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How To Do Business In China: The Infographic

Posted in China Business

About three years ago I shut down my twitter account. A few months ago, I very quietly got back on (@danharris).  My main reason for choosing to return was out of a fear of missing something. Those who know me know exactly what I mean by those. Those who don’t know me probably have no idea what I mean by this.

Anyway, someone named Matt Pillar started following me on Twitter and when it became apparent to me that this person who had some really insightful things to say about China, I started following him back. The more I saw of him, the more impressed I became and so today I checked out his Fire Dragon Enterprises website. On his website I was drawn to the above diagram, and I really like it.

At this point, before I really start gushing, I feel it important that I make clear that I have never met Matt Pillar nor ever spoken with him. I have never even tweet messaged with him. Nor has anyone I do know told me anything about him. I just really like his diagram, based in part on the following:

  1. I think it makes sense.
  2. I get the strong sense that it is based on many years of real-world experience.
  3. It is general enough to be applicable to just about any sort of company doing business in China or trying to figure out whether and how to do business in China.
  4. I like how it does not put the nine tactics for succeeding in China business in any sort of order.
  5. Most of all, I like how it does not address the inherent contradictions between some of the tactics. For instance, I love how it says “Think Locally, Act Locally,” and “Respect Culture and Context” on the one hand, while on the other hand it says “Maintain High Ethical Standards, Consistency with Global Practices.” I think Pillar wants companies to be aware of the importance of all of these things, while at the same time, making their own specific decisions based on what is right for their own individual companies. Yin and Yang. Localization versus globalization. See China, Glocalization, And The Specter Of Product Liability And More. and China Business And Glocalization. Should What Goes Around Come Around?

I think Pillar is saying that China business is messy and anything but clear cut. This diagram tells you in broad strokes the things about which you should be mindful in determining how you are going to conduct business in China. But in the end, you must be (to quote Pillar) “Strategically Deliberate, But Open to Course Corrections.”

What do you think?

 

CIETAC Arbitration: Different But Fair

Posted in Basics of China Business Law, Legal News

Every year, an increasing number of Chinese companies require that their contracts with American companies provide for disputes to be resolved via arbitration in China. In these situations, we are seeing mostly CIETAC arbitration clauses

Many of our clients “freak out” about the idea of having to arbitrate in China, with their concerns usually focusing on their ability to “get a fair trial” in a case between a Chinese company and an American one. Our China lawyers usually explain how in our experience (and from what we hear from our lawyer friends), the fairness issue is actually less important than how Chinese arbiters (be they judges or arbitrators) view cases, as compared to American arbiters. We then usually  talk about how Chinese courts “tend to look much more at the equities of a case (as opposed to the law) than do American courts,” and that is even more true of Chinese arbitrators.

With equity being so central, it is critical for potential litigants to get away from viewing  cases strictly on the law. You instead must look at it them from an equitable perspective. This means that you must ask who in all fairness should win and whose winning would be best for the people of China?

Many years ago, an American company asked my firm to “compete” for a relatively large China arbitration matter by setting forth the strategy we would employ in their case. We set forth our strategy, which stressed trying to settle the case as quickly as possible because we did not see much likelihood of winning it. The American company gave the case to another law firm, explicitly telling us that they would have hired us, but they could not get past the fact that the other firm was confident about winning while we were confident about losing. I argued a bit with the in-house lawyer of this American company, explaining how even though this other firm (and he himself) were convinced that they would prevail because of the law, we were equally convinced that they were going to lose because of the equities involved.

The case went to arbitration and the American company completely lost.

My law firm this week secured a seven figure arbitration award in a CIETAC arbitration (conducted in Chinese) on behalf of an American company against a Chinese company, helping us maintain a perfect record both in predicting the results of China arbitrations and in prevailing in them. Without a doubt, one of the keys to this victory was our lawyers (not me) accounting for the equities in making the decision to bring the case and then emphasizing the equities at the arbitration itself.

I have been called to testify before Congress next month regarding how foreign companies are treated in China. One of the things I plan to discuss is how American companies oftentimes mistake “the Chinese way of doing things” for bias. I will use China arbitration and litigation as an example of this. I am not going to say that foreign companies are always treated fairly in China because they clearly are not (and we have been saying that since we started this blog in 2006). But I am going to talk about the importance of distinguishing between what truly stems from bias and what stems from American misunderstandings of how China operates for everyone, Americans and Chinese alike.

What do you think?

 

The Classic China Scam: Done Often Because It Works

Posted in China Business

Got an email the other day from the owner of a leading Northwest interior design firm. This person who has asked to remain anonymous, wanted to tell me about how he and his company had been scammed, so as to prevent others from suffering the same fate. 

My response was to say that we have written about this very scam a few times previously but that it has been long enough since the last one that we would do it again.

Here goes.

I want to tell you about what happened to us for the sole purpose of allowing other small businesses the chance to find this thread when searching for information on business opportunities in China, specifically Kunming in my case.

In August, 2014 I was contacted by Mr Chen _________ with the opportunity to complete interior design drawings for 56 luxury villas in Kunming.

This is the official headquarters information the scammers are using on emails: [we are leaving out the specific identifiers on the off chance that the Chinese individual and alleged company have some explanation.  I say alleged company because I would be that there is no company.]

Like many of our larger new jobs, we are expected to provide our own transportation to the first meeting. I did this by flying from San Francisco to Kunming to meet with the fraudulent company. Upon my arrival to Kunming, I was picked up by a driver and taken to my hotel, the next morning Mr Chen met with me to review the contract and the site plans. I was then taken to lunch and we discussed any changes that would need to be agreed upon with the extensive contract (written in english). At the end of lunch I was told there are some Chinese cultural differences that we must honor and one is providing gifts to the local authorities and banker. They suggested I buy 50-60 cartons of very high end cigarettes for this purpose.

At this point I had my first hint that something felt odd, but then the day was filled with a site visit, a presentation in a large conference room of my portfolio and their feedback on the likes/dislikes of the interior design. So I felt maybe they were trying to get some cigarettes from me but the project of designing 56 luxury villas in Kunming seemed legit.

The next day I met more members of the organization and we signed the contract, took celebratory photos and had a dinner with 5-6 other people that evening. I was never asked to pay for any transportation or meals/drinks while in Kunming as the host paid for these items.

Upon getting back to the US, I provided my banking information for the wire transfer of the first payment of 20% of the project before starting the work. The next few emails were from _________, Financial Manager of Yunnan ______Construction & Engineering and this is when I knew they had an elaborate scam going with interior designers. They wanted me to provide a remittance fee to ______ bank account, since this couldn’t be paid from their “corporate account.”

I had done extensive research before buying my plane ticket and I couldn’t find any negative or contrary information about the project, so I was optimistic about the project. But after receiving the emails where they are asking for large sums to be deposited to their private bank accounts I then began to search again and this new thread popped up.

I’m not sure what can be done to these people from so far away, but I’m hoping this post will help enlighten others of the scam and fraud that these people are doing in Kunming under the disguise of developers looking for interior design or interior decoration from foreign companies.

I then asked for information regarding exactly what this Northwest company had paid for and learned that they had also paid about $150 a night for hotel rooms while in Kunming. I noted that was probably three times what the hotel ordinarily charges and that these same people probably had a deal with the hotel to pocketed the difference. The Northwest company wrote back and agreed, after looking up the normal rate at the hotel at which they stayed.

There you have it. The classic China scam to get a service company to go to China, making hundreds of dollars a night on overpriced hotel rooms and with the potential to make much more on things like cigarettes and remittance fees.

Over the years, we have been asked to perform basic due diligence for many American and European service companies before they go to China. In most instances, we have relatively rapidly become convinced that our client is in fact caught up in a scam, without our client having to go to China at all. We do this by first determining whether our client is dealing with a real company — most of the time they are not. There are all sorts of other checks as well that can and should be done before you leave. In the story above, the company got off with losing money — sometimes worse happens.

You have been warned. Again.

For more on this particular scam, check out Ancient Chinese Business Scam With A New Hollywood Twist. It’s Baaaack. and Ancient China Business Scam With A New Hollywood Twist.

Company Law In China: A Must Have China Law Book

Posted in Legal News, Recommended Reading

We received the book, Company Law in China: Regulation of Business Organizations in a Socialist Market Economy:  by Jiangyu Wang, a few months ago, and our China lawyers have been using it ever since. It is that good. We find ourselves using it both as a “first look” at various aspects of Chinese company law and also for its 17 page bibliography. This is a really good, really serious, really well written, really comprehensive book on China company law.  

It describes itself as follows, 100% accurately:

This accessible book offers a comprehensive and critical introduction to the law on business organizations in the People’s Republic of China. The coverage focuses on the 2005-adopted PRC Company Law and the most recent legislative and regulatory developments in the company law landscape in China. The book covers a wide range of topics including the definitions of companies as compared with other forms of business organizations, incorporation, shareholders rights and legal remedies, corporate governance (including the fiduciary and other duties and liabilities of directors, supervisors and managers), corporate finance (including capital and shares offering), fundamental corporate changes (including mergers & acquisitions, and takeovers), and corporate liquidation and bankruptcy. In addition to presenting strong doctrinal analysis, the author also considers China’s unique social, political and economic contexts.

The book is made up of the following eleven chapters:

  1. An Overview of the Company Law Regime In China
  2. Types of Companies in the Diverse World of Business Organizations in China
  3. Corporate Legal Personality and Limited Liability
  4. Formation of Companies and the Rules of Capital Maintenance
  5. Shareholders and their Rights
  6. The General Corporate Governance and Management Structure
  7. Fiduciary Duties of the Directors, Supervisors and Management Executives
  8. Shareholder Litigation
  9. Offering and Trading of Shares in Joint Stock Limited Companies
  10. Financial Affairs, Accounting and Profit Distribution
  11. Mergers, Acquisitions, and Takeovers 12. Corporate Liquidation and Bankruptcy Index

We highly recommend Company Law in China for lawyers, academics and even investors interested in understanding Chinese company law.

For those interested in a shorter overview of China’s company law, we shamelessly suggest you read co-blogger Steve Dickinson’s law review article in Pacific Law & Policy Journal.

Wal-Mart In China. What Does That Tell Us?

Posted in China Business, Recommended Reading

Read this amazing article entitled, How Wal-Mart Made Its Crumbling China Business Look So Good for So Long. Then please answer some or all of the following questions:

1. Is this a China issue?

2. To what extent is this Wal-Mart’s fault and to what extent was it unpreventable?

3. Are the issues Wal-Mart faced here similar to those faced by OSI Group earlier this year relating to the meat it supplied to McDonald’s in China?

3. Can Western companies succeed in China retail beyond a really small scale?

4. What Western companies have succeeded in China retail beyond a really small scale? Please name names.

I can tell you that from my vantage point and that of my firm’s China lawyers, American companies’ succeeding in China retail by having stores and locations in China are few and far between. Starbucks, KFC, Carrefour, and Pizza Hut immediately spring to mind. How do these companies succeed and why do so many others fail?

There is a story co-blogger Steve Dickinson loves to tell. He had an Australian friend who managed a high end health club in Shanghai. This friend would constantly complain to Steve about how he could not get the Chinese employees to provide even middling customer service to health club members. One day, Steve was at the club and his friend was instructing an employee not to answer her cell phone in front of a guest waiting to check in (live). Seconds after he explained that to her, a guest came in and she answered her phone. Steve’s friend quit on the spot and went back to Australia. Is this story even relevant to the above? Why or why not? Do you know people who spent years doing business in China who are now convinced that it is “impossible?” Did they just burn out or is there some wisdom there?

I am asking these questions because I would love to see a discussion on the above because I think it important. Do you?

 

China Culture By The Numbers

Posted in China Business, Recommended Reading

If you have not played around with the Geert-Hofstede country comparison tool, you should. It seems accurate to me (but what do I know), but even if it isn’t, it sure is great fun.

It examines more than 100 countries on the following cultural traits:

  1. Power Distance
  2. Individualism
  3. Masculinity
  4. Uncertainty Avoidance
  5. Pragmatism
  6. Indulgence

China scores off the charts on pragmatism.  Have fun with it and please let us know what you think.

China Labor Dispatch Rules. Almost Fresh Off The Presses.

Posted in Legal News

China is continually tightening its requirements for proper usage of workers through third party hiring agencies and this is causing all sorts of confusion for foreign companies doing business in China or seeking to do business there. With this post we seek to clarify the current rules.

China permits only the following three categories of “dispatched” employees to be hired by a third party hiring agency:

  1. Temporary employees with a term of no longer than 6 months.
  2. Auxiliary employees who provide supporting services that are not central to the employer’s core business.
  3. Substitute employees who perform tasks in replacement of permanent employees during a period when permanent employees are unable to work due to off-the-job training, vacation, maternity leave, etc.

A company cannot have more than 10% of its workforce be made up of dispatched employees. The denominator for calculating this 10% figure shall be all employees who have a labor contract directly with the employer and all dispatched employees. If your dispatched employees make up more than 10% of your workforce, you have until March 1, 2016 (two years from the date on which the Interim Provisions on Labor Dispatch were enacted) to get the percentage to 10% or lower. During this two year transition period you cannot take on more dispatched workers if your current number of dispatched workers exceeds 10%. There is no grace period for the other rules.

And as we always stress when it comes to China labor and employment laws, you must always be mindful of local rules. For example, in Shanghai, employers must file with the relevant labor bureau a plan detailing how they intend to get their percentage of dispatched workers to 10% or less.

There is one exception to the above. Employment agreements executed before December 28, 2012 (when the Standing Committee of the National People’s Congress issued the decision to amend China’s Labor Contract Law can be carried out to their full terms and even beyond March 1, 2016.

Bottom line: If you have not already done so, you need to start bringing your business into compliance with the applicable labor dispatch rules. For many WFOEs operating in China, this will mean terminating labor dispatch agreements and contracting directly with your employees. This also will mean many WFOEs cannot make any new hires unless and until they start complying with  the 10% rule.

 

Maybe Owe Money To China? Don’t Go There.

Posted in China Business, Legal News

Back in 2011, Richard Wagner, a Chicago-based Baker & McKenzie international arbitration and litigation lawyer, wrote an article entitled, Permission denied: The curious case of exit restrictions in Chinese commercial litigation. The article explains why personnel of foreign companies involved in Chinese litigation are often denied permission to leave China. Most importantly, that article details why denying a foreigner permission to leave can be completely legal.

Wagner’s article details how China’s Supreme People’s Court has made clear that foreigners who work for a foreign company involved in a China commercial case may be blocked from leaving China, by stating the following:

When foreign-related commercial disputes are handled by people’s courts, the courts may adopt exit restriction measures if all of the following conditions are met:

(1) the foreign-related commercial case has not yet been concluded;

(2) the person against whom the restriction would be levied is a party to the case, the legal representative of a party to the case or a responsible person with a party to the case;

(3) there exists the possibility that the party with whom the person is affiliated would evade the litigation or the performance of a statutory obligation;

(4) if the person in question left China the court might have difficulty conducting the trial or enforcing the judgment if levied against the party with whom the person was affiliated.

Richard goes on to explain how the term “Legal Representative” is a “term of art under Chinese law and easily determined from a company’s business license,” but the meaning of the term “responsible person” is “far more elusive” and “ultimately subject to court discretion.” According to the article, a foreigner need not be a senior executive to be stopped from leaving China; they need merely “be perceived by the court to have a high enough or important enough position in the company to be able to have some impact on the case (for example, some knowledge about the case or some influence on decisions concerning settlement.”

I completely agree with Richard’s assessment but raise him one. In our experience, the courts can and will hold someone hostage in China if they believe that doing so will speed up resolution/settlement. And since most American companies will settle cases rather quickly when any of their employees are being prevented from leaving a particular Chinese city, China’s courts are willing to hold just about any foreigner in China.

On top of that, it is not at all uncommon for foreigners to be held in China over a debt without a court order. Our China lawyers have handled a number of instances where foreigners were being held over a debt and there was no court order. These people were being held by private parties, usually with local government and/or local police acquiescence. In other words, though it can be legal to prohibit a foreigner to leave China over a debt, much of the time, the alleged creditors (the Chinese parties claiming to be owed money) take the law into their own hands.

Bottom Line: If you or your company are being sued in China or if a Chinese company or individual is threatening to sue you or your company in China or if someone in China is merely claiming that you or your company owe money, you should think long and hard about whether to go to China until that issue is resolved.

For more on China hostage taking, check out the following:

 

 

China’s Foreign Company Double Standard: How To Fight Back

Posted in Basics of China Business Law

Last week, China government news agency Xinhua announced that the government would be cracking down on foreign company tax avoidance. To anyone familiar with doing business in China, the Chinese government singling out foreign businesses should come as no surprise; the only surprise should be that it would announce that openly.

Foreign companies doing business in China are under a government and media microscope. Both the Chinese government and the Chinese media hold foreign companies to a higher standard than their Chinese competitors. Behaving badly in China just because the local competition does so is not an acceptable defense.

American companies generally approach compliance issues in China in one of the following three ways, going from worst to best:

1. On the bottom rung are companies with the attitude that “it is so fun to ignore the laws in China and to act like I am a Chinese company, and I pity the naive foreign companies that don’t realize how things ‘are really done’ in China.” This sort of company typically gets shut down in a year or two.

2. In the middle rung are the American companies that believe that “we can just leave it up to our Chinese partner or our Chinese employees on how to handle things in China because they have to know better than us how to deal with things there.” This sort of company seems to believe that everyone in China knows everything there is to know about what foreign companies must do in China to remain in legal compliance. This sort of company typically gets shut down in a few years, or gets smart and changes and survives.

3. At the top rung are the American companies that do all that they can to handle China without self-immolating. These companies are the majority, and the percentage of these companies seems to increase every year.

To remain on top of your compliance and ethical issues, you should constantly be asking the following four questions

1.  What do our local competitors do to get business and what of that should we — as a foreign company — not be doing?

2.  What would this particular employee or that particular Chinese counterparty do if they had to choose between compliance and doing the deal?

3.  What can we do better to ensure compliance?

4.  Is there any way we can use our strict compliance standards to our competitive advantage?

You must constantly make your compliance principles clear to your employees, both in writing and with live presentations. You need to always be emphasizing that compliance is essential to your company’s health and reputation. Your employees must know — really know – that if they are ever forced to choose between compliance and doing a deal, they should choose compliance.

If your profits in China depend on your operating on the compliance margins, you should figure out now how to change or you should start formulating your exit strategy. As China’s economy continues to slow, the pressure on foreign companies will continue to accelerate.

You just have to read the paper for proof of this.