(Leider steht keine deutsche Übersetzung für diesen Artikel zur Verfügung.)

Almost all foreigners doing business in China will have heard of FESCO. The acronym stands for Foreign Enterprise Service Company, and most people assume it is one organization. Many foreign companies will actually have a contract in place with a FESCO for certain services. These may include dispatching of staff, organizing payment of mandatory benefits for directly-employed staff, managing payroll or even hiring of staff and headhunting.

In actual fact, FESCO is not a company at all. It is a generic term used by dozens of local HR companies around the country. Because of the widely held misconception that FESCO is one company, the "brand" is a powerful marketing tool for companies using the moniker. In this article we will take a look at the current "FESCO environment" and comment on issues that foreign enterprises contracting with a FESCO should bear in mind.

Who is claiming to be a FESCO?

The answer to this question is complex. There are several competing organizations in each city. Some of them have invested in subsidiaries or affiliates in several cities across the country. Some of them used to be state-owned, some of them still are partially state-owned, while others are 100 percent privately owned. As an example, let's focus on the situation in one large city (Shanghai), and one smaller regional city (Dalian):

Who is FESCO in Shanghai?

There are two main FESCOs in Shanghai, namely:

1.      Shanghai Foreign Service Co. Ltd. (Shanghai FESCO)

2.      Beijing Foreign Enterprise Human Resources Service Shanghai Co. Ltd (FESCO Shanghai)

Let's look at each of these companies in turn:

1.      Shanghai FESCO

This FESCO is owned by the Shanghai World Expo Group. The Chinese name of this organization is 世博集团上海市对外服务有限公司. It has ten offices across Shanghai. It also has eight subsidiaries and affiliates and four branches in other cities around the country. This group also owns another smaller company providing similar services called FESC, based in Pudong.

2.      FESCO Shanghai

The Chinese name of this organization is北京外企人力资源服务上海有限公司. The parent company is a FESCO in Beijing. This parent company has subsidiaries and affiliates in 10 cities across China. Most of these cities are the same ones in which Shanghai FESCO has established subsidiaries or affiliates.

Who is FESCO in Dalian?

In Dalian there are at least three competing FESCOs:

1.      Dalian FESCO

This FESCO is affiliated to Shanghai FESCO. It is 50 percent owned by Shanghai FESCO and 50 percent owned by four individuals. Its official Chinese name is大连菲斯克外企服务有限公. Established in 2003, it has a registered capital of RMB2 million.

2.      FESCO Dalian

Beijing FESCO owns 76 percent of this company, whose Chinese name is大连华夏外企服务有限公司. It was established in 2002 and has a registered capital of RMB10 million.

3.      Dalian Development Zone FESCO

This is a good example of an individually operating FESCO not affiliated to any particular network. Its Chinese name is大连开发区外国企业服务有限公司. It has a registered capital of RMB1 million and it is owned by two individual investors.

How is this possible?

For those who have studied Chinese corporate law the answer is simple. The English term "FESCO" is a generic one, indicating nothing more than the type of service provided by the company. From a legal perspective the only true names of these companies are the Chinese names we have shown you above. All of them include some variation of the term "外企服务有限公司," or "foreign enterprise service company."

As a result we have a situation where dozens of independent companies all over the country are all claiming to be "FESCO." It's not surprising. With most foreign companies paying "FESCO" a couple of hundred RMB each month per employee to be the official employer of their staff or to manage social security payments for their workforce nationwide, it is a big market. Whatever else it may be, FESCO is undoubtedly a powerful brand.

How about CIIC and STAR?

As if the situation wasn't confusing enough already, there are a couple of other large players in this market providing similar services but using a different brand. One is called CIIC (China International Intellectech Corporation - Chinese name 中国国际技术智力合作公司). CIIC is a state-owned organization based in Beijing and has 13 subsidiaries, affiliates or branches around the country. In this sense it has a larger network than any of the various FESCOs.

Unfortunately even CIIC appears to have a similar identity crisis to the various FESCOs. To continue with the above Shanghai-Dalian analysis, the Shanghai FESCO site claims CIIC Dalian to be part of their national network (the Shanghai FESCO site links directly to the Dalian CIIC site). This is despite the fact that CIIC Dalian competes directly with Dalian FESCO - which is partially invested by a subsidiary of Shanghai FESCO.

To muddy the waters further, CIIC Dalian uses the web site address www.dlfesco.com as one of its home pages. Effectively, at the same time as creating their own corporate identity under the CIIC brand the company also makes an attempt to appear to be a "FESCO."

According to government records, 40 percent of CIIC Dalian is owned by CIIC, with the remaining 60 percent being owned by a collection of 31 other individual and corporate investors.

The other large player is known in English as China Star (Chinese name 中国四达国际经济技术合作公司). Headquartered in Beijing, it also has branches in Shanghai, Shenzhen and Guangzhou. While its network may be smaller than the competing organizations, at least its identity is fairly clear.

How should foreign enterprises deal with these various companies?

Given this confusing situation, we can assume that many managers at foreign enterprises do not understand the true nature of the "FESCO" organization they are dealing with. We suggest you bear in mind the following points when dealing with such organizations:

1.      If your employees are scattered across several cities, restrict to a minimum the information provided by your HR department to the FESCO you work with. This is because the information you provide will be shared with various organizations (both affiliates and non-affiliates) across the country. For employees earning more than three times the average social salary in these various cities, just ask FESCO to make the maximum contributions on their behalf - there is no need to release precise salary information.

2.      All FESCOs are limited liability companies. Some of them have capitalizations of just RMB1 million. If you are sending your entire payroll funds to a FESCO each month for subsequent distribution to your staff you may want to consider paying your employees directly from your corporate bank account instead.

3.      Some of these FESCOs carry out executive search work (headhunting) on behalf of their clients. This creates a conflict of interest internally between payroll clients (who supply confidential personal and salary information) and headhunting clients (for whom the knowledge of such confidential data is valuable).

What useful functions do these organizations play today?

FESCOs provide some useful services. Some examples are as follows:

1.      Hiring of employees working at your representative office in China

 Under current laws, ROs are unable to hire employees directly. Using a FESCO, CIIC, STAR or independent HR agency cannot be avoided.

2.      Managing social security and housing fund payments on behalf of staff

 For employees located in cities where companies have not established a formal operation (eg: an invested entity or a branch), payment of social security and housing fund contributions cannot be facilitated without the assistance of an organization such as a FESCO. A foreign invested company may contract with one of its local FESCOs for management of this service. The local FESCO will coordinate with partners in other parts of the country to manage the payment of these contributions, charging the foreign invested company a lump sum every month.

Some companies also choose to use a FESCO to provide this service in the city where they are based. This can be a convenient option, especially for smaller companies.

3.      Hiring of temporary, substitute or auxiliary staff

There are certain positions within most companies for which it is not desirable or necessary for an employer to enter into a direct labor contract with the "employee." These positions are normally defined as "temporary, substitute or auxiliary," and the current labor contract law defines such positions as appropriate for using agencies such as FESCO as the official employer. Employees working in such positions will generally not have a strategic role within the company and will not have access to corporate secrets, so a direct contractual labor relationship is often not considered necessary. It can make sense to employ people occupying such positions through an agent.

Finally, remember when negotiating terms with these agents that you do have a choice. The largest benefit that companies using the "FESCO" brand receive is the general perception that they are part of one homogenous organization. In actual fact, if you are operating in a large Chinese city you will likely have a choice between multiple FESCOs, CIIC, possibly STAR, and a whole range of local agents. Putting them into competition should reduce your cost and improve the quality of service provided to you.

For professional advice and assistance with tax and regulatory matters, please contact info@dezshira.com.