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China Joint Ventures: What Goes Around Comes Around

Posted in China Business, Legal News

Just read an article on the white hot (at least for millennials) web site Ozy.com, entitled, Surfing China’s Business Boom … Without Wiping Out. The theme of the article is that the incidence of joint ventures is rising in China as foreign companies and foreign businesspeople are finding it just too difficult to do business in China on their own.

The Ozy article starts out discussing two foreigners, Charles Ezzell and Kaashiv Sampath, who are considering starting a restaurant in “Beijing’s trendy Sanlitun neighborhood. These two have planned just about everything but they still have “to make a crucial decision: Go it alone as foreign owners, or tie the knot with a local Chinese partner?”

The article sees going forward as a joint venture as bringing “Ezzell and Sampath serious guanxi — connections — not to mention X-ray vision into China’s chaotic and (to outsiders, at least) often enigmatic business landscape. Assuming all went well, of course. But a soured partnership might leave their business a smoking crater, whether from simple cultural misunderstandings or something more insidious. Staying independent, meanwhile, would preserve their flexibility, but might leave them vulnerable the next time the local health department unexpectedly changes its standards.”

Well okay, but….

1. There is the risk of a soured partnership between Ezzel and Sampath, not just between Ezzel and Sampath and whomever they bring into their joint venture.

2. Joint ventures are expensive to form and expensive to maintain. A joint venture must be well documented or it is almost certain to fail at some point.

3. Forming a joint venture may or may not help with “the local health department.” Hiring a good local manager might have the same chance of helping with the local health department.

I mention these three things above simply to very briefly highlight how complicated China company formation issues can be.

The article then notes the difficulties inherent in China joint ventures:

But in China, where arbitrary government regulation remains pervasive, such partnerships are rising at a dramatic pace, embraced by businesses from retailers and manufacturers to restaurants and car dealerships. So too, though, are complaints by foreign entrepreneurs who feel abused or taken advantage of by their local counterparts. Indeed, a survey released this year by the consulting firm Vantage Partners found that 59 percent of joint ventures failed to meet expectations. They “are notorious for their high failure rate,” warns Dan Harris, author of China Law Blog, which discusses the country’s legal rules and how they impact business there.

Despite the potential difficulties of partnering with a Chinese company or individual, joint ventures and strategic alliances are on the upswing:

Of course, business opportunities in China are like nothing most entrepreneurs have seen, even given the nation’s slowing economy. Fear of missing out is a big reason joint ventures remain stunningly popular. A whopping 76 percent of senior executives surveyed this year by advisory firm PricewaterhouseCoopers said they were planning to enter into a business partnership in China. But partners also bring a variety of risks, and not just to small businesses. In the past few years, big multinationals such as French beverage-maker Danone and the British supermarket chain Tesco have seen major joint ventures go south.

The PWC report is superb and I urge everyone to read it. That report is entitled, Courting China Inc: Expectations, pitfalls and success factors of Sino-foreign business partnerships in China and you can download it here. But just to be clear, the 76 percent figure is for both joint ventures and strategic alliances. A “strategic alliance” is not a legal term and can mean anything from two companies orally agreeing to “cooperate” on one small thing to a 500 page contract requiring that two (or more) companies do A-Z together as per the terms of the contract.

What makes the PWC report so helpful beyond just its numbers are its discussions on why and how to partner with a Chinese company. My favorite part of that report were the following two paragraphs of advice on how to maximize the likelihood of success in a joint venture/strategic alliance with a Chinese company:

Incentivizing partners. Some companies try to ensure at the very beginning of a partnership that the JV structure incentivizes both partners to outperform. “Akers Biosciences and my co-chairman Thomas Knox own 44% of the JV between us and the JV partners own the rest. By doing it that way we give them incredible incentive to not only generate revenues but also then to have a real equity piece that can be a difference- maker for them,” says Dr Akers. “That’s really a key reason for doing this, because otherwise you would penetrate one of the largest-growing diagnostic markets in the world at a snail’s pace.”

Be involved in operations to ensure quality. Other companies take a different approach and make sure they have operational control at the onset, in order to guarantee that the quality of the JV’s products and services matches the quality the company offers in other, more developed markets. “We wanted to ensure that our partners would give us operational management,” said Jean-Michel Vallin, president of the China operation of French automotive parts maker Faurecia. “Our partners understand and welcome the fact that the JV Management, for which the GM role is given to Faurecia, would follow Faurecia procedures and processes to ensure the quality of our products, and that we would go on delivering the level of quality we have been delivering for years.”

In most of the speeches I give on just about anything involving Chinese law, I throw up the following PowerPoint that says something very similar:

THE key to success with your China deal.

The Ozy article also discusses why joint venture deals fail:

Most joint ventures stumble for exactly the reasons you’d expect — primarily bad management and poor planning, Vantage Partners found. But sometimes the problems arise when foreigners don’t check their Western business assumptions at the door. For example, owning a majority of a joint venture doesn’t always translate into control of the company, Harris points out. Chinese partners, for instance, often allow foreigners to hold 51 percent ownership of a venture in exchange for the authority to appoint senior managers — which, in practice, leaves them running the store.

To JV or not to JV, that is the question. The following articles should help you in making the right decision on how to proceed:

China Joint Ventures That Work

Avoiding Mistakes in China Joint Ventures

11 Key Issues When Starting A China Business

China Joint Ventures: How Not To Get Burned

Buying Product From China? Don’t Forget U.S. State Laws

Posted in China Business, Legal News
When buying from China, don't forget the laws in your own country and state.

When buying from China, don’t forget the laws in your own country and state.

Because your company is located in and/or conducts business in China, it is of course subject to China’s laws and regulations and should take steps to address Chinese compliance concerns. If the company exports products from China, it will also be subject to various laws in the importing country. If that importing country is the United States, your company may also need to consider regulatory requirements in those U.S. states to which the product is shipped, and in which the product is marketed and sold. Surprisingly enough, our clients sometimes forget this.

One such U.S. state-specific law that often trips up companies that buy product from China is California’s Transparency in Supply Chains Act that became effective on January 1, 2012. This law applies to retail sellers and manufacturers that (1) conduct business in California, (2) file tax returns in California, and (3) have annual worldwide gross receipts exceeding $100,000,000. If a company does not satisfy all three conditions, the law does not apply to the company’s operations.

The purpose of the California Transparency in Supply Chains Act is a worthy one: to help prevent global human trafficking and slavery. The law requires retail sellers and manufacturers described above to include conspicuous links on their websites to information about their companies’ efforts to address human trafficking and slavery. By requiring easy access to such information, California ensures that consumers can understand companies’ efforts to combat human trafficking and slavery.

Information posted on a company’s website must at a minimum include the following:

  • whether and to what extent the company verifies its supply chains for human trafficking and slavery risks and if such verifications are conducted by third parties;
  • whether and how the company audits its suppliers’ compliance with the company’s standards on human trafficking and slavery and whether such audits were independent and/or unannounced;
  • whether and the extent to which the company requires direct suppliers to certify that input materials comply with applicable laws concerning slavery and human trafficking;
  • how the company holds its employees or contractors accountable if they fail to meet the company’s standards on slavery and human trafficking; and
  • whether the company provides training on human trafficking and slavery to management and employees with supply chain responsibilities.

Importantly, the California law does not require that companies have in place any particular programs addressing slavery and human trafficking issues or that companies adopt procedures to address these issues. The law only requires that companies post on their websites a link to information detailing what efforts, if any, the companies have undertaken to address slavery and human trafficking. Companies without websites must provide consumers information about such efforts within 30 days of receiving requests for such information.

In addition, the only penalty for violating the law is an injunction – generally an order that the violating company implement processes so that it complies with the law.

Demonstrating its resolve to enforce this law, in April 2015 California’s Department of Justice issued letters concerning the California Transparency in Supply Chains Act to a large number of California retailers and manufacturers. These letters informed the recipients that they may be subject to California’s Transparency in Supply Chains Act such that they need to evaluate whether they are currently complying with the law’s requirements.

California’s Transparency in Supply Chains Act generated considerable attention in the international business community and media. This interest was generated by the important social goals the law promotes as well as the very public way in which companies must comply with the law.

But California’s law is only one example of the many different types of national, provincial, state, area, county, city, and town laws faced by businesses operating in China that may source from or ship to other countries. Companies with operations throughout different geographic regions face significant challenges in inventorying and evaluating different areas’ regulatory risks. Strategic companies will undertake the necessary efforts to identify and prioritize regulatory requirements and compliance risks. In this way, companies can address state-specific laws such as the California Transparency in Supply Chains Act in a collaborative, methodical manner to ensure that operations are not disrupted.

For more on the California Transparency in Supply Chains Act and how companies doing business with China should deal with it, check out The California Transparency in Supply Chains Act at the China Manufacturing Bulletin.

Don’t Get Lazy With Your China Employment Contracts

Posted in Basics of China Business Law, Legal News
China's laws protect China's employees. They really really do.

China’s laws protect China’s employees. They really really do.

China law mandates written employment contracts with all (Chinese and expat) full-time employees. Those employment contracts must include the following provisions:

  • Basic information about the employer and the employee, including place of work
  • Duration of the contract
  • A description of the work the employee will be performing
  • Working hours and rest and leave time
  • Wages and social insurance
  • Applicable labor protections and labor conditions and protection against occupational hazards
  • “Other matters required by relevant laws and regulations.”

If an employer goes more than a month without a valid written employment contract with an employee, the employer will be required to pay that employee double the employee’s monthly wage. If a second one-month period passes without a valid written employment contract (even if the employee refuses to enter into a written contract), the employer must pay applicable economic compensation upon terminating that employee. In addition to the double wages that the employer must pay to its employee, most local authorities also fine the employer (sometimes quite substantially) for having violated the rules on written contracts.

If an employer goes more than a year without a written employment contract with an employee, the employee lacking the written employment contract will be deemed to have entered into an open-term labor contract the employer, which essentially means there is no definitive end date to the labor relationship. If this happens, it becomes nearly impossible to terminate the employee without having to pay multiple years of wages.

It is important to note that the above rules apply both to Chinese and to foreign employees working in China. It is also important to note that some Chinese labor arbitration commissions and some Chinese courts do not recognize anything other than Chinese language agreements as valid written employment contracts.

Now consider this common situation about which our China lawyers are often contacted. The employer and an employee execute a fixed-term written employment agreement. After that contract expires, the employer and the employee do not renew the contract, but the employee continues working for the employer. The employer just assumes that its previous written contract is in effect and that it and the employee have merely orally agreed to continue it. But can the employer be penalized for not having a written labor contract with the employee? None of China’s national employment rules provide clear guidance on this issue and so (like so many China employment law issues) the answer depends on the employer’s location.

The Beijing Labor Bureau is of the clear opinion an employee who keeps working after a written contract has expires has no valid written contract and this means that the employer must pay double the employee’s monthly wage for all work performed after the initial written agreement expired. So if you are employing anyone in Beijing under anything other than a still-valid written employment contract, you can (and almost certainly will) eventually get hit with a double-wage penalty for continuing to employ someone after his or her labor contract has expired. This comes as a most unpleasant shock to those to whom this has happened.Though most cities are less clear than Beijing regarding double wages, our China lawyers are aware of companies outside Beijing that either have paid a double-wage penalty or paid settlements with employees as though the double wage penalty was a real possibility.

Bottom Line: If you are employing anyone in China without an up-to-date written contract in Chinese, you are at risk for a substantial penalty.

China Motion Picture Copyrights

Posted in China Business, China Film Industry

China and Motion Picture CopyrightI covered this topic during my recent webinar for the China-Britain Business Council about China Film Intellectual Property. Here is a summary of the main points I made.

China joined WIPO (the World Intellectual Property Organization) in 1980 and it introduced its first copyright law in 1990. China adopted modern intellectual property laws as a condition of joining the WTO (the World Trade Organization) in 2001.

The amendments of 2001 were the first round of modernization of China’s copyright law. A second round came into force in 2010. A bill representing a third round of amendments is now at an advanced stage. Incidentally, one of the biggest issues currently being debated is whether China should introduce a terrestrial public performance right for sound recordings. China is often criticized by the US for its copyright laws but China and the US have more in common than you might have thought when it comes to copyright — they are both among a small number of nations that do not regard sound recording copyright as including a terrestrial public performance right. In other words, in the US and China, when a recording of a song is played on free-to-air radio the record company and the recording artist are not entitled to receive any royalties. The interests of the record companies and the broadcasters are at odds here. For more on this, see Will Chinese Broadcasters Pay Public Performance Royalties to Record Companies?

The general principles applicable to copyright in the West apply to copyright in China. China recognizes the moral rights of creators. As in the US, copyright comes into existence by operation of law but copyright is also registrable. For more on the general principles, see China Copyrights: The Basics. Going beyond generalities, note that effective notice and takedown procedures exist for pirate content online. My firm handles many of these takedown applications. Depending on the sophistication of the Internet provider concerned, the applicant needs to prove that they are the copyright owner and the applicant’s attorneys need to prove that they represent the copyright owner. Another emerging area of interest is the registration of security over Chinese copyrights; i.e., the possibility of registering a kind of charge over a Chinese copyright.

Despite the pace of modernization, intellectual property remains a relatively new concept with little basis in Chinese history or culture, so copyright infringement is still a big problem. The Chinese generally have a different attitude to intellectual property. Confucianism is still influential. It tends to devalue novelty and innovation and to encourage mastery through emulation. The stigma applicable to copying or plagiarism in the West does not apply in China. To some extent, policies encouraging or requiring the disclosure of proprietary information by foreigners as a condition to the granting of business licenses have contributed to this. For instance, under the so-called “indigenous innovation” policy introduced in 2006, China’s state-owned enterprises were required to extract technology from foreigners through processes described as “co-innovation” and “re-innovation”. The issue is considered in AmCham China’s 2015 Business Climate Survey.

The biggest problem with the Chinese copyright system has been that copyright infringement proceedings do not deter infringers because damages awards are very low. In other words, if you sue someone for copyright infringement in China you won’t get much in the way of compensation. The evidentiary burden imposed on copyright plaintiffs is extremely high and, in the absence of sufficient evidence of infringement, damages are capped at 500,000 RMB (about 80,000 USD). For more on this see Copyright Extremophiles by Eric Priest.

Even in face of these problems, there have also been some encouraging developments in recent years. As mentioned in Copyright Extremophiles, the turning point came in 2009. At that time almost all online content was pirated and delivery platforms were all advertiser-supported — consumers were required to view ads before downloading pirate content. In 2009 Coca-Cola and Pepsi were sued for contributory copyright infringement because they were advertising on a Youku platform from which pirated content was readily available. That is, they were sued not for infringing copyright directly but for contributing to the infringement. The case was brought by members of a group calling themselves the “China Online Video Anti-Piracy Alliance”. Fearing a flight of advertising revenue, Youku moved rapidly to take down infringing content and allow only licensed content. Over the next couple of years, this resulted in an increase in average online license fees from around 1,600 USD per episode to around 300,000 USD per episode. The point here is that these improvements were driven by China’s copyright system.

Despite the difficulties, it is possible to protect intellectual property in China if appropriate steps are taken early enough. These steps include registering copyrights in China and entering binding contracts that deal properly with copyright issues in China. Unfortunately, foreigners often fail to take these steps and therefore ensure that they will have absolutely no redress in the event of a dispute. The myth that copyright cannot be protected then becomes a self-fulfilling prophecy.

Not So Fast, Fashionistas: China Trademark Registration Is Still Required.

Posted in Basics of China Business Law, Legal News
Don't get excited, fashionistas. China's trademark laws have not changed.

Don’t get excited, fashionistas. China’s trademark laws have not changed.

Last week, fashion blogs (see here, here and here) were abuzz with the news that Michael Bastian, an American fashion designer, had won a “landmark” decision against a trademark squatter in China. Specifically, on April 20, 2015, China’s Trademark Review and Adjudication Board (TRAB) invalidated a trademark squatter’s registration of Bastian’s eponymous mark, even though the squatter had filed first and Bastian apparently had not used the mark in China. According to Bastian’s lawyers, this decision marked the first time a non-Chinese party had invalidated a Chinese trademark based on a trademark squatter’s bad faith.

Bastian and his lawyers characterized this decision as “seminal” and one which “provides a sense of confidence for foreign celebrities entering the Chinese market.” Without taking anything away from their well-justified delight at the outcome, such statements are pure hokum. This decision changes nothing, and if anyone thinks differently, I have a bridge I’d like to sell them.

The TRAB’s decision was based on one fact only: the owner of the “Michael Bastian” trademark was a notorious trademark squatter, with 120 trademark registrations and no apparent business related to those trademarks. The Chinese Trademark Office (CTMO) and the TRAB have invoked the bad faith provisions of the Chinese Trademark Law for years to invalidate trademark squatters’ registrations—but they do so only against notorious squatters, and even then the outcome is a coin-flip. If the previous owner of the “Michael Bastian” trademark had actually been conducting fashion-related business, he would still own that trademark.

It is also important to understand that Michael Bastian is not a celebrity in China. This is no slight on Mr. Bastian’s status in the fashion world or his oeuvre as a menswear designer. I simply mean that he is not a famous name in China, nor is his eponymous brand widely known there. In short, “Michael Bastian” would not qualify as a well-known brand in China, and this decision had nothing to do with Bastian’s fame.

The moral of the story is the same as it was last week, last month, last year, and last decade. If you care about protecting your brand in China, there’s only one thing to do: file a trademark application in China now, before someone else does it for you. Even if you’re a celebrity.

Iran Sanctions And Your China Operations

Posted in Recommended Reading
When can and how should your China entity start doing business with China?

When can and how should your China entity start doing business with Iran?

A couple of months ago, Chris Priddy, our international compliance attorney, did a post entitled, What Your Chinese Operations Needs To Know About Iran Sanctions. Chris today did a post entitled, Iran Nuclear Deal’s Historic Opportunities, discussing the eventual lifting of sanctions in light the nuclear agreement almost certain to be signed with Iran. If your American business or your China operations are contemplating doing business with Iran, I recommend you read both of Chris’s posts.

Getting Money Out Of China: An Update

Posted in China Business, Legal News
How to get paid by a Chinese company

What is required for Chinese companies to send money out of China.

I always love it when “my” blog posts are written for me via an email from one of our China lawyers to a client on which I am cc’ed. The following is such an email, relating to the ability of a Chinese company to invest in a project outside of China. Broken down to its most simple element, the question relates to how difficult it is for a Chinese company to send more than $50,000 (that is the yearly cut-off number) outside China. Here is the email, modified slightly to strip it of any possible identifiers:

[Client]:

Briefly.

The Chinese government must approve in advance the transfer of funds outside China in excess of USD $50,000.  Chinese government regulations state that this approval is routine and will be completed in three days. This is not true. In fact, the PRC government restricts all foreign investment by all private Chinese investors.

However, your investors will state that this investment is supported by the local government and that approval is guaranteed. In that case, they simply need to obtain the approval. However, any transfer made without approval is a violation of Chinese law and is virtually impossible in any case.

To deal with this issue, most Chinese companies (private and government owned) make their overseas investments with funds already located outside of China, usually in Hong Kong, Cayman Islands or BVI. How these funds got to these locations is never clear. However, once the funds are located outside of China, China approval is no longer required.

To answer your specific question about how to secure investment in your project from China, you essentially have the following two options:

1. The PRC person or entity should request approval as soon as possible. We can help draft the documents they will need from you to secure this approval.

2. The PRC person or entity should make arrangements for payment from a source located outside of China.

With China’s recent stock market fluctuations, the PRC government is restricting even more the investment of funds from China into the U.S. Your PRC investors are well connected and you indicated that this is a project supported at the local level. In that case, approval should be easy to obtain. Accordingly, the application should be made as soon as possible. Note, however, that any payment into the U.S. that is not approved is a violation of PRC law.

For information on the related issue of getting paid by a Chinese company that owes you money for services your company provided to it, check out Service Companies In China. How To Get Paid.

China Domain Name Scams Rising

Posted in China Business

Every so often there seems to be an uptick in what I call the China domain name scam. Now is one of those times. Our China lawyers frequently get emails from U.S. companies asking us what they should do about an email that they just received (usually in badly written English) telling them that they must register their domain name in China fast or lose it forever.

China domain name scams are again on the rise.

China domain name scams are again on the rise.

The thing about these emails is that the companies that ask us about them usually just got back from their first (or sometimes their second) trip to China and that is why they are so confused. Us too in that we do not know if there are groups in China that get the names of U.S. companies going there and then send out these emails or whether it is just the case that these U.S. companies are just particularly attuned to such emails because they are just starting to do business in China. Can anyone tell us?

Anyway, just so everyone knows, these emails usually look something like this and they are complete fakes and should be ignored:

We are China’s internet domain services company and last week, we received an application from a Chinese company that has requested we register “[NAME OF U.S. COMPANY”] as their internet name and China (CN) domain name. But after checking into it, we learned that this name conflict with your company name or trademark. In order to deal with this matter better, it’s necessary to send email to you and confirm whether this company is your distributor or business partner in China? Please respond soonest.

We first wrote about this scam way back in 2009, in China Domain Name Scams. Just Move Along…., and back then we had this to say:

If your company has done anything in China (even just sending someone there to meet with a supplier), you have probably received a somewhat official email offering, at a steep price, to “help” you stop someone from taking your domain name.

DO NOT RESPOND.

Near as I can tell, every single one of these that I have seen (and I have seen at least fifty of them because clients are always sending them to me) are a scam.

You also may get emails from someone claiming to have already registered some iteration of your company name (or one of your product names) and seeking to sell it to you. For example, if your company is called “xyz” and you already own the xyz.com domain name, your email may come from someone who has purchased and now wants to sell you the xyz.cn domain.

What to do?

First off, as soon as possible, register whatever domains necessary to protect yourself. Determine now what domain names you care about so you do not need to make this determination with a gun to your head. Right now is the time to think about Chinese character domain names.

Secondly, if someone has taken a domain name that is important to you and they are now offering to sell it to you, you essentially have three choices. One, let the domain name go. Two, buy it from the company that “took” it from you. And, three, pursue legal action against the company that took it from you.

Preemption by registration is your best and least expensive protection.

Nothing has changed since then, near as we can tell, other than that the popularity of these waxes and wanes.

So be careful out there.

Even Industries New To China Need Grounding In Past Lessons Too, Part II.

Posted in Basics of China Business Law, China Business
Getting into an industry new to foreigners in China will have its own special pitfalls.

Getting into an industry new to foreigners in China will have its own special pitfalls.

This is the second part of Ben Shobert’s post on China’s senior care and healthcare. Go here for part I.  Ben has assisted countless companies in these industries get into China and I thought it would be helpful to our readers to have him talk about the issues his senior and healthcare clients are facing in China. This sort of analysis is critical for anyone in those industries, but also helpful for anyone looking to go into China, especially if they too are in an industry newly opening to foreigners.

 

As readers of China Law Blog might guess, China’s regulatory scheme for senior care is dynamically changing. This can make it difficult for both overseas investors and local government officials to keep constant track of the changes, leading to disconnects that impact investment and operating plans.   Many parts of the legislation governing the senior care industry are unclear, leaving “gray” areas. An essential part of a foreign operator’s go-to-market strategy is an understanding of what parts within its planned services fall within the “gray” areas. Estimating and devising a way to manage the risks are essential to avoid jeopardizing the entire business in China, or breaking a contractual arrangement with a Chinese partner. Many western companies we talked to were in such a rush to get an initial MOU or LOI in place with a Chinese partner that they cut corners. Inevitably this created a problem as they ended up having to go back and start over, many times not only because they had been in too much of a rush in getting a license, but more importantly, because they had not taken the time to complete even the most basic due diligence on their Chinese partner.

The most painful lesson our research brought forward was what happens when this licensing process is not taken seriously. Licensing a new foreign owned and operated senior care or healthcare entity in China is more than a mere formality. In fact, the scope of services explicitly called out during the registration process is determinative to a number of core commercial issues. During the WFOE formation process, the most important variable a senior care operator will need to think through is the business scope of their license. In the case of home healthcare as just one example, most foreign operators want a business scope that will allow broad nurse-led interactions in the home. These interactions tend to reflect what a foreign home healthcare provider has found are most commercially and clinically valuable to both families and payers in developed markets. Examples of these higher acuity services include maintenance of IV-administered fluids and medications, enteral feeding, PICC lines, respiratory therapy, broad rehabilitation services, delivery of opiates as part of hospice care, and ventilator management,. The issue is how relevant Chinese authorities view and regulate new foreign businesses that aspire to deliver western, nurse-led care within Chinese homes.

If your company is forward thinking enough to be considering taking your senior care, home healthcare or healthcare business to China, you are likely the type of organization that is comfortable taking risks. That’s good and necessary to be successful in China. However, it isn’t enough. Taking the time, being patient and willing to spend money vetting potential partners, talking and building relationships with government stakeholders and thinking proactively about how you are going to find customers are all critical to being successful in China. The pressure to get “something” done in China can lead many healthcare organizations to under-estimate the amount of time they need to spend conducting due diligence and filling the pipeline with multiple potential suitors. In China, especially in sectors as hot as senior care and hospitals, the amount of interest from possible Chinese partners can make it difficult to maintain a disciplined strategy. Many organizations end up choosing a partner based on intangibles, things like the always thrown-about guanxi, and assume their Chinese partner can wave a magic wand and make all potential licensing, marketing and patient acquisition issues disappear. Our research over the last six months, and our in-country work over the last four years, shows these are dangerous assumptions to make. Western healthcare providers that are successful take a focused, patient approach to China, in particular around questions of how to license their healthcare business. This may slow things down in the short term, but it goes a long way to ensuring your business has longevity and is protected from China’s various ill-tempered moods towards FDI in sensitive parts of its economy, of which healthcare will remain one for the next several decades.

More information on our 200+ page report on China’s senior care and home healthcare industry is available here.

Industries New To China Need Grounding In The Lessons Of the Past Too

Posted in Basics of China Business Law, China Business
Senior and health care in China. The new thing for foreign companies doing business in China

Senior and health care in China. The new thing for foreign companies doing business in China

Today’s post covers one of the more exciting sectors that has recently opened to foreign direct investment in China: senior care and healthcare. It is written by Ben Shobert, who I typically describe as the most knowledgeable person I know about China senior and healthcare issues. Ben has assisted countless companies in these industries get into China and I thought it would be helpful to our readers to have him talk about the issues his senior and healthcare clients are facing in China. This sort of analysis is critical for anyone in those industries, but also incredibly helpful for anyone looking to go into China, especially if they too are in an industry newly opening to foreigners.  

The legal and business issues emerging as various western healthcare service providers expand into China will not be new. Questions over how to properly evaluate potential partners, licensing issues around WFOEs, and understanding how to protect your IP are as relevant for senior care and healthcare companies as they are for industries that have more experience working and getting to scale in China.

This article has been split into two parts. The first will introduce the broader context within which China’s relaxation of its FDI catalog for healthcare is taking place and the second will introduce some of the common challenges – especially around licensing – foreign operators are encountering.

When thinking about China there is always a temptation to tell yourself that your industry, your situation, your business is somehow different. Sure, you can see how an injection molding company having complex molds manufactured in China for a medical device customer needs a robust agreement between themselves and their China tool manufacturer, but you’re only manufacturing a specific type of hydraulic seal for a proprietary OEM hydraulic cylinder. Surely you don’t need to worry about having all the same agreements in place – until of course something bad happens: you can’t move your tool to another manufacturer, you find out your “proprietary” seal is – well – not so “proprietary” any more, or you can’t get product released from the manufacturer because your Chinese partner has all of a sudden decided to change terms on you. The point is this: the best-intentioned businesses that begin to work in China tend to make the same mistakes, regardless of industry.

Before I expand on this, let me provide a little bit of background. For the last several years, my firm has been helping American and European senior care, home healthcare, medical device and pharma companies expand into China. We have been particularly active in senior care and home healthcare, including successfully obtaining and project managing the very first WFOE license ever in Beijing for home healthcare, the second such license in all of China. Over a six month period that began in late 2014, we began working on the first comprehensive research project to profile the largest and what we believed to be the most important senior care and home healthcare providers in China. Most of these – but not all – are foreign invested and run.

In the projects profiled, we identified an estimated RMB 26 billion worth of investment and 1,052,630 square meters of senior living space. Our team in Beijing and the US then extracted and organized the information into a standard template that includes a summary analysis of how each particular project is viewed in the Chinese senior care space and what it may have to say about the current state of the market; a company overview that provides the background of the ownership group and, when available, the structure of the financing for each project and whether each project is profitable, losing money, or breaking even; and, a detailed summary of each project. Each detailed summary provides overview tables of key information that provides a quick-glance overview of project details, and long-form descriptions of each project, from phase build out plans and pricing details to lessons learned by management as well as insights on market positioning of the services in question.

As readers of China Law Blog already know, China’s Foreign Direct Investment (FDI) catalog has been opened to allow Wholly Foreign Owned Entities (WFOE) in both senior care and healthcare. These are significant changes to the FDI Catalog, and they reflect the government’s desire to see more FDI in these areas. However, even though 100% foreign ownership of senior care facilities is possible, many foreign entrants still find they need a local Chinese partner to access the best land, accelerate regulatory approvals, or attach themselves to a brand the Chinese consumer knows.

The evolution of China’s FDI Catalog is a well-understood process: the country realizes it has fallen behind relative to technology or capabilities, opens its economy to FDI through joint ventures (JVs), then later on opens further to allow 100% foreign ownership. But, what is in theory possible around 100% foreign ownership is many times practically impossible, as foreign companies find they still need JVs to navigate local regulations. This process of gradual opening to FDI tends to end in China when domestic and foreign companies find they no longer need or want to work together, at which time they exit the relationship. In practice, most industries that have seen this sort of process unfold have found that strategic partnerships with the Chinese will end in three to five years, simply because both parties want to build their own brands, and have gained from each other what initially made their partnership necessary.

In tomorrow’s post, we will begin to focus on how China’s regulatory scheme for senior care and healthcare businesses is changing, and the most common challenges western companies face when identifying potential partners and obtaining the proper licenses for their healthcare services.