WFOE ‘vs’ Rep Office for Business in China

This is a question about the scope of activity an RO can take on in China, versus setting up a WFOE. It’s a question about a small company who exports $50k AUD of product a year from China, and who is looking to spend that $50k AUD a year on doing it ourselves in China, as apposed to paying some other Chinese company.

I’ve done a bunch of research, including a 3 weeks research assignment to China. I’ve just returned. I’ll be heading back over there in 2 weeks.

My Australian company, for or the last 6 months, have outsource the production of a very simple “widget” to China. This widget is custom-ordered, meaning when we receive an order (for one widget) from our client, we order from China. Twice a week, all the orders are shipped back to Australia for distribution to our clients. We export about 100 of these a week and we spend about $1,000 AUD per week on the production. Shipping is about $3,000 per week as these are light, but bulky items.

The biggest opportunity is that in 6 months we’ve gone from just an idea and a website to turning over $2k a week in sales. This is growing rapidly. The biggest issue, time and time again is maintaining quality standards and getting these fragile things packed properly. Big headache.

I say the “production of”, rather than the “manufacturing of” because this widget can be produced very easily. It requires no special manufacturing equipment, are put together by hand, and only takes up a lot of space if we receive a lot of orders. In fact the space to do packaging and to store packaging supplies is the biggest component!

We’d like to do the production of these in China ourselves because after about a $10k AUD setup, it’ll cost us about the same each year ($50k AUD) to have our own office, employ a couple of people, buy our own supplies and put these things together. The benefit is that we’ll finally be able to control quality and perhaps capitalise on other opportunities in the region. And, as we grow, we’ll save money because this product is labour intensive and labour in China, as you know, is very affordable! If it doesn’t work, we’ve really only lost the setup cost and my time, as owner. The business in Australia suffers very little without me there as I’ve spent many years making it so I can easily step back. And hey, I get to live in China for a while if all goes well.

Ultimately, I want to look at setting up an WFOE in China however given that the production of these products is really simple, I’m really hoping an RO can handle it – and handle it legally. We only need to employ a couple of people, need about 100 SQM of office space. Packaging is 50% of the space / work (and my understanding is that packaging is allowed as a function of an RO). So it’s the other 50% (a couple of people putting these things together made from two basic materials sourced locally) that MAY cause a problem should we get audited.

The purchase of the two basic materials would be done directly from our Australian company and we don’t want to sell locally.

Anyone have any ideas if an RO is all we need?

You might ask why don’t I just set up a WFOE…

Our customers pay us and then we pay China for the production. So, while we have good cash-flow, we don’t have a bucket load of money in the bank. Setting up a WFOE requires a lot of capital – capital that one, we don’t have and two, is really not needed when producing custom-ordered, single-item widgets. For paid up capital, we can initially inject $10k for the office setup and then $50k over a year, but my research suggests that’s not nearly enough to get a WFOE approved.

Does anyone know if I could register a WOFE with that kind of capital?

If you’ve read this far, wow… thanks. I truly hope I can contribute to this forum and answer other’s questions – once I know something useful!