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China Law Blog

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How To Win Over The Chinese Consumer. What Happens In The Store May Not Stay In The Store.
'); document.write('published on September 03, 2010 04:08:21 pm
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This post was written by Stephanie Henry, a Harris & Moure legal assistant.

In a Harvard Business Review blog post, entitled, China’s In-Store Wars, Max Magni and Yuval Atsmon contend that to win over the Chinese consumer, you need to get in on the ground floor – literally:

As many as 45% of Chinese consumers make purchase decisions in real time....while “56% of Chinese consumers told us that the information they get at retail outlets is essential to make up their minds. Compare this percentage to the only 41% of Chinese consumers who credit television advertising with the same value. These results mean that your retail marketing strategy must account for the influence won or lost on store floors.

Magni and Atsomn advocate using the following four strategies to boost China retail sales and to win over the Chinese consumer:

1. Prioritize. Covering more of the Chinese market will not necessarily translate into winning more consumers; it could just leave you overextended and financially strained. Magni and Atsmon cite to Unilever\'s China success and call for initially focusing on key outlets:

Many multinational companies, seeking to grow rapidly in the Chinese market, stretch budgets (and supply chains) to cover the large and fragmented retail landscape quickly, and, consequently, distribution costs soon get out of hand. In fact, three years ago, Unilever decided to re-focus its attention and resources on key outlets such as hypermarkets, supermarkets, and smaller stores in high-traffic neighborhoods where it could sell large volumes or high-margin products. Only after it attained scale did Unilever expand aggressively into smaller outlets This tactic allowed the multinational giant to compete better with its well-established archrival in China, Procter & Gamble.

2. Pay for shelf space. To win prime placement on store shelves, you have to be willing to incentivize shop owners. Magni and Atsmon talk approvingly of Kangshifu, a company that offers store owners “better financial terms if they display only its coolers and umbrellas” and gives store owners two cases of bottled water – at no charge- in return for better shelf placement.

3. Offer a consistent retail experience. “Chinese consumers say they greatly trust brands that have standard in-store displays.” Coca –Cola and Cadbury are two primary examples of companies that have mastered this. Both maintain strict controls over their products and displays in all outlets and by doing so they boost consumer trust and increase brand recognition.

4. Use in-store promoters. In-store promoters provide a surprising boost to sales. The post cites one instance in which the presence of an in-store promoter increased sales nearly 40%. The store manager who saw this jump in sales credited the event to “the propensity of Chinese consumers to make up their minds just before making purchases.” Magni and Atsmon note that, “since labor is still relatively cheap in China, the use of in-store promoters is also-cost effective.”

What does your company do to win over the Chinese consumer? What works and what does not?

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How Risky Is China?
'); document.write('published on September 02, 2010 11:58:52 am
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Excellent post by Rich Brubaker of the All Roads Lead to China blog on his discussion with Neal Beatty entitled, \"Identifying, Measuring, and Taking Action on the Risks of China.\" It is the kind of post every company doing business in or even with China should read.

The post sets out an amazingly comprehensive (yet blissfully concise) list of risks businesses face in China:
- Compliance & integrity issues: internal fraud (kickbacks and conflicts of interest are most common)
- Corruption & Graft: recognized by the government in Beijing as a serious issue in China. And now an increasingly serious issue in the US and UK with the growing impact of anti-corruption laws.
- IP issues - counterfeiting, internal theft of critical information, and the protection of your trade secrets are major issues
- Business partners: Who really is your prospective JV partner? How did they accumulate their wealth? Does your partner or key staff have undeclared family or business connections to a competitor or supplier?
- Political and regulatory risks – this is largely more of a strategic, ‘big picture’ issue, but companies who lose touch with the prevailing political pressures affecting their industry can find themselves exposed to problems or shifts that they weren’t expecting.
- Supply Chain risks – lack of transparency and controls along the chain
- Natural Disasters – typhoon, flood, earthquake
- Business disputes – the concept of “illegal detention” by business partners as a means to settle a dispute over payments due; threats by disgruntled former employees.
- Restructuring & labour disputes – closing a factory, or dealing with the disgruntled employee who seeks revenge on a manager
- HR risks – associated with the new HR law and the complexity of hiring & firing staff.
It goes on to note, absolutely correctly, that the extent of each of these risks varies with the companies. I did a post, entitled, \"China\'s Lack Of IP Protection: Overrated. Overrated,\" and an article in the Conference Board Review, entitled, \"In China, Piracy is no Excuse,\" on how foreign companies are sometimes overly hamstrung by piracy and the lack of IP protection in China.

I particularly like the post\'s no-nonsense approach to law-skirting:

One of the most serious potential risks to any business in China is the tacit acceptance of the “This is China” approach to business ethics and compliance issues. “We can’t do business without paying the occasional bribe to win contracts” or “it’s OK to allow employees to take a few kickbacks from suppliers – that’s how business is done here”. I’ve heard similar sentiments from managers in China and I worry that they are leaving themselves exposed to more serious issues further down the line. By condoning “low level” corruption within the organization, there is a serious risk of it getting out of control and in the worst case putting the entire operation in jeopardy. A zero tolerance approach is certainly not easy, and requires time, effort and budget, but I would say it is the best way to operate in China, just as in other parts of the world. And it is essential that senior management lay down the law and set out the company culture towards such issues from the very start.

I am often criticized for emphasizing (or over-emphasizing) the risks of not complying with China\'s laws. Those who criticize me are usually violating one or more laws and their \"evidence\" is that \"so and so has been doing the same thing for five years without any problems.\" All I know is that in my experience (which consists of having represented and/or spoken with thousands of companies doing business in China), nearly all foreign companies with unresolvable legal problems in China have those problems not because the Chinese government or Chinese laws are \"crazy,\" but because they either ignored or clearly violated Chinese law.

Note how I use the word \"clearly.\" I do so because so many times when foreign companies assert that their problems are due to a lack of clarity in Chinese laws, that simply is not the case. Way more often than not, when foreign companies find themselves on the wrong side of Chinese laws, it is because they either willfully chose to ignore the laws or because they chose to search out an English language explanation (usually not by a lawyer) to justify what they sought to do. For more on this, check out \"China\'s Business Laws. Ignore Them At Your Peril.\"

The All Roads post nicely notes the role of lawyers in helping to understand and mitigate a company\'s China risk:

If you are new to China, whether sourcing, selling or manufacturing, the first step needs to be to ask for advice. But who to ask? Lawyers are a necessity, but as I have seen from my own experience, they do not always give you the full picture of the risks your operation may face. So the biggest risk is actually not actively assessing and properly planning for the risks! Many firms still don’t really do this until something goes wrong.

I completely agree. Lawyers cannot give the full picture or the risks your company may face in China because no lawyer can ever know your company as well as you do, no lawyer is ever going to be positioned to see the day to day matters with which your company has to deal, and, most importantly, most of the risks your company is going to face in China are not going to be related to the law.

So how then can your company operate risk free in China? Well of course it cannot:

I don’t think any company can run “risk free”, no matter what sector or what size of operation. From the largest MNC with multiple manufacturing and distribution facilities around China, to the “one-man-band” sourcing operation, everyone will face risks.

Moreover, you can never reduce risk to zero. No matter how good your risk management program, there will always be someone who does something without considering the possible outcomes and impacts thoroughly, or simply faces a problem that couldn’t be anticipated or couldn’t be prevented. And thus you need to be able to react appropriately and have contingencies in place. But a good awareness of the risks from the very beginning, along with regular (twice a year) reviews of your level of risk exposure, will go a long way to mitigating many of your operational risks.

What are your business risks in China? How do you quantify them? How do you deal with them?

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Eight China Business Travel Tips.
'); document.write('published on September 01, 2010 11:11:20 am
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The Dragon Business Network Blog did a post, entitled, \"7 Tips for Business Travel to China.\" Believing both that one was missing and that eight is a lucky number, I added one more.

Here are the original seven:
1. Bring an unlocked mobile phone
2. Take taxis everywhere
3. Use Mguanxi to get around the city
4. Program 962288 into your phone, in Shanghai
5. Register with Ctrip
6. Know that some hotels cater to the domestic market, not foreigners
7. Treat yourself to a tailor-made suit
Is Ctrip necessarily better than elong?

For more on the seven, I urge you to read the full post here.

And now for the eight tip. Enjoy yourself at least a bit. If at all possible, spend a few hours taking in some of the tourist sites. Walk around the city in which you find yourself. Enjoy the food. Get out of your hotel.

What else?

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Chinese Companies In America. A TwoFish Rebuttal.
'); document.write('published on August 30, 2010 10:08:43 am
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The other day I did a post linking over to an article I recently wrote for the Wall Street Journal, entitled, \"Chinese Companies Court Disaster,\" [if you cannot read the whole article, email to yourself] on how Chinese companies are falling down badly when it comes to understanding the American legal system and using American lawyers appropriately.

Regular CLB reader and commenter TwoFish vehemently disagrees with me and he made this abundantly clear in two long comments (here and here) he left to that post. Though I am not backing down an inch (if anything, I wish I could give specific examples, but for attorney-client reasons, I cannot), I respect TwoFish\'s viewpoint and I think it so important it be heard, I am moving them from the comments section into this post. So without further ado here\'s TwoFish, along with me putting in my two cents worth in bold italics:

I don\'t think this is true at all. My personal experience is that large Chinese companies that are doing or planning to do business in the United States are perfectly aware of the legal environment in the United States and acting accordingly. (Also, it\'s important to be clear here that we are talking about the United States and not the West. The US is unique in being particularly litigious.) TwoFish, I am guessing you are dealing with sophisticated Chinese financial or technology companies. I have dealt with those companies too, and you are for the most part right. But I have also dealt with massive state owned Chinese industrial companies and they have, for the most part, been wholly unprepared to deal with the United States.

Smaller companies tend to be less aware, but when made aware of their legal exposure in the United States, generally find that their assets in the United States are often not high enough to justify legal planning to fight a lawsuit. The strategic plan is \"if we get sued, we pull out\" which as far as I\'m concerned is a perfectly good one. Also a lot of the strategic planning that I have seen with smaller and mid-sized Chinese companies involves not so much litigation planning, but setting rather up their asset and corporate structures so that if they lose a lawsuit in the United States, that their ability to do business is not impaired. The typical structure would be to create a US subsidiary of an offshore corporation in HK or BVI such that if they lose a lawsuit in the US, the judgement is going to be against an empty shell. The parent Chinese corporation is judgement proof, and the US corporation can be folded and a new corporation started which is not subject to the liabilities of the old corporation. Something else that I have seen is that with Chinese companies is that when they are made aware of the legal costs of doing business in the United States, rather than hire lawyers, their reaction is not to do business in the United States at all. Which again is a rational response. All I can tell you is that too many Chinese companies seem convinced that nobody will ever be able to reach their assets anywhere, but that has not been the case. There are plenty of countries out there that will enforce US breach of contract judgments and plenty of additional countries that tend to grant summary judgment on these judgments (or the equivalent). You are attributing brilliant strategy to what is in many cases just plain bumbling.

And again the fact that we are talking about the US rather than the \"West\" makes a difference. You can decide to do business in Canada or the EU, where you don\'t have to deal with lawsuit non-sense, and a lot of Chinese companies do just that. This could be industry dependent (I\'m in banking and finance). Anecdotally, I know of some Chinese companies that were forced to pack up and go home, but I don\'t know of any situations in which a Chinese company was seriously damaged by packing up and going home, and in the cases that I\'m aware of \"packing up and going home if we get into trouble\" *was* part of the strategy. Also, I don\'t know of any companies that were shocked by the US legal system. I am talking about the United States, not so much the West and the U.S. is a tougher legal place to be than maybe anywhere else. I do not think I have dealt with any foreign company (including large and sophisticated Canadian and British and Korean and Russian and German companies) that has not been at least surprised by the extent of discovery allowed in the United States and the sorts of damages that are awarded. The Chinese companies are no exception.

One big asymmetry with China is that Chinese tend to be much, much more knowledgeable about the United States than Americans about China (although this is changing.) Even if you don\'t take into account the large number of Chinese that have spent large amounts of time in the US, you just run into the fact that more Chinese can read English than Americans can read Chinese. I should also point out that it\'s not that hard to set up your US corporate structure and that it is easy to \"pack up and go home.\" It\'s trivially easy to get up a US corporation and to have assets in that corporation, and it\'s trivially easy to move assets into and out of that corporation. You are just wrong on this. In my experience in many different courts in the United States, judges are very quick to find fraudulent transfer if they suspect a company has moved assets to avoid a judgment. Very quick.

There are ways of enforcement a judgement against an associated corporation, but these tend to be in practice useless if one of those corporations is offshore. (i.e. if you route your assets through BVI or HK, you aren\'t going to know who to sue and where to serve the summons, and good luck trying to find what banks accounts have money.) By contrast, Chinese law is set up to intentionally make it hard or impossible for foreign companies to pack up and go home. A moments thought should make it obvious why Chinese government official obsess about minimum capital requirements, and require that you have large amounts of physical assets in China, and make it annoying to convert from RMB to USD. This completely ignores the fact that the United States is a massive market for Chinese companies, even those no longer located in the United States. Those who sell into the United States can have their assets (payments) seized in the United States.

It should be noted that there are Chinese companies that intend on large capital investments in the US, but these companies tend to also pay top dollar for extremely high priced legal and governmental relations firms in NYC and Washington, DC. Once you are that level, then your main challenge aren\'t lawsuits, since you just deal with US lawsuits the same way large US companies do (stonewall and settle). The main challenges are regulatory (i.e. getting CFIUS approval and getting approval from the Fed, the SEC, Treasury, Commerce, and the USDOJ) and then dealing with the same set of regulators in China. Again a lot depends on which Chinese and which Chinese companies you deal with, but having seen large Chinese SOE\'s hire dozens if not hundreds of lawyers (who often tend to be Chinese having gone to Harvard or Columbia law school) to deal with the intracracies of CFIUS and USDOJ anti-trust review and the details of getting exemptions from the Federal Reserve to avoid being classified as bank holding companies, I just can\'t accept the idea that \"Chinese companies just don\'t understand US law\" and are unprepared for it. That was not what my article was about. It was how they are unprepared for US litigation. Chinese companies tend to use NYC lawyers for their IPOs because the investment bankers require this. Beyond that, they are unprepared for the U.S. legal system, particularly litigation. A couple of Chinese companies have told me this. You also make it sound as though there are hundreds of experienced Chinese language commercial litigators in the United States, but I am not aware of a single city with more than a handful.

Also, I\'m not aware of any particular problems that Chinese companies have with IP lawsuits. The types of IP lawsuits that the big Chinese companies find themselves in the US, are the same types of lawsuits that large domestic technology companies routinely file against each other. Cisco recently filed a major lawsuit against Huawei, but Oracle also just filed one against Google. One reality of how IP really works with large technology companies. In some high technology areas, it is impossible to do anything without infringing on some patent, and so large companies deal with this by maintaining cross-licensing agreements and defensive patents. You sue me, I counter-sue you, we settle. This is not what I am talking about at all. I am talking about Chinese companies being accused of having engaged in conduct here that would be bound to get them sued.

The other fact that makes large companies different from small companies, is that if you are a large company with deep pockets, you will spend a lot of your time defending yourself against lawsuits. Any large company with deep pockets will typically have dozens if not hundreds of lawsuits pending against it at any given time, and the cost of dealing with lawsuits is basically the cost of doing business in the United States, and something that is simply factored in a business decision. If you ask any in-house counsel of any large corporation what the corporation can do to eliminate lawsuits, the answer is essentially that you can\'t. By being honest and producing quality products, you can reduce your liability, but you still have to deal with the cost of lawsuits even if you do everything right. That is true and what I am saying is that I am seeing Chinese companies (both large and small) that do not seem to understand the legal benefits that stem from \"being honest and producing quality products.\"

However, this gets to another question which is why a Chinese company would want to do business in the US at all. US businesses do business in China for basically two reasons cheap labor and new markets. If you are a small Chinese company, you are going to be able to take advantage of new markets by just staying home. It can be in your strategic interest to \"go global\" but there are other countries where it is just easier to do business than the United States, and even among industrialized nations, there are other countries that may be easier for a Chinese company to do business in than the United States (Australia, Canada, and Singapore). I am seeing a number of manufacturing companies that want to do business in the United States so that they can capture higher margins.

The only two reasons that I can think of for a Chinese company to do business in the United States, are that the United States is still the world\'s leader in technology and process management, and there is a lot of stuff that a large Chinese company can learn from doing business in the United States, and that China has large reserves of capital which can be used to fund US businesses. However in the second case, you bypass most of the legal headaches by just being a passive investor in a company. Instead of trying to run a company in the US, just take your cash, buy a minority stake in the company, and let the managers run the company. You are ignoring the profit margins here. Also, Chinese companies want American brands because they know those have greater respect around the world.

Getting access to US technology and know-how is something that a lot of Chinese companies are very interested in. However, if you want something from the US, that you can\'t get from say Finland or Australia, then the odds are very good that the US is not going to give it to you. In any case, you will be hiring dozens of lawyers and lobbyists filing applications for CFIUS review and export licenses with the US Department of Commerce, and the odds are very good that you will be in some sort of joint venture with a US technology firm which means dozens more lawyers. More often than not, you as a Chinese company will walk away when you look at what you are up against and the fact that the final answer is likely to be NO!!!! This certainly does happen.

I don\'t have a huge amount of experience with SME\'s, and most of what I\'ve seen up close involves large US and Chinese companies, but in those situations I have absolutely not seen the sort of misunderstanding of the US legal and business system that the original articles implies Chinese companies have. Usually when you have a big Chinese company that is considering a move into the US, they already have an in-house legal department that is staffed with returnees that went to school in the top US universities, lived in the US for an extended period of time, and often have experience with a US law firm before being poached by the Chinese company. This is just not true of all but the most sophisticated Chinese company. What I see at least as often are massive SOEs that may or may not have one or two foreign lawyers who never really practiced law anywhere before going in house with a Chinese company at a paltry salary where they can be the token Laowai. For that matter the major law firms that handle these sorts of mega-cases hire a lot of Chinese from the big name law schools. I have seen one basic reality which is that good lawyering matters less than lawyers sometimes think it does. There are a lot of situations where a deal is doomed from the beginning for business or political reasons, and sometimes you are just not going to get that export license no matter how good your lawyers and lobbyists are. Even when good lawyering can make a difference, there is the issue of cost. Good lawyers cost a lot of money, and sometimes when you add in the possible costs, its just not worth doing business in the US. In that case, there\'s no need to spend the money going into the details of the law or thinking too much about strategy in the US.

There is another basic reality which is that the United States is the most powerful country in the world, and there is a lot of worry within the United States that China may displace or challenge US global power. One thing that is striking when you talk to someone that is not American is how people outside of the United States view those concerns differently. It may matter a lot to an American if the US or China is the worlds most powerful country. It matters a lot less to a Canadian or a Malaysian, so in the United States you are going to have a degree of suspicion and nervousness about Chinese businesses that you just don\'t see in say Canada or Australia. I generally agree, which is all the more reason why Chinese companies that come to the United States cannot afford to make mistakes.

I do not dispute there are plenty of Chinese companies coming into the United States with intelligent overall strategies, but from my perspective having represented a whole slew of foreign companies coming into the United States, Chinese companies are the least equipped of any country\'s companies with which I have dealt. I do expect that to change eventually, as word starts reaching China (which I know is already happening) but I expect this will take a long time and in the meantime, Chinese companies will suffer here.

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China Stock Experts. Where Are You?
'); document.write('published on August 29, 2010 10:58:30 am
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An editor for a leading U.S. business magazine wrote me seeking my suggestions for good people to write, in English, about China\'s stock market. My response was to warn about the need to avoid bringing on any of the China investment amateurs who hold themselves out as experts.

I did not name any names for her and I do not plan on doing so here either, but I told her that those who are really in the business (and I know this through a very close relative who is really in the business) do not take these people seriously, nor do I. Respected stock analysts are those who devote their lives to it, putting in 60-80 hours a week and not becoming good until they have been doing it for a decade or more.

The Merrill Lynches and Goldman Sachs of the world have their China stock experts internally, but their advice is mostly confined to internal company documents provided to customers. Who out there is writing on Chinese stocks (even quasi-regularly) who knows whereof he or she speaks? Who, if anyone, do you look to for your China stock advice? Who are the true China stock experts out there writing in English?

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Chinese Companies Court U.S. Disaster.
'); document.write('published on August 27, 2010 12:08:45 pm
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I had an article published by the Wall Street Journal on how Chinese companies are mishandling their overseas legal matters. The article is entitled, \"Chinese Companies Court Disaster: Doing business in America means also learning how to navigate the U.S. legal system.\" I believe it requires a subscription to the Wall Street Journal, but I also think that you can email it to yourself and then view the entire article that way.

In it, I discuss how Chinese companies are coming over to the United States ill prepared for our legal system. Though this is true of most foreign companies that come to the United States, the huge differences between our two systems, and even the way Americans feel about China, have made things even tougher for Chinese companies:

Anecdotal evidence at my firm and others suggests lawsuits in the U.S. against Chinese companies are increasing. Chinese companies face certain general disadvantages that will be hard for them to overcome anytime soon. For instance, many American jurors seem to reflect broader public unease about China as an economic threat, and are more likely to assume all of its companies engage in unscrupulous business tactics and produce shoddy products. And Chinese companies face the same problems that dog any company litigating outside its home country—unfamiliar rules and the like.

To put it bluntly, Chinese companies are making big mistakes when they come over here, and I am aware of some that have had to pack up and go home because of this:

But Chinese companies are needlessly putting themselves at an even deeper disadvantage by making basic mistakes. The first is a failure to do the planning necessary to avoid lawsuits in the first place. In the U.S., companies generally view lawyers as counselors whose job includes helping their clients prevent legal problems, while also making sure the company is best positioned if a lawsuit does pop up (for instance, by helping to draft precisely worded contracts). In China, executives tend to view lawyers as technicians whose job is simply to navigate the court system when a lawsuit arises, rather than as strategic legal planners. This has been a factor in the growing area of U.S. intellectual property litigation against Chinese companies, where often a competent American lawyer would have warned the Chinese manufacturer early on of potential IP problems with a product had the company sought counsel.

For more, check out the full article.

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Put China In Your Business Future. Philadelphia, September 8, 2010.
'); document.write('published on August 27, 2010 11:18:35 am
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On Wednesday, September 8, 2010, The China Business Network will be putting on a China Event at the Cira Center in Philadelphia, entitled, \"Put China in Your Business Future.\" It is shaping up as a great event, and I urge you all to attend. I am going to be on one of the panels so if you are interested in going and wish a discount, please email me.

The day is going to begin with CEO panels on China Health/Biotech and China Clean Tech/Green Tech.

The CEO Health panel will consist of the following:
- Martyn Greenacre, Chairman, BMP Sunstone
- Dr. Mike Butler, CEO, Xceleron
- Dr. Ian Hau, CEO, Orchestrall
Dr. Jun Huangpu, of the Mainline Chinese Culture Center, will be moderating.

The CEO Clean Tech and Green Tech CEO Panel will consist of the following:
- Elinor Haider, CEO, NovaThermal
- Dr. Stephen Hammer, Executive Director, Joint US-China Cooperation on Clean Energy (JUCCCE)
- Bill Chandler, CEO, Transition Energy
This session will be moderated by Terry Cooke, CEO, GC3 Strategy

I am on the next panel, which is going to focus on China Capital and Operations, and consist of the following:
- Mark Ellenbogen, Assurance Partner, BDO Seidman
- Wil Block, Relationship Manager, HSBC
- Dan Harris, Founder, Harris & Moure LLC
This panel will be moderated by Janet Carmosky, CEO, The China Business Network

In the afternoon, Janet Carmosky speaking on \"Get the Mindset & Map for China Market Access\" and on \"The Lay of the Land: A Framework for Seeing and Dealing with China.\" It will also include a \"Market Access Case Study\" focusing on \"How Judge Group Got Started in China. This session will be with Martin E. Judge Jr., CEO, The Judge Group and Alex Van Gorden, General Manager, Orchestrall.

It will then wrap up with a Q & A session, scheduled to run from 4:30 to 5:00. This event is being sponsored by Continental Airlines, HSBC, BDO Seidman, Orchestrall, and White & Williams LLP.

Hope to see you all there. To register, go here.

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Cracking Down On Illegal Land Use In China. Do You Really Still Feel Lucky, Foreign Punk?
'); document.write('published on August 25, 2010 11:18:40 am
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The following is an amalgamation of a number (maybe 5 or 6) of conversations I have had over the years with people wanting to register a WFOE (Wholly Foreign Owned Entity) in China fast:

Potential Client: Can you help me register a WFOE in China.

Me: Yes. Not a problem. Do you have a lease yet? Do you know that a legitimate lease is required for the approval of a WFOE?

Potential Client: I know that but we are in a real hurry here.

Me: Okay. But do you have a lease.

Potential Client: We have a lease but I don\'t think it technically will qualify.

Me: What do you mean?

Potential Client: The land is zoned agricultural but my Chinese partner has secured all the okays to allow us to use it for our factory.

Me: Not a good idea. Trust me on that.

Potential Client: The factory has been there for two years without a problem and my Chinese partner assures me that the local government is fine with it.

Me: Don\'t do it. Right now, the local government is okay with it. But what if the current mayor is pushed out next week on corruption grounds. Do you really want to be in a situation where you have spent a large amount of money on a space that gets shut down?

Potential Client: I am in a hurry and this is the only space that works.

Me: Are you sure? You are in a hurry, but is it really going to be worth the few months if you get shut down?

Potential Client: I am not going to get shut down. My Chinese partner is incredibly connected.

Me: Incredibly connected to the current local administration, MAYBE, but as I said, that administration could be out the door next week. Beijing checks on these things too and if they see that your facility is illegal, Beijing could see to its shut-down. I just don\'t think it a good idea to go into a WFOE illegally and my firm cannot be a part of that.

Potential Client: That\'s ridiculous. This is how business is done in China. Are you really saying you won\'t take us.

Me: Yes. We won\'t take you because we do not want our reputation damaged when you get shut down and we won\'t take you because we do not want to be blamed when you get shut down. On top of that, I know that the Chinese law firm in _________ with which we work on these matters will not do it either because they don\'t want to be viewed badly by Beijing.

Potential Client: Well I am sure I will have no trouble finding someone to help me on this. Good-by.

I know that at least one of these companies did end up getting shut down (within about a year) because someone at the company who had sided with me on the company not going forward emailed me to tell me of this.

I thought of the above today after reading \"Cracking Down On Illegal Land Use: The BYD Case\" over at the consistently excellent China Bystander blog. The post is on BYD, \"the fast-growing compact automaker in which American investor Warren Buffett has a 10% stake.\" Seems BYD has seven factories on land zoned for agriculture and China\'s Ministry of Land and Resources is going to be ruling by September 30 on what to do about that:

China Bystander nails it in describing these situations:

It is not unknown for local officials to turn a blind eye to such zoning violations in the drive for economic growth. Companies want to bring new production capacity on stream without waiting for all the red tape to be dealt with, while officials themselves are judged on their promotion of local economic growth and local governments have become hooked on land sales for their revenue.

The ministry has said that 7,800 hectares of land had been used illegally in the first half of this year, a 14% increase over the same period last year. That reversed the trend of the figures of the past three years. They had shown the issue was shrinking, but that may just have reflected lax enforcement and reporting. The country’s farmland has continued to be eaten up by industrialization and urbanization. It has shrunk by 6% over the past decade to 122 million hectares, barely above the minimum arable land the ministry reckons China needs to be self-sufficient in food. The summer’s floods and the drought earlier in the year in some parts of the country have reduced that margin further.

China has been cracking down hard on facilities operating outside China\'s zoning laws:

The ministry has hit five companies so far this year for illegal land use, following a tougher inspection regime launched in February that found examples of illegal land use in more than half the 13 cities examined in an initial spot check and officials cooking the books in four. In those cases buildings were ordered to be demolished, land taken back, executives imprisoned and official reprimanded.

China Bystander ends its post by noting that none of the companies previously sanctioned were as high profile as BYD and then wonders\" how tough the ministry will be this time\" and what sort of signal will it want its ruling to send?

Bottom Line: If China is going after Chinese companies for putting manufacturing facilities on agricultural land, what in the world makes you as a foreign company think you will be able to get away with doing the same thing? And it is not just agricultural land. I am aware of a big China city office building that was shut down because it was zoned for a hospital.

What are you seeing out there?

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The Basics On Doing Business In China.
'); document.write('published on August 25, 2010 09:08:12 am
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Beijinger Magazine recently did a really nice article on our blog,entitled, \"Blogging the Law.\" The article is mostly an interview with me and it nicely distills the basics for doing business in China.

On the business side, it first addresses China\'s current climate for foreign businesses:

How would you describe the government\'s present attitude towards foreign investment?

China\'s attitude towards foreign investment ebbs and flows. If I were to describe China\'s attitude towards foreign investment right now in one word, it would be \"neutral.\" If your project is going to contribute good jobs for China and you are going to go in correctly, which means you are following the various laws, then your chances of securing the proper approvals are extremely high. If you think you can just waltz in because you are bringing in 100 mediocre jobs, you will likely fail.

It then discusses China joint ventures and why they tend to be so problematic:

Why are joint ventures so troublesome?

We are not fans of joint ventures in China, or anywhere for that matter, because the local party almost always ends up holding a much better hand and on top of that, it\'s their country. In mostinstances, everything that the potential joint venture parties seek to do can be accomplished just as well without doing a joint venture. The American company goes to China and comes back talking \"joint venture\" but when that same company goes to England they come back talking about \"establishing a long term relationship\" or \"doing deals together.\" In most instances, they should be talking this way about China too. I love the expression, \"same bed, different dreams.\" We have been involved with some joint ventures that have worked beautifully and truly stood the test of time, but those are rare.

It moves on to the (limited) role of guanxi for foreigners doing business in China:

Guanxi (relationships) is a much talked about, much written about subject. How big of a role does it really play?

Shockingly little. I have met many people who have real power in China but virtually none of them really do rely on their relationships with people to take care of business. Our lead China lawyer, Steve Dickinson, has been living in China and doing business there about half his life. His spoken and written Mandarin are better than your average educated Chinese person. Steve knows a ton of people in China, yet he would never claim to have pull there nor would he ever advocate taking a shortcut because of pull. I cannot tell you how many times I have heard of or seen a Western company believe it did not need to follow the rules because it had sufficient pull to get away with doing things outside of the lines, only to face major issues for having operated outside of the law. The problem with guanxi is that there is always going to be someone higher up than your contact and that person higher up may at some point call you to account for your failure to follow the laws to the letter. Also, and I have seen this happen more times than I can count, your contact may be removed and then the person who takes your contacts place may remove you as an example of how things will operate under the new regime.

I then talk about how just keeping up on China\'s ever-changing laws is the most difficult legal challenge for most foreign companies doing business in China:

From a legally oriented perspective, I would say that the most difficult challenge is for them to stay up on all of the laws that apply to them.

The problem with Chinese laws and laws everywhere is that unless you are a massive organization that can afford to have multiple attorneys in-house, you cannot realistically expect to be able to pay your lawyers enough to monitor every law that applies to your particular business. You are going to have to do much of that yourself and that is extremely difficult. Smaller companies often ask my firm to help them handle their various required employment and other taxes and I always tell them they need to find a good Chinese bookkeeper to help them with that sort of thing because using a law firm for that is just not cost effective.

I definitely sympathize though because my law firm is small and we have to hire out for just about everything, ranging from payroll to bookkeeping, to local taxes, etc., and it is very difficult to stay on top of all that is required and that is on my home turf with my native language.

I then set out what I see as the two most common (and somewhat paradoxical) misconceptions foreign companies tend to have about China:

Two things. That business in China is nothing like business anywhere else. Business is business – a good deal is a good deal and a bad deal is a bad deal. That the law in China is just like the law everywhere else. Far too often, Western companies go head first into China assuming the laws there are pretty much just like they are at home.

A classic example of this is in the area of trademarks. In the United States, the first to use a trademark generally gets it. In China (and most countries in the world) it is the first to file for the trademark who gets it. American companies will manufacture something in China for five years using their United States trademark and yet never register it in China. Then some Chinese company who has actually registered the trademark will go to the American company and tell them to cease using their (the Chinese company\'s) trademark or else pay the Chinese company to license it. The American company will then try to hire my firm to sue the Chinese company for having \"stolen\" the American company\'s trademark. I then have to tell them that just because they own the trademark in the United States does not mean they also own it in China and in fact they do not. They are never happy when I tell them that instead of hiring us to sue the Chinese company over the trademark, they should hire us to negotiate purchasing the trademark or securing a license to use it.

This problem and so many others stem from the assumption that Chinese law is the same as the law back home or, even worse, that the law back home actually applies in China.

Do check out the rest of the article here.

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China Supply Chain Problems. Maybe It\'s All In Your Head.
'); document.write('published on August 24, 2010 11:18:55 am
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Received a very nice email this morning from Keith, a Birmingham, Alabama 3L with a quite good blog called An Associate\'s Mind. Keith was writing to pass on a blog post on China supply chain problems.

The post is \"Supply Chain Risk: Culture Shock,\" and it is on an academic article that posits that many supply chain issues that arise between China and the West are caused by cultural differences. The article reviewed ascribes the problems to supply relational risk caused by the following prime differences between the West and China:
1. Family orientation vs self-interest.
2. Guanxi network vs multiple institutions-
3. Guanxi building process vs Western relationship-building process.
I must say that the article does an excellent job defining guanxi, which it describes as \"a special type of relationship that bonds the exchange partners through reciprocal exchange of favours and mutual obligations a special type of relationship that bonds theexchange partners through reciprocal exchange of favours and mutual obligations.\"

To incredibly grossly oversimplify, the article seems to be saying that the Chinese supplier is more focused on its guanxi family than on making this one supply relationship work. I have no idea whether this is true or not, but I have seen this dynamic at work in China joint ventures where the Western company is focused on profit and the Chinese company is focused on nurturing its network. This \"same bed, different dreams\" thing frequently comes up in joint ventures when the Chinese company (which usually has hiring authority) is more focused on hiring a bunch of friends and relatives for the Joint Venture, rather than hiring based on merit.

Come on you supply chain experts, are your problems with China due to cultural differences?

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