Archives: China Business

Choosing your China company nameThough I generally recommend foreign companies filing for trademarks in China avoid the Madrid system and file a national application – that is, an application directly submitted to the Chinese Trademark Office (CTMO) – the Madrid system does provide one minor advantage. National applications must include the applicant’s Chinese name, whereas Madrid applications have no such requirement. Companies often spend considerable time and money in determining their Chinese branding strategy, and rightfully so. The annals of advertising are filled with tales of inopportune translations when companies go abroad. Indeed, we work with marketing companies whose sole raison d’être is to help foreign companies with branding in China.

That being said, it’s no big deal if you haven’t come up with a Chinese name for your company but still want to file a trademark application in China. First, it’s important to distinguish between the Chinese name for your company and the Chinese name for your product. For some companies, the company name is the brand; for other companies, the company name is of little import. Second, and most importantly, an applicant’s Chinese name on a trademark application is solely used for internal purposes at the CTMO. It has no meaning, relevance, or effect in the outside world.

If you have already determined the Chinese name for your company, then by all means use it in the trademark application. But if you don’t have a Chinese name and you don’t have the time, money, or interest to create one, it doesn’t matter what name you choose. You will want to continue using that name for any further trademark applications (to maintain internal consistency). But in all other respects, it will be as if your company does not have a Chinese name, so when it comes time to select a Chinese name for use in commerce, you won’t be limited by your choice on the CTMO application.

China LawyersBecause of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

I got an email the other day from a reader who linked over to a Vox article, entitled, Bill Clinton and Loretta Lynch’s meeting scandal is every Clinton scandal in miniature, along with the following text:

How can you always say China is the most corrupt country in the world when your own country is equally as bad? It is not fair that you always focus on China and ignore your own country. You should cover the Clinton scandals and how influence has been for sale in the United States with lobbying for the last century. Why do you never compare levels of violence between the United Stats and China either?

We actually get such emails and comments all the time (usually with a lot more vitriol), both here and even more often on our Facebook page, where there was one person who would leave a similar comment just about every time we posted anything remotely negative about China. Here though, once and for all, is the answer to the above email and to the many that we receive:

  1. What are you even talking about? We have never called China the most corrupt country in the world, nor do we consider it as such.
  2. We fully recognize that the United States is far from perfect.
  3. Read the title of this blog. It starts with “China” for a reason.

Any more questions?

Importer of Record
Don’t get crushed when you import

The US Importer of Record is liable for antidumping and countervailing duties tied to the product being imported. The Importer of Record is the company listed in Block 26 of the U.S. Customs 7501 form. When I told a US Senator this, he responded by saying he “thought the Chinese company was liable for the duties, not the US company.”

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 U.S. Commerce Department treats China as a non-market economy country. Dumping is generally defined as selling products in the United States below their normal value, which generally means selling a product in the United States below its price in the home market or below its fully allocated cost of production.

Since China is a non-market economy country, Commerce refuses to use actual China prices and costs to determine whether a Chinese company is dumping. It instead uses complicated consumption factors for raw materials and other inputs and surrogate values from five to ten constantly changing countries to calculate the Chinese company’s production costs. All this makes it impossible for the Chinese manufacturer/exporter to know whether it is dumping, never mind the US importer.

In the Mushrooms from China antidumping case, from the time the antidumping order issued in 1999 through numerous subsequent yearly review investigations, many antidumping rates were in the single digits because Commerce used India as the surrogate country. But when Commerce switched from India to Columbia as the surrogate country in 2012, the Antidumping rates went from less than 10% to more than 200%. The Importers of Record were then liable for the difference in the duty rates, plus interest.

How can you as an importer of products from China (or from anywhere else) avoid getting hit with a massive antidumping or countervailing duty fee? Do not become the Importer of Record. The dollars saved by this can be staggering.

In the Wooden Bedroom Furniture from China initial investigation, for example, I represented a U.S. company importing furniture purchased from a Chinese furniture manufacturing company.  At my recommendation, the U.S. importer pushed the Chinese furniture producer to become the importer of record for its own sales to the company.

In the initial investigation, the Chinese furniture company initially received a 16% antidumping rate which for various reasons, eventually hit 216%. My client estimated that the Chinese manufacturer exported $100 million, which created $200 million in retroactive liability for its U.S. importers. The Chinese company then decided not do a second review investigation, creating an additional $200 million in retroactive liability (for a total of $400 million) in retroactive liability for the U.S. importers.

However because my client it was not an importer of record on the sales from the Chinese furniture manufacturer, it never had to pay a penny. This was not true of most of the other U.S. import companies and a number of those went bankrupt.

What if your company is the Importer of Record and your antidumping or countervailing rates go up? U.S. antidumping and countervailing duty laws are remedial, not penal. This means requesting review investigations at the Commerce Department, appealing adverse rulings to the Courts and working with Customs often can substantially reduce or even eliminate any penalties. Chinese exporters also can (and often do) use the Commerce review process to reduce their antidumping and countervailing duty rates so they can export to the US again.

China LawyersBack when I used to watch a lot of horror movies (a long long time ago), When a Stranger Calls was one of my favorites. Spoiler Alert: It was about a babysitter who was experiencing weird things and constantly getting calls from someone who kept asking “have you checked the children.” To make a long story short, the creep was in the house.

I mention that movie today because our China lawyers have been getting a spate of calls lately to assist from American and European companies who have just learned that the creep is in their house.

Let me explain by way of some examples:

1. U.S. company terminates its head of China operations and then a couple of its China employees reveal that the U.S. company’s leading supplier is owned by the former head of China operations who — almost needless to say — has been charging about 40% over market.

2. Spanish company terminates its head of China operations only to learn that it actually does not have any China operations. The WFOE this person claimed to have formed and which the home office for the last three years believed was there actually wasn’t. The head of China operations had pocketed all of the money for the WFOE and all of the money marked for China income taxes as well. Fortunately, it turned out it never made sense for this company to have a China WFOE in the first place and so it exited China and now contracts with a Chinese company to accomplish what its fake WFOE had previously done. I say fortunately because if it had to have remained in China, it would have been at risk for not having paid its China taxes. For more on this fake WFOE phenomenon check out So You Think You Have A China WFOE Or Joint Venture Or Trademark. What Makes You So Sure?

3. American company flies to China to meet with its nine employees, only to learn from one employee that it has only five employees and that the head of its China operations has been pocketing the extra funds that allegedly went to pay the salaries of the four phantom employees. For the past three years!

Why are we getting so many of these calls now? All of them can to at least some extent be traced to the downturn in China’s economy. Many foreign companies are checking on their Chinese operations more closely than previously simply because they are concerned because they are less profitable. To quote Warren Buffett: “Only when the tide goes out do you discover who’s been swimming naked.”

Do you really know who’s in your house? Have you checked your children?

China employment contract

China permits only the following three categories of “dispatched” employees to be hired by a labor dispatch agency:

  1. Temporary employees with a term of no longer than 6 months.
  2. Auxiliary employees who provide supporting services that are not central to the employer’s core business.
  3. Substitute employees who perform tasks in replacement of permanent employees during a period when permanent employees are unable to work due to off-the-job training, vacation, maternity leave, etc.

Both the PRC Labor Contract Law and the PRC Interim Provisions on Labor Dispatch require that a dispatch agency and a dispatched employee enter into a labor contract for a fixed term of no shorter than two years. It should be noted that the labor dispatch agency is for legal purposes treated as the employer in this relationship.

As covered in some of my previous posts, China’s labor law mandates that an employee is entitled to an open-term contract after having executed two consecutive fixed-term labor contracts (unless grounds for termination exists). So a question arises: if a labor dispatch agency has consecutively executed two fixed-term labor contracts with an employee, will the employee be entitled to an open-term contract? In other words, will a dispatched employee be treated the same as a regular employee under this circumstance? Note that China’s labor law clearly states that at the time of renewal or execution of the labor contract, unless the employee requests a fixed-term labor contract, an open-term labor contract must be concluded.

Consider two recent cases in Beijing (I have simplified both a bit for purposes of this post). In the first case, after having executed two consecutive fixed-term contracts, the employee requested an open-term labor contract, however, the labor dispatch agency ultimately refused and served the employee with a termination notice. The labor dispatch agency argued that the law on open-term labor contracts does not equally apply to dispatched employees. The employee sued and the Second Intermediate People’s Court of Beijing ruled against the labor dispatch agency and instead held that China’s law regarding open-term labor contracts does apply to dispatched employees. And then, just as would have been the case had the employee worked for any other company in China, the Court required the dispatch agency pay the employee double the employee’s monthly wage and forced it to enter into an open-term contract with that employee and pay that employee damages for wrongful termination. And here’s the kicker: the company that retained the labor dispatch agency and used the employee was deemed jointly liable for both of those amounts (the wages and the damages), meaning it too was on the hook for payment.

In another case involving a dispatched employee, the Xicheng District People’s Court also concluded that China’s labor law applies with equal force to labor dispatch agencies. This court reasoned that even though the PRC Labor Contract Law states that a labor dispatch agency and a dispatched employee must enter into a labor contract for a fixed term of no less than two years, this provision does not preclude such a labor contract from being a regular labor contract. The court also discussed how since the law treats a labor dispatch agency as an employer for legal purposes, this means the labor dispatch agency is subject to the same responsibilities as an ordinary China employer, including the obligation to execute an open-term contract when conditions for being required to do so have been met. The Court went on to make clear that the general intent of China’s Labor Contract Law is to protect employees, and allowing a labor dispatch agency to be exempt from this requirement on open-term contracts would be contrary to that intent.

Though it is true that Beijing tends to be a pro-employee municipality and the above cases are not necessarily conclusive regarding how similar cases would turn out in other municipalities, this does reinforce the Chinese government’s generally negative view of labor dispatch situations. For how China’s on the ground labor law can vary from city to city, check out China Employment Law: Local and Not So Simple

The bottom line here is the same as the bottom line when doing just about anything regarding China employment law:

  1. Assume the Chinese courts will favor the employee.
  2. Figure out all of the laws and rules, and especially the local rules and cases, before proceeding.
  3. Know that China does not generally like the hiring of workers via third party hiring agencies. It never has and its distaste for such arrangements just keeps growing.
  4. You as the company that retains the third party hiring agency and uses the workers provided by the third party hiring agency can be held liable and hit with damages for the misfeasance of your third party hiring agency. I am tempted to repeat this (but I won’t) simply because there is a widespread belief that using a hiring agency eliminates any legal responsibility for the workers employed. This is just flat out wrong.
  5. If you are going to use workers from a third party hiring agency, you should make sure that you have a good contract with that third party hiring agency and that the third party hiring agency you use has a good contract with those who will be working for you.

 

 

China Manufacturing ContractsAs I mentioned in my first post of this series on China manufacturing contracts, Original Development Manufacturing (ODM) has become very common in China. Shenzhen in particular has become the “go to” location for start-up companies with an innovative product concept but no manufacturing facility. For low volume production of hardware and internet of things (IoT) products, China has become virtually the sole source for production.

The most common form of ODM for foreign start-ups in China is some form of co-development. This is a major change from the former standard practice in Asia. In the old days, U.S. entities went to Taiwan, Hong Kong, Japan or Korea for their development work. Under that model, the foreign entity paid for the development and the final product was delivered to the foreign entity as a deliverable with no strings attached. The ownership of IP was clear: the foreign entity paid the fee and the foreign entity had 100% ownership of the product.

With the co-development approach that is now almost universal in China, the approach is quite different.  There are two basic types of co-development in China. In the “new product” approach, a foreign entity approaches a Chinese factory with an idea for a new product. However, the foreign entity usually has just the bare outline for the new product: often no more than simple drawings and a specification sheet. The Chinese factory is then asked to develop that product with the often unstated assumption that the factory will manufacture the product when development is complete. In the “add-on approach”, the factory already has its own proprietary technology. The foreign entity then engages the Chinese factory to produce a new product based on the core technology owned by the factory.

The issue our China lawyers keep encountering is that the legal consciousness of all the parties to these transactions is stuck in the old model of straight development for a fee. But the issues that arise under the new, co-development model are quite different from the former “straight” development model. The purpose of this post is to set out in a preliminary way the basics on what a foreign entity must consider when engaging in co-development in China.

None of the issues are easy to resolve, and the alternatives are very complex. Because of the difficulty, many foreign entities seek to hide their head in the sand and just ignore the issues. This is a mistake. It makes no sense to go to all the trouble of developing your product if, in the end, someone else (the Chinese factory) either owns the rights to “your” product or monopolizes the right to manufacture it.

The basic issues to consider in a Chinese co-development project are as follows:

1. Will the Chinese side do the development work at its own expense or will you pay for the development work? This is the critical first decision. Note that if the Chinese side does it at its own expense, you have very little ability to control the development process. There are several ways Chinese companies deal with this issue.

  • Some Chinese companies will do the development work at their own cost on the assumption that you are required to use them for manufacturing.
  • Some Chinese companies will pay the development costs up front, but then charge them back to you by applying some sort of fee to your initial purchases. Again, this assumes you are required to use them for manufacturing.
  • Some Chinese companies will charge a fee for the development work. Often this is a partial fee, and the Chinese company will charge the remainder to you by applying some sort of fee to your purchases. For example, if the total development cost is around $150,000, the Chinese factory will charge you a $50,000 upfront fee and then amortize the remaining $100,000 over a two year period. If you do not repay the entire amount during this period, the Chinese factory will then expect you to pay the remainder in a lump sum at the end of the two year period.

Note that all of these alternatives assume the foreign buyer is required to use the Chinese factory to manufacture the product.

2. What is the time schedule for the product development work? What happens if, as is normal, the Chinese side fails to meet the time schedule? This issue should not be underestimated. In our experience, the Chinese factory almost never completes production within the required time period. It also is not uncommon for the Chinese factory to never succeed in developing an acceptable product.

3. What is the final price goal for the product? If the Chinese side succeeds in making a workable product, but the price is triple what you need to viably sell it, that does not constitute success. Sometimes the higher price is because the Chinese factory was unrealistic in its initial estimate or it accepted an unrealistic price from the foreign buyer just to keep the work away from a competitor. In other cases, the Chinese factory will intentionally set the price absurdly high simply to drive away the foreign buyer so it can make the product for itself.

4. What exactly are the “deliverables” and what is the process for determining whether the deliverables meet your goals? Often the “deliverable” is no more than a working prototype. However, a single prototype cannot be considered the property of the foreign buyer. So when a prototype is the sole deliverable, the foreign buyer has in fact acquired nothing of value other than perhaps a commitment by the Chinese factory to manufacture consistent with that prototype.

5. Molds and tooling are usually of critical importance in developing a new product. With respect to your molds, you need to consider the following: Who will arrange to design and manufacture the molds and tooling? Who will pay for the molds and tooling and on what schedule? Who owns the molds and tooling? If you want to move the molds and tooling (not the intellectual property for the product, just the molds and tooling) to a new factory, do you have the right to do that? Often Chinese factories will say: yes, you can move the molds and tooling, but you have to pay a fee. In other cases, the Chinese will claim to own certain molds and tooling that are directly connected to what they believe is their proprietary IP. Deciding what fits into what category can be very complex. For how to keep your molds, check out China Manufacturing: How To Hang On To YOUR Molds

Though these five issues are normally difficult to resolve, they actually are the easy part of the process. The more difficult issue is who owns what with respect to the intellectual property in the product. Determining that the factory owns 50% and you own 50% may be relevant for allocating income from commercialization of the IP, but it does not tell you anything useful on the practical level of manufacturing the product.

In tomorrow’s post, I will discuss the intellectual property issues related to determining who actually owns what in an ODM arrangement.

 

 

China TrademarkA couple years back, I wrote a post explaining why it rarely made sense to file a trademark application in China via the Madrid System. Nothing has changed substantively since then, but a growing trend among foreign rightsholders has made the Madrid System even less relevant.

As I have written previously, the Chinese Trademark Office (CTMO) does not require trademark applicants to prove use of the mark at the time of application, or any time thereafter (unless a third party seeks to cancel the mark for non-use, which is only possible after three years). As a result, many corporations—especially multinational corporations facing an onslaught of counterfeit merchandise—have started filing applications that cover a range of goods far greater than what they are actually producing or selling. Although we don’t represent Starbucks, I like to hold them up as an example of the gold standard in “offensive” trademark registration. They have registered the word “Starbucks” in China as a trademark in all 45 classes of goods and services. Starbucks brand diapers? Covered. Starbucks brand patio furniture? Covered. Starbucks brand binoculars? Covered.

As far as I know, Starbucks has not sold and has no plans to sell branded diapers, patio furniture, or binoculars. Accordingly, it would not be able to register trademarks for such goods in the United States or most other countries in the world –and therefore could not use such registrations as the basis for a Madrid System application. In other words: the only way Starbucks, or any other company, can take advantage of the China trademark system’s unique protections would be by filing a national trademark application in China.

The only mystery to me is why more companies with the means and motivation aren’t taking advantage of the Chinese trademark system. I just did a quick search for “Star Trek” on the CTMO database—not that I’m looking forward to Star Trek Beyond or anything—and the folks at Viacom are just asking for trouble. They have registered “Star Trek” in only classes 9, 16, and 41, which means that an entrepreneurial Chinese company could soon be boldly going where no man has gone before. Star Trek vitamin supplements, anyone?

China LawyersBecause of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

One of the most frequent, weirdest, and probably most insulting questions our China lawyers get is the one where we are provided a link and then asked if this is a real or a good Chinese law firm. How are we even supposed to respond to that anyway. My tactic (after having received so incredibly many of these is with something snarky like the following:

Let me get this straight. You are writing my law firm asking me to conduct free research for you and then provide you with free advice so that you can go ahead and use another law firm? Is it just me, or should I not feel entitled to tell you that we will not provide you with this service unless we are paid USD$3500 upfront.”

Needless to say, nobody has ever taken me up on this offer. But perhaps they should.

Over the years we have often written about fake Chinese law firms and the havoc they cause to real American and European and Australian companies, and probably to companies from a whole host of other countries as well. The below are two of our oldest most classic posts on the topic and two of our more recent ones:

We have many times represented companies that thought they had paid money to a Chinese law firm for something like registering a trademark in China or drafting a manufacturing agreement or forming a WFOE, only to learn that they had instead paid money somebody who had set up a temporary website with the sole intention of bilking the unwary. I have never heard of a real Chinese lawyer doing this. The trick is knowing who is a real lawyer and who is not.

Anyway, I thought about these fake law firms this week because I both heard from someone who had paid someone (I presume a fake lawyer) to register a couple trademarks for them in China a few years ago and then just discovered that nothing had ever been filed and the “law firm” no longer exists and because our law firm has for the third time been “faked.” Go here to see the fake HarrisMoure law firm and go here to see our real website for our real law firm. I have already received two emails from people alerting us to the fake law firm and telling us of how the fake law firm had cheated them. I have no idea whether this fake law firm is based in China or not, but it should be lesson to all who seek out law firms on the internet to at least conduct the following basic due diligence:

1. Determine how long the law firm has been in existence. Really in existence, not just some date on its website. If it hasn’t been around for many years, you should be wary. Of course there are plenty of legitimate law firms formed just this year, but longevity is at least some proof of legitimacy.

2. Read about the law firm and its lawyers on other sites. Real law firms exist outside their websites. Does this law firm show up on court records as having represented someone? Have any of its lawyers published articles with recognized media? Are any of its lawyers listed on lawyer ranking websites? Dig deep to be sure.

3. Go ahead and call the relevant bar associations or lawyer licensing bureaus to confirm.

4. Most importantly, do not be afraid to go with your gut. Just about every time I have talked to someone who used a fake law firm they have admitted that something (oftentimes the too low pricing) made them wary even before they paid.

5. Be careful out there.

UPDATE: Cannot resist adding this piece regarding a fake Qing-Era Mansion.

 

China Joint Venture
China joint ventures. When in doubt, don’t.

Many of our foreign company clients (usually North American, European or Australian) have their product made in China under a contract manufacturing arrangement with a Chinese manufacturer. At the start of this relationship, the foreign company’s goal is to sell its product in the North American and European markets. But as China continues to get wealthier and more sophisticated, it often happens that a Chinese company approaches the foreign company about selling the foreign company’s product in China to Chinese customers.

When the foreign company investigates the situation, it quickly discovers that selling its product into China will be considerably more complex than initially seems. Since the foreign company does not own the product until after it is shipped outside of China, selling the product within China will necessarily involve a complex process of exporting out of China and then selling back into China. This results in potentially having to pay VAT twice: once on the export and again on the import. As a result of this, foreign buyers of contract manufactured product will often be approached by a Chinese company with elaborate schemes designed to avoid such taxation.

Such schemes should almost always be avoided.

The Chinese company often will try to convince the foreign company to enter into a complex “partnership” or joint venture that will “allow” the foreign company to participate in the product distribution business in China. Entering into such a partnership is virtually always a mistake and the sensible foreign company should not want to have anything to do with this kind of business in China, particularly when tax avoidance and “incentives” for making sales are the major objective. For more on China Joint Ventures, check out the following:

The foreign company should instead insist on operating under the standard distribution model used throughout the world. The foreign company should purchase its product from its Chinese manufacturer, receive that product outside of China (in an export processing zone or when shipped) and then sell that product back into China to a qualified PRC distributor. The distributor can be located in China, or in a PRC export processing zone or in Hong Kong. The foreign company should set up that distribution relationship so that it earns its profit from that initial sale, freeing the foreign company from any concerns with the financial side of the Chinese operation. On the other hand, the foreign company should strictly monitor the operations of the Chinese distributor through a standard distribution agreement.

If the foreign company wishes to support its PRC distributor, it is free to offer incentives. There are many ways to do this, including by a) not charging the Chinese distributer for product that will be used as samples, b) giving the Chinese distributer reduced pricing for a certain number of products, and/or c) providing the Chinese distributer with cash incentive payments for advertising, for seminars and/or to partially or completely cover the cost of government registrations. However, such incentives should be offered to a distributor operating under a standard distribution agreement that allows the foreign company to terminate the agreement if the distributor does not perform (which is common), that allows the foreign company  the absolute right to audit the distributer’s performance, and that allows the foreign company to immediately terminate the Chinese distributor if it engages in irregular conduct such as bribery or kick backs (which is common). One major defect in any kind of partnership/joint venture approach is that it is difficult to hold the Chinese side to a tight performance standard when there is a business ownership relationship. It is like a marriage: easy to get into, but hard to get out of.

Due to the need to export product from China and then import it back into China, the distributor often will establish an entity in Hong Kong to handle these operations. The foreign company can take an ownership interest in the Hong Kong distributor, but the basic rules remain the same: 1) the Hong Kong distributor should be treated as an arms length third party, operating under a standard distribution agreement and 2) the foreign company (the North American or European or Australian company) should earn its profits from sales to the distributor — taking the profits NOW — and not from the very uncertain and tax disadvantaged distribution of profits from the distributor at some unknown inherently uncertain later date. The foreign company should understand that it is a myth that it will be able to exercise more control in a joint venture than via the above sort of distributer relationship. It is very difficult for a foreign company to control a joint venture thousands of miles away and with no right to make a quick and decisive contract termination decision.

It is rare for foreign companies (particularly SMEs) to want to get intensely involved in the business of product distribution in a vast and complex market like the PRC. This is why major multi-nationals often contract with Chinese distributors to do the work. It is virtually unheard of for foreign SMEs that understand the issues to even consider taking on this difficult burden. But inexperienced SMEs and start-up companies seem constantly to get approached with this kind of ill-conceived concept, for obvious reasons.

If you are having your product made in China (or even outside China) and you are approached with a proposal to “joint venture” on selling your product into China, the first thing you should do is apply the following three basic rules that apply to any project concerning China:

  1. If the proposal is complex, don’t do it. You should be able to understand every word of the proposal in a first reading.
  1. If the proposal involves an equity joint venture business, don’t do it. Do not get into any business relationship with an entity in China that you cannot terminate by a simple contract termination notice.
  1. If the proposal is not supported with a detailed set of financial projections, don’t do it. A “business plan” full of fluff and fancy jargon that no one really understands does not count. You need a standard set of financial projections (hard numbers, not jargon) with each assumption clearly spelled out and supported with facts.

Just follow these three rules and you will save yourself time and money in dealing with projects in China.

For more on China joint ventures, check out Joint Venture Jeopardy (WSJ) and Avoiding Mistakes in China Joint Ventures (AmCham) and for more on China distributer relationships and distribution agreements, check out the following:

index-315754_960_720This is the third in a series of posts about getting paid by a Chinese company. In Have the Rules Changed? I looked briefly at the underlying framework of rules that apply to foreign conversions and remittances. Is there a PRC Tax Problem? dealt with some of the tax-related issues that cause payment delays or defaults. In this third post I look at some basic due diligence that can identify or avoid defaults or delays in money transfers out of China.

If you don’t get paid, ask yourself these questions before you rush to blame the Chinese company:

1. Do you have any idea what taxes should have been paid by the Chinese company and what taxes should be deducted from the remittance itself?

2. Was your contract exempt from the kind of prior registrations required by the tax authorities?

3. Do you even have an enforceable contract against the Chinese company in China?

4. Has an independent person gone down to the Chinese company’s bank branch to confirm what their particular requirements and concerns are?

5. Did you withhold any deliverables until you received all or substantially all of the money out of China?

6. Did you ask the Chinese company to provide examples of previous successful foreign remittances?

7. Does the business license of the Chinese company allow for foreign trade and thereby indicate that foreign remittances would not be unusual in the ordinary course of business?

8. If you’re dealing with a State Owned Entity (SOE), or a very large company of any kind, did you understand all of the internal approvals that company would require before a payment could be authorized and did you appreciate how long this might take?

If the answer to any one of these questions is “no”, don’t blame the Chinese company.