China Law Blog - China Law for Business

Interesting China article in this weekend's Wall Street Journal.   Entitled, "A Legend's Bumpy Ride," the article details how the once legendary state owned Flying Pigeon bike manufacturing company failed to keep up with the changes in China's market.  After laying off nearly all of its 10,000 workers due to its inability to compete using a "Big Rice Bowl Mentality," Flying Pigeon eventually succumbed to a "partial management buy-out" and now offers its employees " low hourly wages, no benefits and few chances for advancement" just like its competitors. 

The article elucidates the economics for Chinese bike manufacturers that provide OEM production for companies like Schwinn, Huffy, and Wal-Mart:

But the future still looks tough. Factory owners in Tianjin say they earn a 3% profit margin on a mountain bike they sell wholesalers for around $35 -- a handsome model with 12 gears, padded seat and a front suspension system. That's about $1 in profit.

The same bicycle, which can retail for $70 at a U.S. chain store like Wal-Mart, is much more profitable for others in the sales hierarchy. The U.S. importer earns on average about $8 after paying shipping and insurance costs, according to Jay Townley, a U.S. bicycle industry consultant. The retailer does even better, pulling in at least $17. The upshot, says Mr. Townley, is that Chinese manufacturers "are getting screwed into the ground."

Using these numbers, the Chinese OEM bike producer shipping bikes to the United States makes only $1 for every $25 in profit that goes to the U.S. importer and retailer.  I previously blogged on this phenomenon in a post, entitled, "Lies, Damn Lies, Statistics and Making Lots of Money in China." where I talked about how the Chinese OEM producers of Barbie dolls that sell for $20 at retail make only around 35 cents per doll.

American politicians either seem to be unaware of numbers like these or just choose to ignore them. 

The other day, in a post entitled, "To Succeed in China Know the Now," I blogged on the relative importance of knowing Chinese culture for doing business in China.  My views on this are summarized here:

Knowledge of Chinese history and culture is an asset for doing business in China.  However, because circumstances in China change so quickly, staying abreast of China's current situation is far more important than knowing its past.  The most successful businesses in China usually emphasize knowing their own businesses inside and out first, understanding China today second, and China's history and culture third.

Asia Business Law Blog just did an excellent job probing the need for cultural knowledge in a two part series, entitled, "Do The Top Ten Cultural Tips For Doing Business In China Really Help?"  Their first post quotes from Doug Berman, a second year law student at Indiana University School of Law (who I actually had the pleasure of meeting when I was there lecturing on International Law a year and a half ago) who also questions the value of the books that purport to teach a nation's culture in a few hundred pages:

How many more books do we need by the new China hand on the block explaining to the wide-eyed corporate executives the top ten tricks to put in one's knapsack?

While I am hardly an insider, over the years I have seen (and you probably have as well) how people of similar extraction in Hong Kong, Taiwan, and China may behave quite differently in certain respects. Even in China, such "fixed" cultural attributes find variation among young/old, educated/uneducated. It is odd that such books often tout the tremendous changes in China and then fall back on cultural essentialisms...

Moreover, and more fundamentally, knowing that "guanxi" is important only takes one so far. In many ways, learning Chinese culture (or any culture for that matter) is a lot like learning chess. The basic rules are easily memorized; responding to every situation that can arise is very, very difficult. No wonder we often fall back on our acquired understanding and background when the going gets rough. I think the problem is that very few foreigners, especially businesspeople, are willing to put in the many years to learn the language, get that Ph.D. in anthropology or East Asian studies, and, more importantly, immerse themselves in the culture.

I like Asia Business Law Blog's reply to Doug because though it recognizes the inherent value in learning another's language and culture, it also makes clear it is quite acceptable for that not to be the businessperson's primary goal:

I love your well-founded skepticism about providing businesspeople with drive-thru lessons about China. I was reading about the philosopher Zhuangzi yesterday and he said something to the effect that our lives are limited and what there is to learn is unlimited. Taking the finite to learn about the infinite is an inspiring conundrum, but I think it highlights nicely the fact that people make choices about what they want to achieve in life, and the businessperson wants to increase their profit margin. Others, perhaps not unlike yourself, want to truly learn and understand the culture, which requires learning the language and actually being in the culture.

Doug then replies, in part two of the series, by conceding that knowing about culture is not always a prerequisite to commercial success in China:

Putting aside my obvious passion for China and a bias against people who represent the MNC [multinational corporation] view (which, unfortunately, I made all too obvious in my earlier post to you), I do think there is an argument to make that knowing about culture may not always be a prerequisite to commercial success in China. For many reasons, I would like not to believe that, given that it downgrades my own stock. On the other hand, the post Dan cites does not say this, merely that MNCs understand how to make money and do localize to the extent they need to do so.

Doug goes on to say that he still considers knowing the language and culture as very useful:

My tentative answer is still that knowing the language and culture is very useful, at least on an individual level, at the very least because it is important to the Chinese themselves and gives respect. No other country have I been to where speaking the mother tongue takes you so far.

I agree with all of this.  The Chinese (like every other culture of which I am familiar, with the exception of the French) greatly appreciate foreigners who have an interest in Chinese culture and language.  No country appreciates the stereotypical "ugly American" and I always strongly advise anyone doing business in China to learn the basics of Chinese culture, etiquette and language before going there for even the first time.  Something as simple as just knowing how to say "I am pleased to meet you" in Chinese goes an incredibly long way towards showing your Chinese hosts that you care about their country and about them.

Ever since I read an article in the most recent Fast Company Magazine issue, entitled, "The Mintz Dynasty," I have been waiting for an opportunity to use a great question posed in it.  The article itself is on the huge successes achieved by the Dynamic Marketing Group, an advertising and communications agency formed by Dan Mintz in Beijing eleven years ago. The question, from Dan Mintz, in many ways sums up the whole issue on culture.  Mintz complains about Westerners coming to China and then he asks this question and gives his own answer:

Why would you think people in government here all think the same when there's nowhere else in the world where that's the case?" Mintz asks. "It's like thinking every Chinese guy knows kung fu.

Anyone who thinks they know China and its 1.3 billion plus inhabitants from reading a few books is as misguided as those who think every Chinese guy knows kung fu.  Anyone who thinks reading a few books on Chinese culture gives them the measure of the individual Chinese person with whom they are dealing is mistaken.

The Redberry service is now live in China with a Chinese and English language website up and running.  Its site highlights its four greatest achievements in 2005 and the only item it puts in bold is the following:

1st commercially available Uni PushMail solution in China. (Before RIMM's [sic]BlackBerry )

The actual acronym for the company that makes Blackberries is RIM, for Research in Motion.

Redberry is offering a six month free trial with the purchase of its phone and then will be charging 100 RMB (approximately $12.50) per month thereafter.  One can buy a full year's service for 1000 RMB (roughly $125).  I am not sure what Redberry charges for the phone, a Daxian CU 928, nor am I familiar with the quality of the service.  The site makes clear that the Redberry service is a push service, which means the e-mails go to the phone automatically, without having to pull them down off the internet. 

The strangest thing about Redberry's English language site is that the only article in its news section is a Business Week article (will anyone bet me that they secured permission from Business Week to post the entire article?) talking about Blackberry's IP rights should it pursue a trademark claim against Redberry. 

Redberry is now up and running and marketing its inexpensive product while Blackberry is still talking about its China plans.  At this point, anyway, we have to score it Redberry 1 and Blackberry 0.  But, it is still very early. 

In a previous post, entitled, "Software Piracy In China Has Staying Power," I blogged on how software piracy is so rampant in China and why it will not be going away anytime soon.  That post referred to an article, entitled, "Why Piracy Isn't Going Away in China," whose thesis is that software piracy in China will exist in large numbers until the ratio of software prices in China to average income in China comes closer to the ratio of software prices to average income in the western world:

Piracy is exceptionally simple: it's cheaper to reproduce and sell software in which you didn't invest, market, or frankly do anything else except slap a disc into a replication machine. That's one part of the equation.

However, piracy as an issue is far more complex than, say, the Business Software Association (BSA) makes it out to be. Certainly companies that invest in and develop new software deserve a fair return on investment. But that must take into account local market conditions.

There is a false impression that China is now a rich country. Certain sectors of the society have done very well for themselves. They've made real money. But the average monthly salary in the nation's major cities -- the wealthiest areas -- remains around US$250 to $400 per month.

Compare that to average salaries in the U.S. If someone makes $2,000 to $2,500 per month, then a $250 operating system upgrade doesn't seem too terrible. But when that price is approximately the same in dollar terms in a lower-income country, as it is in China, then suddenly a potentially buggy, definitely pirated edition of the same software for about $5 to $10 sounds much more attractive.

If software companies want better results out of China, then pricing needs to be commensurate with local market conditions. Software developers and their policy representatives have attempted, futilely, to make piracy a moral issue. It isn't. It's an economic issue. Piracy doesn't flourish in developed countries where the cost of legitimate software doesn't outweigh its benefits. But it flourishes in developing countries, where the cost-benefit ratio is different. Authentic software will never be as an inexpensive as pirated goods. But when its value helps to close the gap between price and usability, more people will pay the appropriate price.

I noted my complete agreement with this analysis and referred to one of my earlier posts, entitled, "Faked in China, Protection is Possible," where I discussed how economics drives counterfeiting:

The article notes that "security experts don't buy into the belief that copying is somehow inherent in Chinese culture. The simple fact is that counterfeit goods are cheaper than the genuine ones, and in developing nations like China, wages are low."  I completely agree.  Like everywhere else, those in China who can afford the real thing, prefer to buy the real thing.  As Chinese wealth increases,  and as more and more Chinese companies seek to protect their own brands, counterfeiting will decrease.  This is what happened in both Japan and Korea, both of which were at one time, notorious for counterfeiting. 

The hugely popular One Man Bandwidth Blog (h/t to IP Dragon Blog), just noted in a post, entitled, "Outdueling the Pirates in China" that Warner Home Video lowered the price of The Aviator DVD to only $1.50 in China an apparent effort to compete directly with the China's legions of DVD counterfeiters.  One Man Bandwidth heartily approves:

Finally an intelligent answer to fighting piracy: Warner has decided to compete with the DVD pirates in order to try to stop bootleggers. I really do think they are on to something.

Warner Home Video has started to sell a DVD priced at $1.50 USD! This is still more expensive than the bootleg version ( bootlegs are .50-1.50 depending on quality) , but many of my friends have indicated they would support the effort because it is legal and the quality would be assured. That means no more 'PROPERTY OF'' or 'FOR ACADEMY VIEWING PURPOSES ONLY' scrolling across the screen in the middle of a great shot.

To get its product down to an acceptable price level Warner has put the cheaper DVD into a cardboard envelope and I hear that extras will be left out. That is fine with me because I rarely watch the 500 hours of leftover footage anyway.

Warner is definitely on to something here and it will be interesting to see how far they expand this new pricing.  I am convinced that if legitimate DVDs all start selling for $1.50 in China, the DVD counterfeiters there will pack up and move on to something else. I do have one question, though.  Is there anything to stop a Westerner from buying a whole slew of the legal DVDs for $1.50, bringing them back to their home country, paying any minimal customs duty, and then re-selling them for substantially more?  Seems to be quite a good arbitrage opportunity and I just wonder how Warner would prevent that.

Just received the latest issue of the McKinsey Quarterly and, like always, it does not disappoint.  The folks at McKinsey usually include a highly informative and unique article on China and in this issue Richard C. Cheung and Andrew J. Grant write about "China's Booming Dairy Market" [free registration to view may be required].  Now I know that even for the most ardent China watcher this one does not sound good, but stay with me here because it is. There is definitely information in this article that applies to China's food products market as a whole and even to its entire consumer market. 

The article predicts "China's dairy industry will double in size, to nearly $20 billion, by the decade's end," and it foresees "changing consumer tastes, retail modernization, and the country's increasing affluence will transform competition in this nascent industry and likely usher in a wave of consolidation�a transformation that could be mirrored in other product categories across China."  It goes on to state that now is the time for foreign dairy companies to come to China, because China still very much needs their "capabilities in areas such as product development, branding, and channel management."

The article notes three important findings:

1. China's consumers are "adopting the purchasing habits of their Asian neighbors and seeking higher-value-added products such as milk beverages, cheese, and yogurt:"

Today these products account for one-quarter of China's dairy consumption, compared with nearly 60 percent of Japan's. This proportion will change as Chinese incomes rise; indeed, we expect that over the next five years revenues from sales of milk beverages, cheese and desserts, and yogurt in China will grow by 22, 38, and 31 percent a year, respectively. For dairy companies, this is welcome news�such products command margins two to three times higher than that of liquid milk.

2.   The second important finding is the growing importance of China's second tier cities in the consumer economy:

A second factor�one also seen, to varying degrees, throughout China's packaged-goods sector�is the growing importance of midsize cities as consumer incomes rise. In 2004, for example, China's 3 biggest cities accounted for 14 percent of all dairy revenues; in 2010, their share will fall to 11 percent. From now until the decade's end, 70 percent of the growth in net revenues will come from the next 100 cities, the second and third tiers.

3.  The third finding is the growth in the proportion of sales by China's modern grocery stores:

Our third finding is a shift in the channels through which dairy products will be sold, as well as in how they are sold. In 2000, modern grocery-retailing formats (such as supermarkets and hypermarkets) accounted for one-fifth of packaged-goods sales in urban China�a proportion that by 2004 had grown to about one-third. The December 2004 removal of regulatory barriers on foreign retailers all but guarantees that global giants such as Carrefour will continue to expand into China. For dairy producers, the shift in formats will mean big changes. By 2010, nearly two-thirds of China's dairy sales will come through modern formats, compared with 40 percent in 1998.

The article notes that the big grocery stores springing up rapidly in China are a "double-edged sword for China's dairy industry" because though they increase distribution efficiency, they also "negotiate more tenaciously than mom-and-pop stores do when it comes to entry fees or shelf space." Some of the modern-format retailers also are launching their own private-label dairy products.

The article posits that to succeed in the Chinese dairy business, Chinese dairy companies will need to increase their Research and Development (R&D) budgets to bring them more in line with their Western counterparts:

To succeed, domestic companies must build new capabilities in areas such as product development, branding, account management, and marketing. Milk beverages and yogurt, for example, are innovation-driven products requiring strong R&D formulation and consumer segmentation skills, and many domestic dairy companies have little of either. The top five Chinese dairy companies, for instance, spend less than 1 percent of their revenues on R&D, compared with 3 to 4 percent for their Western counterparts.

According to McKinsey, the Chinese dairy industry is still "wide open" to foreigners and "foreign dairy companies are capitalizing on the sector's openness."  For example, the world's largest dairy exporter, New Zealand's Fonterra recently purchased a 43 percent stake in San Lu, a large Chinese domestic dairy company.  Fonterra's 43 percent stake in Hebei based San Lu will cost about $107 million.

The Chinese consumer is stepping up the quality of its purchases.  Consumer spending in China's second tier cities is likely to continue to increase in proportion to China's largest cities and the sales growth of the big modern grocery stores in China will outstrip those of the smaller "mom and pop" stores.  All of these things bode well for foreign food product and consumer companies. 

A reader from Vermont just sent me the A.T. Kearney FDI Confidence Index in support of my recent post, entitled, "Good China. Good. It's Simple. China Is All Good. Good. Good. Good. And Business Demands We All Realize This."  Had I seen this "Confidence Index" before doing my post I would have considered adding another "good" to the title.

This survey (I am not sure why A.T. Kearney calls it an index) reveals that the CEOs, CFOs and "key decision makers" of the world's 1,000 largest firms have greater confidence in foreign direct investment (FDI) in China than any other country.  FDI in China ranked first in all four of the different sectors delineated in the survey:  manufacturing, telecommunications and utilities, financial and non-financial services, and wholesale and retail.   

Bottom Line:  China FDI is good business. 

The Wall Street Journal has a good story on tourism in some of China's less developed and less visited regions.  There is also a very nicely done sidebar article, with a map, entitled, "Seeing the Rest of China" that describes "three trips -- two day, three day, and five day options -- from each of Beijing, Shanghai, and Guangzhou."  The sidebar is meant those going to these main cities in China with a few days to spare for a bit of pleasure travel.   

Five western luxury goods makers, Prada, Chanel, Louis Vuitton, Gucci, and Burberry just won a major trademark case in the Beijing High People's Court against the Beijing-based Silk Street Market, according to this China Daily article.  The ruling requires the Silk Street Market to pay each of the five companies 20,000 yuan (approximately US $2,500) to each company for trademark rights infringement.  The Silk Street market was found liable for trademark infringement because it allowed its retail tenants to sell fake products in violation of the intellectual property rights of these five luxury goods makers. 

This decision is a watershed event in the evolution of China's enforcement of intellectual property rights because it extends liability for trademark infringement beyond just the companies actually selling the counterfeit product to the companies that lease space to the offending retailers and then turn a blind high to their selling of counterfeits. The Silk Street Market's liability for trademark violations was not for actually selling counterfeit goods, but for failing to act on the infringing retailers after being informed of the five luxury goods makers informed the Silk Street Market of its retail tenant's infringing sales:

Each of the five brand owners found counterfeits of their products in the Silk Street Market and presented them as evidence of counterfeiting in a co-ordinated act in 2005 aimed at protecting their intellectual property rights (IPR).

They filed a collective complaint against the market in a call for the prohibition of counterfeits last May. But the fakes remained on sale at the market one month later, and the brand owners decided to bring both the market and the individual stores before the court.

A representative for the Silk Street market "expressed his disappointment over the final ruling, saying it was near impossible for operators to eradicate all counterfeiting in such a large market."  Huai Xiaofeng, vice-president of the Beijing High People's Court, said the court would go to great lengths to crack down on counterfeiters of foreign products.

Additionally, Louis Vuitton won a separate, but similar, lawsuit in a Beijing court against a Beijing market called Chaowai Men's Department Store.  The court ordered this market to pay Louis Vuitton 150,000 yuan (approximately $19,000) -- about the price of 30 genuine bags -- after finding that 22 stalls within this "indoor market" were selling handbags bearing the LV trademark without Louis Vuitton's prior authorization.

Bottom Line:  These two cases are important as they show China is widening the net of trademark infringement liability to step up its intellectual property rights enforcement.  The lessons to be learned from these cases are simple.  One, register your trademark in China.  Two, if you find someone violating your trademark, send them AND their landlord a letter (in Chinese, of course) demanding the violations immediately cease.  Three, if the violations continue, sue. 

Forbes Magazine just published an article by Forbes.com editor, Paul Maidment, entitled, "The Real Deal on China."  Forbes aptly summarizes the article with the comment, "Domestic politics is going to keep China from floating its currency. Time to move on to other issues."

Maidment asserts that internal politics preclude China from floating the Yuan right now: 

China's swelling $200 billion trade surplus with the U.S. and the role of the yuan's exchange rate, held artificially low to promote its exports, according to China's congressional critics, has become the focus of this debate.

But many in Congress are barking up the wrong tree in hectoring China to unpeg its currency against the U.S. dollar.

According to Maidment, viewing China as having a booming economy is an oversimplification. Though China's coastal cities are indeed booming, huge swaths of the country are not and Beijing must be and is very mindful of this:

While in the aggregate China looks like a big economy with big growth rates, big export numbers and a big trade surplus with the U.S., in reality it is a collection of disparate economic regions--and always has been.

Some of those regions, notably on the coasts, are growing at breakneck speed on the back of light manufacturing exports. But others, in the interior, are stagnating.

That is of great concern to the authorities in Beijing. There is growing social unrest in the countryside, especially in the poor western part of the country. But violent protests are on the rise in all rural areas.

And anyone who knows China's history realizes what a political hot button that is for Beijing. The overthrow of China's ruling dynasties has always started with uprisings in the countryside.

Maidment argues that China cannot float the Yuan right now because if it did, it would lower the cost of foreign goods in China and drive many rural, state owned, industries out of business.  Because these industries provide so much rural employment, Beijing simply cannot allow them to fail: 

Instead, its [China's] currency imperative is to protect the vast network of bankrupt but job-providing heavy industries that Mao Zedong scatted across China's countryside. They would be destroyed by import competition if the yuan was revalued.

That would exacerbate the social disruption and violent protests breaking out in record numbers in China's poorest regions. Beijing won't countenance that level of political unrest.

That is the political imperative that drives China's exchange-rate policy right now, regardless of how much atavistic chest thumping comes out of Washington, either while Hu is here or after he has left.

I completely agree with Maidment's analysis of China's current economic situation.  I have had many discussions with Chinese elites (lawyers and MBA graduates) on the issue of China's state owned companies and, virtually without exception, they would all concur with Maidment.  They view China's state owned entities as generally inefficient, poorly run, corrupt, and non-competitive.  Yet, at the same time, they are not ready to see them fail or to be rapidly privatized. They like the government policy of allowing them to die off slowly.  China is proud that it has not had Russian style dislocation from what the Chinese see as overly fast privatization there.  I hate to sound like a broken record here, but as I mentioned in two earlier posts (Two Views of China. Do You Want Some Syrup With That? and "China Rises -- The TV Show/"Getting Rich."), China's elites concur with Beijing's go slow reform policies:

The Chinese elite concur with the government's go slow reform policy of "crossing the river by feeling for stones."  In the show, an obviously wealthy banker talks about how this policy, first coined by Deng Xiaoping in referring to China's step by step liberalization, makes sense for China.  Those with whom I talk in China concur with this.  I think the urban elite of China concur with this not because they feel compelled to do so by the government, but because this policy has, at least so far, served them so well. 

Bottom Line:  China is not going to float its currency soon so the United States would be wise to move on to other issues.

One of the things I love about writing this blog is the opportunity it gives me to read China posts by bloggers with completely different perspectives on China than mine.  The other day I came across an excellent post on the Journal Of Intercultural Learning Blog, entitled "Cultural Implications of Google's New Chinese Name."   The focus of this blog is on understanding cultures.   

The post examines Google's new Chinese name, pronounced Gu-Ge, and in doing so, makes clear the importance of choosing a brand name for China that suits the Chinese culture.  The post's discussion of Coca-Cola's initial naming problems in China ought to -- standing alone -- give anyone pause in choosing a company name for China: 

The name Coca-Cola in China was first rendered as Ke-kou-ke-la. Unfortunately, the Coke company did not discover until after thousands of signs had been printed that the phrase means "bite the wax tadpole" or "female horse stuffed with wax," depending on the dialect. Coke then researched 40,000 Chinese characters and found a close phonetic equivalent, ko-kou-ko-le, which can be loosely translated as "happiness in the mouth" (from Funny Translation Errors)

The article goes on to compliment Google on its new Chinese name: 

No matter what people would say about the new name itself, Google seemed to have made the right move in terms of pursuing its long term goals in China. With its new Chinese name, Google wants to be as "culturally-friendly" as its major local competitors like Baidu, whose name was in fact also taken out of an ancient poem. And with this new name, Google manifested its strong hope for further development in the local market by the local ways. At least Google demonstrated its "intercultural" efforts, despite all other controversies. Its new Chinese name would certainly help it to take more roots among millions of the internet users and in the general public where not all are willing to learn English, and some perhaps even dislike it for reasons that it has "corrupted" the Chinese language.

Bottom Line:  Choosing a Chinese name is both extremely important and extremely difficult.  Western companies setting up operations in China should always consider how their name plays in the Chinese market.  Sometimes the western name should remain unchanged, sometimes it should be modified, and sometimes it should be tossed entirely.  One must also always remember that barely over half of China's population speak Mandarin so in choosing a name, one should also usually consider how it plays in Cantonese and perhaps other of China's many languages as well.   

I just wish President Hu would visit Seattle every day. 

Because of his visit, a local paper did a story on my law firm's China practice today, I appeared on BBC World to discuss China, and, now, China Venture News just ran a post on my firm's China practice and its financial company work, entitled, "Seattle Law Firm Opens China's Door For Small Companies." 

Everyone (including the media above) have been asking Steve and me about our views on the impact President Hu's visit will have on our China practice and on our clients.  Our response has been basically "little to none."  Now that President Hu is here in town, however, I feel we should revise our prediction, as his visit has had the following effects:

1.  It has given us great publicity. 

2.  It made the sushi restaurant across the street from our office, Red Fin, (to which I go just about every day) more crowded.  Today it seemed everyone there was a reporter staying at the hotel next door.

3.  It has made our office quite noisy as helicopters have been flying overhead nearly all day.

4.  And, if I ever get out of the office, I am guessing traffic will be an even bigger nightmare than usual. 

Well, maybe every day would be too often.

Just finished my show on the BBC and found it both interesting and frustrating.  The theme of the show was whether China is too powerful.  I tried to break that question into two, by asking whether the question was meant to be a political one or an economic one. 

The rest of the show involved those who focused on China's economics (I was in that camp) saying no and those who focused on China's politics saying yes. 

One of the guests said liberalizing and democratizing in China were actually on the decline.  I disputed that by saying there had not been any big movements towards liberalization in the last few years, but that there had been little ones that added together were helping establish a base for the future.  I talked about how the courts were improving in their handling of business and local matters and I also talked about how China's government had generally wised up in terms of giving a looser rein to private business.  One of the callers who was originally from India, talked about how less educated countries like India and China are not ready for democracy.  I vehemently disagree with that, yet I also think it can be counterproductive for an outside power to push a country towards democracy too quickly. 

Others on the show talked extensively on the hundreds of missiles China has pointed at Taiwan and on how China recently made clear it would attack Taiwan militarily if there were increased signs of Taiwan seeking "independence."  I put independence in quotes because whether one agrees with a one China policy or not, Taiwan is independent right now. 

Also on the show with me (but in the other camp) was the editor of the The China Confidential Blog, which I am always touting as one of the best blogs on China.  China Confidential did a post the other day called, "China Spins A Tale Of Two Washingtons" that focuses on the different perspectives Washington State (where I live) and Washington D.C. (our capital) have on China.  China Confidential essentially divides the two Washingtons along the lines of the state focusing on business and the capital focusing on human rights and on China's military buildup.  I agree that the focuses are quite different, but I think it is more a matter of the state believing change in China will come from engagement and the capital believing change will come from confrontation.  I touched on these same issues in my post the other day, called, "Bad China. Bad. It's Simple. China Is All Bad. Bad. Bad. Bad. And Politics Demands We All Realize This." 

My sense is that the carrot approach with China is slowly working and the stick approach will not.  Call me naive, but I actually believe the Beijing government recognizes the need to liberalize but wants to go slow in doing so; it is following Deng Xiaoping's exhortation to cross the river by feeling for stones.  Economic liberalization is happening in China and with the confidence and freedom that brings, political liberalization will eventually follow, whether Beijing wants it or not. 

But maybe there needs to be a stick coming out of our capital as well.  Go ahead and accuse me of waffling here because I am, and I am because I truly do not think there is any one answer here and if there is, I certainly do not have it. 

I just watched two more episodes of the highly publicized new four part TV series, "China Rises."  I watched the episodes entitled, "Food is Heaven," which focused on the centrality of both the quality of food in Chinese culture and on the difficulty so many in China still have in just getting enough to eat and I watched "Party Games," which focused on Beijing getting ready for the 2008 Olympics.  Both episodes were excellent.   

The following two things from the "Food is Heaven" episode stood out for me:

1.   I often wondered how China could have so many great restaurants despite the Cultural Revolution.  How could there be so many great chefs and incredible restaurants in China when the Cultural Revolution (and even the entire period under Mao) looked so askance at anything as bourgeois as great food?  This episode answered this question for me.  Food is so much a part of Chinese culture that I now realize it was silly of me to have thought any government could have annihilated something so important and ingrained.      

2.  This episode did a story on fish farms wiped out by pollution emanating from an up river leather factory.  The story focused on a Beijing lawyer trying to determine whether he had enough evidence to sue the leather factory for damages on behalf of the fish farmers. This Beijing lawyer has won about half of his 70 environmental cases against Chinese companies.  The lawyer talked about how the leather factory was violating the law but corrupt local authorities were ignoring the violations.  This lawyer's success rate bolsters my view and that the Chinese courts generally rule fairly in business disputes.  The Beijing central government controls China's courts and Beijing generally wants corrupt local party hacks reigned in. 

I found it interesting that the lawyer used the same methods and case analysis one would expect a United States lawyer to use.  The lawyer was testing the water, interviewing witnesses, and making a video showing the factory's discharge.  The lawyer talked again and again about the need for evidence.  One should conclude from this that the Chinese courts, like those in the west, focus on the evidence in deciding how to rule in business cases.

The "Party Games" episode makes clear, however, that the Chinese courts work far less well (or not at all) in dealing with an overzealous government.  Chinese law and courts are of virtually no use when challenging the Beijing government and its policies.  This episode focused on a lawyer and his wife and her friend who had sued over the razing of a Shanghai apartment for development.  The plaintiffs lost their case (which by all rights they should have won) and the lawyer was imprisoned for three years and his wife and her friend were constantly followed and harassed for having  brought it.

This series' portrayal of China's legal system jibes with my firm's own experiences with business issues in Chinese courts.  The Chinese courts (in China's business cities) are thorough and fair in dealing with business disputes, even if those disputes involve a "connected" local factory and even if those disputes involve a foreign party.  Chinese judges are well paid and closely monitored from Beijing in an effort to avoid corruption.  Beijing uses the courts to extend its own powers and Chinese judges generally look to Beijing in determining how to rule. Beijing wants business in China to function smoothly and business functions smoothly when courts rule fairly in business disputes. 

China's courts, are however, of little to no use in cases involving the legality of Beijing government actions or policies.  The courts support the center or, at best, will not cross it.  The Communist Party takes priority over China's constitution and the courts accede to this.  A few months ago, while in Qingdao, I asked a couple of top Qingdao lawyers what would happen if a Qingdao judge were to issue a ruling that went against a higher court decision out of Beijing. The lawyers told me they were unaware of that ever having happened and they could not even imagine it.  They found my question funny.

Bottom Line:  China's courts are surprisingly good at handling business disputes, but do not expect to use them against the government or its policies. 

Computer Partner magazine, published out of the Netherlands, just did an excellent article (in English) detailing why software piracy is so rampant in China and why it will not be going away anytime soon.  Entitled, "Why Piracy Isn't Going Away in China," the article's thesis is that software piracy in China will exist in large numbers until the ratio of software prices in China to average income in China comes closer to the ratio of software prices to average income in the western world:

Piracy is exceptionally simple: it's cheaper to reproduce and sell software in which you didn't invest, market, or frankly do anything else except slap a disc into a replication machine. That's one part of the equation.

However, piracy as an issue is far more complex than, say, the Business Software Association (BSA) makes it out to be. Certainly companies that invest in and develop new software deserve a fair return on investment. But that must take into account local market conditions.

There is a false impression that China is now a rich country. Certain sectors of the society have done very well for themselves. They've made real money. But the average monthly salary in the nation's major cities -- the wealthiest areas -- remains around US$250 to $400 per month.

Compare that to average salaries in the U.S. If someone makes $2,000 to $2,500 per month, then a $250 operating system upgrade doesn't seem too terrible. But when that price is approximately the same in dollar terms in a lower-income country, as it is in China, then suddenly a potentially buggy, definitely pirated edition of the same software for about $5 to $10 sounds much more attractive.

If software companies want better results out of China, then pricing needs to be commensurate with local market conditions. Software developers and their policy representatives have attempted, futilely, to make piracy a moral issue. It isn't. It's an economic issue. Piracy doesn't flourish in developed countries where the cost of legitimate software doesn't outweigh its benefits. But it flourishes in developing countries, where the cost-benefit ratio is different. Authentic software will never be as an inexpensive as pirated goods. But when its value helps to close the gap between price and usability, more people will pay the appropriate price.

I completely agree.  In a previous post, "Faked in China, Protection is Possible," I discussed how economics drives counterfeiting, not culture:

The article notes that "security experts don't buy into the belief that copying is somehow inherent in Chinese culture. The simple fact is that counterfeit goods are cheaper than the genuine ones, and in developing nations like China, wages are low."  I completely agree.  Like everywhere else, those in China who can afford the real thing, prefer to buy the real thing.  As Chinese wealth increases,  and as more and more Chinese companies seek to protect their own brands, counterfeiting will decrease.  This is what happened in both Japan and Korea, both of which were at one time, notorious for counterfeiting. 

In addition to a country's per capita income and the cost of its software, a country's enforcement of intellectual property rights (IPR) can also cause a reduction in counterfeiting.  As China's legal system continues to increase its enforcement of copyright laws, the risks for those producing illegal software will increase, leading to an increase in the prices they charge and a decrease in the demand. 

China's central government does seem to have recently turned the corner in terms of actually believing it is now in China's interests to increase IPR enforcement. Chinese companies are innovating in ever larger numbers and they want to see their IPR protected.  On top of this, China has made clear its aspirations of unseating India as a software outsourcing center and it has to know that to realize this goal it must step up its intellectual property (IP) enforcement.   

BOTTOM LINE:  Producing counterfeit software in China is easy and lucrative, but as the price of doing so continues to rise due to China's increasing IPR enforcement and as the wealth of the Chinese consumer continues to grow, we can expect to see sales of counterfeit software decrease.  To the extent foreign software producers are willing to charge less for their software in China than they charge in wealthier countries, they will speed up the rate of decline in counterfeit software sales. 

James Na is one of the smartest, most insightful columnists writing on Asia.  On top of this, he is a great guy and I consider him a friend.  I am in awe of his knowledge of military issues and of Korea. His writings on North Korea are absolutely top notch.  Our views on Seattle sushi restaurants almost always jibed (James has since left Seattle to return to the East Coast), but, when it comes to China, we always seem to disagree.  In a previous post, James astutely attributed our disagreements on China to our varying perspectives:

These guys [China Law Blog] are much more bullish on China than I am.  But then again, those who engage primarily in civil/business side of China tend to be so while those who deal in security or human rights issues tend to be more cautious (I count myself in the latter category).

Today, I disagree not with James' opinions on China, but with his facts. For today, James seems to have fallen prey to the China is "all bad and on the verge of imminent implosion school of thought," and he has done so not because the facts demand it, but because politics do.  Bad James.  Bad. 

In a recent post on his Korea Liberator Blog, entitled, "China Hype, Part 4," James cites favorably to an overly simplistic and downright unfair article on China written by Richard Halloran and entitled, "Conventional Wisdom Overlooks China's Troubles"  Near as I can tell, Halloran is a journalist with much more of a focus on the military than on China. James uses Halloran's article to push for the United States getting tougher on China. 

I am an attorney and a businessperson, not a political scientist or a military strategist, so I will confine my criticisms to the portrayal of China, while steering clear of the issues raised regarding United States foreign relations and military policy with respect to China. 

Halloran's article claims that when China's President Hu Jintao meets with President George Bush this Thursday, "he will have behind him a troubled and vulnerable nation that will surely put him in a weakened negotiating posture with the Americans."  Halloran posits that the "conventional wisdom on China today holds that it has generated an economic miracle that is propelling Beijing into the top ranks of the global arena. While there is much truth in that image, it overlooks widespread political unrest, vast unemployment and under-employment, and a disruptive disparity in the sharing of economic progress." 

It is unfair for Halloran to refer to China's economic miracle as an "image."  The buildings constantly going up in China's cities are -- standing alone -- enough to refute that accusation.  I do not dispute that there is "political unrest" in China nor that it is on the rise, but it is wrong to automatically conclude these protests mean Chinese populace is getting angrier with its government when they can just as likely be due to an increased belief in the efficacy of protests and a decreased fear of repercussions.  I also agree unemployment and underemployment in China is a huge problem, but I find it unfair for Halloran to ignore that the quality of jobs and the number of jobs in China is growing rapidly every year.  China does have a vast disparity of wealth and that is and will continue to be a problem, but since this is due more to the rapid increases in the wealth of Chinese urbanites than to a decrease in wealth among those in the countryside, this disparity is at least as much an argument for China's strength as for its weakness.

Mr. Halloran talks about how wealth disparity is disruptive, but he ignores that the general view in China these days is one of optimism. It is no accident that a recent international survey found that the Chinese view capitalism more favorably than those of any other country.  They view it favorably because (at least so far) it has done so well for them.  People who believe they are on an ascendancy tend not to be disruptive. 

Halloran also claims "China's reliance on exports to drive its economic engine has left it exposed to external pressures, notably from the United States. Foreign investment has faltered."  Halloran has his facts wrong here.  Foreign investment (FDI) in China for the first quarter of 2006 is actually up 6.4% from last year.   On top of this, China's GDP is rising faster this year than expected.  There has been no faltering. 

Halloran also cites to China's "looming water shortages that affect not only agriculture but the economy and national security, inadequate public health and safety programs, and pollution caused by dumping industrial waste, accidental spills, and harmful smoke billowing from factories everywhere."  China has terrible environmental problems and regions with water shortages and its citizens are unhappy about this, sometimes to the point of rioting.  (I blogged on a violent, environmentally induced rampage just this past week, here.)  However, it is unfair -- without more -- to cite China's environmental problems as proof of its weakness when dealing with the United States. 

Halloran triumphantly notes that the U.S. Pacific Command, which is responsible for deterring or countering potential threats from China, summed up its annual economic assessment of the Asia-Pacific region with perhaps an understatement: "China faces great uncertainty."  Should we stop the presses on this one? I mean, is there a developing country that does not face great uncertainty?  Do we need the U.S. Pacific Command to tell us this?  This is not analysis. 

Then, Halloran "reveals" that "China, however, could not find a market anywhere near the size of that in America. Privately and candidly, Chinese scholars acknowledge this."  Privately and candidly?  Is Halloran implying that "Chinese scholars" would be imprisoned in China if they were to state what everyone in China with a decent education must know and can read in the Chinese press every day: that the United States is the biggest market in the world? 

Halloran notes that "Robert Zoellick, U.S. deputy secretary of state, said in September that U.S. business executives who saw China as a land of opportunity in the 1990's now "worry about Chinese competition, rampant piracy, counterfeiting, and currency manipulation."  Halloran's clear implication here is that U.S. business executives no longer see China as a land of opportunity and that is simply not true.  I talk China with business executives nearly ever day and though they do indeed "worry about "Chinese competition, rampant piracy, and counterfeiting," they, virtually without exception, view China's opportunities as exceeding its risks.   

Sunday's Seattle Times has an interesting article, entitled, "Two Washingtons, Two Reactions to Hu," that talks about how differently the two Washingtons (the State and the capital city) view China and why this is so: 

Hu will seek to allay fears that China's growth presents an economic and political threat to the United States. Seattle, with two leading U.S. companies that view China as an unrivaled business opportunity, gives him the perfect setting for that message.

"This Washington [the state] is an alternative vision of what the US-China relationship can be," said David Bachman, a professor and China specialist at the [Henry M. Jackson School of International Studies at the] University of Washington. "Here we have a state establishment that is almost 100 percent behind encouraging engagement, and a perception that things are moving well on both sides."

In D.C., by contrast, "the whole view is the relationship is negative," Bachman said.

Bottom Line:  U.S. politicians and political and military writers are bound to view China differently than those of us who do business there, and I have no beef with that. But it is not fair for political writers to twist the facts on the ground in China so as to advance a particular political agenda.  We need a United States' policy towards China based on reality, not on manipulations. 

I watched one of the episodes of the highly publicized new four part TV series, "China Rises."  I watched the episode entitled, "Getting Rich" and I thought it was nicely done. 

The following things from the "Getting Rich" episode stood out for me:

1.  Many of the Chinese citizens interviewed spoke of the nearly limitless opportunities China now offers its people.  Only a few hours after watching this program, I was interviewed by a U.S. paper doing a story on China and I was asked what I thought was the American people's biggest misconception about China.  I said the idea that the Chinese people are in a constant state of repression. I said the reality is that the people with whom I deal (and admittedly these are for the most part the urban elite) are hugely proud of their country and wildly optimistic about its future.   

2.  Though one cannot fairly describe China as a country built on laws, it is becoming more so each day and the people are more and more turning to China's courts for legal redress.  These courts do not always rule fairly, but they apparently rule fairly enough for the people to generally believe in them.  I have definitely found this to be the case in the business world, where threatening to sue a company that has not paid its bills usually convinces them to pay. 

3.  Private enterprise is thriving and it is China's private companies (not its state owned entities) that drive what the show kept calling the "greatest transformation in history."

4.  The Chinese elite concur with the government's go slow reform policy of "crossing the river by feeling for stones."  In the show, an obviously wealthy banker talks about how this policy, first coined by Deng Xiaoping in referring to China's step by step liberalization, makes sense for China.  Those with whom I talk in China concur with this.  I think the urban elite of China concur with this not because they feel compelled to do so by the government, but because this policy has, at least so far, served them so well. 

The series is a co-production of the Discovery Times Channel, The New York Times,  the Canadian Broadcasting Corporation, France 5, and S4C.  For more on this series, click here.  You can see the series trailers on the DaveinChinaBlog. 

Yesterday in a post entitled, Blackberry vs. Redberry in China, I blogged about Blackberry's plans to go into China and China's own newly launched mobile e-mail service, Redberry.  Because of that post, I am today as red faced as (groan!) a red berry.   For in my post I predicted Redberry would have a new name by the time President Hu Jintao's airplane hits the tarmac in the United States later this month:

With China putting on a grand show this week (before President Hu Jintao's upcoming United States trip) regarding its increased efforts to protect intellectual property rights in China, this China Unicom announcement seems rather untimely. I put the chances at 50-50 that "Redberry" will have a new name by the time China's President's plane lands in the United States. 

Silly me.  Research in Motion (RIM), the maker of the Blackberry, is a CANADIAN company, not a U.S. company so it is extremely doubtful this will be on the Bush-Hu Agenda.  Thanks to Asia Pundit for astutely pointing this out. 

The Development Bank Research Blog (with a stated goal of "Understanding the Wealth of Nations") just did an interesting post, entitled, "Will China Quadruple Its Income By 2020? Nobel Prize Laureate Fogel Says Yes. I Am Not So Sure."  The post questions Nobel Prize laureate Robert W. Fogel's recently published paper entitled, "Why China Is Likely To Achieve Its Growth Objectives." Fogel is very optimistic regarding China's future, based on the following three assumptions:

(1) China will achieve at least 8% annual growth.  According to Fogel, this growth rate is not a miracle as it is really no different from what other Asian countries were able to achieve during periods when they were similarly situated to where China is today.  I concur. 

(2) China's problems with its money losing state owned entities (SOEs) and weak banking sector will be "mechanically reduced by 50%" as the Chinese economy doubles in size every decade. These problems will decline in importance and scope as the role of China's private sector in the economy increases.  I concur

(3) The Chinese government is increasingly sensitive to public opinion and to issues of inequality and corruption.  The Chinese populace generally supports the government, which makes political instability unlikely.  I concur.  As much as I hate state control, I have to admit that (so far at least) the Chinese government has been quite adept at reading and then reacting to public opinion. 

The Development Bank Research Blog takes issue with Fogel's assumptions, saying they are based on "hope" and "luck" and "if there is any economic and financial setback in the economy, however small it is, we are going to see all of Fogel�s assumptions self-destroying: SOEs, banking system will become a bigger problem, and social unrest will explode."   I disagree with this blog in that I do not see China's economy becoming uncoupled due to a "however small" economic setback. 

The blog also disputes Professor Fogel's assertion that China has vigorous public debates regarding its economic policies.  I again disagree with the blog, though I am not sure this issue is of great significance in predicting China's economic future.  China is not a free society, but when it comes to economic debate, it is pretty much "no holds barred." 

Finally, the blog states that China has "many problems ahead" and "we shouldn't�t pretend that they are not serious enough."  No sane person can believe China does not now have serious problems and will not in the future be facing serious problems.  However I side with Dr. Fogel in predicting China will be able to surmount enough of these problems to continue thriving.

Though it would be easy for me to side with this blog and say I too am not sure where China's economy is headed (I mean, who can be "sure" of any prediction like this?), I do concur with each of Dr. Fogel's assumptions and with his optimistic view of China's future. 

For more China optimism, check out this post, entitled, "China Through Rose Colored Glasses, Clearly"

Interesting article today in the China Economic Review, entitled
"Environmental Crackdown Could Raise Prices."   According to the article, the Chinese government's increasingly tough environmental standards will likely soon cause price increases: 

Stringent new environmental laws affecting the petrochemicals sector could result in price rises for clothes, household goods and other plastic products.  The [Chinese] State Environmental Protection Agency is expected to introduce a more stringent approval process for new industrial projects after it last week outlined the results of a two-month nationwide audit of 127 chemical producers in which it rejected or suspended approval for 44 projects across a range of heavy industries, and published a "name-and-shame" list of 20 projects that fell short of environmental standards.  Analysts said the crackdown has effectively frozen new petrochemical projects and would limit capacity in a sector already squeezed by record oil prices and widespread overinvestment. As a result, petrochemical firms may start charging more for the raw materials they sell to manufacturers of everything from toys to textiles, which would likely be passed on to consumers.

Bottom Line:  The Chinese government strongly favors environmentally sound companies.

By:  Steve Dickinson

In part I of this post, I blogged about Starbucks' trademark history in China and about the recent Qingdao court decision finding a Qingdao coffee shop had violated various of Starbucks' Chinese trademarks.  In this post, I discuss my own on the ground observations of the Qingdao coffee shop and my own views regarding the Qingdao court's decision.  Lastly, I discuss what foreign companies doing business in China should take from the Qingdao decision regarding protecting their trademarks in China.

The Qingdao decision was based on the facts and the law and nothing indicates Starbucks was shown any favoritism as a large multinational.  The Qingdao defendant was clearly operating a business openly infringing on Starbucks' trademarks.  All of Starbucks trademarks were properly registered before the infringing business even incorporated.  Defendant's only plausible argument was that it was using the Chinese name as a company name, not as a trademark.  However, as a factual matter, this was simply not true. The Qingdao Starbucks was an open rip off of Starbucks, and the xingbake name was openly used to identify the business to customers.  Starbucks' success in the case was in complete accord with Chinese law and it shows no favoritism towards Starbucks at all.

It is important to note that the defendant in this case is also a foreign owned company.  The owner of the Qingdao defendant is an overseas Chinese who only recently returned to Qingdao to open the Starbucks caf'.  Accordingly, this case was a dispute between two foreign entities, not a dispute between a U.S. company and a local Chinese company. This actually is quite typical in China.  The Chinese themselves are not very sophisticated about what products to copy.  Much copying in China is organized and carried out by overseas Chinese based in Taiwan, Hong Kong, Canada, or the United States.  This increases the complexity of dealing with intellectual property (IP) infringement in China.

Starbuck's victory in this case is not complete. The defendant has appealed on the issue of using the xingbake name, using the name Star Sbuck and using its logo.  The defendant has conceded on the use of the Starbucks English language trademarks.  The appeal will go to the Shandong High Court and may take another year to resolve.  This is a major case and the court will no doubt take a very careful approach to the appeal.

Since I live in Qingdao, I went to visit the defendant's shop to evaluate this case on the ground.  Here is what I found.  The defendant's business is a traditional Chinese style coffee shop.  It does not resemble a typical Starbucks cafe.  The shop is located in a somewhat seedy hotel on a busy street in Qingdao.  The offerings are typical of a Chinese style coffee shop: the place is really a combination coffee shop, tea parlor, ice cream parlor, restaurant and  bar all rolled into one.  This lack of focus, "do it all" approach is typical in China. Personally, I had a beer and peanuts and avoided the coffee.  The other customers were drinking tea, eating fruit and ice cream or enjoying a beer. There was a great U.S. country and western singer on the stereo.  I stayed about an hour and had a good time.  I never once saw anyone order a coffee or drinking a coffee.

The defendant has removed all reference to the Starbucks English language trademarks.  However, the old references to Yukon Blend, Frappucino and the rest are clearly visible between the white outs on the menu.  The defendant has not changed anything, however, on the use of the xingbake name, the Star Sbuck name, or the design and shape of its logo. This will be resolved pending appeal.

Nobody familiar with Starbucks would ever confuse this this shop with a real Starbucks outlet.  In fact, there is a real Starbucks outlet located about ten blocks up the street from the defendant. The real Starbucks is an absolutely perfect clone of a Starbucks from the United States and it bears no resemblance whatsoever to defendant's establishment.  Of course, this is the reason Starbucks is concerned about coffee shops such as that of the defendant. The sloppy service, shabby d'cor and mixed message on the product served all are damaging to the Starbucks image and brand identity. This is particularly important in China, where Starbucks is working to create its image.

The message from this case to foreign companies involved with China is clear:
            
             '  Register your trademarks early.
            
             '  Register your Chinese name even if you do not plan to use it right away. This is especially important if your Chinese name is different from your company name, as was the case with Starbucks.

             ' Registering your trademarks in China is a necessary start towards protecting them, but it may not be enough. The Chinese government will not protect your trademark for you. You must enforce the trademark yourself. 

              ' If you properly register your trademarks in China you will probably succeed in an enforcement action.  However, you must be prepared to incur the legal costs of enforcement.  China is a huge and complex country.  If your product is successful, there is a good chance it will be copied. You will need to vigorously defend your rights from the very start in order to prevent this.

The good news we can take from the Starbucks case in Qingdao is that that China's legal system has developed to the point where intellectual property rights can be successfully defended through legal action. 

If you are a regular China Law Blog reader, you know by now that I take seriously China's intentions to improve its environment.  And, if you are not a regular reader, well, the title of this post ought to tell you the same thing.  You can find my previous posts on China's environmental efforts here, here, here, here, and here.

As further proof, the Shanghai Daily ran an article today on how a number of China's provinces are now either seeking only environmentally friendly investments or at least greatly favoring those sorts of investments.  According to the article, "China's regions and provinces are seeking to lure investors with green, clean projects in a bid to move away from traditionally polluting industries."  The article goes on to mention how Zhenping County, in northwestern Shaanxi Province, is seeking to avoid polluting industries in favor of food or herb processing and eight of its eleven investment projects this year are in "environmentally friendly industries." The article also cites Guizhou Province's efforts to "build a recycling economy" and, according to a senior official with Guizhou's Development and Reform Commission, "any enterprises wanting to invest there are required to have a 'zero pollution discharge.' "

Bottom Line:  There is money to be made in China by being environmentally friendly and Western companies' greater experience with this gives them an advantage.

The NW China Council, in conjunction with the World Affairs Council of Oregon and Portland State University, is putting on a speech by James McGregor on Monday, April 10, 2006, from 7:30 a.m. to 9:00 a.m. at The University Club of Portland, main dining room, 2nd floor, 1225 SW 6th Ave., Portland, OR.  Go here to register online.  McGregor, author of the widely acclaimed book on China Business, One Billion Customers, will, in this speech, "walk the audience into the middle of the Chinese business world while sharing his insider's perspective on the politics, the people and China's changing place in the world order." 

I expect this speech will be both interesting and informative and if I were not scheduled to be on an airplane flying into Seattle when it will be going on, I would be making the three hour drive to Portland to see it.  In particular, I would like to ask Mr. McGregor if he thinks the situations that befell the large companies he chronicles in his book are less likely to occur to smaller companies seeking to do business in China. 

Lillian Tsai, NW China Council's Board President, alerted me to this event.  Ms. Tsai is a driving force behind the NW China Council, which is one of the best organizations of its kind in the United States.  In addition to this, she owns and runs Tsaicomms, a leading Asian marketing and communications company. 

On April 25, 2006, from 7:30 a.m. to 9:30 a.m. at the Multnomah Athletic Club in Portland, Ms. Tsai will be part of an American Marketing Association workshop on "America's Ethnic Buying Power."  Click here for more information on that event. 

By:  Steve Dickinson

Starbucks Corporation has been in a long running dispute with coffee shops in Shanghai and Qingdao over the use of the Starbucks trademark in China. Starbucks has prevailed in both actions. On November 16, 2005, the Qingdao court ruled in favor of Starbucks and it recently published that decision (in Chinese only) on its intellectual property law website (text of decision found here.)

On January 4, 2006, the Shanghai court also ruled in Starbucks' favor but because that decision is not yet up on that court's website, I will be focusing only on the Qingdao decision in this post.  I will summarize the Qingdao decision, discuss my on the scene observations of the offending Qingdao coffee shop and then give trademark advice to companies doing business in China.

The court decision sets forth Starbuck's history in China.  Starbucks began doing business in China in 1999.  By 2003, Starbucks had registered all its major trademarks in China, including its Chinese name, xingbake. 

The defendant coffee shop started business in Qingdao on October 23, 2003 under the name Qingdao xingbake kafei canting youxian gong si, which means Qingdao Xingbake Coffee Shop Company Limited.  It thus made use of the Starbucks registered name xingbake in its company name. In addition to this, the defendant Qingdao company used the English name Qingdao Star Sbuck Coffee on its napkins, menus and business cards.  Within its shop, the defendant used Starbucks trademarks such as frappucino and Yukon blend, and it sold coffee beans clearly labeled as Starbucks Coffee.  The beans were packaged in bags identical to those used by Starbucks in its legitimate shops. The Qingdao company's logo is a round circle with stars just like Starbucks, but it replaced the Starbucks mermaid with a coffee cup and eliminated the company name.

Starbucks filed suit against the Qingdao company claiming it was infringing on its xingbake and English language trademarks. The Qingdao defendant asserted the following defenses: 

            1. A trademark that has been registered but never used cannot be enforced.  Though Starbucks registered xingbake as its trademark in China, it never actually used the term. It uses only its English language trademarks. Accordingly, defendant is free to use the term xingbake as its business name.

            2. There is a difference between a business name and a trademark. A company is free to use its legal business name in conducting its business activities, so long as it does not infringe on someone else's trademark. The relevant Chinese authorities approved the Qingdao company using the xingbake business name and since Starbucks does not actually use that name, defendant has the right to use it in its normal business activities.

The Qingdao company's only defense for using the English language Starbucks trademarks was the clearly unsupportable argument that the plaintiff did not actually own the marks in question.

The Qingdao court quite properly summarily rejected the argument that Starbucks does not own its own English language marks and rejected both defenses regarding the xingbake name as well.  First, the court found that Starbucks had in fact used the Chinese term xingbake in identifying its business in China. Second, and more importantly, the court held that the Qingdao defendant was not using xingbake as a business name; it was using xingbake as a trademark to identify its business as a coffee shop. The xingbake name was prominently displayed throughout the shop and on the sign identifying the shop from the street. This confused customers as to the identity of the ownership of the coffee shop.

The court was clearly influenced by defendant's using the English language Starbucks trademarks to identify its products.  The defendant also copied the Starbucks color scheme and decorations in its interior and exterior design. The defendant even went so far as to copy the green color Starbucks uses in its signage and logo. All of this convinced the court this defendant had not simply innocently taken on the name xingbake, but rather, had deliberately copied  Starbucks' entire trademark system, along with Starbucks' look and feel.  The defendant's English name of Star Sbuck was used to copy the Starbucks name.

The court therefore held in favor of Starbucks, and  issued the following order:

1. Defendant must remove the term xingbake from its legal name;

2. Defendant  must cease using any Starbucks trademarks, including the Chinese term xingbake;

3. Defendant must cease using the green circle logo as it is confusingly similar to Starbucks' logo; 

4. The defendant is ordered to pay economic damages to Starbucks in the amount of 500,000 RMB ($62,000).

On Monday, in Part II, I will analyze the court's decision and its impact. 

A friend of mine from Michigan who owns an auto supply business sent me an article today from the AutoChannel, which bills itself as "the largest independent automotive information resource." The article is entitled, "Study Reveals: Auto Suppliers Find No Cost Guarantee in China Sourcing."  We need a study for this? 

The article goes on to reveal the less than ground breaking news that an "efficient low cost country supply chain is a competitive weapon," but that for American auto suppliers, establishing that chain out of China will soon be essential.  But, there are no guarantees. 

Once one gets beyond these journalistic truisms, however, the study itself does contain some very cogent information.  Andreas Mai, a principal at management consultancy, PRTM made the following excellent points based on the study, which consisted of "more than 50 interviews and surveys with executives of global automotive suppliers located in the U.S:"

-- "China sourcing requires minimum savings of 20 percent to outweigh the increased costs of logistics, quality and intellectual property risk."  I agree.  Not sure if things like accounting fees and legal fees go under logistics, but companies should plan for those to increase as well when doing business internationally.   

-- "A remote 'test the waters' approach is bound to fail." I completely agree.  Do not expect to go over to China for a few weeks to "start" a complicated operation there and then turn everything over to your newly hired, but expert Chinese managers and engineers.  That simply will not happen.  It will take years before you have a really good team on board.  Years.  And, good Chinese management and technical people, no matter where you are in the country, cost more than $200 per month.  Always.

--"Highest savings were achieved by suppliers that deployed an integrated China strategy as part of Chinese market expansion and/or global product management."  This makes sense.

-- "Sustainable China sourcing results require high investment in local supplier development, technical and quality support."  This makes sense.

-- "Early adopters achieve the highest savings rates, shorter procurement lead times and lower quality and supply chain risks, but the learning curve was 6-10 years."  China has changed so much from 6-10 years ago, that I have to believe it will take far less time than 6-10 years now. I say this for many reasons.  First, the early adopters have made things easier for the next generation.  The Chinese government and the local facilities are now better equipped and better able to provide the suppliers with what they need.  Second, China's labor force is better now than ten years ago.  Third, China's legal and regulatory climate is much better now than it was 6-10 years ago, particularly for these sorts of industry. 

Bottom Line:  Business basics apply in China just like everywhere else. 

An economist, a physicist and a chemist are stranded on an island with one unopened can of food.  The physicist suggests they roll the can down a hill where it will strike a rock which will pierce the can and release the food.   The chemist suggests they cool the can in the ocean then heat it in the sun so as to cause the can to burst.  The economist suggests they assume they have a can opener. 

My sense is that any prediction of China's economic future will be so dependent on the assumptions chosen that the assumptions themselves will determine the prediction.  Nonetheless, I was very impressed with a recent Asia Business Law post, entitled, "China Surveyed," that sets forth the following three possibilities for China's economic future:

• An economy that continues to boom as the political system gradually becomes more liberal and China becomes an increasingly positive force in the world;
• A fast-growing economy, a surge of vengeful nationalism and an attempt by China to displace American power in Asia regain Taiwan and challenge Japan; or
• A country in disarray, engulfed by social and political crises as its economy slumps.

The post goes on to provide an excellent analysis of how politics, demographics, productivity, and reform might influence China's economic future.  I find it both fascinating and a bit scary that one can easily muster facts to argue for any of these three scenarios. 

Asia Business Law's subtitle is "clarifying news of import for legal professionals in Asian business" and though it has been online for only a few weeks, it is already living up to its subtitle.  It is written by four University of California Hastings College of the Law students who show an enviable passion for and deeply rooted knowledge of Asia. The blogosphere needs a site that analyzes how the various Asian countries interact and influence each other and the world.  Asia Business Law Blog is that site and we have added it to our blogroll.