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Vietnam For China Diversification

Posted in China Business
Night shot of Ho Chi Minh City.

Night shot of Ho Chi Minh City.

I recently returned from a trip to Ho Chi Minh City and Hanoi. As a lawyer who does Vietnam work, I monitor developments in Vietnam and my frequent visits help to give me an “on the ground” sense of the overall business climate in the country. We are seeing an increase in our China clients looking to diversify their Asia presence by going to Vietnam and because I practiced in Ho Chi Minh City and in Hanoi for a total of ten years, I am the one tasked with assisting them.

As more foreign companies look to diversify their manufacturing and product sourcing bases in Asia, Vietnam is competing with the other ASEAN countries for more foreign investment and trade. Though not without its issues, Vietnam has been generally placing higher than most of the other ASEAN countries as a potential place for foreign companies to invest.

Just since my last Vietnam visit several months ago, much has changed. Nguyen Hue Boulevard in Ho Chi Minh has been renovated, creating a beautiful pedestrian-friendly thoroughfare in the heart of District 1. I also enjoyed traveling on the new multi-lane freeway which now connects recently renovated Noi Bai airport to Hanoi.  Positive developments to be sure, but not enough to gauge the current and business climate in Vietnam.

However, during this trip, the results of the latest Vietnam Provincial Competitiveness Index (PCI) came out. The PCI, now in its tenth year, is an annual collaboration of the Vietnam Chamber of Commerce and Industry (VCCI) and USAID. Simply stated, the PCI measures the business climate in Vietnam for private (domestic and foreign-invested) businesses on a province-by-province basis and is intended to measure the ease of doing business in Vietnam. In compiling its Index, it looks at factors like entry costs for business start-ups, access to land and security of business premises, the transparency of the business environment and equitable business information, the prevalence and amount of information charges, the extent of bureaucratic procedures and inspections, bias toward state, foreign or connected companies, proactive and creative provincial leadership in solving problems for businesses, availability of quality business support services, sound labor training policies, and fair and effective procedures for dispute resolution.  The following are some highlights of this year’s PCI.

The PCI showed increased growth and higher business confidence compared to the previous two years, with 46.1% of domestic firms planning to expand their businesses in the next two years and only 8.3% planning to downsize their operations or close their businesses.

The Foreign Investment Survey portion of the PCI reflected an uptick in optimism among foreign-invested enterprises (“FIE”) in Vietnam. Of the 1,491 FIEs from 43 countries surveyed, 16.3% had increased their investments in existing operations and 65.1% had added new employees. More than half of the FIEs said they intend to increase the size of their operations. The increase in employment and business expansion plans were the highest recorded for FIEs in the last five years. Interestingly, upwards of 80% of FIEs said their plans to invest in Vietnam were not adversely affected by the riots which took place in several Vietnamese provinces in May 2014.

Approximately half the FIEs surveyed considered other countries before choosing Vietnam. Of the investors which considered other countries, 83% selected Vietnam over other countries and 17% were in Vietnam as part of a strategy to invest in multiple countries. Vietnam’s competitiveness, as reflected in the PCI, is generally consistent with the results of the American Chamber of Commerce’s (AmCham) ASEAN Business Outlook Survey 2015, which ranked Vietnam ahead of all of the other ASEAN countries except Indonesia. I expect Vietnam to eclipse Indonesia if and when the Trans Pacific Partnership Agreement — to which Vietnam but not Indonesia is a party — enters into force.

The PCI survey showed that FIEs considered Vietnam better than most of the other countries with which it traditionally competes on the issues of expropriation risk, policy stability and the ability of FIEs to influence government policies that affect the business environment for foreign investment in Vietnam. Vietnam is also considered to have a relatively favorable overall tax regime compared to other countries with which it is competing for foreign investment.

As was the case the last year, FIEs find Vietnam less attractive on the issues of corruption, regulatory burdens (e.g., business regulations, inspections and customs procedures), availability of quality public services, and the quality and dependability of infrastructure. Also, due to the shortage of skilled labor in Vietnam, FIEs have had to provide additional training to 20%-35% of their newly hired workers.  The cost of this has been offset somewhat by the fact that employee retention rates in Vietnam are high, with relatively few employees leaving their employers for greener pastures after having been trained.

With respect to customs procedures, Vietnam is in the process of taking steps to simplify customs and tax procedures, and FIEs, through such organizations as AmCham, are lobbying the Vietnamese government to, among other things, provide for advance rulings from customs authorities on tariffs applicable to imported goods, a step that would go a long way to making supply chain issues for FIEs more manageable.

Meanwhile, ground has broken on several new highways that will cut travel times in the southern, central and northern parts of Vietnam. It is hoped that prospective improvements to Vietnam’s Public Private Partnership regime and related legal framework, now under discussion, will help facilitate the some $200 billion in investment needed to modernize Vietnam, bridges, ports, water sanitation, power, and other infrastructure.

For more on Vietnam and its China connections, check out the following:

Four Things Importers From China Should Know About U.S. Antidumping Cases

Posted in China Business, Legal News
Four things importers from China should know about US anti-dumping cases.

Four things importers from China should know about US anti-dumping cases.

Companies importing products into the United States from China may be unfamiliar with terms such as “non-market economy (NME),” “respondent,” and “surrogate values.” However, this quickly changes when such companies’ imported goods are subject to a U.S. antidumping proceeding.

U.S. antidumping or “AD” cases are complex. This is especially true for “non-market economy” or “NME” cases, including those that involve China. The United States deems China to be a non-market economy in which the Chinese Government is presumed to control all Chinese companies and their pricing decisions. Consequently, the United States does not generally use the Chinese companies’ prices in China to determine whether and to what the extent dumping has occurred.

Instead, the United States constructs the sales price of a good in China by valuing the good’s factors of production – such as raw materials, labor, energy, and capital costs – with surrogate values from another country at a comparable level of economic development. Historically, India was the default surrogate country for China. In January 2015, the U.S. Department of Commerce identified Bulgaria, Ecuador, Romania, South Africa, Thailand, and Ukraine as countries at the same level of economic development as China based on per capita 2013 gross national income data.

Because U.S. antidumping cases move fast, U.S. importers are advised to have a good understanding of their roles during and after the various stages of AD proceedings.

First, assuming no affiliations between the Chinese exporter and U.S. importer, U.S. importers are not the responding or examined parties in U.S. AD cases against China. The U.S. Department of Commerce will select one or more companies for examination – the “respondents” – from the companies in China that exported the products to the United States during the investigation or review period.

Nonetheless, U.S. importers should strongly encourage their Chinese suppliers to take the important first step in an NME AD investigation of applying for a separate rate to demonstrate that the Chinese company is not controlled by the Chinese Government. Such applications must be submitted 30 days from the date on which the NME AD case initiation notice was published in the Federal Register. Submitting the NME “Separate Rate Application” is necessary to ensure the Chinese company does not receive the adverse antidumping margin assigned to the “PRC-Wide Entity.”

Second, although U.S. importers are not the respondents in U.S. AD cases, they are the parties liable for paying AD duties on imported products subject to the AD cases. However, such duties will not be conclusively finalized until a subsequent administrative review period concludes. Following an investigation, an AD case’s first administrative review will likely conclude over two years from the date on which an investigation’s final order is published.

Following the AD investigation’s preliminary determination and until an order is issued for an investigation, U.S. importers may post bonds for estimated AD duties on the imported goods. After the order is published, importers must pay cash deposits for estimated AD duties.

Third, U.S. law generally prohibits a U.S. importer’s Chinese vendor from paying or reimbursing the importer for antidumping duties the importer must pay. The Department will deduct any such reimbursed duties from a respondent’s export price in the AD margin calculation such that the AD margin effectively doubles.

Fourth and (for this blog post) finally, U.S. AD cases on Chinese products wreak havoc on global markets for the goods subject to the AD cases. Chinese companies and their U.S. importers will not know the final AD rates on the products for several years. Because U.S. importers do not definitively know their AD risk exposure in sourcing from particular Chinese companies, they cannot accurately budget for purchasing such companies’ goods. This uncertainty often encourages U.S. companies to source goods from other countries or U.S. producers that are not subject to the AD case.

Uncertainty about an instituted AD case and possible liability should not mean indecision. Exactly the opposite is true. In order to ensure that all steps are taken to fully protect U.S. importers’ interests concerning purchases from their Chinese suppliers, U.S. importers need to get out ahead of the AD action and encourage their Chinese suppliers to do the same. AD actions move quickly; U.S. importers and their Chinese vendors need to be quicker.

Why Court Corruption Does Not Mean Lights Out

Posted in Legal News
Just say no to corruption, but also understand what it can mean for your lawsuit

Just say no to corruption, but also understand what it can mean for your lawsuit

Let me put it right out there: most Americans don’t understand court corruption. They have heard about it, of course, but they generally do not understand how it impacts their business. Otherwise they would not so frequently say that there is no point in bringing a lawsuit in such and such a court because it’s corrupt. Corruption influences (sometimes greatly) court cases, but not as often as is so widely believed, and not as much either.

When dealing with corruption, one has to be sensitive to location, type of case, and relative influence of the parties. In other words, a $100,000 breach of contract case between a U.S. private company and a Chinese private company is much more likely to get a “fair trial” in a Chinese court in Shanghai than a case against a massive China SOE (State Owned Entity) involving stolen trade secrets that might have military applications in the small Chinese city in which that SOE is based. Sometimes this is due to corruption and sometimes this is due to what lawyers commonly call getting  home-towned. There are Wall Street lawyers who are as afraid of going to trial in a rural Mississippi court as US companies are of going to trial in China.

But when Americans think of a corrupt court they usually think of the opposing party paying a judge in cash for the ruling of their dreams. But it is rarely that simple and knowing how court corruption works can be an important.

I was schooled in the “finer points” of court corruption by a very smart, very honest Russian lawyer friend of mine who used to practice law in the Russian Far East — where many a prosecutor and judge lives in multi-million dollar mansions on $35,000 a year salaries. What he explained to me works pretty much the same way most of the other emerging market country of which I am aware with a less than pristine court system — or at least that is what lawyers in some of these countries have told me.

My schooling on Russian court corruption was in “real time” as it involved a real case and a real client. It has been many years so I may be a bit off on the numbers, but bear with me here. It is possible that things have changed in Russia since then and it is also quite possible that this information held true only for this one region in Russia. It is also possible that I am the King of Prussia.

My client had a contract with a Russian company under which the Russian company clearly owed my client $2 million, but the Russian company was refusing to pay and all but challenging my client to sue it in a Vladivostok court, the only place my client could pursue its claims. Legally, my client’s case was about as close to a slam-dunk winner as you are likely to see in a business dispute. But my client was rightfully concerned how corruption would influence its case.

Our Russian local counsel explained how we should view the case, corruption warts and all, and he did so by explaining the following:

Nine of the fifteen judges are corrupt. The other six are not .So we have a less than 50-50 chance of getting a fair trial. But I still like our case even before one of the corrupt ones. Our case is so strong that none of the corrupt judges will just toss it to the other side without a very substantial payment. No judge wants to be thought of as corrupt and ruling against our mutual client in this case will definitely raise some eyebrows.

The Russian company will probably need to pay the lower court judge approximately $300,000 for the ruling it wants. And then we can appeal to a three judge appellate panel, made up of judges from throughout the province. A lower percentage of the appellate judges are corrupt and those that are require large payments, especially on a case like this. The odds of all three of our appellate judges being corrupt are quite low. The odds of the Russian company have close connections with any of the judges are lower than when all of the judges are based in its home city. This means that to try to bribe two of the three judges will be very risky and very expensive. Risky because, though rare, people sometimes do go to jail on bribery charges. Expensive because we are talking about 3 appellate judges. So in the end, I estimate that for the Russian company to be assured of winning through the appellate level, it will need to pay maybe a million dollars. And that ignores our ability to at least try to appeal to the Supreme Court in Moscow.

My numbers are obviously just estimates but what I am telling you is that though corruption is a factor, our job is to not allow our client to panic in the face of it. We can settle this case on good terms and that is what we should be trying to do. The Russian company would rather pay us to eliminate risk than pay a bunch of judges and take on new risks.

We did end up settling the case and at a figure not all that much lower than what we would have accepted in the United States.

I am not by any means trying to minimize the impact of corruption; I am merely trying to show that it oftentimes is not as overwhelming as it may initially appear.

Note also that we never discussed our client paying a bribe to anyone. That is always the worst alternative because it puts people at real risk of going to jail without anything close to a guarantee that it will even work. When our Russian lawyer said that people in Russia rarely get arrested for bribery, he was talking about Russians, not foreigners. Do you really think that you have the savvy to engage in risk-free bribery in a foreign country? I can tell you that none of our China lawyers would make that claim.

Court corruption is a much bigger with cases that can reasonably go either way. In those situations — or so I am told — the lower court judges in Vladivostok (and this was many years ago) would take $15,000 to throw the case, knowing that nobody could be certain whether their decision was due to the funds or to the facts. An interesting sidelight: this lawyer also told me that if after paying the bribe the judge no longer felt comfortable ruling for the bribe-payer, he or she would return the funds before ruling against that person. In other words, the judges were honest thieves. On cases that are close to 50-50, appellate courts tend to favor not overruling the lower court.

The bottom line then is that if you want to negate corruption as much as possible, you use a contract that makes it all the more likely for you to prevail, just as you would want if there were no corruption at all.

What are you seeing out there?

China Outsourcing: You Need a System and a Contract

Posted in Basics of China Business Law

Renaud Anjoran’s Quality Inspection Blog (which if you are not reading you absolutely should be) had an interesting post the other day, Setting a System in Place when Buying from a China Factorystressing the importance of having system in place with your China contract manufacturer.

You need a system and a contract

You need a system and a contract for China outsourcing.

The post starts out noting that satisfactorily completing most product orders from China factories usually “depends on a few key people,” such as the following:

  • The old guy who does the setups but doesn’t document them
  • The salesperson who remembers what is important for the customer and repeats it every time to production people
  • The owner’s wife who keeps an eye on production quality

The post then talks about how many Chinese factories have poor systems in place but a boss or some other key person with a “relatively good attitude.” But what “happens when these key people switch jobs, retire, or get busy on something else?” Anjoran answers this question by citing to this post I did on the “exact topic.”

My post was on how restaurants in China that start out well so often deteriorate in quality due to poor management, which then leads to the chef leaving, which then accelerates the cycle of decline until the restaurant shuts its doors. I actually did not write that post to highlight how important key people are to a foreign company’s relationship with its China factory, but I now wish I had.

Anjoran’s post then goes on to list out various ways the foreign company can do something to put a system in place through their ordering process” that will survive the “chef” leaving. He also provides scores of helpful links setting out what sort of systems should be used, and I urge you to go to his post for those.

What I took from Anjoran’s post is how important it is to have a written contract in Chinese with your Chinese factory so that when its “chef” does leave, you have a written document setting forth the strictures of your relationship with the factory and the terms of your product purchase transactions. This is when trade secret and confidentiality and non-compete provisions really earn their keep. You may trust the people at the company with whom you are now dealing but are you certain that you will be able to trust their replacements?

For more on the benefits of having a contract with your Chinese manufacturer, and on what you should put into that agreement, check out the following:

Quick Question Friday, China Law Answers, Part III

Posted in Basics of China Business Law

This is the third in our weekly series, posted every Friday.

Foreign ownership in a domestic Chinese company. It's a trap.

Foreign ownership in a domestic Chinese company. It’s a trap.

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.

Every week or so we get an email or a phone call from someone trying to figure out how to avoid having to spend the time and the money to form a WFOE in China. We don’t really blame them for trying to find a workaround. One of the most common workaround question we always get is along the following lines:

I am looking to go into business with a Chinese citizen and she is suggesting that we do together own a Chinese domestic company. Does this make sense to you?

The quick answer is no, that does not make sense. It does not make sense because foreigners like you are not allowed to have an ownership interest in a Chinese domestic company. The only real method for co-ownership of a China company as between Chinese citizens/Chinese companies and foreign citizens/foriegn companies is via a Joint Venture and let me tell you, what it takes to form a China WOFE is nothing as compared to what it takes to form a China Joint Venture. Forming a China joint venture has pretty much all of the requirements of forming a WFOE, along with having to resolve and document all sorts of additional issues relating to the relationship between the China party and the foreign party.

 

Serving A China Company Under The Hague Service Convention: Have Fun With That

Posted in Legal News
The Hague is more than just a charming town in Holland. It is also how you must serve process on Chinese companies.

The Hague is more than just a charming town in Holland. It is also how you must serve process on Chinese companies.

Suing Chinese companies is a growth area. What it takes to litigate against Chinese companies is one of my favorite speaking topics because so many are surprised to hear what it takes to get it right. Rule number one is do not just go off and sue in a United States court assuming that a U.S. court judgment has any value in terms of actually collecting money. The problem is that Chinese courts do not enforce U.S. court judgments. For more on this issue, check out the following:

Many years ago, I wrote an article for the Wall Street Journal entitled, Chinese Companies Court Disaster: Doing business in America means also learning how to navigate the U.S. legal system. That article focused on the increasing number of lawsuits brought by foreign companies against Chinese companies and on how Chinese companies handle those lawsuits. If you are involved in a lawsuit against a Chinese company or even just considering one, I urge you to read that article.

This post deals with something far more basic. This post is for when you have already sued a Chinese company in the United States and now you need to figure out how to serve process on that company in such a way that will work for the U.S. Courts and, in some cases, for whatever foreign court where you may want to eventually enforce your U.S. judgment.

 

How to Effect Service of Process on a China Company under the Hague Convention

China is party to the Hague Convention on Service Abroad of Judicial and Extrajudicial Documents in Civil and Commercial Matters. This means that service on a Chinese company must comply fully with this Convention. Service under the Hague Convention on Service is effected through the designated Chinese Central Authority in Beijing, which is the Bureau of International Judicial Assistance, Ministry of Justice of the People’s Republic of China. The U.S. company must submit the following to the Ministry of Justice:

1.  A completed United States Marshals Service Form USM-94

2. The original English version of the documents to be served (the summons must have the issuing court’s seal)

3. The Chinese translation of all documents to be served.

4. A photocopy of each of these documents.

Note that because the USM‐94 will not be served, translation of this document is not necessary. In addition to the documents, a payment of approximately US$100 by an international payment order must be sent with the service request, payable to the Supreme People’s Court of the People’s Republic of China. It is imperative that you get all of the above 100% correct as we have heard (and been retained by) law firms that did not even learn of why service was not occurring until six months into the process, at which time they had to start again.

The Ministry of Justice then sends the service documents to the appropriate local court, and that court will effect service. Chinese courts are often fairly slow to send out service. If the Chinese company being sued is a powerful local entity, the service may be even slower. We find that repeatedly calling and emailing both the court itself and the Ministry of Justice expedites service. Generally, both the court and the Ministry of Justice greatly prefer dealing with lawyers (not translators or even paralegals) who both speak and write in Chinese, though this too can vary.

Service usually takes anywhere from one to five months months.

Service on a Chinese company by mail is not effective and U.S. courts have held that China’s formal objection to service by mail under Article 10(a) of the Convention is valid. See DeJames v. Magnificence Carriers, Inc. and Dr. Ing H.C. F. Porsche A.G. v. Superior Court.

BREAKING NEWS: Leading China International School Lays Off Employees

Posted in Uncategorized
What goes up must come down, but as with Seattle, it can also rise back up again.

What goes up must come down, but as with Seattle, it can also rise back up again.

Just got word from a good and highly reliable friend that one of the top international schools in a first tier China city just laid off a number of its employees due to declining enrollment. My friend calls this a “reality check” and attributes it to expats both losing jobs in China and choosing to leave for either personal (see pollution) or business reasons. He says the “great shake out has begun,” with larger companies further trimming their expat ranks and packages for those that remain and smaller companies either sending expats home or reducing their China forces in favor of countries like Vietnam and Indonesia.

What does this decline in expat student enrollment mean? Is China’s economy slowing? The answer to this has to be yes, so the better question is then by how much? Are foreign companies leaving China because it is becoming increasingly difficult to conduct business there due to a tightening legal enforcement? Are foreign companies leaving China because it is becoming increasingly expensive? Is this the long ago vaunted end of cheap China? Are foreign companies actually leaving China in any greater number today than a few years ago? Or are we going way overboard in attributing what may just be one school losing its competitive edge?

What is happening here, if anything?

YOU tell us.

China Law Blog’s Linkedin Group Reaches 10,000 Members

Posted in China Business, Good People, Legal News, Recommended Reading
Our Linkedin China Law Blog Group: It's All Good

Our Linkedin China Law Blog Group: It’s All Good

A couple years ago, we started a China Law Blog Group on Linkedin to create a spam-free forum for China networking, information and discussion. This week we surpassed 10,000 members and the number and quality of our discussions continues to increase as well.

We have had some absolutely terrific discussions, both based on the numbers (discussions sometimes get 100-200 comments) and on their substance. Our discussions range from practical (such as, “what should I do to have a good relationship with my China manufacturer” or “how do I open a China bank account” or “what are the best practices for a China Joint Venture”) to “deep think” (such as, “will China ever respect IP” or “when will we know that China is taking innovation seriously”).

The group’s diversity is one of its greatest strengths. We have a large contingent of members within China and without. 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 Chinese citizens, Americans, and Europeans. These mixes help elevate the discussions.

I am, however, proudest of how we have prevented even a scintilla of spam from landing on our site. We have become so proficient at this, in fact, that we now commonly go weeks and sometimes months without anyone trying to land a spam-bomb in one of our discussions.

If you want to learn more about doing business in China or with China, 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.

We will see you there. Click here and join us.

TPP Will Hurt China Companies

Posted in China Business, Legal News

China, the world’s second largest economy, is not one of the twelve countries currently negotiating a Trans-Pacific Partnership (“TPP”) multilateral trade agreement. The United States and Japan, respectively the world’s No. 1 and No. 3 largest economies, are anchoring the negotiations. Nonetheless, a concluded TPP could adversely impact companies in China that manufacture and export goods.

By way of background on the TPP, please reference my blog posts here and here.

TPP wil adversely impact China businesses

TPP will adversely impact China businesses.

One of the principal objectives of any free trade agreement, and specifically the one being pursued under the TPP, is eliminating or significantly reducing participating countries’ import tariffs. As referenced in one of my previous blogs about the TPP, the Office of the U.S. Trade Representative (“USTR”) used an example of U.S. automobile parts exports to Vietnam to show the importance of import tariff reductions to U.S. companies.

In the USTR’s example, exports of certain automobile parts to Vietnam are subject to a 27% Vietnamese import tariff. Because China, the European Union, and India have free trade agreements (“FTAs”) with Vietnam, exports of these countries’ automobile parts are not subject to Vietnam’s 27% import tariff. If the TPP eliminates Vietnamese tariff rates for U.S. automobile parts, U.S. exporters will have achieved a level and more competitive playing field in Vietnam against exporters from China, the EU, and India. Trade in Goods, USTR. In the example and after TPP, Vietnamese imports of automobile parts from China, the EU, India, and the United States will all be subject to no import tariffs.

Based on other FTAs signed by the United States, we can assume that the TPP would have strict requirements for determining an imported good’s country of origin and whether it qualifies for lower import tariffs under the TPP. For example, under the 2012 U.S.-Korea Free Trade Agreement (“KORUS”), a product traded between the United States and Korea generally must meet one of the following criteria to be eligible for 0% or reduced import tariffs:

  • wholly obtained from one of the countries –an example of which is an agricultural product (like a tomato) that was grown from seed in the country;
  • produced in either Korea or the United States, with any input originating in another country having undergone a shift in Harmonized Tariff Schedule or “HTS” classifications as outlined in KORUS – for example, KORUS may require that a product’s components originally classified under one subheading chapter be ultimately included in a finished product that is classified under another subheading; or
  • produced in either Korea or the United States with any other country’s inputs accounting for less than a total percentage of the product’s net value or cost.

Referencing USTR’s automobile parts example above in the context of the TPP, we can understand how the TPP could adversely impact companies in China that manufacture and export parts and components. Let’s assume that the TPP is signed by the 12 participating countries and that under USTR’s example, Vietnam’s 27% import tariff is eliminated for automobile parts from the TPP countries. Let’s also assume that a U.S. company (“Company ABC”) makes automobile parts and sources some subcomponents from China.

If Company ABC wants to export its automobile parts to Vietnam with no import duty, and thus be competitive with Chinese, EU and Indian companies whose companies’ parts have no import duties, Company ABC will first need to determine whether its parts will be deemed of U.S. origin under TPP. This is a significant concern for Company ABC because it sources certain subcomponents from China and because its product will be subject to a 27% import duty if Company ABC cannot demonstrate its product is of U.S. origin. If the value or cost of auto subcomponents is too great or the subcomponents do not undergo the required HTS shifts so that Company ABC can claim U.S. origin for the finished auto part, Company ABC may reduce or eliminate sourcing of parts from China for exports to Vietnam.

As demonstrated by this example, manufacturers and exporters in China could lose customers or current product demand levels because companies under TPP would want to ensure their products qualify for TPP benefits. Companies in those countries negotiating the TPP will be carefully evaluating TPP country of origin requirements and the impact on their goods. So will companies in China.

Starting A China Business: What JM Keynes Would Say

Posted in China Business

Too many American companies still go to China for other than economic reasons. Too many American companies still go to China with little to no chance of succeeding there. Too many American companies go to China for vanity reasons.

Let me explain…..

Why is that company starting a business in China? Read JM Keynes.

Why is that company starting a business in China? Read JM Keynes.

During college I took all of the required economics courses but fell one (1) elective course short of a major. For at least ten years after graduating, I did not care one bit about not having secured a third major, but as my view of the world has increasingly become from an economic/economist’s perspective it irks me that I cannot claim to have majored in it. In my heart I did, in that all I needed for the major was to take any single economics course. But I digress.

But just a bit.

I read a lot of Keynes back then (what economics or even ersatz-economics major doesn’t?) and one of the things I have never forgotten was how Keynes talked of how big companies are often run by people with goals that go well beyond — and even sometimes conflict with — earning profits. He talked about how those who run big companies often (or was it sometimes?) act to bolster their own standing or prestige, rather than for the good of the company.

I have countless examples from my own experiences representing big companies, but one of my favorites is the following (with enough of the facts changed so that nobody will ever know the company of which I am speaking):

My firm was representing a massive multinational company in an international matter our China lawyers were able to resolve quickly and  favorably for this company. In the course of this representation I became convinced that our client had a strong insurance coverage claim against its insurance company, with a value of around $15 million. I told this to the lawyer with whom I was working and he was far less interested than I expected. I suggested that I contact a lawyer friend of mine (one of the best international insurance coverage lawyers in the world) to gauge his views on the case. The insurance coverage lawyer loved it.

So I convinced my client to move forward with the case. It is important to note that my firm was not billing any time on this matter and it never did. I just wanted to see the client get the insurance money as opposed to a nameless and faceless insurance company.

The international insurance coverage lawyer filed suit against the insurance company and within about a week of that, the insurance company offered $5 million to settle. The insurance coverage lawyer passed this on to our mutual client who immediately wanted to accept it. The coverage lawyer and I were shocked. When a defendant immediately offers $5 million upon the filing of a complaint, there is little doubt that is just an opening offer and the odds are overwhelming that it is willing to go higher. We two lawyers prevailed upon our client to allow to allow for a us to counter-offer and we got authority to do so at $7.5 million, with clear and strong instructions to be sure to “wrap up the case as quickly as possible.” We countered with our $7.5 million and the insurance company immediately accepted.

Had we been given more leeway and more time, there is little doubt that “we” could have negotiated considerably more out of the insurance company. There is almost no way that insurance company would not have paid at least $10 million, probably more.

Why were we not given more leeway and time? Why was our counteroffer so low? In-house lawyers at massive multinationals do not get promoting by bringing in a few more million dollars for the company, but they do lose out on promotions when they bog their company down in litigation in which the company need not be involved. The in-house lawyers with whom we worked lived in fear of being called into a meeting with the General Counsel and the CEO and to explain why they had given the go-ahead to a long drawn out lawsuit that was now consuming valuable executive time. I am convinced that the settlement negotiations were driven more by the in house lawyers career concerns than by company finances.

This sort of thing is not at all uncommon. But what does this have to do with China?

I saw an article on a big company I know well that is going into China in a big way in an industry where I and just about everybody else knows it will lose its shirt. And this is not an isolated case. Our China lawyers still see American companies bring their companies to China when everything points to that being a money losing proposition. Sometimes even their explanations for the move hint that they know this. They will say things like “it just seemed like it’s time” or “there are a lot of people telling us that we should go in.”

Why do companies go into China when the odds overwhelmingly point to their failing? It is always difficult to parse one’s motives, but I am convinced it is sometimes simply because the CEO wants to be able to tell the company’s shareholders or investors that the company “is moving into China” or that the company has a “China plan.” We have also have seen instances where it appears a company is moving into China because someone a level or two below the CEO thinks doing so will expand their standing with the company and lead to promotions and raises.

A lot of this is speculation on my part, but I also know that I am not the first one to raise this issue since Keynes or regarding China expansions.

What are you seeing out there?