Monday, October 31, 2011

Due Diligence Key to Saving your Skin in China: Don't do it the John Paulson Way

Private Equity firms, Hedge Funds and overzealous investors in Chinese companies beware.  Needless to say I wasn’t surprised or disappointed when learning that “Hedge Fund Guru” John Paulson of Paulson & Co. lost a cool half a billion dollars on a Chinese company called Sino-Forest, listed on the Toronto exchange, after a report from the research firm Muddy Waters exposed significant reporting fraud at Sin0-Forest. 

Now for those of us who are in the Jungle (China) on a daily basis, we could have saved Paulson a lot of money and Muddy Waters a lot of time and told everyone from the beginning to expect fraud and overstatement of resources, assets, and earnings and to do due diligence. 

Then after you’ve done it, do it again and again.  Yes there are good companies in the Jungle, with solid earnings, accurate financial statements and transparency and I am sure the opportunities for investment and stock trading can be promising.  But, it is never what it really seems here in the Jungle and best to remember and dream about due diligence.  The following from the editorial page of the South China Morning Post as always for your reading pleasure.

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Investors need to have faith restored in companies being brought to market
LEADER
Jun 28, 2011

The cloud of doubt over Chinese companies listed on the world’s stock markets is getting ever darker. Values took another dive last week after it emerged that American hedge fund guru John Paulson had suffered massive losses by ditching his entire stake in the Toronto-listed mainland firm Sino-Forest, accused by a short-seller of faking timber holdings.

His move has added to the damage caused by a series of scandals that have wiped billions of dollars off the market value of companies and damaged their credibility, regardless of whether they have been implicated.
But it is wrong to point the finger at suspect companies alone. Those who bring questionable firms to market should also be under the spotlight. Those are the investment banks, accounting firms, institutional investors and lawyers who vouch for the firms that are trying to list on stock exchanges. Just as during the global financial meltdown three years ago and the dotcom bubble of 2000, it is obvious that they have not done their homework. A number of firms that have doctored their books have been able to list.

A point is fast approaching where investors are unsure who they can trust. Large state firms and small private ones alike are being shunned. The values of many have plunged at least 20 per cent, and some by as much as 60 per cent, in the past few weeks alone. Quick action is needed by companies and the government to shore up credibility.

But a public relations blitz, in which firms make themselves as transparent as possible, and a concerted effort by authorities to improve domestic accounting practices are only part of the solution. Investors also have to have faith in the foreign entities that sign off on audits, underwrite initial public offerings and promote companies as sound deals. Conflicts of interest that abound have to be taken out of the process. Foreign stock exchanges seeking to attract mainland companies must also meet their responsibility to investors.
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SeanHayes@ipglegal.com

Doing Business in Shenzhen, China and the Pearl River Delta

Shenzhen, China is approximately 80 kilometers (50 miles for those of us who have trouble with the metric system) north of Hong Kong.  It used to be a fishing village, and while there are locals and native Shenzheners, they are few as everyone seems to be from somewhere else.   Shenzhen was established as a “Special Economic Zone” (“SEZ”) as part of China’s reform policies in the late 70′s and early 80′s.

Anyway, for the last  decade I have been here in Shenzhen and I consider it my second home.  It is a beautiful city and I particularly like the tropical climate and proximity to the sea.  As an SEZ, Shenzhen is filled with techonology, consumer electronics and other companies and to me is the Silicon Valley of China.

We have about 12 million people here, but I tend to believe that it’s considerably more as I always have to wait in line for everything.  This article just in from the China Daily concerning Shenzhen and it’s expansion.

Remember what we have been telling you about the plans for Free Trade in the Pearl River Delta and loosening of forex rules in the region.  This is big news and another example of the methodical and strategic approach taken by the government here to continue to make the PRD into a global economic power.
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Shenzhen SEZ aims to be 5 times bigger

By Chen Hong in Shenzhen, Joey Kwok in Hong Kong and Xin Dingding in Beijing (China Daily)
Updated: 2009-05-22 07:40

The Shenzhen government has drawn up a blueprint to expand the country’s first special economic zone (SEZ) to the whole city – as a restructuring strategy to increase its competitiveness amid the economic downturn.

“Legislators are working on the proposal to expand the scope of Shenzhen SEZ to the whole city, but it needs the approval of the State Council,” an official with the legislative affairs office of the Shenzhen People’s Congress, who did not want to be identified, told China Daily Thursday.  Earlier this month, the State Council added the city to the list of two more areas to pilot comprehensive reforms. But “important reforms regarding the scope of the SEZ, land and finance should get approval case by case,” the document specifies.
 
If the proposal is approved, Bao’an and Longgang districts, which make up four-fifths of the city’s land mass, will become part of the SEZ, whose area will swell from the current 395.81 sq km to more than 1,900 sq km.

“In the face of the economic downturn, the SEZ has been retooling its strategy to bring in more high-tech enterprises in place of labor-intensive industries.  The economic restructuring will sharpen its competitive edge,” explained Cheng Jiansan, an economist with the Guangdong Academy of Social Sciences.
In the land-strapped SEZ, where the government also needs to develop commercial facilities and green areas for residents, IT enterprises like Huawei have hardly any room for expansion, he said.  Huawei is moving its production base to Longgang district, which is not yet part of the SEZ. “But, if in the future, Longgang district becomes part of the SEZ, IT companies like Huawei will be able to enjoy preferential policies like lower income tax,” he said.

The city can also have balanced development with the removal of long-existing policy and legal differences inside and outside the SEZ, scholars said.  Bao’an and Longgang are separated from the four districts in the SEZ by a 100-km-long border although in recent years, the government has allowed entry to the SEZ with special passports.

But “if the merger is approved, the two districts would enjoy the same legislation, same urban planning and same infrastructure. The integration will allow the city to achieve balanced development,” said Guo Wanda, vice-president of the China Development Institute, a government think tank.

For example, people living outside the SEZ cannot enjoy the superior education and healthcare resources inside the zone.  Also, the Shenzhen government tended to be partial to the SEZ, Cheng said. Likewise, the infrastructure and industrial planning in the two districts were often not in tune with the SEZ.
Cheng said the Zhuhai and Shantou SEZs face a similar problem and “if Shenzhen’s proposal for expansion is approved, I believe Zhuhai will try to go down the same path”.

Linus Yip, strategist at Hong Kong-based First Shanghai Securities, believes the expansion of Shenzhen SEZ will also benefit development in the Pearl River Delta region (PRD).  Yip also said it is just a matter of time for Shenzhen to further expand and combine with Hong Kong. “The two cities are, at the moment, quite closely correlated in terms of economic activities, and it will be irresistible for them to merge,” Yip said, adding a merger would bring synergy.

Since 1980, the government has set up five SEZs (Shenzhen, Zhuhai and Shantou in Guangdong province, Xiamen in Fujian province, and Hainan Island).  In 2005 and 2006, the State Council designated Shanghai Pudong and Tianjin Binhai as comprehensive reform pilot areas, with Shenzhen added to the list this month.  On May 6, Shanghai Pudong secured approval to expand by merging with Nanhui District, to facilitate its plan of becoming an international financial and shipping center.
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SeanHayes@ipglegal.com

Workplace Safety in China: Yah the Chinese Government Cares

Y’all might have read about the town in Hunan province where it was recently discovered that at least one factory had been polluting the ground, water and air so badly that people were actually dying as a direct result of the pollution.

As China continues to develop and evolve there will undoubtedly be more of these stories – similar to our Love Canal in New York state in the 1970′s where 21,000 tons of toxic chemical waste was buried.

Anyway, it seems that this recent event in Hunan province has given the government good reason to look at and implement some new measures on occupational hazards and safety.  While this is probably good, nobody knows what the law means or how far the government or local governments will go to enforce the law.  Please notice that in the the article below it doesn’t just mention “polluting factories” but also “businesses.”

Remember with the labor law how we told you that the ambiguity in the law was one of the ways that the burgeoning legal trade here in China was going to find sources of revenue.  Looks like this new regulation will be a bonanza for disgruntled employees, competitors and hungry lawyers.

Companies now required to monitor workplace hazards
(China Daily)
Updated: 2009-08-14 09:33
Beginning next month, Chinese businesses and factories that violate occupational hazard regulations will be shut down and face a maximum penalty of 300,000 yuan ($44,000).

“If an employee’s health has been affected by dust, toxic substances and other harmful factors during occupational activities, those harms can be defined as occupational hazards,” according to a temporary provision released recently by China’s work safety watchdog.

The provisions were formulated by the State Administration of Work Safety (SAWS). SAWS is in charge of monitoring and inspecting work safety practices, halting work hazards, issuing licenses, investigating accidents and stopping illegal work practices.

Businesses and factories should faithfully inform employees about possible occupational hazards and their consequences, and provide occupational hazards prevention knowledge training. Also, employers are required to give their workers necessary health checkups. They also should buy protective gear for employees working around hazards and ensure that equipment remains safe and in good repair.

Businesses that violate the provision will receive a warning from SAWS, ordering them to correct the practice within a time limit. Enterprises that do not correct the problem within the time limit will be fined 20,000 yuan.

Businesses that seriously violate a relevant law, regulation, or industry standard, causing grave damage to employees’ life and health, will be closed and required to pay a fine of between 100,000 and 300,000 yuan.
Moreover, companies are obliged to report any occupational hazards in construction projects to their local work safety department. They also must periodically monitor work safety procedures and make reports to the department. Occupational hazards should be monitored at least once a year, and be evaluated at least once every three years.

Misconceptions about China: IP Protection Strategies Work in China

My mother thinks that people in China still ride around on bicycles wearing those green army suits and green hats with the red star in the middle.  While there are still a lot of bicycles, especially in Beijing and Shanghai – where they are proud to wear their silk pajamas while riding their bicycles and smoking at the same time – there are not many people wearing those green outfits.

In fact, to most people in the U.S., China would be unrecognizable from what they remember in the news clips from the last few decades.  There are many misconceptions about China and we are here to clear up a big one.

I have had several clients recently tell me that their lawyer from _______ (insert the country here cause they are all the same) told them that there “wasn’t any need to file a trademark or patent application in China because China doesn’t recognize intellectual property rights anyway and people still ride around on bicycles wearing those green army suits and hats” (I added that part).  This is a big misconception that could potentially cost someone a lot of money.

First of all, China has something called the State Intellectual Property  Office of the Peoples Republic of China “SIPO”.  They even have a website if you want to pay them a visit:  SIPO and if you can read Chinese you would understand what they are writing.  If you can’t read Chinese, they have an English version at: SIPO English Site.  From the website you can see they are legitimate, SIPO is similar to the US Patent and Trademark Office (USPTO), and takes Intellectual Property filing and enforcement very seriously.

Secondly, as more Chinese companies file for IP protection in China and in the West, and they have an expectation of enforcement and a rule of law, those same principles will extend to foreign companies and individuals who apply for IP protection in China.  I have personally watched IP filing and protection improve dramatically in the past decade and most of the problems in enforcing intellectual property rights arise when foreign companies have not filed in China.

Thirdly,  China does not recognize US and other patents in the same way as other countries.  China recognizes Chinese patents filed with the SIPO and China is a first to file jurisdiction.  This means the first person to file usually gets the IP rights.  I say usually because there are circumstances where internationally recognized brands have spent a lot of money to enforce their trademark rights from people who have filed first in China or similarly they have spent a lot of money to buy the rights from those same clever individuals who filed first.

Finally, filing Trademark and Patent applications in China is relatively straight forward and not prohibitively expensive.  In fact, the costs compare with those in the U.S. and are lower than in the E.U.  When filed and approved by the SIPO you then have Intellectual Property rights and an asset in the IP that you didn’t have in China prior to filing.  The certificate then allows you to use expanding legal channels to enforce your IP.

So, why wouldn’t you file!!!!  Because your lawyer, who has never been to China, told you it wouldn’t make a difference? While we don’t make a bunch of money on helping clients file Trademarks and Patents in China, it is a service we offer because we simply wouldn’t be doing everything we can to help our clients navigate the business jungle in China – if we didn’t.

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SeanHayes@ipglegal.com

Protecting your Products in China: Customs is your Friend

Fake products in China are nothing new and I have been advising clients on protecting Intellectual Property matters for many years here. As I wrote in my previous blawg entitled “Misconceptions about China” as more Chinese companies file for IP protection in China and in the West, and they have an expectation of enforcement and a rule of law, those same principles will extend to foreign companies and individuals who apply for IP protection in China.

I thought this below article was interesting and while you can never be quite sure if the numbers are accurate, I can assure you from personal experience that Chinese Customs will enforce the IP rights of those who have IP – this means Patents and Trademarks that have been filed in China.

So, the best thing you can do is file often and file early as the first to file has the IP in China and then file your IP rights with Customs and establish a good relationship with Customs (you would be surprised how far a nice sincere lunch will go). So, I hope you learn something from the below article and as always.

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Drastic increase due to rapid development of e-business: Customs
BEIJING — The country’s customs officials seized as many as 37,000 pieces of mails and express mails containing counterfeit items from June to December of last year, seven times the figure in the same period of 2008, the General Administration of Customs (GAC) said on Monday.

On July 20, 2009, Beijing Customs stopped a batch of outbound express mail for random inspection.
Each of the 75 boxes, with “digital accessories and parts, digital cassettes and electronic accessories” written on them, weighed 30 kg. The parcels were headed to 10 countries.

On opening the boxes, officers found more than 50,000 mobile phones, SD cards, flash drives and memory banks involving 12 brand names.

The smuggling bid opened the customs department’s eyes to the seriousness of the infringement of intellectual property rights in the country.

The case is now been transferred to the public security department for further investigation.
The drastic increase in the practice is due to the development of e-business, said Meng Yang, director of the policy and regulations department of GAC, at a press conference in Beijing.

“Intellectual property protection in export trade faces new threats as e-business develops. With online trading gaining popularity, we’re seeing more and more cases where tort goods are shipped through mail, express mail, or carried by individual passengers across the border,” Meng said.
But she said the department would not regard it as an infringement of property rights if tort goods carried by passengers were within “range of reasonable self-use”.

Zhao Fudi, spokesperson for the GAC, said mails and express mails had become a major channel in the cross-border circulation of tort goods. Zhao said the GAC launched a special campaign from July to December last year, where inspection was focused on mail and express mail.

“The number of batches of goods seized through mails and express mail in 2009 has jumped by 738 percent compared with 2008. “The number of items has increased by 28 percent, and the total value by 402 percent,” he said. China’s e-business transactions reached 530 million yuan ($77.6 million) in 2009, an annual increase of 248.7 percent, iResearch said in its report on Thursday.

It said China’s e-business market is stepping into an explosively increasing stage. “In the next two to three years, the country’s e-business customers will maintain an annual growth rate of 70 percent. Scales of real goods will reach an annual increase of up to 400 percent,” the report said.

According to the GAC data, a total of 280 million items were seized last year because of intellectual property infringement, where 99.9 percent were exporting goods and 99 percent were trademark infringement. Tobacco products, light industrial products, cosmetic and care products, hardware and mechanical products, and clothes topped the list of goods categories in terms of the number of items seized in 2009. Among the five, only tobacco products saw a decrease in number compared with last year, from 560 million in 2008 to 180 million in 2009.

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SeanHayes@ipglegal.com

Legal Fees in China: Fear the Cheap

We have a phrase in Texas, something about the difference between a steer and a cow, I don’t remember how it goes, but it’s kind of like the British one – Pennywise and Pound Foolish.

This can be used to describe those who try to save a few dollars (used to be a penny back in the 1600′s) and it ends up costing them a lot more in the long term.  Old Chinatex gets a lot of enquiries from people and companies that want to do business in Asia-Pacific.  They think that just because factories makes stuff real cheap here in China, that things like quality legal counsel should also be cheap.

As many of you may know, Hong Kong and it’s neighbor city in China (Shenzhen) are two of the most expensive cities, as ranked by Mercer, in the world and that while making stuff is still cheap, helping those who make stuff keep their money is not.

Now, I know what you are thinking “those *#!% lawyers” – well that’s what you will be saying if you trust somebody who is not a lawyer or even worse, a local lawyer to handle your matter.  Reminds me of one of the first legal matters I witnessed here in China.  Foreign (U.S.) company comes to China to build a entertainment facility in a shopping mall.  Against the advice of those who know better, they hire a local lawyer for numerous reasons  - one of them being he is cheaper.  Unbeknownst to them, the lawyer was good friends with the lawyer for the shopping mall and they had struck a deal where the savings to the shopping mall owner from the negotiations would be shared equally between the two lawyers and the mall owner.  True story and I fear not a rare one.

Now, Old Frank has been helping people in Hong Kong and China who are in trouble and who don’t want to be in trouble and who want to make good money and keep it – for many years.  I don’t want to see y’all be Pennywise and Pound Foolish when having somebody advise you on your business, which to many of you is your life.  Better just be careful, make sure you get references if you have any doubt who you are hiring and expect to spend what you would spend in your country for similar quality services.

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SeanHayes@ipglegal.com

Due Diligence or Get Robbed by the Bar Sisters in China.

I can remember about 5 years ago here in the Jungle (Shenzhen, China).  There was a new bar street that had just opened, and while there were about 7 bars, only one was relatively modern and western, and ultimately, the only one with customers.  As the shopping mall to which the bar street was attached became more popular, so did the other bars, only because there was nowhere else to go.  It’s the law of numbers in China, especially in cities like Shenzhen where there is so much money and relatively little culture.

But, this isn’t about lamenting the few choices or lack of culture in Shenzhen, China, it is about the discussion I had with one of the small bar owners, who almost never had any customers.  The bar had a bad name and a picture of a dodgy kangaroo (it didn’t even look like a kangaroo) and was supposedly an Australian wine bar.  In turns out one of the owners who put in most of the money lived in Australia and the bar was run by the other two owners who happened to be very clever sisters. 

I asked one of the sisters one evening why they didn’t have any customers, and if she would like me to bring in some friends to make the place more popular.  She emphatically said it wasn’t necessary because they were trying to make the bar lose money so that the absentee partner would accept a fraction of his initial investment in a sale to the sisters.  She said that they knew the bar street was going to be really popular – and eventually it was standing room only every night – and that she and her sister would share all the profits.  He eventually acquiesced, as he didn’t spend much time in China and had no idea what was really going on, and the rest is history.

I haven’t seen the sisters in quite awhile, but, I imagine them driving one of those new Mercedes SL Class Roadsters that are a dime a dozen here in the Jungle, smiling all the way to the VIP counter at the Bank of China.

One of the people I most respect in the world once told me, “nothin’ is ever what it seems.”  That lesson is driven home to me every day that I spend here in the Jungle.  I always tell my clients in China and anyone that will listen, do as much due diligence as you possibly can, peel back the layers of the onion until you reach the core, take your time, never be in a hurry and then once you make the investment or hire the factory or the distributor or the general manager, never stop doing due diligence. Never, never, never.  That is if you really want to make money.

The post is by Frank Caruso.  Frank Caruso is the head of the China Law Group at IPG Legal and has lived and worked in Shenzhen of over 12 years.

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SeanHayes@ipglegal.com

Registering your Business in Hong Kong and Enter the China Market: The Hong Kong Phooey Way

I remember watching a cartoon on Saturday mornings called Hong Kong Phooey.  It was about this kung foo fighting dog that battled crime in Hong Kong.  Now, I didn’t know where Hong Kong was or how to get there or if I would ever go there, but, I dug that kung foo dog and the way that good prevailed over evil. 

Now that was the early 70’s and I was probably a burgeoning teenager with two karate lessons under my belt, which I quit because I couldn’t touch my toes and would rather have been playing basketball.  35+ years later and here I am in Hong Kong drinking coffee on a Wednesday morning before the organized chaos begins and I’m reading an article in the Asian Wall Street Journal about the influx of foreign (outside of Hong Kong) companies desiring to list on the Hong Kong stock exchange.

I thought, of course they want to list in Hong Kong because of the lower cost of listing, fair but not burdensome compliance – unlike the U.S. Sarbanes Oxley laws which make it cost prohibitive to list on the NASDAQ or NYSE for many firms. Also, the transparent and safe banking system and the access to capital.  Why wouldn’t they want to relocate their company or alternatively set up a new company to handle their international or Asian business?

Freest country in the world.  Easiest to do business.  16.5% flat corporate tax. 15% flat personal tax rate – even lower if it means you can pay less tax. No death tax, no capital gains tax, no tax on dividends, no sales tax, no consumption tax. No graffiti. World class medical care, world class schools, clean, safe, a bit crowded for those accustomed to living in a rural or suburban environment, but, a very livable city. In fact, Hong Kong was ranked number 1 in the Heritage Foundations 2011 Index of Economic Freedom. http://www.heritage.org/index/country/hongkong


I have to think that Hong Kong Phooey had something to do with this. Now, unlike Hong Kong Phooey, I don’t have a Phooeymobile to travel around Hong Kong, but I don’t really need it because the public transportation is the best I’ve ever experienced anywhere in the world – and it’s cheap.  Anyway, if I had a Phooeymobile I would certainly get confused driving on the wrong side of the road, and those roundabouts would have my head spinning. I do have something similar to Hong Kong Phooey’s Hong Kong Book of Kung Foo which he consulted to fight bad guys, only to be saved each time by his trusty sidekick Spot – go figure a cat saving a kung foo fighting dog.  What I have is a book of knowledge gained from being on the ground here in Hong Kong, advising my clients on Asian (specifically China) market entry via Hong Kong and on numerous transactions, mergers and joint ventures.

What I know is I am big fan of Hong Kong Phooey and a bigger fan of Hong Kong. I was with one of my clients yesterday and we were talking about Hong Kong – she’s been spending more time here as her global business grows. She said, “Hong Kong has everything, it is safe and easy and a world class city, I love it here.”  What you should know about her is that she is a very experienced, talented and successful entrepreneur and has chosen to base her new ventures in Hong Kong specifically because of the economic freedom.  She didn’t mention that her country, which is supposedly the “freest” in the world comes in at a distant number 9 on the list, which is generous and just one slot ahead of the economic megalopolis of Bahrain.

So, next time you and your business are feeling overburdened by regulations and taxes and lack of capital, look to the kung foo fighting dog and his trusty sidekick Spot. Look to Hong Kong Phooey!!

The post was written by Frank Caruso, the chair of the China Practice Group at IPG Legal.
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SeanHayes@ipglegal.com

South China Legal Blues: Enforcing of Law in China by Jordon Dotson

One quiet Thursday evening, three men from a second-tier, coastal South China city known for its Soprano like families, entered a luxury hotel. Bleary eyed and floating in a haze of rice liquor though they were, none of the three men seemed out of place in this particularly busy lobby. Practically straddling a bustling Hong Kong border crossing, this Chinese-owned, internationally operated hotel sees its fair share of tycoons and traders, miscreants and manufacturers on a daily basis. It is the seat of luxury, the kind of place that shines like a beacon for local businessmen caught in the heady mix of dinner, drinks, and deal-making.
According to the police statement, they were drunk.

None of the men were hotel guests – they more likely had their eye on the oak- and brass-coated lobby bar. Before settling at a table though, the three of them sauntered into the lobby bathroom to excise the effects of a fine dinner. One settled into the toilet stall, the other two wavered in front of the urinals before heading back out to the bar. For five minutes they talked and laughed in the lobby, unaware that two foreign guests were simultaneously recoiling at the sight of a limp hand lying beneath a toilet stall door.

Just like that, their friend was dead of a heart attack, collapsed on the cold tile, wedged against the door.
The foreign guests ran out to notify hotel staff that, perhaps, something wasn’t right in the bathroom. Security personnel hurried in to investigate. The stall door was locked tight, supporting the weight of the man’s body through his neck. Not sure if he’d simply fainted or passed out in a drunken haze, security was fearful of breaking in the door. The way the man’s body was positioned, a blow to the door surely would’ve injured his neck. Paramedics were called. Hotel managers notified. Engineers rushed in to remove the door frame, and less than fifteen minutes after he entered, the man’s body was lying lifeless before them.

Almost immediately after the stall door was removed, an ambulance rolled into the entryway. Medical staff cleared the scene, but there was little hope. The man’s heart had obviously stopped. Hotel administrators, wracked with urgency, offered their regulatory defibrillator. Maybe the man’s heart could be revived. The paramedics waved it away. They had their own defibrillator, they said, but it seemed they weren’t in a hurry to plug it in. Hotel managers waited as the paramedics tended to the body, hoping for CPR, hoping for some sign of life.

They inserted an IV drip into a limp arm.
Again hotel staff offered a defibrillator. Leave it to us, they were told. Finally they initiated CPR, leaning on the man’s motionless chest, but it was too late. They were unable to resuscitate him. Forty minutes after he entered the bathroom, the man was pronounced officially, legally, bureaucratically deceased.

The man’s two friends stood quietly on the perimeter, perhaps in shock, perhaps suddenly sobered by the gravity of the situation. Either way, they never objected, never offered assistance. The two foreigners, hotel security, the engineers and the man’s friends all scratched their heads and gave solemn statements to the police. The official conclusion: he died of a bum ticker, its decline accelerated from a life of smoking, overeating and drinking;  the hotel did everything possible to help him, it was in no way liable. It was an unfortunate accident, an extraordinary occurrence, a sad day.

Approximately one hour after his death, a crowd began mulling about the lobby. We’re family, they claimed, pushing ambulance personnel aside, shielding the man’s body. Tensions rose. Tempers flared. Through the night they all but fought with everyone who wasn’t family. Only after several rattling hours were police able to distract them so the body could be removed. The air was electric, the crowd growing, the voices rising like the typhoons that rage into the South China night.

By seven o’clock the following morning, more than thirty bodies filled the hotel lobby. Though short on luck, this man apparently had an abundance of family. Fists pounded the front desk, demanding compensation, demanding a cash payment to pacify all of that…grief. The hotel didn’t act quickly enough, they said. First aid should have come sooner, they railed. The door should have been knocked in, they screamed. Their brother was dead, they claimed, dead at the hands of a glistening, five-star monument to luxury, consumerism, hospitality…and large bank accounts.

Hotel management responded. They were sorry for this family’s loss, but would not, could not accept any liability until police prepared a formal report. A very solemn conversation would have to take place with the Chinese owner and the international  corporation whose name graced the door.

Meanwhile, another crowd was forming outside the hotel. Paying guests ambled around, wondering what all the fuss was, wondering why this odd crowd was pushing them away from the lobby lounge. Hotel staff stood on a chair and announced to the now seething crowd that the lounge was for paying customers, requesting that everyone please go outside where they could accommodate the sheer size of the herd. The family was agitated already. Now they grew hostile. Paying customers turned from the hotel as closed signs went up around the lounge, the bar, the second floor restaurant. The hotel had no choice. Every public room was occupied by a screaming, increasingly aggressive crowd.

Exasperated, the General Manager made repeated requests for police assistance, if only to explain that the hotel couldn’t pay the crowd off until an investigation was complete. Eventually the police came. They stood and watched. They smoked cigarettes (apparently unworried about public smoking bans). They raised their hands as if to say not our problem. They meandered around the perimeter of the crowd, refusing to clear the room, even as it exploded into a full scale riot. Screams rang out at hotel staff, demanding compensation, cash, now. Even the hotel manager, a brave Malaysian Chinese himself, had to run away as fingers twisted his clothes, fists flew at his face. All the while, the police watched. As too did the CCTV camera, during the most interesting day of its career.

Eventually the riot stopped. Hotel staff observed from a distance and security did their best, hoping that the police would do their job and everything would just go away. But it didn’t, it wouldn’t, not that day. Even as the rioters calmed, police refused to remove them from the hotel, refused to even ask for their names or ID cards, and an eerie calm descended over the entire hotel.

In the late afternoon, lawyers settled into the local sub-district police station. The foreign lawyer with sixteen years of international experience dressed smartly in a fitted suit and the lawyer appointed for the family, a genial young local fellow who didn’t seem able to afford socks. Across the table, the oldest, largest, and loudest members of the dead man’s family sat with their arms crossed. The lawyer had seen these types before in positions of local power in the factory villages that populate South China.  A police official declared, according to their report, that the hotel had no liability in the man’s death. Again the yelling. Again the pounding of tables. There were children to take care of, parents. Who would pay for their food, their schooling, their medicine?

Even as the foreign hotel lawyer reasserted the matter of liability, even as they detailed the lost revenue and negative publicity, there was no action other than the reading of reports. The lawyer tapped his fingers on the table, politely reminding police that foreign guests were already frightened. How could such lawlessness occur in this, oh-so-modernized of cities? How long before international media arrived with their wide angle lenses? How long before international guests arriving for the University Games would learn of this riot and, perhaps, change their minds about visiting?  He wouldn’t be able to keep the lid on this for very long.
Around the perimeter of the room, a handful of policeman glanced sideways at each other before slinking out the door. Not our problem.

For hours upon hours, the dead man’s family told the same story over and over again, that most tried and true of Chinese negotiation tactics. After awhile, even the mediator couldn’t stop herself from yawning. The foreign lawyer, seeing that the negotiations were going nowhere, and knowing that rioters were still in the hotel, offered a solution – a weekend respite with a follow up meeting on Monday afternoon, provided that the rioters agreed to leave. Even the appointed, sockless lawyer agreed – things would cool down, the hotel would have time to meet with the owner, he himself a native of the same coastal city as the victim. Despite the family’s dogged insistence on receiving more than two million Yuan in compensation (about $307,000 USD, which they did not receive), somehow, some way, almost exactly twenty-four hours after the man sat down on his most fated of toilet seats, the crowd leaked out of the lobby and agreed to return on Monday afternoon.

After discussions with Hotel Management, weekend or not, the owner refused to offer compensation. But he got it. He understood. These were his people, after all. The General Manager agreed to help with funeral expenses as an act of compassion. Ritual purification of the bathroom would be allowed – there were already enough ghosts and demons floating about. The Hotel Manager who’d barely escaped the crowd with his skin intact (his suit wasn’t so lucky), even lowered his head and offered free use of hotel facilities to the widow. All they had to do was leave the hotel, promise not to return. The foreign lawyer prepared to present this offer to the police conducting mediation on Monday.

Monday afternoon came in with a grinding halt. At 2PM, coincidentally just after the still-present police force left for lunch and a habitual nap, the dead man’s family poured back into the hotel lobby. Please leave. This area is for paying Customers only. Please. Please. They brought their own food and boxes of bottled water, the were prepared to use the two negotiation tactics that bring all foreigners to their knees – time and disregard for the law.

Again the screams rose. The word riot bounced around the room like a super ball. At some point, the police walked back through the lobby door, immediately turned around, and lit a round of cigarettes.

The General Manager picked up the phone and immediately called their lawyer. The family had breached their promise and, no, the hotel no longer wanted to help them. 150,000 RMB in costs and lost revenue. 10,000 a day in extra security costs. They could pay for their own funeral. Ghosts and demons be damned.
The foreign lawyer was prepared. He had already copied and translated the relevant parts of the Civil Law of the People’s Republic of China and was preparing a counteroffensive with reporters from International News media standing by in the event the meeting didn’t proceed as it clearly should.

He presented the following to the police mediator, the police lawyer, the sockless lawyer, and the family. It’s hard to argue with their own law.

General Principles of the Civil Law of the People’s Republic of China:
Chapter I, Article 5
The lawful civil rights and interests of citizens and legal persons shall be protected by law; no organization or individual may infringe upon them.


Chapter IV, Article 75
A citizen’s or legal persons property shall be protected by law and no organization or individual may appropriate, encroach upon, destroy or illegal seal up, distrain, freeze or confiscate it.


Chapter VI, Article 106
Citizens that who through their fault encroach upon the property or person of other people shall bear civil liability.


Article 109
If a person suffers damages from preventing or stopping encroachment on their property, the infringer shall bear responsibility for compensation.

Article 117
Anyone who encroaches on the property of another person shall return the property and failure to do so he shall reimburse the loss.  If the victim suffers other great loss, the infringer shall compensate for those losses as well.


Article 120
If a right of personal name, reputation or honor is infringed upon, he shall have the right to demand that the infringement be stopped, his reputation be rehabilitated, the ill effects be eliminated and an apology be made, he may also demand compensation for loss.


Article 130
If two or more persons jointly infringe upon another person’s rights and cause him damage, they shall bear joint liability.


Presenting the law in written Chinese, the foreign lawyer formally requested to police that all who were in violation of Civil Law be arrested and pay compensation to his client.

Hold on a minute…maybe we can resolve this.

The lawyer provided a list of costs, expenses and lost revenue.

Hmm…that’s difficult. The family isn’t going to buy this and we are going to have to enforce the law.
Tea was offered. Cigarettes were smoked (the matter of a public smoking ban was not discussed).
Not recognizing logic, rational or the rule of law, the family countered. They were sure they had the upper hand – the lobby was once again closed, filled with rioters. 350,000 RMB (about $53,000 USD), the piece of paper said. No riots. No more screams in the lobby. All for the tidy fee of 350,000 RMB. If not that, then only one act of retribution would suffice. They’d tear the hotel apart, and not even the police would make it out unharmed.

One police official spoke directly to the foreign lawyer’s legal assistant and translator – she was being unpatriotic, he said. She had a duty to convince the foreign lawyer to help police solve this matter. Calmly the assistant stated that it wasn’t the foreign lawyer’s decision to make – that decision belonged to his client the owner and hotel management. That’s how legal representation and advocacy works in the rest of the world.  If only the rioters hadn’t returned to the hotel, she said, the foreign lawyer would have presented an offer of aid to the family.

The police didn’t relent in their attempts at persuasion. After three hours and countless cups of tea and cigarettes, the foreign lawyer declared an end to negotiations. He could sense that, though the family would never grow tired (time, after all, was irrelevant to them), the police, the sockless lawyer and the mediator were indeed trying to convince them to leave, to accept some small act of gratitude from the hotel, or else they’d be arrested. If the police and government deemed the hotel responsible, so be it, the lawyer said. They’d follow the rule of law. If the family wanted to sue the hotel, so be it. They’d abide by the Court’s decision. They settled into their respective cars and sat silently until they walked through the doors of the hotel lobby. Upstairs, a congregation of police were eating dinner. Outside, a separate congregation stood behind a wall of riot shields. Not our problem, someone seemed to say.

The oldest member of the family ambled back into the hotel entryway with his hands clasped tightly behind his back. How could he save face? He had failed. It was time to go, he said. But even he could only stand aside as voices rose and limbs pushed against police shields. Finally, something in the evening clicked. Perhaps boredom, perhaps the family simply grew tired of being so angry, so loud. Either way, the lobby emptied as if a drain had been pulled, and a quiet group of policeman sat down to smoke cigarettes.
Stalemate.

All is back to normal in the hotel lobby. Management agreed to pay the family 50,000 RMB as a humanitarian gift (20,000 of which, the police promised, would be returned as an award for being a model member of the business community). Even now though, no one is quite certain whether or not the crowd will return, and its screams and threats hang over the lobby like a fog. Desk clerks and waitresses eye the door with suspicion, biting their lips, hoping for a quiet night. Even the ghosts in the bathroom sit quietly, wishing it would all just go away.

In the end, the hotel was generous. They had no legal or moral obligations. And as the envelope of money changed hands, as a written agreement not to return to the hotel was signed, fingerprinted and chopped by police, the only sound in the room was a hushed thank you from the family…to the police. They sauntered out of the room, averting their eyes from the foreign lawyer, holding tight to their envelope of cash.

Jordon Dotson is a Commercial Adviser for IPG Legal's Shenzhen, China Office. 
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SeanHayes@ipglegal.com

Shenzhen is a Great Place to Do Business: Just Ask my Law Firm Partner Frank Caruso

It’s been a busy Fall here in the Jungle (Shenzhen).  With the rest of the world economies crumbling as a result of too much debt and their populations getting bigger because of too many carbohydrates, business and baking is booming here in China.  The government continues to support an economy that is growing at somewhere between 8 and 12% and the people can’t get enough Ferrari’s, Mercedes, BMW’s, LV and Gucci bags, not to mention apartments and commercial office space.  You really have to be here on a daily basis to see it, understand it and then appreciate it as the consumption is unlike anything most of us have ever seen in our lives, or will ever see again.

That being said, while we have been busy helping our clients enter and exit the manufacturing business in China, we seem to be advising an increasing number of clients on entering this market to sell their products to distribution or even at retail.  As I have been telling anyone who would listen for the last 10 years, we are in the midst of the greatest (largest) economic boom that the world might ever see, purely because of the number of people here and their desire for the things that the rest of the world has.  China will soon surpass the United States as the largest economy in the world.

One of my friends and clients, although he rarely requires my counsel, is one that is taking advantage of the Chinese quest for things that the rest of the world has, like Pizza.  Thomson Ly is the founder of NYPD Pizza in Shenzhen, China and Hong Kong.  We met many years ago when he opened his first delivery pizza place in a back alley here in the Jungle.  I was shocked to see a picture of his pizza in the English language newspaper, Shenzhen Daily, and a story about his new venture.  So, I called the pizza shop and he answered the phone and I asked him if his pizza was really as good as the picture made it look.  He suggested I come over and try one and find out for myself.  So, after an hour trying to find the back alley where he was located next to the tire repair shop I walked in on a diminutive Chinese American in jeans and a baseball cap.  I checked again and thought, “this can’t be the place” “a Chinese can’t make a pizza as good as the one in the picture”.


Lo and behold not only can this ABC (American Born Chinese) who speaks fluent Mandarin, Cantonese, English and several other languages make a fantastic pizza, but after several years, multiple awards and a growing customer base of carbohydrated Chinese and foreigners he recently won an award in Hong Kong for the best pizza.  He even beat out a place called Paisano’s which makes a pretty darn good pie.


Best Pizza in Hong Kong 2011 – NYPD
As the four of you who read my blog know, I like to write about my entrepreneurial friends and clients who are willing to take big risks and go all in here in the Jungle.  Lot’s of people said that the Chinese wouldn’t like pizza or even order delivery pizza.  Tell that to Thompson at NYPD and the next time you are in the Jungle, try ordering The Caruso http://www.nypdpizza.com.cn/ it’s my favorite.

The following post was written by Frank Caruso.  Frank is the head of the China Practice Group at my Firm.  Yes, the pizza is good.  Not as good, of course, a Pepe's in New Haven, Connecticut, but still great pie and the best I have had in Asia.  The owner is also one of the nicest guys you will meet in the world.  
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SeanHayes@ipglegal.com

Developing Trust in China by Building Processes

A blog referred to me by the China Law Blog has a wonderful post on Developing Trust in China by Building Trustworthy Systems/Processes.

The value of building systems in China should not to be underestimated.  The Chinese, in most respects, are wonderful at performing tasks that are well dictated and explained. While in the West we often more autonomy oriented, in the East partners often want ordered guidance.

My Firm often works with business consultants to assist client in implementing systems that reward following these systems/processes. These “systems” are, often, incorporated by reference into our joint venture, OEM and other agreements.

Don’t jump into a relationship before considering the development of verification, quality assurance, logistic and like systems.

The article from the All Roads Lead to China Blog notes emphatically that:

Systems that can, regardless of human ignorance, greed, inaction, confusion or incompetence, remove the downside risks that comes with the human element of any process. Systems that at the heart of it, are established to minimize human impact, alert system operators (buyers/ clients) of a failure, and provide the data necessary to make changes to the system (human or mechanical). For me this is a system, as basic as it is, that allows for the most protection for a firm who is engaging with any external party, and in a way where “trust” isn’t an issue.
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SeanHayes@ipglegal.com

Building Systems Before JVs in China to Build Trust between Partners

A blog referred to me by the China Law Blog has a wonderful post on Developing Trust in China by Building Trustworthy Systems/Processes.

The same advice given in this blog post is relevant to work done in Korea, Southeast Asia, China and even the West.

The value of building systems is not to be underestimated. Asians, in most respects, are wonderful at performing tasks that are well dictated and explained. While in the West we often more autonomy oriented and don't strive when systems are mandated. In the East, partners often want and expect ordered guidance.

My Firm often works with business consultants to assist client in implementing systems that reward following these systems/processes. These “systems” are, often, incorporated by reference into our joint venture, OEM and other agreements in Korea.

Don’t jump into a relationship before considering the development of verification, quality assurance, logistic and like systems.

The article from the All Roads Lead to China Blog notes emphatically that:

Systems that can, regardless of human ignorance, greed, inaction, confusion or incompetence, remove the downside risks that comes with the human element of any process. Systems that at the heart of it, are established to minimize human impact, alert system operators (buyers/ clients) of a failure, and provide the data necessary to make changes to the system (human or mechanical). For me this is a system, as basic as it is, that allows for the most protection for a firm who is engaging with any external party, and in a way where “trust” isn’t an issue.
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SeanHayes@ipglegal.com

Monday, October 24, 2011

Don't Waste Your Money in Asia: Commission a Feasibility Study before Hitting the Bricks in China, Korea, Vietnam and Cambodia

I see too many investors engage in projects in Korea, China and Southeast Asia without conducting an adequate feasibility study.  The feasibility study should be performed by an attorney with the active participation of a business consultant and potentially an accountant. 

A business consultant, alone, is not enough.  Attorneys deal in numerous projects simultaneous and normally have a better grasp of the market and pitfalls than business consultants and accountants, because of this experience.  Beware, however, some attorneys that only deal with transactional work are also, too often, not adequately prepared to give the advice necessary to assist clients.

I always work with business consultants, since they often do a great job of complementing my experience.  I find that any law firm not utilizing business consultants are, too often, the wrong law firms to utilize.  These law firms, often, look down on the role of consultants – the reasons I am not quite sure of.  Often, attorneys, are blinded by the risk and consultants are blinded by the opportunity – the two make a very useful team.  Get them on your team.   

Only decide to engage in investment in Asia after a complete feasibility study that includes:
  1. Legal Feasibility:  The study should include, at a minimum, the basic regulatory, environmental, tax, incentive, and license framework with a legal opinion addressing the feasibility of the project under the relevant law.  The study should also detail the estimated timeframe for approvals and the major risks of JVs, OEM, and like relationships;
  2. Technical & Operational Feasibility:  The study should include, at a minimum, the ability and timeframe of the host nation’s companies to be able to satisfy the technical and operational requirements of the foreign investor.  This should include issues of sourcing, land procurement, labor sourcing and risk and, if relevant, political risks;
  3. Economic Feasibility & Market Study:  The study should include, at a minimum, a detailed market study, cultural relations study, efficiency study and the competitive advantage of the nation versus other nations.  Increasingly, Asia is becoming more costly to manufacture in and, thus, a mere labor cost evaluation is not enough, since labor efficiency rates are lower and material costs and utilities are often higher than in the West, thus, negating some of the benefits of manufacturing abroad.  

Thursday, October 20, 2011

The Ten Commandments of Labor Relations in Asia

The following is published in the Korean language in the Legal Times.

Korea has one of the most capricious and least efficient labor forces in the world and China is catching up with Korea very fast. Vietnam, Cambodia, Laos, Malaysia, Indonesia and the Philippines will soon follow. The fault is on the employees, but on the employers.

Korean companies have departed for greener fields in China to discover that the fields are not as green as originally imagined. Many of these same companies, as we all know, have packed their bags and moved to the less developed Vietnam, Cambodia, Indonesia, Malaysia, Laos and the Philippines.

In all of these nations, one thing holds true, lawyers are needed, not only to mitigate the ubiquitous legal risks, but to structure a labor relations system that mitigates labor relation risks.

Because of the lack of this advice or more likely the lack of company management willing to hear this advice, Korean businesses have become some of the least favored companies to work for, for the more skilled employees in Asia. Even in Korea, foreign companies are increasingly becoming the favored choice of many of the most skilled employees.

The situation can change with the active involvement of lawyers with the knowledge and guts to push clients to heed this very simple advice.

All of my clients doing business overseas are, always, strongly advised to follow these Ten Labor Law Commandments otherwise they will likely need to move to another green pasture or face the costs of the legal system or the scorn of employees.

For example, one of my clients, recently, departed China to move his factory to Vietnam. The company left China because of an inability to find skilled workers. This Korean Company was blackballed by the local skilled employees, since a employee representative noted that they wished to work for a “kinder and gentler” employer.

I strongly told the Company that they will run into the same issues if the employer is not willing to consider employee relations as their number one risk. Luckily for the Company, the management is, now, heeding my advice. Much of this advice was developed over my decade in Asia working along with Tom Coyner a former human resources professional with a leading international software company.

Ten Commandments of Good Employee Relations
  1. Carefully Draft Employment Rules and an Employee Handbook. The form rules and handbooks being utilized by the majority of the smaller law firms are not adequate. These employment rules and the employee handbook should be drafted with the advice of a knowledgeable international attorney and a local Human Resources professional. The employment rules should be strictly followed and enforced. Always apply rules equally to all employees;
  2. Hold Monthly Meetings between Management and Employee Representatives. Be honest about issues in the company, the future vision for the Company’s Management and the hopes and wishes for the employees;
  3. Publish a Quarterly Newsletter. In the newsletter summarize the Management –Employee Representative Meetings, Job Training Programs, Available Positions, Promotions, Welfare Benefits, Requests to Employees, Personal Stories (Births and Marriages), Charitable Endeavors etc.. If possible, have a monthly newsletter;
  4. Separate Management Compensation from Union/Employee Collective Pay Increases. This helps to alleviate collusion between employees and management. Union/Employee pay increases should primarily be tied to inflation, while management should, primarily, be tied to job and company performance;
  5. Hire a Professional HR Manager. The HR manager should have a position equal to the Finance Manager. In addition, the HR Manager should be trained in HR and not merely moved from a different department of a company. The HR Manager is an essential role in the company and as such should receive the same pay, support and education as the Finance Manager;
  6. Build Good Relations with Labor Boards/Labor Relations Organizations. These organizations are a useful source of information, can assist with hiring and also assist with terminating an employee;
  7. Reward Workers with Token Gestures of Appreciation. A reward for Best Worker of the Month, Least Absence Days, Most Improved etc. goes a long way in building loyalty to the company;
  8. Make Concessions. Some of the concessions made can be utilized to show that the management respects the employees. Most strikes and labor disputes occur because of a breakdown in trust, not the simple lack of enough compensation. The breakdown in trust, usually, occurs because of the perceived lack of respect the employer has for the employee. The breakdown in trust leads to a breakdown in communication, which ultimately leads to labor disputes;
  9. Embrace Good Ethical Management. Differentiate your workplace from other workplaces by leading the company with a respect for the law, best business practices and strong business ethics. The companies that embrace ethical managements, overwhelming, attract better talent and achieve far better results;
  10. Educate Employees to know how their Specific Task Leads to success for the Company as a Whole. This is especially important in manufacturing companies. Often the employees’ role is so mundane that they lose focus on the essential nature of their function. An employee that understands the importance of his or her role is an employee that will be more productive.
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SeanHayes@ipglegal.com

Friday, October 14, 2011

Meeting the Good Ole Boys at the China Law Blog in Beijing

I will be in Beijing tomorrow and Sunday to visit with my good friends at the China Law Blog.

Old China hat Steve will be giving a talk on China and the WTO at an event that should be interesting and hopefully doesn't land Steve in the clink.

Here is a remark from the China Law Blog on the event.

CLB's own Steve Dickinson will be one half of a two person discussion this Sunday, October 16, at 3:00 p.m., on China and the WTO. The event is part of the Hopkins China Forum, which describes itself as "a quarterly speakers series that brings together counterparts from the United States and China in China's capital city to discuss current events."

More specifically, the topic is "China and the WTO: A 10 Year Review With a Look to the Future." it will be a "conversation" between our own Steve Dickinson and Professor Tu Xinquan, the Deputy Director of the China Institute for WTO Studies (中国WTO研究院). Wei Lai, editor of the Global Times will be the moderator.

It will take place at the Western Returned Scholars Association (WRSA) Building, 111 Nanheyan St., 欧美同学会会址,南河沿大街111号, Beijing. There is a RMB 30 entrance fee, but that includes a drink and a reception to follow.

Both speakers will have 10 minutes to make opening remarks, followed by a 20-minute moderated dialogue. After that, the speakers will take questions from the audience. Without revealing what Steve is going to say, I can assure you that it will cause some sparks to fly.

I (Dan) am going to be attending and I can hardly wait. Who's in?

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SeanHayes@ipglegal.com

The Korean Law Blog Meets the China Law Blog in Beijing for a Discussion of the Ages

I will be in Beijing tomorrow and Sunday to visit with my good friends at the China Law Blog.

Old China hat Steve will be giving a talk on China and the WTO at an event that should be interesting and hopefully doesn't land Steve in the clink.

Here is a remark from the China Law Blog on the event.

CLB's own Steve Dickinson will be one half of a two person discussion this Sunday, October 16, at 3:00 p.m., on China and the WTO. The event is part of the Hopkins China Forum, which describes itself as "a quarterly speakers series that brings together counterparts from the United States and China in China's capital city to discuss current events."

More specifically, the topic is "China and the WTO: A 10 Year Review With a Look to the Future." it will be a "conversation" between our own Steve Dickinson and Professor Tu Xinquan, the Deputy Director of the China Institute for WTO Studies (中国WTO研究院). Wei Lai, editor of the Global Times will be the moderator.

It will take place at the Western Returned Scholars Association (WRSA) Building, 111 Nanheyan St., 欧美同学会会址,南河沿大街111号, Beijing. There is a RMB 30 entrance fee, but that includes a drink and a reception to follow.

Both speakers will have 10 minutes to make opening remarks, followed by a 20-minute moderated dialogue. After that, the speakers will take questions from the audience. Without revealing what Steve is going to say, I can assure you that it will cause some sparks to fly.

I (Dan) am going to be attending and I can hardly wait. Who's in?

_________
SeanHayes@ipglegal.com

Monday, October 3, 2011

Korea is Falling Behind China in Innovation

Sang-Hun CHOE posted a great article in the New York Times quoting IPG’s Senior Commercial Advisor Tom Coyner in an article entitled - Korea: Connected Yes, Competitive Maybe.

Mr. CHOE emphatically notes that:
But being hyper-connected is not the same as being hyper competitive. Connectivity on its own does not bring productivity or happiness. It does not necessarily even bring foreign investment. And for all its positives, Seoul’s connectivity comes with some downsides.
For starters, the city is home to the headquarters of global hardware giants like Samsung and LG, but the companies have built their success largely by copying and improving existing products rather than by innovating or moving into new technology frontiers.
Korea is still a blue-collar manufacturing country that has failed, to date, as noted by Mr. CHOE to create truly innovative products and move into new technologies.  China, in many cases, is years ahead of Korea in innovation, because of its willingness to actively promote FDI and liberalize its investment environment.  We also find China to be much more welcoming to foreign products than Korea.

Mr. CHOE goes on to note:
Today, Seoul is a place where a digital rush collides with industrial-age regulation and mind-set.
Until Apple’s iPhone made a splash here, advertisements for foreign electronics were all but nonexistent; the market was almost completely dominated by local brands like Samsung and LG. Electronic home appliances are almost entirely South Korean-made. The phenomenon said as much about an implicit buy-Korea mentality as the products’ growing competitiveness.
Korea is one if the not the most nationalistic nation in Asia.  The Chinese are proud to be Chinese, but they also know the benefit of foreign investment and foreign technology.

This Korean mindset, coupled with the burdensome regulatory environment, is leading Korea to only live off its past manufacturing glory, a glory that is increasingly being eaten away at by the more competitive China.   The majority of the major Korean companies, today, produce more of their wares outside Korea than in Korea.  Most of the major Korean companies have large manufacturing plants in China, Vietnam, the Philippines, India and in North America.  Many of the R & D centers have also moved off-shore.

Mr. CHOE has worked for the New York Times for the majority of his career as a journalist.  He is a recipient of the Pulitzer Prize.  His work appears in the International Herald Tribune and the New York Times.  Mr. CHOE's article maybe found at:  Connected Yes, Competitive Maybe.
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SeanHayes@ipglegal.com

Korea: "Connected Yes, Competitive Maybe." Korea - Beware of the Dragon to the North.

Sang-Hun CHOE posted a great article in the New York Times quoting IPG’s Senior Commercial Advisor Tom Coyner in an article entitled - Connected Yes, Competitive Maybe.

Mr. CHOE emphatically notes that:
But being hyper-connected is not the same as being hyper competitive. Connectivity on its own does not bring productivity or happiness. It does not necessarily even bring foreign investment. And for all its positives, Seoul’s connectivity comes with some downsides.
For starters, the city is home to the headquarters of global hardware giants like Samsung and LG, but the companies have built their success largely by copying and improving existing products rather than by innovating or moving into new technology frontiers.
Korea is still a blue-collar manufacturing country that has failed, to date, as noted by Mr. CHOE to create truly innovative products and move into new technologies.  China, in many cases, is years ahead of Korea in innovation, because of its willingness to actively promote FDI and liberalize its investment environment.

Mr. CHOE goes on to note:
Today, Seoul is a place where a digital rush collides with industrial-age regulation and mind-set.
Until Apple’s iPhone made a splash here, advertisements for foreign electronics were all but nonexistent; the market was almost completely dominated by local brands like Samsung and LG. Electronic home appliances are almost entirely South Korean-made. The phenomenon said as much about an implicit buy-Korea mentality as the products’ growing competitiveness.
Korea is one if the not the most nationalistic nation in Asia.  This mindset, coupled with the burdensome regulatory environment, is leading Korea to only live off its past manufacturing glory, a glory that is increasingly being eaten away at by the  more competitive China.   The majority of the major Korean companies, today, produce more of their wares outside Korea than in Korea.
Nonetheless, expats face hurdles in this purportedly most wired country in the world. For instance, their access to local Web sites, including their use of complementary Wi-Fi at places like Starbucks, is severely restricted because they cannot provide a citizenship registration number.
“It’s a smart city if you are a Korean. But it’s a semi-smart city if you are a foreigner,” Mr. Coyner said.
Mr. CHOE has worked for the New York Times for the majority of his career as a journalist.  He is a recipient of the Pulitzer Prize.  His work appears in the International Herald Tribune and the New York Times.  Mr. CHOE's article may be found at:  Connected Yes, Competitive Maybe
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SeanHayes@ipglegal.com

Sunday, October 2, 2011

Korea Ranks Low in Global Reputation - Just Behind China.

The following post was posted on our sister blog.

The Reputation Institute has, again, listed Korea as the second lowest rated country in Asia and one of the lowest in its world rankings for global reputation.  China has ranked slightly lower than Korea.

The ranking heavily relies on impressions of individuals polled in Korea and throughout the world.

The three main components of the survey include:
  • “Appealing Environment" (enjoyable country, appealing lifestyle, friendly people and natural environment); 
  •  “Advanced Economy” (global culture, global brands, workforce, and quality of products); and, 
  •  “Effective Government” (effective government, openness to investment, and efficient workforce)

If you live in Korea, the reasons for the low rankings become immediately obvious.

Korea can be a great place to live and do business, but overall neighboring countries are much more concerned with having an “appealing environment,” “advanced economy” and an “effective government.”  This leads to Korea as being perceived low in the eyes of Koreans and foreigners when compared to other nations.

Improved rankings have been shown to contribute to increase tourism, business opportunities, and the improvement in citizen satisfaction with government and society.

The Korean government, facially, has made efforts to improve the national image of the country, but all efforts, according to the survey, have failed.

Appealing Environment
  • Seoul is, overall, a great place to live, however, outside the major cities few cultural, employment and social opportunities are available.  This is why most Koreans and foreigners live in the Seoul region.
  •  Recently, Koreans, during sporting events have held up signs congratulating Japan for the earthquake.  Koreans are often incredibly nationalistic, insensitive to outsiders and xenophobic. 
  • Koreans have a reputation for being incredibly impolite to those in the service industry.
  • Koreans, often, react to occurrences in a very irrational manner (U.S. beef issue, crimes by U.S. military personnel and foreign relations).
  • Koreans, often, treat “poorer” Asians as subhuman.
  • Korea has the highest suicide rates in the OECD.  Yes, the rate is now higher than Japan.  The former Korean president, even, committed suicide. This occurrence may have contributed to the recent increase in the suicide rate over the past half decade.
Advanced Economy
  • Korea has a few noted brands, however, these brands are often not recognized as Korean brands.
  • Most of the major brands are involved in peculiar and illegal activities through their executive management. 
  • Korean unions, often, engage in violent strikes over issues that would be resolved peacefully in most neighboring nations.
  • The major Korean products are generally well made, but mid-size companies often produce poor quality products and engage in unique business tactics with customers. 
  • Korea is still a manufacturing country with only a handful of true innovative products.

Effective Government
  •  Fist fights in the halls and the floor of the National Assembly in Korea are commonplace.
  •  Most Korean politicians are without any ideology other than the ideology of self-preservation.
  • The government still has anti-foreign capital sentiment (Lone Star).
  • The Korean government is, often, more reactive than proactive (flooding, subway fires and building/bridge collapses). 
  • The Korean bureaucracy is bloated, bold and inefficient.
The good news is that we, in Seoul, see improvements each year.   The bad news is drastic improvements will take a drastic change in education, government and in the powers that be.

What do you think?
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SeanHayes@ipglegal.com