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The Basics On Doing Business In China. Big Risks, Bigger Rewards?

Posted in Basics of China Business Law, Legal News

Just read a CNN article entitled, China offers big risk, bigger reward.  The article quotes me and a nice range of other attorneys on what it takes for foreign companies to succeed in doing business in China — from a legal perspective.  I really like the article, but I have a beef with its title.

If I had written the title, it would have been something really like, “China offers big opportunities, but hey, it’s gonna be difficult and it isn’t nearly as cheap as it used to be.”  I am just not sure China is all that risky for foreign companies.  I say this because my “sense” is that well over 90 percent of my law firm’s clients that do business in China or with China succeed at it and because every AmCham survey I can remember essentially says that American companies in China are thriving.  Is it difficult doing business in China?  Of course it is.  Just the mere fact that it is a foreign country (make that a very foreign country) with a different business culture, language, and laws guarantees that will be the case.  Is it risky?  Well, yes, in that it is a foreign country with a different business culture, language and laws, all of which increases the likelihood of something going wrong.  But is it physically dangerous?  No.  Are foreign countries at any real risk of having their assets appropriated by the government?  No.

You want risky?  Let me tell you about risky.  Many years ago, a very good client of ours was offered the shrimp farming concession in a small African country.  THE shrimp farming concession.  Like for the entire country, which meant a huge amount of easily caught shrimp. We worked with our client on various aspects of the deal and the most conservative numbers showed that the return on the investment would be astronomical. Like about 300% starting in the first year.  One big problem though was that none of the last three foreign companies that had been given the same concession had lasted even one year without the government taking everything and unceremoniously booting them out.  The government sought to assure us that it had good reason all three times but in the end, our client deemed the deal too risky.

Bad things do happen to good foreign business in China, but as compared to many other emerging markets, China is relatively tame.

But the article itself does an excellent job setting out the core legal issues foreign companies face in China and conveying that dealing with those issues is not going to be easy or cheap.  It starts out talking about a young entrepreneur who found it difficult forming a WFOE because, among other things, he had to first prove that he had office space and a commercial address.  The article said this first meant that this entrepreneur had to make a “significant upfront investment, with no  guarantee of [WFOE] approval.”  This is only sort of true in that many landlords in China these days will agree to what we call a tentative lease.  Under such a lease (which we do literally all the time for our clients), the foreign putative tenant need only start paying if the WFOE is approved.  Landlords typically agree to this and we have never had a WFOE rejected because of this.

It then quotes me as saying that “many” wait for a year to have the paperwork approved.  This too is only sort of true.  We have never had a situation where it has taken anywhere close to a year for our WFOE paperwork to get approved; but we have had situations where it has taken our clients a year or so to complete the WFOE registration process because the foreign company seeking the WFOE was simply not well prepared from a business side to do everything it would take.  For instance, a typical slowdown is when the foreign company has trouble finding an appropriate space to lease.  For more on the issue of leasing space for a WFOE in formation, check out the following:

For more on how to form a WFOE in China, check out the following:

The article then rightly notes that “hiring staff, conducting training, avoiding corruption and protecting intellectual property are some of the biggest challenges they face.”  I completely agree with this, in that probably 80 percent of what we do for foreign companies that are already in China relates to one of these items.

It then talks about the need to find the right hire/right partner — someone , who “can bridge West with East, and East with West.”  This is so true.  In fact, I went to lunch with a good friend/client yesterday and much of the conversation was him telling me how difficult it was going to be for him to find the right general manager for a new business he has been working on in China.  Like everyone else, he seeks someone who understands both the China side and the Western side and can deal with the people on both sides and actually knows the specific business.  Those people are always going to be few and far between.  Janet Carmosky just wrote an excellent article for the China Business Review on this issue, entitled, What a China Team Needs.

The article then (quite wisely) notes how “business in some industries — media, banking and energy, for example — can only be done through a joint venture with a local Chinese partner.”  In other words, these businesses cannot be 100% foreign owned and therefore they cannot be done as a WFOE; foreign companies therefore typically get involved in these industries in China via a joint venture.

The article then relays how “corruption carries some of the biggest risks for businesses looking to break into China” and how it is “common practice” in some industries “for firms to give generous gifts and entertain business partners with lavish meals, and companies may lose an edge if they don’t follow suit.”  Unfortunately, this is true and as a foreign company you will need to decide whether you are going to risk jail time for yourself and your employees by violating the law. Needless to say, our advice is always not to do it and to do everything you possibly can to make sure that ethos is made clear and enforced throughout your company. We constantly are working with our clients to help them avoid corruption.

The article then addresses the importance of protecting intellectual property and rightly suggests that foreign companies “register trademarks or patents before entering China.”  It also mentions some non legal steps for protecting IP, such as “setting up offices or plants in different locations, and only taking the most essential core technology overseas.”  For more on registering trademarks in China and the timing of that, check out the following:

For more on how to protect your IP from China, check out the following five part blog post series:
The article then concludes by talking about how “despite the ups and downs” and despite China not being an easy place to do business, it can be a very profitable one.  I can agree with that.
And in that end, that is what matters most, is it not?  What do you think?  Is China worth it for foreign businesses?