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Chinese Drywall. If You Think That Is Bad…..Just Wait.

Posted in Legal News

Absurdity, Allegory and China is doing an excellent job in covering the recent problems with Chinese drywall that have cropped up in Florida. AAC has done a series of posts on this issue, the most recent one, entitled, “Just Follow the Links,” which, as its name implies, links over to the previous ones.
As I am always saying, lawyers make for excellent canaries in terms of what is happening and what is going to happen. This is because we oftentimes hear of things from our clients before they become public, through either litigation or an announced deal. My law firm has been hearing much more about and/or getting much more work in four areas relating to China. Only one relates to the drywall problem, but all four directly relate to the downturn in the economy.
Here goes.
First, we are hearing of even more incidences (yes that is possible) of China quality control problems. Chinese companies that are strapped for cash are the most likely to skimp on quality and with more Chinese companies strapped for cash….well you do the math. In “How To Protect Your Company From Bad China Product,” we wrote on how foreign companies can reduce the likelihood of receiving bad product from their Chinese manufacturers. Our advice from that post still holds, but the need for foreign companies to follow it has increased.
Second, we are getting an increasing amount of work from foreign companies who want to exit from their Chinese joint ventures. The reason this is happening now is that when times were good, the foreign participants in joint ventures have a tendency to “let things slide.” Now, with profits tanking, they are feeling they cannot just sit back and wait.
Third, and paradoxically enough, we are doing a greatly increased business in forming joint ventures in China. We are getting clients who are saying that up to a few months ago, they were planning on going into China on their own, via a Wholly Foreign Owned Entity (WFOE), but now they want to go the joint venture route to “spread the risk.”
Fourth, we are getting a ton of work from companies owed money from other companies that are either unable to pay their bills or just choosing not to pay the companies that are calling us. I estimate our breach of international contracts business has doubled in the last six months. As Jeremy Gordon over at China Business Services, puts it, “this is a risky time for payment.”
Are you seeing these same legal/business trends? How are they impacting your business?

  • http://www.thechinaobserver.com Joel

    Interesting post Dan. I am surprised to find that your firm is both handling a rise in demand for JV formation at the same time it is experiencing an increasing number of clients who want out of their JV partnerships. I would have thought that more companies would opt for the WFOE in order to maintain more control over the course of their venture, but I guess under uncertain economic conditions, JVs are an alternative to help spread the risk. However, I guess the level of risk also depends on how reliable the Chinese JV partner is…

  • Cynthia

    This Chinese drywall issue is crazy. I just read another piece on this on NewsInferno.com: http://www.newsinferno.com/archives/4628#more-4628

  • Anonymous

    These drywall problems aren’t that recent. Apparently, some builders have been getting complaints for the past 3 yrs. http://www.newsinferno.com/archives/4700

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