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China continues to show strong growth into 2025, beating forecasts. The manufacturing, export and tech sectors are surging ahead, making now an excellent time for international businesses looking to expand into China.
The two most popular expansion vehicles in 2024 are the Wholly Foreign-Owned Enterprise (WFOE) and the Joint Venture. Since the 1980s, joint ventures have been the most popular way for foreign companies to enter China, whether they want to or not.
In this article, I want to explain why a WFOE is increasingly becoming the sensible expansion option.
Related: Expanding to China? Don’t Do These 6 Things
Why expand with a Wholly Foreign-Owned Enterprise?
Wholly Foreign-Owned Enterprises are limited liability, incorporated entities where the foreign company or investor has 100 percent ownership and control of the legal entity in China.
As an independent legal entity, a WFOE with the requisite registrations has a wide scope of activities in China. Traditionally, this structure is divided into three types of entities: Consulting WFOEs, Trading WFOEs and Manufacturing WFOEs.
Apple, Microsoft and Nike all manufacture their goods in China through WFOEs, retaining full control of operations and their own intellectual property.
While there are no universal minimum capital requirements, an approved amount of registered capital is required. Some industries (such as banking and telecommunications) require significantly more capital than consulting or retail operations.
The WFOE gives the maximum degree of control in their China operations to the foreign entity or investor.
Why expand with a Joint Venture?
A Joint Venture in China operates similarly to joint ventures in other regions, serving as a partnership model for businesses. Typically, for foreign investors, this is established through a limited liability company where both foreign and domestic Chinese partners own shares in the venture. So, why might a company opt for a Joint Venture instead of a Wholly Foreign-Owned Enterprise?
One reason is that the WFOE structure isn’t accessible to all types of businesses. For instance, foreign car manufacturers and telecommunications companies generally must form a Joint Venture unless they have specific exemptions. Tesla stands out as the first exception in the automotive sector, having received approval to run the Shanghai Gigafactory as a WFOE.
Second, partnering with a local business is often crucial to the success of China’s expansion. Local partners have direct access to local networks, resources and expertise. It is much harder for a company to get up and running alone quickly.
Third, Joint Ventures have reduced registered capital requirements. The existence of China-based partners means the authorities are far more relaxed about the amount of capital required.
However, along with those potential benefits, it is still important to consider some of the potential downsides of Joint Ventures compared to WFOEs.
First, a Joint Venture means giving up some degree of control. The China-based partner usually has access to the company’s assets and other official documentation and may act without the full knowledge or consent of the foreign partner. This even carries intellectual property risks through the possible sharing of confidential company information.
Second, profits will be shared with the China-based partner. Some companies may find that they are sharing profits in a way that doesn’t fully reflect the contributions of both parties.
Related: China Remains Rich in Opportunities for Entrepreneurs Who Keep Calm
What is better? WFOE or a Joint Venture?
Assuming you are not quite in the Apple or Tesla category yet, which option is the best for your China expansion?
I suggest you ask the following questions:
- Is the industry restricted to Joint Ventures only? Note that even where the industry is restricted in this way, exceptions are often possible,
- Do you have the financial resources for a WFOE? Not only do you need to meet the increased capital requirements, you need to be confident you can foot the bill alone if anything goes wrong.
- How important is protecting your IP? For consulting or retail, this is likely not a critical factor. However, sharing access to IP can be risky for manufacturing, industrial or software applications.
- How important is brand consistency? If you produce luxury goods, for example, a WFOE will be the best way to ensure the integrity of your product for global consumers. Conversely, if you are actually targeting Chinese consumers, a Joint Venture partner may be essential for effectively altering your product.
- Do you need quick access to local distribution and manufacturing networks? Historically, this has been harder to achieve through a WFOE, though businesses are increasingly able to do this through non-equity partners such as consulting and advisory firms.
- How important is governmental support? In China, most of the financial support for businesses comes from local governments. A joint venture with a local partner can help applicants apply for subsidies and grants.
Joining forces or going alone
Joint Ventures have traditionally been the primary structure for foreign businesses entering China, regardless of whether this structure is desired. However, it is becoming less necessary to form a Joint Venture, and a Wholly Foreign-Owned Enterprise often proves to be a more advantageous option.
A WFOE allows a global business to maintain full control over its operations in China and the associated profits. While local support is essential for success in the Chinese market, this need can now be met through consulting partners rather than requiring equity partnerships.
