Many companies continue to purchase container load quantities of product from small manufacturers located on the southern coast of China. This trade has developed a standard form of payment, often termed 30/70 TT. This means: 30 percent down payment on placement of the order, with the remaining 70% due upon shipment. This means 30% of the price is paid before the product is manufactured and 100% of the price is paid before the product is shipped.

Here are some common results of this system:

  • Product arrives in the United States. Upon inspection, it is determined that a substantial percentage of the product is defective. The buyer demands a refund and the Chinese manufacturer refuses. In the alternative, the manufacturer offers a discount on the next order. If this offer is accepted, the buyer is forced to continue to do business with a manufacturer that makes defective product.
  • The buyer arranges for an inspection during the production process or prior to shipment. The inspection reveals a substantial number of defects. The buyer demands a refund of the deposit and the manufacturer refuses, stating that they have already spent the deposit to manufacture the disputed goods. In the alternative, the manufacturer offers to correct the defects and provide a discount on the existing order. If this offer is accepted, the buyer is forced to continue to do business with a manufacturer that makes defective product.

The foreign (usually U.S.) company buying the product then contacts my law firm about filing a lawsuit against the Chinese manufacturer, rather than accept the unacceptable terms. In virtually every case, however, the buyer ultimately determines that the cost of litigation is not justified by the amount of the potential recovery. The buyer is then forced either to abandon the manufacturer and take its losses or accept the terms proposed and continue to work with a bad manufacturer.

We continue to see this problem on almost a weekly basis. We can now describe the situation with a general rule: If you pay in advance in China and a problem arises with the product, you will likely be unable to succeed in defending/prosecuting your rights through legal action unless you have a sealed contract from the manufacturer that has been written (in Chinese) to protect you. That is, once you have made payment, the money is no longer yours. It belongs to the manufacturer and you are not likely to ever get it back.

Though this general rule may seem obvious, it does not seem to be well understood by many foreign companies outsourcing their manufacturing to China. They come to China to obtain a low price for manufacturing their product, but in analyzing the price that they will pay, they fail to account for the risk that they will make payments that will never be recovered.

I am not suggesting that the 30/70 TT system be abandoned. Frankly, for small, container load manufacturing projects there really is no viable alternative in China. What I am suggesting is that the foreign buyer realistically assess its risks and the prices being offered based on those risks. The buyer should also mitigate its risks as much as possible by doing the following:

  • Do not make the second, 70% payment until after an inspection of the goods. In this way, the buyer’s risk is limited to the 30% down payment.
  • Inspect the product as early possible. Time is a major factor in China business. If you find defects early, it is possible that you will be able to resolve the issue in time to save the shipment. If the issue cannot be resolved, then you at least can probably move on to a different manufacturer early enough to obtain acceptable product in time to meet your business needs.
  • Treat the 30/70 TT method as the price for testing out the Chinese manufacturing system. As soon as possible, move to a different method of payment. Use one that does not require payment of any funds until after an inspection has been made. There are many alternative methods of payment in China. Of course, the use of such a method will require a quantity and timing commitment from the buyer that extends beyond the spot, single container type of purchase that is typical for the 30/70 TT method of payment. If you are not Wal-Mart, you are not going to get Wal-Mart like terms.

Risk cannot be avoided in any international business venture. Due to the long history of business operations in China, the risks can be determined in advance. For success, foreign companies operating in China must account for these risks in their business planning.

What are you seeing out there?

 

I was recently referred to an Kindle Ebook on how to source from China. The eBook is called, “Find a Chinese Manufacturer: a guide to the ins and outs of sourcing from China” [link no longer exists]. It is written by M.Vancisin and it sells for $2.99, strictly as a Kindle eBook.

The writer describes herself and her book as follows (this is from the book itself):

I am a 15-year global supply chain veteran and have worked for several name-brand Fortune 500 companies. I’ve exported and imported goods all over the world and, even with the resources of a multi-billion dollar company at my back, it was never simple.  Experience is what makes a successful supply chain and the information presented here will allow you to build on my expertise toward your own success.

This e-article became a gleam in my eye after reading small business accounts of sourcing goods in China. The problems encountered were all preventable, but no one had yet created a concise and affordable how-to guide like this one. At least not one that people could afford. There are actually some very expensive ebooks being sold by various consultants. I wanted to offer something more affordable because I know what it’s like to dream big with a small budget.

My hope is this article shows small business owners where the starting line is and what the route looks like.

I quickly read the book and it does actually deliver on its goals. It is an excellent starting guide for the small company looking to outsource product from China and needing the basics on how to do so.

The eBookconsists of only around 20 pages broken out by the following chapters:

  • Top 7 Pitfalls of Doing Business in China
  • How to Find a Chinese Manufacturer
  • Verified Suppliers
  • The Internet and Intellectual Property Issues
  • Internet Bait and Switch
  • Anatomy of a Supplier Scam
  • The Value of a Good Middlemen in China
  • Ways to Find Middlemen/Trade Brokers/Consultants
  • Freight Forwarders
  • How to Find a Freight Forwarder
  • Federal Level Resources
  • State Level Resources
  • Trade Shows
  • Face-to-Face Meetings/Factory Tours
  • Mapping the Route: A 10 Point Checklist
  • The Future of Sourcing Goods in China
  • Special Thank You for Readers: Chinese Visas Demystified
  • Additional Resources

In addition to providing good nuts and bolts type information and helpful checklists on China sourcing, it is also chock-full of excellent links. If you are looking to start outsourcing product from China, this eBook should be your starting point.

If you read it, please let us know what you think.

One of the things that drives me nuts is how some businesspeople act as though the laws in China are so unclear that either nobody knows how to do things right or that there is no point in even trying.

But in so many areas of China business, there is a real uniformity of views among lawyers experienced in representing clients in or doing business with China. That is certainly the case when it comes to the legal safeguards one must undertake when outsourcing from China. These legal safeguards will save you money by both reducing the chance of problems and by greatly increasing your chances for a good resolution should problems occur.

I thought of this uniformity of views when I read a post on the Korean Law Blog, entitled, “Korean Outsourcing: The Legal Basics.” It is a very good post on what it takes to do outsourcing to Korea correctly, but it really is a post on how to do outsourcing to anywhere correctly. In fact, all you need do is change the word “Korea” from that post to “China” and you have a great post on China outsourcing.

That post starts out by noting that if you are “just dealing through a purchase order (PO) in Korea you are heading down a path that will invariably lead to a kick in the tail.” The same is true with China. It then talks of how “foreign companies often make the poorest of choices when doing business with Korean companies” and of how “Korea is still far behind the United States and the West in terms of business ethics, protection of intellectual property and legal transparency.” In these sentences, take the word “Korea” and multiply by four and you have China. It then notes how “many risks, not even considered potential risks in the West, are regularly realized in Korea.” Absolutely ditto for China.

The post then gives the following advice (with my comments in italics:

1. Request and obtain the company’s business registration number and perform a credit check on the company. Ditto for China. For more on this, check out “Giving China Due Diligence Its Due, Part II. Don’t Be A Sucker.”

2. Register all your intellectual property rights (copyright, patents, trademarks etc.) in Korea. Registration will help to prevent your competitor, a disgruntled distributor, or your manufacturer from counterfeiting your goods and exporting your product from Korea to your customers and potential customers. Registration in the United States and Europe does not guarantee that your intellectual property rights are protected in Korea. IP treaties only provide you a window of time to register in a member state.  Ditto for China. For more on this, check out “Register Your IP In China. This Is What I’m Talkin ‘Bout.

3. Your Korean license, distribution, OEM agreements and other agreements used in other nations are not adequate for Korea. All “standard” distribution, license, OEM agreements and other agreements should only be used as guides in Korea. Korea has a unique legal system with unique business risks. If you are planning to deal only through a purchase order (PO), you are a goat waiting to be milked. Ditto for China. For more on this, check out China Supply Agreements. “Why The “Perfect” OEM Agreement Should Cost Less.

4. All agreements, to avoid any initial misunderstandings, should be drafted in English and Korean. A well drafted Korean OEM agreement is not complete until it is translated. Even the best English speaking Koreans, are ill prepared to understand agreements of this nature. Clear misunderstandings upfront and avoid legal fees down the road. Ditto for China. Ditto for China. For more on this, check out “China OEM Agreements. Why Ours Are In Chinese. Flat Out.

5. Know-how, trade secrets and the like should be protected through a written agreement. A standard non-disclosure agreement (NDA) is not enough. This agreement should be signed prior to any course of dealing and normally should include confidentiality, non-use, non-circumvention, non-competition clauses with a liquidated damage clause. Ditto for China. For more on this, check out “Why Non Disclosures (NDAs) Alone Are Not Enough For China” and “Why Non Disclosures (NDAs) Alone Are Not Enough For China, Part II.

6. For at least the first few shipments, don’t pay until the goods are inspected. For the first shipment, check the goods at the port yourself. Afterwards, procedures can be put in place that guarantees the quality, quantity and delivery time through local channels. Not quite ditto for China. This is great advice, when it works. Unfortunately, most Chinese suppliers operate on such slim margins that they cannot or will not start production on a contract without at least half of the money upfront.

What do you think?

Last week, I gave an hour long talk before the Pacific Northwest Chapter of the International Association of Outsourcing Professionals (IAOP). My talk was entitled, “The Legal Myths, Realities, Traps and Benefits to Outsourcing to an Emerging Market,” but I should have called it everything you need to know about the law of outsourcing, crammed into an hour.

The following is the written version of the speech I gave. Please realize this was a speech and not a paper and read it accordingly. I would ordinarily break something like this up into a series of posts, but there really was no logical way to do that with this and so I am giving you the whole (very long) thing in one fell swoop.

INTRODUCTION

I am going to start by telling you a little bit more about me so you can better understand where I am coming from when I talk about international outsourcing and, more particularly, outsourcing to an emerging market.

I am an international lawyer and what that means is that I focus on legal matters involving multiple countries.

In the last ten years, about 50% of my work has involved China, about 10% has involved Russia, 10% Korea and 10% Vietnam, with the remaining 20% percent involving mostly India, Turkey, Thailand, Indonesia, Malaysia, and various countries in Eastern Europe and in Latin America.

So as you can tell, the bulk of my work has been with emerging market countries.

My clients have been a fairly even mix of tech, service and manufacturing companies and I have written and reviewed countless international outsourcing agreements for all three types of business. I have represented both companies that were contracting for outsourcing and companies that were contracting to provide outsourcing. I have been at this long enough to have taken part in what I see as the evolution of outsourcing from the United States. This means I started out mostly dealing with contract manufacturing of goods and then started working on the contracting of technology services and BPO outsourcing. In the last few years, I have been handling an increasing number of outsourcing contracts involving medical clinical trials and professional services.

For the last five years, I have also written a blog on China, which has put me in touch with hundreds of companies involved in doing business internationally, many involving international outsourcing to emerging market countries, especially China. This has given me a much wider perspective than I would have received from my law practice alone.

My talk today is going to be based in large measure on my experiences and on what I have learned from talking with clients and other businesses that are engaged in international outsourcing with emerging market countries.

I am going to focus more on how things really are than on what the law says about how things should be. The distinction between what a country’s laws say and how those laws are actually enforced in the real world is a very important one, particularly when dealing with an emerging market country where the laws are often very good, but the enforcement of them is often very poor.

My goals will be to highlight the legal issues related to outsourcing to an emerging market country and to provide approaches and methods for dealing with those issues.

 DEFINITIONS/SCOPE

What exactly is international outsourcing?

For purposes of my talk today, I will be defining it as using another company to provide your company with a service or a product. I am intentionally being very broad and simplistic here because the legal issues involved in international outsourcing typically apply across the board to most “outsourcing” situations and I do not want to get bogged down in making fine distinctions between the various types of outsourcing.

The “international” part of “International outsourcing” simply means that at least two of the companies involved in the outsourcing be from different countries. International outsourcing does not include a contract between a US company and the US arm of a foreign company when all of the outsourcing work will be done in the United States, because in that situation, no international law issues are likely to be implicated.

I am going to give my own intentionally broad definition of what constitutes an emerging market country because I tend to disagree with most lists and definitions of emerging market countries, both because they so often include what I see as developed countries, like South Korea, Poland, and Chile, and because they so often fail to include a country like Viet Nam, which has been one of the fastest growing countries over the last five years and will, I am convinced, be one of the fastest growing countries over the next five years as well.

In broad and simple terms, my definition of an emerging market country is any country that is growing fast, is able to feed its people, and is not yet highly developed.

Now, I fully realize that all or nearly all of you here today are primarily or exclusively involved in technology outsourcing, so when possible, I will focus on international technology outsourcing. However, from a legal perspective, the big picture issues involved in outsourcing the manufacturing of a shirt button in China are surprisingly similar to the legal issues involved in outsourcing the writing of complex software code to India.

 

In both cases, the primary issues usually revolve around:

 RISKS/BENEFITS

In choosing whether or not to outsource, U.S. companies typically weigh the perceived benefits of outsourcing versus the perceived risks.

The perceived benefits typically are one or more of the following:

  • Reduced Costs
  • Having an outside company handle the non-core aspects of the business
  • Better quality/operational performance
  • Around the clock work force

All of these benefits can be realized by outsourcing to an emerging market country, particularly the lower costs and the 24/7 work force.

But of course, there are risks to outsourcing as well, including the following:

  • Your vendor will do a bad job
  • Your vendor will do a bad job, yet still expect full payment
  • Your vendor will steal your data
  • Your vendor will steal your Intellectual Property
  • Your vendor will steal your trade secrets
  • Your vendor will sell your data or IP or trade secrets to one of your competitors
  • Your vendor will use your data or IP or trade secrets to compete with you
  • Your vendor will cost more than expected in the short term due to transition costs
  • Your vendor will cost more than expected in the long term
  • Your company will lose its innovation edge because someone else is doing its key work
  • Your vendor’s personnel tomorrow will be different from your vendor’s personnel today
  • Your company’s morale will be negatively impacted by your outsourcing
  • Suing and collecting meaningful damages from your vendor may be difficult
  • Politics will impair the project
  • The price will change due to currency fluctuation
  • An inability to secure visas will impair the project
  • Crime will impair the project
  • You might face export control issues
  • You might face Foreign Corrupt Practices Act issues (FCPA)
  • You might get snared in your vendor’s labor/employment law issues
  • You might get snared in your vendor’s bankruptcy

Nearly all of the above risks are present even when you outsource domestically, but nearly all of these risks will be greater when you outsource overseas and nearly all of these risks will be even greater still when you outsource to an emerging market country.

Let’s look at a few of these risks and how going to an emerging market country makes them even greater.

Let’s take the first one: your vendor doing a bad job. If you are outsourcing to a country with a really different language and culture, the chance of a miscommunication is greatly increased and bad communication can cause your vendor to do a bad job.

I can give you a very real example of how this can easily happen, even if your company has strong language skills. A few years ago, my firm was handling a lawsuit in China. We were representing a United States company owed money by a Russian company and we knew the Russian company would be shipping its product to Dalian, China. My firm has two U.S. trained lawyers who are completely fluent in spoken and written Chinese (one here in Seattle and one in China) and a Chinese lawyer who speaks pretty good English, so we were pretty much covered.

We put our lead China lawyer on the case and he and I were handling the matter together. His Chinese is so good that he at one time taught law at China’s best law school — in Chinese. We then brought in a really good Dalian lawyer to assist us on the case and we asked her, both in English and in Chinese, whether we would need to post a bond to seize the Russian company’s product when it hit China and she said “no.” I passed this information on to my client and we thought we were done with that issue. Then, a few weeks later and only a few days before we were to file our complaint, the Chinese lawyer told us that our client would need to come up with around $200,000 for “counter-security.” We simply had not realized that our Dalian lawyer would consider a bond to be different than a counter-security because the word “bond” is usually used to cover all sorts of required payments in this sort of situation. And on the flip side, our Chinese lawyer just assumed we knew all along that we would need to post a “counter-security” because she just assumed that those were required everywhere.

So even though both parties spoke the language of the other quite well and even though both parties were international lawyers, a miscommunication occurred.

Can miscommunications occur domestically? Of course they can…. But they are more likely when the language and the culture are very different.

Let’s talk a bit about the fourth one on this list: theft of Intellectual Property (IP). Emerging market countries do not respect IP as much as developed countries. There is no getting away from that.

In the 1800s, the United States, which could be said to have been an emerging market country at that time, was notorious for its IP infringement. IP enforcement tends to correlate very closely with income because countries do not tend to enforce IP laws until their own native companies have started building up their own IP and pushing hard for IP enforcement.

Each year, the U.S. Trade Department comes out with a list of countries it believes to be the worst IP scofflaws and the following countries made its Priority Watch List and its Regular Watch List:

PRIORITY WATCH LIST

  • Argentina
  • Canada
  • Chile
  • China
  • Costa Rica
  • India
  • Indonesia
  • Mexico
  • Philippines
  • Russia

WATCH LIST

  • Poland
  • Ukraine
  • Vietnam

As you can see, China, India, Indonesia, Mexico, the Philippines and Russia are all on the priority list. IP protection in Vietnam is no better than any of the countries on the priority list and I think the only reason it didn’t make the priority list is because it is newer to the international marketplace and because it is not as economically developed as some of the countries on the Priority Watch List. Canada is obviously a very interesting one. It is on there because it is such a developed country and it is our neighbor, and it has a few really strange IP laws, including, I believe, that it is not a crime to import clearly counterfeit goods. The point of my showing you these lists is to highlight how virtually all of the outsourcing powerhouse countries are on these lists; and if they are not, they should be.

So turning over your IP to an outsourcing company in an emerging market country means you will likely be taking on risks that you would not be taking on if you were turning that IP over to a company in Fargo, North Dakota.

REDUCING THE RISKS

How then can you protect your company from the risks of doing business with a company in an emerging market country?

There are three main ways and all are critically important.

  • Due Diligence on the company you are thinking of using
  • A good contract with the company you end up using
  • Quality Control monitoring every step of the way

Note how only the second of these three is explicitly legal. I am going to talk about the first two. I am not going to talk about Quality Control (QC) because I figure you all are much more knowledgeable about that than I am.

Let’s first talk a bit about Due Diligence.

It is absolutely critical.

I have already done a fair amount of talking about various countries, but to a large extent it is not the country that matters, but the company with which you are doing business.

First off, countries do not tend to be monolithic. Take China, for example. Shanghai is in most respects more like New York than it is like a tiny city in a remote Chinese province. If you have to sue a Chinese company in China, you will be far better off suing in Shanghai where your judge will likely have a law degree from a top university and view his task as ruling fairly. If you sue a Chinese company in a remote province, your judge’s “legal” credentials might consist of a fourth grade education and a prestigious war medal.

The same is true of Russia, where Moscow is more like New York than it is like Magadan. I was once stranded in Magadan in January when the city had no heating oil, so you are going to have to trust me on this.

Second, and even more importantly, the reputation of the particular company with whom you do business should trump the reputation of the country in which that company is based. I am always telling my clients that no matter how good a contract I write and no matter how good the court system is of whatever country is going to enforce that contract, if you enter into a contract with a crook, you are all but guaranteed to face major problems. Conversely, if you enter into a contract with a company that wants more than anything to do a good job for you so as to build up its reputation worldwide, things will almost certainly go well for you, no matter in what country that company is based.

So what due diligence should you do?

The quick, pat answer is whatever is appropriate in terms of the value of the contract. Your due diligence on a 30 thousand dollar outsourcing deal should be very different from your due diligence on a 30 million dollar deal.

You have to be serious about your due diligence, or don’t even bother. For example, if your potential outsourcing company says it did good work for some other company, don’t just believe it. Check it out.

A few years ago, an American company came to me wanting to sue a Chinese company for having provided bad product. When I asked this American company why it had gone with this particular Chinese company in the first place, the American company told me that it had picked this Chinese company because “so and so” had used them. The funny thing was that “so and so” had come to me maybe six months earlier wanting to sue this same Chinese company for bad product as well.

So I then asked the American company if it had ever checked with the first American company regarding its satisfaction with the Chinese company and they told me “no.” They had just assumed that the first American company was happy with the Chinese company simply because they were using them. The second American company lost about a million dollars because of this assumption.

I always recommend going over and visiting the company with whom you are contemplating doing business. Business is business and many of my clients have told me how surprised they were at how easy it was for them to distinguish good companies from bad companies by going and visiting them, even in countries where they did not speak a word of the language.

And don’t be afraid to push for the information you think will be helpful to you. American companies are oftentimes reluctant to be seen as pushing too hard for fear of indicating mistrust. In my experience, the legitimate foreign company actually welcomes the opportunity to prove it is bona fide and it will usually bend over backwards to get you the information you seek. On the other hand, the illegitimate foreign company will usually claim that what you are seeking is “never done” in their particular country.

This means that the way the foreign company reacts to your requests for information can be one of the best and cheapest indicators of the kind of company it really is.

The same is true of Non-Disclosure Agreements (NDA), which you should pretty much always require your foreign counterparty to sign before you reveal anything to them of any real importance. How your prospective outsourcing company handles your request for them to sign an NDA can tell you volumes about who they really are.

My law firm has done hundreds of non-disclosure agreements for China and we know what is acceptable to companies there. So when we draft one for our clients and their Chinese counterpart claims “this is not how we do things in China,” we tell our clients that this is how things are done in China and the only reason we can think of for why the Chinese company would be claiming otherwise is that it does not want to be tied down by a non-disclosure agreement because it plans to steal some of your information.

In fact, for every 100 non-disclosure Agreements we have done for China, I would say that around 50 of them are accepted without any changes, 45 are accepted with reasonable changes and 5 are rejected as not the “Chinese way.”  We actually like it best when the Chinese company comes back with suggested changes because we view that to mean that it is very concerned about not signing a contract that it cannot fulfill. When a company like this does sign a contract it does so with every intention of abiding by it.

The best way to protect yourself against many of the risks I enumerated earlier is to deal with those risks in your contract. The differences between a foreign and a domestic outsourcing contract lie more in the way the contract should be written than in the issues that need to be resolved. In other words, the issues are mostly going to be the same, whether you are outsourcing domestically or internationally, but the big differences in the laws will usually necessitate that your international contract be written very differently from your domestic one.

What is the benefit of having a written contract with another company?

The most common reason given for having a contract is so you have something you can use to sue on if something goes wrong.

In most instances, if you get into a lawsuit over a contract or over someone having taken your IP, you have already lost. This is particularly true of litigation involving outsourcing agreements.

The second reason for having a contract is so you have a mutually agreed-upon blueprint setting out what is expected of the parties. This means that a well-written contract not only positions you to prevail in the lawsuit you hope never happens, it also helps you avoid problems with your foreign outsourcing company. The contract therefore helps the project go smoothly and that works to decrease the chances of a dispute requiring litigation.

So what should you be looking at in terms of your international outsourcing contract?

The first thing you should do is to make sure that what you are planning to do is legal. I am not kidding. What is legal here may not be legal there and you need to know that. We had a very sophisticated American company come to us after having spent half a million dollars on a market research firm that had told them the Chinese market was ripe for exactly what this American company planned to do in China. This American company was now coming to us to help them with their outsourcing agreement with a Chinese company that would be setting up and hosting their Chinese website and also to have us form their company in China.

They were very unhappy when we told them that China forbids foreign companies from operating on their own in the very business they were planning to start.

When it comes to the contract itself, I am always stressing how international contracts almost always require much greater specificity than domestic contracts. Courts in emerging market countries tend to be good at enforcing simple, clear contracts where the standards for default are objective and where the penalty requires little analysis. They tend not to be good at making contracts for the parties, as is common in the U.S. legal system. In the United States, suing on an oral contract or a contract written on a napkin can work out just fine. Don’t think that will be the case in an emerging market country where your not having your contract sealed may preclude you from suing on it.

It is therefore essential that you draft your contract with an emerging market company in such a way that it will produce a good result for you in whatever court you may find yourself. You do not want to base your court case in an emerging market country on a complex set of emails, oral communications and practice over time.

Not only does greater specificity in your contract make sense for foreign courts, it also makes sense for your outsourcing project itself. The cultural and linguistic differences between you and your foreign outsourcing company only increase the likelihood that the two of you will have different understandings about what is implicit in your deal.

For these same reasons, I usually try to avoid words like “reasonable” or “best efforts” in the contracts I draft for foreign countries. What is “reasonable” in Saigon might be very different from what is “reasonable” in Seattle. This is particularly true when it comes to quality. In China, you can pay 25 cents for a t-shirt that will be ruined when washed once. That being the case, it is pretty clear that what constitutes reasonable quality for a t-shirt differs between China and the United States, and there is no reason to think there will not be similar differences with other products and services.

Many years ago, I heard a story of an American who was renting an apartment in Shanghai. Whether this story is true or apocryphal, it is such a good illustration of how Chinese judges and arbitrators view contracts that it really doesn’t matter whether it happened or not. And, by extension, it is also a good story to illustrate how emerging market judges and arbitrators might view your contract.

The apartment this American was renting was a really nice apartment and it had a really nice expensive office chair — high-end apartments in China are virtually always rented out fully furnished. One day, the really nice office chair broke and became unusable and the American tenant kept asking his Chinese landlord to replace it. But that wasn’t happening.

The lease on the apartment eventually came up for renewal and the American refused to renew it unless the landlord put in writing that he would replace the really nice office chair. The landlord agreed and after the new lease was signed, he came by and put in a $2 metal folding chair.

What would happen in the United States if this tenant were to sue the landlord over the landlord’s failure to replace the office chair with something pretty comparable?

The tenant would almost certainly win because the court would essentially write into the lease contract the provision that the replacement chair had to be a good office chair like the one it was replacing. What would happen if the tenant sued the landlord in a Chinese court?

The Landlord would almost certainly win because if you want something in your contract in China, you had better put it in there.

Why is this chair story relevant? It’s relevant because American companies too often fail to put enough into their contracts with foreign companies. Instead, they just assume that the courts or arbitrators will know what the parties intended and re-write their contracts accordingly. But it doesn’t work that way in China. And it doesn’t work that way in Russia or Vietnam or Korea or Turkey or just about every emerging market country of which I am aware.

Not so long ago, an American company came to me after having received a large shipment of laptop bags that weren’t strong enough to hold a laptop. We called the Chinese company to ask about getting a refund, and they told us that if our client had wanted a bag strong enough to hold a laptop, they should have paid 50 cents more per bag for one that could actually do that. The American company should have specified in its contract that they wanted a bag that could hold x number of kilograms.

Damages are another difference between the United States and the typical emerging market country and, therefore, another matter you should consider addressing in your contract.

My eldest daughter is studying in Saigon right now and when she takes a taxi, she makes it a point to talk with the taxi drivers so as to improve her Vietnamese. The taxi drivers always talk of their desire to go to Los Angeles where they will make $2000 a month instead of the $200 or so a month they are making in Saigon. When my daughter explains to them that a studio apartment in Los Angeles will cost them $1000 a month and lunch out costs $10, they literally don’t believe her. They just can’t grasp those numbers.

When my daughter goes to the Ben Than market in Saigon to buy a purse, the vendor typically starts out asking $100 for a purse my daughter ends up buying for 5 or 6 dollars. Why does the vendor ask for $100? Because every once in a while a Western tourist will buy it for $50.

If you go to court in Vietnam or in a typical emerging market country, you will be dealing with something very similar when it comes to your damage numbers.

Let’s say you are a bank and you hired a Vietnamese company to write some software for you. You paid that Vietnamese company $500,000 and the software comes back three months late and it works, but is buggy. So you sue the company in Vietnam and you seek $3 million in lost profits and in the time your company had to spend fixing the software to make it work perfectly.

What is likely to happen to your case in a Vietnamese court?

The judge is almost certainly not going to award you the $3 million you seek. He or she will view that number as the equivalent of the $100 purse, and why not? On top of that, the judge is going to think you have already having saved a fortune by having done the work in Vietnam, so it is unlikely that he or she is going to have much sympathy for you. But the judge is likely to have sympathy for the Vietnamese company if he or she believes it tried its best but is just learning how to handle such big projects. The judge is likely to have sympathy for the Vietnamese company because he or she will likely think that you have not sought hard enough to resolve your issues with the Vietnamese company before suing. And working it out with the Vietnamese company would entail giving the Vietnamese company a lot more time to fix the problems.

In the United States we are always saying “time is money.” They don’t think that way in places like Vietnam and China where time is just an opportunity to throw more really cheap workers at the problem.

So your $3 million dollar case in Vietnam might be worth maybe only $30,000 when and if you win it.

So what can you put in your contract to help you get more in damages?

How about putting in your contract that you can sue your Vietnamese vendor in the United States? You’d get your $3 million from them easy if you could sue here, right? Wrong. If you sue here, you might very well get a U.S. judgment for $3 million, but will you ever collect on it? Vietnam, China, Russia, even Japan: none of those countries will just take a U.S. judgment and turn it into a domestic judgment in those countries such that you will be able to enforce it against your vendor there.

My firm constantly gets calls from American lawyers wanting to retain us to collect on a U.S. judgments they have received against Chinese or Russian companies. The American lawyers have usually charged their clients a pretty fair sum and they think all that is left for them to do is to take that judgment to a Chinese or Russian court. There, they think, they will get their U.S. judgment automatically converted into a Chinese or a Russian judgment and then they will get their money.

But it doesn’t work that way. Your United States judgment pretty much has zero value in either China or Russia, and in most other places in the world as well.

In fact, Chinese and Russian companies love it when you put a United States litigation requirement in your contract with them because they know that their own courts won’t enforce against them whatever judgment you may get. And even if you later realize that suing in the United States is not the way to go and you choose to sue the Chinese or Russian company in its home country, the court there will almost certainly toss your case out for being in the wrong jurisdiction because you signed a contract agreeing to sue in the United States.

So you have to be very careful not to write a contract that essentially blocks you from ever suing on it. And of course, on the flip side, if you put the United States in your contract as the jurisdiction for disputes, the foreign company can easily sue you right here.

Arbitration is oftentimes your best option and should in many cases go into your contract. Almost every country is a signatory to the New York Convention on Arbitration Awards, which means it will enforce U.S. and other foreign arbitration awards.

But arbitration has its shortcomings and sometimes you are better off putting a foreign court as your venue for resolving disputes. For example, if your biggest fear is your outsourcing company running off with your IP or your trade secrets, the fastest and best way to stop that is usually through the courts in the country in which your outsourcing company is based. Choosing the venue oftentimes comes down to figuring out the worst thing that could happen to you and then choosing the best venue for dealing with that.

Another possible solution to the bank software problem I described above is to put a liquidated damages provision in your contract, specifying exactly what the damages will be if the software is late and also what the damages will be if it is buggy – though you will need to define what late and buggy mean. But don’t put three million dollars as the liquidated damages amount; if you do, the court will probably bend over backwards to avoid having to issue a judgment in that amount. Put in $300,000 and you just might get it. Better yet, if your foreign outsourcing company believes you just might get $300,000, you will have positioned yourself well to get the software on time and bug free.

It oftentimes makes sense to put personnel requirements into your overseas outsourcing contract. Emerging market countries have rapid growth and with that growth it is common to see rapid job changing, which likely will not be good for your outsourcing project. One way to try to deal with this is to put in the contract a percentage retention rate that your foreign outsourcing company must meet to avoid a penalty or to get a bonus. You can get even more specific by listing out maybe the ten key people and setting a penalty if some number of those ten leave.

You should also consider the possibility of future currency fluctuations and think about what you should put into your outsourcing contract to protect you from that.

In 1995, a very sophisticated American client of mine sold a very expensive product to a Korean company for three yearly payments of “3.5 million dollars/2.7 Billion Korean Won.” By the time the Korean company was to make its final payment in 1998, its 2.7 billion Korean Won payment was worth only around about 1.7 million dollars, not the $3.5 million dollars the American company had expected. The American company (who had used its in-house counsel, not my firm to draft this contract) came to me to see if it could assert a claim against the Korean company for the approximately $2 million dollar shortfall it had experienced due strictly to the devaluation of the Korean Won, mostly during the Asian crisis of 1997. Since the contract was silent on whether the payments had to be in dollars or in Won, and since it seemed to provide for the Korean company paying in either currency, we determined that the best course of action for this American company would be to chalk this deal up to experience.

One common way to handle currency issues in international outsourcing agreements is for the outsourcing fee to be raised or lowered by half of the percentage change in the currency. In other words, the two parties split the fluctuation down the middle. But if you are going to do this, you need to have clear benchmarks in terms of what the currencies are worth and in terms of when their worth will be measured.

The key here though is that you think about the currency issues before you draft your contract and that you put something in the contract to provide for that – or not, depending on what is most likely to work in your favor.

Protecting your Intellectual Property is always important, particularly when your IP is either going overseas or will be created there. Every country has its own laws governing intellectual property rights within its borders and those laws can run the gamut both as between countries and as between patents, trademarks and copyrights.

Every type of IP asset — trade secrets, trademarks, industrial designs, patents, copyrights — may be involved in your outsourcing relationship and the best to protect those assets is to keep them right here in the United States.

But that isn’t always practical and that doesn’t always make business sense.

If you are going to “loan” your IP to a foreign company you should make it clear in the contract what belongs to you. It is not going to work for you to claim a few years from now that “everyone knew it belonged to us.” You should also think about registering that IP in the country to which you are sending it. Registering it here in the United States is not registering it “there”, particularly when it comes to patents and trademarks.

You are going to have to know and understand the IP laws of the country with which you are dealing. Putting in your contract that IP developed by your foreign outsourcing company belongs to you is not going to help you much if under the laws of the country with which you are dealing, the developed IP actually will belong to the employees or independent contractors who worked on it, rather than the company with which you have a contract.

International IP issues are almost always very complicated and it does not help that they can vary so considerably from country to country.

What if you do end up needing to sue your outsourcing provider in its home country? Is all lost? Maybe not.

Earlier this year, The World Bank came out with its 2010 Country Rankings regarding handling of Commercial Disputes, based on “procedures, time and cost to resolve a commercial dispute”:

  • China 15
  • Russia 18
  • Vietnam 31
  • Ukraine 43
  • Poland 77
  • Philippines 118
  • India 182

How can China have done so well? Because cases there move much faster and cost far less to bring than in most other countries. The same is true for Russia and Vietnam. Whereas US courts grant extensive time for information-gathering, or discovery, almost all emerging market countries pretty much forgo discovery altogether. It bears mentioning that these rankings did weigh corruption.

Corruption is a much bigger factor in emerging market countries than in the U.S. and is something your company is going to have to address, particularly since the U.S. government has really stepped up its enforcement of the Foreign Corrupt Practices Act (FCPA) in the last few years.

You will need to be particularly careful in dealing with companies in Communist countries. The United States’ Foreign Corrupt Practices Act applies to payments to government officials and there are a lot of government officials embedded in companies in China and Vietnam and Cambodia due to the nature of their economic systems. Paying off a non-governmental employee could also land your company in hot water — or you in jail — because most countries have their own laws forbidding this sort of thing.

I am not aware of any country in the world that has a “but everybody else was doing it too” defense.

I often hear people say that contracts in such-and-such a country are not worth the paper they are printed on due to corruption. This is pretty much always wrong.

Take Russia for example. Among the countries with which I frequently deal, I see Russia’s judges as being the most corrupt. But even there, corruption has very definite limits. I have a lawyer friend in Russia who tells me that about half of the judges in his city are corrupt (and he knows exactly which ones are and are not). So is it worth having a good contract if your odds of getting someone who will enforce it are only 50%? Yes, and here’s why.

First off, I am going to assume that you are not going to want to get into the business of paying bribes. And on that, my only advice is never ever do that.

My friend’s Russian city is probably more corrupt than most other Russian cities with strong outsourcing and even if your chances of getting a fair hearing on your case in Russia are only 50%, that is high enough to warrant having a real contract.

But even if you do end up with a corrupt judge, you will still be far better off with a good contract on your side. Let me explain.

Let’s say you are suing your Russian counterparty for a million dollars. Should you go forward with the case if you get assigned one of the corrupt judges? Absolutely yes. If you have a great contract and you should clearly prevail, it is going to cost your Russian counterparty a lot of money to pay off the judge for a ruling in its favor. Even corrupt judges in a country with endemic corruption do not want to be seen as corrupt. If you clearly should have won the case, the lower court judge will be very worried about appearing to the appellate court to have been bought and paid for.

So now you are probably saying, “well that’s great, he is telling me to sue so that the Russian company will have to pay some Russian judge a lot of money, but I am still going to be out my $1 million.” Not so fast. If the Russian company is going to have to pay the judge $300,000 to avoid paying you $1 million, and if the Russian company is going to have to risk going to jail for bribery on top of having made the payment, and perhaps most importantly, if the Russian company is going to have to risk losing the case at the Court of Appeals level (and that court is usually made up of at least 3 judges and is usually in another city), don’t you think it would rather pay you $500,000 than pay $300,000 to a judge and risk paying the million on top of that if it loses on appeal?

And I know $500,000 is not the million you were owed, but it is a lot better than zero. In other words, even where corruption is rampant, you are better off having a good contract.

Here is how some of the more prominent countries for outsourcing fared on the most widely cited and probably most highly regarded corruption index, Transparency International:

  • Poland 41
  • China 78
  • India 87
  • Indonesia 110
  • Vietnam 116
  • Ukraine 134
  • Philippines 134
  • Russia 154

I hope I haven’t scared you too much.

Brian Wingfield at Forbes Magazine has a story, entitled Toying With China on the recent Senate hearing on toy safety. Wingfield sees the hearing as “having less to do with safety concerns than with ongoing economic disputes with China.” I agree.

Senator Sam Brownback (who not so coincidentally is running for President), told Nancy Nord, the Acting Chairman of the Consumer Products Safety Commission that, “What I want to hear is for you to say ‘These [unsafe] products are not going to enter our shores,’ He went on to say, “I think you have to just pull a heavy club out and say ‘That’s the way it’s going to be.’

While you are at it Senator Brownback, would you please get someone to say that there will be 1) no more crime, 2) no more car accidents, 3) no more war, 4) no more taxes, 5) no more gossip, 6) no more Entertainment Tonight ragging on Brittany, 7) no more demagoguery. All that would certainly make me feel better.

The article then quotes me as saying, “China right now is the current bugaboo.”

Mattel Chairman Robert Eckert spoke at the hearing and “apologized for the recalls but shifted much of the blame to subcontractors in China,” saying, “We wouldn’t be here if a handful of vendors hadn’t violated our rules.”

I close out the article with the following:

The toy issue is likely to be resolved through market solutions. Harris, who is also an author of the China Law Blog says American companies will have to perform better due diligence, including checking out potential suppliers before doing business with them, examining goods before they leave the factory and getting solid contracts in writing.
“Americans are really going to have to lead the charge by not dealing with bad Chinese companies,” he says.

The toy issue is a politician’s dream come true as it involves “our children,” “our safety,” and the “evil Chinese empire,” but the reality is that this is not really a U.S. government issue. I have heard (but cannot verify) that upwards of 50% of the Chinese companies exporting toys from China were either operating illegally or exporting illegally. At minimum, American companies must make sure the companies with whom they do business in China are legal (though this would not have helped Mattel). For more on what American companies can and should be doing to protect themselves from bad Chinese product, check out CYA: China Outsourcer Protect Thyself.

And though I am always skeptical of the Chinese government’s ability to police the quality of its manufacturers, I do note that a client of ours just yesterday reported the following:

The Xinghu area is under the microscope now. We have one vendor there who informed us they cannot ship our goods because they have not passed an inspection the government made without notice. Their shipments are flagged in Ningbo Customs. They told us the area has many toy mfgs and as such the government has moved into it.

We will see.

In an article entitled, Is sourcing in China worth it? Businesses weigh the costs and benefits, in the wake of product recalls and bans, CNNmoney.com tells us that companies are now doing a cost benefit analysis before just up and having all of their goods made in China. As my ten year old would say, “duh.”

To make a long story short, the article says there are risks to outsourcing to China and the way to minimize those risks is to conduct due diligence on your supplier and/or to get qualified assistance from those who know China.

My favorite line in is the following:

Suddenly, outsourcing to China — standard procedure for thousands of entrepreneurs — looks a lot more complicated. Now businesses must factor in the true cost of obtaining their products at the world-beating “China price.”

Did anyone out there ever find outsourcing to China anything other than complicated? Did anyone deliberately not factor in the “true cost” of obtaining their products from China?

David Scott Lewis is an experienced businessperson/techie, now with Startech Global’s Beijing Office in Tsinghua Pioneer Park. In this three part Sourcing Magazine series, Diane Schaffhauser extensively interviews Lewis on China and on technology in China. Part I, “Analyst David Scott Lewis Shares His China Perspective” is here, Part II, “Your China Strategy Development: Advice from an Analyst” is here, and Part III, “The Current State of Services Outsourcing in China” is here.

Schaffhauser describes the Lewis interview as follows:

You can never know what’s going to come out of David Scott Lewis’ mouth next — but you should know whatever he says will be insightful and you’d better pay attention. An ex-METAGroup analyst who — along with many others — lost his job when the company was acquired by Gartner Research, he had never been to China, aside from Hong Kong. But not so many months ago, he moved overseas because little was keeping him in the US and love beckoned from afar (and online). The last time we caught up with him — in July 2005, when he’d returned home for a brief visit to speak at the AlwaysOn conference at Stanford University — he was providing consulting services in China, primarily to US clients trying to locate just the right service providers to work with. In this interview, Mr. Lewis supplies a no-holds-barred rundown on the current state of the outsourcing business in China.

Though the interview is two years old, it is, like all discussions with Mr. Lewis (a frequent CLB commenter) it is truly “no-holds-barred” and, more importantly, quite interesting and quite instructive.

I recommend it to all who are doing business in China, particularly to those in the tech business.

A recent San Diego Union Tribune article, entitled, Santee go-kart maker cuts costs with shop in China, but move still tricky, is a great example of how small manufacturers can thrive in China. The article’s theme is that China outsourcing is not just for big companies and its focus is on Electra Motorsports in Santee, California, and its owner, Kevin Heath.

Last year, Electra set up a machine shop in Shenzhen to manufacture electric go-karts. Electra now employs 20 people in Shenzhen and setting up there cut its operating costs in half. Heath’s original “dream was to have this great American workshop,” but, according to Heath, “by the time workers’ comp [compensation] and everything else is done with me, we could have a $3 million or $4 million business and still end up with nothing.” Electra’s cost for machinists to build the go-karts has gone from $50 to $60 an hour to $5 to $6 an hour. Of course, its shipping costs are far higher and obtaining the factory, business licenses, export permits and other approvals “was a very complicated and tedious job.”

The article goes on to note the recent surge in small and medium enterprises (SMEs) setting up operations in China and talks of how venture capital (VC) firms are telling their small start-up companies to have a global strategy. “They are saying, ‘We want to see now how you’re going to reduce costs and increase your efficiencies.'”

Smaller companies have historically been cut out of China because they lack the resources necessary “to keep up with changes in governments, laws, intellectual property and piracy,” but that “has changed in recent years.”

Electra’s Shenzhen machine shop is about 10,000 square feet right now, but Heath plans to add 18,000 square feet and offer his low-cost manufacturing services to other small businesses.  Electra has already started making foam surfboard blanks for a local (California) surfboard maker and conveyor belt equipment for a San Diego construction-equipment company. Sales last year amounted to $1.2 million, Heath said.

We too have been seeing increasing numbers of American and European small and medium sized enterprises (SMEs) leveraging their China knowledge to make money off other American/European SMEs seeking to take advantage of China, but without their own capabilities to do so. China is very difficult for small companies inexperienced in the ways of China business and many of these companies can save money and reduce risk by dealing with the pioneers already doing business in China. Our own law firm does this to the extent that about a third of our China work comes to our China lawyers from American and European law firms that do not have their own China legal practice.

I would love to hear of other examples of companies who started doing business in China for strictly “internal” reasons, but ended up using their China knowledge to expand into manufacturing, outsourcing, or consulting for “outside” companies.

What are you seeing out there?

I once wrote an article on the nine keys to controlling legal costs and improving legal services and I wrote another article on the four essential principles of emerging market success. Co-blogger, Steve Dickinson, wrote an article on the five basics for reducing risk with China outsourcing. Three articles and the two of us could come up with only 18 commandments total.

So when ChinaSolved came out with its “Ten commandments for Westerners in China,” [link no longer exists] we had to post on it.  Sinocidal then came out with its own post, entitled, “The Sinocidal Antithesis Commandments: 10 Commandments for Chinese Working with Westerners.” [link no longer exists]  If your put your mouse on “Sinocidal” on our blogroll (to the right), you would see that we describe it as “Funny rants on China. Sometimes even informative,” and that is how I would describe its most ten commandments post. It is meant to be funny and it is, but underneath it all, it makes some valid points. How can you dispute a post that tells people to contact my law firm’s China lawyers for China legal assistance?  This post is an excellent primer on what Western companies will find (not always) in dealing with Chinese companies.

Following up on its commandments to Chinese dealing with foreigners, Sinocidal came out with an additional ten commandments for Westerners dealing with China. Beyond being impressed with Sinocidal’s ability to gin out 20 commandments with seeming ease, this post certainly qualifies as “even informative.” I know the guy who wrote these posts for Sinocidal and though he enjoys having us believe he is an uncouth low-life, he is also quite knowledgeable about doing business in China and I have from time to time on this blog used information and advice he has given me.

In PG-13 form, this post’s ten commandments are as follows:

1. Know your ‘enemy’ well. Keep your friends close and your enemies closer still. Both phrases that come to mind when dealing with potential Chinese partners. A couple of good books to read on the plane The Art of War and When Yes means No’. Read them, understand them and remember them. A meeting with the Chinese is based on sound principles of feeling your enemy out, probing attacks, tactical withdrawals and counter attacks, all leading up to a ‘decisive’ thrust, from both parties, that at best will end up in stalemate. You’ll never win the war but you may end up with a non-aggression pact. Just think Korean peninsula and try to end up being the South.

2. China is a communist country and who are we to disagree. As a country, they’ve got far bigger problems than communism. Live with it, live in it and have fun . . . .

3. There was a saying we read many lunar events ago, well seven Spring Festivals ago to be exact. “It’s China’s a sand pit and if you want to play in it then learn to play by their rules.” This does not mean you follow their example on all occasions though: keep it legal and keep it above the table.

4. When you feel your ability to meet the China Challenge is diminishing, take a break. Do NOT keep beating your head against the Great Wall that is business in China. There is a reason Chinese take off for a month a year. Plan a trip to Australia for a week, or better yet, just take a 5 day cruise.

5. Time is one thing the Chinese have plenty of. The more time they spend in meetings the less actual work they have to do. Since they rarely make decisions in meetings with foreigners then get into the meeting, make your point and then invite them to lunch or dinner. Always try to schedule meetings for about 10.30 or 15.00 and use the other time for doing real work and planning, that way your meetings will be cut short for meals and it’ll save you having to spend hours drinking cheap tea. If you don’t smoke and don’t like smoke, make it clear to the Chinese that you’d prefer it if they didn’t smoke in the meetings as you find it distracting and uncomfortable. At meals times forget it ‘ smoking at the table is part of life here.

6. Truth, honesty, good-will and long-term benefit are all culturally-specific concepts that do not apply in relationships between Western and Chinese companies. You’re not Chinese and they couldn’t give a toss about you. Forget trying to build up this “guangxi” you’ve heard about, you’ll never do it. Win-Win is not something the Chinese understand; it’s just the name of a Panda in the Chengdu zoo. The Chinese prefer “we Win more you Win less.” Be prepared and make sure that YOU win more.

7. Check your brains in at the border, pal. If you don’t, the minute the money starts draining away and your intellectual property starts turning up on every market stall, you will go nuts. Every single person here will claim to have great connections and offer to open doors for you, but when it comes down to it they’ll be nowhere to be . . . seen.

8. Due diligence is the most important part of preparing to do business in China. Your potential Chinese partner more than likely has no idea what they’re doing because if they did they wouldn’t need or even want to be your partner. Assume you’re about to be shafted . . . . and prepare for the worst. The concepts of “giving them the benefit of the doubt,” “competent until proven useless” or “innocent until proven guilty” are best forgotten and your best move is to be open-minded but prepared to walk away. 9 times out of 10 you will get screwed so shop clever.

9. China will be here for a long time and it’s a big (although very uneven) playing field. Remember the old adage of “history repeats itself” (sometimes) and look back at Chinese history. This place could yet fall to pieces at any time. Not only has the boat not sailed, it’s barely even floating yet. When in negotiations, remember to mention that you’re also looking at setting up in India or Vietnam. India especially has a more stable background and is the worlds largest democracy. The Chinese love to play the numbers game and love to be the world’s best or biggest – goad them into being the world’s largest democracy.

10. Having a sense of humor is absolutely pointless. You will drive yourself insane coming up with interesting and amusing uses of Chinese language only to be met with blank looks. And when things go tits up because of some clueless idiot, you will find that you are the only one laughing.

I agree with all of these commandments, at least partially. Here goes:

  1. “Knowledge is power.”
  2. True about China and I buy into that philosophy generally.
  3. Absolutely.  I have had clients argue with me about the irrationality of China’s laws as though convincing me that China’s laws are irrational means they will not need to follow them. For the record, China’s laws are often irrational and if you want to pay by the hour to have us help defend you in a China criminal trial, just let me know.
  4. Certainly one need not go all the way to Australia for a break.  Macau, HK, Tokyo, Bangkok, and Hanoi are plenty nice and a lot closer.
  5. Yes.  fortunately, not a single China lawyer with whom we typically work (and this is true throughout China) smokes.
  6. I completely agree on the Guanxi point and I have said this many times previously. Co-blogger/China attorney Steve Dickinson has spent the last 30 years of his life intimately involved with China. He lives in China. He speaks absolutely flawless Chinese, and he knows Chinese history, modern and ancient literature, music, and philosophy better than just about anyone in China.   Yet he unhesitatingly admits that because he is not Chinese he will never be able to do Guanxi like a native.  Do you really think you can just because you read one book?
  7. I have written on this previously as well. I said something along the lines of the more someone boasts of their connections, the faster you should run away from them. Everyone who does much business in China knows this.
  8. I am always saying “trust yet verify” when doing business in any country. There is no excuse for acting otherwise. Some would say it should be “do not trust, yet verify,” but I think my version (stolen from Ronald Reagan) is really the same, just more optimistic.
  9. Very true. Or, as co-blogger, Steve Dickinson, has told our clients and potential clients on more than one occasion: “based on what you know about the company with whom you are proposing to do business and based on the agreement they want you to sign, I think you would be better off taking all of the money you were going to put into this deal and going to Macau, sitting down at a roulette table and putting it all on black. Your chances of making any money will be much better and you will (at least for a short time) have more fun doing it.”
  10. Humor is important and should not be abandoned.

This ten commandment thing has real legs and the following blogs have also done something with it:

  • Mike Smock of TwoScenarios Blog says he “was selling engineered piping systems to the Chinese back in the late 80’s” and could have used ChinaSolved’s ten commandments back then and goes on to say he agrees “with every one of them.”
  • Paul Woodward of the Asia Business Media Blog who refers to my original post and says he agrees with my take on ChinaSolved’s commandments.
  • SwizStick at 3PL Wire Blog [link no longer exists] who says the commandments ares “simple, to the point, and highly relevant.”
  • Jerome Cole at Fried Lice Blog [link no longer exists], who adds ten more commandments for Chinese doing business with Westerners, including one of my favorites: “Do not attack dial. If I do not answer my mobile phone, I have a good reason. Calling five or ten times in a row is stupid and annoying. Calling once is enough. After you have called once, your mobile number has been recorded in my missed calls list. I really will call you back.”  This one also applies to my 16 year old daughter.
  • Bill Belew at PanAsiaBiz, who feels Moses would be proud of ChinaSolved’s original ten.

Just came across an interesting debate in Information Week’s Optimize Magazine on whether China is ready to become a major force in IT outsourcing.  The magazine asks the question and received “opposing” answers from the two professors questioned.

Peter Williamson, a professor of Asian business and international management at INSEAD in Singapore answers,”no,” because a fragmented industry and a dearth of English speakers are holding China back for now.”  Go here for that article.

Oded Shenkar, the Ford Motor Company chair in global business management at the Fisher College of Business, Ohio State University, answers, “yes, because government prodding and market pressures are propelling China onto the IT outsourcing stage.”  Go here for that article.

A close reading of the two articles however, reveals more agreement than disagreement.  Shenkar, who answers, “yes,” concludes his article with the following:

Finally, China has more science and engineering students in the United States than any other country, and increasing repatriation rates translate into a flow of a highly capable and globally experienced workforce back to the mainland. The bottom line: You can ignore China at your peril. In five to 10 years, the factory to the world may well become its outsourcing mecca.

Williamson, who cast the negative vote, concludes his article with the following:

For these reasons, China isn’t ready to be a major outsourcing player today. Nevertheless, it would be wrong to write that nation off as a viable competitor in IT-enabled services long term. China is rapidly strengthening its base of software development, and clusters of excellence are emerging: Dalian, in northeastern China, for example, is home to 18 of the world’s top IT companies, including Accenture, General Electric, and IBM. This, in turn, is attracting outsourcing and service activities.

China has another big advantage fueling this growth over India: a large home market for IT. And there are many other potential customers in neighboring, higher-cost Japan and Korea. Given the capacity for rapid learning in Chinese companies and the pool of more than 3 million university graduates entering the market each year, many trained in IT, China is unlikely to confine itself to competing for regional business.

As in the manufacturing sector, after a base is established, China tends to be aggressive in looking for new global markets. While it’s years behind India in these services today, China may be a serious alternative for evaluation in the future.

Seems Williamson and Shenker agree more than they disagree and both agree China is likely to eventually become an IT outsourcing powerhouse.

For more on China IT outsourcing, check out the following:

1.  My post of about a month ago, entitled, “China Outsourcing — Consolidation Waiting (And Waiting) To Happen

2.  “The 2006 China Outsourcing Fair” on China’s big outsourcing fair, taking place from September 7 through the 16 in Beijing, Xiamen, Wuhan, and Tianjin.

3.  “China IT Outsourcing,” [link no longer exists] which concludes China is five to ten years behind Indian IT and “foreign companies in China are spending a small fortune subsidizing China’s education system.”