During the past year, the number of calls from American (sometimes European) SMEs pushed out of China for having operated there without a legal entity (such as a WFOE) have doubled? What is causing this increase of foreign companies getting shut down in China?It’s the economy, stupid.
As China’s economy tightens, various local governments increase their crackdowns on foreign companies operating illegally. Period. But what also happens is that these foreign companies terminate their relationships with their Chinese personnell and then those ex-personnel report the company for operating illegally.
Generally, there is not much our China lawyers can do for a company that has been pushed out of China, but there is a lot we can do for those companies seeking to go legal. And fortunately, the calls and the emails from those companies have increased as well, no doubt due to what they have heard is happening to their compatriots.
The first thing we as lawyers need to do to help these companies get legal (and fast) in China is to figure out how they are currently operating in China (illegally) and then figure out the best way to get them operating legally.
An email from one of our China lawyers to such a client passed my desk the other day and I thought it would be helpful to reprise it here, with changes made so as to completely camouflage the company to whom it was written:
Please provide more details about your business model, including the following:
I understand that your core business is selling _____ products. How do you sell these products? (On the Internet? In a store?)
To whom do you sell your products? (Direct to the consumer? To a store? Via a distributor?)
Where do you sell your products? (The US only? North America? Europe? Asia? China?)
Do you have goods manufactured solely for your own company, or do you sometimes have goods manufactured on behalf of a third party?
What percentage of your products come from China?
Please provide more details about what you are doing in China, including the following:
- I understand that you currently purchase from approximately _____ factories in China and import approximately ____ thousand containers per year. Are your purchases spread fairly even across those factories, or do you order a large percentage from a few of them?
- Are the factories scattered across China, or are they concentrated in one or a few areas?
- Do you have factories make customized goods for you, or do you order “off the shelf” goods that the factories already make?
- Do your products bear your brand/trademark, or the brand/trademark of any third parties?
- For how long have you been working with these factories? How did you come to choose them?
- How do you purchase your products from China? Do you purchase them directly or via a middleman/sourcing agent? Do you use contracts? Purchase orders? Are you committed to purchasing minimum quantities of anything?
- Do you have any plans to add new factories or drop existing factories?
- Do you have any other plans to change your operations in China during the next 1-3 years?
Please provide more details about your “employees” in China, including the following:
- I understand that you currently engage ____ people in China to ______. On what basis have you engaged them?
- For how long have they worked for you?
- How did you hire them in the first place?
- Have they signed a contract? A confidentiality agreement? Anything?
- How do you communicate with them?
- How much do you pay them?
- How often are they paid?
- In what currency?
- In what manner (check, wire transfer, cash, etc.)?
- What arrangements, if any, have you made for payments into these “employees’” social insurance accounts?
- What are their responsibilities?
- To whom do they report to?
- Where in China do they work?
- Do they have an office? If so, where is it?
- Have you ever engaged other people in China besides these ______ current people? If so, how did those engagements end?
Please provide more details about your future hiring plans in China, including the following:
- I understand that you are thinking about engaging ____ additional people in China. When do you anticipate bringing them on?
- How much will you pay them?
- What will their responsibilities be?
- To whom will they report?
- In what city will they work?
What are your main concerns regarding your operations in China?
- Compliance with Chinese laws, including labor laws?
- Developing a market for your products within China?
- Ensuring product quality and compliance with relevant laws in the markets where you sell?
- Protecting your IP?
- Something else?
Once we get answers to the above, along with answers to various follow-up questions, we are ready to start presenting various options, along with their plusses and minuses and their costs.