China Law Blog

When I served on a China panel at Berkeley last month, I met Dan Maas, who asked me for my thoughts on what had been happening to the World of Warcraft online game in China. It took me about fifteen seconds to figure out Dan knew far more about what was happening on that front than I did. I was fascinated by what he was telling me and I asked him to write a post on it. What so interested me was that what was happening to World of Warcraft was what so often happens to smaller foreign companies in China that operate in industries in which the Chinese government would prefer not to see foreign companies. It also nicely encapsulates how China's government (or at least some of its agencies) will employ the law to provide cover/favor to foreign companies. Lastly, it illustrates something we are always saying here and that is that securing approval of one governmental entity in China to do something does not necessarily mean you are free and clear. For more on that, check out "Floating Houses, Conflicting Laws, And Really Nice Governmental Officials. China Law Practice Writ Large."

China generally considers online gaming to constitute publishing and foreign companies are not allowed to go into China publishing solo. This means foreign companies wanting to engage in publishing in China must partner with a Chinese entity, which as the following so nicely points out, can itself create issues.

First, a bit about Dan Maas: Dan founded an Emmy Award-winning special effects company, Maas Digital, whose projects have included creating photorealistic 3D animation for the Disney IMAX documentary “Roving Mars,” and developing production technology for the upcoming 3D adventure film “Quantum Quest,” starring Samuel Jackson and William Shatner. Dan speaks and writes fluent Mandarin and spent two years consulting for an animation studio in Taipei, Taiwan. He is currently pursuing an MBA at Stanford’s Graduate School of Business and he seeks "to continue pushing the envelope of film and interactive gaming technology, particularly in Asia, after graduation"

Second, here's Dan's Post:

China has become a major battleground in the online gaming market. Chinese players make up over half the customer base of the world’s most successful subscription-based online game, World of Warcraft (WoW) by US developer Blizzard Entertainment, which alone pulls in over $1 billion in annual revenue. WoW faces fierce competition in China from locally-developed games such as Kingsoft’s JX Online series and other imported titles like Aion Online from Korean developer NCSoft.

China is a uniquely challenging market for foreign online game companies because government regulations require foreign games to be licensed through local Chinese operators, rather than offered directly by the developer. Friction between government regulators, overseas developers, and Chinese licensees can have a huge impact on the competitive landscape. For example, Blizzard suffered a harsh setback last year when WoW was knocked off-line for several months amidst a license dispute and unexpected regulatory shifts.

Blizzard had successfully brought WoW into the Chinese market in 2005 through a license agreement with local game developer The9. The relationship turned sour last summer when negotiations to renew the license bogged down in a dispute over division of profits. Blizzard ultimately decided to terminate The9’s license and shift WoW’s China operations to another local company, NetEase. (The9 responded acrimoniously, filing suit against Blizzard and announcing development of its own sword-and-sorcery game called “World of Fight”). WoW was knocked off-line for over three months during the transition, leaving a gigantic vacuum in the market which competitors rushed to fill. Kingsoft, Shanda, and other gaming companies stepped up promotional efforts to lure former WoW players to their own games. Blizzard previously had the upper hand in China thanks to its comparatively ample resources and high production values -- but for the moment, it was knocked out of contention.

The story got even more interesting in fall of 2009 as NetEase was just about to re-open WoW to Chinese gamers. The Chinese General Administration of Press and Publication (GAPP) unexpectedly announced new regulatory powers over on-line gaming in China, and put NetEase on notice that WoW had not received permission to operate there. This came as a surprise given that WoW had already been approved by China’s Ministry of Culture, and the GAPP had not previously asserted authority over on-line games.

Some observers speculated that GAPP was engaging in bureaucratic posturing against the Ministry of Culture to stake out regulatory turf over the increasingly lucrative on-line game market. But the timing of the GAPP’s announcement was particularly advantageous for Chinese game companies, since it disrupted the re-entry of foreign juggernaut WoW into China. NetEase and Blizzard were forced to stop accepting new game subscriptions for several additional months while they fought to resolve the GAPP’s complaint (an effort further delayed by The9’s ongoing legal action).

The crisis was finally resolved and WoW fully re-opened by early 2010, but the damage had already been done. NetEase and Blizzard had been unable to accept new subscribers for seven months, an eternity in the fast-moving game industry. Local competitors had made inroads against the foreign entrant’s market share.

The conflict rages on, as U.S. and Korean developers bring more game development experience and higher production budgets to China, but must contend with royalty sharing and an unclear regulatory atmosphere. At the same time, Chinese game companies can bank on their better understanding of the local market, and practical advantages like smoother payment systems and looser regulatory oversight. Will local competitors be able to match the success of games like WoW, and perhaps even export their titles successfully to Western markets? Whatever the outcome, it will be a fascinating contest to watch.

For more on the World of Warcraft in China story, check out the following on Caixin Online:

"Warcraft row: An industry game-changer in China"

Share Your Comments

With President Obama talking about doubling U.S. exports and with China's economy booming, it seems appropriate to talk about what should go into a sales contract with China, when you, the foreign company, are the one doing the sale.

The big thing -- almost, but not quite the only thing -- in such a transaction is the payment terms. In turn, the payment terms greatly influences the complexity and the terms of the contract. The old saying that "possession is nine tenths of the law," is actually great advice when it comes to international sales contracts. If you are selling product to China and you get paid in full in advance, you are at least 90% of the way towards full protection.

Unfortunately, it is the rare sale into China that involves full payment up front. So if you cannot get full payment upfront, you should consider, at minimum, getting a sufficient upfront payment to cover your costs, thereby ensuring that even if you receive nothing more, you will have covered your costs.

If you are not going to get full payment upfront, then you need to figure out what you can do to maximize your chances of getting the rest of your payments. There are many things you can do to improve your chances, including the following, many of which can and should be combined:

1. Conduct due diligence on your Chinese buyer. There are services that can do this at relatively low cost (typically USD $500 to $1500, depending on the depth of research performed).

2. Hold back title. Write your contract so that title to your widgets does not pass to your Chinese buyer unless and until you receive full payment.

3. Choose your venue for contract disputes wisely.

4. Secure payment by using a Letter of Credit. The International Business Law Advisor did a post, entitled, "How to Secure Payment from Your Overseas Customers with Letters of Credit" nicely explaining how these work:

There are four participants in a letter of credit transaction — two businesspeople and two banks:

The buyer. That’s your customer.

The opening bank. This bank normally issues the letter of credit, so it is sometimes referred to as the “issuing bank.” They assume responsibility for the payment on behalf of the buyer.

The paying bank. This is the bank under which the drafts or bills of exchange are drawn under the credit. A paying bank in an L/C transaction might also act as the negotiating bank, advising bank or confirming bank, depending upon what responsibilities it accepts.

The seller. That’s you.

To summarize the process: Once you and your customer agree on payment by letter of credit, it is the customer’s responsibility to take your proforma (an invoice that reflects all estimated costs involved to move product door to door) to her bank and open the L/C (letter of credit) in your favor. Once the opening bank has all the appropriate information from the customer, it advises you, the seller, that the L/C has been opened. Oftentimes this will be done by cable or e-mail to the paying bank. Your bank then forwards that information to you. The letter of credit is final and subject to correction only for errors in transmission.

The post correctly notes how "accuracy in all details of your letter of credit is critical." The problem with letters of credit is that, contrary to what some believe, they do not guarantee you will be paid, even if you fully comply. My firm handle a case involving a fake letter of credit and another case involving a dishonest bank that failed to honor its letter of credit without any basis for doing so, beyond its own desire to stay in good stead with its client.

What do you do to make sure you will get paid?

Share Your Comments

Plus8Star blog has an excellent post up on Beijing's technology "scene." The post is an interview consisting of the following questions (with answers):

1. What’s the funding scene like in China and where are some of the incubators and resources Chinese entrepreneurs can look to?

2. How did the technology scene in China emerge and who are the leaders?

3. In your opinion, who are the up and coming web-based startup companies in China to watch out for?

4. How have Chinese politics and culture scene shaped the types of startups emerging?

5. What government resources are available for entrepreneurs?

6. Other than Mobile Monday Beijing, where can Chinese entrepreneurs go for China-specific events and news?

7. Can you make a case for moving or keeping your startup in China?

Though labeled as an interview on Beijing's tech scene, it really covers China as a whole and I recommend the post to anyone interested in China's emerging tech scene.

Share Your Comments

Ryan McLaughlin over at Lost Laowai (and the technical force behind this blog) just did a post, entitled, "World Expo Shanghai 2010 Pavilions – Some Favourites," comparing various of the Shanghai Expo Pavilions.

Whether you agree or disagree with Ryan's anything but wimpy assessments, his post certainly does make for an interesting read and review of what's coming and I recommend it.

Share Your Comments

Helen Wang over at the Chinese Dream blog is just out with an interesting post on innovation in Chinese manufacturing, or the lack thereof. The post is entitled, "Myth of China’s Manufacturing Prowess," and its central thesis is that Americans misunderstand what drives Chinese manufacturing. I agree with her and at the end of this post, I will explain how this misconception can negatively impact foreign companies that use China for their OEM manufacturing.

Ms. Wang's post starts out discussing a common misconception regarding Chinese manufacturing versus United States manufacturing based on sheer volume:

In a meeting in Silicon Valley with high-tech and business professionals, I asked how many of them thought China was the world’s largest manufacturer. Almost 90 percent raised their hands.

The latest data shows, however, that the United States is still the largest manufacturer in the world. In 2008, U.S. manufacturing output was $1.8 trillion, compared to $1.4 trillion in China (UN data. China’s data do not separate manufacturing from mining and utilities. So the actual Chinese manufacturing number should be much smaller).

Contrary to the conventional view, manufacturing in the U. S. has been growing in the past two decades despite the decline in manufacturing jobs.

She then focuses on what I see as the more important misconception, that China is leading in manufacturing innovation:

It is true that China’s manufacturing is growing faster than that of the United States. However, there is a key misconception about China’s manufacturing prowess.

In the United States and Europe, the manufacturing industry was created due to technology innovation. In China, the manufacturing industry is being created in response to global demand. Chinese manufacturers take orders from Western companies that have designed products for their home markets. They have no involvement with product development, innovation, market research, and even packaging.

She then talks about what this "pure manufacturing" (my term, not hers) impacts China's developing a middle class and I urge you to go to her post for that.

She also notes how China's manufacturing methods have caused "many Chinese manufacturers [to] tend to focus on short term gain. They compete on volume and price, and only enjoy wafer-thin profit margins." I completely agree and I am constantly seeing how this impacts foreign businesses that outsource their manufacturing to China.

The first impact is on the product itself. Foreign businesses going to China for manufacturing for the first time oftentimes have no idea what is really involved. Many of these foreign businesses believe they can take a concept or a design over to China and return in a few days with a completed product, ready to be manufactured en masse. Things rarely work that way. With any product that a Chinese factory has not manufactured previously, nine times out of ten, the best way to go to China with your product is to have it completed, along with a detailed explanation of exactly how you want it manufactured, including an exact list of the materials. If you do not have that before you go, you may find it will take months to get the product done right, if it ever is.

The second impact is on how the Chinese factory handles quality control problems. The easiest way to explain this is by the following composite conversation between a US company and me:

Company: I got this large shipment of widgets and the quality is horrible. No way can I even sell them and I am out USD$500,000.

Me: Okay.

Company: So I've been trying to work it out with the Chinese company and we are not getting anywhere.

Me: In other words, you have asked for them to return your $500,000 and they are saying that's not possible?

Company: Right.

Me: And I take it they have not offered you any refund, beyond a 5% discount on your future orders?

Company: Right. How'd you know?

Me: Because there is a really good chance this company doesn't have anything close to $500,000 to refund to you. What do you think they made from your order after paying for the materials? $5,000? $10,000?

Company: I don't know, but it has to be more than that.

Me: How much more? Seriously. Estimating as high as you can while still being realistic, how much do you think they made on your order?

Company: Maybe $20,000.

Me: So let's assume they cleared $20,000 on your order after paying for materials and let's assume they are the most efficient Chinese factory out there and that after paying wages and utilities and taxes they got to keep $10,000 of that and let's multiply that $10,000 out over all their other orders. Doing this, do you think they make even $300,000 a year in profits?

Company: No.

Me: So there is probably no way they can come up with $500,000 to pay you.

Company: So what should I do?

Me: You have a number of options. None great. You can retain a Chinese lawyer and sue, but the problem with that is that you will almost certainly need to come out of pocket for the court costs, which are based in part on the amount you are seeking and actually can be quite high as compared to the US, and you will probably need to pay the lawyer something as well. And you are going to have to ask yourself whether it will be worth spending real money to try to collect from a Chinese company that you yourself now realize probably will not be able to just pay.

Or you can just try to get whatever you can from this company, maybe $20,000, $50,000 if you are really really lucky, and then just move on. But I have to tell you, most of the time it is difficult to get even $10,000, but you should at least try.

Actually, the best advice I have for you is to take precautions to prevent this from happening the next time.

Company: Well thanks.

Me: Seriously, if there is going to be a next time, give me a call before you contract and we can work together both to minimize the likelihood of this sort of thing happening again and to better position you for recovery if it does.

Company: Okay, thanks.

-- China OEM Agreements. Why Ours Are In Chinese. Flat Out.

-- China Product Quality. What It's Gonna Take.

-- Manufacturing Product In China. Trust Yet Verify.

-- "The Six (Not Five) Keys To China Quality."

-- Six More Keys To Quality Product Made In China.

Share Your Comments

Spoke with a China lawyer friend of mine today who told me his firm had not "done" a single China Rep Office for the last six months. Every time someone had contacted them with plans for a China Rep Office, it ended up as a WFOE. I told him the same thing had been happening at my firm as well and that the only time I could remember not trying to talk a client out of forming a Rep Office was for a company that would have one foreigner in China doing nothing but shilling for an offshore service whose cachet was based in large measure on the fact that it is foreign. In other words, a class Rep Office situation but with the additional twist of the company wanted to trade off and even enhance its foreignness.

China is killing Rep Offices and the reason it is doing so is to increase its tax collections. In the past, Rep Offices virtually always provided substantial tax savings. In the past, forming a Rep Office was nearly always faster, cheaper and easier than forming a WFOE. Now, it is usually a push and because WFOEs are so much more flexible in terms of what they can do in China, it has truly become the rare instance where a Rep Office makes sense. Rep Offices, unlike WFOEs, are not allowed to engage in profit making activities. Chinese law limits them to performing "liaison" activities.They cannot sign contracts or bill customers. They cannot supply parts and after-sales services for a fee. They simply cannot earn any money in China or take any payments from a Chinese person or business for any reason.

In the last year or so, China has increased the tax rate on Rep Offices, greatly stepped up its enforcement of Rep Offices in terms of making sure they are not engaging in anything more than "liaison" activities, and instituted various other provisions to make them less favorable/more expensive. Just by way of example, Rep Offices have always been required to "hire" their employees through an outside third party agency such as FESCO, but what makes that so onerous now is that all of these agencies (at least as far as we know) require a minimum two year employment contract.

And now there's more. The Seyfarth law firm's visa group just came out with an article, entitled, "China Changes Rules Governing Representative Offices," talking about some more rules for Rep Offices:

China’s State Administration for Industry and Commerce (SAIC) recently instituted new regulations for representative offices of foreign companies (ROs) in Shanghai , limiting head count as well as the validity period of the RO’s registration. ROs are now only able to sponsor a maximum of four foreign representatives. In addition, the registration certificates for ROs must be renewed annually. Though these restrictions are only being implemented in Shanghai currently, they will be implemented throughout China in 2010. These new restrictions do not apply to representative offices of foreign law firms.

The article goes on to note that these new regulations mean that work permits will be for one year not three as was formerly the case for Rep Office employees and is typically the case for WFOE employees. The article concludes by noting that the SAIC will perform on-site inspections within three months of the issuance of their registration certificates and Rep Offices that have performed any illegal activities could face fines and a delay in their renewals.

China does not like Rep Offices and the situations in which they still make sense are becoming even rarer.

For more on Representative Offices in China, check out the following:

-- How to Form a Representative Office in China

-- Representative Offices In China. Things Just Got More Difficult/Expensive...

Share Your Comments

Rich Brubaker of All Roads Lead To China is out with an über-helpful post, entitled, A Few Rules for Succeeding in China, setting out the following eight rules to follow to succeed in China:

1. Show up with reasonable expectations. Rich notes how many come to China with "unrealistic expectations… or at least have yet to fully put into context the amount of investment it will take in time, money, and capacity to achieve those goals." A classic example of where I see this as a lawyer is when our client emails us a lease it needs to sign for it to be able to register as a WFOE and asks us to review it and get it back to them in a few days. We respond by telling them that, at minimum, we need to make sure of the following items separate and apart from the lease itself:
a) Is the landlord on the lease really authorized to lease the premises? I would estimate that about 20% of the time (even higher outside the major cities) it is not.
b) Is the property zoned for that which you are planning to use it? I would estimate that about 10% of the time it is not.
c) Does this property/lease qualify for a WFOE? Nearly always it does, but one needs to make sure.

2. Develop a high tolerance for pain. Yup.

3. Have lines (moral and economic) that cannot be moved. This is a great one and one that I too often have seen violated. In fact, I met with someone just the other day who told me that he had left China after building up a successful business there when he realized that what he was doing to keep it up had turned him into someone he did not want to be.

4. Understand the motivating factors of the parties sitting across the table. Stop negotiating and begin collaborating. "If you are walking into a meeting preparing for a heated pissing contest why bother? There are no deals of the century in China, no deal has to be done today, and there are options." Right on all counts.

5. Plan ahead, speak up, and move quickly when things do go wrong. Right again.

6. Pay the full real costs up front. Rich does such a great job here, I will merely quote:

Factoring in the costs of negative externalities is a must. Regulations and consumer expectations are only getting tighter, and firms who caught on the wrong side of a moving regulation are going to pay more to bring themselves into compliance. Want to use a supplier who abuses line workers. You will pay the cost. Don’t care if your supplier dumps chemicals into the river. Someone else will. Think that hongbao is the “key” to a relationship? What happens when they go to jail? Price in the cost of choosing suppliers, partners, and channels that follow global standards because local standards are only going that way, and anything local will require upgrading at some point at a cost that is far more uncertain than if you build your platform on it now.

Absolutely. China Hearsay has been writing lately on how Chinese consumers are coming to expect foreign companies to provide them with the same things these foreign companies are providing to consumers elsewhere in the world. Stan's did a post on this today, entitled, "Is HP the New Toyota?"

7. If something goes wrong, look internally first. "It is not always the supplier's fault or a nationalistic regulation. When things fail it is typically no more than the byproduct of a failed process or system. Identify that, work with it, and move on." Again, I completely agree. I cannot tell you how many times companies have come to me after having failed to abide by a Chinese law and seeking my confirmation that the Chinese law they violated was stupid. The reality is that the overwhelming majority of China's laws make sense, but whether they are sensible or not, it is sensible for you to know what they are and to follow them.

8. Shut up and get to work. Yes.

What else?

Share Your Comments

I had a conversation the other day with a leading journalist on how both of us are always right about our predictions. I joked that the beauty of writing is that all we need to do show how right we are is to highlight the predictions on which we were right and to let cognitive dissonance wash away all the other ones.

Damn, but I was right to predict 2010 would be the year of increased taxation/regulation of foreign business in China. And I have third party proof in the form of this article over at Shanghaiist, where I made the following as two of my five predictions on "business law trends of 2010."

China will increase its efforts to root out and shut down illegal and unregistered foreign businesses. I have seen ample evidence of this already happening in the last 3-6 months and I have no doubt this will continue. Providing jobs to Chinese citizens does not let you off the hook.

China will increase its tax collection efforts. This has been going on at a rapidly accelerating pace over the last six months or so. If your China operations are not making a healthy profit, do not be surprised if the government imputes healthy profits to it. In particular, the government will look very closely at your transfer pricing and in many cases it will not like what it sees.

Both of these two things have been happening in obscene numbers over the last two months. My firm is receiving at least triple the usual number of inquiries from companies who are being told to register their businesses and pay past taxes and fines or get out. And how is it that these companies were caught? Knocks on the door by tax inspectors who, by all indications, are simply going door to door in office buildings and areas where foreign companies tend to locate/congregate. One of these companies is a client for whom we have actually completed about 98% of their registration. The others are all companies that wrongly believed they would be able to operate under the radar for a while.

The highly regarded China Magazine, Economic Observer, just came out with an article, entitled, "China Launches Second round of Taxation Inspections in Bid to Boost Revenue." The article notes how China's tax authorities have been told to collect "additional taxes" this year by targeting "key industries."

Now I know that my perspective is heavily slanted, since none of our Chinese clients would be calling us with an internal Chinese matter, but it sure "feels" to me that the key "industries" being targeted are those which consist of foreigners.

What are you seeing out there?

Share Your Comments

Sometimes the strangest things get me to thinking. Today it was an article, entitled, "Court of Appeal rules on without-prejudice communication," by London lawyer, Andrew McGregor. An incredibly rough summary of the article is that British courts will exclude settlement negotiations as evidence.

Bear with me here, as there will be a China angle here soon.

As an American lawyer, my first thought was, "of course." Of course because US Courts have long had such a rule. But does China have such a rule? I do not know, but I doubt it. The point here though is not whether China has such a rule or not, but how easy it can be to engage in settlement negotiations on a Chinese case without giving any thought as to whether your communications might one day show up as evidence in court. US lawyers do not even give this a second thought, and that is really the problem. It is difficult to take what has become instinct and re-examine it each time you are dealing with a new country.

Back when I was just starting out as a lawyer focusing on emerging markets, I wrote an article setting forth what I saw as the "Four Principles of Emerging Market Success, which included the following:

PRINCIPLE TWO: Keep an Open Mind. Assume Nothing.

Doing business in an emerging market means taking nothing for granted. I have a mantra for my own legal work in these countries that translates well to the business world: "Assume nothing, but assume that you are assuming things without even realizing you are doing so."

Things will be different. Very different. Things you take for granted in your home country might not exist in the emerging market country. Things you take for granted in your home country might be the exact opposite in the emerging market country. Things you think will be totally different in the emerging market country may be exactly the same. Things you thought you knew about emerging market countries based on what you know from another emerging market country may be completely different in a neighboring country, or even in another region within the same country. The principle, one more time: Keep an open mind, and assume nothing.

My firm and I are involved right now in a very high profile case in an Asian country other than China (and on which I hope to be able to write more later, but which is too sensitive right now) that is forcing us to confront anew certain legal doctrines we usually just take for granted, such as the following:

1. Right to counsel of your own choosing.
2. Right to due process.
3. Admissibility of hearsay evidence.
4. Conflicts and waivers of conflicts.

These are the sort of things that go to the heart of lawyering and yet seldom arise in the typical international business transaction. We are finding ourselves wanting answers to these sorts of very basic issues as those answers may influence our overall strategies.

I actually enjoy being tossed out of my comfort zone from time to time and I would guess most of our readers do as well. I say this because Westerners interested in China almost have to be the sort of people who revel in the new and different. Right?

Stories welcome.....

Share Your Comments

Every month or so, I get an email from someone asking me for my views on their starting a business in China. These emails usually come from someone who has been in China for a year or so at a really low paying job or from someone who just recently graduated from college in the United States. I typically respond with one or two sentences of lawyer advice, something along the lines of the following:

I really do not know what to tell you, never having been an entrepreneur in China myself, but from the perspective of a lawyer who spends his life representing companies (including start-up companies there), I can tell you that it is going to be much more difficult and more expensive for you to start a company there (at least legally) than in the U.S. For an on the ground view of what it takes to be a foreign entrepreneur in China, you should read Sam Goodman's book, Where East Eats West.

I am now also going to tell them to read Rand Han's recent post, entitled, "Confessions of A China Entrepreneur." This paragraph both tells you what Rand's post will be about and why you absolutely should read it:

So in the interest of fully answering the “China Entrepreneur” question, I’m going to take those of you not already bored with this article down memory lane, and reflect on how many times I got my assed kicked, punched, and handed back to me in a beautifully arranged gift basket during my journey through China’s “wild wild east” business frontier… from the street level looking up.

The post is a no holds barred history of Rand's Shanghai-based advertising agency Bloody Amazing and his just-formed digital social media agency, ZeroDegrees. Though it does ramble a bit at times (which Rand admits and which really only adds to its charm), doing so it only makes us better "feel" what it is like to go through starting a business and becoming an entrepreneur in China. I am hoping this is only part 1 of a series.

Share Your Comments

A few days ago, I did a post borrowing from and remarking upon an excellent post by Geraldine Johns-Putra on five ways doing deals in China differs from doing deals in the West. I loved her first post and she has just come out with a second, entitled, "Ten things about doing deals in China that are different from the West – Part 2," which is also so good that I would be remiss if I were not to follow up on that one as well.

This time around Ms. Johns-Putra focuses on the approval process in China for getting a deal done and she rightly notes how different this is from the West and how confusing this can be:

Government approvals: Ms. Putra calls this one of the "key things about Chinese deals that are different from the West" and she is absolutely right. Much of what foreign companies do in China must be properly registered with the authorities or it just does not count. My firm has been called in to "clean up" many a deal that was flawed because the foreign party had failed to secure proper registration. If there is one tip to be gleaned from those matters it is that it you will find it far easier, far cheaper and far more likely to meet with success if you properly register your deal at the time of the deal then to try to backtrack and fix things after your relationship with your Chinese counter-party has gone bad.

You should also never rely on your Chinese counter-party to do this registration. Nine times out of ten it will be the foreign party that will end up paying for a failure to register and so it is incumbent upon you as the foreign party to make sure it is done and done right. At least half of the botched failure to register deals on which my firm has worked arose from situations where the Chinese company had assured the foreign company that it would "take care of all necessary China filings." It is your company and your deal on the line and it never makes sense to put all that into someone's hands who may have very different incentives than you do.

Feasibility study reports: Ms. Johns-Putra does a great job explaining this:

Very much a feature of the approval process, the feasibility study report has traditionally been viewed as a necessary evil, but not too problematic. The aim of the document, as the name suggests, is to present a business case to the government authority responsible for approving the transaction. It used to be the case that a feasibility study report was a document that was very much modelled on a precedent. This is changing to some extent, especially as the policies of the Chinese government have also changed in the last 2-3 years and are favouring certain sectors and technologies (e.g. renewable energy) as well as homegrown innovation and developing export markets. As a result of these changes to policy, a little more creativity is required in preparing FSRs to show how deals will satisfy these new policies.

The government has a seat at the table: Ms. Johns-Putra points out that even after the parties have agreed on the deal, the Chinese government oftentimes likes making its own requests. Ms. Johns-Putra notes, correctly, however, that the "person at the government end is just trying to do their job. In my experience, they will accept reasonable answers to their queries." I concur.

Buffers: Ms. Johns-Putra correctly points out how you will need someone Chinese to deal with the Chinese government on your behalf. She is absolutely right. My firm has plenty of lawyers fluent in Mandarin and yet we virtually never have any of them meet directly with the Chinese government simply because no matter how good their Chinese, they are not Chinese and they are not Chinese lawyers. Because even Chinese who work for foreign companies and Chinese who live in the United States can be viewed with suspicion, we use trusted Chinese lawyers from our affiliated Chinese law firms.

Foreign exchange regulations: Again, I will simply defer to Ms. Johns-Putra, who states it beautifully:

The foreign currency exchange angle can be neglected in the excitement of getting a deal signed and approved, but it is sometimes the last and trickiest obstacle to completing an investment. The basic approach is that currency exchanges on current account (i.e. trade payment flows) don’t require approval from the State Administration for Foreign Exchange (SAFE) but trades on capital account (i.e. investment payment flows) do. SAFE approval is, generally speaking, therefore required for foreign investments. It is best to try and sort out the requirements as early as possible. You also need to be prepared for particular requests to come from the bureau you are dealing with. SAFE requirements can differ from province to province and city to city in the actual paperwork required. Don’t forget this. If you get SAFE approval for the relevant currency transfer on your M&A deal, then, and only then, has the fat lady sung.

Doing deals in China is very different from doing deals in the West, but that just means it has its own rules, foibles and inconsistencies. This post and our previous post (thanks obviously in large measure to Ms. Johns-Putra) set out ten differences. Ms. Johns-Putra concluded her post by making clear she would like to hear of more. I would too.

Share Your Comments

Maybe five years ago, I was at a really mediocre China conference right here in Seattle. I knew it would be bad, but I had been given a free ticket and I needed the CLE (continuing legal education) credits. And it was. Bad that is. One of the reasons it was so bad was because the moderator would spout out things like "whatever we [the United States] are making, China can make just as well as us for one tenth the cost and it probably already is. Last time I was there I was picked up in an SUV that cost around $5,000 and was every bit as good as a Range Rover."

What causes someone even to think that way? I don't know and to a large extent I don't care, but I do care that there seems to be a growing trend of people who seem to believe the US can do no right and China can do no wrong. Nobody (and I do mean nobody) with whom "I hang" thinks that way and that is because they have seen too much for reality not to preclude such views.

Steve Mufson and John Pomfret recently did an article in the Washington Post, entitled, "There's a new Red Scare. But is China really so scary?" (h/t to China Private Equity) This article is so dead on, so well-written, so sensible that you just have to read it. In its post, "Smart Commentary on China from Washington Post," China Private Equity provides the following excellent summary of the WaPo article:

The key insight is that America, in the midst of a deep and long recession, is undergoing one of its periodic bouts of self-laceration. The widespread anxiety that America is in decline is exacerbated by a sense that China is now better, smarter, faster in many important ways. A lot of this is plain silliness, as John’s article points out.

America’s problems are home-grown. China’s rise over the last 30 years is overwhelmingly positive, for its own citizens first and foremost, but also for the rest of the world, US included.

There’s a lot for an American to admire, even envy, about China. Two examples: even while remaking most aspects of its society, the family has retained its primacy in Chinese life, as a source of stability, happiness, and purpose. China also remains the most “kid friendly” country I know, measured by the care and affection lavished on the young Chinese, particularly infants and preschoolers.

Americans, in the main, have always had a special fondness for China, regardless of the state of the political relationship between the leaders of the two countries. But, that fondness doesn’t stop many of them from perpetuating simplistic notions about the place. Once, China was seem as hopelessly backward and poverty-stricken. Now, it’s seen as a novice superpower, outmuscling the US across the globe.

John’s article cites a quote from Sun Tzu, “If ignorant both of your enemy and yourself, you are certain to be in peril.”

I completely agree.

What do you think?

Share Your Comments

David Dayton over at Silk Road International has just written a great post on China lawyering, without even knowing it or trying to do so. His post is entitled, "Reasons why a factory doesn’t want you to come see things," and the main point is the conclusion: if a Chinese factory does not want you visiting, it has to mean something bad is afoot.

Dayton sets out the excuses he hears as to why it is not the time for him to come to the factory and then he lists the following as the only possible real reasons:

Regardless of the words used, my experience tells me that there are really only a few reasons that you can’t go into a factory to see your product for a scheduled QC visit (or any other reason):

1. They are not as far along as they should be.

2. They are not actually making the product.

3. They don’t want you to see how some part of the process is done.

4. They don’t want you to reject product or change processes.

5. They are busy and have scheduled legitimate appointments with others on your requested day.

6. They are closed (no power?), have repairs/inspections/other issues that would not allow you to come see product on your requested day.

Dayton then talks about how since you are the one buying the product, you should be able to come visit and if the reason is numbers 5 or 6 above, then you should be able to come out soon in any event. But since this is really a post on handling legal issues in China you will need to read Dayton's post if you want more information on the factory side.

Dayton's post is about the legal side in that we lawyers constantly have to deal with similar excuses, only with far more vituperation (try using that word on your kid sometime when they are really angry at you). With us lawyers it is documents or a demand to see a law. Here are some real world examples:

1. Client of ours is trying to buy a Chinese factory. We are conducting due diligence and determine the first set of books are totally rigged. We demand the real set and are told we already have it. We say "no deal" and then we are given a second, slightly better set, but not the real one. We ask for various documents the factory is absolutely required to provide the government to operate. The factory tells our client that we do not understand China and says there is no such thing as those documents and that nobody actually provides them to the government. We tell our client that we had no issue in getting those exact same documents in our last five such deals and our client (wisely) chooses to walk away from this particular deal.

2. Client of ours is seeking to lease a factory and form a WFOE (Chinese Wholly Foreign Owned Entity). When forming a China WFOE, it is critical that the WFOE-to-be's lease be one that complies fully with various requirements for leases of WFOEs. We tell our client that we need proof that the alleged landlord actually has authority to lease the factory and we set out the various documents that would prove that authority. The "landlord" tells our client that it has approval from the mayor to lease the factory (it did) and that we American lawyers do not understand China (we were working with one of our favorite Chinese law firms on this deal) and that if we persisted in requiring these documents, the deal would be off. Our client said it would have to abide by our advice and the Chinese "landlord" then produced documents which showed that the property was actually part of a collective and could not be leased out to a foreign entity. So again no deal.

3. Client of ours was looking to do a joint venture with a Chinese entity. Our impression was that the Chinese entity was not really interested in our client for the long term, but only to strip it of its valuable intellectual property. The deal the Chinese entity was proposing seemed almost too good to be true in that our client needed only to contribute its IP to the venture. We told our client that such a contribution would not be sufficient to make the joint venture legitimate (there has to be a monetary contribution) and we counseled against going forward. The Chinese company (you know the drill by now) told our client we knew nothing about China and its laws (and again, we were working with a top-flight Chinese law firm) and that the Mayor was behind all this (and again he was). We asked the Chinese company to come up with some law that would justify such a deal and they came back to us with a bizarre and incredibly tortured interpretation of the statutes which forbid this. Our client (wisely) walked.

Now I am not saying that the Chinese company that says you cannot see their factory or documents that day always is out to put one over on you, but I am saying that most of the time if you have a valid basis for wanting to see the factory or the documents, there is a lot to be gained and learned by sticking by your guns.

UPDATE: Just learned of this very thoughtful post, entitled, "You Don't Understand China," over at the very new blog Red, White and Blue in China. According to the post, "there are several reasons why a foreigner might be told “you don’t understand China,” in my experience sometimes what the speaker really means is:"

• “In fact, you really don’t know that much about China.” • “I can’t be bothered to come up with a coherent argument or explanation, so let’s just attribute this problem to your ignorance.” • “I know more than you, let’s keep it that way.” • “I’ve done something wrong, but it’s ok because I going to try to cover up my actions with my country’s culture, inadequate legal system or pervasive corruption.” • “This is China, I’m Chinese, let’s just do what I want to do.”

The post goes on to talk about how "you don't understand China" gets said a lot in China and how it is "too often used as a crutch to dismiss valid concerns by outsiders." I like how it then says that "[w]hen you do business here, if you let anyone say this to you and get away with it, you probably deserve to lose your shirt." The post also provides an excellent retort: “explain it to me:”

If after saying this you are told ‘no’ or confronted with a multi-layered attempt at obfuscation, then you know what you are dealing with. That person has no interest in helping you, which also probably means you don’t share a common objective. You will need to deal with that misalignment as best you can. If it’s important enough to you, it’s time to invest in finding someone who can answer your questions. This is where the high-priced consultants, or maybe different business partners, come in.

On the other hand, if your genuine interest in hearing an explanation about what you supposedly don’t understand is met by a real attempt to enlighten you, then you have found someone who cares enough about their relationship with you to foster it with knowledge. Dear readers, such colleagues, business partners and friends are worth their weight in gold. Find them and reward them.

Excellent advice.

Share Your Comments

In one of my college history courses, my professor was big on emphasizing how much China's mistrust and dislike of foreigners had influenced it. This professor saw the Great Wall as THE symbol of China's attitudes towards foreigners and he ascribed virtually everything China did to its desire to keep its distance from foreigners. Though I have never been a fan of "one motive" analysis, I do think it would be naive to believe China's highly charged history with foreigners does not continue to influence it today.

I was starkly reminded of that today when I read this China Source post, entitled, "What Do They Really Think of Us Laowai?" (h/t China Hope Live). Here's the money portion of that post:

I was attending a banquet hosted by a delegation from a foreign [not for profit] organization that’s been in China for a long time, and has maintained a good relationship with the Chinese government. One of the guests at the banquet was a local academic who was helping us understand the government’s attitudes towards foreign organizations.

At one point, a delegation member asked the scholar “what does the government think of us (the organization specifically). It was assumed the answer would be positive. Instead, the scholar, without hesitation said “They hate you. “But you are useful to them.”

I completely buy it. What do you think?

UPDATE: Just read an excellent post on Mark's China Blog, entitled, "Sometimes the More Information You Have, the Less You Know," that seems at least tangentially related. The post contains a great pull-out from Peter Hessler's book, Oracle Bones, on how China is China and it just keeps on being China and foreign criticism is just not going to have much of an impact on China. Hard really to briefly summarize the post so I urge you to go read it.

Share Your Comments

About four months ago, in Part I of this series, I promised we would go through our blogroll and justify and expound upon each blog, five by five. A couple of months ago, I did part V of this series. This is the sixth of this slowly running series, where I explain, in alphabetical order, why it is that each blog managed to qualify for our blogroll under our admittedly "slippery, vague, and subjective criteria:"

Our blogroll basically consists of those blogs we like and which we think our readers will like or should be reading. We tend to like blogs that are unique in their content, well written, or consistently helpful. If we really like a blog, it makes it on no matter what. The less we like the blog, the more we have to believe it can be helpful to our readers. If a blog has not posted for a couple of months, we start seriously consider removing it from the rolls. Three months and it is usually removed. We obviously focus on China related blogs and, within that, we generally focus on those blogs related to law or business.

So without further ado, the sixth five in our alphabetical list:

China Hearsay. China Hearsay is written by my friend and fellow lawyer, Stan Abrams, who has been practicing law, mostly on the IP side, in China since 1999. It is subtitled, China law, business & economics commentary, and that's exactly what it is. Nearly daily, Stan provides us with insightful comments on China, with a much more political and social slant than this blog. I never miss a post and I urge you to do the same. Stan has recently branched out to form one third of the triumvirate writing for the new China/divide blog.

China Solved. China Solved drives me nuts. It is an excellent blog written by another friend of mine, Andrew Hupert. Andrew describes himself as "an experienced management consultant based in Shanghai. Previous to setting up house in Shanghai almost 6 years ago, Andrew lived in Taipei, Hong Kong and New York. In addition to consulting for MNCs in Shanghai and writing about China success strategies, Andrew lectures at New York University's Shanghai campus on international negotiation." All true but probably too modest. Andrew is an NYU MBA who really knows China business and does a great job writing on it. I swear that I end up writing on about half of Andrew's posts, which is probably a higher percentage than any other blog. So why does it drive me nuts? Because Andrew has a disconcerting tendency to get really busy and not write anything on his blog; his last post was about a month ago. But stay with it for the gems.

Chinalyst. Chinalyst is not really a blog. It is essentially a blog amalgamator that provides "a steady stream of updates from member blogs writing about China." It is a good place to go to keep up on the China blogosphere (particularly newer blogs) and every year it puts on its own best of China blog competition.

China Sourcing Blog. The China Sourcing Blog is put out by The Beijing Axis, which describes itself as "a cross-border business bridge to/from China in three principal areas: Strategy, Sourcing and Investment." This blog is a great source for studies and statistics on China manufacturing and business.

China Tax Insights. Matthew McKee, an Australian tax lawyer based in Beijing is the force behind China Tax Insights. Though I pride myself on hating tax law, I am a regular reader of Matthew's blog because, unfortunately, the importance of tax law to China business has been and will continue to increase exponentially.

More to come....

What do you think?

Share Your Comments

As many of you know, we recently formed a China Law Blog Group on LinkedIn as a forum for open discussion on China law and business issues. That group has been thriving with nearly 600 members already and a ton of fascinating and enlightening discussions under its belt, including the following:

-- Do Chinese professionals have better phone ethics? (with 33 comments)

-- Chinese companies can't build brands? Think again. (with 52 comments)

-- Google declaring war on China's GFW? I knew it was just a matter of time, but how will this event play out? (22 comments)

-- What are the best English language books you have read on China business over the last ten years? (45 comments)

-- Why should an American court recognize a Chinese judgment? (29 comments)

-- Western attitudes towards China - can we change them? Should we? (24 comments)

So things are thriving in our little patch of the LinkedIn World, at least for the most part.

We have a child who has been diagnosed as failing to thrive. And to be brutally honest, I never really wanted it in the first place. It's name is China Expert Networking and it is officially a subgroup of China Law Blog. Its genesis has a somewhat sketchy past. I did an announcement on how I really wanted to keep the discussion section free of anything that hints at self-promotion. I talked about how it is fine to post your own China related articles on the group site, but that such postings should go into the News section, not the Discussion section. This led some members to opine on how they would like to see the Group become a source for China people to find each other to help on projects and the like. In other words, a place for members to do a little of the pitchy thing (I cannot help but think of American Idol's Randy Jackson whenever I use this word) and for members to find those doing the pitching. So a few weeks ago, I reluctantly created the subgroup with that purpose in mind.

Well guess what? We have a grand total of four members (not counting me as the manager), which is not even close to critical mass. And so let it be said right here, right now. If that group does not hit 50 people within the next few weeks, I'm going to pull the plug on it.

Share Your Comments

I had a great conversation the other day with a nurse who called me with what I think is a killer product. I spoke with her for a while and found myself really enjoying the conversation because she had done such a good job in terms of laying the groundwork both here and in China for all that she was seeking to do with her product. Among other things, she had hired the right people to help her every step of the way and had actually called me a tad too soon for China. But as I told her, "call me back when you think you will be doing manufacturing with China that might involve your IP and just remember, there is no penalty for calling me too early, but there very well could be one for calling me too late."

It got me to thinking about how so many people in similar positions to this nurse completely blow it in terms of getting their product to market. Twice very recently, we were contacted by someone who had started manufacturing product in China and now that they were ready to step up production to profitable levels, their Chinese factories were telling them that they owed them large sums of money for all of the prototyping work and that if they were not paid that money, they would lay claim to the product and all of its IP. In both cases, the American product inventors had messed things up so badly that the Chinese factories were not only in the strongest position in terms of business leverage, they also had strong legal claims as well. In both cases, the product inventor had to give up on his own product because it would have cost way too much money even to attempt to try to turn things around.

So I started "writing" a post in my head on the basic steps to take a product from idea to market. But lo and behold, my friend Ashton Udall has beaten me to it, with a post, entitled, "Stanford 'Bring Your Product to Life' 2010 Workshop Roundup," summarizing a recently completed Stanford University workshop with the following on the panel:

Allen Adolph, Adolph Consulting Jeffrey Schox, Schox Patent Group Dr. Dongkai Shangguan, Flextronics Dr. Dariush Rafinejad, Blue Dome Consulting Marc Theeuwes, Nokia Growth Partners Dr. Richard Toepfer, INTJ Associates Phillip Trinidad, Protopulsion Ashton Udall, Global Sourcing Specialists

I urge you to go read Ashton's post, but here is my outline of the basic steps a U.S.-based individual or small company should take to get their product from conception to market:

1. Develop and design the product. Typically this is done by the product inventor in the United States.

2. Go see a United States based intellectual property attorney for help on such things as trademarks, patents, copyrights, trade secrets, confidentiality agreements, non-disclosure agreements, and non circumvention agreements.

3. Get a prototype made either in the United States or overseas. I generally prefer the United States even though it may cost more. I prefer it because your chance of getting quality, reliability and confidentiality will be higher.

4. If you are not fluent or nearly fluent in Mandarin and if you do not have a whole lot of experience in dealing with Chinese factories, you must find someone good to help source your product in China. I cannot emphasize this enough. Good sourcing people know the good Chinese factories and they know the right factories for the right products and they know about what these factories should be charging for any product and they know how to squeeze out good quality from them. If you have not been doing this for the last few years, you don't. You will have a greater chance of landing on red on a roulette wheel than you will of finding the right manufacturer at the right price on Alibaba or by using the cousin of the Chinese person down the street. I am basing this strictly on my many years of dealing with clients who source to China and you should believe me on this since I have no dog in this hunt.

5. At the same time you are establishing contact with a sourcing person, contact a lawyer experienced with China. You can use your really good sourcing person to help you find the right lawyer or vice-versa. Your China lawyer will help you on the China side with the same intellectual property issues with which your American lawyer will have already protected you in the United States. Your China lawyer will also be the person you should use to draft the OEM contract you will eventually need with whichever manufacturer you choose. This lawyer is also likely to be the best person to use to help you negotiate your contract with your China product consultant/sourcing person.

6. Decide who is going to oversee your quality control. Sometimes you may want your sourcing person to do this, sometimes you will want to hire a third party quality control company, and sometimes you may even be able to do it yourself.

Though I have obviously left out many important steps for taking a product from conception to market, including such things a market surveys, market testing, shipping logistics, packaging issues, etc., the above are usually the most important and where I most often see mistakes.

Share Your Comments

Every few weeks some publisher emails me and asks me if I want a book on China to review and every few weeks I say yes, in a vain attempt to trump Milton Friedman. I read maybe half the books I receive (virtually always on an airplane), like probably 75% of them, and tend to review only those I like and believe would be good reads for our own loyal readers. But I never know what to say about them beyond "great book, read it."

So I love it when someone else reviews the book I have read and does a great job on the review and I can just pretty much crib it (see e.g., my review of China Shakes the World taken from Peking Duck). A few months ago, I reviewed Lawrence Allen's book, Chocolate Fortunes and I had this to say:

Just finished the book, Chocolate Fortunes, by Lawrence L. Allen. It's a very good book.

The book is about the competition between Hershey's, Mars, Ferraro Rocher, Nestle and Cadbury for the Chinese consumer. But it is really more about is what it takes to succeed in the consumer products business in China. And lest anyone ever thought China consumer sales would be easy, Chocolate Fortunes thoroughly dispels that notion while explaining exactly what it does take to succeed or fail in China. Lawrence Allen was himself an executive with both Hershey and Nestle and he clearly knows whereof he speaks in describing who among the Chocolate titans did well and why.

For anyone who is thinking of going into consumer products or food or retail in China (and who out there is willing to ignore 1.3 billion customers?) this book is a must read.

Based on my firm's experience in handling the legal aspects for all sorts of businesses going into China, I see the legal side of China consumer products/retail as relatively straightforward. But the "making money side of retail in China is no mean feat. For the most part, our manufacturing clients go into China, start making a product and then start making a profit relatively quickly. Our service sector clients go into China, get an office, and then start making money relatively quickly. Now I know it has to be more difficult than that, but from my perspective as a lawyer, it does seem that the call I get from these clients 3-6 months after we have set them all up usually involves them telling me how well things are going and how well they expect things to keep going.

Not so on the consumer products and retail side. Issues like where to sell in China, distribution, and marketing (all of which Chocolate Fortunes extensively discusses) are intensely complicated and can be fraught with peril. And then there is the issue of costs. Getting good retail space (either through renting one's own store or through distribution through existing stores can be shockingly high in China. We have had a number of very well funded clients decide to test out their retail concept in a second tier city like Qingdao or Suzhou after finding out how much it would cost to do so in Shanghai or Beijing. Indeed, these days, places like Qingdao and Suzhou are not really bargains either. And my 3-6 month calls from our retail/consumer goods clients who are seeking to sell into china usually involve them muttering about how they had no idea "gaining traction" in China would be so difficult.

In other words, I hardly knew what to say about the book itself.

Adam Daniel Mezei does. Adam is what my father calls an Intellectual with a capital "I." This is a guy who reads books and watches movies the way I eat chocolate bars: at least two a day. And then he churns out excellent reviews of them on his truly superb eponymous blog. Adam just came out with a review of Chocolate Fortunes that I like so much, I have to steal a large chunk of it. His post is entitled, "Would You Declare War Over Chocolate? Hell Yeah, Some Would!" and it gives the following reasons for buying/reading it:

--Chocolate Fortunes is a well-written HBS-caliber cross-cultural case study that costs under $20. Why go to school when I can give myself an MBA-level education for heaps less?

--For those seeking a bit of authentic cross-cultural sensitivity training, Fortunes contains lessons in droves.

-- Allen writes convincingly and flawlessly. As business books go, his premise is strongly made, not to mention quickly. The author – highly qualified to tell this story given his own in-China experiences with Nestle, and later, Hershey – gets to the point and holds the line. Fantastic, as business books go, if you ask me. Allen doesn’t soar over your head with useless jargon, new-age phraseology, or insider lingo. He relegates the “$50 words” to their proper place: the ivory tower of (also-ran) academe. Fortunes definitely a pageturner.
if you’re a lover of chocolate, this book will get you thinking differently about your favorite sweet nosh. In fact, I learned a ton about the chocolate industry, about the various mergers and acquisitions in the industry during the late-‘90s, and all about how a new chocolate brand is introduced into a highly-competitive, distribution-compromised, and highly-volatile Chinese consumer market.

--choco-addicts will appreciate the gentle distraction the book provides over the course of several hours from their chronic all-consuming chocolate affliction. They’ll lay off their cocoa addiction for a little while, at least.

--those who toil aimlessly for similarly-large MNCs or other FMCG (Fast-Moving Consumer Goods) corporations or who are planning their own Chinese punch-up might apply a relevant lesson or two from the Thirty Years Chocolate War.

Share Your Comments

During one of the breaks in the recent Berkeley Asia Business conference, I took part in a conversation with an American guy whose wife was expecting her first baby and an American woman with a toddler. Both of these people had spent many years in China and loved it and both were still very much engaged in China related businesses. Both talked of how important it was that they be in China for business reasons.

Then they talked of how they worried about China for their kids. They were focused on the pollution. I stayed silent but I thought about how I would also be concerned about the food. Though not a China story, I can never forget my first trip to Vladivostok, Russia and how the drive from the airport to the city included my seeing abandoned factory with sludge pond after abandoned factory with sludge pond. And interspersed between all this were a bunch of tomato farms. I thought about run-off each time I left the tomatoes (about the only fresh vegetable Vladivostok had back in those days) on my plate.

The New York Times recently did a artcle on yet another food scandal in China. I fear that the China food scandal story scandals have become so routine the media is losing interest. The NY Times article is on how cowpeas from Hainan Island were grown using illegal and highly toxic fertilizers, used because such fertilizer costs way less than the legal kind. I am not even going to bother summarizing the article beyond stating that it only reaffirms that China's food safety system is broken and I for one do not see a rapid repair in sight.

For more on China food safety, or the lack thereof, check out the following:

-- China's New Food Safety Law. An Early Report.

-- China's Food Chain. Nobody Trusts Nobody.

-- China Food Safety: Executions Aren't Working So Let's Try New Standards.

-- China Food Products: Can't Live With 'Em, Can't Live Without 'Em. This one is for those of us who believe that we are immune to Chinese foods by virtue of living in the West.

What do you think?

Share Your Comments

News Flash: Chinese do not like being treated as "second class citizens." It appears Toyota has failed in this most basic of business propositions.

I have written of how I am of the view that foreign companies doing business in China would be wise to employ their highest and best environmental standards, and not "dumb them down" for China:

We are aware of a large Fortune 500 retail company that is opening units in China that meet or exceed the toughest United States environmental law. I estimate this company's environmental sensitivity will cost them at least an additional $25,000 per unit, yet I am firmly convinced this company is doing the right thing.This company's actions make sense because the odds are good that China's environmental laws and enforcement will get tougher over time, and building environmentally sound units now will almost certainly cost less than having to retrofit existing units a few years from now. On top of this, people often get very emotional about the environment and I can see Chinese citizens getting very angry at a foreign company whose units in China are less environmentally sound than their units in the United States or elsewhere. This is obviously even more likely to be the case if there were to be some sort of environmental disaster.

This same sort of thing can hold true for products, as China Hearsay points out in its post, "Toyota Losing the China Messaging War on Recall." The post discusses how Chinese internet car forum participants are voicing anger over how Toyota's Chinese customers are not being picked up and driven to their recall repairs, as is apparently the case in the United States.

China Hearsay concludes its post with some excellent advice, which involves calling in China PR Pros to assist:

But my larger point here is that these things can snowball on you, and if you’re a Japanese company in China, the margin for error is tiny. Many might disagree with me, but the public here has a sort of love/hate relationship with Japan. On the one hand, emulation of Japanese media and fashion is common, but public sentiment may turn quickly if it appears that China or the Chinese people are not being treated fairly (Toyota is no stranger to this and should know better). This reaction might, depending on the situation, be wholly irrational, but given modern history, it is easily understood.

Toyota is getting hammered. People here already think that they have been given crap products. They also think that Chinese consumers are being treated relatively poorly compared to mitigation campaigns carried out in other countries. The accuracy of these accusations is beside the point.

Toyota better hire some top gun PR consultants in a hurry (or fire the ones they have now) or they might be looking at a coordinated effort to embarrass them and drag their asses into court. Whether the Chinese government will encourage or put a stop to such consumer-led actions remains to be seen.

A few months ago, I wrote on similar issues in "China, Glocalization, And The Specter Of Product Liability And More:"

A few years ago, I represented a medical product manufacturer that made a relatively high end, very profitable and ubiquitous product for doctors and hospitals. For confidentiality reasons, I am going to have to stay really vague here, while keeping the thrust of this story intact. This product sold for about $200 in the United States and in Europe, but my client saw a massive need for this product in places like Africa, India, and rural China. But it knew $200 would be way out of reach for these places. On top of that, this item needed to be sterilized after each use, making it not only cost prohibitive for the world's poorest regions, but also not a good choice medically.

So my client developed a disposable version of the same product and had it made in China at a price point that would allow it to sell them for less than $10 a pop. But that is hardly the end of the story.

Though the disposable version would no doubt save lives by bringing a medically important product to regions that previously lacked it, this sort of massive product differentiation in a high risk area like medical treatment can have massive legal and public relations implications for a Western company. Just some of the questions we had to consider:

1. What are the legal ramifications if a Westerner gets poor treatment and a subsequent injury using one of the $10 devices? What happens if this happens in a place like Ghana? What happens if someone starts reselling these $10 devices into Western countries like the United States and someone gets injured there? What are the legal ramifications if someone sues my client in someplace like Pakistan, claiming that they were provided with an inferior product simply to save money? What happens if physicians re-use the device against all instructions? What happens if hospitals seek to sterilize the device, against all instructions? What if the $10 devices are improperly disposed of and that leads to the spread of disease?

2. What are the public relation implications if my client gets sued (or even if they do not get sued) if people start complaining how company X cares far more for the people in the United States than it does in rural China? I know this sounds silly on one level, but trust me this sort of thing does happen and it is why so many top companies maintain worldwide standards in various areas like environmental and human relations.

Worldwide companies must consider Peoria in dealing with Wuhan.

On a somewhat related note, am I the only person over 7 years old who actually likes the song, "It's a Small World"?

Share Your Comments