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When To Register Your China Trademark? Ask Tesla.

Posted in Basics of China Business Law, Legal News

Electric car maker Tesla Motors is being sued in China for trademark infringement, in what Reuters calls “a surprise development that casts a shadow over CEO Elon Musk’s ambition to expand rapidly in the world’s biggest auto market.”  The plaintiff is seeking a court order stopping all Tesla sales and marketing activities in China and around four million dollars compensation. The plaintiff claims to own the “Tesla” car trademark for China because he registered it in 2006, well before Tesla came to China.

Even without digging deeper into the facts and the law surrounding this particular case, we can most emphatically tell you that it should be instructive on at least one thing: if you are ever planning to sell (or even manufacture) your product in China, it behooves you to at least explore registering your trademark(s) in China right now. China is a first to file country, which means that whomever first secures a trademark generally gets it.

What this means in real life is that if you are right now selling ABC Widgets in the United States (where you have a registered trademark, or not) and you do not own the trademark for ABC Widgets in China, someone in China can go off and relatively cheaply register the name ABC for widgets in China. What this then means is that if you, let’s say, two years from now want to sell your ABC Widgets in China, you will need to buy or license the ABC Widgets trademark from its owner in China or sue to try to get it.

In our experience, buying trademarks from Chinese companies is typically quite difficult and quite costly and oftentimes does not result in a sale. Read the Tesla article or read about Apple’s issues with the iPad name in China to see what we mean. And pursuing litigation over a trademark in China is also typically quite difficult and quite costly, and quite risky as well.

By far the fastest, cheapest, easiest, safest way to make sure that you can use “your” trademark in China is to register it before anyone else does. When should that be? Pretty much as soon you have both an inkling that you will need/want to use your trademark in China.

For more on the importance of registering trademarks in China and on how to register a trademark in China, check out the following:

 

 

So You Think You Have A China WFOE Or Joint Venture Or Trademark. What Makes You So Sure?

Posted in China Business, Legal News

Met with a new client the other day and learned of how they had recently purchased a company with a Representative Office in China. I suggested that they have one of my firm’s China lawyers confirm that there really was such an office in China and told them a horror story to convince them of the need.

The story I told was of how a fairly well known U.S. company sought our help in figuring out what to do with its China general manager who had stolen millions of dollars from the company. Our investigation of this employee quickly morphed into an investigation of the China company itself and that led us to realize that there was no China company.  The China WFOE that was doing tens of millions of dollars in manufacturing a year with nearly one hundred employees simply did not exist. No WFOE had ever been formed. We spent months working with local government officials getting this company legal and seeing to its paying of back taxes. This happened many years ago; today, it would be far more likely that the Chinese government would have discovered it and fined it or even shut it down.

But to make a long story short regarding the new client, everything was just fine with this client’s Rep Office and so it was total false alarm on my part.

But having done just gone through this I am reminded of how often our research has revealed that what a client thought they had in China, they did not. In addition to the above company that thought it had a thriving WFOE, we have seen the following:

  • A U.S. company contacted us because its China Joint Venture company had been successfully selling its product in the United States for years and yet the U.S. company had yet to receive a single penny from the venture. The Chinese language “joint venture papers” the client provided us turned out to be an agreement with a Chinese national to have him go off and start a joint venture. Our further research revealed that here were no real “joint venture papers” and there was no real joint venture. This was not even close to the first time we have seen something like this involving a joint venture. Oftentimes, this has come about because (believe it or not) the American company goes along with using one (always local Chinese lawyer) for both parties (the Chinese and the American) in the “joint venture.”
  • An American company came to us to complain about how its former China distributer was now manufacturing and selling the American company’s product in China, “in violation of our trademark.” The American company told us how its former distributer had years ago registered the American company’s brand name for it in China and the American company even had a well done fake trademark certificate to prove this. Problem was that the distributer had never registered the trademark for this American company at all; it appears that the distributer had in fact registered it in the name of a Chinese citizen (probably a relative of the distributer) and that person now owned it. We told the American company that it had a pretty good claim to the trademark in China, but it was so frustrated with China that it chose to just walk away. We see offshoots of this non-existent trademark example at least yearly, oftentimes involving either the distributer or the sourcing agent.

In the above examples, the American companies were fooled by people they thought they knew. Equally common though is the situation where an American company gets fooled by fake or wholly dishonest companies that have been paid to register a company or a trademark and then find it cheaper and easier not to do so. There are even fake law firms (not even necessarily in China) that focus on collecting money from American companies to register their trademarks in China. Of course, once the money is paid, nothing happens. We wrote on this years ago in China: Where Even The “Law Firms” Are Fake. These are the service company equivalents of the manufacturing companies that take money and never provide any product.

Bottom Line: If you have reason to doubt whether your China registration(s) are valid, it would behoove you to check them out now because they very well might be. Most importantly, conduct at least minimal due diligence on your service providers and China partners.

Five Common China Mistakes To Avoid

Posted in Basics of China Business Law, China Business

American companies typically make a lot of mistakes in China. And even when they don’t make mistakes, they get frustrated.

Though mistakes and frustration will always be par for the course in China, at least some heartbreak can be avoided by following these five principles:

  1. Do not underestimate China’s up-front time commitment. American companies tend to underestimate the time their senior managers will need to devote to China, but the worst offenders are SMEs (small and medium sized entities). SME owners often think they can go to China one time, hire a brilliant local staff person to run the show, and never have to come back. Companies like that rarely make money in China — they either go out of business or discover that their local staff person’s brilliance is matched only by his or her self-dealing. Doing business in China is difficult, and almost never works without high-level people from the home office coming to China for at least a couple of years.
  2. Do not underestimate how long things take in ChinaWe Americans like to get things done fast. But China operates according to its own clock and sometimes you just have to back off and let things happen. Many Chinese companies are not primarily motivated by economic efficiency. Their goal may be employment for the local community, or to fill a quota, or to get the boss’s son a green card. If you are doing business in China, you must learn patience.
  3. Do not think you have a deal with a Chinese company until you have the deal. My firm’s China lawyers are always getting called by American companies wanting us to document a deal that never really existed. So many things can go wrong on a China-U.S. business deal. A Beijing-based American lawyer recently told me that around half of the deals on which he has worked “never closed due to cultural differences between the American and the Chinese sides.” If you add in another 20% or so for deals that fail to close because they cannot legally be done (though both parties thought that they could) or because the Chinese side found someone else (it is very common for Chinese companies to be negotiating with multiple companies at the same time) or just changed its mind, you can see why just doing deals can be so frustratingly difficult.
  4. Do not underestimate the difficulty in finding quality personnel for your China operationsFew Chinese professionals today understand what American companies need. They generally do not understand the level of detail, the idea of thoroughness, the standards and the expectations that American businesses take for granted. Chinese professionals tend to be reactive and will blindly follow directions even when they know the method employed is ineffective or counter-productive. Six months later when it turns out this was the wrong thing to do, your Chinese managers will tell you they knew this all along, but that they were just following your orders because “you’re the boss, and you said to do it.”
  5. Do not rely on guanxiI am convinced that our clients who never use the word “guanxi” have a ten times higher China success rate than those who do. This is not because having good relationships in China is not important — it most emphatically is. Rather, it is because having good business relationships is important everywhere, not just in China, and those who use the word guanxi seem to use it as an excuse for abandoning common business sense. As in, “Why did you send them $500,000 without a written contract?” Answer: “Guanxi.” If you are planning to set up a long-term operation in China, you should cultivate important connections and a network of useful connections, just as you would do in Amsterdam, Chicago, Sydney, or anywhere else. But if you are buying a container of stuffed animals or bathroom fixtures, your time would be better spent inspecting the goods and negotiating solid sales agreements. Do not let talk about guanxi divert you from taking appropriate precautions and insisting on adequate protection

If you are at least mindful of the above five principles your chances of success will go up.

What do you think? What else?

China Business. China Law. Go Here For Great Discussions On Both.

Posted in Basics of China Business Law, China Business, Legal News

We started a China Law Blog Group on Linkedin with the goal of creating a spam-free source for China networking, information and discussion. We just today added our 9,000 member. 

I am proud of the absolutely terrific discussions we have within our group, both based on the numbers (a number of the discussions have received around 100 comments and some have gone over 200) and on their substance. Our discussions have ranged from practical (such as, how do I open a China bank account or how do I form a WFOE or what are the best practices for a China Joint Venture or what is the most important thing I should do to succeed at doing business in China) to deep think (such as, what is the future of rule of law in China or what are the differences in how Chinese companies and French companies are run).

Our diversity of membership is also one of our strengths. We have a large contingent of members within China and without. Our members truly come from all over the world. Some members are China lawyers, but the overwhelming majority are not. We have senior personnel (both China attorneys and executives) from both large and small companies and a whole host of junior personnel as well. We have students and we have professors. We have CEOs and we have mail clerks.  We have manufacturers and we have movie makers. This mix only contributes to the high level of discussions.

I am most proud of how no spam item has yet lasted on the site for anything even approaching 24 hours. I constantly get emails from members expressing their appreciation of this and telling us that alone separates us from other groups.

If you want to learn more about China law or China business, if you want to discuss China law or business, or if you want to network with others doing China law or business, I suggest you check out our China Law Blog Group on Linkedin and join up. The more people in our group, the better the discussions. But don’t bother spamming us because your spam will never show up on the site!

Click here and join us. 

Four Common (And Somewhat Deadly) China Law Mistakes To Avoid

Posted in Basics of China Business Law

This post highlights four common and somewhat egregious mistakes my law firm’s China lawyers often see American domestic lawyers make when representing their clients in doing business with or in China, along with a very brief analysis of what causes American lawyers to make each sort of mistake.

1. Many years ago, a lawyer in the Midwest called us to discuss his client’s desire to form a company in China. This lawyer did not even tell us that his client was in the room. The lawyer asked us the minimum capital the Chinese government would likely require his client put into a Chinese bank to be able to start a business (a WFOE) in China. Based on the nature and size of the business, we estimated $6 to $8 million. The lawyer asked us to confirm that a portion of the required $6 to $8 million could come from factory equipment not cash, and we assured him that it could. At that point, he said, “good,” because his client had already purchased $5 million in equipment and shipped it to China.

We then had to tell him those equipment purchases could not count because they had not been previously designated as going to the WFOE. The lawyer then complained about how his client could not afford to come up with another $5 million and how China was putting form over substance. To which we could say little more than, “yeah”…

This is just one of countless instances where an American lawyer has done poorly by his or her client by just assuming that the rest of the world views the law just as we do. China almost always places form over substance and it does that because it views giving its bureaucrats discretionary authority as also giving them the discretion to solicit bribes to influence the exercise of that discretion.

2. A lawyer calls us with an airtight $2 million dollar breach of contract lawsuit against a Chinese company. This lawyer had drafted a contract calling for disputes between her client and the Chinese counter-party to be resolved in Boston Federal Court and she had already sued the Chinese company in Boston and secured a default judgment against it. She was now seeking my law firm’s help in domesticating the judgment in China, and It was clear she expected us to jump at the opportunity to take the case on a contingency fee basis.

That is until we told her that China does not enforce U.S. judgments. Ever.

She then came up with the idea that we start all over by suing the Chinese company again in China. We had to tell her that could not work because the Chinese court would have two strong grounds for throwing out that lawsuit. First, improper jurisdiction because the contract clearly called for the lawsuit to be in Boston. Second, res judicata because the entire case had already been tried (and won) in Boston (the proper jurisdiction). I have no idea how she explained all this to her client.

American lawyers commonly assume that what makes sense for a domestic transaction necessarily also makes sense for an international transaction. Boston would have made sense in the above instance if the counter-party had been in Los Angeles, but the rules and the issues are different when doing business internationally.

3.  Lawyers often call us for “tips” on handling an arbitration in China (usually with CIETAC). We always quickly ask whether the contract calls for the arbitration to be in English or whether the lawyer calling us (or some other lawyer) on the case is fluent in Chinese. This virtually always elicits a really long silence and then they say something about how they had just assumed that their case (usually set for hearing in a month or two) would be in English.

If you do not specify that your China arbitration is going to be in a language other than Chinese, it will be in Chinese. This mistake stems from the American lawyer’s inability to grasp that China is not all that different from the rest of the world. I mean, would anyone ever think that an arbitration in Kansas City is going to be in Chinese even though the contract calling for arbitration there is silent on the language of the arbitration?

4. American lawyers often call us on behalf of their client who has received a product from their Chinese manufacturer, claiming that the product does not meet the contract specified quality. We then determine that the specified quality to which they are referring is “reasonably good quality” in such and such industry. To their surprise, we immediately beg off working on the case and we then have to tell them how there really is no such thing as “reasonably good quality” in a country where you can buy a 30 cent t-shirt that falls apart after its first washing. And/or we tell them of the U.S. company that had us call a Chinese factory from whom the U.S. company received a million dollars worth of laptop bags whose handles were not strong enough to hold a laptop. The Chinese factory’s explanation was that if our client had wanted laptop bags strong enough to truly hold a laptop, our client should have ordered the $6 bags, not the $3 ones.

This mistake stems from the American lawyers’ belief that the U.S. way of looking at the law applies universally, when it does not. China is a civil law country and a phrase like “reasonably good quality” is almost meaningless.

If you are not familiar with the ins and outs of China law, just be sure to use a China lawyer of “reasonably good quality” to assist you. That’s a joke.

What do you think?

China Company Negotiations. Common Tactics And Good Responses.

Posted in China Business

When it comes to negotiating, Chinese companies view American companies as easy marks. They tend to see us as impatient, unfocused and too willing to compromise to avoid losing out. To take advantage of these perceived traits, Chinese companies often employ the following three negotiating techniques:

1. Wear down the American side down with endless issues. This tactic actually has two variants. In the first variant, the Chinese side raises a series of issues. Once these initial issues are resolved, the Chinese side then raises a series of unrelated new issues. This process never stops, because the list of issues is endless. The second variant is for the Chinese side to make several unreasonable demands and then refuse to address the American company’s concerns at all. Both variants are designed to induce the American side to concede on all major points out of a desire to keep the deal moving forward….

2. The artificial deadline. This is my favorite tactic because the manipulation is so blatant, and yet it works surprisingly often. The Chinese side starts by scheduling a date for a public signing ceremony, at which high-level officers from both sides will participate amidst much pomp and circumstance. The date is set far enough in advance to make the American side confident that parties negotiating in good faith will be able to reach agreement on the contract. The Chinese side then delays, stalls, and otherwise ensures that no agreement is reached, while simultaneously pressuring the American side by talking about the massive loss of face the Chinese company will suffer if it has to call off the signing ceremony. The Chinese company then uses the deadline to extract concessions from an already exhausted American negotiator. This tactic also has two variants. The first involves the Chinese side simply refusing to concede on key points in the belief that the American side will crumble when faced with the fixed signing deadline. The second variant is more subtle. In this variant, the Chinese side initially concedes on key points, while still holding its ground on numerous minor points, consistent with the “wear them down” tactic. Then, just a day or two before the signing ceremony, the Chinese side announces that one or more key issues must be revised in a way that entirely benefits the Chinese side. The Chinese side usually justifies this by referring to the demand of a government regulator or a relevant third party like a bank or insurance company. The Chinese side defends its action by saying that other people have forced them to go back on their word.

3. Sign a contract and then come back a few weeks or a few months later and seek to renegotiate key points. Though this too is an obvious technique, it works pretty well. The Chinese side waits until the project has started and the American side has committed money or personnel to the project, and then announces that certain key provisions of the contract must be changed. The Chinese side usually claims this change is mandated by law, by government regulators or by banks or insurance companies. At this point, the only people left on the American side are “committed parties” with a strong incentive to allow the project to proceed. Often, these people do not even fully understand the implications of the changes the Chinese side is demanding. These committed parties on the American side then present the changes to busy upper level management as “minor technical revisions” and the revisions get signed without any lawyer scrutiny. Everyone remembers how the initial negotiation was so troublesome and nobody wants to bring in “legal” to start the process over again.

Because these three tactics tend to work so well, Chinese companies do not hesitate to employ them. Happily, each tactic has a simple antidote:

1. When the Chinese side tries to wear you down with endless issues, refuse to participate. Firmly state your position and do not bend unless and until the Chinese side moves closer to your position.

2. Never agree to a fixed signing date. Make it clear that you will agree to a signing only after you have completed negotiations. Do not fall into the trap of believing that you must say yes to a signing ceremony to avoid causing offense. The Chinese hold suckers in contempt, so your refusing to go along on this tactic will, if anything, earn the Chinese side’s respect.

3. Make clear that there will be no changes to the contract after signing and that you will treat any attempt to change the contract as a material breach that will precipitate a lawsuit for damages. Chinese companies are well known for using the signing of a contract as the start of a new negotiating process, so if you find this happening to you, get your legal team involved (again) right away.

Know the tactics discussed above and respond accordingly.

What do you think?

On The Ethics Of China Red Envelopes

Posted in Recommended Reading

Been catching up on old emails this weekend and among those was one from a reader attaching a New York Times article, From China, With Pragmatism: Are the Chinese outdoing Americans at their own philosophical game?  The article is written by Stephen T. Asma a professor of philosophy and fellow of the Research Group in Mind, Science and Culture at Columbia College Chicago. It deals with how ethics in China are viewed from a different perspective in China than in the United States. Different, not worse.  This is a very crude summary of the article and I urge everyone actually read it.

The reader who sent me the email was dismissive of the article, saying only that:  ”He [Professor Asma] should repel out of his Ivory Tower : ).”

I, on the other hand, LOVED the article because it does such a good job of showing how different our two cultures view the same thing: giving a red envelope (with cash in it) to a doctor before the surgery of a child. I will let that portion of the article speak for itself:

Chinese people regularly give red envelopes, or hongbao, filled with money as gifts for weddings, births, New Year celebrations and so on. The red color is thought to be good luck. It is very common for a Chinese family to give hongbao to a surgeon who is about to perform a procedure on a family member. Everyone knows to do this, and everyone does it to the extent that they are able. The Americans in our group thought this practice was unethical bribery, because it sought to bias the doctor in one’s favor. The Chinese people at the table replied, “Of course it biases the doctor. That’s why we do it.” Not only were they mystified by the censure, but the Chinese were prompted to ask if the Americans had any children — for every parent surely uses any means necessary to protect loved ones.

When one embassy officer (working his best “hearts-and-minds diplomacy”) suggested that the Chinese switch the giving of hongbao to after the successful operation, rather than before, the Chinese were struck dumb with astonishment. Of course, you have to give the hongbao beforehand because it motivates the doctor. The gift tells the doctor: (a) to take special care with our child (b) we respect your surgical skills/education and “give face” accordingly (c) we are devoted to our child, will hold you responsible and have the means to do so. The fact that not everyone can afford to influence their doctor with hongbao is not grounds for withholding it, since we’re trying to protect my child here and now. The parent, according to the Chinese, should never weigh the child’s well-being against something so arcane as an abstract principle.

Wow.  Again, read the article.

New China. New Vietnam.

Posted in China Business

Got an email the other day from a loyal reader who is convinced that we all need to start looking at China differently. I found his email interesting and felt it worth sharing for both that reason and also because I am dying to read the comments it engenders.  Here it is:

 

The last time I was in Shanghai I met with a bunch of Taiwanese engineers/factory owners. These are guys in their 60s who graduated from Taiwan engineering school back in the late 1970s/early 1980s. They have been quite successful in China. They all said the same thing: China has fundamentally changed. So they are taking steps to deal with the change.

Here is an example. A guy whose core business in China is manufacturing rubber gloves. He has done this business for 40 years: 20 years in Taiwan, and 20 years in China. He is moving the ENTIRE manufacturing program to Vietnam, in the Saigon area. However, he is retaining the high value Chinese business: five technical schools a couple of medical service businesses, and a distributorship for consumer goods like toothpaste.

What these guys were saying and my takeaway from that was:

  • China is not bad these days, it is just different.
  • Those who pretend it is not different are going to get killed financially.
  • It makes sense to retain the high value added, easy money in China and to move the low value added manufacturing somewhere else.
  • The ONLY practical “somewhere else” these days is Vietnam. No other country is even worth discussion. Note that for Vietnam, you must recognize what it is really like. For example, this guy has already purchased his own electric generators and he has already secured his own independent supply of diesel fuel. He knows that he cannot expect to rely on Vietnam for either. He does not whine about it: he just does it. This attitude has allowed him to survive for 40 years.
What do you think?

How To Manufacture In AND Sell In China Without A WFOE

Posted in Legal News

Many of our clients that went into China years ago to have their products made there are now interested in selling those same products within China. One way to do that is to form a WFOE for selling the products, but oftentimes the cost and the hassle of doing that is just not worth it, and there are other ways.

Foreign (non-Chinese)companies often ask our China lawyers how they can sell in China the product they are having made in China, without having to set up a WFOE. These foreign companies typically want to buy their own product from their Chinese manufacturer and then resell their product to a Chinese distributer or to Chinese end users.  We usually have two major concerns with this sort of plan. One that VAT will need to be paid for both sales (from the manufacturer to our client and from our client to the distributer or end user) and two, that a WFOE will almost certainly be required.

The key in these situations is to avoid having the foreign entity deal directly with the distributor. Typically the best way to do this is to have the sale made from the manufacturer to the distributor. The goal is to set up a system where 1) the foreign company earns a profit, 2) tax is paid on that profit, 3) the product is transferred to the distributor in way that provides for proper payment of VAT and proper credit for value of the goods for the subsequent payment of VAT by the distributor, 4) title to the goods transfers properly and 5) the foreign company remains in control of the process.

We usually handle these deals as follows:

1. The foreign company and the Chinese manufacturer enter into a manufacturing agreement that protects the foreign company’s intellectual property and deals with all other related manufacturing issues.

2. The foreign company enters into a separate license agreement with the manufacturer. This agreement provides that the manufacturer will sell the product within China to entities (distributors) selected by the foreign company. The sale to the distributor is made at an agreed price that includes profit to the manufacturer and a payment to the foreign company. We have characterized the payment to the foreign entity in various ways. In some cases, we characterized it as a license royalty, in other cases we characterized it as a sales agency fee. The characterization can also influence whether the agreement must be filed with the Chinese government, and where.

This method has worked well in the past and should work in this situation. However, note the following:

  • The exact method used depends on the location of the manufacturer and the distributor. Different localities have different rules. We make it a point to speak with the appropriate government officials before we draft anything.
  • How to characterize the payment to the foreign company is critical and depends on the facts of the specific case.
  • The manufacturing agreement can be simple or complex, depending on the nature of the product being produced.

What do you think?

 

Myanmar: Open For Business?

Posted in Good People, Recommended Reading

Robert Walsh, sometime Seattle resident and long-time friend of our law firm, has been spending the last few years in Myanmar, where he has opened up a business consultancy. Robert is fluent in Chinese and Korean and, amazingly enough, Burmese, having learned Burmese while working in the U.S. Embassy in Yangon many years ago.

Robert has been sending us email updates from Myanmar for some time and we posted one of his earlier ones here about a year ago. We recently got a new one from Robert and are running it below.

Two years after Burma’s “summer of love”, the bloom is pretty much off the rose here, as what few western companies who came in are settling down to the grim realities of trying to get things done here.

The Telecoms Debacle

Last winter Telenor and Ooredoo were given their licenses to operate and start building out the expansion and upgrade of the mobile phone network here. I think their win of the tender included several performance milestones that they must meet or be subject to penalties. As all of this is opaque and not subject to a great deal of public comment, I can only guess what the milestones are. One must be the offer to the public of new low-cost SIM cards. There is huge pent-up demand for SIM cards, and these that are in circulation sell for up to $300 apiece.

So I think both Telenor and Ooredoo have announced they’ll be selling SIM cards. The problem is that from all we’re hearing, the network in place may not be in any way, shape, or form ready to handle a huge number of new subscribers. The build-out of the new network, involving erection of as many as 3500 towers from one end of Myanmar to the other, seems to have hit a solid wall, as terrain and distance make the telecoms companies come to grips with the fact that this is a big country with pretty poor roads.  When the monsoon sets in with a vengeance in a few weeks work will pretty much stop unless it’s being done right on paved major highways.

One problem that both Telenor and Ooredoo were hoping the government would fix was the problem of land use permits for the 1000′s of sites it plans to build towers on … nope, each and every site is the subject of lengthy negotiations with owners, followed by tough-to-get changes to land use permits. As many of the tower locations require building access roads on lands owned by others, you can imagine just what a headache this is turning into.

Another problem is that both companies thought that they could safely and reliably subcontract out each and every facet of the build-out, and everything would happen just like magic. Not here, because magic, or some sort of miracle is required if each and every task is not closely supervised. And of course Myanmar contractors have sub’ed every task down 7 layers deep, until the guys with picks and shovels haven’t the slightest idea what was intended in the first place.

Add to this the fact that the Myanmar government has inked some sort of deal with a Japanese consortium called KDDI. I think they will set up a competing telecoms service that can only undermine whatever Telenor and Ooredoo hope to achieve commercially. Perhaps to strengthen its position vis ã vis the Myanmar government, Telenor just brought in one of its former ambassadors to Myanmar, a tribute to the revolving door between big business and the governments who regulate them.

We are reliably informed that an additional difficulty factor for the “winners” of the telecoms tender is that state and division-level licenses will be awarded to local players, which of course will do nothing for Telenor and Ooredoo’s bottom line.

And then there is Hanthawaddy Airport...

Back in the fall the tender for building the new international airport at Hanthawaddy, about 100km north of Yangon, was awarded to Kumho/Incheon Airport. We had expected to see a flurry of activity, followed by a snowfall of contracts to locals and expat companies. But alas, this did not happen, and recently it was announced that Kumho/incheon have walked away from the project, and that it will come up for re-bid. We have heard from multiple sources that talks between the Koreans and the Myanmar government went pretty much nowhere, due probably to all sorts of demands from the government side for things that were never discussed in the original terms of reference.

Real Estate…

Prices for real estate leases are still astronomical, with no signs of leveling out yet. Rents for places to live are still well north of what one would pay for a similar apartment in Shanghai or Beijing.  UNICEF was recently dinged here when it was revealed by Irrawaddy News that the organization was paying a retired crony general’s family $87,000/month for a house in Golden Valley it is using for their Myanmar HQ.

A member of our Seattle Burmese clique recently rented out his place, a very ordinary residence, to a Japanese company for $9000/month, which was paid 3 years in advance in one handsome lump sum.

Still, new building is going on all over the city, and just down the street the Vietnamese HAGL Group is doing a massive development for condos, services apartments, a mall — you get the picture. Where the market will head once all of this new inventory is on the market is anybody’s guess. At least one factor in the bubble continuing to inflate is that the government has not sold very much of its very considerable land holdings here in Yangon and elsewhere. If they were to do so, I’m pretty sure the bottom would fall out, and senior government officials, military people, and the cronies who love them would end up holding the bag.

But what real estate prices are doing is acting as a very real brake on industrial development and inbound FDI. The price of a 30-year lease on industrial land right now is such that a low-margin business like garments cannot think of setting up here.

Juice!

Electricity and the lack thereof acts as the other brake on FDI for manufacturing. The electricity supply is perceptibly better this spring dry season than it was last year. The government electricity people signed a first-ever power purchase agreement with a private producer. But as people in Yangon are paying less for electricity than it costs to produce, I am wondering if the private producer is getting paid on time, or paid at all.

The US Trade Development Agency’s big push here is to get American equipment sold, and American companies actively involved in building out the infrastructure for transmission. This is hampered by the fact that the Myanmar government either cannot or will not issue sovereign debt to pay for any big-ticket projects. Instead it expects everything to be put in place for what in the end will be free money; that’s the thumbnail version that saves long explanations of every financing option in the works.

People and Education

As months go by we become more and more convinced that the biggest harm the military did to the society, the offense that will take the longest to remedy, was the wholesale destruction of the secondary education system that began in earnest in the mid-1990′s. Foreign companies coming into Myanmar are exasperated by the aggregately low levels of skill found in recent college graduates. The short term solution is to work with who you can get, and train the hell out of them, and hope to retain them.  Myanmar labor law does have provision for writing in retention clauses in exchange for company-provided training. The long term solution is going to be generational in nature, and there is no way to speed up the effect of the “tincture of time.”

Politics and Strife

President Obama has kept sanctions in place on Myanmar for another year, even though they are suspended at the moment.  This has its damping effect on US business coming in. Other than Chevron (just here for the oil & gas), GE (selling as many gas turbines as the market will bear), and Coca-Cola, no other large US business has much of a profile here. Chevrolet and Ford have dealers, but these are fronted respectively by a pharmacy chain and an American company out of Thailand. We have not figured out a good way to get money directly from an American bank to a Myanmar counterpart.

And looming behind this are the proverbial elephants in the room. The Buddhist-on-Muslim violence in Rakhine state won’t be getting sorted out anytime soon. The Kachin state still simmers while the Kachin Independence Army and its associated groups haggle over the most they can get in a ceasefire agreement. And for all intents and purposes, eastern Shan state is a de facto Chinese satellite, by virtue of China’s backing of the United Wa State Army drug trafficking group.

Myanmar is hosting the ASEAN chairmanship this year in Nay Pyi Daw. I hope it all goes well. One piece of good news for foreign investors is that the Myanmar Directorate of Investment and Company Administration (DICA) is moving back down to Yangon with a “one-stop shopping” approach to processing FDI apps. Supposedly the office will have reps from each of the relevant ministries regulating different industries. We will be giving this a shot as we register a JV for a series of tree plantations.

Otherwise, we wait for the monsoon, and this year’s is supposed to be a real “beaut,” if the Farmer’s Almanac is to be trusted.  Maybe even a cyclone for good measure.