The Hangzhou-based WFOE will control distribution of Quantec's IDP (immune defence proteins) patented and trademarked products, and launch its new Epiology brand treatment for acne. The IDP-based skin cream was successfully clinically trialled in the United States in 2013.
Quantec executive chairman John Birch said the WFOE's first job will be to "blue hat" IDP, which means to achieve formal certification as a health food.
IDP is already sold in China by a Chinese national who buys the product from Quantec, but blue hat status is essential for the company to sell to hospitals and pharmacies.
The WFOE will soon employ staff and set up warehousing.
The groundwork for getting Quantec to this stage in China has been done by Birch and founder and managing director Dr Rod Claycomb.
The pair have been regular visitors to China over the years, "rolling up our sleeves, meeting people".
"We've made mistakes and picked ourselves up again. There's been a lot of organic learning," said Birch.
One mistake was being seduced by the common notion it would easier to do business by having a Chinese partner.
Quantec's joint venture lasted one board meeting. Conflict between the Chinese on the other side of the table couldn't be resolved and given China's mind-boggling requirement that director decisions must be unanimous, Claycomb and Birch feel extremely lucky common sense prevailed so they could exit, or they might still be negotiating a way out years on.
"Being involved in a jv can mean you're a passenger in a culture you don't understand," Birch said.
"We're starting to feel we're walking. We've gone through the toddler stage, we understand the market pretty clearly. We're developing deeper relationships which allow us to get very good professional advice."
Quantec's physical move into China was paved by forming a Hong Kong-registered holding company which will be the sole shareholder of its WFOE.
"That has a bunch of benefits," said Birch.
"Chinese nationals can be shareholders if we wish them to. It's regulated under company laws not dissimilar to New Zealand's. You can have majority board control of decision-making, instead of unanimous, and it's quite widely accepted in China that Hong Kong companies will be the shareholders of woofies."
The pair can offer a long list of do's and don'ts for doing business in China, but acknowledge getting it right is probably easier for a nimble firm with empowered on-the-spot decision-makers than a big corporate sending middle managers there to do basics like opening a bank account, which can be a challenge in itself.
They found a "solid" distributor for IDP whose territory was tier two and tier three cities, massive enough markets without trying to take on Beijing or Shanghai.
Good legal advice was essential, Birch said. An early sign a relationship is doomed is "they keep talking and the actual transaction never crystallises".
"Unlike at home, the signing of a contract would appear to be just another phase in the negotiation."
Claycomb said another essential is a translator who understand the nuances of Chinese communication, which doesn't mean a Westerner who speaks Chinese. That person should understand the business well.
Birch: "A mistake people make is planning for the future too much, paying for big premises when they only need a desk. You must have a physical address to register a business and we started off small."
The pair say China's business practices are every bit as sophisticated as New Zealand's – they're just very different.
They've been diligent about protecting Quantec's science-backed IP.
"Trademarks is a minefield," said Claycomb. "China is one of the only countries with a first-to-file rule instead of first-to-use."
Beware also Chinese translation of your brand – from English – and the trademarking of that translation, he said.
Blending of brands is a real issue, said Birch.
"Chinese distributors will develop their own brand to describe the product…when the relationship ceases, they can market some other product using that brand. We've ensured we have control of any brand that goes on a product with our brand."
Another business culture shock can be China's way of pricing.
"Everything is top-down rather than cost-plus pricing," said Claycomb.
"They start with a retail price and everybody gets discounts. If you don't manage that right you won't have enough margin after all the discounting which is completely foreign to us but the Chinese distributor's lifeblood.
"The math they do in their head continues to amaze me."
