April 2017

China contract lawyers
Too many China contracts deserve this appellation

Pretty much every week, at least one of our China lawyers will — after a five minute review — have to tell a potential client their contract is worthless. We see all kinds of worthless contracts. NDA and NNN Agreements, Manufacturing Agreements, Licensing Agreements, Distribution Agreements, Product Development Agreements, Employment Agreements. It goes on and on. And as tempted as I am to ask why they would think a US law contract that calls for disputes to be resolved in Boston or Des Moines would make sense in China, I always refrain from doing so, and I have seen some doozies, including the following:

  • A Seattle company that was being sued by about a dozen of its China employees and its employment contracts were drafted in English under Washington State Law. Their Seattle lawyer had told them that he had drafted their employment contracts this way because China “has no real law.” I explained their problem by pointing out how my law firm cannot hire Chinese people in Seattle and use Chinese law to pay them a dollar an hour because that is the minimum wage over there. They got and we ended up settling as quickly as we could with all of their China employees.
  • Countless companies that have used US or European style NDA agreements and have had their IP or trade secrets stolen by the Chinese company that signed that NDA. They want to know their chances of prevailing in a lawsuit against the Chinese IP thief and I have to tell them that unless the Chinese company has assets in the United States (and incredibly few do), it would probably not be worth it to them for our China lawyers even to look at their agreement. I then explain how China does not enforce United States court judgments and if they are going to continue doing business in China or with China they can do better the next time with a China NNN Agreement.
  • An American company that was using a Chinese company to market and sell the American company’s product in China came to us after the Chinese company had started selling its own products under the American company’s name and was refusing to cease doing so, even though the distribution agreement between them prohibited exactly that. The American company wanted to retain our China legal team to make this stop, but we had to tell them that we probably would not be able to succeed at that because their distribution agreement provides for US law and US court jurisdiction and because the Chinese company had registered the American company’s brand name as its own Chinese trademark. See How To Protect Your Trademark In China; How To Stop Your Distributor From “Stealing” Your Trademark.

Oh and one more thing. Far too many times when we tell someone how their contract precludes us from being able to help them, they tell us something like “we knew it would not work but we knew we needed something.” Wrong. Many times no contract at all is better than a bad contract. 

China has its own laws and its own official languages and its own court system and its own way of doing things, just like every other country in the world. So if you are going to do business in China or with a Chinese company, you almost certainly will need a contract that satisfies China’s legal requirements. There is nothing our China attorneys hate more than having to tell potential clients there is nothing we can do, but we have to do this all the time when given contracts that were not written with China in mind.

Please don’t let a worthless contract happen to you.

China licensing lawyersIn deleting emails I came across this one from one of our China lawyers to a Latin American client for whom we very successfully drafted a China licensing agreement. I love the email because it so nicely encapsulates exactly what we try to do with pretty much every China contract we draft: balance out everything and give our clients a contract that will both protect them and get the deal done.

The email is an introduction to the contract drafting process and it describes as follows what this lawyer will seek to accomplish with the first draft of the licensing agreement:

  1. The contract has to make good business sense for you, our client. This requires I first speak with you to get a good feel for your business and what you are seeking to accomplish and avoid by licensing your technology to China.
  2. The contract has to work for China. In other words, I need to draft something that works within the confines of Chinese law and will lead the Chinese side to take it seriously and view breaching it as likely to cause it a raft of harm.
  3. The contract has to be drafted  such that your potential Chinese licensee will actually sign it. It would be easy for me to draft the “perfect” contract for you, but the other side will never sign that. What we have to do is work together so that we present your potential licensee with the best contract possible for you, but not so one-sided in your favor that the other side will not sign it.

Your thoughts?

 

 

China employment lawyersEven routine China employee terminations are usually challenging and pretty much always require preparation and care. Throw in an employee pregnancy and you increase the complexity and the risk exponentially. Our China employment lawyers have in the last few years increasingly had to resolve situations where a pregnant employee seeks to revoke her termination decision (sometimes by demanding reinstatement of her position), no matter how or why her employment contract is terminated — even when the termination was mutual and even when the termination was with cause. And as is true of just about everything having to do with employment law in China, the laws and the rulings on these things will depend on the facts and on where the employer is located.

Suppose the employer and the employee mutually terminated their employment relationship and after the employee’s departure, the employee finds out she is pregnant. The employee goes back to the employer and asks for her old job back. Recent cases seem to suggest that if the mutual termination was done correctly, the parties’ agreement will be deemed enforceable and the employer does not have to take the employee back. By “correctly,” I mean the following:

  • The termination is documented in writing and the employer has preserved good hard copy evidence. Note that emails and social media do not constitute good hard copy evidence.
  • The employer and its former employee executed a proper mutual termination agreement in Chinese. Note that we do all of ours in both Chinese and in English: the Chinese so that it will actually work and the English so that our client fully understands what they are signing.
  • There is nothing to suggest the former employee was coerced or deceived into signing her termination agreement.

Now suppose the employee’s departure was voluntary at first and the employee resignation was handled correctly. That is, the employer has proper documentation showing the employee resigned voluntarily and there was no employer wrongdoing. But before the separation process was entirely  completed, the employee learned she was pregnant and wanted to withdraw her resignation. Does the employer have to take her back? The answer is likely no. First, Chinese laws give the employee the right to unilaterally terminate a labor contract by giving 30 days written notice, and the employer cannot make it more difficult for the employee to quit. In other words, once an employee gives his or her written notice, the employment relationship will be terminated once the 30-day period has passed. On the flip side, once an employee quits, he or she cannot revoke this decision unless the employer agrees. Under this scenario, the decision to leave was of the employee’s own free will and since the employer does not want to revoke the employee resignation, forcing the employer to take the employee back would be both unjust and unlikely to happen.

It gets a lot trickier if the employee’s departure is a result of her employer unilaterally terminating her. In that situation, if the employer’s termination was lawful it probably will not be ordered to rehire the now pregnant ex-employee. But if the employer did not correctly terminate this employee, the employer will almost certainly be required to rehire the now-pregnant employee. In fact, the employer would probably be required to rehire this employee even were she not pregnant. However, in the case where the employee is pregnant, it means the employer must not only reinstate that employee, it means it will also now need to treat her with extra care and afford her more protections and benefits than other regular employees. It also means the employer must give the employee paid maternity leave of 128 days, more depending on the location.

Regardless of the reasons for having to rehire an employee, you will need to do that correctly as well. Among other things, this usually means you should execute a new employment contract since the last thing you want is to find yourself in a situation where you employ someone without a written employment contract — especially someone you wanted to terminate.

China law firm for arbitrationA European company once came to my law firm wanting us to assess an arbitration it wanted to bring in Geneva, Switzerland between its China WFOE (the putative plaintiff) and a Chinese domestic company (the defendant) with which it had contracted. The contract provided for arbitration in Geneva and the European company wanted our China attorneys to assess its chances.

We did not like our client’s chances on many grounds and no arbitration claim was ever filed. One of our reasons for not liking our client’s chances is a somewhat obscure Chinese law that often trips up foreign companies with China WFOEs or China Joint Venture entities. The law is commonly called “the Domestic Rule” and it provides that only “foreign-related” disputes can be arbitrated outside China.

I describe this law as “somewhat” obscure because every good Chinese lawyer who represents Chinese companies with foreign investors knows this law well and knows exactly how to use it to give a big advantage to their Chinese company clients; it is only obscure for foreign lawyers. Check your China Joint Venture Agreement and if it provides for internal company disputes between your company and your Chinese joint venture partner to be resolved via arbitration outside China, you have probably been taken for a ride by a Chinese lawyer who knew exactly what she was doing. And this is pretty much the norm when the foreign party in a China Joint Venture makes the massive mistake of using its joint venture partner’s lawyer to draft the joint venture agreement.

Under Chinese law, for a dispute involving a Chinese company to be viewed as “foreign-related,” it typically must involve at least one of the following:

  • At least one foreign party. Note that China WFOEs and Joint Ventures are usually not considered to be a foreign party. Note though that Hong Kong, Taiwan and Macau entities are generally viewed as foreign parties.
  • The facts or the subject matter that give rise to the lawsuit occurred or exist outside Mainland China.

If you secure a foreign arbitral award against a Chinese company and you do not have a basis for being able to circumvent the Domestic Rule there is a good chance no China court will enforce your arbitration award. If the Chinese company you are pursuing has assets outside China, you may be fine, but if it does not or if you are seeking to change the operations of a China Joint Venture, your arbitration award will probably prove worthless.

The way to avoid this sort of problem is to draft your contracts to provide for disputes to be resolved in China, either in its courts or before one of its domestic arbitral bodies, such as CIETAC. See CIETAC Arbitration: Different But Fair.

china content licensing agreementsIn Netflix finally finds a way into China, CNN’s Sherisse Pham explains how “six months after admitting defeat in its bid to crack China, Netflix has found a way to tap into the vast market.” To summarize, Netflix for years was trying to set itself up in China, so as to be available to viewers in China, just as it is available in “over 190 countries.” To quote from Netflix’s own site, “Netflix is not yet available in China, though the company continues to explore options for providing the service. It also is not available in Crimea, North Korea, or Syria due to U.S. government restrictions on American companies.” Netflix is not available in China because China tightly regulates foreign content and foreign publishing. No surprise there, right?

So how did Netflix manage to all of a sudden make its way into China? By licensing its content to China.

And that makes total sense.

Both here on the blog and in real life with our clients, our China lawyers are always touting the benefits of licensing products, intellectual property, brands, technology and content to China. Licensing deals make sense under many circumstances, but they make particular sense in situations where it is difficult or impossible to get your “widget” into China any other way. In other words, it makes particular sense for content. And because of that, much of my law firm’s China media and entertainment work involves drafting content licensing agreements for written, visual and audio content for magazine and newspaper and book publishers and for television and movie producers and studios. Just by way of an example, virtually all of the China-language editions of foreign magazine titles you see in China are there via licensing. In the typical magazine licensing deals we do, our client, a US or European magazine publisher, will license its magazine’s name and a certain amount of content (to be translated into Chinese) to a Chinese publishing house. Our movie and television and gaming deals are not substantively much different.

In A China IP Reality Check, Part 3, we explained what is typically necessary for a China content licensing agreement to work:

As a preliminary matter — before you license anything to anyone in China — you should register, in China, any of your intellectual property worth litigating over. That means registering not only your English-language trademarks but also the Chinese-language versions of those trademarks. If the Chinese-language versions don’t exist, it’s time to create them. That also means registering copyrights for any meaningful content. For television shows, that means at the very least registering the show bible, scripts, and any produced episodes. It’s true that China is a signatory to the Berne Convention and therefore a valid copyright in the US or Europe is valid in China without registration, but for practical purposes, it’s much easier to enforce a copyright in China if you have registered it in China.

Do not delegate the task of registering your IP in China to your Chinese licensee. The licensee’s interests may not always be aligned with yours.

Once you have registered your IP in China, you should draft an enforceable contract to protect your interests in China as against the Chinese licensee. A contract with the licensee’s Hong Kong affiliate, with disputes resolved by arbitration in Hong Kong (or any other country other than Mainland China), achieves none of these goals. Yet this is what we see again and again from companies who either don’t trust or don’t understand the Chinese court system. The problem is usually not that Chinese law won’t protect foreign content owners. The problem is usually that content owners (and their lawyers) often decline to take advantage of the protection Chinese law offers. They write contracts designed to be unenforceable in China, and then complain about China’s legal system when their contracts prove to be worthless.

A properly drafted China content licensing agreement should address the following issues:

1. Make sure the contracting party on the licensee side is the actual Chinese entity that will be licensing the content, and not a Hong Kong affiliate. As a corollary, choose the right law and the right jurisdiction for your dispute. If you want to sue a Chinese company for breaching your contract by using your IP in China, choose Chinese law and dispute resolution via Chinese courts in the hometown of the Chinese licensee. See China Contracts: Make Them Enforceable Or Don’t Bother and China Contracts. Watching The Jurisdictional Sausage Get Made.

The issue with contracting with a Hong Kong company is not so much that the Hong Kong company may be a shell company with no assets (although that is often the case). Rather, the issue is that any legal resolution in Hong Kong is unlikely to be effective in China. And if you’re licensing content to China, China is where the action is going to be. Hong Kong still has the common law system passed down from its days as a British colony; it favors injunctive relief and disfavors liquidated damages (aka contract damages). China is the opposite. What good is injunctive relief in Hong Kong if you’re trying to get the judgment enforced in China, which disfavors injunctions? You might argue: we will arbitrate in Hong Kong but provide that Chinese law governs. For a variety of reasons that almost never works, particularly if the defendant is a Hong Kong company. Meanwhile, the infringement in China continues.

2. Provide for upfront payment of the license fee in an amount that makes the deal worth it to you even if the contract is terminated early. See China Licensing Agreements: The Extreme Basics. Provide for substantial contract damages for late or non-payment of the license fee, and do not provide the Chinese side with any of your content until it has paid the license fee and the funds are in your bank account.

3. Provide for substantial contract damages for (1) early termination and (2) each instance of infringement. Do not mess around with lengthy provisions about injunctive relief. Unlike the common law systems of the United States, Canada, Great Britain and Australia, contract damages are not disfavored under Chinese law. In fact, use of contract damages is well established in China and favored by statute. On the other hand, though Chinese judges may be legally empowered to issue injunctive orders, they have virtually no power to ensure those injunctions are implemented. There is no Chinese equivalent of the U.S. Marshals Service. For this reason, Chinese judges are hesitant to issue an order they know is likely to be ignored. Instead, they will seek to convert every decision to an order to pay a sum certain in damages. Including a contract damages provision gives a China judge the roadmap. Most importantly, since Chinese companies know well the power of contract damages provisions, your merely having one in your contract greatly increases the odds of your Chinese counter-party abiding by that contract.

4. The contract damage amounts must be a good faith estimate of the actual amount of income that would be lost by the licensor in the event of early termination. These amounts are not guaranteed even if the plaintiff prevails: at trial, the defendant can argue that the contract damage amount is too high and the plaintiff can argue that the amount is too low. The utility of contract damages is that when a plaintiff seeks pre-judgment attachment of assets China’s courts will almost always allow attachment in an amount equal to contract damages if such damage amount is specified in the contract. In contrast, if the contract provides for injunctive relief and monetary damages in an amount to be determined at trial, it is virtually impossible to obtain a writ of attachment. To repeat: Chinese companies do not like putting their assets at risk of being seized and so having a contract damages provision is a great deterrent to that company breaching your China content licensing agreement.

Note also that an arbitration body cannot issue an enforceable assets seizure order and it is also virtually impossible to obtain such a order from a court outside the district where the assets are located. That is why we normally want to sue in the “home town” of the defendant, even though that sounds counter-intuitive to a most U.S. and European lawyers, who have been taught to avoid getting “home-towned.” The Chinese understand the “home town” issue, which is why there is an automatic right of appeal to a higher court in a different town, and also why such appeals are de novo. Home town favoritism is often reversed at the higher court level.

5. Do not rely on the default provisions of Chinese intellectual property law to protect you against your licensee. Chinese IP law and your IP registrations protect against random third-party infringement. If you want protection against your licensee stealing your IP, put it into the contract. Your contract with your licensee is your best chance to control your Chinese licensee and to protect yourself. Take advantage of it by using a contract that actually achieves those things.

6. The license term should be relatively long; say, five years. If the term is too short, then the penalty for early termination becomes irrelevant.

If your Chinese counter-party refuses to sign a contract that addresses the above, you know what they have in mind and you should reconsider whether to do the deal.

For more on China licensing contracts, check out China Licensing Agreements: The Extreme Basics and Nine Tips for China Licensing.

Mexico exports to China

The following is a guest post by Adrián Cisneros Aguilar.* A Spanish language translation is directly below the English version.

Jorge Guajardo, Mexico’s former Ambassador to China, recently published an opinion piece titled “Dejemos a China por la Paz” [“Let’s Leave China for Good”], which was quickly and enthusiastically retweeted by Jorge Castañeda, former Mexican Minister of Foreign Affairs and one of the leading shapers of Mexican foreign policy.

When I read the article, I was shocked by Guajardo’s profound lack of understanding about the Mexico-China bilateral relationship, and his overall negativity. To be sure, China’s rise has created problems for Mexico. But it has also created opportunities, and we must be clear-eyed about both.

Guajardo, at the end of his piece, asked Mexicans to “defend our interests, clarify the lies [and] promote the truth.” This response is my effort to do exactly that.

1. Guajardo claims it is useless to partner with China because “China protects its markets [by] preventing entry of Mexican products [and] even if China were to open its markets, there is little market for what Mexico exports.” This is a gross exaggeration. The Mexican Ministry of Agriculture has been working to expand Mexico’s agricultural exports to a number of countries and as a result of negotiations last year Mexico is now exporting pork and dairy products to China.

The larger problem is that many Mexican companies lack the size or sophistication to meet Chinese demand, both in terms of quality and quantity. Mexican exports to the U.S. have long faced similar problems, but it has been far easier for them to find a U.S. buyer who will accept smaller quantities and/or varying quality.

Indeed, the inability to meet foreign markets’ demand is so prevalent that one of my company’s main services is to gather several companies (usually SMEs) in the same industry, train them as a group, and then enable them to sell their products, as a group, in Asia (usually China). This collective approach enables these companies to enter large markets with the confidence they can meet market demand while minimizing their exposure. Our success with this approach further underlines the short-sightedness of Guajardo’s comment. It’s also worth noting that this approach is in line with the Mexican Ministry of Economy’s policy to develop Export Networks [Redes de Exportación or Redex].

2. Guajardo argues that Mexico and China have no future in cooperation because they are in fact competitors since both countries are export-oriented manufacturing economies that primarily sell to the U.S. and to Europe. For years, scholars and businesspeople from Mexico and China have offered opinions and action plans to alleviate imbalances in the Sino-Mexican economic relationship. Full disclosure: this issue is near and dear to my heart as it was the subject of my doctoral dissertation in China. There are in fact many ways in which China and Mexico in fact economically complement each other, including the following:

  • China’s demand for Mexico’s resources and raw materials;
  • the appreciation of the RMB, which has increased labor costs in China, making it more attractive for foreign manufacturers to relocate their facilities to Mexico to serve the North American market (“nearsourcing”);
  • the recent Mexican energy and telecommunications reforms, which widely opened these sectors to foreign investment;
  • the opportunity to decrease the Mexico-China trade deficit by having Chinese companies manufacture in Mexico via value-added investments, thereby creating jobs and transferring technology and know-how; and
  • China and Mexico’s common membership in economic blocs that could easily allow the creation of regional value chains and enactment of supportive policies.

3. Guajardo wrongly contends that lack of demand for Mexican products in China is the reason for Mexico’s enormous trade deficit with China. First of all, Chinese demand for Mexican products is slowly increasing. But the reason for the relatively low demand by China for Mexican products is not so simple as that Chinese people don’t want or need Mexican products. I have already discussed the inability of Mexican companies to meet Chinese demand. Another reason is that China has many more barriers to market than the U.S., from geography to language to regulations. But perhaps the biggest problem is Mexican companies too often believe China wants only cheap products and then fail to realize that to sell effectively to China they need to understand and cater to Chinese buyers. More than once I have heard Mexican companies say their marketing plan is to label their product as being Mexican, thereby capitalizing on China’s desire for foreign, exotic fare. This limited vision is self-defeating, because it fails to take the Chinese market seriously. China’s consumers are becoming more sophisticated and more demanding of original, high quality products. To succeed in China, Mexican companies need to meet the real life needs of the China market.

Yes, there is resentment in Mexico toward China because of the flood of Chinese imports that have displaced local manufacturing (especially in the textile, footwear, and toy industries). But as Guajardo’s piece suggests, this feeling is not so much anti-China as it is anti-globalism. And it must be acknowledged that at least some Mexican companies brought this on themselves by shifting manufacturing and/or sourcing to China in an effort to maximize short term profits.

In my second and concluding part of this series, I will discuss Guajardo’s proposed solution – which is even more misguided than his analysis – and offer my own advice on how Mexico and its companies can should profitably deal with China.

*Adrián Cisneros Aguilar is the founder/CEO of Chevaya (驰亚), an Asia-Pacific internationalisation services company. Adrián has a Doctor of Laws from Shanghai Jiao Tong University and an LL.M. in International and Chinese Law from Wuhan University.

 

Jorge Guajardo, ex-Embajador de México en China, publicó recientemente un artículo de opinión intitulado “Dejemos a China por la Paz”, el cual fue rápida y entusiásticamente retuiteado por Jorge Castañeda, ex-Secretario de Relaciones Exteriores y uno de los principales diseñadores de la política exterior mexicana.

Cuando leí el artículo, quedé impactado por la profunda falta de comprensión de la relación de México con China exhibida por Guajardo, así como por el tono negativo de sus opiniones en general. Cierto, el ascenso de China ha ocasionado problemas a México. Pero, también ha traído oportunidades, y debemos ser bien conscientes de ambos.

Al final de su artículo, Guajardo nos pide a los mexicanos que “[d]efendamos nuestros intereses, aclaremos las mentiras, promovamos la verdad.” Pues bien, esta respuesta es el esfuerzo de un servidor para hacer precisamente eso.

1.  Guajardo contende que es inútil buscar asociarse con China porque los chinos “…protegen sus mercados impidiendo la libre entrada de productos mexicanos [y] aún si lo abrieran, hay poco mercado para lo que nosotros exportamos.” Ésta es una grave exageración. La Secretaría de Agricultura, Ganadería. Desarrollo Rural, Pesca y Alimentación (SAGARPA) desde el año pasado ha trabajado bastante para aumentar las exportaciones de productos agroalimentarios mexicanos a nuevos países y, como resultado de estas labores, México ya exporta derivados de carne de cerdo y lácteos a China.

Pero, el problema de fondo aquí es que muchas empresas mexicanas carecen de la envergadura o la sofisticación necesarias para satisfacer la demanda de China, tanto en términos de calidad, como de cantidad. Por mucho tiempo, las exportaciones mexicanas a EE.UU. se han enfrentado con problemas parecidos, pero ha sido mucho más fácil para ellas hallar a un comprador estadounidense que acepte cantidades menores de producto y/o una calidad variable.

En efecto, la inhabilidad de las empresas mexicanas de satisfacer la demanda y los estándares requeridos por los mercados internacionales es tan común que uno de los principales servicios ofrecidos por mi empresa es agrupar varias empresas (normalmente, PyMEs) que pertenezcan a la misma industria, capacitarlas/sofisticarlas y entonces facilitarles vender sus productos en grupo en Asia (en China, por lo general). Este método colectivo les permite a estas empresas incursionar en grandes mercados con la confianza de que pueden satisfacer la demanda del mismo, mientras minimizan sus riesgos. El éxito que hemos tenido con este método reafirma la poca visión del argumento del ex-Embajador. Y cabe señalar que nuestro método es acorde con la política de la Secretaría de Economía de desarrollar Redes de Exportación (Redex).

2.  Guajardo argumenta que “[e]n China no hay nada para México”, pues de hecho, son competidores que “…[han] encauzado [sus] economías hacia la exportación de manufactura…ambos [compitiendo] por los mercados más grandes, Estados Unidos y la Unión Europea.” Por años, académicos y empresarios de México y China han emitido opiniones y planes de acción para compensar los desequilibrios en la relación económica bilateral. Y para que lo sepan, esta cuestión me es especialmente importante, siendo incluso uno de los temas que toqué en mi tesis doctoral en China. Existen de hecho muchas maneras en las cuales China y México se complementan económicamente, entre ellas, las siguientes:

  • La demanda china de los recursos y materias primas de México;
  • La apreciación del yuan chino, la cual ha incrementado los costos de la mano de obra y de personal en ese país, volviendo más atractivo para los fabricantes extranjeros reubicar sus instalaciones en México para atender al mercado norteamericano (“nearsourcing”);
  • Las recientes reformas energética y de telecomunicaciones, las cuales han abierto consierablemente estos sectores a la inversión extranjera;
  • La oportunidad de disminuir el déficit comercial con China al invitar a sus empresas a fabricar en México a través de inversiones de valor agregado, creando así empleos y transfiriendo tecnología y know-how; y
  • La participación, tanto de México como de China, en los mismos bloques económicos y organismos internacionales, lo cual fácilmente permitiría la creación de cadenas regionales de valor y la promulgación de políticas de apoyo.

3.  El ex-Embajador Guajardo sostiene erróneamente que “México tiene un déficit comercial enorme con China. En pocas palabras, los chinos no compran lo que nosotros vendemos.” Además de que la demanda china de productos mexicanos está aumentando lentamente, la razón de la relativamente baja demanda de productos mexicanos en China no es tan simple como decir que los chinos no quieren o necesitan nuestros productos. Ya he mencionado la inhabilidad de las empresas mexicanas para satisfacer la demanda china. Otra razón es que el mercado chino tiene muchas más barreras que el estadounidense, de la lejanía al idioma a la legislación. No obstante, el mayor problema radica en que las empresas mexicanas muy frecuentemente creen que China desea sólo productos baratos, sin darse cuenta que para vender en China de forma efectiva deben comprender y atender a los consumidores chinos. Más de una vez he escuchado a empresarios mexicanos decir que su plan de mercadeo consistirá en etiquetar su producto como “netamente mexicano”, capitalizando así el deseo de los chinos por comida extranjera, exótica. Esta limitada visión de las cosas los pone en desventaja de antemano, ya que no toma al mercado chino con la seriedad debida. Los consumidores chinos se están volviendo más sofisticados y exigen cada vez más productos originales y de alta calidad. Así, para tener éxito en China, las empresas mexicanas necesitan escuchar las necesidades cotidianas reales del mercado de ese país.

Sí, existe un resentimiento en México hacia China debido a la proliferación de importaciones chinas que han desplazado a la industria nacional (especialmente a la textil, de calzado y la juguetera). Pero, como señala el mismo artículo de Guajardo, este sentimiento no es tanto en contra de China como en contra de la globalización en general. Y debe reconocerse que, al menos en algunos casos, han sido las mismas empresas mexicanas las que han causado dicha proliferación al reubicar la fabricación y/o la proveeduría de sus productos a China, en un intento de maximizar sus utilidades en un corto plazo.

En mi segundo y último post, hablaré de la solución propuesta por el ex-Embajador Guajardo –la cual es más equivocada que sus mismos argumentos- ofreciendo mis propias sugerencias sobre cómo México y sus empresas podrían sacar partido de sus tratos con China.

Adrián Cisneros Aguilar es el fundador y Director General de Chevaya (驰亚), una empresa de servicios de internacionalización para Asia-Pacífico. Adrián es Doctor en Derecho por la Universidad Jiao Tong de Shanghái y Maestro en Derecho Internacional y Chino por la Universidad de Wuhan.

Part-time employeesChina employment law have their own special issues in China and for that reason their employment contracts require special care. The following provisions are usually required in part-time employment contracts:

  • The working hours
  • The term/duration of the employment agreement
  • A description of the work the part-time employee will be performing
  • The part-time employee’s wages
  • Applicable labor protections and labor conditions

But as is true of so much regarding China employment law, the laws and the requirements for part-time employees tend to be very local. Nonetheless, there are a number of issues that regularly need resolution when drafting a part-time employee contract, including the below:

Working hours: You should specify your part-time employee’s working hours in the employment contract and make sure the specified hours do not exceed the legal maximum. In most places in China, this means your part-time employee’s working time cannot exceed either 5 hours a day or 24 hours a week. Since it is possible for a part-time employee to incur overtime your company should have a written policy on how your employees (both part-time and full-time) should record and report their working hours. If you have nothing in writing on this, you are setting yourself up for disputes regarding overtime payment.

No probation period is allowed for part-time employees. We constantly see China employment contracts with illegal probation periods and/or a lack of clarity regarding the term of employment. These sorts of ambiguities increase both the likelihood of an employee-employer dispute and the likelihood of the employer losing such a dispute.

Wages: Many places in China (e.g., Beijing, Shenzhen) mandate a 15 day payment cycle for part-time employees, which differs from the rules for full-time employees who are usually paid monthly. These required payment cycles cannot be contracted away and employer’s are legally obligated to pay their employees in full and on time and late payments can subject employers to administrative fines and other regulatory and litigation risks. In addition, as with full-time employees, the salary you pay to your part-time employees must meet all national, provincial and local minimum wage requirements.

Social insurance contributions: Though most places in China do not require employers to make the full range of social insurance contributions for their part-time employees, we are unaware of a municipality that does not mandate at least one type of social insurance for part-time employees. This means you need to formally enroll your part-time employee in government required social insurance program, and paying them with cash to cover their own social insurance (no matter how generous you are) will not cut it and do not believe anyone who tells you otherwise on that, and plenty of people will.

Annual paid leave: It’s generally okay to not provide annual paid leave for part-time employees, but be careful because this is not true of all locales. You need though to make sure that your documents on this are consistent. For example, if your rules and regulations state that employees are entitled to annual paid leave and there is no clear language on what document will control, you will probably need to give such a paid leave even if your employment contracts provide otherwise. It would certainly not hurt you to go search out and then root out any inconsistencies in your employment documents.

Termination: Just as is true with full time employees, ignoring required formalities and procedures in handling employee terminations will be done at your peril.

Oh and one last thing, you want all of your employment contracts to be in both Chinese (the official language) and in English so all your personnel will be able to refer to them in making employee decisions.

China manufacturing contractA houghtful and helpful blog post over at the Dragon Innovation Blog, entitled, Recalls, Returns and Failures: Let History Be Your Guide. This post is geared to companies that have their hardware made in China, but its words of wisdom apply to the manufacturing of pretty much any product in China.

The post starts out by emphasizing the need to focus on how your product may not work as promised and how product defects can harm your company, perhaps even bankrupt it:

When it comes to quality planning, hardware startups tend to spend most of their time working on ensuring that a product will work as promised however many teams do not spend significant time addressing the subject of how the product will not work as promised. Returns, return logistics, and possible recalls can be financially devastating especially in the early life of a product. What may appear as a small change in warranty rates can have significant impact on a company’s bottomline and financial viability.  For example, if a company assumes a $250.00 total cost, $50.00 margin and sales of 100,000 units per year, a change from a 5% to a 7.5% warranty rate can decrease profits by 17% and increase working capital by $50,000. A recall or major quality failure can easily bankrupt a company.

It goes on to advise that you figure out the what if scenarios for your product and then include those factors in your design process as early as possible. It then lists out various tools and techniques you can employ to tease out potential product problems. It even lists out the “major root causes” of recalls, including the following:

  • Loosening of joints/connection
  • Small parts or magnets swallowed by children
  • Not following or adhering to federal safety standards.
  • Pinch, cut or severing risks for fingers
  • Breaking/cracking or other failure
  • Overheating
  • Battery failures
  • Excess material or insufficient material
  • Small pieces or magnets falling off
  • Poisoning

If you are looking to have your product(s) made in China, I urge you to read this post. And to further protect against product defects — especially those that are the fault of your Chinese manufacturer — I urge you read the below posts on China manufacturing contracts as well:

 

 

China employment lawyerAt the beginning of every year, our lawyers receive hundreds of emails from both employees and employers (clients and non-clients) doing business in China. The questions often involve employees who want to change jobs or employers who are having a hard time understanding China’s employment laws.

Unfortunately, we can rarely provide instantaneous answers to their questions. In addition to the complexity of Chinese law at the national level, there are seemingly endless legal twists and turns at the local level as well.

For example, one of our regular blog readers asked about issues related to volunteering for a company that was not his employer. He worked for a U.S. Wholly Foreign-Owned Enterprise (WFOE) and had a residence permit. His questions included:

  • Do I need a certificate or other documentation to allow me to volunteer at the company one day a week?
  • Do I have to ask my current employer for permission to volunteer at another company?
  • If the company decides to start paying me for my work, would that interfere with my relationship with my existing employer?

Another asked whether her employer was justified in terminating her while she was three months pregnant and gave her two months severance. She wanted to know whether her employer was within its rights and whether she should sue it.

Though these sorts of emails may seem to pose straightforward questions, here’s just a sampling of the information our China employment lawyers would need before being able to provide any meaningful guidance:

  • We’d need to know the name and location of his employer and run a conflict check on that company.
  • Since employment laws in China often vary greatly from city to city, simply understanding the laws in an unfamiliar city can require extensive research.
  • A key aspect of understanding local laws and regulations is actually discussing them with the appropriate governmental authorities.
  • The specific contract with the employer would also have to be reviewed in detail.

As you can see, there’s almost no such thing as an easy question when it comes to labor laws in China.

Our firm’s Dan Harris wrote an article for Forbes Magazine last year on China’s Hourly Work Week: Think Locally, explaining how something as seemingly simple as the 40-hour workweek trips up employers that don’t take the time to learn the ins and outs of local employment laws. Do your research before making employment moves and don’t make the mistake of believing it will be easy.

 

US-China trade warTo say that my law firm’s international trade law team has been busy lately would be like saying the Great Wall of China is long. They have been crazy busy because the United States has gone wild with trade case against Chinese companies and their U.S. importers — and against other countries and their importers as well.

If you import products from China, listen up.

US Importers of Record are liable for antidumping and countervailing duties tied to the product they import. The Importer of Record is the company listed in Block 26 of the U.S. Customs 7501 form.

Under US Antidumping, Countervailing Duty and Customs laws, the Importer of Record must exercise reasonable care in importing products and in filling out Customs forms. The Importer of Record must correctly state a product’s country of origin and also whether Antidumping and Countervailing duties apply to the imported product. A knowingly false statement on a Customs form constitutes criminal fraud.

If AD or CVD rates go up in a subsequent review investigation, the Importer of Record is retroactively liable for the difference, plus interest. Retroactive liability for AD and CVD cases is a particular problem involving goods imported from China because the United States treats China as a non-market economy country. Since China is a non-market economy country, the U.S. Commerce Department refuses to use actual China prices and costs to determine whether a Chinese company is dumping. All this makes it nearly impossible for U.S. importers to know whether it is bringing in dumped goods. See Don’t Get Crushed When You Import.

In the last week or so, the Trump trade war has escalated big time with new U.S. antidumping and countervailing duty cases being filed against Mechanical Tubing, Tool Chests and a new Section 232 National Security case against all Steel imports. These trade cases move and at warp speed and that means that if your company shows up as the producer or the importer on any of these cases, you have no time to waste. A brief summary of each of these three cases follows.

 1. Cold-drawn mechanical tubing from China, Germany, India, Italy, Korea and Switzerland. On April 19, 2017, ArcelorMittal Tubular Products, Michigan Seamless Tube, LLC, PTC Alliance Corp., Webco Industries, Inc., and Zekelman Industries, Inc. filed Antidumping and Countervailing Duty cases against hundreds of millions of dollars of cold-drawn mechanical tubing from the six countries in 2016.  The petition alleges antidumping duties ranging as follows:

  1. China: 88.2% – 188.88%
  2. India: 25.48%
  3. Italy: 37.23% – 69.13%
  4. Germany: 70.53% – 148.32%
  5. Republic of Korea: 12.14% – 48.61%
  6. Switzerland: 40.53% – 115.21%

The cold-drawn mechanical tubing covered by the complaint is used to produce numerous different products in the United States, including auto parts and machinery.

The United States International Trade Commission (ITC) will conduct its preliminary injury hearing on May 10, 2017 and US importers’ liability for countervailing duties on imports from China and India will start on September 16, 2017, and Antidumping Duties will start on November 15, 2017. Antidumping and countervailing duty orders can last for 5 to 30 years. These sorts of duty orders can and often do mean the end of U.S. imports and sales for many of the named companies, especially those that do not fight the cases against them from the very beginning.

2. Tool chests from China and Vietnam. On April 11, 2017, Waterloo Industries Inc. filed Antidumping and Countervailing Duty cases against hundreds of millions of dollars of imports of certain tool chests and cabinets from China and Vietnam. The ITC will conduct its preliminary injury hearing on May 2, 2017 and US importers’ liability for countervailing duties on imports from China and Vietnam will start on September 8, 2017 and for Antidumping Duties on November 7, 2017.  

3. National Security Section 232 case against steel imports from many countries, including China. On April 20, 2017, President Trump announced a new trade investigation of steel imports under section 232 to determine if tariffs should be imposed because increased steel imports pose a threat to national security. If the United States Department of Commerce determines that steel imports are a threat to national security, President Trump will be empowered to levy high tariffs and quotas on imports of steel products from various countries. Under Section 232, the Commerce Department will investigate the potential national security threat posed foreign steel entering the U.S. market and then issue its findings and recommendations  to the White House. Once Commerce completes its review President Trump will have 90 days to decide whether to accept or reject its recommendations and to impose trade restraints, including tariffs or quotas on steel imports.

If your company has been named in any of these three cases and you want to avoid having to pay massive duties and/or just walk away from the U.S. market for five to thirty years, you need to start organizing your defense NOW.