China Joint Ventures

Despite the increasing difficulies with doing business in China (or perhaps because of those difficulties), our China corporate lawyers are seeing an increase in foreign companies looking to do joint ventures in China. This is the first part in a new series of posts in which we will explore the issues involved in forming a China joint venture, from beginning to end.

Our firm usually gets a China joint venture matter when a company calls or emails us, saying they are “looking to do a China joint venture” and asking us if we can help. Our immediate answer is to say yes we can, because we can.

Our first questions to this foreign company are usually geared to telling us whether a joint venture makes both business and legal sense foor the foreign company. We usually get at this by asking the foreign company why it is looking to do a China joint venture and what specifically its joint venture will do in China. We then listen to their explanations with an eye toward determining whether a joint venture is necessary on either legal or business grounds. China’s economy remains closed to foreign businesses in many industries and part of that closure involves requiring foreign companies enter into the Chinese market only via a joint venture.

If Chinese law does not legally limit market entry to joint ventures, we then seek to determine whether a joint venture makes business sense. Oftentimes, we will at this point ask the foreign company about their prior experiences in and with China and their prior experiences in other countries around the world. The experience in China question is deployed to gage their knowledge of China. The question about their experiences around the world question are to gage how they typically enter foreign markets — more specifically, whether they use joint ventures or not.

Around half the time it quickly becomes apparent to us that a joint venture will likely be a bad idea. Generally (though not always), if you can go into China via a Wholly Foreign Owned Entity (WFOE), doing so is preferable to a Joint Venture. For the long (but not too long explanation) for why this is the case, I urge you to read this article I wrote for the Wall Street Journal about a decade ago, entitled, Joint Venture Jeopardy. Generally (though not always) if you can go into China via a manufacturing contract, a reseller agreement, a distribution agreement, or some sort of service agreement, doing so will also be preferable to a Joint Venture.

If our China corporate lawyers initially believe that some way of going into China other than via a joint venture would be preferable for the foreign company, we tell them that and we explain why we see things that way and we ask them whether they agree with our assessment. Roughly 50 percent of the time the foreign company will tell us that they did not realize they had other options and they would like to discuss those other options with us. Many times, these same companies tell us that their putative Chinese joint venture partner had claimed that doing a joint venture was legally necessary and they feel (rightly) deceived upon learning this was a lie.

Roughly 50 percent of the time the foreign company will reveal that they fully understand they have options other than a joint venture for going into China or for doing business in China, but doing a joint venture makes sense for them because of what their putative Chinese joint venture partner will be able to contribute. At that point, we usually tell them how they can secure those same contributions from that same Chinese company, but via a contract, and we ask them whether that might make sense for them. Much of the time their response to that will be something along the lines of how they understand all this but their potential Chinese joint venture partner is well-positioned to help them in China and it has made clear it will do so only via a joint venture. Other times the foreign company has never had a “joint venture versus no joint venture” discussion with its Chinese counter-party and it decides it should have such a discussion before moving forward in forming a joint venture.

At this point we move forward with the joint venture for those foreign companies that still wish to go into China as a joint venture and we move forward along other avenues for those who are now uncertain whether a joint venture makes sense or have determined that a joint venture is not for them.

In our next post, we will discuss what is usually our next step for those moving forward on the China joint venture track — how to determine whether the Chinese company with which they are looking to form a joint venture is the right Chinese company with which to form the joint venture.

China Lawyers

“It’s not dark yet, but it’s getting there.” Bob Dylan, from Not Dark Yet

In the 1990s, I represented a number of international fishing and timber and mining companies that did business with Russia. This was not so long after the fall of the Soviet Union and there were a bunch of large Russian companies — many of them formerly state-owned — looking to do deals with my clients, mostly American and Western European companies. My clients would set up long term deals with these Russian companies which nearly always went bad quickly because the Russian company would grab whatever money there was and walk away.

This would leave my clients dumbfounded at how the Russian company would so “irrationally” sacrifice so much money in the long term to grab a relatively small amount of money in the short term. I would find myself explaining the following to them:

You have to understand that for most Russian companies there is no long term. They are used to the Soviet Union where the rules and the laws constantly and unpredictably changed to their detriment. They do not believe they will be able to operate freely five years or even one year from now. So though you see them as having irrationally sacrificed massive long term gains for much smaller short term rewards, they see themselves as having quite rationally grabbed what they could while it was still there.

I am writing about this now because China today is feeling a lot like Russia in the 1990s. I am getting the sense that many Chinese companies are pessimistic about their futures and they are acting accordingly. Our China lawyers are seeing evidence of this everywhere.

China’s economy is hurting right now. On the one hand, food prices are soaring. See China’s consumer prices rise at fastest clip in nearly 8 years, as pork prices continue to soar. On the other hand, exports are plunging. See China’s exports decline for third successive month in October. Reliable economic indicaters (as opposed to official government statistics) paint an economy in trouble.  See China’s economy is in more trouble than markets think. See also China’s car sales drop for 16th consecutive month as October falls 4 per cent. The tariffs are not helping nor is the Chinese government’s crackdown on private businesses.  On top of the economic issues, many Chinese companies have become both wary of and angry at the West, particularly the United States. This too makes things riskier for foreign companies.

We are seeing the results of all this in many ways.

Practically every week one of our China lawyers will get an email or a phone call from someone who bought product from China and received nothing in return or nothing even approaching what they actually ordered. This sending of “junk” instead of real product has spread to pretty much every industry in China and ordering your products from allegedly reputable online sites provides little to no protection.

The below email (modified so as not to reveal anything) is par for the course:

I worked with a company in China to manufacture doggy beds [I made this up] on which I have a U.S. patent pending and also have trademarked.  I received samples from them and all was good. I placed an order for 50,000 pieces and they are of the wrong material and falling apart. They told me they would send me the right product but now they are ghosting me. I cannot sell the product they sent me. I’m still trying to get my new product to market but that is proving really difficult because I have been hurt so badly financially. Can you help?

My response to these sort of emails is usually to explain that the odds of our getting even some of their money back are less than 50 percent and they should think long and hard before throwing good money after bad. I refrain from telling them what they should have done differently, but I can discuss that here and it is the following:

  • These things usually happen when product buyers do not conduct sufficient due diligence on the seller. Do your due diligence before you send money. Send people you trust to investigate the manufacturing site. Do a site inspection on goods before payment. Make sure the company exists and is legally able to conduct the business for which you will be paying it. Doing just these few inexpensive things will greatly increase your odds of not getting scammed.
  • These things often happen with Chinese companies that want to make a few final overseas sales before they shut down and disappear. Just imagine the profits to be made from three $350,000 sales for which laughably bad or no product is ever provided. Now just imagine the incentive Chinese manufacturing companies have to sell and not supply foreign companies right before (or sometimes even right after) they shut their doors for good.
  • Oftentimes the Chinese company that committed the fraud does not exist. It is not registered anywhere in China or if it is registered as a real company in China it is registered for something like kitchen repairs, not for manufacturing whatever product it is they sold you.
  • These fraudsters are smart and there are good reasons why they spend the money to send you something instead of nothing at all and why they initially say they will remedy the problems and why they often continue making that claim. Sending even really bad product is less likely to lead to criminal charges than sending no product at all. They can tell the police that they sent you the product you ordered and it’s not their fault those Americans/Europeans/Australians are so picky. By stalling you they can keep their scam alive. They’ve paid for advertising and for a website and they’ve even bought the really bad product and they want to maximize these expenditures. Act early on these sorts of problems and your chances for a recovery increase.
  • Use a contract that actually works for China and that sets forth clearly what you are buying and what happens if your China supplier fails to comply. See China Contracts: Make Them Enforceable Or Don’t Bother and China Contracts that Work.
  • Know the market price of whatever it is you are seeking to purchase before you purchase it. Do not trust a company that gives you an unreasonably low price quote.
  • Consider a small trial order to reduce your risk. The problem with this is that many scammers will provide you with a good trial order and then scam you when you order the full amount. But if you combine this with a contract that works for China and proof that the company actually exists and is operating legally, you will be greatly lowering your risks.

One more thing that warrants its own special mention. Do not buy product from China without first registering your trademark in China because many of the fraudsters sending out bad product are now also registering YOUR brand name and/or product name and/or logo in China as THEIR trademarks in China and then coming back later seeking to sell you these trademarks for a lot of money under threat of blocking your products from leaving China for violating THEIR trademarks. See 8 Reasons to Register Your Trademarks in China.

Speaking of trademarks and IP, we have also seen a massive increase in what I call early IP theft, which also stems from Chinese companies’ lack of confidence in their future. We wrote about this in China Trademark Theft. It’s Baaaaaack in a Big Way:

For years we probably averaged a call a week from someone who had lost their trademark to China to someone who had gone ahead and filed it before the non-Chinese company did so. Then, starting maybe 5 or 6 years ago, the number of these calls declined. I have ascribed this decline to two things. First, foreign companies started getting wiser about the need to get their brands, their logos and their company names registered as trademarks in China. Second, and of equal importance, China instituted rules to try to stop Chinese manufacturers and trading companies from registering as trademarks the brand names and logos and company names of the foreign companies for whom they were manufacturing or sourcing products. To simplify a bit, your China agent could not hang on to a China trademark that you were using before you brought them on for your manufacturing or product sourcing. We went from one China trademark “theft” call a week to maybe one a month.

But starting about a year or so ago, our China trademark lawyers started getting a ton of China trademark theft calls and the number of those calls has been accelerating ever since. Why has the tide on trademark “theft” come in again? Two reasons. One, there is hardly a sole in China who does not know how to get around the prohibition on an agent registering the trademark that rightfully should go to the foreign company for whom it is acting as an agent. If your manufacturer in Shenzhen wants to secure “your” trademark in China it will not go off and register it under its name as it knows that cannot work. So instead of registering the trademark under its own Shenzhen company name, it will ask a cousin or a nephew in Xi’an to register it under its company name, making it nearly impossible for you to invalidate the trademark. Two, many (most) Chinese factories are hurting and they desperately want to improve their profit margins. What better way to do so than to sell a product under a prestigious or well-known American brand name — or even just any American brand name? See Your China Factory as your Toughest Competitor.

There is a third reason trademark and IP theft has so dramatically increased in China of late. More Chinese companies have stopped thinking long term. Just yesterday, in The Right Way to Reduce Your China Product Costs, we wrote how Chinese companies have become wary of their foreign buyers leaving them for tariff-free manufacturing outside China:

But you must be very careful in negotiating lower prices from your Chinese factory because just asking for lower prices could cause your company some very serious blowback. The first thing you should know is that Chinese factories are sick and tired of losing so many of their customers and they are very wary of anyone who they believe may leave them for another factory in another country.

If your Chinese factory is not convinced it will be making your widgets for another three years, it knows it can make more money by making “your widgets” for itself and then selling them wherever it can. In the last year, more foreign companies have come to us after their Chinese manufacturer “stole” their product (and its IP) without ever having made a single one for the foreign company than in the last five years combined.

We are also seeing an incredible uptick in Sinosure cases. We wrote about this earlier this year in China’s Sinosure: It’s Back and It Wants Your First Born:

Like clockwork, the downturn in China’s economy is leading to a big uptick in American companies contacting our international litigators for help in fending off Sinosure threats. For the full import of what I mean by Sinosure threats, I urge you to check out Owe Money to China? Meet Sinosure, Leviton Law Firm, and Brown & Joseph and China Sinosure: What You NEED to Know. To summarize, Sinosure is China’s Export and Credit Insurance Corporation and what that means in real life is that it insures most of China’s exports. It insures those exports by paying its policyholders when a foreign company fails to pay for product it has received from its Chinese supplier.

So how does an increase in Sinosure cases against American companies reflect the downturn in China’s economy? Well over half of the many Sinosure cases our lawyers have seen over the years arise from bad product delivered by the Chinese manufacturer. The typical Sinosure case involves a Chinese company sending over (let’s say) $500,000 in bad product. The American company cannot sell that product for its usual $950,000, but instead is forced to unload it for $350,000. The American company tells all this to the Chinese company and seeks to resolve its alleged $500,000 debt to its Chinese supplier with a one time $250,000 payment. The Chinese company goes silent and a few weeks later, the American company receives an aggressively threatening letter from one of Sinosure’s U.S. lawyers.

In As trade war deepens, a state-owned insurer in China helps soften the blow, Reuters News wrote about the increasing number of Sinosure cases:

Last year, as the trade war started to bite, Sinosure’s claim payouts surged more than 40% to nearly $2 billion, according to data from the company, which is owned by an investment company controlled by the finance ministry.

Payouts are poised to climb further this year with tariffs rising, according the company’s internal estimates.

*    *    *    *

Dan Harris, a lawyer who represents U.S. importers, said he has received increasing requests for help dealing with Sinosure demands for payment on behalf of Chinese exporters.

“Before the trade war, I might go … four, five months without getting a Sinosure email, now I’m getting four or five a week,” said Harris, managing partner at international law firm Harris Bricken

Sinosure is China’s state-owned export insurance company that pays Chinese manufacturers that were stiffed by their foreign buyers and then seeks to collect from the foreign buyers that allegedly failed to pay. Before this year the Sinosure cases we handled always involved situations where if the Chinese manufacture did not get Sinosure involved it would almost certainly never get paid. We are now seeing Sinosure cases where the Chinese manufacturer has made what we think are fraudulent policy claims to Sinosure because they are desperate for cash and they don’t care about maintaining their relationship with their foreign buyer.

Lastly, our China lawyers are dealing with an increasing number of situations where the Chinese side of a China joint venture has essentially taken over the joint venture and stops communicating with its foreign joint venture partner. Maybe these joint ventures are no longer even profitable, but our clients are entitled to determine this and if the joint venture should be shut down, our clients are also entitled to a share of the joint venture company’s existing assets. For how to prevent/mitigate such problems, check out this article on China joint ventures. It’s as though the Chinese side in these joint venture partnerships views it as their patriotic duty to kick their foreign partner to the curb.

For some companies, China’s increasing risks now exceed its rewards, but for others this is not at all true. Do you really need a legal entity in China with Chinese employees or might your company be better off with no operations in China beyond a third party distributer or reseller? Our China lawyers have been doing a lot of work in the last six months helping our clients reduce their China footprint and thereby reduce their China risks. No matter what you are doing in or with China, now is a good time to look at how you too can reduce your risks. The following posts are relevant for this:

Bottom Line: China in the last year has become far riskier on nearly all fronts. It is important you recognize this and act accordingly.

International Manufacturing Lawyers

In China Factories Are Exporting Lower Prices Around the World, Bloomberg News wrote this week about something our internmational manufacturing lawyers have been seeing: Desperate Chinese factories are lowering their prices. Are all Chinese factories desperate? Absolutely not. Are all Chinese factories lowering their prices? Near as we can tell, a great many are, especially for their best customers.

But you must be very careful in negotiating lower prices from your Chinese factory because just asking for lower prices could cause your company some very serious blowback. The first thing you should know is that Chinese factories are sick and tired of losing so many of their customers and they are very wary of anyone who they believe may leave them for another factory in another country.

China’s factories just suffered their third straight month of declining production and nearly all legitimate economists see this decline continuing. More importantly, nearly all Chinese factory owners see the same thing. This is important because if you tell your Chinese factory that you “need” a price reduction, it will think you will leave if it does not give you the full amount you request and this can be dangerous. If you tell your Chinese factory that if it does not lower its prices by 10 percent or you will go elsewhere and your factory cannot lower its prices you just put your company at major risk. In The Single Best Way To Avoid Being Taken Hostage In China, we wrote of how Chinese companies often take hostages to try to collect on alleged debts or to protest employee layoffs or the closing of a China facility:

As the [Associated Press] article states, “it is not rare in China for managers to be held by workers demanding back pay or other benefits, often from their Chinese owners, though occasionally also involving foreign bosses.”

My law firm’s advice every single time to our clients who are laying off workers in China or closing a facility in China or allegedly owing money in China is to stay outside China for all negotiations.  One only needs to be a regular reader of our blog to know that we took this position long ago and have never waffled:]

If you are in a debt dispute with a Chinese company, the best thing to do is not go to China at all.

If you must go to China, think about using a bodyguard or two and think very carefully about where you stay and where you go. Most importantly, be very careful with whom you meet.

Consider preemptively suing the alleged creditor somewhere so that you can very plausibly claim that you have been seized not because you owe a debt, but out of retaliation for having sued someone. If you are going to sue, carry proof of your lawsuit with you at all times while you are in China.

You are probably wondering why I am writing about debt collection and hostages when the theme of this post is reducing your China factory pricing. The reason is simple: when Chinese companies believe you will be leaving them/leaving China, alleged creditors come out of the woodwork. The tax authorities will come up with taxes that you owe. Your factory will explain why you owe it way more than you thought you did. Your factory’s sub-suppliers may send you bills for components you never ordered and never knew you were responsible for paying. You will get a bill for the molds and the tooling and the design work your factory did years ago and you thought (rightfully so until now) was included in your product pricing. These sorts of things do not always happen, but they happen often enough that you need to be prepared for them. The first rule is that you should have this discussion with your factory from your own country, not at a face-to-face meeting in the corrupt Chinese town where your factory wields its power.

If the “bad things” described above happen and none of your personnel are held hostage, can you not just “walk away” in the middle of the night never to return to China? That is possible, but that comes with risks and it seldom will make sense unless you absolutely certain neither your company nor anyone who can be relatively easily identified with your company will ever again do business with China or find itself in China. As someone who has many times been in an airplane that had to land somewhere other than its intended destination (I once spent four unplanned January days in Magadan, Russia, when the city had essentially no fuel for heat) you also will need to be completely certain that neither you nor any of your personnel will ever involuntary find yourself in Mainland China (or Hong Kong or Macau?).

if you are going to try to negotiate lower prices from your China factory, you need to have a Plan B setting out what to do if your relationship with your China supplier ends that day. These days, about 10 percent of the time when one of our clients goes to its China supplier to negotiate a lower price the supplier flat out says something like “we are done manufacturing for you. We don’t need you anymore. We are selling our own products direct now.” That ten percent figure is even higher for any foreign company whose products are being shipped to the United States because so many Chinese companies have come to believe those companies will soon be leaving China entirely — and they are right. Oh, and its “own” product that it will be selling (or has been selling already for months) could very well be a clone of your product.

What then should you do to plan in advance for something as simple as asking your Chinese factory for a price reduction? First, make sure nobody from your company is in China when you make the pricing request. Second, make sure that you have secured your molds/tooling and all product for which you have already paid before you do anything that might tip off your China supplier regarding the possibility that you may start manufacturing elsewhere. Third, line up new suppliers (preferably outside China) that can start producing quickly.

Over the years our China manufacturing lawyers have repeatedly seen the following:

  • Foreign company tells its China manufacturer it will be ceasing to use China manufacturer for its production. China manufacturer then keeps all of the foreign company’s tooling and molds, claiming to own them. The way to prevent this is to get an agreement from your Chinese manufacturer that you own the tooling and molds before your Chinese manufacturer has any inkling you may be moving on. For more on the importance of mold agreements, check out How Not To Lose Your Molds In China and Want Your China-Based Molds? You’re Probably Too Late For That.
  • Foreign company tells its China manufacturer it will stop using the China manufacturer for its production. Foreign company then learns that someone in China has registered the foreign company’s brand names and logos as trademarks in China. Foreign company is convinced its China manufacturer is the one that did these registrations, but it has no solid evidence to prove this. Foreign company is now not able to have its product — at least with its own brand name — manufactured in China. Foreign company is also now faced with having to deal with a low cost Chinese competitor that can legally make products in China with the foreign company’s brand name and logo and sell those products anywhere in the world where the foreign company does not itself possess the trademark rights in its brand name and logo. The way to prevent this is to make sure your IP registrations in China are current before you say anything to anyone that may lead them to believe you may be leaving them, or even just reducing your purchases from them. See China Trademarks: Register Yours BEFORE You Do ANYTHING Else. Not long ago, a U.S. company came to us after having told its China manufacturer that it would need to add an additional manufacturer because it needed much greater production capabilities. The China manufacturer responded by saying that “we own the China trademarks to your products and the China patent to your product designs and if anyone else in China tries to make your products we will get an injunction to stop them from doing so and another injunction to stop any of your products from leaving China. SIX lawsuits later the warring companies reached a settlement. Do not let this happen to you!
  • Foreign company tells its China manufacturer that it will be ceasing to use China manufacturer for its production. A few weeks later, foreign company has its products seized at the China border for violating someone’s trademark or design patent. The foreign company is (rightly) convinced that its China manufacturer is the one behind the product seizure, believing the Chinese manufacturer registered the foreign company’s brand names as trademarks in China long ago and is just now using that trademark to seize product as revenge (or just registered the design patent). China has laws forbidding its manufacturers from registering the trademarks of those for whom it manufactures, but because it is usually not possible to prove that your manufacturer in Shenzhen had a cousin in Xi’an do the registering, this sort of thing goes on unchecked. For how to prevent this from happening to you, check out the following:
  • Foreign company tells its China manufacturer that it will be ceasing to use China manufacturer for its production. China manufacturer then says that it will not be shipping any more product because foreign company is late on payment and owes it hundreds of thousands of dollars. China manufacturer then reports foreign manufacturer to Sinosure and Sinosure then ceases to insure product sales to this foreign company, which can have the effect of convincing other Chinese manufacturers not to sell to foreign company without getting 100% payment upfront. For more on Sinosure’s role regarding China exports, check out Be Sure Regarding China’s Sinosure. Note that if you are planning to move your business to a country other than China, Sinosure’s power over you will be greatly diminished. More importantly, note that with the downturn in Chinese manufacturing, Sinosure has gotten incredibly aggressive at going after foreign companies. See this Reuters article, As trade war deepens, a state-owned insurer in China helps soften the blow
The bottom line is that if your Chinese factory believes you may be leaving it or leaving China, your company is at risk and asking for a price cut will often be viewed as your having one foot out the door.
Despite all the risks, now is the ideal time to be looking at moving your supply chain out of China and/or trying to get your China suppliers to lower your product pricing. Our international manufacturing lawyers are working nearly non-stop to help our clients move all or diversify their manufacturing to countries outside China — so far this has mostly been to other Asian countries, such as Vietnam, Cambodia, the Philippines, Malaysia, Pakistan, India, Thailand and Taiwan, but also to Mexico, Colombia, Eastern Europe, Portugal, Germany and Spain. Even to Canada and the United States — more so after the announcement of the “new NAFTA” agreement, a/k/a the USMC.

But what if you have no choice but to stay in China? Seeking to lower your product pricing will be your best option.

What you need to know about the new realities of China factory pricing is that the Chinese government is doing whatever it can to prop up its factories. More than anything, the Communist Party does not want to see factories closing and jobs being lost and huge numbers of people marching in the streets, as is happening in Hong Kong.

So to avoid that, China has been doing the following (and more)

  1. It has reduced income tax rates for Chinese export manufacturers, thereby reducing overall costs by about 4%.
  2. China has reduced its VAT rates for the export of various (but not all) products, thereby reducing overall costs by roughly 4%.
  3. China has pushed down the value of the RMB, thereby increasing by about 4% the amount of RMB Chinese export manufacturers get from their Dollar/Euro sales.

So right there we have about a 12% reduction in costs for China Factory. Note that the numbers above are rough calculations and individual valuations will vary. Note also that we are hearing rumors that Sinosure is now providing export insurance to Chinese factories at no cost and this is just one of many cost/expense subsidies/reductions of which we are hearing. But because we have not run down any of these rumors, we will ignore them for purposes of today’s cost-cutting discussion.

What you need to do then is try to get your Chinese factory to share at least some of its 12% windfall with you. Tell your factory that you have heard that China’s recent income tax reductions and VAT rebate increases and RMB devaluations — and who knows what else the Chinese government is doing and will do to subsidize Chinese manufacturers — has reduced its manufacturing costs by 15% to 20% and with all this it ought to be able to cut your pricing by 10%. Tell them how you know this will cut into their profits a bit but your having to pay the tariffs has cut into your profits and because of your great relationship with them over the years and in recognition of your plans to stay with them for many more years, they should reduce their prices to you.

This sort of price reduction request works sometimes, not all the time. But it is obviously working often enough for Bloomberg to write about how China product prices are declining.

Hong Kong Lawyer
Reuters Photo

This coming Friday, November 15, our law firm will be hosting a CLE seminar in Seattle, titled Investment in China and Hong Kong’s Legal Role. The seminar will be sponsored by the International Practice Section of the Washington State Bar Association.

The seminar will be led by Claudio de Bedin, founder of de Bedin & Lee, a law firm with offices in Hong Kong, Chongqing and Milan. Mr. de Bedin has extensive experience in commercial and corporate law in both Hong Kong and Mainland China, with a focus on the representation of Italian companies, allowing him to bring a unique perspective to us here in Seattle. Though a number of our lawyers have worked with Mr. de Bedin and know him well (this is especially true of Fred Rocafort of our firm who spent many years practicing law in Hong Kong). I don’t believe any of us know what position Mr. de Bedin will take regarding Hong Kong’s future or its future role vis à vis Mainland China

With all that transpired just this past weekend in Hong Kong (see below for just a portion of it), Mr. de Bedin’s talk could not be more timely or important.

For a taste of what to expect, check out this video by the Hong Kong Trade Development Council featuring Mr. de Bedin.

Please join us at the seminar. The official WSBA announcement can be found here.

 

international law

This is the twenty-second episode in our ongoing weekend series on eight+ things to read about China and a lot more. Our China lawyers constantly get emails from readers/friends/clients asking what to read on China and all sorts of things related and even barely related to China and this series is intended to constantly and consistently answer these questions.

As we said in our initial post, the posts in this series will list out eight (or so) articles we benefitted from reading and think you our readers would also benefit from reading, along with a very brief explanation as to why the particular article was included. More specifically:

The articles will likely include many on China and on Asia and a few on international trade, international politics, Spain and Latin America, economics and really just anything else we believe might benefit our readers or even that we just want people to read. We do not plan to choose articles that push our or any other political agenda or any other agenda for that matter, but having said that, we are not objective and our views may creep through. Our goal though is to focus on articles that are important or helpful or — most importantly — that make you think. Our posting of an article will NOT mean we agree with all of it or even any of it. Most of the articles will be from the week preceding the post but we will also sometimes throw in older articles (classics if you will) as well.

Please do not hesitate to comment at the end of this or any other post. We cannot tell you how much we appreciate your comments, good, bad and indifferent.

Here we go, in absolutely no particular order.

1 I Accidentally Uncovered a Nationwide Scam on Airbnb. VICE News. Because I’ve never been a fan of AirBnB after I rented an apartment in Valencia, Spain, in August and its heavily touted air conditioning didn’t work and I had to fight tooth and nail with AirBnb to get any discount at all. I have not used AirBnb since and it would not surprise me if their projected IPO becomes another WeWork-esque cult failure. Speaking of WeWork and cults, I suggest you also read Adam Neumann and the Art of Failing Up

2 Adam Silver: Chinese Government Asked NBA to Fire and Discipline Daryl Morey. Sports Illustrated. I intentionally waited until the NBA furor had somewhat died down to post on this. What happened to the NBA is — pure and simple — a colossal clash of cultures; it is a war between a country that believes in free speech and a government that greatly (and rightly) fears it. Fortunately, free speech won this round (barely), but there will always be plenty of companies ready, willing and able to sell their souls at the alter of the almighty dollar, or should I say RMB. But as what happened to the NBA proved, there may be outside-China backlash for those who belly up to an increasingly authoritarian China.

3. Chinese Outbound Investments – The Regulatory Landscape. JD Supra. Because this report nicely explains the layers of regulatory morass to which Chinese companies that want to invest outside China must go to secure necessary Chinese government approvals to do so. If you want to read this, fine, but what our international M & A lawyers tell our clients is essentially the following: if you want to secure investment from a Chinese company, you better hope that company has money outside the Mainland.

4. Male Chinese ‘Relatives’ Assigned to Uyghur Homes Co-sleep With Female ‘Hosts’. Radio Free Asia. Because this is so incredibly “creepy” and the world must know.

5. Study Chinese in Taipei and Taiwan – Best Private Schools and Universities. Sapore di Cina. Because we are often asked this question and because Taiwan is such a great place for studying Chinese.

6. This man is disrupting the cult of the billionaire. Fast Company. Because “Anand Giridharadas is rebuking the idea that philanthropic billionaires are society’s heroes.” Because whether you end up agreeing with the following or not, you should at least ponder it:

That idea, or at least the sound-bite version of it, is that today’s plutocrats—as Giridharadas isn’t afraid to call the 1%—maintain their elite status, and the broader status quo, by using their wealth to control, marionette-style, the priorities of America’s noble-minded societal institutions, from top research universities to humble community organizations. For too long, Giridharadas argues, we’ve allowed our modern moneyed classes to burnish their reputations with philanthropic gifts and Davos fireside chats while the corporations they control simultaneously gut our labor institutions, plunder our planet, and hoard our collective resources. Given this exercise of power, he believes, it should come as no surprise that inequality has been on the rise in the United States for the past three decades, and that no giant check from on high has fixed it.

7. Chile’s People Have Had Enough. Slate. Because the massive protests happening in Chile could happen just about anywhere. And because I draw a straight line between these protests, and those in BoliviaFrance, Hong Kong, Lebanon, Iraq, and even the movie Parasite, (one of the best movies I’ve seen in a long, long time). People are demanding a voice and change.

8. Cornhole Is a Pro Sport Now. Outside. Because this is a clear sign of the apocalypse.

9. A great supply risk lies in the Uighur crisis of China’s Xinjiang Province. Supply Chain Drive. Because in addition to the two biggest and best known risks of having your products made in China (IP theft and tariffs), there are rising “moral” risks as well. You should assume more consumers will boycot Made in China products when they learn how brutally China treats its Uighurs and Hong Kong protestors. You should also expect to see an increase in those (millennials, especially) who will not work for companies that do business with China or leave employers that do.

10. Celebrada en la Cámara de Madrid la jornada “La nueva era del Doing Business en los EE.UU.” Empressa Exterior. Because four Harris Bricken lawyers just did a Madrid-Barcelona roadshow on investing in the United States and because those events gave me a chance to talke with a number of Spanish lawyer friends of mine, all of whom expressed concerns about Spain’s trade future with China. Because as so many companies from around the world are looking at doing business in new countries as they seek to minimize or eliminate their China business.

China Cybersecurity Lawyers

In China’s New Cybersecurity Program: NO Place to Hide and again in China’s New Cybersecurity System: There is NO Place to Hide we wrote how China’s new “cybersecurity” laws give the Chinese government and its prized companies full and total access to all data and IP held by foreign companies. Yesterday, in China’s New Cryptography Law: Still No Place to Hide, we wrote why encryption will not provide foreign companies a way out from China’s wholesale takeover of foreign company data and its concomitant IP.  In this post, we set out two ways China’s data takeover will harm foreign businesses far beyond China.

The first harm comes from U.S. export control laws that require certain high-tech information not be disclosed to persons who are not U.S. citizens, green card holders or protected individuals without an export license. These export control laws directly conflict with Chinese law  requiring full and total government access to that information in China because putting information regarding a controlled technology on a server or a computer in China will instantly create significant export control problems for itself. Foreign companies typically put their private information in China on a private server in China so as to isolate that information from the Chinese government. China’s new laws make clear that foreign companies must turn over this information to the Chinese government and failing to do so can lead to prison time. This conflict will be an enormous problem for US high tech companies with computer servers in China with high tech information on them because their “willingness” to give this information to the Chinese government (which obviously is not a U.S. citizen or green card holder) will in some instances constitute criminal law violations of U.S. export control laws.

The second way China’s latest data subversions will be disastrous for many foreign companies is by eviscerating their trade secret protections. To prevail on a trade secret claim in most countries you must be able to prove the following three things:

  1. The secret taken qualifies for trade secret protection.
  2. The holder of the secret took reasonable precautions to prevent disclosure of the secret.
  3. The secret was wrongfully taken.

Number 2 above could prove to be the downfall of foreign companies in China and here is an example of how that could happen. Suppose your Australian company (this is not just a United States issue) has a trade secret regarding cost efficiently producing a particular product. Suppose you make your China subsidiary makes your product in China and you provide the production information to your China subsidiary so it can cost efficiently make that product. Now further suppose one of your employees at your Germany subsidiary quits the company and sells your trade secret to your largest competitor, based in the United States. You then sue your ex-employee in Germany and your largest competitor in the United States for trade secret violations. No doubt, both your ex-employee and your largest competitor will argue that the information they bought/sold was not a trade secret because by your having revealed this information to the Chinese Government (and to its SOEs and Universities, etc.) means you did not take reasonable precautions to prevent disclosure of the information and therefore the information lost any standing it might have had as a trade secret and your case should be dismissed.

Will your ex-employee and your largest competitor win on this argument? Who knows at this point, but I think they will because companies that go into China do so voluntarily and they know that by doing so they are making their information freely available to others.

Your thoughts?

China Cyber Lawyers

The PRC National People’s Congress on October 26 enacted the long awaited Encryption Law (密码法), which will come into effect on January 1, 2020. The official text of the law can be found here and an English language summary can be found here:  The Law is another piece of the comprehensive cybersecurity system China is rolling out under its Cybersecurity Law and MLPS 2.0 system we previously described in China’s New Cybersecurity Program: NO Place to Hide and China’s New Cybersecurity System: There is NO Place to Hide. The system being designed for China seeks to pursue a challenging goal: make networks opaque to bad actors but transparent to the government and the CCP.

Cryptography is a key technology that will be used to achieve these goals. Cryptography must be used to protect the confidentiality of information transmitted and stored on networks, but its use presents governments with a dilemma: the same cryptography that hides information from the general public can also be used to hide information from the government itself. In this case, the Chinese government is presented with the issue of how it can require cryptography while still maintaining its open access to the network system.

The Law divides encryption into three categories: core, common and commercial. Core and common are intended for systems that transmit and store PRC state secrets. Commercial encryption is intended for business and private use. The Law provides that it welcomes foreign providers of commercial encryption. Art 22-23. Foreign encryption systems can be sold in China, provided that the systems have been approved and certified through a certification system that has not yet been described. Use of encryption will be subject to the provisions of the Cybersecurity Law and the associated MLPS 2.0 regulations. Article 26. The State Cryptography Administration (SCA), an office of the CCP, will have authority to monitor and inspect implementation and use of the cryptography system.  Article 31.

This three class system ignores the way cryptography is normally implemented. The most important cryptography systems are not commercial systems. Most systems are based on the Gnu Privacy Guard system. This is a completely open system. The source code is generally available to the public. You can download the source code here. It is not conceivable that the organizations that offer GPG systems will cooperate with the PRC government in obtaining review and certification of their product when their whole focus is to allow companies and individuals to hide their information from the government. Cooperation with any government would be contrary to that principle.

This then leads to the first question under the new Law. Most cryptography systems are freely downloadable as open source systems. The PRC government is free to examine the source code used to implement the GPG and related open source systems. So the real issue is: will the PRC government allow companies and persons who operate in China to use GPG and related systems, given that that these system will NEVER be submitted to the PRC government for review and approval. If the answer is no, then the entire set of provisions for foreign encryption systems are completely meaningless. If the answer is yes, then the designation “commercial” has not meaning.

This then leads to the most important issue. Cryptography techniques are not secret. The most importent algorithms are public and available to anyone to use. Governments know exactly how the algorithms work because governments have been the inventors of most of these algorithms. So the Cybersecurity Law ‘s focus on cryptography products is really nothing more than a head fake. What is critical in cryptography is not protection of the cryptography algorithm; what is critical is protection of the key that allows decryption of the encrypted message or data.

The Cryptography Law is silent on the issue of decryption and it is also silent on protection of passwords and other keys that prevent decryption. Its ultimate plan is to break all forms of end to end encryption by putting all passwords and decryption keys into the hands of the PRC government and the CCP. In other words, opaque to the public but transparent to the government.

Article 31 of the Cryptography Law provides for a government inspection and control system implemented by the SCA and its local agencies. This system provides for the SCA and its local agencies to have complete access to the cryptography system and to the data protected by that system. The systems are also subject to the MPS supervision and control system that is being implemented under the Cybersecurity Law and the MLPS 2.0 system described here and here. So both the SCA (a CCP office) and the MPS (working with the MSS) will have full access to encrypted servers, including full access to the decryption keys and the passwords. Once this access is achieved, end to end encryption disappears. For a description of how this works, see this.

So in the end, inviting foreign providers and users of cryptography is just a trap for the unwary. Once data crosses the Chinese border on a network, 100% of that data will be 100% available to the Chinese government and the CCP. Cryptography may work well to prevent access by the public, but all this data will be an open book to the PRC government.

This then raises major issues for U.S. and other country entities that are relying on end to end encryption in China as an exception to U.S. export control rules. Under China’s new system, end to end encryption will no longer exist in China and for this reason this exemption from U.S. export controls will no longer be effective. As the U.S. expands the scope of technology subject to export controls, the risks for foreign companies will become progressively more significant.

Many U.S. entities look at cryptography as their escape from China’s Cybersecurity Law, but that will not work because the PRC government will not let it work. The Chinese government knows exactly what it is doing. The Chinese government has set up a system that will allow it to achieve a fully transparent system.

There is no workaround.

There is no place to hide.

UPDATE:  We have been hearing completely unsubstantiated rumors that the talks to ratify “Phase 1” of a US-China trade deal blew up over the United States’s anger over China’s efforts to control and use American company data. FBI Director Wray’s recent testimony regarding Chinese intellectual property theft on an unprecedented scale and his warning that “China Can Compel Companies Doing Business In Country To Turn Over Any Information China Wants” may also have played a part.

 

pain Golden Visa Real Estate Lawyers

As regular readers of this blog know, we are very much down on Hong Kong as an international business center. See Hong Kong for International Business: Stick a Fork in It (August 13) and Hong Kong for International Business: Stick a Fork in It, Part 2 (October 22). We have seen and we believe we will continue to see international businesses reduce their footprints in Hong Kong, leave Hong Kong, and stop setting up in Hong Kong.  Put simply, why should a country with daily violence, tear-gassing, and rising government oppression be on anyone’s list for their company headquarters or even as an arbitration venue? Hong Kong’s allure was its stability and its freedom from the CCP. Both of these things are and will continue to slip away, and with that Hong Kong’s primacy as Asia’s international business center will slip away as well.

Which brings me to the subject of today’s post. There is an old saying about lawyers which is an old saying because it is so true: Lawyers do well when times are good, we just do not do well when everything stays the same. Somewhat paradoxically, Hong Kong’s decline has been very good for our law firm’s Spain lawyers. The South China Morning Post (Hong Kong’s leading newspaper) did a story today on people fleeing Hong Kong for Spain, entitled, More Hong Kong investors are eyeing Spanish property as gateway to permanent residency in EU. All true.

Per the SCMP:

Hong Kong buyers are discovering the investment opportunities Spain’s property market has to offer, as well as the route it provides to permanent residency in the European Union.

Inquiries have doubled in recent months even as pro-independence protests in Catalonia raise eyebrows, said Lily Siu-Rambaud, managing director of Madrid-based property agency Epic Asia.

She said initially she had one client buying property under a residence permit programme – or acquiring a “golden visa” – but now she had seven clients who were finalising deals that will also allow them to eventually gain permanent residency.

Siu-Rambaud said three clients from Hong Kong were expected in Madrid for a “property hunting trip” by the end of November.
*      *      *      *
With Hong Kong mired in its worst political crisis in decades, a rising number of Hongkongers are looking for permanent residency options should they wish to move overseas in a hurry.
Other agents have also seen increasing interest in Spanish property from mainland Chinese and Hong Kong buyers, among others.
Overall, foreigners have bought 100,000 properties in Spain so far this year, an increase of 4 per cent, and accounted for about a fifth of all property transactions in the country.
Since 2014, more than 1,700 Chinese nationals have been granted golden visas, accounting for more than a third of the total approved applicants.
“Investors are attracted to the stunning architecture and the lifestyle afforded by living close to the Mediterranean Sea, the Sun and award-winning beaches,” said Sebastian Nieblas, chief executive of Amrein Fischer – Marbella Luxury Properties, which is part of Leading Real Estate Companies of the World.
The SCMP article lists Madrid, the Balearic Islands, the Canary Islands and the Valencia/Alicante region, as the leading areas in Spain for real estate investment by foreigners.
Not so coincidentally, our lead Spain real estate lawyer, Nadja Vietz, recently wrote about Spain’s Golden Visa program. Nadja had this to say:

In September 2013, the Spanish parliament approved a new law allowing non-EU investors to apply for a Spanish residence permit and by extension for a Schengen visa. The objective of the law is to attract entrepreneurs to Spain and to stimulate foreign investment in Spanish real estate, public debt, and job creation.

What this all means is that real estate buyers can gain a Spanish residency visa by spending a minimum of €500,000 on a real estate property purchase or purchases in Spain.

A resident permit applicant must not have entered or stayed illegally in Spanish territory or have been refused entry to any of the Schengen countries, be 18 years or older, have no criminal record, be covered by medical insurance in Spain, and have sufficient economic means to cover personal and family living expenses. A spouse and children up to 18 years of age can secure their own visa and residence permit later so long as they too have a clean record and health insurance. In other words, it isn’t that tough.

Once granted, the initial Visa will be for one year and then after the first year, investors can apply for authorization to live in Spain for two more years, renewable for an additional two years if the investment requirements have been maintained or increased. This means the investor can buy and sell properties during this period but the investment threshold of €500,000 needs to be maintained. The renewal application must also evidence that the investor travelled to Spain at least once in the previous 12 months. This visa method will enable an investor to reside in Spain for five years with the possibility of getting permanent residency and, later on, Spanish nationality. That this visa has no minimum stay requirement for renewal means that investors can remain tax residents outside of Spain, while at the same time benefiting from Spanish residency and the freedom of unlimited travel and stays in the EU.

Spanish residency, and with that the ability to travel freely in the European Schengen area, is a major attraction for many non-EU investors, but confusion over various aspects of the program has so far kept the number of visa investors lower than anticipated. But now that the Spanish government has worked out most of the kinks, and with Spain’s economy (and real estate market) slowly working its way back, the number of those seeking these visas is rapidly increasing.

Our firm — in conjunction with the Spain law firm of Monereo Meyer Abogados — has offices in Madrid, Barcelona, and the Balearic Islands, from which we service Spain’s entire real estate market. Four of our lawyers from the United States are in Spain right now because we — along with a number of our Spain based lawyers — will today and tomorrow be putting on free seminars on “Doing Business in the United States.” Go here for more information on these webinars and to sign up. All of the lawyers leading this event speak at least some Spanish and two of them also speak Mandarin.

I mention these events not just to plug them but because our having publicized them has somewhat not so surprisingly led to a large increase in people from Hong Kong and from Mainland China reaching out to us for legal assistance in going into Spain via Spain’s Golden Visa Program and otherwise. The United States having recently done so many things to make getting US investment visas more difficult has not exactly hurt Spain’s Golden Visa program either.

I find it quite funny, somewhat ironic and quite enjoyable to see our law firm so well-positioned to handle this sort of work. I say this because our posts on the demise of Hong Kong have angered many and many of the angered have asserted that we are pushing “the Hong Kong is on the decline,” along with the US-China trade war will not be resolved narratives (See e.g., Repeat After Me: There Will Be No US-China Trade Deal) so as to improve business prospects for our own international lawyers. I virtually never bother responding to these sort of ad hominum attacks but I would always wonder how it was that our detractors  had concluded that a law firm so well known for its China practice and this, its China Law Blog, would financially benefit from foreign companies and individuals leaving Mainland China or Hong Kong.

But with the recent and almost certain to be sustained uptick in Chinese and Hong Kong interest in Spain I will go on the record for admitting that we are and will continue to benefit from the foreign this foreign exodus. It only remains to be seen whether increased business in Spain will offset our decreased business in China. Either way, if you are in Spain please stop by to see us in either Barcelona or Madrid this week.

The seemingly endless U.S.-China trade war keeps slogging along. The Office of the U.S. Trade Representative (USTR) has already imposed 25% tariffs on $250 billion of Chinese imports on three previous lists (List 1 = $34 billion starting from July 2018, List 2 = $16 billion from August 2018, List 3 = $200 billion from September 2018) and in August 2019, President Trump ordered all remaining Chinese imports (about $300 billion) also be hit with tariffs.  On September 1, 2019, 15% tariffs were imposed on the first part of List 4A products and additional tariffs have been proposed for the remaining List 4B products effective December 15, 2019, but these tariffs may be delayed or cancelled depending on negotiations between the U.S. and China.

The products on the first two lists consisted primarily of products that were inputs, parts, and components used to manufacture finished products. The products on the third and fourth lists covered primarily finished products (e.g., clothing, household products, car seats/ baby products, sporting equipment, electronics).

The latest development in the Section 301 China tariff disputes is that USTR has officially announced the opening of an exclusion request process for those Chinese products that had a tariff rate of 15% imposed effective from September 1, 2019 (i.e., the List 4A tariffs). Your opportunity to submit List 4 product exclusion requests began on October 31, 2019 and will remain open through January 31, 2020. All exclusion requests must be submitted through USTR’s web portal. Any granted exclusions will be valid for one year from the date the exclusion grant is published in the Federal Register. The List 4A product exclusion request is similar to that used for the prior three lists of tariffed Chinese products.

Exclusion requests are to cover only a single product, and must include the following information:

  • The 10 digit subheading of the Harmonized Tariff Schedule (HTSUS) applicable to the particular product requested for exclusion.
  • Product name and detailed description, including the physical characteristics (e.g., dimensions, material composition, or other characteristics) of the product that distinguish it from other products within the covered 8-digit subheading.
    • USTR will not consider requests that identify the product using criteria that cannot be made available to the public.
  • The product function, application, and principal use.
    • Requesters may submit attachments with publicly available information that help distinguish the products (e.g., CBP rulings, photos and specification sheets, and previous import documentation).
  • Whether the product is subject to an antidumping or countervailing duty order.

USTR also is asking the requesting parties to provide the following more detailed sales and financial information:

  • Identify their relationship to the product (e.g., importer, U.S. producer, purchaser, industry association, other).
  • The company’s gross revenue for 2018 and first half 2019.
  • Report the quantity and value of the company’s purchases of the product for 2017, 2018 and first half 2019, not only for the Chinese imports, but also from domestic and third-country suppliers.
  • For imports sold as final products, the percentage of the company’s 2018 total US gross sales that were accounted for by the Chinese products.
  • For imports used in the production of final products, companies will need to report the percentage of the total cost of the finished product that is accounted for by the imported Chinese input, and the percentage of the company’s 2018 total US gross sales that were accounted for by the final products.
  • Is your company a “small business” as defined by the Small Business Administration.

Exclusion requests also should address the following factors:

  • Whether the particular product is available only from China.  In addressing this factor, requesters should address specifically whether the particular product and/or a comparable product is available from sources in the United States and/or in third countries.
    • Requestors are asked to discuss any attempts to source the product from the United States or third countries.
  • Whether imposition of additional duties on the particular product would cause severe economic harm to the requester or other U.S. interests.
  • Whether the particular product is strategically important or related to “Made in China 2025” or other Chinese industrial programs.

Requesters may also provide any other information or data that they consider relevant to an evaluation of the request.

These last factors appear to be key considerations to whether an exclusion will be granted or not.  Products that are available from U.S. or third-country suppliers are more likely to be denied than products that can only be sourced from China.  Successful exclusion requests usually have a good story describing the harm to American economic or other interests that would be caused by the tariffs.

USTR has completed its review of exclusion requests for all of List 1 ($34 billion) and most of List 2 ($16 billion). The Wall Street Journal reported in early October that about 61 percent of the exclusion requests for these two lists had been denied, 31 percent had been granted, and the rest were still pending. In other words, requests to exclude products from tariffs have about a one in three chance of succeeding.

The deadline to submit exclusion requests for List 3 just closed September 30, 2019. Although USTR has only just started its review of List 3 exclusion requests, it has already granted a small number of exclusion requests for List 3 products.

If you want to avoid the next round of tariffs against your China products, you need to submit your exclusion request by January 31, 2020.

Africa lawyers

This is the third of a series of posts on how companies can benefit from China’s Belt and Road Initiative and the second post focused on Africa. To read the first post, click here. To read the second post, click here. The goal of these posts is to help companies better understand what China is doing with its Belt and Road Initiative so that they can benefit from utilizing Chinese-funded or Chinese-built infrastructure as a springboard to their own growth. This and other posts will focus on general enabling environments, including legal frameworks for doing business in these countries. This post is presented in a Q&A format with David Baxter, my longtime friend and PPP (Public Private Partnerships) expert, who is based in Washington, D.C.

Does Africa present a viable alternative to companies that want to move manufacturing from China?

Many products manufactured in China could be manufactured in Africa. Textiles, shoes, and glassware could easily be produced in Africa. The key is to find partners in countries that have created an enabling environment,  meaning that the country is stable for foreign competitive and transparent investment. Companies should focus on the ease of starting up business indices, which vary from country to country. Many Southeast Asian countries are no longer inexpensive labor markets, but there are still inexpensive labor markets in many regional hubs in Africa. These hubs contain skilled people seeking jobs and a rapidly growing middle class. These African countries present great opportunities to build a sustainable market base. Some US companies have been in Africa for over a hundred years. Companies like Coke, Ford, and IBM know about Africa’s potential and have done well there, and their market penetration strategies should be emulated.

Which African nations are most welcoming to Chinese development projects? Are these same countries also welcoming to U.S. and European companies?

Poorer countries like Mozambique, Somalia, and Sudan are some of those that have welcomed China. More developed African nations have been pushing back against China. African countries with strong anti-corruption policies and competitive and transparent procurement practices are more interested in doing business with Western companies. Chinese companies typically want handshake deals; they often do not want transparency or competition. Countries with good legal frameworks and enabling environments (e.g. South Africa and Ghana) have great potential and present a better chance for Western companies to compete because deals are not being made behind closed doors. Studying and utilizing the World Bank’s ease of doing business index will be helpful in selecting good markets to enter. Countries with strong contract enforcement and less strict controls on repatriation of profits will be more attractive to Western companies. Many African countries have laws with strict profit remittance controls. These restrictions do not bother the Chinese companies because they generally do not remit money back to China; they remit raw goods to their home country instead.

What most concerns you regarding the current state of African development?

Africa’s public sector funding gap is its biggest challenge. Countries have significant needs, such as hospitals, schools, road, bridges, but they do not have the funds to build them. Sectors such as healthcare, education, water, wastewater disposal, energy, and transportation are already a big focus. These generally enhance the sustainable development goals of the UN and require business partners that support sustainability and resilience. There is great potential for Western companies with responsible market policies. The current Chinese and Indian consumer markets will be dwarfed by the end of this century by Africa’s domestic market demands. This demand, supported by a movement to develop free trade zones, will enhance African development objectives by encouraging these countries to work together, integrate their economies, and share resources in sub-Saharan Africa.

How important are the geopolitics of Africa to current and future business prospects in Africa?

Pan-African identity is continually evolving. The countries and markets may be inclusive or exclusive. It is important to pay attention to how different regional blocks or customs unions develop. Will they collaborate or will they compete with each other? Which foreign companies will gain footholds in these post-colonial regions? The Chinese are present across Africa. So are the French in Francophone West Africa. Former British colonies (Commonwealth countries) comprise their own geopolitical unit, as do the Lusophone colonies (colonized by the Portuguese) and the Saharan African blocks. The African Free Trade Zone has not developed yet because of the disparate geopolitical aspirations among these regions. The rule of law is significant due to the starkly different legal structures present. For instance, some countries operate under the “Napoleonic code” (French Colonies). Others operate under Roman/Dutch law, like South Africa and its immediate neighbors. Then you have the English common law, along with the legal philosophies and practices. Similarly aligned countries are well positioned to do business across borders, but there are still complexities in procuring large transnational infrastructure. Overall political stability is a significant factor. Look at East Africa – the Somalia/Somaliland split is problematic and needs to be resolved. The Democratic Republic of the Congo and the Central African Republic essentially do not even exist as functioning states. Their boundaries were drawn by foreign powers in Berlin a hundred years ago, and these regions are facing difficult issues centered around the different ethnicities of their people. The typical Western company will be better off to focus on the African countries that have had multiple successful democratic elections resulting in progressive leaders who provide political and economic stability.

What does Africa need that foreign companies can provide?

Africans need Western innovation and new technology. Western companies need partners in countries that have a strong rule of law to protect these valuable business investments in infrastructure.

What does Africa have that foreign companies need?

Africa’s burgeoning middle class makes for a large and growing consumer market, and the rapidly increasing number of well-educated Africans needing employment make for a strong workforce. Africa can provide both skilled and semi-skilled labor to meet most any company’s needs.

Can you give examples of industries in which Africa is doing well and in which it will likely emerge as a global leader?

Africa currently excels at producing basic essentials, such as textiles and shoes. Vehicle manufacturing is growing. Japanese and German companies established large auto manufacturing facilities in South Africa years ago, and Africa now exports Toyota, Nissan, and Mercedes-Benz vehicles to their countries of origin. Petrochemicals will be big for a long time. Tanzania and Mozambique recently discovered oil and gas reserves. In Uganda and Kenya’s Rift Valley they have been developing numerous renewables: geothermal, solar, wind, and hydroelectric energy. Africa’s ports are important for its import and export economies, including for landlocked countries. Africa has the most landlocked countries in the world, and the growing transportation infrastructure that can unlock those countries will be important. Unfortunately, Africa’s airline industry is problematic and has a long way to go.

What should foreign companies consider when making their first foray into Africa to do business?

You need reputable local partners. It is difficult to get into certain countries without them. I am not talking about “fixers” or “facilitators” who will lead your company toward a path of corruption. Do not assume Africa doesn’t have skilled people. South Africans are highly skilled. Namibia is very advanced; Rwanda is quickly becoming the IT hub of Africa. Reach back into the African diaspora for assistance from people who live in your home country — people like me. Do not hire foreigners who know little about the complexities of Africa. For example, the Nigerian expat communities in the U.S.  and in Europe are enormous and can offer much. There is a large Ethiopian community here in D.C. and in various other cities in the United States and Europe. Many of these Africans have come to the U.S. and other Western countries and become trained as professionals, and many are looking for opportunities to invest their time and money in their home countries in Africa. They are looking to collaborate with U.S. companies in those future opportunities. Western companies have largely ignored the opportunities that members of the African diaspora offer.

Africa is ready to do business with the world.

The World Bank’s 2019 rankings for ease of doing business can be found here, with the following African countries in the top 100:

38. Rwanda

53. Morocco

56. Kenya

78. Tunisia

84. South Africa

85. Zambia

87. Botswana

97. Togo

In our future posts we will look at additional world regions and zoom in on promising markets with strong enabling environments and rule of law that provide businesses with a sufficient level of certainty to move forward in developing relationships in those countries as alternatives to China.