Withdraw from China: Can It Be Done?

Withdraw from China: Can It Be Done?

  • Posted by: Peter Pang
  • Category: Category: Business In China
Withdraw From the Chinese Market

Although it may seem sheer lunacy to some due to the rapid growth of the Chinese economy in recent decades, particularly with its status as the world’s second largest economy, some iconic Western brands have found themselves unable to achieve any success in the Chinese market. This has led some Western brands to pull out of China altogether. For instance, in August 2016 Uber announced that it was leaving the Chinese market. In 2010, iconic American technology giant Google did the same thing, due largely to its failure to catch on with Chinese web users as rival Chinese search engine Baidu grabbed an ever-larger market share while Google struggled to make single digit growth gains in the Chinese market.

Many storied brands have tried to establish themselves in the PRC only to find that they were unable to appeal to Chinese consumers’ tastes enough to develop a following.

However, despite the large numbers of Western companies that have attempted to withdraw from the Chinese market, withdrawing from the PRC market is not as simple as just closing a company or brand’s doors. Instead, there are a number of steps that a foreign company or brand must take in order to ensure not only that it winds down its Chinese operations in accordance with Chinese law, but also preserves its ability to re-enter the Chinese market if for some reason the foreign company or brand makes the decision at a later point to re-enter the Chinese market. Among these steps are de-registering the corporate entity under which the foreign brand or company was operating its Chinese division or subsidiary, paying all of the company’s debts, deciding what to do with any trademarks the foreign company may have in China, among other things. This can be a cumbersome, expensive, time-consuming process that if not done correctly can haunt a foreign company’s future prospects and bottom line, particularly if it later attempts to re-enter the Chinese market. However, a foreign company that chooses to leave the Chinese market must do things the right way and follow the required steps under Chinese law, lest it forever lose its ability to re-enter what will soon become the world’s largest economy.

Foreign Brands Unable to Find Success in China

Despite the rising affluence of Chinese consumers as well as the sheer size of the country’s market, some global brands are finding that the costs of having a Chinese presence simply do not justify remaining in the Chinese marketplace. Although a hard-charging foreign corporate executive may never want to admit defeat, there may come a time when the enormous costs of building the presence of a successful brand from scratch in the PRC. Many storied brands have tried to establish themselves in the PRC only to find that they were unable to appeal to Chinese consumers’ tastes enough to develop a following.

Often, it can be difficult if not downright impossible for a company or brand to say no to the Chinese market.

For example, the British fashion website Asos closed down its Chinese operations in 2016 after spending £9,000,000 launching its Chinese operations only three years before, £3,000,000 more than the company had forecast it would cost to jumpstart its Chinese operations. The company announced the closure not long after losing £4,000,000 in 2015, weighing down its parent company’s share price. Asos cited its failure to catch on with Chinese consumers as the reason for closing down its Chinese presence.

Steps Necessary To Exit The Chinese Market

However, a foreign company or brand cannot just close its doors, pack up its things and leave China. Instead, there are a number of steps that a foreign brand must take not only to unwind its Chinese subsidiary but also to protect any patents and trademarks the company many have in the event it ever wants to return to the Chinese market in the future. Exiting China can mean a major headache for any brand seeking to do so. First, the company needs to ensure its business affairs are properly wound up. This means becoming current on all taxes due to national, regional and local authorities. Once all tax obligations have been cleared up, the company must submit an official report known as a Tax Clearance Report (obtained from the company’s auditors) and then the relevant tax bureau will issue the company a notice of cancellation of the foreign company’s tax registration in the PRC.

Maintaining the company’s intellectual property properly under Chinese law is an important factor to consider even if the company decides to close down shop in China.

Winding up a business in China also includes paying any suppliers or other vendors with outstanding invoices that remain to be paid as well as paying off any other debt the company may have. Only then can the corporate entity under which the foreign brand was operating its Chinese division be legally dissolved. If a Chinese company attempts to liquidate itself without paying all of its debts first, then according to the PRC Company Law, then the company is referred to the courts for a bankruptcy proceeding. This can be not only incredibly time-consuming, but may even make it impossible for a foreign company which is the shareholder of the Chinese corporate entity being liquidated to re-establish operations in China if it wishes to re-enter the Chinese market at some point in the future. Therefore, the utmost care should be taken to follow the steps required under Chinese law for winding up a business.

In addition to the above steps, a foreign company must also submit an application to the PRC Foreign Trade & Economic Cooperation Bureau to cancel its corporate registration. After this approval has been received, the foreign company also must cancel its business licenses, alien employment permit and register the dissolution of both its Organizational Code Certificate and Statistics Registration Certificate. Once these registrations have been achieved, the company must close its Chinese bank accounts, repatriate any capital remaining in China and then cancel the company stamps. Only after all of these steps are accomplished can a foreign company receive an official notice of the approval of cancellation from the PRC State Administration of Industry & Commerce.

A final important issue to consider is what the foreign company wants to do with any trademarks or patents it may have registered in the PRC. If a company has trademarked its name, then allowing the trademark to expire would theoretically allow a competitor or domestic Chinese entrepreneur to come in and offer products under that brand name. This can be catastrophic for a brand’s value, which is why maintaining the company’s intellectual property properly under Chinese law is an important factor to consider even if the company decides to close down shop in China.

Conclusion: Sometimes Exiting the Chinese Market May Be the Right Move, Although Painful

Often, it can be difficult if not downright impossible for a company or brand to say no to the Chinese market. As the world’s second largest economy and one that is continuing to expand at nearly four times the growth rate of the United States economy, saying no to China can seem like suicide to some U.S. or foreign executives. However, if a product or brand has failed to catch on with Chinese consumers for cultural or other reasons, then perhaps it is best to shed a tear, say goodbye and close up shop in China. This is particularly true where the foreign company is spewing red ink due to a failure to catch on with Chinese customers. This is not an easy process and requires considerable forethought and planning, but can in the end, be the right move for a foreign brand that is hemorrhaging money in China with little chance of turning things around anytime soon. This is a well-worn path that has been trod by the likes of Google, Uber, Best Buy and a number of other iconic Western brands.

 

IPO PANG XINGPU, with headquarters in Shanghai China, we have been helping clients from all over the world with their legal matters since 1992. We are a group of dedicated attorneys and professionals with expertise and experience in a variety of legal disciplines.  Clients come to us “When Being Right Matters ®”.

Peter Pang
Author: Peter Pang
Peter C. Pang* is Chairman and Managing Partner of IPO PANG XINGPU LAW FIRM., His expertise includes corporate law and formation, franchising – inbound and outbound, mergers and acquisitions, real estate acquisitions, private placement, technology transfer, joint venture formation and business alliances, and trade secrets and intellectual property protection. Mr. Pang’s over 35 years of law practice in the People’s Republic of China and the United States places him amongst a handful of US-China lawyers with Asian International Expertise and in-depth appreciation for both the Western and Asian cultural and business differences and sensitivities. Mr. Pang is an attorney who “not only knows, but knows how” to close a deal, litigate vigorously and represent clients zealously. We don’t sell time, we sell solutions ™.

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