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Doing Business In The New China

Posted in China Business

Let me start out by saying that I realize how ridiculous the term “New China” is.  First off, what does it mean?  I don’t know.  Second, if it means anything, it means that China today is not like it was yesterday, which has of course always been true, not just of China, but of everywhere. Despite its lack of meaning, I love the phrase because it does, in its own sort of crazy way, nicely convey that change is a constant in China.  Now of course change is a constant everywhere, but this just seems “more” true in China. I also love the phrase “really pregnant.”

Whenever my law firm starts getting an increasing number of phone calls/emails from companies that have ordered product from their Chinese suppliers and then had those suppliers shut down without ever providing the product, I write a post like this one, detailing what foreign companies doing business in China or with China should be focusing on to protect themselves.  Those phone calls and emails started increasing a few months ago and though they are not necessarily an iron-clad indicator of the direction of China’s economy, they are a good indicator of what is happening to Chinese manufacturers and to what is happening to foreign companies doing business in China.

Rather than reinvent the wheel, I am going to reprise an email I received and responded to years ago as a classic example of the sort of phone calls and emails we are getting these days as well. Here goes:

Hi. I am an avid reader of China Law Blog. I run a small _________ company in Shanghai and have come upon my own situation in which I would like to ask for a legal opinion. It’s not a very big issue and maybe not even worth pursuing it but since we are a very small company with limited funds it’s still of relevance for us.

A part of our business is renting out _________ machines to customers such as restaurants. One of these restaurants has just gone out of business. Since several months of rent are due to the landlord, the landlord has locked the shop down with all equipment (our _______ machine, the restaurant’s employees’ personal things, etc.) all still inside. The landlord is saying that they will release everything inside the restaurant only after discussing with the restaurant operators, all significant employees of which have now left town.

I am not exactly sure what will happen, the situation is vague as many things are here, but we would like to get our machine back (wholesale cost of about 20k RMB).

My questions now are if the landlord has the right to keep our property (e.g., the machine) and if not, if there is anything worthwhile that we can do about it?

Thank you.

Here is my response:

Without reviewing your contract with this restaurant, I have no way of knowing what you can and should do. If you have a really good contract (preferably in Chinese) that makes clear that the ______ machines belong to you unless and until they are fully paid-for, then you should show that to the landlord and odds are good he will let you walk off with your machines. If you don’t have such a contract, I wish you good luck because at that point it is not likely to be very clear who owns what.

We have lately been getting a ton of these sorts of requests and I am going to do a blog post on it, stripping your email of any identifiers.

This is China’s new reality, brought about by more businesses failing and by foreign companies that are doing business in China having become much more intwined in China’s economy.  About a year ago, I wrote a piece for the Wall Street Journal discussing the impact China’s slowing economy is having on American businesses that do business with China and how they should respond to that.  The article is entitled, “China’s Slowdown and American Business” in the US Edition and “China’s Slowdown and You” in the Asian edition, and if you want to read the whole article, you should Google either title and “Dan Harris” and then click the leading link and the full article will appear.

In the article, I assert the following on doing business in the new China:

  • The Chinese government “is much more concerned with social harmony than with economic numbers” and that is why it is continuing to encourage wage growth even though higher wages make China’s factories less competitive.
  • China’s prioritization of its citizens’ contentment means that China is going to get tougher on foreigners, just as it (and nearly every other country) has always done when times are tough. Everything foreign businesses do will be under heightened scrutiny.
  • The authorities also are throwing new roadblocks in the way of foreigners seeking to form businesses in China. Such higher standards are not uniformly applied. Beijing and local governments are ever more eager to distinguish between “contributing” and “noncontributing” foreigners. Thus, it has never been easier for well-funded, nonpolluting foreign companies to secure approval to operate in China. Conversely, it has never been tougher for foreign companies that pollute, pay low wages, or have no plans to hire Chinese employees to get their foot in the door.
  • Chinese exporters, particularly those that compete with companies from lower-wage countries like Vietnam and Bangladesh, are suffering—in particular in very low-tech, very low-wage industries such as textiles, clothing, shoes and low-end electronics and toys. Foreign companies that do business with Chinese companies in these industries must be on their guard.
  • The key to weathering China’s slowdown will be for foreign companies to go back to basics: think afresh about what a company contributes to China’s economy and how that is likely to shape policy makers’ opinions; focus on scrupulous regulatory compliance; and renew focus on due diligence at a company-to-company level.

Though the above is happening, there is something very positive in China is happening as well: a greater number of China businesses are getting savvier, more sophisticated and more international.  China’s high end (in terms of sophistication and savvy, not necessarily the product they produce) companies are getting bigger and deeper at the very same time its low end companies are suffering. These high end companies are doing their utmost to do more than just churn out bad quality widgets; their goal is to provide a product or a service (or a product and a service) that can compete anywhere.  I first started talking about this trend about a year ago and since then I have mentioned it at just about all of my speaking engagements and I am finding that people are increasingly agreeing with me on this.  The point is not that the existence of such Chinese companies is new, rather that the number of them is proliferating at a rapid pace as more and more Chinese companies are realizing that “stepping up the pace” is the best way for them to survive. Co-blogger Steve Dickinson hit on this trend in his post The New Role Of Written Contracts For Product Purchases In China.

In other words, the importance of choosing your China partner — which was always critical — has become even more so.

What are you seeing out there?

 

  • China Law for Expats

    “Beijing and local governments are ever more eager to distinguish between “contributing” and “noncontributing” foreigners.”

    Great point, Dan, and this is both on the individual and corporate levels. According to China’s new immigration law that went into effect yesterday, the State Council will sometime in the future promulgate a catalog of encouraged, restricted, and prohibited industries for individual foreigners, in addition to the catalog for foreign investment, which you’ve talked about on this site.

    - Eric Meng
    http://www.chinalawforexpats.com

  • Heatwolves

    really interesting piece, linking to your site now on mine. the times are changing as usual.

  • Lucas Blaustein

    In terms of agriculture, I could not agree more. Chinese agricultural development still lags by the Ministry of Agriculture’s own account, some 100 years behind that of the United States. Despite this, in a few of the tertiary fields that serve agriculture, specificaly agricultural machinery, Chinese firms are beating some of the world’s most competent and able American agricultural equipment manufacturers with higher quality, cheaper products for the domestic market, with one important end goal… To take their companies abroad.

    The days of cheap China are likely over, the days of the red-carpet expat treatment are likely over, the days of American companies that produce cheap widgets in China is coming to an end. But, the days for American firms that provide high-end services, that deal with industries that improve the lives of the Chinese people (i.e. medical and agribusiness, among others) are just beginning. In order to take advantage of the changing opportunities in China, it’s not only going to take a different kind of company, but a different kind of foreigner – one who speaks the language, comprehends the culture, and seeks not to change China, but to understand it. And this new kind of foreigner is going to have to work hand-in-hand with an increasingly larger Chinese talent pool of highly educated young Chinese professionals with greater exposure to the West.

    Sometimes-different-companies, alongside a newer kind of employee is now what it takes to master the Chinese market.

    And mastery is still very much worth it. The risks Chinese developing firms pose internationally to solid Western brands is real , for if Western firms cannot successfully sharper their swords against the competition in China, they will never survive the Chinese arsenal abroad.

    In addition, even with 7.5% growth, it is important to remember that for 18 of the last 21 centuries, China’s standard of living and GDP dwarfed that of most of the Western world combined. The opportunity in China has changed from quick cash and cheap goods, to a long-term opportunity for extreme profit, but that comes with. Large caveat – Western firms must lean to navigate “the new China”.

  • Lucas Blaustein

    In terms of agriculture, I could not agree more. Chinese agricultural development still lags by the Ministry of Agriculture’s own account, some 100 years behind that of the United States. Despite this, in a few of the tertiary fields that serve agriculture, specificaly agricultural machinery, Chinese firms are beating some of the world’s most competent and able American agricultural equipment manufacturers with higher quality, cheaper products for the domestic market, with one important end goal… To take their companies abroad.

    The days of cheap China are likely over, the days of the red-carpet expat treatment are likely over, the days of American companies that produce cheap widgets in China is coming to an end. But, the days for American firms that provide high-end services, that deal with industries that improve the lives of the Chinese people (i.e. medical and agribusiness, among others) are just beginning. In order to take advantage of the changing opportunities in China, it’s not only going to take a different kind of company, but a different kind of foreigner – one who speaks the language, comprehends the culture, and seeks not to change China, but to understand it. And this new kind of foreigner is going to have to work hand-in-hand with an increasingly larger Chinese talent pool of highly educated young Chinese professionals with greater exposure to the West.

    Sometimes-different-companies, alongside a newer kind of employee is now what it takes to master the Chinese market.

    And mastery is still very much worth it. The risks Chinese developing firms pose internationally to solid Western brands is real , for if Western firms cannot successfully sharper their swords against the competition in China, they will never survive the Chinese arsenal abroad.

    In addition, even with 7.5% growth, it is important to remember that for 18 of the last 21 centuries, China’s standard of living and GDP dwarfed that of most of the Western world combined. The opportunity in China has changed from quick cash and cheap goods, to a long-term opportunity for solid profit, but that comes with a large caveat – Western firms must learn to navigate “the new China”.