Monday, December 19, 2011

Christmas in Asia: Yes, we do Decorate House Plants

One of our senior advisers (Tom Conyer) and his wife (Yeri) hosted a wonderful Christmas party in Seoul last night where we trimmed the tree.  This is a rare occasion to see me in casual attire and a house plant in Christmas attire.

Only in Asia.
IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar, Vietnam and the U.S.

Thursday, December 15, 2011

How to Succeed in Business in China

We have dealt with hundreds of clients over the past decade within our operations in China and, overwhelmingly, those company clients that have failed have fell into the below categories. 

To note, the vast majority of the clients that have retained us from the beginning of their entry and have heeded our advice have succeeded (some, however, have not - China is loaded with risks). 

Some we have, in recent years, advised, strongly, to look to greener pastures with lower labor costs, thus, foregoing our services of winding-up a company in China because of low margins caused by increased labor costs (most have not listened). 

The clients that have listened have used our Southeast Asian/South Asia market entry services.  Our favorite destination, for most low-skill manufacturing, these days, is Bangladesh and Cambodia.  We are finding most low-margin and low value-added businesses should consider, first, Bangladesh and Cambodia and forgo China and other markets with drastically increasing labor, tax and compliance requirements.   The Chinese government is even advising this. 

However, China is becoming the must-be investment destination for those in consumer products, industries that can capitalize on the growing Chinese middle class, tech and medical equipment manufacturing companies and manufacturing that requires skilled labor at labor costs that are much lower than OECD economies (Korea beware).

We have had a few clients, over the years, squeezed out because of reduced margins or a failure to be able to capture on the Chinese middle class (normally poor market research), but few that had the typical shareholder dispute and government compliance issues that are increasingly the bread-and-butter of our China law firm. Regrettably, many of these bread-and-butter clients, previously, have hired legal and business professionals that were nothing but hacks or utilized counsel with no experience in China (flying out a couple of times a year and no office in China is a clear sign of a hack)

Here is our list.  If you have any to add, drop me a comment and I will likely add your comment to the list:
  • Wrong joint venture partner.  We find many people have done little to no due diligence on the partner and finds, quickly, that the partner is a shark.  A shark with friends in the government and teeth that love to bite.
  • No or poorly drafted shareholder agreements.  Must be drafted by an experienced international attorney doing business in China.  A guy from the West coast U.S. that flies in for a few cases a year is not adequate.  Some of these guys are great marketers: beware and screen counsel.
  • No feasibility study. Legal, Technical and Cost.  Again, not from a guy sitting on a sofa in NY.  We refer to the best for technical and cost work.  However, the best is not cheap and the process won't simply take a couple of weeks.  Good guys in this business are systematic.  Systematic guys need time.  Trust us, we have never seen an opportunity simply disappear.
  • Flagrant violations of Chinese law.  If you are in the local newspaper, call your lawyer quickly. Know the law and follow the law to the tee.  Compliance doesn't, simply, mean hiring a Chinese compliance officer that graduated from law school last year.   It, also, doesn't mean hiring a lawyer sitting on a sofa in NY.
  • Stepping on the wrong guys toes.  Easily avoided.  Stay low and dry.  The head of our China Practice Team was a U.S. Marine officer and he has learned to always keep his head down and his socks dry.  
  • No Friends in China.   Read: "How to Make Friends and Influence People" by Dale Carnegie and make a lot of Chinese friends and hire people that have a lot of friends in China.
  • No IP Protection Strategy.  I wrote so much about this on this blog that I am not going to bore you.
  • No Internal Processes to Check Quality of Products.  If you are producing junk - its your own fault.  Build a system and no junk will be produced.  If you can't build a system, we know a Swiss guy that builds systems that will drive you nuts, but will, without a doubt, end in a quality product. Unless you sell junk (scrap metal, trash incineration etc.), then, keep up the good work.
  • No Understanding of Chinese Consumer Behavior.  We use the best company in market research in Asia (and these guys are quite small).  All clients that we have referred have been satisfied, because they are not simply performing surveys, but understand how to read consumers.  Simply, Idea Analytics is the best, since they use the best algoritism (weed out the clutter) and have experience with reading Asian consumers.  
  • Hiring the Wrong Senior Employees.  Executive recruiters operating based on contingency, only, will normally feed you anything and often the anything is crap.   If you have crap working for you, you will produce crap.  Some of the international head hunters operating in China are no better. We have referred to two recruiters in China and had minimal issues with them (communication is not great though), but this is because if they won't feed us crap, since we will feed them nil in the future and give them an ear full.

Wednesday, December 14, 2011

How to Guarantee Quality Products from a Chinese Manufacturer: 10 Must Dos

A blog, I just discovered, because of reading a post at the China Law Blog, details a strategy to guarantee the quality of Chinese goods.

We agree, generally, with the advice, however, we hope that clients wishing to engage in an OEM relationship with a Chinese manufacturer don't neglect to:
  •  Have Professionally Drafted OEM/Manufacturing Agreements in Chinese and English;
  •  Register all IP in China;
  •  Protect your Trade Secrets;
  •  Choose the Right Chinese Manufacturing Partner Through Due Diligence; and
  •  Build Internal Quality Control and Compliance Processes at the Chinese Company.
The post can be found at: China Success Stories
1. Detailed Documents
"The number one key to quality when working with factories in China is documentation. Having bi-lingual, detailed, factory agreed upon checklists in place that document an item’s specifications and the criteria for inspecting the product before shipment, is essential to controlling product quality. One can not say for sure, but I would be willing to bet that the factories responsible for products recently recalled for lead paint did not have bi-lingual documentation on hand from their customer stating the type of paints that could and could not be used. Sure, this type of documentation takes time and hard work to create, but putting such processes in place is the first and most important step in avoiding quality issues. QC Checklists should describe in detail:

a) Item Packaging
b) Item Defect Classification (what is considered an defect and at what severity)
c) Item Size and Other Specifications
d) Item Functionality and How it is Checked"

2. Factory Presence
Having a presence at the factory ensures that both factory staff and management really know who you are. Either through a 3rd party QC company or your own staff, ensure that you are being represented at the factory in person on a regular basis, and that the factory clearly connects your presence there with your production.

3. Inspection
Perform regular product inspections (either with your staff or a via 3rd party), not only on the final product shipment, but also during production (otherwise knows as DUPRO). Ensure these inspections are consistent and based on clear inspection criteria. Always review the inspection results with factory management and their own QC team.

4. Keep Approved Samples
Some say that a picture is worth a thousand words. I say that a sample is worth a thousand headaches! Items often get revised and modified several times in the sourcing process, and then again after production begins. Keeping an approved sample in your office, and also one in the factory that can be used to verify the production product by the QC team, is essential in seeing eye to eye with your Chinese suppliers.

5. Take Responsibility
Nothing will alienate your Chinese suppliers more than a mistake on your side for which you take no responsibility, and blame their misunderstanding. I’ve seen hard-headed buyers make this mistake more than once, to the demise of their hard earned factory relationships. So, make sure you have all the facts before you start to blame. Recognize when it’s possible that a mistake or production issue may have been caused by your own fault, or your own team’s mis-communication. Take responsibility when this happens, even if it means a financial loss. If you are working with the factory on a long term basis, the credibility you will gain will outweigh what you have given up.
Again, please don't forget (link to article on matter in red):
6.  OEM/Manufacturing Agreements: Do Contracts Matter in China?
7.  Register IP: IP Protection Strategies Work in China
8.  Protect Trade Secrets: Keep Your Trade Secrets Secret in China
9.  Partner Due Diligence:  Due Diligence or Get Robbed by the Bar Sisters
10. Build Processes: Developing Trust in China by Building Processes


Keep your Trade Secrets Secret in China or Become Featured on the NY Times: Cathay Industrial Biotech Saga

The New York Times recently posted an article bringing attention to one of the most common potential pitfalls of promising companies here in China. The article relates to the plight of Cathay Industrial Biotech.

Cathay’s founder, Mr. Liu Xiucai earned his Ph.D. in chemistry at the University of Wisconsin before returning to China to develop China’s domestic market for biotech innovation. In 1997, Mr. Liu developed a new and more efficient method of using microbe fermentation to produce diacid, an essential building block of nylon. After taking on Dow Chemical as its largest customer, Cathay attracted $120 million in investments structured by Goldman Sachs with a plan toward an IPO in the states in the summer of 2011.

While, today, Cathay produces half the world’s diacid, its prices, profits and margins have been slashed and the IPO postponed indefinitely. What happened, of course, is that the manager of Cathay’s diacid plant, Wang Zhizhou, quit and took 6 employees with him to start his own company to compete directly with Cathay in the production of diacid.

What made this interesting enough for the New York Times is that Wang’s coup was made possible by the financial and political support of the Chinese government. Wang’s new company, Hilead, secured $300 million in financing from the state owned China Development Bank, and his partners have known ties to the Shandong government.

Having a factory manager that runs off with secrets to start a competing firm is a well-known occurrence in China. Successful businesses here know that a great deal of resources need to be reserved for preventing the theft of whatever makes them profitable.

Employees leave with production methods, client lists, patents, trademarks, and other employees. Sometimes, legal action can be taken after the fact, but often, as in Cathay’s case, the prospects are quite grim.

Mr. Liu acted quickly, filed a lawsuit with the local government and sent the police to investigate Hilead’s factory. However, when they arrived, Beijing had declared diacid production a matter of national security, voiding any authority they had to gather evidence and build a case in Cathay’s defense.

Being up against the government is rarely a good idea in China. A legal win for Cathay would mean a loss for the Shandong government, making the matter nearly impossible.

What’s important to note, in this case, is that IP theft is not just committed against foreigners or the carelessly naïve. Foreigners often come with the expectation that Chinese competitors target foreign ideas but are less able to steal from each other. This mindset often leads to the wrong way of dealing with these type problems. A Chinese partner may know more about navigating local laws and politics, but as Cathay’s situation shows, its no guarantee of protection.

Seeing dollar signs, foreign investors in China often neglect to file the necessary patents and trademarks. We see many cases where long-term relationships with Chinese partners, based on blind trust, leads to poorly written contracts that are difficult to enforce. 

We, also, see too many foreigner business operating in China not doing some good ole self-help by keeping trade secrets secret by implementing strategies and procedures to prohibit access to key data. 

Cathay’s case has gained a lot of attention and commentary from various news sources. Some suggest that greater compensation or profit sharing could have persuaded Mr. Wang to stay with Cathay, but there is little evidence that loyalty can be purchased so easily.

It’s quite likely that financial independence may have only accelerated Mr. Wang’s plans to start out on his own. Anywhere in the world, the more there is at stake, the more must be done to protect it. Mr. Liu decided to produce diacid in China, like many of our non-Chinese clients, where production costs are lower, but in doing so he gave up many of the legal protections that would have protected him in the US.

His decision to raise money through Goldman Sachs was clearly better for his long-term plan of taking the company public in the US, but by neglecting the Shandong government and not protecting trade secrets, it seems his long-term plan may never come to be. 

This is simply a typical case of the poor control of trade secrets, mismanagement of company employees, lack of understanding of the workings of Chinese local politics and, possibly, the poor structuring of a deal.

What do you think?

By Frank Caruso

Monday, December 12, 2011

China in Negotiations with Korean and Japan for East Asia FTA

China, Japan and Korea are set to negotiate, this month, the framework for a trilateral free trade agreement.  This meeting is the first meeting with the followup meetings to be held in China and Japan.

The parties will meet in Pyeongchang, Korea this week and in China early next year.  Pyeongchang is the host of the 2018 Winter Olympic games.

We see the major stumbling blocks as:
  • China is not likely to agree to a significant decrease in tariffs on automobiles or electronic goods.  Both Korea and Japan are major exporters of automobiles and electronic goods and will likely push China hard on the issue.  However, the good news is that many Japanese and Korean automobile and electronic goods companies are operating in China.  These companies hold overwhelming power in Korea and Japan and, generally, strongly favor the lowering of tariffs.
  • Japan holds a very protectionist attitude over its agricultural industry.  China is a major exporter of agricultural products.   The Japanese rice market is off limits because of political realities in Japan. 
  • Korea holds a large trade deficit with Japan and fears that a decrease in tariffs will widen the deficient.  Korea, however, because of the realization that margins are decreasing in most industries and inflation is a major stumbling block to sustained growth is enthusiastically negotiating FTAs.  The KOREU and KORUS FTAs have been signed into law.  The KOREU FTA is in effect and KORUS FTA is likely to be in effect early this coming year.
This is great news for consumers and businesses, but don't expect any positive updates in the near future.

IPG's Sister Blog's Korea Practice Team's KORUS Annoucement

Our sister blog is proud to have announced the following concerning IPG Legal's Korea Practice Group.

IPG Legal is happy to announce the formation of the first team of professionals dedicated to providing clients advice and representation on how to maximize the benefits of the KORUS and KOREU FTAs for EU, U.S. and Korean companies.

IPG has compiled a team of Korean and international attorneys, senior company executives, patent attorneys, accountants, recruitment professionals, business consultants, custom agents and other professionals to provide services to American and EU companies doing business in Korea under the KOREU and KORUS FTAs. 

Since, we are not simply a team of lawyers, we are proud to be the first one-stop shop for all companies wishing to import products into Korea, form strategic relationships with Korean companies and entrepreneurs, retain Korean employees, resolve disputes in Korea and obtain approvals to import and export products from and into Korea.

Our extensive research over the last few months of the US and EU FTAs and extensive experience in advising clients on the risks and benefits of doing business in Korea, has led us to be one, if not the only, group engaged for business in Korea with extensive knowledge of the major issues facing companies entering the Korea market including issues related to:
  • Korean Import Duties & Customs Clearance under FTAs
  • Operating in Free Trade Zones in Korea
  • National Treatment and Korean Market Access
  • Retaining and Terminating Korean Employees
  • Investor-State Dispute Resolution
  • Korea FDA, Government License and Export Restrictions
  • Joint Ventures & Partnership Relationship Building and Dissolution
  • License, OEM and Distributorship Relationship Building and Dissolution
  • Rules of Origin and Export Procedures
  • Arbitration & Dispute Resolution
  • Service Sector & Special Industry Market Entry
  • Korean Government Procurement
  • Korean Agricultural Imports and Exports
  • Textile and Apparel Imports and Exports
  • Pharmaceutical, Cosmetic and Medical Device Imports and Exports
  • Korean Company Formation, Registration and Tax Approvals
  • General Corporate and Compliance Issues in Korea
The team includes some of the most experienced business professionals and attorneys including:
  • Senior Executive VP of a major Korean Oil Refiner
  • First non-Korean attorney employed by Korean Court System
  • American and other International Attorneys
  • Noted Korean Lawyer and Author of Books on IP and Entertainment Law
  • Author of the Most Known Book on Doing Business in Korea
  • Experienced Korean Accountant with International Experience
  • A Law Professor of International Law & Business
  • Executive from a Major International Cosmetic Company
  • International Recruitment Professional
  • Korean Patent Attorney with International Experience
  • Korean Custom Clearance Professional

Friday, December 9, 2011

Renewing Your Trademarks in China

Numerous trademarks are expiring this year in China - are your trademarks expiring? Have you even, filed your trademarks in China?

As I mentioned in previous posts, China is a first-to-file nation and as you probably heard, Apple is experiencing this the hard way.  If you you registered your trademarks overseas - NO - this is not enough.  You must register your trademarks in China to gain protection.

The majority of trademarks in China are only protected for ten years from the date the application is approved. 

If one wish to extend the period of registration, one must file to the China National Trademark Office for renewal at least six months prior to expiration of the trademark (grace period of six months after expiration, but get this done early).  If the registration is approved, the trademark will be registered for ten more years.

Other posts that may be of interest:

Thursday, December 8, 2011

Can I find myself in Jail in China for Business Crimes? I Shot (Stole from) the Sheriff

If you get on the wrong side of the law in China you may not only end up in jail - you may end up in a wooden box.  And no, you don't need to "Shoot the Sheriff" and the defense of having not "Shot the Deputy" won't work in China.

All kidding aside, the Chinese national government, in order to fight the prevalent perceived local corruption, has sentenced individuals to death for white collar crimes related to the powers of government officials. In recent years, many private disputes are, also, ending in convictions.

Foreigners, largely, have been off the radar of the Chinese government, until, the last half decade.  In recent years, many international business disputes, in China, have ended in prosecutions, many of which, have lead to international scorn.

The most recent includes a matter that IPG has been closely monitoring and that the Wall Street Journal has written an interesting article about.

An Australian businessman, of Chinese ethnicity, has been sentenced, last week, to a 13-year jail sentence for embezzlement and bribery.  The case has the Australian government up in arms.

Mr. Matthew Ng's friend was quoted by the Wall Street Journal as saying that:
"Matthew's problem was that he took a Western view of business in China and stood his ground behind the legal system" said Mr Rose, who was an original investor in Et-China and is a close friend of Ng's. "We do not believe justice has been served."
We see this issue all too often.  When doing business in Asia, a deep understanding of the local landscape and risks are needed.  Going about business in a completely Western manner often leads to
loses, litigation and in a small minority of cases - criminal prosecutions.

We, always, advise this to clients and I hope, all, will listen.  Many think it is just typical nihilism in the legal community, however, it is not.  Sure all lawyers are naturally pessimistic, however, these risks exist and are caused, largely, by either employing the wrong counsel or not properly listening to the advice of counsel.

The Michael Ng saga, fundamentally, is an issue of the poor structuring of deals and a lack of an understanding of doing business in and with China.   Risks can be mitigated, but stubbornness and too quickly jumping into "wonderful opportunities" can land you in the pokey.  Trust me, you don't want to be jail and you especially don't want to be in jail in China.

This is not intended to scare off businesses from doing business in China.  China is a wonderful place to do business - just listen to good advisers and always think before you jump.

Here are a few articles that will assist in keeping you on the good side of the Chinese government:
Our other blogs:
The Korean Law Blog
The Asian Law Blog

Wednesday, December 7, 2011

Securities Fraud Investigation Against China Medical Technologies

Faruqi & Faruqui, one of the leading U.S. litigation law firm, has begun to investigate potential securities fraud violations by China Medical Technologies.  China Med is one of the leading in-vitro diagnostic companies in the world.  It seems like a few of our clients have purchased from this company and, also, may have been enticed to invest in the company.  This post has, also, been sent to clients that we think may have an interest in this litigation.  

The following is from a Press Release by the law firm. 
Faruqi & Faruqi, LLP, a leading national securities law firm, is investigating potential securities fraud at China Medical Technologies ("China Med" or the "Company")

The investigation focuses on whether the Company and its executives violated federal securities laws by failing to disclose that: (1) China Med's acquisition of Bio-Ekon Biotechnology Co. Ltd. ("BBE") was from a third-party seller connected to the Company's own chairman; (2) China Med overpaid by an estimated $20 million in the acquisition of BBE; (3) China Med's transaction to acquire BBE involved the Company's use of fraudulent shell companies, including Finnea International Limited ("Finnea") which never owned BBE; (4) according to SAIC filings, BBE actually suffered operating losses prior to China Med's acquisition; and (5) the Company has spent twice as much on "investing activities" as it has purportedly generated from operations.

On December 6, 2011, Glaucus Research Group ("Glaucus") released a report focusing on the Company's fraudulent acquisition of BBE and initiating a strong sell for China Med. On this shocking news, China Med shares plunged roughly 23% at the end of trading on December 6, 2011.

Tuesday, December 6, 2011

Does China Lead the World in Green-technology Opportunties?

China may have the most potential opportunities for companies in the green-technology business.
The Wall Street Journal in an article this week entitled China Fuels Energy Innovation quotes an SME green- energy company:
Will Latta, the founder of clean-energy company LP Amina Inc., says he tried last year to interest U.S. power utilities in testing a new technology that reduces pollution from burning coal. Rebuffed, he took his invention to the coal-belt city of Fengtai in eastern China, where he found a partner eager to install the multimillion-dollar technology.

"In the U.S. there's a resistance to demonstrate new technology," says Mr. Latta, a 42-year-old Miami native who founded LP Amina in 2007. "They don't like to be the first."
China is, often, more responsive to the voices of its citizens than western democracies because of the fear of protest and the realization that without the support of the people the communist system may perish.
The government, therefore, listens and responds to the people's demands.  Overwhelmingly, the party does an excellent job in meeting the needs of the people.  The people, for the last decade, have demanded a cleaner environment and the party is delivering.

I first started doing work in China over a decade ago.  The environment, in most major cities, is much less polluted that it was a decade ago.  The reason stems from the significant investments being made in green technology and more stringent environmental protection measures.

The largest percentage of the cutting-edge green innovations are imported from the U.S., Canada, Australia and Europe.  The companies licensing their technology to Chinese companies are often not, only, the big players, but business start-ups and entrepreneurs. 

Our clients, nearly universally, find it much easier to find potential opportunities in China, than, in the overly risk averse and complacent West, since in the West most new green-technology initiatives are funded by individual companies with little government support.

If you are a green-technology company and your are not doing business in China  - you  must ask yourself why.  The big and small are prospering from China's deep pockets and a strong and growing appetite for solutions to environmental issues.

What do you think?

Sunday, December 4, 2011

Licensing Your Software in China: Registering the Software Usually Required

My friends at the China Law Blog wrote a good post on  the Licensing/Selling of Software to Chinese companies and users.  The post, however, makes the issue seem a little more simple than it really is.

The article quotes, in length, from an email by Steve Dickson to a client.
In general, if a contract is characterized as a "license," payments under that contract are characterized as "royalties." Under Chinese law, to receive royalty payments, the contract must be registered as a foreign technology transfer contract. This can be simple or it can be complex, depending on the district in which the paying party is located.
However, many districts treat software agreements these as normal sale contracts and do not require registration. The decision is made at the foreign exchange bank that will process the payments. If the bank does not require registration, then you do not really have any issues. The way we typically suggest our clients deal with the issue is to have the paying party check with its bank. If the bank will process payments in the ordinary course, then there is no issue. I am sorry to make this so complex, but the issue is quite unsettled in China and so it must be made on a case by case basis.
Note that this goes back to the issue above: who is actually responsible for making payments to you: your distributor or the end user. This matters because it is the bank of the payer that will make the decision, so it is important to get clear about the responsible party. If your software distributor is always the one who is going to be paying you, then you only need to deal with this issue once. If each end user is the payer, then you have to deal with the issue with each end user separately, increasing your burden and risk. I note that if you have already received a payment without having this issue arise, it is probable that the locals are treating your contract as a normal sales contract, which is good for you.
I, generally, agree with Steve, but it is, also, a good idea to not simply trust the bank.  The bank could change its "policy" or be forced to change its policy and you could be out a future payment in a transaction with continuing license fees.

We advise for these matters, for your counsel to contact the local government to inquire how the specific situation will be considered by the government.  Often, a proactive counse can obtain a disposition that lessens the burden and risk of the transaction. 

Things change quickly in China.  Your agreement last year may not be treated the same this year.

China Can Make You Money: Don't Trust Us, Trust the Former U.S. Undersecretary of Trade

A retired U.S. undersecretary of Trade, Frank Lavin, was interviewed by Forbes in an article entitled:  Export to China on the Cheap.  The article sheds light on the great opportunities present in doing business in China for American and European exporters.  American and European companies are, increasingly, seeing China not only as a sourcing option, but as a new market for their exported products. We have numerous clients that have succeeded in entering and selling to the Chinese.

The Chinese have the largest number of millionaires in the world.  These individuals, overwhelmingly, prefer foreign products over Chinese products.  Often, the price is of no concern, thus, many of my clients find they maintain higher margins in China than in the West.  The middle class is growing quickly and overwhelmingly they wish to follow in the footsteps of Chinese millionaires and thus buy "quality" foreign products.
"The China market is far more open than is perceived in the U.S., especially in the consumer space,” Lavin says.  It’s also big. Last year alone, just the increase in U.S. exports to China of about $27 billion was as large as the total value of American sales to France, he says.
Lavin doesn’t know China only from his stint in Washington. He earlier had a banking career in Hong Kong.  And he was chairman of the steering committee of the USA Pavilion at the Shanghai Expo last year. He is currently living in Hong Kong, where he also works as chairman of public affairs at Edelman Asia Pacific.

Lavin thinks one of the most promising industries in China for U.S. exporters is baby items. “People are willing to pay a premium for safety,” he says. Another: auto accessories.  China has become the world’s largest auto market, and has a growing number of car aficionados.
What do you think?

U.S. International Trade Office Rules on China Solar Panel Dumping

The  International Trade Office (ITC) has ruled unanimously, in a preliminary holding, that China's exports of solar panels are in violation of U.S. and international anti-dumping and related trade laws.

The final holding is unlikely to conflict with the present holding.  

The remedies for the violation will likely be an increased tariff.   We expect a holding on the preliminary remedies by mid-January of next year.

The complainant, the Bonn-headquartered Solar World AG, claims that China is giving producers of solar panels in China low-cost land leases, low-interest loans, and favorable tax treatment.  The U.S. provides similar benefits, but at a much lower level than that provided by China.

We need to question why we even care that China is subsidizing an industry that we need and that most politicians support.

Sure we are not on a level playing field with China in this industry because of Chinese government subsidies, but maybe this is an industry that we need the support of the Chinese taxpayer in order for the price of panels to reach a level that leads to widespread usage.

Maybe without the support the industry would collapse.

What do you think?

Solving China Joint Venture, Partner, and Shareholder Disputes: Maybe without an Attorney

Conflicts are inevitable, but not unresolvable. Since the circumstances surrounding Asian JV/partner conflicts can vary greatly and since the personalities of the involved parties play a major role in the confrontation, there may not be any ready-made prescription for the solution. There are however, some general ideas that may help in resolving conflicts in the local Asian business environment.

Personal Considerations
Western logic, alone, is not usually sufficient to influence an Asian counterpart. Re-opening or referring to the exact stipulations of a contract is not desirable; it has been said "don't confuse me with facts." Such a factual confrontation will only raise the defenses of the local partner and even block any attempt at resolution. Once again, the matter of "Feelings" plays a subconscious role in the resolution of conflict. Try to appeal to his emotional common denominator.

Control Emotions
Showing one's emotions in a demonstration of anger can only exacerbate the situation; the foreign partner must always keep his own emotions under complete control, while appealing to the local partner's emotions.

Just as wise parents go to great lengths not to bicker in front of the children, it is even more important that the top executives representing the two companies keep a positive façade for the benefit of the other employees. They can still – and should – let their hair down off site or behind closed doors to get conflicting matters, while still small, out on to the table for resolution.

Compromise Diplomacy
In difficult confrontations, the use of some diplomatic procedures such as the give-and-take of a trade-off may prove productive in resolving conflicts. It may require some innovation to generate alternative ideas to try in the resolving process.

A Chinese, Korean or other Asian joint venture partner may agree to concede the majority share in the company to the foreign partner on condition that he will be granted the right to veto the first executive vice-president appointed by the foreign partner. Though not ideal perhaps it may be an example of tradeoff.

The "tit-for-tat" procedure may never create a win/lose situation. One wins only the battle and not the war. If a deadlock arises, however, a valid alternative may be to consider areas of possible tradeoff in order to reach a compromise.

Home Office Support
A very important requirement for expatriates representing a foreign company is to secure the full support of the head office for what one intends to propose vis-à-vis the local partner. If such support is not firm, it will be more difficult to resolve the differences.

Such consultation and approval from the head office has several benefits. First, it offers the opportunity for counsel concerning the proposal. It also takes the foreign partner off-the-hook so that the proposal is not just his or her own idea that might not work. Finally, it adds backing to the foreign partner in presenting his case to the local partner. The wider the support, the better in dealing with knotty problems in an unresolved conflict situation. Such backing adds confidence that can influence the outcome of the consultation.

Confidential Negotiations
Not an easy discipline in resolving conflicts, but a crucial one, is to keep quiet about the matter.    Word spreads fast, especially if it is undesirable, unfortunate news. In this case the problem of "blab" is not confined to any one segment of society. So it is important to keep one's mouth shut when partners are trying to resolve a conflict. During World War II we were told that "a slip of the lip can sink a ship." If this is true in war, it is also true that loose lips can sink a business partnership as well.

Neutral Moderator
A mediator or go-between has no emotional connection to the situation and can help to reduce tensions and defuse the volatile atmosphere between the partners. Third parties can be used to great advantage. When one is confronted with an uncompromising deadlock, replacing the negotiating party with another may lead to a solution.

Exceptional Conflicts
Sometimes the conflict goes beyond personalities. Fundamental differences in the priorities between the two mother companies can and does take place. When the conflict of interests becomes so obvious that most middle managers and above recognize the problem, it may be a good strategy not to try to futilely hide the matter but to amplify the matter so that ultimately the issue, in an extreme case, may go beyond even the board of directors and over to the next shareholders' meeting. Obviously, this is an extreme case. But sometimes this magnitude of conflict can occur beyond the control of the current representative directors – regardless how adroit they may be in handling the issue locally.

Top 10 Pointers from an Experienced Foreign JV Director:
1. Whenever possible, make sure your firm has the CFO position. Try to avoid giving up control of the position. In the end, no matter how tempting the current situation may be to negotiate away that position, you will regret it.

2. The local Chinese CEO is likely to be a god in the eyes of the Chinese employees. Never underestimate your counterpart's power and be extremely careful not to cause him to lose face. It is not easy but you must determine how to walk the line between not being belligerent and being a push over.

3. The wrong motivation to enter into a JV in China includes forming a partnership simply out of necessity or ease in entering the market. There needs to be a genuine, ongoing and mutual reason for maintaining the JV with the Chinese partner.

4. The expatriate director must have a clear cut mission and genuine backing from his head office to be successful. Too often the overseas head office looses interest in the Chinese operations and the local expat director takes on an attitude of resignation from not making a real contribution. This sort of matter often appears in JVs created out of convenience rather than of shared purpose with the China firm. When that attitude sets in, it is often the beginning of the end of any chance of a successful joint venture.

5. It takes at least 18 months even for a fairly experienced and competent foreign director to become truly effective since it so difficult to understand the game.

6. As soon as a new guy comes in as the new foreign JV representative, almost certainly the Chinese partner will try to revise the relationship with the disappearance of a number of regular meetings, reports and information procedures. It's therefore important that the new  director arrive with a clear agenda as to his role and what information he is to received plus clear delegation of authority such as spending authority, investment authorization, etc.

7. Most Westerners want about a month to ease into a job before putting their foot down. In China, one is not normally given that luxury. Rather it is much better to approach the job as director with even a dogmatic sense of authority. Otherwise, the China organization will likely marginalize the new director and he or she will be endlessly trying to chase down critical information.

8. It is critical into immediately establish your authority to be included on important – particularly negative – information.

9. Networks of relationships are critical. Often the real communication and secrets are shared over beers after work.

10. Hire a bilingual Chinese  who is totally on your payroll but works within the JV. This person can do much more than be an interpreter. 


Saturday, December 3, 2011

Manufacturing in China: Top Ten Things to Know Before You Go

This list is not intended to be exclusive. The list assumes that you will have a local company as your JV partner in this venture:
  • Register all Intellectual Property including your trademarks and patents in China. No - your E.U., U.S., Indian, Japanese etc. registrations are not enough; 
  • Due Diligence, Due Diligence, and More Due Diligence.  Read our many posts on this issue;
  • Complete a decent feasibility study. This does not mean simply running a cost estimate;
  • Consult a technical adviser;
  • Checkout and go through IPG's Stock Purchase/JV Due Diligence Check List;
  • Meet the Anticipated JV Partner and learn about the partner. A discussion on the phone is not enough either is a meeting over dinner. Have a local help with feeling the person out;
  • Execute a Non-Disclosure Agreement (NDA) in English and Chinese;
  • Execute OEM, Manufacturing, JV, Supplier, Shareholder Agreements as the case may be in English and Chinese. Don’t get them drafted by hacks or those who don't have experience in China. No, the lawyer you use in NY is not good enough;
  • Research or have researched benefits to manufacturing in the China Free Trade Zone (FTZ); and
  • Research or have researched benefits to manufacturing or employing people in certain areas of the country.

Entering the Chinese Market through a JV: The Slim Basics

A client, a minority shareholder in a company in China, is involved in litigation with another company shareholder over issues the client had with the majority and other shareholders over his three years in this venture.

The majority shareholder (controls the representative director) has been helping himself to the company profits through creative expenses and interested transactions with the company and his personal company. The majority shareholder is also threatening to block distributions and is possibly increasing the stickiness of his fingers.

Like situations WILL occur in many cases where a JV is not completed through a carefully drafted shareholder agreement and articles of association. A majority shareholding will not prevent this situation from occurring, because of the nature and power of a China managed company.

I have said this numerous times, if you don’t want to support my extravagant lifestyle (actually I don’t have an extravagant lifestyle), get an experienced lawyer/solicitor to draft your China shareholder agreement and articles of association. Make sure the attorney knows what the heck he is doing- many of the foreign and Chinese attorneys - don’t.

Make sure the attorney is not merely going to give you form agreements. Every joint venture agreement in China is different and form agreements are a sign of a lack of care and trouble in the future. Don’t skimp at this stage and thus don’t use form articles, form shareholder agreements, and form by-laws drafted by hacks, attorneys that quote the lowest price and only accountants and agents.

Joint Venture Basics in China
  • Due Diligence, Due Diligence, Due Diligence; 
  •  Limit the Powers of the Company Directors and Managers;
  •  Retain the Power to Appoint and Remove the Directors; 
  •  Maintain Control over the Company Seal; 
  •  Retain Majority Control or include other Minority Protection Clauses;and
  •  Hire an Independent Accountant and Utilize a Neutral REAL Auditor.

Law Firms in Shenzhen, China with International Law Experience

When hiring an attorney in China, insure that your law firm has a foreign attorney (American, British, Australian etc.) that actively manages the local Chinese attorneys and staff.

The local law firms in Shenzhen and Guangzhou are far less experienced than law firms in Beijing.  However, refrain from hiring a Beijing firm for work in Shenzhen or Guangzhou.  Local experience and connections are needed to insure an easy entry into the region because of the power of the local government.  The locals know best.

The following firms have significant experience assisting foreign clients in Shenzhen, Guangzhou, and surroundings areas.  Yes, one of the firms is the firm that runs this blog. 

I am sorry if I didn't list your firm.  Please email me and I will consider listing it if it has significant experience assisting foreign clients.

The leading firms in Shenzhen assisting foreign clients in entering the Chinese market include:

1.  IPG Legal (Frank Caruso: Chair, China Practice Team, IPG)
2. King & Wood (Wang Rongkang:Decent English Skills, M & A)
3. Grandall Law Firm (Yujin Fu:  Decent English Conversation Skills)
4. V & T (Zhang Zi, Proficient in English Conversation, Hong Kong educated)


China Visas for Those Doing Business in China

The visa laws, in China, change regularly.  Please note that these visas are accurate as of December of 2011.   Most of these visas are obtainable without legal assistance.  However, in cases where you will be having foreign staff working in Korea (Z Visa), it is advisable to consult counsel in order to be in compliance with Chinese tax and corporate law.

D Visa:  Permanent Residency Visa
The D Visa is, in most cases, only available for those that are married to Chinese or those having lived in China for over five years and has made significant investments in China. 

L VISA:  Tourist Visa
A tourist visa needs to be obtained, normally, prior to entering China.  These visas, normally, allow one to stay in the country for no longer than three months.   You are able, in most cases, to obtain a multiple-entry visa that is good for one year.

F VISA:  Business Visa
The F Visa, normally, allows for the presence in China for a period of six months and is good for, normally, a period of one year. 

X Visa: Student Visa
Student Visa are obtainable by contacting the school that you intend to study with.  The visas are, normally, available for as long as the period of study. 

Z Visa:  Work Visa/Joining Family
Upon obtaining the visa abroad, the holder should enter China report residence and receive a residence permit within 30 days of entering China. 

The Top Ten Legal/Compliance/Business Risks Facing Foreign Companies Doing Business in and with China

Ask yourself and your counsel these questions each year and you are well on your way to a successful relationship with the Chinese government, Chinese companies and your customers.   Please note that the posts/links below the title are links to articles on the particular subject.   We will be adding more links to posts to this article- so please bookmark this page and check back for updates.

1.  Am I protecting my intellectual property in China?

2.  Do I have enforceable contracts with my Chinese suppliers, vendors, business partners, employees etc.?  Will I get paid?  Will my products arrive and be as promised?

3.  Am I in compliance with Chinese Labor & Employment law?

4.  Am I in compliance with the U.S./British Foreign Corrupt Practices Act? Think Bribes

5.  Can I sell the product I am selling in China?

6.  Can I sell in the manner that I am selling with the business license I have?

7.  Am I in compliance with Chinese Environmental Laws?

8.  Am I in compliance with Chinese Tax Law?

9. Did I properly form my Chinese company?  We see too many companies that have hired the most incompetent of counsel and the formation of the company is flawed and, thus, consistent problems occur and risks abound.

10. Am I in compliance with Chinese Corporate Law?

Foreign Corrupt Practices Act: Don't Forget your Business in China and Throughout Asia

China Law Blog directed me to a great blog post on the U.S. Foreign Corrupt Practices Act. Michael Kohler's FCPA Professor blog has a great post in the form of a Q & A. The most significant sections are below.  

IPG Legal is advising all clients doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar and Vietnam to read the post. 


Registered Capital in China: Starting a Company in China, but Mitigating Your Risk

This is the number one question that we receive from the most risk averse of our clients that wish to start a Wholly Foreign Owned Enterprise/Entity (WFOE).  The answer is not as simple as me writing a figure down below.

Revisions to Chinese Company Law has liberalized the minimum amount necessary to, in theory, start a business in China. The minimum "theoretical" amount is a trivial amount in most industries.  However, the local government has threshold amounts that are often utilized as true minimums.  The necessary amount, thus, will depend on the industry, locale and hopefully your proactive counsels interactions with the local authorities.  However, we always advise to not skimp on registered capital for a variety of reasons relating to relationship with the local government, your customers and partners.  We will address this issue in a follow-up post.

The registered capital of a company includes transferred IP, company assets, and start-up cash.  The registered capital amount can be found by anyone with a computer and most business customers will realize that a low capitalized amount means increased risk for the customer.

For large amounts (discretionary on part of government) of registered capital the amount can, normally, be remitted over a period of a couple of years.  For smaller amounts, the amount must be contributed to the company's account immediately.

A few issues to consider:

1.  Don't begin to value your IP, company assets or structure deals before discussing the matter with your counsel and having them contact the local government.  If your counsel is not proactive, they will not contact the local government - run quickly to another counsel. I had a client that used one of the "leading law firms in China" that didn't discuss with the government the transferred asset value that, in the eyes of the client, was valued at over USD 450,000, but that was only worth, in the eyes of the local government - USD 50,000.  A proactive approach would have allowed a higher sum to be placed on the asset. This led to the company forwarding an unexpected large amount of money into China
at a time when the amount was needed for a capital investment in the states (replacement of the asset being sent to China).

2.  The registered capital is public information.  Many of the more careful of Chinese (and WFOEs in China) companies will not do business with companies with low registered capital.  Many Chinese companies know that they are, in most cases, only going to be able to attach the registered capital of the company if things go awry and the "foreign" company will likely close shop and be nowhere to be found when the proverbial horse excrement hits the fan.

3.   It is true, that in most cases, liability is limited to the registered capital.  However, don't forget exit bans, the criminal "justice" system and the local police.  Legal wind-up is essential.
See my article: Winding-up/Shutting Down a Company in China.

4.   Playing with the books in order to show that the company is capitalized is a criminal offense that can land you in an unwelcoming jail.  We have seen this situation and we hate visiting people in jail, thus, don't play this game. 

5.  Starting a company in China is more expensive than starting a company in the West, since often leases are pre-paid, many areas require "good-will" money in advance of leasing, a capital reserve is often required prior to hiring a significant number of employees and many vendors require pre-payment. 

6.   If the local government quotes you a ridiculously high number in the eyes of your lawyer in China, then, likely the government believes your involved in a scam, the venture is not feasible or the venture is of a nature that is inherently dangerous to workers, the environment or the reputation of the local government.