Tag Archives: china

Searching for USB Power Supplies that Won’t Explode

via hardware – Hackaday

USB power supplies are super cheap and omnipresent. They are the Tribble of my household. But they’re not all created equal, and some of them may even be dangerous. I had to source USB power supplies for a product, and it wasn’t easy. But the upside is that I got to tear them all apart and check out their designs.

In order to be legitimate, it’s nice (but not legally required) for a power supply to have UL approval. Some retailers and offices and building managers require it, and some insurance companies may not pay claims if it turns out the damage was caused by a non-UL-approved device.  UL approval is not an easy process, though, and it is time consuming and expensive. The good news is that if you are developing a low voltage DC product, you can pair it with a UL approved power supply and you’re good to go without any further testing necessary.

power_supply_1_overviewIf you are going for FCC approval and are having unintentional emissions testing done (which is more likely than UL as it’s a legal requirement for products that meet certain qualifications), the testing has to be done on the whole solution, so the power supply must be included in the testing, too.

Sourcing cheap electronics in large quantities usually ends up in China, and specifically Alibaba. First, we started with a how-low-can-you-go solution. This wasn’t even a power adapter; it was a power “adapteP”, and the whole batch was mis-printed. Quality control could not be a high priority. After cutting it open, it wasn’t terrible, and it had all the necessary parts. It was surprising how much of it was through-hole, which indicates that the assembly was done mostly by people. That happens when factories are cheaper, hire inexpensive labor, don’t invest in technology, and don’t care as much about quality.

There are certain things you should look for in a power supply to determine the level of risk:

  • Isolation Distance – This is how much space there is between the primary (AC) and secondary (DC 5V) sides. UL requires a few millimeters, and often you’ll see two separate PCBs. On many single-PCB solutions you’ll see a white line meander across the board to distinguish between the two. The smaller this separation, the closer your USB power is to AC line voltage, and if the gap is bridged somehow, you’re in for a world of hurt.
  • Fuse – if there is a short, a lot of current starts flowing, components heat up, and things get dangerous. A thermal cut-off (TCO) fuse (also known as a resettable fuse or a PTC) is a component that breaks the circuit when it gets too hot, like a circuit chaperon. When it cools off, the TCO resets and you can plug the device back in with no harm done. Without the fuse, the supply heats up and current keeps flowing until a component fries, sometimes explosively.
  • Connectors – You don’t want bare leads hanging out in space where they could move and touch something. You don’t want the USB port to be soldered only by its four pins. You don’t want the power pins to be loose.
  • Decent Label – “Adaptep”? Yes, to someone who uses a different alphabet the “P” and R are very similar characters. But still. Also, fake certifications abound. Look for the difference between the CE (China Export) and the CE (Communite Europeanne) labels. And the UL Logo should have a number. So should an FCC label.

So this first adapter? Isolation distance was fine because it was two separate boards, but there was no fuse and no protective tape between components. The connectors were all secure, but the label didn’t make any promises. As for performance, output at 5.34V under my product’s load meant it was a little outside of USB spec (5.25V limit), but not dangerous. On the scope it was ringing with a peak at 5.5 V at 4 kHz.

Of course, sourcing this supply for a second batch proved tricky, and we wanted the USB plug to come out the side instead of the front so it would have a thinner profile against a wall. Additionally, we needed UL approval for a client. Our second attempt was surprisingly successful. This adapter had UL certification, with a number to look up. Note that just having a number isn’t enough; many companies will just put someone else’s number on their product and assume nobody will bother to check. So when you do look it up, and find a different manufacturer, a different enclosure, and it looks more like a refrigerator than a USB power supply, don’t be too surprised. But no, this particular one was great! The label had a company name on it, model number and specs, and certifications that could be verified. Let’s tear it open!

power_supply_2_overviewSweet sweet silicon meat inside an ABS shell! Components wrapped in protective tape, two PCBs for isolation, and even a special injection-molded plastic piece to add additional protection. Components are labeled, and what’s this, an IC to control the oscillation instead of a feedback winding on the transformer? Fancy! It’s pretty clear that this power supply is good, and I’d trust this one.

Comparing this one to the others, there were so many noticeable little details that are important and clearly thought-out. Take, for example, the connection between the prongs and the PCB. On the previous board, it was made with wires soldered by hand. Solid, but time consuming and prone to failure or quality issues. This adapter has metal contacts that snap into the case very solidly so that the prongs cannot get loose. The connection to the PCB is via the springiness of the metal, but notice that the PCB has pads specifically designed to maximize the surface area of that connection. On the next PCB you’ll see no such effort.

Some components were covered in shrink tube, tape, or non-conductive grey adhesive. The assembly was tight with no room for components to shake loose or accidentally touch. And the output was perfect. 4.9 Volts with nary a ripple.

But this is China, and component sourcing problems are a thing, so I guess I shouldn’t have been surprised when these supplies were no longer available. In retrospect, maybe these were unsold overstock, or possibly QC rejects. That would explain why they were only slightly more expensive than the others. And so we moved on to another supplier; one that could pad-print our logo on top.

power_supply_differencesAt first glance these power supplies appeared identical. But close inspection reveals slight differences in the style around the USB and the raised ridges on the underside. The label was completely different, and gone was the number next to the UL logo. There was no company name on the supply either, and the company we purchased from turned out to be a reseller and not the OEM. Also, why was the output 4.7-5V, and why did my scope say 5.5V (but surprisingly stable)?

Inside was a completely different beast. Using a single PCB, the creep distance was about a millimeter. You can see the white line meandering through the bottom of the PCB that shows the high and low sides. The USB port wasn’t soldered to the PCB except by the four signal/power pins (see the bottom side lower left and the hanging USB connection pins), and there was a capacitor with really long uncovered leads and the positive side dangerously close to the USB shell. There was almost no protective tape, no shrink tube on the leads, and no protection in case of a short.

 

power_supply_3_top power_supply_3

In the end, I wouldn’t trust the two non-UL supplies with anything worth more than a few bucks, and certainly not my cell phone. I’d have really big reservations about reselling them to customers who don’t know the difference. The UL-approved one was great, but the other two are only good for powering low-current-draw devices that are not sensitive to voltage. Also, finding a reliable supplier in China is HARD.

Check out a much more thorough analysis of this and pretty much every USB power supply cube by [Ken Shirriff]. It’s surprising how little has changed in four years with these supplies, and his analysis goes into how the circuits behind these supplies work, identifying each component and its purpose.

We also covered a Sparkfun teardown of some power supplies with similar conclusions, and a Fail of the Week in which a faulty USB power adapter was the likely cause of a fire.


Filed under: Featured, hardware

HOW TO: Chinese Driver’s License

via Dangerous Prototypes

dl

China has huge factories, but there’s also thousands of tiny factories hidden away on back streets and in garages. During production of The Expressway we had a lot of down time waiting for molds to heat so we explored the neighborhood. On one tiny road there was a compression molding factory, several gauze factories, several cloth factories, a PCP molding factory, and a clothing factory. All very unassuming and tucked away in small garages. You’d never know they were there without getting up close.

Shenzhen is surrounded by these small factories, and they’re a treasure trove of opportunities for small scale manufacturing. On numerous occasions we tried to get our driver to cruise the side streets, alleys, and frontage roads to get a closer look, but drivers seem to find this really annoying. The only thing left to do was rent a car and drive ourselves.

While driving in China isn’t nearly as terrifying as some people would have you think, a Chinese driver’s license is required to get on the road. China doesn’t recognize any foreign licenses nor the international driver permit.

If you have a valid foreign license it’s not too difficult to get a Chinese license. The foreign license needs to be translated and certified, we hired an agent to do this for 1,800RMB ($300USD) which also included all the government fees. When the translation was accepted we scheduled an appointment online to take a computerized knowledge test (available in English).

The license is a great example of China’s major evolution towards squeaky clean government. A few years ago it cost 6,000-10,000 RMB ($1000USD-$1,600USD) to get a license, the major cost was a bribe to have someone else take the written test. There was no non-bribe option so we just didn’t do it. Now it’s not possible to bribe your way out of the test, but it’s a hell of a lot cheaper.

The test is 100 questions, pulled from a bank of 1,200. A passing grade is 90/100. The test is computerized, and a webcam records the entire thing to ensure there’s no cheating. The results are shown instantly, with an automatic do-over if you fail the first time.

Horror stories aside, the test wasn’t as bad as it was made out to be by infamous reports from NPR and the Washington Post. There are some oddities and terms that were unfamiliar. The official practice test in English covers most of it. The real thing is exactly the same, with a couple questions about fines, penalties, and traffic cop hand signals that we only knew from studying this practice exam as well. Most of the questions are dead simple and obvious. The translations are pretty good as of 2016.

dl-fog

There seemed to be an unhealthy obsession with fog lamps. Having never owned or driven a vehicle with fog lamps this was something new.

dl-level

There are lots of British English terms we had to learn. A level crossing is where a train crosses a road at street level. Each red line means 50 meters. The correct answer is C.

dl-tidal

A tidal lane is a narrow road where traffic in both directions share all or part of a single lane.

dl-traverse

The white lines mean slow down. The correct answer is reduce the transverse speed, a term we found in a New Zealand government study of traffic calming measures.

dl-long

This is the only question that truly baffles the mind. The correct answer is A, reduce the longitudinal speed. No idea what that means or how to operationalize it while driving. Just had to memorize this one.

Several questions in the actual test weren’t on the practice test, it wouldn’t have been possible to pass without the additional study guide linked above. For example: how long do you go to jail for killing someone in an accident (3 years), and how long for a hit and run (3-7years, can never drive again)? How many points on a Chinese license (12), and how many points are deducted for various infractions (6 for blowing a red light or light speeding, 12 for everything else)?

The test took around 10 minutes, we passed it with 90% on the first try. The license arrived by courier in 3 days. At times learning the terms on the practice exam was frustrating, but over all it was mostly painless. It was also extremely interesting to see how much the government has changed. Three years ago cheating was mandatory and agents were expensive, now it’s cheap and there’s no hint of corruption.

Very soon we’ll rent a giant SUV with all the safety features and hit the road. We’ll post reports from

 

HOW TO: Chinese Driver’s License

via Dangerous Prototypes

dl

China has huge factories, but there’s also thousands of tiny factories hidden away on back streets and in garages. During production of The Expressway we had a lot of down time waiting for molds to heat so we explored the neighborhood. On one tiny road there was a compression molding factory, several gauze factories, several cloth factories, a PCP molding factory, and a clothing factory. All very unassuming and tucked away in small garages. You’d never know they were there without getting up close.

Shenzhen is surrounded by these small factories, and they’re a treasure trove of opportunities for small scale manufacturing. On numerous occasions we tried to get our driver to cruise the side streets, alleys, and frontage roads to get a closer look, but drivers seem to find this really annoying. The only thing left to do was rent a car and drive ourselves.

While driving in China isn’t nearly as terrifying as some people would have you think, a Chinese driver’s license is required to get on the road. China doesn’t recognize any foreign licenses nor the international driver permit.

If you have a valid foreign license it’s not too difficult to get a Chinese license. The foreign license needs to be translated and certified, we hired an agent to do this for 1,800RMB ($300USD) which also included all the government fees. When the translation was accepted we scheduled an appointment online to take a computerized knowledge test (available in English).

The license is a great example of China’s major evolution towards squeaky clean government. A few years ago it cost 6,000-10,000 RMB ($1000USD-$1,600USD) to get a license, the major cost was a bribe to have someone else take the written test. There was no non-bribe option so we just didn’t do it. Now it’s not possible to bribe your way out of the test, but it’s a hell of a lot cheaper.

The test is 100 questions, pulled from a bank of 1,200. A passing grade is 90/100. The test is computerized, and a webcam records the entire thing to ensure there’s no cheating. The results are shown instantly, with an automatic do-over if you fail the first time.

Horror stories aside, the test wasn’t as bad as it was made out to be by infamous reports from NPR and the Washington Post. There are some oddities and terms that were unfamiliar. The official practice test in English covers most of it. The real thing is exactly the same, with a couple questions about fines, penalties, and traffic cop hand signals that we only knew from studying this practice exam as well. Most of the questions are dead simple and obvious. The translations are pretty good as of 2016.

dl-fog

There seemed to be an unhealthy obsession with fog lamps. Having never owned or driven a vehicle with fog lamps this was something new.

dl-level

There are lots of British English terms we had to learn. A level crossing is where a train crosses a road at street level. Each red line means 50 meters. The correct answer is C.

dl-tidal

A tidal lane is a narrow road where traffic in both directions share all or part of a single lane.

dl-traverse

The white lines mean slow down. The correct answer is reduce the transverse speed, a term we found in a New Zealand government study of traffic calming measures.

dl-long

This is the only question that truly baffles the mind. The correct answer is A, reduce the longitudinal speed. No idea what that means or how to operationalize it while driving. Just had to memorize this one.

Several questions in the actual test weren’t on the practice test, it wouldn’t have been possible to pass without the additional study guide linked above. For example: how long do you go to jail for killing someone in an accident (3 years), and how long for a hit and run (3-7years, can never drive again)? How many points on a Chinese license (12), and how many points are deducted for various infractions (6 for blowing a red light or light speeding, 12 for everything else)?

The test took around 10 minutes, we passed it with 90% on the first try. The license arrived by courier in 3 days. At times learning the terms on the practice exam was frustrating, but over all it was mostly painless. It was also extremely interesting to see how much the government has changed. Three years ago cheating was mandatory and agents were expensive, now it’s cheap and there’s no hint of corruption.

Very soon we’ll rent a giant SUV with all the safety features and hit the road. We’ll post reports from

 

Waiting for China to Re-Open, From Huaqiangbei

via hardware – Hackaday

The Chinese New Year is something we keep in mind at least half of the year, and probably still don’t plan for properly. In case you’re new to the situation: The Chinese New Year celebration empties out Shenzhen of its more than 12 million residents for the better part of a month. It’s the one time of year that manufacturing sector workers (and everyone that supports that ecosystem) travels home to visit family.

For those involved in manufacturing goods in Shenzhen, this part of the year leaves us cut off from one of our vices and we count the days until our tracking numbers and order confirmations start to show signs of life. It’s an inconvenience of an entirely different nature if you are one of the lonely few that stays in the city during the holiday. [Ian] over at Dangerous Prototypes wrote a blog post from his office in Huaqiangbei which is a sub-district of Shenzhen, China to share the experience with us.

Shenzhen is uniquely a migrant-worker city, and when emptied of the factory employees there are not enough people to patronize local services like markets and restaurants so they also shut down. But an empty city offers its own interesting entertainment like wicked fireworks sessions. As always, [Ian] does a great job of sharing this peculiar part of Shenzhen culture. He also kindly points out some of the offensive offers that come through the inter-webs from desperate customers who have poorly planned around the holiday.


Filed under: hardware, news

HOW TO: China import/export permit and company bank

via Dangerous Prototypes

import-export

Last week we described the painful process of opening a Chinese company. That was actually the fast and easy part. There’s still a pile of paperwork and months of waiting ahead. This week we look at the proper, and improper, ways to export from China.

A Chinese import export permit is permission to exchange foreign money to Chinese RMB, and refund sales / VAT tax on exported products. Imports, exports, and foreign currency exchange are attached to your permit number. Any trader operating in China without one is illegally exporting and violating the currency control laws, and is not a reliable supplier in our view.

Our license was handled by an agent, we literally did nothing but hand over the company documents. It took about a month and cost around 5000RMB ($900USD). It isn’t hard to get, but is difficult to use for small scale stuff. Our giant CPA firm even botched our first attempt to get a VAT tax refund. Continue below for more on the right and wrong way to export from China, and a summary of the crisis that almost ended our Chinese company this week.

How to export from China. The legal way. 

This is the biggie. It took lots of trial and error, but to the best of our knowledge this is the proper way to export products from China and receive payment in foreign currency.

1. Receive foreign currency (USD,EUR, etc) payment by wire to the company bank account

2. Go to the bank, show an invoice for products and the import export permit

3. Money is converted to RMB. The amount and purpose is reported to government

4. Purchase products and get the official ‘fapiao’ VAT tax receipt

5. When the products leave China get a stamped export declaration form from the shipper

6. Take the VAT tax receipt and export declaration form to the tax office to rebate the 17% VAT tax. Many people skip this step. It is quite a hassle with very specific timing requirements. Unless you ship a container load of the same thing, or something very expensive, it is generally not worth the effort to get a VAT refund

7. Give the export declaration form to the accountant. The government will audit to see if the amount of currency converted to RMB matches the products exported

The tricky thing is the export declaration form. It is not a simple commercial invoice or proof of shipping. It has to come from an authorized authority with the correct stamp. It costs 300RMB ($50USD), and you need one for each package exported!

export-proof

For example a simple 5x5cm $14 Dirty PCBs order. To convert that payment to RMB to pay the factory and refund the 17% VAT we need an export declaration form that costs $50 for this order alone. Unpossible.

Why are we still doing this?

So how do you deal with this? Hong Kong company to the rescue! Instead of shipping individual orders directly to hackers from China, we export the PCBs in bulk to Dangerous Prototypes Limited Hong Kong. For a while it looked like we had to rent a warehouse in Hong Kong and hire people, but eventually we found a service to do it for us.

Xiao Tang packages PCBs into boxes and puts on all the postage labels in China. A logistics company picks up the boxes, imports them to Hong Kong as a single shipment, and drops them at the post. They charge 300RMB to handle the customs export inspection and prepare an export declaration form. Now we can exchange money to pay suppliers and refund VAT.

It seems like Seeed Studio has had to make big changes to comply with this in preparation to go IPO. Small(er) Chinese companies have a different standard of accounting and compliance requirements, but when you take a bunch of government money and prepare for public listing many more rules apply.

We’ve noticed our stuff go out of stock at Seeed a few times recently, evidently while they move between Hong Kong warehouses. Our guess is they had to ship all or most of their stock to Hong Kong to refund the VAT and get the export declaration form required to exchange currency.

We’re a WFOE, which means we are held to the highest standard from day one.

How to export from China. The wrong way.

There’s a number of loopholes and unsavory practices foreign and Chinese agents use to circumvent the currency control system.

The process we describe above is only to pay for products. Payments for services can be converted with a simple invoice. So a small Chinese company might do a production run of 100 PCBs, but bill the client for consulting services. This seems so widespread for small stuff that bankers and accountants openly encourage it.

Each individual can freely convert $50,000USD to RMB each year. According to our CPA, around 70% of foreign business with Huaqiangbei market traders is paid to the boss’ personal account. This way the boss avoids paying VAT, and they don’t need an export declaration form to convert foreign currency to RMB. We won’t pay suppliers this way until a lawyer says it is actually legal to convert funds for business. Even if it is legal, $50,000 doesn’t go far for any sizable production.

A variant on the above is to recruit Chinese people to “rent” you their yearly allotment. You wire $50,000 to their account and they keep a percentage. This is so fraught with risk and uncertainty it hardly seems like a way to run a company, but it does seem like a good way to have your money stolen…

Importing

No experience here yet, but some general observations.

The import export license can be used to import and pay taxes on stuff coming into China. For example microcontrollers. Tax is generally 17%, and can be refunded when the chips are exported in a finished product. It is a bit of a hassle, especially for a small production run, but it is very doable.

In practice, almost everyone doing production in China has some variant of a story where they smuggle chips into the country in a backpack, pants pocket, etc. Foreign engineers becoming smugglers and tax cheats, over a 17% tax that’s refundable.

Supply chains are delicate enough already, you want to throw SMUGGLING into the mix!?!? Do you want your production held up for a month while you re-source chips because you got busted smuggling them into China to cheat a 17% tax? Then DON’T SMUGGLE!

Always ask your Chinese supplier for a copy of their import export license! It is at least moderate assurance your money won’t be stolen on the way into the country, and that your products won’t be confiscated on the way out.

Open a company bank account

cmb-logo

So after months and months of work we finally have a Chinese company! But wait, it isn’t really useful with out a bank account that can convert foreign currency to RMB. This took nearly three more months.

Here’s the strange thing: Chinese banking rocks. Fees are non-existent or super duper low. Foreigners can walk in off the street, open a personal account, get an ATM card on the spot, and sign up for internet banking, all for free with a small initial deposit (~$20USD, ~120RMB).

Business banking is a whole other thing. First we went to Bank of China, cause, you know, they’re huge and international. They wanted to schedule a call in a week to setup an appointment for next month, not ok. We visited PingAn, ICBC, Communications Bank, and a few other smaller banks that weren’t even licensed to work with foreign owned companies.

Eventually we landed with China Merchant’s bank, simply because they would actually meet with us. Pro tip: choose a bank close to home or office, you or your employees will be spending a day a week there for as long as the company operates. Almost every major transaction needs to happen in person.

bank-cert

After more than a month we received permission to open a bank account from the People’s Bank Of China central banking authority. At this point the import export permit was finished and we entered another month of waiting for approvals before the account was open.

Capital injection

verification

Even with a bank account and import export license we still can’t run the damn company. We have to “inject” the 400,000RMB of capital, then convert it from USD to RMB.

operatingexpenses

The 400,000RMB in foreign currency is wired from the business owner, the HK company, to a special single-use capital injection account. When the money arrives, appear in person to convert up to 300,000RMB per day for operating expenses.

If you want to withdraw and convert capital to pay a supplier, say for PCBs, you have to submit already-paid tax receipts. Our accountant describes this as an “incomplete system”: you can only use company money to buy products, but you can’t get company money until you can prove you paid for the products and taxes. We had pay for stuff with personal money pulled from an ATM machine so we could get the tax receipts so we could get money out of the company. Which came first: the chicken or the fapiao?

Online banking

cmb

China Merchant’s Bank has reasonably workable English (likely Windows only) crapware for managing accounts. It comes with two USB certificates, one for the accounting department and one for the administrator.

Each transfer is first entered by the accounting department login, then the administrator has to login and approve. It’s pretty burdensome for a small business.

enough-fun

At least the developers seem to care about the user experience. “Check if there is enough fun”. Indeed.

For the big ones, not the small ones

One theme that keeps popping up: China is still built for big business. The plus side is a real company with real no-bull expenses and tax deductions. But, while the bank software would be great for an organization of 100+, but it stinks for a couple hackers who want to export a few PCBs. Similarly, it is easy to export a shipping container load of stuff, refund VAT, and convert payment to RMB, but you gotta hack the system to ship a $14 PCB order.

Maybe this is why such a large gray market export economy is allowed to thrive in China. Foreign and local agents are exporting products, which China encourages, but the system is incomplete and overly burdensome for small companies and individuals to be fully compliant.

A blind eye approach could be much more effective than reworking the whole system. After all, currency control largely exists to prevent big (foreign) interests from speculating and manipulating the Chinese economy. The spirit of the law isn’t to bust an eBay Arduino seller for illegal exports.

Wrap-up

For those of you following along on WeChat #shenzhen_hacker_bei, some of this might seem familiar. We reviewed our business plan with the accounting firm multiple times, but still had a moderate crisis last week.

The accountant specifically told us, in writing and on multiple occasions, that a fapiao tax receipt was sufficient to get a VAT refund. We show up with fapiaos from the PCB factory for a refund. They pull out the example export declaration form – no refund without it, and by the way, no currency conversion either. It was obvious our accountant simply had not done it before. Rather than ask the head CPA, she just parroted incorrect conventional wisdom from her colleges. Idiots.

For most of the week we thought we were tanked. After multiple visits with lawyers and accountants we pieced together the full picture described in this post, and it seemed impossible to continue without renting a Hong Kong warehouse.

Yesterday we finally found the logistics agent willing to handle the export for us and provide an export declaration form. Hopefully these extended write-ups save someone anguish in the future.

Company. Check. Import export license. Check. Bank account with money. Check and check! But wait! We still need the work permit and residency permit! Add another 2 months before we can actually run the company. More on that process next week.

 

HOW TO: Start a Chinese Company

via Dangerous Prototypes

foreign-invest-cert

While Shenzhen is becoming “Hollywood for Makers”, and not always in a good way, there don’t seem to be a lot of foreign open hardware/maker/start-up/accelerated/innovated/incubated people starting Chinese companies. As far as we know, we are the first foreign owned open hardware centric Chinese company in Shenzhen. With everything going on here, we definitely wont be the last.

There are three reasons foreigners start a Chinese company: to sell to China’s domestic market, to get legal residency, and to work with small suppliers who can’t accept foreign currency. We are only interested in the latter.

Working with a controlled currency

rmb-note

Chinese RMB is a controlled currency. Money only goes in and out of China for certain purposes, in allowed amounts, with the proper license. Most small Chinese suppliers don’t have an import/export license (and dodge taxes) so they can’t convert payments made in a foreign currency.

compression-molding

That’s why it is almost impossible for you, from abroad, to work with the small, flexible, inexpensive Chinese suppliers we have access to. If you really want to make small scale supply chain mash-ups, say 100 traffic-themed adult novelties, then tiny suppliers are crucial and they must be paid in RMB.

Our solution has always been to partner with a Chinese owned local company like Seeed Studio and FlyLin Consulting to handle our ground operation in China. Now we can pay small suppliers directly.

There are also tons of illegitimate Chinese and foreign agents in Shenzhen who do all kinds of exploitative things to circumvent the currency control system and bring money into the country. We now tell everyone: don’t work with someone in China until you see their import-export license!

Fight zombie lies

HKnotCN

Before we continue, lets take a moment to address a pervasive, zombie myth that rings constantly at every start-up meet-up in town: a Hong Kong company is NOT an alternative to a Chinese company. Despite what agents and drunken foreign start-up groupies tell you, you’re not gonna be wiring RMB into China with your new HSBC Hong Kong account.

This is so obviously false and stupid on every level – if Hong Kong had exemption to the currency control wouldn’t every rich Chinese person setup a  company to funnel money in and out? Yet everyone orbiting the start-up scene will proudly and confidently lay it out like they’re skilled insiders. Morons.

WOOF WOOF WFOE

linlin-office

Officially our company is a WFOE, a Wholly Foreign Owned Enterprise. A simpler, cheaper structure called a FIPE is becoming more common with young entrepreneurs, but we understand it to lack liability protection. Foreign Owned doesn’t refer to us, it actually refers to the Hong Kong holding company that owns the WFOE.

fapiao

WFOE is a massive beast of a company. It files a full audit report every month, it must have a minimum size office, and every single penny of expense must have a government tax receipt (fapiao, above) attached.

Its a real company and its does have some cool advantages over an US-based LLC. We draw actual salary, and personal housing is a 100% tax deductible expense for the company. Profits can be remitted to Hong Kong as dividends and taxed as capital gains, if you’re into that kinda thing. While it may take a year to setup and cost as much as a small car, there are advantages if you actually live and work and run a company in China.

Hold me tight – start a holding company

You can own a WFOE personally, but it is seriously difficult to sell shares or take on partners, and there are massive tax issues.

hong-hong-city

Instead, open a Hong Kong company first, then the Hong Kong company starts the WFOE. There are certain tax benefits for remitting profits back to the Hong Kong company, but we haven’t done it and can’t comment yet. This is our structure, and we understand it to be the same structure Seeed is now using while preparing for IPO. Image source.

The Hong Kong company is quick and easy. Setup takes a week and costs around $700-$1000USD. Supposedly you can DIY, but we tried and eventually used an agent. Beware – the Hong Kong company requires an annual audit by a CPA ($500-$1000) and a registered secretary to file the annual report ($700).

HSBC

Opening the Hong Kong company bank account is simple, but you’ll need an appointment and it will take 2-3 weeks to be approved. We use Hang Seng, but would prefer to have gone with HSBC cause, you know, they print the freaking Hong Kong money. It is helpful to take some invoices or contracts to prove you’re a real company. Monthly fees around $60.

hangseng-onlinebank

The account can hold any currency, and you can exchange between almost any currency online, pretty cool. International wires are done online and cost about $35-$40USD.

Prove you understand basic tax principals

Hong Kong has a reputation as a tax haven. Sure, if you’re a legal resident personal taxes are pretty low, but that’s not much use to a foreigner with a small business.

Corporate tax is 16.5%, but your accountant won’t let you leave profit in the company so you’ll never pay corporate tax anyways! Same with Dangerous Prototypes’ US LLC, a pass-through entity isn’t even taxed! You’ll pay personal income tax in your country of residence, however much that is. Americans are also taxed on world wide income even when paying taxes as a legal resident of a foreign country. Get it?

If someone tells you about low tax Hong Kong companies just walk away, they’re a moron.

Choose your sleazebag agent

Agents are incompetent, sleazy, misinformed, and the absolute worst part of starting a Chinese company. There’s really very little opportunity to DIY a WFOE, so you’ll have to deal with them.

We interviewed 6 agents. Initially we hired the Chinese firm that did the Hong Kong company, but they hadn’t really done a WFOE before and the requirements are too numerous and fluid to leave it in the hands of an amateur. We fired them.

Next we hired a foreign guy who always seemed to have the answers we needed. He was super slimy and went on about having face (connections) and being the fastest in town, a total turn off, but he did seem to know the process.

Our agent misguided us multiple times, delaying the formation and costing money. The agent messed up really obvious and stupid stuff. We felt like he had never done a WFOE before either. Turns out, that was close to the truth. He subcontracted the paperwork to another local agent (Aaron Best), who actually presented at the first Hacker Camp…

sz-credit-registration

Eventually we looked up the agent’s company registration. It isn’t even a WFOE. It appears he had two Chinese people start the company so he wouldn’t have to put up the 10 million RMB capital he registered. If you’re talking to an agent in Shenzhen, be sure to look up the company on the official SZ government business listing to confirm who you’re working with. Here’s our registration.

The agent said the company could be done in a month, but in all it took 4-5 months to complete this initial setup phase. Much of the delay was our own complicated situation because we’re an existing, functioning company. A competent agent would have foreseen and guided, instead ours made everything much, much worse. We paid the guy $7000, which includes lots of government fees.

Get your stuff together

Capital

capital-injection

Up until this year you needed 500,000RMB ($81,000USD) of actual cash to start a trading WFOE. There are no hard limits now, but you have to convince the government you can run your company for a year with that amount.

Everyone says minimum 100,000RMB if you want a work visa. Agents terrified us with likely untrue anecdotes about being deemed unfeasible, so we put up 400,000RMB fully paid. Supposedly this is enough to get 4-5 work permits for foreign hackers to work in our Shenzhen office, but who knows if that’s really true.

You need to prove that you have the full amount, but only 20% needs to be transferred up front. The remaining 80% can be paid over the next 2 years. At least that’s what they say, it seems really unfeasible for a small company because each payment takes weeks of processing documents and updating licenses.

bank-reference

A bank reference letter and a certified balance statement prove you have the capital. Hang Seng’s phone bank sent us to the nearest branch to apply in person, somewhat conveniently located in the bank district of a dusty little boarder town called Sheung Shui. The first Hong Kong metro stop outside China.

The banker insisted, INSISTED, there was no such thing as a bank reference letter OR certified balance statement. After 10 minutes of begging, they uncovered the form for the reference letter, but not the balance statement.

More begging and pleading, but they insisted that there was no such thing and threw us out.  The next day the phone banker sent us the form by email to print and take to the branch. Got the same guy, but no apology for making us schlep back to Hong Kong a second time.

Both letters run about $50 each, and are available for pickup after 10 business days.

Director documents

secondpassport

The director of the company needs to supply a passport. The passport will be out of reach for a reasonably long time, many months, so it is absolutely critical that you get a second valid passport if allowed in your country. It is quite easy in the US, all the Shenzhen regulars seem to have them.

The passport will need to be authenticated. The deal here is that China is not part of the Apostille Convention that defines how most countries translate and verify documents.

Authentication is a 1900s era flair of ribbons and wax stamps. The US State Department verifies the passport and makes a copy. The Chinese embassy in the US verifies the State Department copy with a ribbon.  Back in China the government verifies the embassy ribbon with a wax stamp. Or something like that. $1000USD for this frilly anachronism.

Hong Kong company documents

hk-greenbox

All the Hong Kong company “green box” stuff needs to be authenticated by a lawyer (7000HKD/$1000USD). If you have a brand new Hong Kong company the documents are already authenticated, but ours was a year old and it all had to be redone.

hk-greenbox-hack

Speaking of green box, we added a magnetic reed switch and RGB LEDs to ours. Nothing says “business” like a company box with a party mode to celebrate the signing (chopping) of a contract. So far bankers and lawyers don’t seem to find it as amusing as we do.

hkvisa

Expert tip: when signing documents in Hong Kong a copy of your entry visa slip is required. If you’re smart and have the second passport you MUST enter Hong Kong on the passport used to register the Hong Kong company. Our agent neglected to tell us about this, so we had to make two trips.

audit-report

If the Hong Kong company is more than a year old China wants to see an audit report completed by a CPA. Hong Kong companies are required to file an audit report with the Hong Kong government every year anyways, but as a little perk the first is due after 18 months. Everybody knows this, all the agents use it as a selling point.

Dangerous Prototypes Limited (HK) fell into the gap – not old enough to need a report in HK, but old enough to need one in China. Instead of pointing this out and helping us deal with it, our idiot agent said our accountant had failed to file the report on time and we would have to pay fines and could even go to jail. He got us whipped up into a frothy lather and scared the hell out of us.

Nope, just needed to get the audit report done early. The audit took two weeks and cost about $500USD from a Chinese accounting firm with an office in Hong Kong. Submit a Google-translated Chinese copy of the report as well.

Officespaced

office-door

A WFOE office must be at least 30 square meters in commercial zoned space, not an apartment. Agents terrified us with myths about inspections, verification, losing visas, and bribing inspectors, so we were needlessly married to having a big office in Huaqiangbei.

HQB-map

We looked at a lot of offices in three buildings. SEG at the south, the Mr. Goodluck Buy building (not actual name) mid-market, and Galaxy Stars building at the North of the market. Offices run about 100RMB per square meter, plus building fees and tax.

seg
The office is going to sit empty for half a year while the company is formed, so we wanted to pay about $1000USD per month (6000RMB). There were lots of too small offices in the 4000RMB range, and there were lots of really big multi-room offices for 10,000RMB+, but not a whole lot for us.

mrgoodluckbuy

The Mr. Goodluck Buy building is unique. Its owned entirely by one company. That’s easier for a WFOE to work with, and there’s no charge for upgrading to a bigger office in the same building later.

qunxin

We ended up in Galaxy Stars Plaza, the building at the very north end of the market with a helicopter landing pad. No, we haven’t been to the helipad. Yes, we’ve tried. Several times.

Galaxy Stars is the Chung King Mansion of Huaqiangbei offices, a Mos Eisley Cantina of little Chinese trading companies. Perfect place for us, and our logistics company is just a floor below.

office

Initially we had rental agents show us space, but they run you all around unable to get inside any of the offices. Its a joke. Asking the security guard on duty to show us around was much more effective. He found us a perfect 52 square meter office for 6000RMB/month including fees and taxes.

building-tax

The contract needs to say that the owner allows the office to be used for a WFOE. Everyone exchanges ID copies, and they hand over a copy of the building tax license. The contract needs a realtor stamp to be official, the guard found someone to provide it.

China’s clean government

National_Emblem_of_the_Peop

One theme throughout the formation process is that agents tell myths, stories, legends, “conventional wisdom”, and seemingly outright lie about stuff. One agent came into our office and said it wasn’t big enough, he was confident the work visa officer would review the floor plan and ask for a bribe. Image source.

Never, during this entire process, was there even a HINT of corruption in the Shenzhen government. Absolutely everything was by the books and squeaky clean. Follow the rules, file paperwork, wait, repeat. There wasn’t even a remote opportunity for something improper to happen.

Part of our motivation for writing this in such long form is to show how clean the experience was. The only corruption and incompetence we experienced was from agents.

The numbers man

An accounting firm is mandatory. The amount of paperwork they file monthly is epic.

China has two levels of sales tax/VAT. A small tax payer pays 3% VAT on everything purchased, and it cannot be refunded when things are exported or sold.

A general tax payer owes 17% VAT on everything they buy, but the tax is refunded when the stuff is exported out of China.

We have been both, currently we’re general tax payers and that was a horrible, horrible mistake. We haven’t done a VAT refund from exporting PCBs yet, it will be interesting to see what happens.

Accounting prices are the same all over town. 400RMB ($70USD) per month for a small tax payer, 1100RMB ($180USD) for a general tax payer. 50RMB ($9USD) per month per Chinese employee, and 150RMB ($29USD) per month per foreigner. Our accounting firm is acceptable, if a little lazy.

The process

complete-docs-pile

Got all that stuff now? It took us 3 months to get everything in order before filing the first document with the government.

Name check (2 weeks)

name-search

Submit a bunch of Chinese names, the government will pick their favorite. There are all sorts of naming rules. Ours shook out to Shenzhen Hanging from the Cliff’s Edge Electronics Technology Limited Company. “Hanging from the Cliff’s Edge” is the actual translation of Xuan Yaun, which is a close as we could get to “Dangerous”.

Foreign Ownership Certificate (4 weeks)

foreign-invest-cert

Here’s where that Foreign Owned part really clicks. The Hong Kong company applies to the government for permission to open a company in China. China gives us this giant certificate redeemable for one Chinese company. Now we’re getting somewhere.

foreign-invest-details

Notice it says for investors from Hong Kong, Macau, and Taiwan? That’s because it belongs to the Hong Kong company, not us.

Business license (10 days)

cn-company-license

All the documents and the company coupon go the local government. 10 days later we get a business license and a copy. These giant papers will have to be folded and carried a ridiculous number of places over the next several months.

company-permission

We also get a half dozen permission letters from the local government. They want one every time we get permits, a bank account, visas, etc, etc.

The problem with stamps

stamps

So, China enjoys stamps. You need them endlessly. The company has three stamps: general stamp, financial stamp, and customs stamp.

KNOW IT: Domestic company stamps are round, WFOE stamps are oval. Are they really a WFOE? Check their stamp!

personal-stamp

We each have name stamps as well. Literally just a stamp with English names.

During the next phase everyone needs the stamps: accountants, permit and licensing agents, visa agents, the bank. Of course you’re gonna need a little stamp time of your own too.

Here’s the rub: you only get one stamp and its illegal to copy them. Part of what takes so damn long with the WFOE is waiting for stamp time. For a while our stamps were couriered between 6 offices almost daily. This can’t be how Tencent deals, can it?

Mix and serve over ice

This is just the initial setup. To actually do anything with the company we still need a bank license and account (2 months), an import-export license (1 month), a work visa (3 months), and a couple other things. We’ll write these up in less-epic posts in the coming weeks.

Was it worth it? No idea yet. The dust is settling though, and we can see a day in the future when we’re running the company instead of starting it.