Mr. Lu’s Tea Leaves
With Luc Lu
A seasoned veteran of the Chinese RCBI industry keeps readers abreast of overarching trends in the world’s biggest investment migration market.
Translation and editing by Christian Henrik Nesheim
Foreign investment migration firms entering the Chinese market, broadly speaking, follow one (sometimes two) of three business models: Targeting clients directly (B2C), relying on partnerships with local immigration firms for client-flow (B2B), and developing business with chiefly institutional partners. Making the wrong choice often spells disaster.
Few firms can afford to ignore the Chinese investment migration market which, for at least 15 consecutive years, has been the world’s largest. The question, for most, isn’t whether they should penetrate the Chinese market, but how they should go about doing so.
The three prevailing models are:
We’ll get into the details of each model in a moment but, first, let’s clarify some of the terminology used for foreign firms in the Chinese market:
“Program-side firms” (项目方): This is the term the Chinese use for those foreign firms who either directly or nearly directly interface with the government’s processing bodies (think Caribbean CIUs or Malta’s MRVA). Firms that fall into the group include accredited agents (who directly deal with the processing body), real estate developers (who tend to deal with processing bodies indirectly via accredited agents), or large international RCBI firms who have extensive networks of accredited agents. This is a diverse group, but what they have in common is that they are at most one step removed from the governmental processing unit.
Examples of “program-side firms”:
- Small-time law firms in Saint Kitts that have CIP accreditation
- Property developers in Cyprus that either do in-house application preparation or outsource it to a local lawyer
- Henley & Partners, Harvey Law Group, Bayat Legal Services, or other large, international IM firms that are either themselves accredited agents in the destination countries or have close, longstanding relationships with accredited agents in all or most destinations.
Three business models
Since most foreign companies tend to start out following the B2B model, we’ll describe that first.
Typically, a program firm will find one or several large Chinese immigration companies to partner with (think Globe Visa, EK, or Wailian, for example) so as to quickly get clients flowing to them at volume.
Let’s consider the pros and cons of this model.
Pros of the B2B model:
- Volume potential: A single successful partnership with a Chinese behemoth can bring a program-side firm hundreds of clients over just a few years. That’s because the big domestic companies, being client-facing, spend millions every year to market to direct clients. They already have huge client volume – some have several thousand a year – so all the foreign program-side firm needs to do is gain the favor of the domestic giant.
- No marketing investment, only business development: The domestic immigration firm has already made the investments necessary to build up a gargantuan stream of clients, which the foreign firm can – if accepted by the Chinese company – tap into.
- No direct competition with domestic firms: In the B2B model, you are not taking market share from domestic firms; instead, you become their subcontractor, delivering to their clients the types of services the domestic firms are themselves not well-placed to provide, such as application submission and real estate acquisition.
Cons of the B2B model:
- Competition from other foreign program-side firms: Because of the enormous potential rewards that await foreign firms who successfully strike deals with the large Chinese companies, every domestic firm beyond a certain size has hundreds of foreign program-side firms falling over themselves to offer them deals. Many will do so with a loss-lead, giving up the lion’s share of their own commissions/client fees just to get a foot in the door. As a result, most domestic giants already have multiple program-side partners for each destination, at very favorable terms.
- Miserable margins: This is related to the point above. Big Chinese immigration firms have the clients you want, and the clients all the other five-star hotel projects on your island want as well. The Chinese firms, in this scenario, have all the cards and they know it. They will squeeze your margins until you think you can’t take it any longer. And then they will squeeze some more. And then they will request a “minor” change to the contract the day before the signing, making you wonder if the last six months of courtship was even worth it. But because you’ve already sunk $50,000 and eight flights to Nanjing into the venture, you acquiesce, lest it all be for naught.
- No chance to build brand recognition: An international program-side firm may have processed 200 Chinese clients last year thanks to a B2B deal with a Chinese client-facing immigration company. But many of those Chinese clients will hardly even know that they were served by an international subcontractor, much less know anything about the foreign brand. Today, it is quite possible for a program applicant to never leave China, never interface with the foreign subcontractor, and still get their new passport. All they know is that Chongqing Golden Fortune Entry-Exit Service Ltd. (or something like that) helped them get a Kittitian passport, and that’s good enough for them. This is the reason some of the best-known and biggest IM firms internationally are hardly recognized at all in China, even after a decade of activity in the country.
A much less common approach for foreign companies going to China is the B2C model. This involves targeting the same clients as domestic incumbents and competing with local firms on a (mostly) level playing field.
Pros of the B2C model:
- Set your own prices: Your Chinese clients will now contract and deal with you directly, which means they pay the client fee directly to you. You no longer have to shave down your margins to compensate your B2B-source for the clients they send you.
- Foreign program-side firms now come to you: Presuming you have been able to find your own clients in China, you will now be in the shoes otherwise reserved for the domestic giants. Developers from Greece, lawyers from Antigua, and citizenship consultancies from Dubai will now be knocking on your door.
- Brand recognition: Because your firm is no longer a subcontractor to a large Chinese company, but instead faces clients directly, you are now free to build your own brand in China. You can print your logo out in big letters and hang it over the expo center entrance at the Shanghai Swissotel on weekends. You can take out keyword ads on Baidu with your own letterhead. You can finally build a brand.
- Control over client due diligence: With the B2C model, you can now screen your clients before onboarding, rather than find out three weeks into processing that the client your Chinese B2B partner has a cousin on the Politburo, making him an ineligible PEP.
Cons of the B2C model:
- Huge marketing investment: There’s a reason the big Chinese immigration companies have thousands of clients; they spend millions each year on ads, exhibitions, and so-called shuominghui (说明会, explanatory meetings where potential clients are told about the different RCBI opportunities around the world). If you want to (successfully) do B2C in China, be prepared to absorb this cost. See also: If You Don’t Have WeChat, You Don’t Have a Serious China-Market Strategy
- Hostility from local competitors: If you opt to go it alone as a B2C operator in China, don’t expect any of your B2B deals to remain valid. You are now trying to take their market share, so why would they continue doing business with you? All the big firms who used to send you clients will stop doing that instantly. They will block you from attending their events. They will shun you like an undercooked bat. Some may even call in favors from contacts in local government to hurt you. See also: China’s RCBI-Industry Unanimous: International Firms Who Target Direct Clients “Must be Opposed”
- Legal and regulatory risk: To run a B2C business in China – in any sector – necessitates a registered Chinese entity. You are now responsible for paying tax, complying with labor laws, and staying abreast of local and national regulations. In a nutshell, if something – anything – goes wrong or is misinterpreted, you – not your Chinese partner firms – will be held to account.
The third approach type, the institutional model, is the only model that can be adopted in conjunction with the other two. Whereas the B2B and B2C models are mutually exclusive, the institutional model can actually complement either of the other two models because any conflicts with market incumbents are limited.
By institutions, we mean third-party firms that aren’t directly involved in investment migration but which, nonetheless, have clients who need that type of service. Institutions can include China-based wealth managers, tax advisors, family offices, law firms, and so on. They have clients who want alternative residences and citizenships, but don’t have the in-house capacity to render those services.
These firms are content to refer their clients to investment migration firms (whether Chinese domestic ones or foreign program-side ones) and cash an introducer-check without doing any additional work.
Pros of the institutional model:
- Works in conjunction with both B2C and B2B models:
- No marketing investment, only business development:
- Less competition for the favor of any given institutional partner:
- Set your own prices:
Cons of the institutional model:
- Low per-firm client volume: With the exception of a few large-scale financial services companies (who, I can assure you, have already received plenty of program-side offers), most institutional firms you’ll partner with will produce only a small number of clients each year. Remember that immigration is not their business; they only keep an introducer agreement with you in their drawer for those situations where a client of theirs happens to need investment migration services. And even then, yours is probably not the only company with which they have such agreements. Even if you have agreements with 50 different multi-family offices, for example, you may only get 30-40 clients out of it each year. But just to get to those 50 agreements that may or may not turn out to be productive, you’ll have to visit hundreds of offices and go on dozens of roadshows throughout China. Considered in isolation, the ROI for each deal will be meager.
A changing landscape
In November 2018, almost every unwritten rule of the Chinese investment migration market became null and void. That fall, Beijing decided to deregulate the immigration sector. That move marked the end of an era, and the beginning a brave new investment migration world.
For decades, the big Chinese immigration firms were not overly concerned about B2C competitors of overseas origin because the sector was so strictly regulated. Licenses were very hard to come by even for Chinese firms, to say nothing of foreign ones, and the number of incumbents varied little from year to year. The Chinese titans were comfortable; they enjoyed egregious margins while the government kept new entrants largely at bay.
The first signs that this was changing came four years ago.
The Chinese government had already been gradually liberalizing the market since 2016 by introducing pilot deregulation projects in the provinces of Guangdong (traditionally the designated sandbox for all manner of policy experiments going back, at least, to the Deng Xiaoping years) and Shanghai.
The pilot projects in Shanghai and Guangdong offered but a preview of what was about to happen nationwide.
More or less immediately following the deregulation, the number of immigration consultancies in Shanghai and Guangzhou began to multiply at an astonishing rate. Chinese market researchers found that, in the year from 2016 to 2017, the number of newly registered immigration firms in Shanghai, one of the two deregulated provinces, rose by 71%. The following year, it more than doubled compared to 2017.
So sudden and massive was the uptick in newly registered immigration advisors that the researchers discovered that, by August 2019, nearly half of all existing immigration firms in Shanghai were established within the past year (!).
Before long, the number of firms referring to themselves as investment migration consultancies across the country had mushroomed exponentially, to the point where the researchers now estimate China has almost 30,000 such firms. If you want to understand more details about how this happened, read the conclusions from the original research here and here.
Suffice it to say that the Chinese leviathans now have thousands of new competitors coming at them from every angle, and the government isn’t lifting a finger to stop it.
Tough choices for Chinese immigration firms
How are Chinese immigration firms rising to the challenge? Just as foreign firms must choose how to enter the Chinese market, domestic firms must now decide how to adapt to the changing market landscape. The alternative is to perish.
To understand the choices that Chinese firms are making today, we must first consider where they came from.
The conventional Chinese big-firm approach to the market has been to “seize control over incoming traffic” (clients) by controlling the sales funnel, standardizing processing with vast numbers of employees to achieve economies of scale, and generating profits at ludicrous margins. Remember that the bigger you are as a Chinese immigration firm, the better your bargaining position (and therefore margins) vis-à-vis program-side foreign firms. Scaling up, therefore, had the counterintuitive effect of improving margins.
But while margins may have been scandalously high, they were arguably justified by the severe risks these companies were running on a regular basis, such as foreign exchange control risk, headaches associated with filing tax returns in an environment of often opaque sources of income, and general lack of civil rights for successful businessmen.
Inevitably, many Chinese immigration firms have had to operate in a legal grey area. How could they not, when you consider that dual citizenship is not formally recognized and sending more than $50,000 per person out of the country per year is not permitted? After all, it was this very grey area that permitted 57,000+ Chinese to spend more than $44 billion on golden visas in the last decade.
While some may initially have felt pangs of guilt collecting their client fees, 300% profit margins have a way of making principles seem rather abstract.
Now that everything is changing in China’s market, some of the firms that justified these margins with the excess risk they were taking are now feeling the chill of that risk creeping up behind them. Not content to wait for their past to catch up, and hoping to retain fruits harvested in laxer times, quite a few time-honored Chinese companies, whose names you are probably familiar with, are gradually (but quickly) morphing into other types of companies, hoping to end up largely unrecognizable from their former selves.
How can they maintain their high margins?
Some are making a horizontal-integration foray into the financial industry. Others go for vertical integration, attempting to become program-side firms themselves in order to move up in the value chain, a feat few Chinese immigration firms have managed successfully.
More on that in this series:
- The Crisis in China’s Investment Migration Market: Part 1
- The Crisis in China’s Investment Immigration Market: Part 2
- The Crisis in China’s Investment Migration Market: Part 3