Archives: doing business with China

The Wall Street Journal did a story by Wei Gu on the spending habits of Chinese tourists when overseas.  No surprise, they are buying tons of luxury goods. As Wei Gu so aptly puts it:

When Chinese go abroad, they are transformed from obsessive savers and bargain hunters into serious shoppers, much to the joy of retailers. Although conspicuous consumption is now frowned upon at home, total spending abroad by Chinese travelers jumped by 58% in 2012, according to Global Blue, which processes tax refunds for tourists. More than two-thirds of Chinese purchases of luxury goods take place abroad, and overseas sales to Chinese tourists are also growing at a faster clip than sales inside China.

As an international law firm focused on representing American companies doing business with China, we are seeing rapid growth in the following areas related to China’s consumers:

  • Ultra-high end services. China’s super-rich are hiring Americans and American companies to tutor their kids and prepare them for college. China’s super-rich are hiring Americans and American companies to help them put on their big events like weddings and parties.  China’s super-rich are hiring Americans and American companies to design their houses and their interiors.  China’s super-rich are hiring Americans and American companies to design and produce their custom-made clothes.  China’s super-rich are hiring Americans and American companies to plan out their international travel.  China’s super-rich are hiring Americans and American companies to help manage their money (although near as I can tell, this isn’t happening as much as one would think). China’s super-rich are hiring Americans and American companies to run their households. China’s super-rich are hiring Americans and American companies to help them find homes in the United States and in other countries around the world. China’s super-rich are hiring Americans and American companies to take care of their health care needs.
  • Companies that help other companies cater to China’s super-rich.  I am aware of two companies, Affinity China and China Luxury Network involved with this.  It is my understanding that Affinity China brings China’s super-rich to the United States and then partners with American companies in terms of what the Chinese tourists see and do while in the United States. China Luxury Network provides business advice to luxury goods companies on how to cater to incoming Chinese tourists and students.
  • Realtors that focus on Chinese buying real estate in the United States.
  • Private elementary schools on up to graduate schools that are focusing on increasing their numbers of Chinese students, especially the sons and daughters of China’s super-rich.

What have we missed? What else?

A friend emailed me a post the other day and asked me if I agreed with him that it was the “most helpful post your blog has done for helping foreign companies doing business with China.” My response was that I wasn’t sure, but that it certainly ranked up there and that it had been so long since we did that post (more than seven years), I would run it again. Certainly though the advice in that post holds equally true (or more so) today as it did way back then.

Here is that post:

If you are doing business in or with China, you have to check out ChinaSolved. It is operated by my friend Andrew Hupert, who also operates DiligenceChina, [link no longer exists] which is one of the best China business blogs. ChinaSolved is shaping up as a terrific resource on doing business in China. It is already chock-full of useful business advice.

Its article, “Ten Commandments for Westerners In China,” [link no longer exists] is typical of the site’s excellent and straightforward advice for foreign companies doing business in China. And I found myself agreeing with nine out of ten. Here goes:

  1. “Know what you don’t know” (for many westerners, this is by far the most difficult challenge.). Any similarities between China and “back home” are purely accidental. This is a completely different culture. Do not be fooled by surface similarities or by local people who “seem to get it.” Sources of reliable information are your #1 asset.
  2. China is still a communist country – and there is absolutely zero chance of that changing any time soon.
  3. You have to show up to win. You must be physically present and put in the “face time.” There is no “autopilot” in China business. If you feel that you are too busy to learn about China, then you are certainly too busy to be successful here.
  4. If things worked well here in China, then there would be significantly fewer opportunities for competent westerners. Try not to get too frustrated by the challenges you face.
  5. Time does not mean money here. Chinese business people do not believe in “opportunity cost.” Even simple negotiations can drag on for a long time. Avoid getting sucked into an endless cycle of meetings that don’t accomplish anything.
  6. Truth, honesty, good-will and long-term benefit are all culturally-specific concepts. Don’t expect your western standards to carry over here. Win-Win is not standard operating procedure here. Do not fool yourself that your long-term relationship with a local partner means anything.
  7. Don’t check your brains in at the border. You wouldn’t hand over your company’s money, intellectual property or trademarks to a virtual stranger in Sydney, London or San Francisco and expect to make a windfall. Don’t do it in China. The people that are offering to open doors for you are the same ones that can lock you out. Beware of people who peddle their “powerful friends and great connections.” They can use them to hurt you as well as help you.
  8. Due Diligence becomes more important when the language and systems are unclear, not less important. Don’t settle for the “least worst” deal or partner. Partners don’t get more honest and relationships don’t improve as the amount of money involved increases.
  9. China will still be here next year, and in 5 years. Don’t be pressured into signing a contract or making a deal because you are afraid of “missing the boat.” The boat has been here for 4,000+ years.
  10. Having a sense of humor helps. Having a Plan B helps even more.

I agree with all but number 6.  I understand why ChinaSolved felt it necessary to put it in here, but I think it is wrong.

Truth, honesty, good-will and long term benefit are not culturally specific concepts and long term relationships with local partners mean a lot. I think ChinaSolved felt the need to put this in here to make up for the common mistake of Westerners equating a week of good businesses meetings and friendly dinners in China with being set for life. All of us (China consultants, China accountants, and China lawyers alike) who represent Western companies that are doing business with China could fill a book with stories of China deals gone bad. So let us just take it as a given that Western companies constantly make the mistake of trusting too much, too soon.

But, I personally have also have seen enough to fill a book about excellent, mutually beneficial relationships between Chinese companies and Western companies.  And, at least as far as I know, every one of those successful long term relationships was based on trust and mutual long term benefit.

So I say we downsize to just nine commandments.

What do you think?

One month ago, in China Fraud Season Starts Early This Year, we wrote about seeing a massive increase in frauds emanating from China.  I write again regarding one of those frauds because just since last month, we have dealt with two instances of that fraud and one of those involved a very sophisticated client of ours.

More than anything, I want to emphasize how easy it is to fall prey to this one.

The fraud which we are discussing is what I call “the new bank account scam” and we described it as follows in our previous post:

“The new bank account to pay us scam.”  This is the scam on which we focused last year and it is still around and scary as ever.  I really really hate this scam because I have seen far too many smart companies fall for it and I view it as maybe the most difficult to detect.

This scam is usually employed against a foreign company that has been making purchases from a Chinese company for an extended period. The foreign company has been making its payments pursuant to purchase orders that specify the company bank account to which payment should be made. Suddenly, the “Chinese company” (note the quote marks here) sends an email to the foreign company requesting funds for outstanding POs be made to a new bank account. Often, the name on the bank account is not the same as the name of the Chinese company. Often, the bank account is in a different city or even in a different country. Often it is for Hong Kong.

What is the scheme here?  Well, it is always possible that the Chinese company has changed its bank account, but you had better be quite certain of this before you switch your payment.  In the old days, the scheme was either that the Chinese company had hit hard times and was seeking a double payment or an employee at the Chinese company was seeking to get your payment instead of the company.  The Chinese company would get the money in Hong Kong and then claim that you had never paid and that you still owed them money because it was completely your fault for having made the payment to someone other than to them.

Then last year this scam became even more sophisticated when computer hackers started hacking into Chinese companies’ computers and sending out invoices that purported to be on behalf of the Chinese company.

How can you avoid getting caught up in this type of fraud?  Take note of the following:

  • The computer networks of many Chinese companies are not secure. The networks are subject to abuse by employees of the Chinese company and by outsiders. This means that you can NEVER trust an email communication from a Chinese company. Email is inherently insecure in China and you never know with whom you are really dealing when engaging in electronic communication with Chinese companies.
  • Chinese companies tend to be very loyal to their banks and so you should view with extreme suspicion any request to make a change in the payment bank. You should not even consider following such a request unless the request is made in writing on a revised purchase order stamped with the company seal. Even in that case, it is important to contact someone you know in the company with supervisory authority to ensure that the request is valid. Email requests to make a change should be ignored, but the request should be forwarded to your trusted Chinese company contact for an explanation.
  • Carefully review all bank account information. Monitor both the name of the payee and the location of the bank. Where the payee is even slightly incorrect, do not pay. Where the location of the bank is in the wrong city or country, do not pay. I have seen cases where foreign buyers paid to bank accounts outside of China to payees with no connection to the seller. These cases were all obvious frauds and the buyers lost their entire payment. I have seen millions of dollars vanish into thin air with this sort of scam.  The Chinese parties committing the fraud will explain the need for this irregular payment as part of a plan to hold foreign currency outside of China. This kind of arrangement is no longer required in China. Explanations of this kind are indicia of fraud and should be ignored.

If you think you are immune to this scam, you are just flat out wrong.  This scam is hitting serious, savvy, large, internationally experienced companies and it is doing so because it is just so hard to stop.  Our client who got hit with it was dealing with a large multi-national company based overseas (not in China).  This company’s email got hacked and my client received an email with the PROPER invoice and a message saying that the company was consolidating its payment processing and going forward all payments should be made through its Guangdong office and to the following Guangdong bank account.  Someone at my client’s company did exactly as told and now there is a problem between my client and this multi-national.

Yesterday, Casey Xiao-Morris, a very experienced and very savvy China consultant I know left the following comment:

Recently I received an email from Yvonne, my long-time distributor partner in Shanghai. I got suspicious of the email because the signature looked different ( Her email signature is always in English, this particular email had modified signature). I also recognized the writing style was strange too.

I called her right way. It turned out her company email system got hacked. She did not write that email content. Since then, Yvonne company moved to a more secure email system. I hope it is the end of it. Boy, it was close.

She escaped because she was so smart and so careful.  Yesterday, one of our China lawyers got an email from someone who lost around $20,000 via such a scam. If you are doing business with China, be afraid.  Be very afraid.

Or are you immune to this scam, and if so, how have you managed that? What are you seeing out there on this one?

Last December, in a post entitled, Payment Fraud In China. This Season’s Edition, we wrote of how it has “become somewhat of a December tradition to write about China payment scams in December because history shows this is the biggest month for those.  Last December, it was Ancient China Business Scam. Back With A Vengeance This Season.”

This year it seems that China fraud season has started earlier than usual for those doing business with China and, near as I can tell from my completely unscientific non-survey, it seems that the diversity and ingenuity and number of scams is way up as well.  In other words, don’t say we didn’t warn you.

We are seeing the following old scams in quantity this year:

1.  “The come to China to celebrate our deal scam”  In this scam an alleged Chinese company emails a foreign company to express a desire to buy a few million dollars of the foreign company’s product or service.  The terms of the deal are quickly worked out and the Chinese company suggests the foreign company come to China to sign the contract and to celebrate the two parties having cooperated so well in inking their deal.   The foreigner(s) gets to China (usually some fairly out of the way city in China) and is treated to what appears to the foreigner to be a really expensive meal at which the contract is signed. At which point, the foreign company is told that Chinese custom requires that the foreigner buy the Chinese CEO an expensive gift and pay the notarization fee. The foreigner is then either taken to purchase a nice piece of jade and requested to pay a couple of thousand dollars for the notarization fee. Oftentimes the foreigner just gives the Chinese company people cash to go off and buy the CEO gift on the foreign company’s behalf.

It isn’t until weeks later that the foreigner learns that there is no deal and, in fact, there is no Chinese company either. The big lure of this scam is that nobody wants to fly all the way to China, have a great meal at someone else’s expense, and then be too cheap to spend USD$3,000 to $8,000 more to seal the deal.

I keep getting emails from people asking me if “their” deal looks real to me.  My answer is always the same: I have no idea but before getting on a plane, I would do some due diligence on the company AND if the company shows up as real, I would contact them to make sure that they are really the ones with whom you are dealing.  Sometimes just one email to the company that is purportedly behind the deal is enough to determine that a scam is being perpetrated.
It should go without saying, but real Chinese companies are a heckuva lot less likely to perpetrate this sort of scam than someone posing as a real Chinese company.

2.  “The new bank account to pay us scam.”  This is the scam on which we focused last year and it is still around and scary as ever.  I really really hate this scam because I have seen far too many smart companies fall for it and I view it as maybe the most difficult to detect.

This scam is usually employed against a foreign company that has been making purchases from a Chinese company for an extended period. The foreign company has been making its payments pursuant to purchase orders that specify the company bank account to which payment should be made. Suddenly, the “Chinese company” (note the quote marks here) sends an email to the foreign company requesting funds for outstanding POs be made to a new bank account. Often, the name on the bank account is not the same as the name of the Chinese company. Often, the bank account is in a different city or even in a different country. Often it is for Hong Kong.

What is the scheme here?  Well, it is always possible that the Chinese company has changed its bank account, but you had better be quite certain of this before you switch your payment.  In the old days, the scheme was either that the Chinese company had hit hard times and was seeking a double payment or an employee at the Chinese company was seeking to get your payment instead of the company.  The Chinese company would get the money in Hong Kong and then claim that you had never paid and that you still owed them money because it was completely your fault for having made the payment to someone other than to them.

Then last year this scam became even more sophisticated when computer hackers started hacking into Chinese companies’ computers and sending out invoices that purported to be on behalf of the Chinese company.

How can you avoid getting caught up in this type of fraud?  Take note of the following:

  • The computer networks of many Chinese companies are not secure. The networks are subject to abuse by employees of the Chinese company and by outsiders. This means that you can NEVER trust an email communication from a Chinese company. Email is inherently insecure in China and you never know with whom you are really dealing when engaging in electronic communication with Chinese companies.
  • Chinese companies tend to be very loyal to their banks and so you should view with extreme suspicion any request to make a change in the payment bank. You should not even consider following such a request unless the request is made in writing on a revised purchase order stamped with the company seal. Even in that case, it is important to contact someone you know in the company with supervisory authority to ensure that the request is valid. Email requests to make a change should be ignored, but the request should be forwarded to your trusted Chinese company contact for an explanation.
  • Carefully review all bank account information. Monitor both the name of the payee and the location of the bank. Where the payee is even slightly incorrect, do not pay. Where the location of the bank is in the wrong city or country, do not pay. I have seen cases where foreign buyers paid to bank accounts outside of China to payees with no connection to the seller. These cases were all obvious frauds and the buyers lost their entire payment. I have seen millions of dollars vanish into thin air with this sort of scam.  The Chinese parties committing the fraud will explain the need for this irregular payment as part of a plan to hold foreign currency outside of China. This kind of arrangement is no longer required in China. Explanations of this kind are indicia of fraud and should be ignored.
My law firm recently drafted a settlement agreement between an American company that had been tricked by someone (presumably outside the Chinese company) into sending a six figure payment to a “new” Hong Kong bank account. The Chinese company continued to seek payment from the American company for product the Chinese company had produced and delivered to the American company.  Initially, the Chinese company sought full payment, but it agreed to compromise both because we noted that it had been  negligent in allowing its computers to get hacked and because it wanted to maintain its relationship with the American company.

3.  “The fake company scam.’  This is a tried and true favorite and it comes back in new forms every year.  My personal favorite is the fake law firm or fake trademark/copyright/patent agent scam.  Under that scam, a website appears proclaiming really cheap trademark, copyright and patent registrations in China.  Foreign company sends some money and nothing ever gets filed.  There are two variations on this one, one much more sophisticated and harmful than the other.

The first and more simple version is for the fake China law firm or China IP agent to get a one-time payment and then do absolutely nothing further.  Under this scenario, the foreign company quickly realizes it has been scammed and, more importantly, knows that it still needs to register its IP in China.

Under the more sophisticated version, however, the fake Chinese law firm or IP agent keeps updating the foreign company and keeps requesting more money along the way.  Many (probably even most) legitimate law firms and IP agents charge for registrations in stages so even savvy foreign companies see nothing wrong in this.  The smartest of these sophisticated scammers even eventually send the foreign company a fake trademark registration certificate or copyright registration certificate (I am personally not aware of this having gone so far with a patent registration, but I would not doubt that it has).  The foreign company then thinks it is covered for its China IP registrations and does not learn for many years later that it is not. By that point, of course, there are no further traces that might lead to the scammers.

This years most popular edition of the fake company scam seems to be that of fake freight forwarders.  I did some research on this scam  after getting my second email on it in a month and came across this article, Forwarders put on alert over new Chinese freight scam.   One version of this scam is not all that different from the fake IP registration scam in that both involve gaining trust, getting money, and then disappearing:

Fraudulent forwarders pose as legitimate companies with spare capacity. They arrive on-time to collect loads and then disappear.

Another frequently seen scam involves organized gangs creating their own websites and advertising themselves as freight forwarders. These sites are characterized by very basic information, freemail accounts, and mobile phone or Skype contacts only, Mr Yarwood warned.

A third type of fraud commonly seen is where criminal organizations buy failing operators and continue to trade under their name in a state of virtual insolvency. They are able to identify and accept cargo which is subsequently stolen in transit.

Many years ago, a company came to us after its multi-million dollar cargo had disappeared.  All we had to do was look at the shipper’s business license to know that it was a complete fake.

What is the best way to prevent falling victim to this scam?  Pretty much the same as with most other scams.  Make sure that you know with whom you are doing business.  In other words, do your due diligence.  For more on what that means, check out the following:

One of our China lawyers is about ¼ the way through what is appearing to be a very thorough and systematic book on China Due Diligence, called, Due Diligence in China.  We will be posting a review of that book soon.

What are you-all seeing out there?

Co-blogger Steve Dickinson and I will be giving a presentation at AmCham (Beijing) on September 24, from noon until 2 p.m.  AmCham just posted this event but I do not think its posting (which we did not review before it went live) is quite clear enough on what we will be discussing.

So I will try to get clear on that right here and now.

China is obviously going through a lot of changes — when is it not?  It should go without saying that those changes are impacting foreign businesses that do business in China or with China.  Steve and I are constantly talking with each other and with our clients and others about how China’s changes are impacting and might impact foreign businesses involved with China.

Since Steve is based in China and I am based in Seattle, we necessarily talk with different people and we necessarily have a different perspective.  So our plan for this upcoming event is to talk about what each of us are seeing/hearing from our own individual perspectives and then comment just a bit on what the other person is seeing/hearing.  We are each going to independently come up with and discuss the five big trends that we see impacting foreign businesses in China or doing business with China.  Honestly, neither of us will know the other’s list until it is presented live at AmCham.  I swear it.

We plan to speak for a combined 30 minutes or so and then open it up for questions.

I’m hoping you-all can stop by with questions.  Go here to read more and to register.

About a week ago, we did a post, entitled, How To Write A China Contract. Arbitration Versus Litigation. Say Where?  That post discussed an issue that had been raised on China Group on Linkedin, (which just hit 7,700+ members): which forum is better for resolving disputes with Chinese companies, the courts or arbitration?  Our post came down favoring litigation in China (yes, in China) as usually being the best forum.

We talked of how when we seek to determine the appropriate forum for our China contracts, foremost on our minds is the following:

In figuring out what we are going to put in the contracts we write between our US clients and their Chinese counterparts, we first sit back and try to figure out the most likely breach of contract scenarios (either by our own client or by the Chinese company) and also the really critical breach of contract scenarios.  A bad delivery of $100,000 in product might be very likely, but that is going to pale in importance to the Chinese company taking over our client’s factory in China and ceasing all deliveries.  So between those two, we would probably write the contract to provide our client with the best forum for dealing with its factory being hijacked.

A recently issued Chinese Court ruling highlights why a Chinese court is oftentimes the best place to be for an American company seeking redress against a Chinese company. The ruling came from Shanghai’s No. 1 Intermediate Court in the case of Eli Lilly v. Huang, involving a trade secret dispute. The facts of the case are relatively simple.  Huang had been an employee of Eli Lilly’s Chinese subsidiary and he had signed a confidentiality agreement with the subsidiary agreeing not to reveal Eli Lilly trade secrets.  Huang downloaded 21 confidential documents from Eli Lilly’s server, without authorization.  Eli Lilly demanded Huang delete these documents, but he resigned “instead.”  Eli Lilly brought a trade secret misappropriation claim against Huang under China’s Anti-Unfair Competition Law, seeking injunctive relief and RMB 20,000,000 in damages.

The Shanghai court almost instantly issued an interlocutory injunction prohibiting Huang from disclosing, using or allowing others to use any trade secret information in the 21 documents he had downloaded.

This decision presents a number of good takeaways for foreign companies doing business in China or doing business with China, including the following:

1.  Put a trade secret provision in your contracts whenever appropriate.  These especially make sense in your employment contracts.  China does protect trade secrets taken by an employee even if you do not have a contract with that employee forbidding theft of trade secrets, but for various reasons, it is better to have it in your contracts as well, and that is exactly what Eli Lilly had done here.

2. If protecting your trade secrets are important to you, write your contract with that goal in mind.  This means figuring out the best forum for enforcing your trade secret provision. Typically, the best forum for enforcing your trade secret provision is going to be a court not an arbitration panel.  Yes, arbitration panels can sometimes get courts to issue orders stopping trade secret violations (and sometimes they can’t), but having to go through arbitration and then having to go through a court will greatly increase the time it will take to get such relief and also increase your chances of never getting such relief.  Typically, the best court for enforcing your trade secret provision is going to be the court with the most power over your Chinese counter-party.  Typically, that court is going to be a Chinese court because most Chinese companies do not have much that can be reached outside China.

3.  If getting your trade secret provision enforced quickly in a Chinese court is going to matter to you, do your contract in Chinese.  For more on this, check out Your China Contract Should Be In Chinese. Here’s Why.

How to write a China contract to protect your trade secrets?  Write it in Chinese, with a trade secret provision and the right forum set to enforce it.

Any questions?

 

Ancient as it may seem, this blog still has around 1,000 people who read us via email.  Many of those readers have been subscribing virtually since our inception in January, 2006.  What I have always liked about email subscribers is their ability to respond directly to us (and our posts) simply by writing a responsive email.  The typical email might be something really short, like “I agree” or “I have been seeing the same thing” or even an occasional “this is wrong.”

Anyway, I got an interesting two emails yesterday.  One was from an email subscriber, a solo practitioner who is learning Chinese in Pittsburgh, PA (yes, I know most of you know that Pittsburgh is in Pennsylvania, but as someone who listens to E Street Radio pretty much every day, I can’t say Pittsburgh — even in my head — without adding P.A.), asking us to write about getting Chinese clients.  The other was from a young lawyer in New York City, about to go to China, asking us essentially the same thing.

I responded to the New York lawyer via email and I am going to give a similar response to the Pittsburgh, PA, lawyer here.

I don’t know.  When it comes to China, my firm’s focus is on mostly American (that includes Canada and Latin America) and European companies looking to go into China, looking to do business with China, already in China, or already doing business with China. Less than one percent of our “China work” involves companies from China.  We long ago determined that our time would be better spent focusing on representing companies from these countries than from China.

Though we do from time to time get business from Chinese companies, that work has nearly always come as referrals from Chinese lawyers with whom we regularly work in China or from Chinese (and Chinese-American) businesspeople that we know in the United States. We are certainly not opposed to representing Chinese companies, but we have found far too many of them (including very large companies) to be unsophisticated in how to use American lawyers and unappreciative of what it takes — and, yes, most importantly, what it costs — to practice law in the United States.  Put simply, we have found it to make economic sense (for us) to focus on working with foreign companies going to China, rather than on the reverse.  As a result of that, we are not the people to ask about marketing to Chinese clients.

So people, especially you lawyers out there that represent Chinese clients, can you help?  How do you get your Chinese clients?  Do you market to them mostly in China or in the US?  What are Chinese companies looking for in an American law firm?  Does a solo practitioner have a chance?  What about small law firms?

Many years ago, a friend of mine came to me with a plan to start a blog on how China impacts American lives, both knowingly and, more often, unknowingly. His blog would discuss China’s influence on American politics, economics, culture, food, media, etc. I liked the idea and suggested he name his blog “Ubiquitous China.” He loved the name but never started the blog. I thought of that blog today upon reflecting on my recently completed summer vacation in Pentwater, Michigan.

If I were a good writer, now would be the time to wax poetic about the Lake Michigan lakeshore. But since I am not, I will merely “steal” a few paragraphs on Pentwater from a lawyer who covered this same turf (literally) — Kevin Lacroix, in his D&O Diary Post, Summer Time:

One of the many gifts my wife brought to our marriage was a generations-long family tradition of spending summers in Pentwater, Michigan. If I were, like a true Michigander, to hold up the back of my left hand as a map of Michigan’s mitten-shaped lower peninsula, I would point to the outside knuckle at the base of my little finger, to show where Pentwater is located, on the eastern side of Lake Michigan, between Muskegon and Ludington.

Pentwater was established in the years after the Civil War as a lumbering and furniture making center. There is still some manufacturing in town, but now the lovingly maintained Victorian homes from that earlier time are mostly occupied by retirees. The village’s main street runs parallel to the Lake Michigan shoreline, and perpendicular to Pentwater Lake, which connects to the big lake through a channel.

All true for me as well.

Pentwater has all of 857 people. Ludington, around 20 miles North, has a few families over 8,000 people and Muskegon, about 45 miles South, has almost 40,000 people. The big things to do in Pentwater are to hike the state and national parks, ride the dunes, swim in Lake Michigan, race go-carts, play miniature golf, eat great corn, and eat great cherries, all of which we do every time we are there. And if you are there at the right time you can go to the town’s “big” Homecoming parade and then watch the fireworks from the beach.

Which is my segue to China.

We were there at the “right time” this year and the fireworks were shockingly good. How can a town of 857 people afford such great fireworks? China. Without knowing a thing about the price of fireworks, I know enough to know (based on a conversation a few years ago with a fireworks guy on an airplane) that fireworks from China are (or at least were) continually getting better and cheaper. So obviously China reaches even into places like Pentwater.

China also reaches to Ludington, where we go to get groceries at either Meijer’s or Wal-Mart, either of which probably qualify as the largest store to which I have ever been, and both of which are, of course, stocked with clothing, electronics, food, and pretty much everything else from China.

But it is Muskegon that spurred me to write this post. Good “ole” Muskegon.

Cause one day, I ventured far from Pentwater to meet an old China-based friend of mine, Kurt Braybrook. Kurt has been living in Shanghai for around 20 years, providing business consultancy services to mostly American companies trying to figure out China. Kurt grew up in Grand Rapids, Michigan — the truly big city in the area with nearly 200,000 people. As a side-note, when I was growing up in Kalamazoo, Michigan, which is around 45 miles south of Grand Rapids, we would refer to it as “The Big GR,” probably 95% sarcastically and 5% reverentially.

Kurt left Grand Rapids for China right after college and he has been there ever since, which standing alone, makes him an expert on China changes during that time. When Kurt and I realized that there would be only around 100 miles separating us this summer, we determined that we had to meet up and we chose Muskegon for that. After extensive consultations with my foodie younger brother, I picked lunch at Mia & Grace.

Before I get to my conversation with Kurt, I want to tell you a little about Mia & Grace and the conversation I had with the server when I ordered. Mia & Grace calls itself a “farm to table restaurant” and it is. Most importantly, the food there is absolutely excellent. But when I walked up to order, the very polite and earnest young server asked me if I had been there before, and when I told her that I had not, she went into the following spiel:

Well, then you should know that we are a farm to table restaurant and what that means is that everything is local and slow cooked so please be prepared to wait.

Impressed by her earnestness, and being the nice guy that I am, I bit my tongue and resisted my usual comeback to this sort of thing, which is usually something like the following:

I’m going to be ordering a Diet Coke and I just want to make sure that everything in that is local. It is right? And what about the salt? I didn’t realize that was being mined locally these days. Oh, and are you saying that none of your spices come from outside the area either?

But instead, I simply ordered a baked pretzel, a shrimp po’ boy (there is no way the shrimp could have been local) a chocolate chip cookie (no way the cocoa that went into the chocolate could have been local) and my proverbial Diet Coke, or as I say in China, my Jen-He Cola. And again, I want to emphasize that the food was great.

But here’s the thing. How much of today’s emphasis on local foods is a reaction to China? I think a lot and I say that because the rise in that emphasis corresponds pretty closely with the rise in food imports from China. What do you-all think about this? Has the influx in Chinese products (not just food) coming to America influenced the rise in localism and even the increasing desire among young people to be farmers? Ludington and Muskegon and Grand Rapids all have super high quality and well known local breweries. My home town of Kalamazoo produces Bell’s Beer, considered by many to be the best in the US. Is the turn to craft breweries and craft distilleries in the US also a reaction to China? At least in part? I never took a single sociology class, so I’m qualified to say that I think it is.

Kurt and I had a nice lunch and then we took a long walk around Muskegon, talking about China nearly the whole time. Though our conversation ran the gamut of China topics, we probably spent the most time on the following:

1. The changeover in China opportunities from manufacturing to sales. Kurt talked of how his client mix has been gradually shifting from manufacturers to product sellers and how his training and background in advertising and public relations were helping him with this. I talked of how my law firm had been seeing the same thing for years. We talked extensively on how American companies — food companies in particular — were not doing enough to sell to the Chinese market.  A few days later, Kurt emailed me to say that he had snared a new China client: a large, Michigan fruit company looking to sell its fruit products to China. We also talked of how difficult it is for foreigners seeking to start their own retail enterprises in China and of how licensing the product or selling through a distributor is oftentimes a better way to go. We then talked about how many consultants and lawyers do not like giving this advice because the money they make from a distribution or licensing relationship will be less than what can be made by helping to set up a WFOE in China. We also discussed how American companies need to be wary of getting won over by someone in China seeking to sell their product nationwide and of how that seldom makes sense. Kurt told me of a large food company for whom he worked a few years ago that insisted on going with one distributor for all of China and signed a long-term agreement to that effect. That food company’s sales in the few China cities with which their distributor has familiarity/contacts/expertise, are going fine, but they are languishing everywhere else.

2.  It is getting tougher on foreign companies seeking to do business in China. China’s rules and regulations are getting more serious and, more importantly, enforcement against foreign companies has greatly increased. This, along with other areas of rising costs, means the cost of doing business in China has gone way up for most foreign companies.  Therefore, doing business with China should, if possible, be favored over doing business in China. For more on this, check out China Is Getting Tougher On Foreign Business. Stay Flexible And It Will Be Just Fine.… and Doing Business In China Just Got Even Tougher.

For more on doing business with China by way of a distribution contract, check out the following:

3. We also talked of how Chinese manufacturing has improved and become more professional and of how more and more Chinese manufacturers are starting to “get it.” Those Chinese manufacturers that realize product quality and customer relationships matter are gaining business at the expense of those that continue to churn out junk. I told him of how five or six years ago, about 30% of Chinese manufacturers would refuse to sign OEM manufacturing contracts with our clients, but that we had not received any such rejection in about two years. We agreed that Chinese manufacturers now realize that written contracts benefit both parties. For more on this, check out The New Role Of Written Contracts For Product Purchases In China and The New Era In China Product Supplier Relationships Requires New Contracts.

4. We discussed how Chinese investment in the United States is slowly increasing, and of how as it becomes clearer that China’s formerly breakneck economic growth is not going to be returning, we both see that investment increasing even more. Kurt talked of how so many Chinese people he knows have bought or are looking to buy real estate in the United States and of how there is considerable interest in Michigan (even Detroit) properties. He said that a large downtown office building in Grand Rapids is said to be owned by Chinese investors.

So what do you think? How has China already influenced the US and what influences do you see going forward?

Let me start out by saying that I realize how ridiculous the term “New China” is.  First off, what does it mean?  I don’t know.  Second, if it means anything, it means that China today is not like it was yesterday, which has of course always been true, not just of China, but of everywhere. Despite its lack of meaning, I love the phrase because it does, in its own sort of crazy way, nicely convey that change is a constant in China.  Now of course change is a constant everywhere, but this just seems “more” true in China. I also love the phrase “really pregnant.”

Whenever my law firm starts getting an increasing number of phone calls/emails from companies that have ordered product from their Chinese suppliers and then had those suppliers shut down without ever providing the product, I write a post like this one, detailing what foreign companies doing business in China or with China should be focusing on to protect themselves.  Those phone calls and emails started increasing a few months ago and though they are not necessarily an iron-clad indicator of the direction of China’s economy, they are a good indicator of what is happening to Chinese manufacturers and to what is happening to foreign companies doing business in China.

Rather than reinvent the wheel, I am going to reprise an email I received and responded to years ago as a classic example of the sort of phone calls and emails we are getting these days as well. Here goes:

Hi. I am an avid reader of China Law Blog. I run a small _________ company in Shanghai and have come upon my own situation in which I would like to ask for a legal opinion. It’s not a very big issue and maybe not even worth pursuing it but since we are a very small company with limited funds it’s still of relevance for us.

A part of our business is renting out _________ machines to customers such as restaurants. One of these restaurants has just gone out of business. Since several months of rent are due to the landlord, the landlord has locked the shop down with all equipment (our _______ machine, the restaurant’s employees’ personal things, etc.) all still inside. The landlord is saying that they will release everything inside the restaurant only after discussing with the restaurant operators, all significant employees of which have now left town.

I am not exactly sure what will happen, the situation is vague as many things are here, but we would like to get our machine back (wholesale cost of about 20k RMB).

My questions now are if the landlord has the right to keep our property (e.g., the machine) and if not, if there is anything worthwhile that we can do about it?

Thank you.

Here is my response:

Without reviewing your contract with this restaurant, I have no way of knowing what you can and should do. If you have a really good contract (preferably in Chinese) that makes clear that the ______ machines belong to you unless and until they are fully paid-for, then you should show that to the landlord and odds are good he will let you walk off with your machines. If you don’t have such a contract, I wish you good luck because at that point it is not likely to be very clear who owns what.

We have lately been getting a ton of these sorts of requests and I am going to do a blog post on it, stripping your email of any identifiers.

This is China’s new reality, brought about by more businesses failing and by foreign companies that are doing business in China having become much more intwined in China’s economy.  About a year ago, I wrote a piece for the Wall Street Journal discussing the impact China’s slowing economy is having on American businesses that do business with China and how they should respond to that.  The article is entitled, “China’s Slowdown and American Business” in the US Edition and “China’s Slowdown and You” in the Asian edition, and if you want to read the whole article, you should Google either title and “Dan Harris” and then click the leading link and the full article will appear.

In the article, I assert the following on doing business in the new China:

  • The Chinese government “is much more concerned with social harmony than with economic numbers” and that is why it is continuing to encourage wage growth even though higher wages make China’s factories less competitive.
  • China’s prioritization of its citizens’ contentment means that China is going to get tougher on foreigners, just as it (and nearly every other country) has always done when times are tough. Everything foreign businesses do will be under heightened scrutiny.
  • The authorities also are throwing new roadblocks in the way of foreigners seeking to form businesses in China. Such higher standards are not uniformly applied. Beijing and local governments are ever more eager to distinguish between “contributing” and “noncontributing” foreigners. Thus, it has never been easier for well-funded, nonpolluting foreign companies to secure approval to operate in China. Conversely, it has never been tougher for foreign companies that pollute, pay low wages, or have no plans to hire Chinese employees to get their foot in the door.
  • Chinese exporters, particularly those that compete with companies from lower-wage countries like Vietnam and Bangladesh, are suffering—in particular in very low-tech, very low-wage industries such as textiles, clothing, shoes and low-end electronics and toys. Foreign companies that do business with Chinese companies in these industries must be on their guard.
  • The key to weathering China’s slowdown will be for foreign companies to go back to basics: think afresh about what a company contributes to China’s economy and how that is likely to shape policy makers’ opinions; focus on scrupulous regulatory compliance; and renew focus on due diligence at a company-to-company level.

Though the above is happening, there is something very positive in China is happening as well: a greater number of China businesses are getting savvier, more sophisticated and more international.  China’s high end (in terms of sophistication and savvy, not necessarily the product they produce) companies are getting bigger and deeper at the very same time its low end companies are suffering. These high end companies are doing their utmost to do more than just churn out bad quality widgets; their goal is to provide a product or a service (or a product and a service) that can compete anywhere.  I first started talking about this trend about a year ago and since then I have mentioned it at just about all of my speaking engagements and I am finding that people are increasingly agreeing with me on this.  The point is not that the existence of such Chinese companies is new, rather that the number of them is proliferating at a rapid pace as more and more Chinese companies are realizing that “stepping up the pace” is the best way for them to survive. Co-blogger Steve Dickinson hit on this trend in his post The New Role Of Written Contracts For Product Purchases In China.

In other words, the importance of choosing your China partner — which was always critical — has become even more so.

What are you seeing out there?

 

A friend of mine sent me an article today on how “mid-market” American companies are not doing enough to take advantage of money making opportunities in China. The article is entitled Still figuring out China and it starts out noting how America’s share of imports into China has shrunk from to 7% from 10% in 2000 and this shows “America is losing competitive ground to other countries in what is widely viewed as the biggest growth opportunity of the 21st century.”  My friend sent me this article (along with some others) after expressing strong frustration regarding his own company being too “chicken” to venture into China.

The article posits the following reasons for America’s lack of success in doing business with China:

  • Too much concern with China’s lack of IP protection
  • Anti-China sentiment
  • A lack of focus on China/a lack of support regarding China

I think all of the above are true and I will add one more. American companies tend to be more conservative about doing business internationally, particularly when it comes to countries very different from our own, like China. We are a big country and a big market and it is relatively easy to write off a complicated and difficult country like China.  The problem with doing that, however, is that by the time that country becomes “easier,” the companies that went in during more difficult times already have a massive leg up when it comes to things like name recognition and distribution, making it difficult to catch up.

Not saying all American companies should be looking at doing business in China.  Not at all.  But I do think too many American companies are ignoring great opportunities in China and like my friend, this frustrates me.

Are we off base here?  What are you seeing out there?