My post yesterday, How to Do Business in China AND Sleep at Night, highlighted a very thoughtful comment from an experienced China businessperson. That businessperson emphasized how his China business philosophy is to figure out the laws that apply to foreign companies doing business in China and comply with them.
As China lawyers, my firm wholeheartedly agrees with that sort of philosophy. We have to. We are hired to help our clients discern China’s laws and how to comply with them. If a company is comfortable with violating Chinese law, they don’t have a lot of need for a China attorney. Yesterday’s post concluded with my saying the following:
Yes, scrupulously following the law in China can at times be difficult and expensive, but it is the ONLY way to achieve long term success there. It also is the only way — at least for most people — to sleep soundly at night.
* * * *
Bottom Line: If you want to succeed in China and avoid legal problems, work with the right people and do things the right way. It is that simple. The foreign company doing business in China that operates this way will virtually never get into trouble in China.
A reader who clearly did not like this blog post left the following comment:
It bothers me that you’re a victim of confirmation bias and don’t seem to realize it. You ONLY hear when people have problems. And, let’s face it, there is a tone of “you deserve all the grief you get, you morons!” running through the posts. It’s like this blog is a form of therapy to allow one man to vent his anger at being forced to be highly paid to deal with problems.
This attitude is sorely lacking in real-world, shoe leather experience. What do you do when you call the labor bureau about your question, and they just shrug and tell you “chabuduo”? What do you do when the tax bureau can’t even get you the right forms to file in a timely manner? Or when there’s one strict, expensive standard for foreign companies and another totally lax standard for local companies? One that will drive you out of business if you actually follow it? Or, or, or, a thousand times or. “Go bankrupt” isn’t an option so let’s just eliminate that one already, shall we?
As mentioned in yesterday’s post, just about whenever we talk about foreign companies getting into any sort of trouble in China, we get emails from readers who accuse us of exaggerating. This comment hints at that by accusing us of unrealized confirmation bias. We do not dispute that as attorneys we get contacted a lot after companies have already had a China problem, but by the same token, most businesspeople do not reveal these sorts of problems openly, so there is a confirmation bias going the other way as well. But be that as it may, all we do here is report on what we see and we see a whole lot of foreign companies get into big trouble in China for not following the law. Does anyone really believe this is not the case?
I really don’t know how to respond to the accusation that I believe people “deserve all the grief” they get because they are “morons.” you morons, other than to say that I do not feel that way at all. I also am not the least bit angry at “being forced to be highly paid to deal with problems.” I love my job and I actually find it more interesting to help extricate companies from problems than helping them prevent them. Anyone who accuses me otherwise on this doesn’t know me.
But enough about me; let’s examine the substantive portion of this comment.
The reader asks “what do you do when you call the labor bureau about your question, and they just shrug and tell you “chabuduo”? First off, we don’t just go to the labor bureau with a question. We go to them with a question and with our own analysis of how we see the answer, based on our extensive legal research. When you go to a Chinese governmental body like this, it is the rare time where they give you no answer at all. And in those rare instances, we analyze the situation and give our client our best recommendation, based on a totality of the circumstances.
The reader also asks what do you do “when there’s one strict, expensive standard for foreign companies and another totally lax standard for local companies?” We have written about this situation many times on here and the answer is that you follow the law. Pretty much every country (and even state and city) favors its locals. If you are a foreigner, that is just a cost of doing business, not an excuse for violating the law unless you are willing to pay the penalties for doing so. We have never said that businesspeople in China have no choice about abiding by the law there. Of course they do. But our job as lawyers is to be clear about what the law is and what the risks are for not following it. If someone wants to take those risks, it is entirely up to them, but they should not shoot the messenger for calling out the risks.
And here’s the thing. The commenter is right that there are plenty of times where a foreign company simply cannot operate profitably in China and abide by its laws. See e.g., Buying A Chinese Company? Why China Deals DON’T Get Done. In those sitautions, we examine the alternatives, which often include things like licensing or distribution or other sorts of contracts/agreements that allow the foreign company to take its product or service or name into China without having to go into China at all. In a recent post, entitled, Uber Couldn’t Make it Alone in China, Why Do You Think You Can? we explicitly discuss how foreign companies are often at a disadvantage in China and we lay out concrete alternatives:
Chinese companies will almost always (though not always) be able to maintain lower cost operations in China than a Western company and so Western companies without other advantages generally don’t succeed in China. For some of the reasons why this is so, check out Buying A Chinese Company? Why China Deals DON’T Get Done. I guess all I am saying is that companies — especially SMEs — should not be so quick to demand “full control” over what they do in China (via a WFOE or a Joint Venture), and should think longer and harder about how they can stick their toes into China via licensing deals and distributorships. See Negotiating with Chinese Companies: Distribution Agreements with no Joint Venture Required.
Our China lawyers get calls all the time from America, Australian, and European companies seeking our help in getting them out of China by extricating them from their joint venture or by helping them close down their WFOE. But I truly cannot remember an instance where we have been called to help a company get out of a well crafted China licensing agreement or China distributor relationship. Of course, the lack of these calls may be due in equal parts to the fact that getting out of a contract — especially one at the end of its duration — is usually a piece of cake, but still.
So yes, we fully realize that operating a foreign company in China is usually very difficult. Our solution to that, however, is not to advocate that people just ignore the laws and risk massive penalties and even jail, but that they figure out how to profit from China in other — fully legal — ways.