rub: you only get one stamp and its illegal to copy them. Part of what takes so damn long with the WFOE is waiting for stamp time. For a while our stamps were couriered between 6 offices almost daily. This can’t be how Tencent deals, can it?

Mix and serve over ice

This is just the initial setup. To actually do anything with the company we still need a bank license and account (2 months), an import-export license (1 month), a work visa (3 months), and a couple other things. We’ll write these up in less-epic posts in the coming weeks.

Was it worth it? No idea yet. The dust is settling though, and we can see a day in the future when we’re running the company instead of starting it.