B2B SaaS in China
China is a large and tempting market for software vendors. In April 2017, our Canadian based SaaS B2B company Nimonik acquired a similar company base in Shanghai, China. The company in Shanghai is called Envitool and was setup in 2010 by a Swedish company.
Envitool is a Wholly Owned Foreign Enterprise (WOFE) and it offers an online service that helps businesses understand and monitor environmental, health and safety regulations. It also offers some consulting services that are critical to the use of the software system. When researching the market and legal requirements in the run-up to the acquisition, I read some interesting articles about selling software as a service in China and insightful articles on dos and dont’s on China Law Blog. Despite our research, there was not a lot of positive articles on B2B SaaS or SaaS in general in China.
Since the acquisition we have learned that running SaaS in China is not as hard as you might think, but it does require additional resources, costs and complexities. For one, you need to pick the appropriate legal arrangement for your entry into the Chinese market. The company was already a wholly owned foreign enterprise (WOFE), but we did look at various options below.
Legal Options for SaaS in China
- Do business through a Reseller:
Keep the server is located outside China to reduce risk that the Chinese government would put up a firewall and block access. At a minimum, the reseller locates customers for the foreign company’s SaaS product. The reseller provides the ultimate customer with a username and password that allows the customer to connect to the foreign server hosting the SaaS product. The reseller collects the fee from the customer and deducts and pays applicable Chinese business and income taxes and then remits the remaining amount to the foreign software provider.
- Set up a WOFE
We estimated it takes about 6 months of time and $50K to $100K USD for paid up capital. Once paid up capital is resident in China, restrictions apply to taking out 50% of it, once the WFOE is profitable. Basically, you need to park money in the company in China and you can never take all of it out.
- Do business through an Agent
Licence the your software to a Chinese entity that obtains the commercial ICP license that allows for offering the SaaS service to Chinese customers through a Chinese server. If a partnership type arrangement is set up, the Chinese Agent would invoice and collect payment from customers, and continue to be responsible for the operations in China.
- Do business directly in China from Overseas:
You are short paid for the amount of taxes (withholding tax 10% & VAT). Payments may be delayed and clients may not receive permission to send payment as they cannot easily send money overseas. As a non-Chinese company, it would be difficult to get approval to run the software on a Chinese server, and if run on a non-Chinese server, you run the risk that the Chinese government would put up a firewall and block access.
Key Lessons Learned So Far
For a variety of reasons we opted to acquire the existing WOFE and continue to run the company from China. We are in the process of integrating the data from the Envitool software into our more modern platform, NimonikApp. Once that is complete, we will move all of our clients and data to the new platform and offer only that to the Chinese Market. We maintained the legal entity in China, maintained our ICP licence and ensured that we have trademarks in China.
To setup the Swedish Envitool company in 2010, the services of Scandic Sourcing were used. This is a Swedish consulting company that helps businesses setup in China. They also offer back-office services related to accounting, taxes, payroll and other items. We are still using their services and are very satisfied. They work with our team to ensure that all of our documents and paperwork are in order.
Though all the legal questions are fun and interesting, the main worry for many foreign businesses is “will I get paid and how!” If there is one thing the Chinese Government is serious about, it is the collection of Taxes. Invoicing in China is interesting, the workflow is as follows:
- We speak to an existing or a new customer
- We send them an order form with a quote, this order form is stamped with our company seal (called a Chomp)
- They sign and return the order form (sometimes in paper format and sometimes in electronic format).
- We then send a real invoice (FaPiao), this is printed from a specific machine that is connected to the government servers, so they know exactly how much we charged, when and to whom
- We stamp the invoice with another company seal (you have three different ones, one of which authorizes the sale of the business)
- We then physically send this invoice to our client
- Our client pays us via bank transfer
- We charge a 6% VAT on all of our invoices and we have to remit that amount immediately, not when we get paid.
- If an invoice never gets paid, it can be cancelled, but it is complicated. This happens in less than 2% of our cases.
I could go on with the intricacies of managing a team of Chinese sales and EHS experts, the cost pressure from local Chinese competitors and the demands for constantly increasing salaries – but I will spare those details for now. Long story short is that you can do B2B SaaS in China, but be prepared to invest at least 500 000$ before you see profit and make sure you work with local partners who really understand the system. Feel free to contact me with questions or comments, always happy to help a fellow weiguoren!
Published on January 30, 2018
Who will lead the world?
Western media is biased against China. Then again, the west is biased against everything that is not western. From ancient democratic Greece, to the Roman Empire, to the Christian world, the renaissance, the enlightenment and the industrial revolution and putting a man on the moon – we think we are the the best off the best. Nevermind the slavery, the crucifications, the witch burnings, the constant warfare, rape, pillage, massive environmental damage, imperialism, the holocaust, foreign wars and the treatment of minorities – we are the best! We are taught at nearly every level of schooling that the logical endpoint of human societal development is the path the west is on, the ideal system, though imperfect is the liberal representative democracy. What if we are wrong?
History is a long and winding road, the victor never permanent nor clear. Today’s global geopolitical situation is as cloudy as it has been since the 1930s. Back in the 30s, many leading politicians and thinkers were engaged in a serious debate over the merits of capitalist market economies, fascist dictatorships and communist nations. Capitalist market economies won out, proving many smart people wrong. However, this does not mean that our system is the long term solution or that it beats all other potential solutions. It might, it might not. Today, the rise of populist protectionist anti-immigration nationalists in the UK, Austria, Turkey and the United States, contrasts starkly with the defence of globalization by China, France and Canada. To add to that, the ongoing regional wars in the Middle East create great uncertainty over the future of that part of the world. Where will Saudi Arabia, Lebanon, Iran and Tunisia be in 20 years? I have no clue. More and more, I am asking myself what Europe and its former colonies will look like 40 years? Will we still be the dominant economic an cultural powers or will we have returned to an Asia centric world that dominated the world from 400 AD – 1700 AD? If so, what will happen to the west?
For most of human history, the economic centre of the world was Asia. Asia had the most advanced technologies, the most complex societies and the wealthiest nations. For a variety of reasons, Europe emerged as a leading intellectual powerhouse with the Renaissance and then with the Enlightenment and the Industrial Revolution. This took about 800 years after the fall of the Roman Empire. Why this happened is well dissected in books such as Guns, Germs and Steel and other anthropological studies. One of the standard narratives we tell ourselves is that West’s rise required democracy and competition. We explain to our muslim friends or our Chinese friends that our democratic institutions allowed for the intellectual freedom that led to the three iterative improvements during the Renaissance, Enlightenment, and the Industrial Revolution.
Of course, there was no true democracy until 1776/1789, so maybe democracy was not the key. Despite a rather monolithic Church, the competing states and aristocrats in Europe along with physical mobility allowed for competition, innovative ideas and eventually, massive cheap labour for factories. In a sense, though there was no democracy until the late 18th century, Europeans had more individual liberty than Asians as they could and did move from one nation to another with their ideas and projects. The famous story is that of Christopher Columbus who visited three kings before obtaining the venture capital to set off for a route to the Indies and needing up in the Americas, the rest is history, as they say. We are told that without individual freedom in Europe, the momentous inventions and advances that led to most of our modern day wealth would have not been possible.
When the European powers controlled most of the world and invaded China in the mid and late 1800s, our production capacity was 10 times more efficient than China due to the use of fossil fuels and the invention of the steam engine. (See Richard Baldwin, The Great Convergence, p. 59). 10x times can be hard to imagine, but try to imagine a country that is 10x more productive than the United States (or Sweden) on a per capita basis. This discrepancy is so massive it would inevitably lead to domination of one nation by another and likely to a sense sense of superiority.
In contrast to clearly divided European powers post Peace of Westphalia, China had a centralized imperial system that shut its doors to outsiders and trade in 1422, starting its decline to a impoverished nation. Some argue that had China been more fragmented and more individualistic, it might have had the ability to innovate like the West. Additionally, its lack of rule of law and democracy prevented new innovative ideas or progress from being made. Some argue that Asia is less prone to innovation than the West, making a clear implication that the west and caucasians have an inherent cultural advantage. That is the story we are told and like all stories, it has an element of truth.
Culture is a technology. As Lawrence Lessig has said, our laws (and culture) are the source code of our society. The laws and regulations determine what we can and cannot do, the method of innovation in society, our interactions and the way we offer opportunity to those who strive to build something better. Culture enables us to interact with each other, it sets societal norms and defines what is acceptable and what is not. Cultural norms and legal systems change for better and for the worse. But, it should be noted that anyone can steal and borrow both our hard technology (plans to a nuclear plant) and our soft technology (culture).
Our culture that lynched blacks, castrated gays, and caused wars and devastation has changed dramatically for the better. Asian culture has and will evolve as well, so we must avoid assuming that the rise of China is a temporary event – inevitably to be set back by the realities of their lack of a liberal democracy. China Economic Quarterly made a point recently that the west has been predicting the demise of China for more than 20 years and that has not yet materialized (thought it does not mean it will not).
Between 1880s and 1950s, many educated and intelligent people believed that the World would move from capitalism to socialism. The tremendous progress made by the Soviet Union and then China in improving the welfare of their people seemed to signal that a centralized and powerful state would beat out a decentralized and less organized Western Democracy. Yet, the revelation of the excesses of Stalin and Mao along with the collapse of their economies laid bare the failures of that system, With the fall of the Berlin Wall, the victory of liberal democracy over communism that was not at all obvious in 1930 or 1950 became self-evident.
But what if we are wrong? What if the Chinese governance model of a strong state and the interaction of government bureaucracy, state owned enterprise and government officials is actually a better model than universal suffrage and representative democracy?
China’s rise is still confounding many researchers. It goes against the narrative that without liberal democracy, a nation inevitably collapses due to corruption and nepotism. Xi Jiping’s 3 and half hour speech in 2017 on growing Chinese power and their preparations to open their economy, invest in clean energy and engage the world would not have been imaginable 40 years ago. His shorter version at Davos hit many of the same critical points. Many western commentators still write it off as a ploy and that the country actually has little intention of doing what it says. The west seems to confuse what we want from what is and this can be a deadly mistake. With 6,8% growth in China and a stable political system that is generally well liked by its people, it is becoming less and less obvious who will collapse first – the West or China.
This interesting talk outlines how the Chinese political machine works:
One of the reasons the West continues to culturally dominate the world is the narrative of freedom and democracy. We can rightfully claim that our rule of law and low(er) corruption levels will carry us in the long term as investors and people prefer to live and be members of a society where they are not subject to arbitrary decisions by government officials. However, our story is starting to show cracks at the seams.
The United States, the most democratic country in the world, has severely overextended itself in the Middle East and its internal infrastructure is crumbling. Additionally, its continued problems of racism and the mass imprisonment of millions of its citizens is undermining its ability to convince anyone, let alone China, that it has the right political and economic model. The capture of Congress and even the presidency by lobbyists and powerful interests makes it difficult for anyone to believe that the US is less corrupt than the average country. Additionally, the US has lost a great deal of support in the developing world as its proposed solutions for development, offered through the World Bank and the IMF have failed to deliver real gains for citizens. More and more countries are looking to China’s model as an option for development.
Speed of delivery is a core part of the satisfaction of the recipients. From the mundane to the geopoliticical, speed matters. Domino’s Pizza is famous for its commitment to deliver your Pizza in 30 minutes or its free. Despite mediocre pizza, this time limit made Domino’s into a financial success. At the national level, the speed of the reforms politicians deliver is just as important as the type or reforms.
At the U.S. Republican National Convention during the 2012 US election campaign the Hollywood actor and director Clint Eastwood improvised a skit. He stood on stage, in front of the nation and talked to an empty chair. He rambled about the lack of progress and lack of change for the American people. The imaginary chair represented Barack Obama.
At the time, everyone mocked Eastwood for an incoherent speech, but looking back on it may have been prescient. Obama did make progress, but for a few reasons the progress he made was marginal and slow. No significant metric in the US moved significantly – education, infant mortality, social mobility or disposable income. Some people received cheaper college and some people got insurance, but in the grand scheme of things it was too little, too slow to stop the rise of Trump.
Speed is of course a double edged sword. You can move fast in the wrong direction and part of the reason we endorse representative democracy is to avoid fast decisions made by one person that lead to disaster. However, as more and more countries are turning towards the Chinese approach of making big and relatively fast decisions on a 5 year scale and using state tools to accelerate implementation – notably State Owned Enterprises. Western commentators often brush this off as a desire for third world leaders to clamp down on opposition and that China is simply offering them a dictatorship model, not an economic model. However, I think that more and more countries are looking seriously at the type of State Capitalism that China has demonstrated and saying – why should we outsource our projects and thinking to western companies and institutions? We need to build up our internal capacity and remain independent. It is of course much more complex than this, but at a high level, Western development models have hit a brick wall and the past poster children of our development models – South Africa, India and Brazil – have seen their rise stall.
If we cannot deliver economic growth to developing countries, at least we can show them the moral high ground of democracy and freedom, right? Yet, our moral high ground (which was dubious to start with is eroding due to our wars, growing nationalism, refugee crisis handling and high incarceration rates in the US. If the West loses its moral high ground it will be near impossible to counter Chinese political and economic initiatives in the developing world. Countries will increasingly turn towards a Chinese type model of a strong state, large state owned companies and limited individual freedoms and liberties.
Yet, the recurring response to all this is that the West will rise again. That our system of governance, imperfect though it may be, offers the greatest freedoms and the greatest opportunities for individuals to create value for society. That, despite our challenges, we will rise again and hold high the light of liberty that all humans desire. This is a dangerous strategy. Many empires and ideologies thought themselves better than everyone else and then crumbled. The West’s wealth is primarily built on technical innovation (steam engine, …) and a bit of exploitation of people (slaves) and natural ressources (colonies). We are still living of our lottery ticket from 1700 when we invented the steam engine, extracted natural resources and colonized the world. What happens when we use up our winnings?
There is no doubt that an overhanging question that remains for the great Chinese expansion is, “Can you develop a society with rule of law and low corruption within a one party system?”. In concept it would seem not. An independent judiciary requires a political system that is not beholden to one set of people. Yet, the Chinese Communist Party is a party that has changed dramatically in since its inception in 1921. It has gone from a Soviet allied party to the Great Leap Forward that tried some pretty insane things and then to the Cultural Revolution that attempted to put farmers in prestigious universities and now to a form of state(s) directed and dominated market economy that is focused on technology and science advancement. China has shown a tremendous ability to change over the last hundred years. The west has not, though our civil liberties have greatly improved, our political institutions are basically unchanged since 1776.
Political systems aside, there is one trump card: technology. At the end of the day, all other thing aside, the rulers of history had the best technology – the best tools for farming, for production, and for war. As Vladimir Putin recently said, “the country that controls Artificial Intelligence, will control the world.” If the West wants to stay competitive, let alone rule, it needs to dramatically accelerate technological innovation and its deployment into society. We know what we need to do – autonomous vehicles, AI, hyperloops, better food production, space travel – the governments need to have the courage to invest and to act. I fear that our governments do not have that courage, the fear failure more than they believe in the potential for big projects to pay off. If we can say one thing that is without debate, the Chinese communist party believes in doing things on a massive, massive scale. From high speed rail to electric cars and AI, when China decides to go big, it goes very big. The next economic revolution is coming and it is not clear the West will lead.
Useful articles on China
A Chinese Empire Reborn – The New York Times
Brrr … Xi’s short-sighted pollution policy goes up in smoke
What to do about China’s â€œsharp powerâ€ – Sunlight v subversion
Do you still want to bet against China?
Year 2018 in China
Behind the Fall and Rise of China”s Xiaomi
The traditional Chinese dance troupe China doesn’t want you to see
China’s Top Ideologue Calls for Tight Control of Internet
Maybe China Can”t Take Over the World
Wang Huning: China’s Antidote to Strongman Politics
The Western Elite from a Chinese Perspective – American Affairs Journal
China Busts a $3 Billion Underground Bank as It Tightens Its Grip on Money
China Looks to the Dumb Money for Its Financial Industry
China”s Quest For Clean Air Could Hit You in the Wallet
What a debt crisis in the provinces says about governing China
4 Attitudes of Chinese Young Women Impacting Their Lingerie Preferences | Jing Daily
Pollution curbs set to make skies clearer – China – Chinadaily.com.cn
Air Quality in China: Improving But Still Not Healthy
As Trump turns his back on the world, the stage is set for President Xi | Larry Elliott
China’s Silk Road Illusions
Opinion | Will the Next Steve Jobs Be From China?
We are obsessed with Brexit and Trump: we should be thinking about China | Martin Kettle
Xi Jinping heralds “new era” of Chinese power at Communist party congress
China’s Electric Car Push Lures Global Auto Giants, Despite Risks – The New York Times
The future China chooses will dictate the future of the planet
China encourages environmental groups to sue polluters
â€˜My job is to clean up the environment. China really wants to do that’
In the shadows of high-rises, Shanghai’s small neighbourhoods struggle to survive | Aeon Videos
“You should consider our feelings”: for Chinese students the state is an extension of family | Merriden Varrall
As Bike-Sharing Brings Out Bad Manners, China Asks, What’s Wrong With Us?
China Should Beware What It Wishes For
Global automakers call on China to ease “impossible” electric car rules
10 Chinese Megacities to See Before You Die
The changing face of growing old in China
Is China Outsmarting America in A.I.?
China”s Asian Dream
World”s biggest building project aims to make China great again
China can deflate the world’s largest credit bubble in an orderly fashion
Inside Alabama’s Auto Jobs Boom: Cheap Wages, Little Training, Crushed Limbs
As Hong Kong Chooses Its Next Leader, China Still Pulls the Strings
China Poised to Take Lead on Climate After Trump’s Move to Undo Policies – The New York Times
China to Plant â€˜Green Necklace’ of Trees Around Beijing to Fight Smog – The New York Times
The miracle of reading and writing Chinese characters
Welcome to Yiwu: China”s testing ground for a multicultural city
More than 100 Chinese cities now above 1 million people
“Half these apartments are empty”: Mao’s former home city struggles with growth
China Pushes Legal Overhaul That Would Bolster State Power
China’s Plan to Build Its Own High-Tech Industries Worries Western Businesses – The New York Times
Chinese premier declares war on pollution in economic overhaul
China builds world”s biggest solar farm in journey to become green superpower #GlobalWarning
Out of China’s Dusty Northwest Corner, a Solar Behemoth Arises
China”s premier unveils smog-busting plan to “make skies blue again”
Beijing is replacing its entire taxi fleet with electric cars to fight pollution
Gas-to-electric cab conversion in Beijing brings opportunity worth 9 bln yuan
Elon Musk reaffirms UBI prediction at World Government Summit | Basic Income News
China”s Outstanding B2B Invoices Grow | PYMNTS.com
Selling your software in China
What’s Causing Those Capital Outflows From China: QuickTake Q&A
China “eliminating civil society” by targeting human rights activists â€“ report
Why Europe Is Warning of Pax Americana”s End
How Xi Jinping”s global ambitions could thrive as Trump turns inward
Getting Money Out of China: The Reality Has Changed | China Law Blog
SaaS in China: The 101 | China Law Blog
Selling Software as a Service (SaaS) in China
Foreign SaaS in China: Get off of my cloud
Is Your WFOE in China Optimized? Find Out Where You’re at Risk of a Crash Landingâ€¦
Watch Out For Saas Startups in Asia