To be or not to be a WFOE (wholly foreign-owned enterprise) is a fashionable topic among foreign investors in China today.

In July, Nexans, one of the world's top three cable manufacturers, established its Shanghai Cable Company Ltd in the Pudong Waigaoqiao Bonded Zone. It is Nexans' largest wholly-owned business in China since Nexans dipped its toes in China in the mid-1980s.

The Swedish home electric appliance giant Electrolux purchased the remaining 40 percent stake in its Chinese joint venture from Changsha Zhongyi Group and turned it into a wholly owned subsidiary last September.

And reports say IBM will sell its 80 percent stock in its joint venture company International Information Products (Shenzhen) Co Ltd.

In three modes: setting up a new WFOE, or buying or selling shares in joint ventures, many foreign-funded enterprises have begun to step forward to sole proprietorship in China.

Many world-famous companies have their names on the list such as P&G, Avon, Matsushita and Siemens, which gives the impression that foreign investors will abandon their Chinese partners.

Wang Zhile, a professor from the Research Center on Multinationals, says foreign companies are reverting to normal.

"The form of joint venture is quite rare in foreign countries and it is China's own form of enterprise," he said.

When foreign companies first entered China, the main reason for them to form joint ventures with Chinese enterprises was that there were policy restrictions imposed on foreign investors in many Chinese industries, he said.

"I do not think the WFOE trend will harm the Chinese economy. The partners can decide whether to co-operate and the mode of the cooperation by economic benefits," he said.

Wang said the WFOE, which requires more investment, indicated foreign investors' confidence in China in the long term.

"You should not worry that foreign investors are putting more eggs in the basket and local businessmen also have learned how to live alone," he said.

According to Guangzhou Development Zone, wholly foreign-owned projects accounted for 60 percent of the total compared to two of 59 projects a decade ago.

The increasing number of WFOEs in the last three years reflects that China is further opening up its economy and foreign companies are adding China's weight to its global strategy, he said.

China revised its WFOE Implementing Regulations in 2001 before its entry to the World trade Organization.

The revised WFOE Rules now provide that "the establishment of WFOE must benefit the Chinese national economy" and that China "encourages the establishment of technologically advanced WFOEs".

Before the revision, the rule said WFOE applications would be approved only if the WFOE committed to use advanced technology or exported at least 50 percent of its products each year.

After China's WTO accession, China has lifted policy restrictions in many industries, especially in the service industry.

Foreign companies have obtained sufficient understanding about China's markets through long-term participation.

"The two elements made the change to WFOEs a certain choice for some foreign investors in recent years," Wang said.

Wang said he expected the moves towards WFOEs will speed up in next two to three years during the peak period of China lifting its restriction on shareholding.

"The distribution sector will be the focus," he said.

On July 1, Olympus opened its wholly-owned Olympus Sales & Service Co Ltd in China with a total investment of US$5 million, in a bid to build a stronger service structure in the country.

News Corporation has also announced it will set up a wholly-owned advertising company in Shanghai.

Foreign companies have also changed to sole proprietorship as preparation for new market access, Wang said.

The world's direct-selling giant chose to be a WFOE as the country opens its direct-selling sector in December.

Avon (China) Co Ltd has decided to acquire the stake of its Chinese partner Masson for US$50 million to become a solely foreign-funded enterprise in China.

Presently Avon, the world's leading direct-sales cosmetics group, Masson, a Guangzhou-based private company, and several individual shareholders have 75 percent, 20 percent and 5 percent stakes in the joint venture (JV), respectively.

Gao Shoukang, president of Avon China, said the move aims to allow Avon and Masson to concentrate on key businesses and optimize product mix.

"We are working towards a strategy that places China at the centre of our growth," said Gao.

Besides the policy change, China's rising position in foreign investors' global strategies highlights the need for a structure for WFOEs, Wang said.

Foreign companies are changing their assessment on China from a world factory to a world market, Wang said.

"Besides having investment in China to produce exports, they find China is actually emerging as a large consumption market," he said.

To support the change, foreign companies are setting up research and development centres and service departments especially for the market. They say they believe that WFOEs are a better choice.

For research and development facilities, WFOEs offer the additional advantage of allowing foreign investors to maintain closer security and protection over their intellectual property and other proprietary information, Wang said.

Consumer products maker Procter & Gamble (P&G) bought the remaining 20 percent stake in its China joint venture from partner Hutchison Whampoa China Ltd for US$1.8 billion this year.

The joint venture was set up in 1988 when P&G began operations in mainland China.

A spokeswoman from P&G said results from its China business give it confidence that it has the right people, the right business strategies and the in-depth understanding of local consumers and retailers to go it alone.

"Their increased money and support facilities in China requires stronger local management by setting up WFOEs," Wang said.

Wang points out in a research report this year that an important purpose of the sole proprietorship of foreign companies is to integrate their dispersed investment projects in China so as to execute unified management, save resources and improve efficiency.

Lizzy Wang, an analyst from Fiducia, a management consultant company, said experience has shown that the set-up costs for a joint venture before the commencement of production are often unexpectedly high, compared to the WFOE.

The main reason for this is long and costly negotiation. Furthermore, the JV partner frequently incurs high production costs over which the foreign investor has no control, she said.

In addition, another important reason for the trend of sole proprietorship is the conflict of management between the two sides in joint ventures, she said.

A middle-level manager of a joint venture company believed the main reason for conflict is that co-operation between Chinese investors and foreigners is not based on both sides' common conception, but is compelled by situations and policies.

Therefore, when the situation has changed, these conflicts of management become a crucial reason for the separation of the two sides, the manager said.

Wang said a WFOE allows the foreign investor to maintain complete ownership of the business enterprise and to operate the business without the constraints of a partner that may not share the same goals, expectations, values, and corporate culture.

But Wang said that though sole proprietorship is becoming a new trend in foreign companies' development in China, the "sole proprietorship reform" of joint ventures does not mean that transnational companies no longer need Chinese partners.

"In fact, transnational companies will select Chinese partners according to their own willingness and establish non-restricted partnerships with the Chinese sides in more flexible ways," Wang said.

However, she said the new joint venture and partnership will be based on the precondition of "interests" instead of the restriction of "policies."

Though future competition between Chinese and foreign enterprises will be intense, they can also assist each other in competition, she said.

As a WFOE, the foreign investor has no Chinese partner to guide projects through approval processes and other regulatory issues, the procedures of establishing a WFOE in China can be complicated, difficult and costly, Wang said.

"Regarding different situations, different enterprises have chosen different ways in line with their own strategic needs," she said.

(China Daily August 24, 2004)