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China Product Outsourcing: Everything You Need To Know

Posted in Basics of China Business Law, China Business, Legal News
Made in China does not have to mean made badly in China.

Made in China does not have to mean made badly in China.

I just this week learned of a ChinaImportal article, Recommended import from China forums & blogs, written about two years ago. In this article, Fredrik Grönkvis, an experienced China sourcing agent, cites to the two China blogs he reads “on an almost daily basis” and highlights 13 posts from those two blogs that he sees as critical for outsourcing from China. The two blogs are ours and Renaud Anjoran’s Quality Inspection Blog, of which I too am a huge fan.

Here is what Fredrik has to say:

China Law Blog. It’s amazing these guys hasn’t written a book yet (or am I wrong?). While Chinalawblog.com is not focused only on importing (it covers a ton of China business related topics) it’s still a must read for small businesses and startups sourcing from China. Below I list a few posts I think you should read:

How to negotiate with Chinese companies.
Choosing a China OEM manufacturer: A practical guide.
How to find your China manufacturer.
Doing business in China safely. The due diligence basics.
China product sourcing problems.
Payment fraud in China. This season’s edition.

Quality Inspection Blog. This blog is focused on China importing and Quality Assurance and most posts are written for small to medium sized enterprises. I can confess that I’ve been drawing a lot of inspiration from Qualityinspection.com during the development of Chinaimportal.com. The infographics are another great reason to visit this blog. Nobody makes AQL and QC as easy to understand as these guys. These are the posts you should read today:

Best Practices For Importers.
Who is your best contact in Chinese factories?
Difficulties of foreign companies sourcing products in China.
5 ways an importer can develop an unfair advantage.
The small buyer’s dilemma in China.
Top 10 mistakes committed by importers.
The 10 components of a good quality assurance strategy in China.

I cannot resist adding two more blog posts you should read for China product outsourcing assistance:

Getting Started On Manufacturing In China. The Legal Basics.

China OEM Agreements. Why Ours Are In Chinese. Flat Out.

The above is a great list(s) of reading for education regarding China outsourcing. Anything to add to this list?

 

China Business Basics

Posted in Basics of China Business Law, China Business
The basics on doing business in China

The basics on doing business in China

I (and the other China lawyers at my firm) are always getting asked — by clients and by reporters — the “basics” of what businesses “need to know about doing business in China.” A couple years ago, I was interviewed for a China Business article, entitled, The Troubleshooter, in which I discussed some of the basics of doing business in China. That article concisely gives some of the flavor of what it is like to do business in China, while also concisely setting forth some of the basics for doing so. The below are what I see as the highlights from that interview, but I urge you to go here and read the whole thing.

What assumptions do you want to debunk about how things actually work in China?  The most important thing to know about China is that it has sophisticated laws and those laws are enforced.

Is there really such a thing as a “Chinese business culture”? There is. But like any business culture it isn’t universal and it isn’t immutable. If I had to pick one thing to define it, it would be a desire to get the deal done. Chinese businesspeople are more concerned about getting a deal done than they are about cultural niceties.

What are some of the thorniest problems you’ve solved for clients in China? Getting people out of China who are being held there against their will for allegedly having failed to pay debts. This sort of thing happens all the time.

What are the most important pointers/reminders you share for those who want to protect their Intellectual Property? One, Get a good partner that makes sense for you because IP (Intellectual Property) theft is much less likely to happen within a good relationship. Two, get a good contract (in Chinese) with your good partner so that you have a good road map on where your relationship should go. This minimizes future problems. Three, do whatever you can to protect your IP outside of anything legal. It might be as simple as bringing in last year’s model to China. Four, register your IP in China because if you don’t register it, you can’t really protect it if it gets taken.

How should a foreign business court good relations with Chinese government officials? The most basic advice here is to simply try. Go introduce yourself now, not when you have a problem. Let them know what you are doing and ask them how they feel about it. Do NOT bribe.

You once wrote, “The [Chinese] government is much more concerned with social harmony than it is with economic numbers.” Can you cite examples where you saw this in action? Try registering a high pollution foreign business in China today. That will prove this axiom right off the bat.

What has Apple done right in China? A lot. Starting with it simply being Apple in China. Many years ago, when Apple first arrived in China, a number of pundits were criticizing it for not being Chinese enough. They were saying that Apple needed to change its product and/or reduce its cost. Apple did the opposite. It kept its product and prices the same and by doing so it maintained its reputation worldwide. If Apple had made cheaper product and charged less in China, I am convinced that would have hurt its name, reputation, and business worldwide. You have to realize that there will always be pundits out there who criticize the big companies so as to try to convey that they know China business better than the big companies and therefore you should hire them as your business consultant. 

What do you think?

8 Questions For Doing Business in China

Posted in China Business, Legal News
8 questions to ask yourself when doing business in China or even with China

8 questions to ask yourself when doing business in China or even with China

I wrote the below post for Above the Law, the leading (by far) news and information and gossip site for lawyers. Since it showed up on that site this morning, I have received a number of communications from people in China saying that they have been unable to read it there. I therefore am running it here as well for everyone in China, and also for anyone who has not seen it on Above the Law yet.

The China lawyers at my firm are often asked what foreign companies should know and do to stay out of legal trouble in China. The following eight questions make for my answer:

1. Are You Operating Legally? If you are doing business in China for more than a month or two, you should be looking at whether you need to form a legal entity there (a Wholly Foreign Owned Entity (WFOE), a joint venture, or a representative office). Note though that some businesses that are perfectly legal in the United States or in Europe are proscribed to foreigners in China.

2. Do You Have a Good Contract? Written contracts are highly advisable and they generally should be in Chinese. If you entertain thoughts of enforcing the contract against your Chinese counterparty, disputes should usually be resolved in China.

3. Are You Protecting Your Intellectual Property? To protect your trademarks, patents, and copyrights in China, you should register them in China, notwithstanding ostensibly relevant international conventions.

4. Are You Bribing Anyone? Are You Sure? The United States vigorously enforces its Foreign Corrupt Practices Act (FCPA), dealing with improper payments to foreign officials. China now too has its own anti-bribery laws, and those laws are in many ways even broader. At minimum, your company also needs to be sure it is not dealing with any individuals or companies on applicable sanctions lists.

5. Are You Complying With Import-Export Laws? A company recently called me to draft a sales contract for selling their technology product to China. My first question was whether the United States would even allow their product to go to China. This question had never occurred to this company, but it turned out that exporting their product to China would indeed have been illegal under U.S. export control laws. Additionally, many products require special approvals to be imported into China and some cannot be imported into China at all.

6. Are You Complying with China’s Employment Laws? China’s employment laws are national, provincial, and local. Very local. If you are not complying with all levels of China’s employment laws and regulations, you are setting yourself up for problems.

7. Are You Paying All of Your Taxes? Like governments everywhere, China loves collecting taxes, especially from foreigners. And if it can collect interest and penalties for your initial failure to pay taxes due, it is even happier. Know what taxes you need to pay and pay them.

8. Are You Violating Any Antitrust/Pricing/Environmental Laws? I realize that grouping these together is a bit of a fudge, but analyzing them separately would take many more articles. The key point is that doing business in or even with China requires you at least consider these issues and realize that China’s laws may be very different from comparable laws in your country.

If your company cannot give good answers to the above eight questions, you should start making changes, and fast.

China E-Commerce: The New Rules

Posted in China Business, Legal News
China's e-commerce laws are constantly changing.

China’s e-commerce laws are constantly changing.

As part of its program designed to modernize the Chinese economy, the State Council has recently issued a series of opinions on development of e-commerce in China. The underlying concept is that e-commerce is one way to push China towards developing a consumer economy. The most recent opinion focuses on the development of international e-commerce in China: Guiding Opinion for the Promotion of Healthy and Rapid Development of Cross-Border E-Commerce (关于促进跨境电子商务健康快速发展的指导意见). Consistent with recent trends in Chinese law, this Guiding Opinion shows two underlying primary themes. First, e-commerce in China shall be conducted in accordance with Chinese law in a manner firmly under the control of the central government. Second, e-commerce in China shall be conducted by Chinese companies. Foreign participation in the ownership and control of e-commerce companies in China is not even mentioned in the document.

Consider how these underlying themes apply to the sale of U.S. made consumer products to China. Many U.S. manufacturers of consumer goods seek to focus on the Chinese market. Their efforts are restricted for a number of reasons. First, Chinese product safety requirements are difficult or impossible to comply with by U.S. companies. For example, the Chinese requirement for animal testing on imported cosmetics means that many foreign cosmetic products cannot receive approval to sell their cruelty free cosmetics products in China. For more on this, check out Do This One Thing Before Doing Business In ChinaSimilar issues apply to the sale of many food and beverage products. In the same way, many small volume manufacturers of consumer electronics do not wish to or are unable to comply with PRC electronics safety certification requirements.

Many U.S. companies have sought to avoid these issues by selling their product on e-commerce websites. Where the sale is made directly to the individual consumer in China, these companies have worked a loophole in Chinese regulation that gets around these restrictions. First, Chinese consumers are now able to make foreign purchases using their Chinese Unionpay credit cards. Second, the Chinese customs officials have taken a de minimus inspection approach and have tended not to inspect single purchase product shipments sold directly to the Chinese consumer. In fact, Chinese service providers have started to market use of this personal use import loophole to promote sales of non-conforming product in China.

It appears that the Guiding Opinion may be intended to presage shutting down this personal use loophole.

First, payment systems will be centrally monitored to enforce compliance with central government laws and regulations. The current system  basically allowing unmonitored credit card purchases by Chinese individual consumers and small businesses will be replaced by a centrally monitored system that enforces compliance. (See Guiding Opinion, Articles 6, 9, 10 and 12).

Second, for import of consumer goods, strict compliance with central government quality and safety standards will be enforced (See Guiding Opinion, Article 4):

  • The government will impose centralized reporting, shipping and delivery systems. The current loose and disorganized local systems will be shut down.
  • Under this centralized system, strict compliance with central government quality and safety regulations will be imposed.
  • Importers will be held personally responsible for compliance.
  • Those who import in violation of Chinese quality and safety requirements will be prosecuted.

To implement its goal of complete central control, the State Council approved model is the China cross-border e-commerce comprehensive test zone (中国(杭州)跨境电子商务综合试验区 ) established in Hangzhou with Alibaba’s cooperation. Under this model, the plan is to replace the current de-centralized individual importer system with a completely centralized operation under the careful control of the central government authorities.

Note also that under the system advocated by the Guiding Opinion, there will be no role for sales into China through most online sales websites of individual U.S. companies. The plan is for large Chinese companies to control the entire process. Chinese companies will purchase consumer goods overseas and then warehouse the goods overseas and then ship those products to China to one of the centralized cross border e-commerce distribution centers. The Chinese consumer will then purchase the products within China from an e-commerce retailer located in one of those distribution centers. Payment processing will be handled and product will be shipped to the consumer from that central location. The role of the foreign manufacturer or online retailer will be reduced. China’s e-commerce model will be very different from the decentralized e-commerce system typifying online selling in the United States.

If China implements this system, U.S. manufacturers and retailers will need to comply with the following rules:

  • No direct selling to Chinese customers.
  • All sales in China will be done through Chinese owned e-commerce companies.
  • All product must comply with Chinese quality and safety standards.

It remains to be seen what will actually happen in China but for right now, things are not looking so good for many American companies (including many of our clients) who were using e-commerce to sell their products into China using the individual use system. Interestingly though, China just last month announced that it would be opening up some e-commerce sectors to foreign ownership.

We will be closely monitoring China e-commerce developments from on the ground here in China and reporting back on what we are seeing and hearing.

Quick Question Friday, China Law Answers, Part V

Posted in Basics of China Business Law, Legal News
Putting a contract damages provision in your China contract will usually make sense.

Putting a contract damages provision in your China contract will usually make sense. Photo by Steven Snodgrass.http://bit.ly/1CPPrkp

Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all these questions and then comprehensively answer them, that would soon become all that we do and we would soon be out of business. And that would be a bad thing for us and for this blog. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here.

The following was sent to us just yesterday by a lawyer based in China and it is one we get every so often (almost always from fellow lawyers) seeking help on writing a China contract.

What are commercial contract rules in China on interest for late payments? More specifically, is a contractual provision charging more for late payments or charging interest, enforceable? If these things are possible, are there restrictions voiding penalties unless they represent a bona fide estimate of loss?

The issue you are raising is usury. China has no usury law for commercial contracts; China has no law on the highest rate of interest that can be charged on a commercial contract.

2. With respect to damages in general, China does not prohibit liquidated damages. China does not have the penalty/estimate of actual damages concept like that which we have in the United States.

3. PRC Contract law provides for contract damages, or damages determined in advance by the parties to the contract. Rather than being disfavored, China actually favors contract damages since this provides clarity in litigation. For more on how to write a contract damages provision for a China contract, check out the following

4. With respect to the amount of contract damages, if litigation ensues in a Chinese court the plaintiff can argue that the amount is less than actual damages and should be increased. Conversely, the defendant can argue that the damages are too high and that the amount should be reduced. In either case, the amount of contract damages does not affect the validity of the rest of the contract. It is simply one of many factual issues decided by the judge. But as stated above, Chinese courts generally favor contract damages provisions and so if yours was properly crafted, the odds of it holding are pretty good. Also, just having such a provision should give you a lot of leverage because it will make a quick court seizure of assets way more likely.  

5. In general terms, no provision of a Chinese contract will invalidate the entire contract. If a provision of the contract is determined to be void (which is very rare), the judges will simply reinterpret the provision in a manner that is legal and move on.

The Bad Smell of China Customs Circumvention

Posted in Basics of China Business Law, China Business
Imagine eating meat from one of these cows 40 years from now. Now just imagine not having a program in place to prevent your company from buying such meat.

Imagine eating meat from one of these cows 40 years from now. Now imagine your company not having a program in place to prevent that from happening.

Last week it was reported that over $480 million worth of frozen meat – some of which dated from the 1970s – had been illegally smuggled into China where it was seized by Chinese customs officials. The frozen beef, chicken, and pork products had never passed through China Customs and, consequently, had not been inspected for compliance with required Chinese health regulations.

Is it even possible that the buyers of these frozen meat products did not know that the meat they were buying was spoiled and posed health risks to Chinese consumers? Two principal considerations should inform a buyer’s decision to buy particular products: (1) the seller’s identity and (2) the authenticity of the product.

In the case of China’s tainted meat products, it would seem that the buyers would only have needed to conduct the minimal amount of due diligence – either looking at or smelling the meat products – to know that the meat was a health risk. However, for buyers in most other cases, understanding the risks associated with purchasing certain products requires due diligence efforts on both the vendors and the actual product being purchased.

Sometimes sellers view a buyer’s due diligence as indicating the buyer does not trust the seller. In those situations, you should explain the need for due diligence as necessary to ensure compliance with various countries’ regulations. Buyer due diligence typically includes reviewing government sources and official copies of the seller’s business formation documents and business licenses, and sometimes the seller’s financial records as well.

In addition, U.S. companies should also review U.S. lists of sanctioned countries and entities to confirm that the seller is not in a sanctioned country and that neither the seller nor any of its owners or managers are on such lists. Any questions about whether an individual or entity is on U.S. sanctions lists should be resolved before you undertake the contemplated transaction.

American companies doing transactions with Chinese companies will often want to determine whether the Chinese company on the other side is a state-owned enterprise (SOE). This is helpful to know because bribery and corruption risks are always going to be greater with SOEs. American companies that do business with SOEs should ensure that their standard operating procedures minimize and address risks of bribery and corruption.

Concerning the goods themselves, buyers should ensure that the purchased goods comply with the regulatory requirements of both the exporting and importing countries. At minimum, purchasers should ensure that the goods have an official certificate of origin and are clearly documented on applicable shipping and commercial documents. In addition to obtaining documentation demonstrating your due diligence efforts, you should archive such documentation just in case you ever need it to support your position in any regulatory or court proceedings or in the event of a consumer complaint.

Not all products obtained from illegal parties or in illegal ways will look or smell as bad as last week’s 40-year-old meat. However, buyers committed to minimizing regulatory or public relations risks should undertake commercial relationships as if they did smell this bad – at least until you know and trust your business partners and the goods you are buying.

China Entertainment Contracts, 101

Posted in Basics of China Business Law, China Film Industry, Legal News
Make sure that your entertainment contracts are tailored to work in China.

Make sure that your entertainment contracts are tailored to work in China.

I touched on this topic during my recent webinar for the China-Britain Business Council about China Film Intellectual Property. Most of my comments apply equally to all industries, not just the film industry.

Chinese contracts are usually simpler and shorter than contracts used in the West. The specialized vocabulary taken for granted in Western film contracts is still emerging in China contracts, so commonly used expressions or concepts may be misunderstood or simply inapplicable. A Chinese businessperson is less likely to view a contract as a complete statement of a commercial relationship and more likely to see it as a starting point for further negotiations that may become necessary if and when circumstances change. The Chinese approach to negotiations is more personal. Western contracting parties may not always trust each other, but they tend to trust the legal systems in which they operate and this allows them to make reasonably accurate predictions about the consequences of contractual breaches. For Chinese contracting parties the reverse often applies — interpersonal trust is more important.

The main thing to remember is that if you want your contracts with Chinese nationals to be enforceable against them they usually need to be written in Chinese and subject to Chinese law and jurisdiction. This is equally true for China entertainment contracts, especially those involving licensing deals.

Chinese law and jurisdiction are often more appropriate than foreign law and jurisdiction, especially since Chinese courts do not enforce foreign judgments. Blind insistence on the law and jurisdiction of your home country can render your contracts unenforceable against Chinese parties. In the event of a dispute, Chinese courts may well be preferable to an international arbitration commission especially given that, unlike arbitration commissions, Chinese courts can issue asset-freezing orders and arbitral awards require enforcement through courts in any event. Moreover, Chinese courts in the big cities are increasingly capable of fairly resolving disputes involving foreigners — especially when the parties are “symmetrical”, i.e. private companies of approximately the same size. The point is that the Chinese system is not perfect but there will be many times when you will need to be able to access it to have any hope of settling a dispute with a Chinese national who has no assets in your jurisdiction. Oftentimes the key to a good relationship with your Chinese counter-party is picking the right jurisdiction for disputes.

Finally, bear in mind that the enforceability of contracts in China ranks high by world standards. According to the World Bank’s rankings of countries by enforceability of contracts, China is number 35. The UK is number 36. The US comes in at 41 with Singapore at no. 1. Sure, much of this ranking stems from the rapidity by which Chinese courts rule on their cases, but it is out there and it does at least show that contract enforceability in Chinese courts is not nearly as bad as it is so often portrayed.

China Foreign Investment in the U.S.: Beware of Easy Money

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

China is now the world’s third largest overseas foreign investor, behind only the United States and Japan. With the inception of China’s “Go Global Campaign” in the early 2000s, in just 10 years Chinese Overseas Foreign Direct Investment (OFDI) has grown from a mere trickle to an estimated $120 billion in 2014. Within two years, it is estimated that Chinese outbound foreign investment will exceed inbound investment in China. Some Chinese government agencies estimate that total OFDI from China will exceed two trillion U.S. dollars by 2020.

Contrary to popular belief, taking on Chinese investment is rarely easy money.

Contrary to popular belief, taking on Chinese investment is rarely easy money.

The structure of PRC OFDI has also changed rapidly. Early investments were dominated by state owned enterprises, with most of those investments funded by Chinese state owned banks. That investment was focused primarily on Asia and Africa and it was designed primarily to secure key raw materials and secondarily to focus on developing secure trading and manufacturing networks in those regions.

This structure of investment meant that until quite recently U.S. businesses saw very little investment from China. In just the last several years however, this situation has changed. Chinese investment into the United States, however, has been quite different from China’s pattern with the rest of the world. Investment in the U.S. has been primarily from private businesses, mostly funded from outside China’s banking system, and not primarily focused on securing raw materials.

The major new trend that I and the other China lawyers at my firm are seeing (both from here in China and back in the United States) is rapidly increasing participation by Chinese SMEs in US investments. Though the motives for these investments vary widely, investments by Chinese SMEs are — surprisingly — not primarily focused on investment returns. Instead, the SME investments are usually designed to provide the PRC entity with some other advantage.

We typically see two common motivations for China SME investment into  the U.S., depending on the type of industry. For companies in traditional export industries such as furniture, shoes, clothing and housewares, the Chinese SME is usually looking for a secure market for its products. For technology companies, the Chinese SME is looking for privileged access to technology that it will be able to exploit in China.

The structure of the Chinese SME transactions is also quite different from the norm. Most foreign investment by Chinese state owned entities has been in big ticket M&A transactions where the Chinese purchaser takes a 100% or controlling interest in the acquired entity. Chinese SMEs have preferred to take a more conservative route by usually buying only a minority ownership interest in the U.S. company. The China SME then couples this minority investment with an additional agreement to secure the benefit on which they are actually focused. For the traditional exporters, this will typically be a long-term contract with their Chinese factory. For the technology investors, this will typically be a favorable long-term license for a key technology.

The U.S. side must take care to negotiate these types of Chinese investment with great care. In a typical minority investment, the minority investor primarily focuses on minority investor protections, such as super majority decision rules or anti-dilution requirements. Chinese investors typically ignore these issues and are willing to fund the venture with minimal documentation. This then looks like “easy money” to the U.S. side, which too often leads them to make fundamentally bad decisions.

In the traditional manufacturing type of venture, the common mistake is for the American company to agree to a long-term supply contract with the Chinese factory that is financially unattractive to the U.S. parent company. In the technology ventures, the common mistake is for the American company to enter into a license agreement that results in their giving away key technology to the Chinese investor. When we point out these mistakes to the U.S. side (my client), their response is almost always, “But the Chinese side is a co-owner of the U.S. parent company so I know that it will not make any decisions that could harm the U.S. parent. So there really is no reason for us to be concerned about getting trapped into a bad manufacturing agreement or license.”

These American-side explanations are based on the wrongly held belief that the Chinese side is investing for US returns and they almost never prove true.  The Chinese investor is almost never concerned with the success of the U.S. parent; it is concerned only with the short-term benefit(s) that will accrue to the Chinese company. The Chinese side does not even care about financially destroying the U.S. company. It is therefore critically important that the “side” agreements in this type of transaction be drafted to provide maximum protection for the U.S. parent and its U.S. investors. This is seldom done, with predictable results. I know this both because we get called in to represent American companies in these transactions and because we get called to try to fix these deals after the American companies realize their true nature.

BREAKING NEWS: Leading China International School Lays Off Employees. PART 2

Posted in Events
We now return you to our regularly scheduled China programming.

We now return you to our regularly scheduled China programming.

On June 10, I wrote a post about how there had been a major reduction in force at a leading China International School. The purpose of that post, BREAKING NEWS: Leading China International School Lays Off Employees, was to generate discussion as to how China’s international economy is impacting expats in China. My theory was that the layoffs at this prominent school were a reflection of what is happening in the expat community as a whole.

When I published that post, I was confident that a number of employees at a particular school had been laid off and my confidence in those facts has not been shaken. That post actually generated a slew of communications to me from people I know and trust (and also some I do not know) describing layoffs at other schools as well.

There were a number of angry comments in response to my post, challenging me to name the school to which I was referring in the post.  My response to those comments was essentially: calm down, it’s real. And quit accusing me of being out to smear anyone when I never even mentioned the school by name.

Let me step back here a bit. Our policy is to print all comments, good or bad, so long as they are not hate speech or abusive or spam. I and my staff who review comments get to decide what we mean by these things. We do allow anonymous comments but we tend to hold those on a slightly tighter leash.

Now back to our International School post. In response to my fighting back against those who did not believe that the post was factual, a number of people left comments specifically naming one school that the commenters said had laid off employees. Those comments in turn received angry responses from people accusing the commenters (and sometimes me as well) as having it in for this particular school and of trying to destroy it. Some even accused me of hating China and doing whatever I could to drive business away from China — accusations which make zero sense since a large proportion of my law firm’s business depends on our China lawyers helping American and European (mostly) companies get into and do business in China.

Some of those angry with me or with the commenters who wrote about the layoffs claimed to be various different people at a particular international school. One of the people whose name was attached to a number of these comments — including one that threatened to report me to the Chinese government — allegedly was a high level employee at a school named by one of the commenters. I subsequently received a very professional (and not at all angry e-mail) from this person letting me know that he had not written any of the comments attributed to him and telling me that he did not agree with the thrust of what these comments in his name were saying.

He did NOT ask me to pull any comments on the post nor did he hint at suing anyone. But after communicating with him, I came to the realization — entirely of my own accord — that the comment stream to the international school post had become so tainted (not to mention, run so far afield from the original purpose of the post), that I went back and deleted most of them. I deleted the comments that sided with me and those that opposed me and kept only those that addressed the original issue of expats in China. I deleted the ones that I did because they did not add to the original discussion nor could I be sure that the names attached to them were real.

Our comment policy is not going to change, other than if we believe someone is posing as someone else, we will delete the post.

If anyone has any questions, please feel free to fire away below. If anyone wishes to comment on our comment policy — loose as it is — please feel free to do so below.

We now return to our regularly scheduled China programming.

The China Twist: How To Do Business In China, Or Not

Posted in Basics of China Business Law, China Business, Recommended Reading

Just finished reading The China Twist, a fascinating, easy to read, and very helpful book on doing business in China. The China Twist is written by Wen-Szu Lin, and it is described as “the firsthand story of two Wharton MBAs who brought a beloved U.S. food franchise [Auntie Anne’s Pretzels] to Chin and encountered outrageous obstacles that will make anyone in business laugh, cringe, and think twice about doing business in Asia.”

Really? All of Asia?

The China Twist

The China Twist

In reality, instead of making you think twice about doing business even in China, it should make you realize how important it is to go there prepared and with an experienced team in place to assist you. This is an excellent book, but it is much more a cautionary lesson on how not to do business in China than as a lesson on why not to go to China (much less all of Asia) at all.

I use the following legal mishap as an example of this. This excerpt comes from the chapter, “Tripping Up on Chinese Labor Contract Laws”:

Let me see if I understand this correctly. So what you are saying is that even though we have paid our employees on time for the past three years, including raises, bonuses, overtime, and six inusurances, they can sue us for double pay since we “took advantage” of them by not having a renewed contract?” I asked our HR lawyer, Adrian.

“That is absolutely correct. According to labor contract laws, after the original contract ends, you must renew within a month. Otherwise you have to pay double for the entire period that they are not under contract. It is not the same as the US. You guys are foreigners so you do not understand,” Adrian explained.

“That is bullshit! Several people told us that if we do not sign a renewal contract, it automatically renews after one month.

*    *    *    *

We were learning the hard way that the underlying concept behind labor laws in China was drastically different from that of US laws. Although we had HR lawyers draft all of our legal contracts, we were unsure about the details and the technicalities of how they were to be implemented.

Let’s parse out some of this paragraph. Rather than discuss what to do with his HR lawyer before the company’s employment contracts with its employees expired, he relied on what “several people” had told him. Not only is not wise to “crowdfund” your legal advice, it is particularly unwise to do that with China’s employment laws because they are so local. I touched on this in an article I wrote for Forbes Magazine earlier this year, entitled, China’s Hourly Workweek: Think Locally:

I have avoided writing on China employment law because it is so complicated and so localized. My fear has been that any single article can only scratch the surface.

I am also troubled by his argument above for sympathy. He is essentially saying that because he followed China’s laws on bonuses and overtime and insurances, he should be allowed to violate China’s laws on the requirement of a written contract. Really? So if I go ten days in a row without violating a law, I should not be fined for going over the speed limit on the 11th day? And again, would he not have been better off having sat down with his China HR lawyer proactively and discussed China’s employment laws both generally and specifically, rather than “learning the hard way” about them?

Nonetheless, it is still a very fine book because the problems (both legal and otherwise) are exactly the same problems that befell most American entrepreneurs that seek to do business in China. It is a well-written and forthright book, and even though I sometimes found myself disagreeing with Mr. Lin regarding the reasons for some of his China business problems and some of his solutions as well, it does provide real life hands-on insight for those considering setting up a business in China. Had Wen-Szu Lin read his own book before he had gone to China, his chances of success there would almost certainly have been higher. That should be reason enough for you to read China Twist.