Header graphic for print

China Law Blog

China Law for Business

How To Sell To China. Sometimes You Can’t Just Walk In.

Posted in China Business

When we first started this blog, the media was obsessed with “doing business in China stories.” Nearly every week there would be a good first person account from someone recounting what it is/was like to do business in China. I often found those pieces quite helpful as they tended to deal with on the ground specifics and I always feel like I am channelling Ronald Reagan by taking the example of one business and extrapolating it to a massive and diverse country.

Here is a partial list of some of those posts:

Most importantly, we always love it when someone with real on the ground China business (not China law) experience sets forth some of the same China maxims as us.

Today’s “writ large” post is by Jeff Holtmeier.  Jeff is the Managing Partner of China-US Business Development Corporation, a Cincinnati-Beijing-Shenzhen Consultancy with whom my firm’s China lawyers have worked on a number of matters. Jeff recently assisted a medical group in getting its innovative eye care product into China. Having worked with a large number companies that have sought to do the same thing, I can vouch for how difficult that is. Selling product or services to China’s medical industry is far different than selling a consumer product and I thought it would be informative to have Jeff explain how he and his team pulled this off.

So without further ado, I give you Jeff’s brief case study on getting through to China’s hospitals.

 

Selling your product or service in China is a challenge that typically requires a combination of market demand and market knowledge. Sometimes it also requires meeting the right people.  This is particularly true when your product is aimed at a relatively closed market like hospitals.

In late summer 2013, a small, fast-growing medical technology company from the Midwest sought my company’s assistance in developing the Chinese market for their diabetic retinopathy telemedicine platform – an innovative cloud based software platform that allows remote diagnoses of a person’s risk of diabetes-related blindness. What both distinguishes this platform and makes it so promising for China is that its tests can be performed by any qualified retinal specialist from a smartphone, tablet or PC. The company had already found success in the U.S. by selling to primary care medical providers, and was looking for something similar in China—where an estimated 140 million people suffer from diabetes, and many of the nearly 20,000 publicly operated hospitals have neither the access to sophisticated technology nor the available retinal specialists to interpret the massive volume of images.

We began by researching China’s diabetic population, and quickly determined that the best potential buyers for my client’s product would be ophthalmological hospitals. But our client could not simply walk into the hospital and ask to talk with its purchasing department, so I spent some time researching the target hospitals and identifying the key decision-makers, and then worked my Chinese contacts for proper introductions.

Through “a business associate of a business associate,” we set up a meeting with one of China’s most respected doctors of ophthalmology and his colleague, the director of one of the largest eye institutes in China. (No matter how large the organization in China, the top executive always makes the decisions.) The doctor liked our product and he liked us, and he subsequently invited us to present my client’s product to his hospital’s executive team. He also made personal introductions to other leading Chinese ophthalmologists.

Later, one of these ophthalmologists introduced my client to the chairman of a large eye hospital in Henan. The hospital’s chairman loved the product and the following day asked our client to provide a MOU for their consideration, which we delivered two weeks later upon our return to the U.S. Less than six months after our initial contact with the hospital in Henan, my client’s company licensed the use of its first platform in China.

By identifying a large, untapped customer base, by being willing to spend the time and money necessary to get proper introductions into a relatively closed industry, and then working to secure meetings with key the decision makers, my client is well on the road to success in China.

China IP Protection Is Possible

Posted in Basics of China Business Law, Legal News

Virtually every U.S. company doing business in or with China has intellectual property requiring protection from China. Yet far too many of these companies treat their intellectual property in China as an optional or secondary matter when it really should be one of the first issues they consider when approaching the China market.

Let’s first get clear what we mean by “intellectual property.” IP is not patents, trademarks, copyrights, etc. These are simply tools for protecting intellectual property

So what is intellectual property?

  • A better term might be intangible property or intangible assets. This includes everything about your business that has value that cannot be reduced to a physical asset or to a monetary cash flow, with the exception of things like Goodwill or reputation.
  • For creative industries, IP can include virtually all of the assets of the business:
    • Music
    • Film
    • Books and magazines
    • Research and analysis
    • Design of any kind: interior design, clothing design, product design
    • Architecture and engineering
    • Software of all kinds: industrial, retail, video games, phone “apps”
  • For traditional industrial firms, it includes:
    • Inventions
    • Formulas
    • Industrial processes and know how
  • For all businesses, it includes:
    • Brand and image
    • Business planning and corporate strategy
    • Pricing plans

IP is a substantial portion of the value of most modern businesses.. For many businesses, such as those in creative services, it forms the core of the value of the company. Consider the stars of the modern business world: Apple, BMW, Microsoft, IBM, Boeing, Siemens, Nestle, General Electric, Dow Chemical, Starbucks, Amazon, and SAP. Huge portions of their value is in their intangible assets.

However, even for hard asset, resource-based companies, IP is still a major component in their company value. Take the mining companies that have dealt with China for the past ten years. A major portion of their value lies in their pricing plans, their internal data on their resources, their techniques of extraction and transport, their future exploitation plans and the like. This explains why the primary battle between these companies and their Chinese competitors centers on the attempts of both sides to acquire data to aid in the struggle over control of the market.

Active and careful cultivation of intangible assets is mandatory to survive in the modern business world. There is much more to protecting intangible assets than the traditional IP tools.

The traditional intellectual property tools are:

  1. Patents
  2. Trademarks
  3. Copyrights
  4. Trade Secrets

Though these tools are essential in the IP world, there is a far wider set of techniques that can be used, including the following:

  1. Secrecy and refusal to disclose
  2. Licensing and trade secrecy agreements
  3. Trade secrecy and related agreements with employees and joint venture partners
  4. Physical techniques such as encryption and related data protection techniques

Many companies believe that since they have done what is necessary to secure their rights in North America and Europe, there is nothing special they need to do in China. This is a mistake.

The key concept is that IP protection is local. Since all IP protection is based on local law and practice, you must adopt an effective and realistic protection program for the country in which you are operating. If you are in China, you must consider the situation in China. China is currently the most dangerous country in the world when it comes to protecting intangible assets, but that does not mean you can afford to throw up your hands and do nothing. China’s IP risks can be managed, if you realistically assess the risks and  take practical steps for protection.

To protect your IP in China you must make use of the Chinese system. You must act within China for creation of rights, enforcement of rights, and monetary exploitation of rights. You must deal with China the way it is, rather than hoping to rely on a perhaps more perfect system that simply does not exist in China.

China IP protection can be divided into the following four categories in terms of the effectiveness of the system of legal protection:

  • Patent and trademark protections generally work well in China for protecting against large scale infringement, though small time infringement is difficult to prevent.
  • Contractual measures (such as trade secrecy agreements, non-disclosure agreements, licensing agreements, and technology transfer agreements) work in China if — and only if — properly implemented. For what should go into a China contract, check out Drafting China Contracts that Work.
  • Software copyright. China has a specific regime for software protection by copyright. The system is shockingly effective for commercial software. The system has had limited success in protecting retail software.
  • Copyright in creative works. Copyright protection in China has not worked well at protecting creative works in the retail sector. Virtually all movie, film, and music products are cheaply available in China on a wide scale in pirated form. On the other hand, copyright is effective in China for specific violations of copyright in a business to business setting. However, effective protection of copyright requires careful attention to the Chinese registration regulations. It does little good to rely on the general right of copyright for creative works.

Businesses must focus on the realistic risks within China. The risks vary depending on the type of intellectual property. The general situation is as follows.

1. If your IP has value, and if it can be copied with minimal effort, it will be copied and you should prepare for this . The following assets are particularly susceptible to copying in China:

  • Trademarks, trade names, and logos.
  • Exterior product design (design patent and copyright).
  • Books, photos, reports, drawings/plans — any other medium that can be photocopied and reproduced.
  • Any material that can be copied in digital form: music, film, CAD drawings.

2. The Chinese seldom put much effort into independent copying of inventions and other technical IP that cannot be copied easily. If intangible assets cannot easily be copied, the Chinese will usually wait to be trained by the foreign business. They will seldom appropriate foreign technology on their own initiative. As a result, the motivation of many Chinese companies that work with foreign businesses is to acquire technology, trade secrets, and know-how via training from the owner of the IP. This occurs in virtually any area where Chinese companies work with foreign businesses:

  • Technology licensing projects;
  • Joint venture manufacturing or services;
  • OEM manufacturing;
  • Product design and development agreements;
  • Employee training; and
  • Distribution and sales agreements.

Most technology, know-how, and trade secrets are lost in China to companies and employees that have been trained by the foreign owner of the intangible asset. Usually this loss could have been prevented with proper agreements and business practices.

No protection in China will be perfect and American companies often discover that their preferred and customary method of technology protection is not available in China:

  • Patent protection is often not available because of the China rule requiring that China patents must be filed within one year of the patent having been filed elsewhere.
  • Copyright protection is often not effective for easily copied digital media.

Faced with this, many American companies simply give up and operate in China with no protection at all. This virtually always leads to disaster in China. The correct approach is to work to find an alternative form of protection. This can be achieved in many ways, including the following:

  • Licensing agreements;
  • Secrecy and non-use agreements;
  • Technical controls, such as encryption; and
  • Direct manufacture rather than OEM or joint venture.

Many American businesses think China has no IP laws and that Chinese companies do not file lawsuits. This is a mistake. Chinese companies actually tend to be quite adept at using the Chinese IP system to their own benefit, including employing the following tactics:

  • If the American side fails to register its intellectual property in China, a Chinese entity will register the IP in its own name. In this way, the Chinese company cuts the American company out of the American company’s own market. This happens regularly with trademarks, patents, and commercial copyrights.
  • Many American companies mistakenly believe that China does not have a developed IP protection system. They therefore do not adequately investigate to ensure that they are not infringing the rights of others in their operations in China. This is especially of concern when the American company hires a Chinese contractor to perform services or engages in cooperative design or manufacturing operations with a Chinese company. The American company only learns later that it has infringed on the IP of another. The resulting damages can be significant. For how this can play out on the trademark front, check out When To Register Your China Trademark? Ask Tesla.

There is IP protection in China and if you are going to be doing business in or with China, it behooves you to figure out how best to protect your intangible assets.

How To Form A China WFOE: Hong Kong Parent Company Is Optional

Posted in Basics of China Business Law, Legal News

I was cc’ed on the following email the other day from one of our China lawyers responding to a client who wanted to know the “benefits” of forming a Hong Kong company to own its China WFOE, as opposed to its just forming its China WFOE directly in China. I am publishing it below because it provides such a good and blissfully succinct explanation of the pros and cons of forming a Hong Kong company to own a China WFOE. The key takeaway should be that whether it makes sense to have a Hong Kong entity be the parent of a planned China WFOE truly depends on the individual situation.

 

The question you ask is a complicated one. Generally speaking, there are two basic reasons for establishing a subsidiary in Hong Kong to be the direct parent of a WFOE in China: (1) tax benefits and (2) ease of incorporation.

(1) The tax benefits depend on a number of factors, such as the country where the parent company is incorporated, the tax treaties between that country and Hong Kong (if any), the tax treaties between that country and China (if any), the type of work done by the WFOE, the amount of profit the WFOE is projected to make, the amount of money the WFOE plans to repatriate to the home country, and so forth. Sometimes there are no tax benefits; it is something to discuss with your international accountant beforehand. If you need any assistance in finding the right accountant to work with you on this, please let us know as we can certainly make some referrals for you.

(2) Ease of incorporation has to do with the substantial (and often nonsensical) documentary requirements of the Chinese authorities. For a variety of mundane reasons, it is almost always easier and faster to submit documentation from a Hong Kong parent company than from a U.S. company.

Forming a Hong Kong company also has disadvantages. You will have to pay for incorporating a separate entity, and to maintain that entity you will have to file annual reports, pay taxes, and do all the other things required of Hong Kong corporations. All of this is relatively easy and cheap, but it’s an additional layer of complexity. Also, while incorporating a Hong Kong company is easy, opening a Hong Kong bank account is not. It takes time, a lot of documentary evidence, and an in-person appearance at the bank by at least one representative of the Hong Kong company.

The above discussion presumes that the Hong Kong company is a mere shell company that has no employees and no operations outside of its ownership of the Chinese WFOE.

Happy to discuss further if you’d like.

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.