China Law Blog

The All Roads Lead to China Blog did an excellent post the other day, entitled, "Save Money in China GUARANTEED!"  Though I wholeheartedly concur with the advice, I must, as a lawyer add some fine print.

All Roads sets forth a nine fold path for guaranteed cost savings in China outsourcing, of which I highlight the following four:

1) Know what you want to gain by going through this process:
- What is the end game?
- How much money must be saved before moving?
- Should any move involve a gradual shift from current suppliers to new suppliers?
- Is a higher cost acceptable until full volume is moved over?

2) Check your gut:
- Do you like this person, or do they just have the best price?
- Would you hire this person in-house under normal conditions?
- Do they respond to your requests for more information?
- Do they understand your concerns and work with you to work through them?
- Can they do what they say they will?

3) Build relationships and trust:
Many buyers will do all they can to drive down prices and will always be looking for a better deal.  this is a strategy that often leads to short term gains and long term pains as relationships are never stable, and both parties are suspicious'. A situation which often leads to supply chain instability and time/ money spent to find new suppliers.

Working with a supplier and developing each other's businesses is a far more effective strategy that will lead to tighter relationships and long term stability.  With China 101 rule #1 being relationships are everything, the above is the goal.

4) Understand and work with relationships when there are problems:
Suppliers will always have a learning curve to climb, and understanding that is critical.  No one is perfect, and no process is.  There are bound to be issues in quality, and it is not always because a supplier is trying to use lesser quality materials or processes.  Sometimes, it is a simple mistake, and at other times it is a serious issue that needs to be talked through. however, if at all possible, one should not simply walk away from the relationship as no one gains from that, especially the buyer.

I urge everyone to check out the full post here.  My favorite is "check your gut."  I say this because my firm is surprisingly often brought in to write contracts on deals that simply make no sense for the non-Chinese company.  When we ask our client about the portion (or portions) of the deal that make no sense, their response is invariably not to explain it to us from a business perspective, but rather, to tell us that the Chinese company with whom they are doing business has told them "this is what the law requires in China." 

WRONG. 

Chinese law is NOT written to harm the foreigner.  If the Chinese company with whom you are doing business tells you things that make no sense to you, there is a 99% chance it is nonsensical, rather than that you do not understand China.  Just by way of example, the following are some of the things our clients have reported to have heard from Chinese companies with which they are seeking to do business, most of which are never true, some of which are almost never true:

1.  You [the foreign company] need to license or give title to your IP to a Chinese company.

2.  You need to deposit the initial funds into the personal bank account of the Chinese company's president.

3.  You need to pay the Chinese government $100,000 to do this kind of business in China, through the Chinese company.

4.  You need to do this business as a joint venture (JV), not as a wholly foreign owned entity (WFOE).

5.  You need to do this business with your having a minority interest in the joint venture.

6.  You need to turn over your client list to the Chinese company so that it can confirm with the Chinese government that none of the companies are forbidden from doing China business.

7.  This sort of business cannot be memorialized in a written contract.

8.  Chinese companies are not allowed to consent to arbitration.

Now for the fine print:  Even if you follow all of the above advice, you can still lose money if you  have a bad contract, if you pick a bad company with which to do business, if your business is not fundamentally a good one, or if you fail to protect your IP. 

Business everywhere has its risks and China is, of course, no different.