A London reader e-mailed me to ask about some China information posted on the U.S. Government’s export web site.  While perusing it, I came across a very good, yet somewhat outdated and basic, list of what the government calls Essential Advice for Doing Business in China. [Link no longer exists]  The article calls it a “key list of ‘do’s and don’ts’ of doing business in China,” drawn from the experiences “of American companies with successful sales in China, as well as information from the U.S. Department of Commerce.”

The article sets forth the following twelve do’s and don’ts of doing business in China:

1.  Diverse Markets Require Careful Research.   China is a diverse market in terms of its “topographies, climates, cultures, and peoples” and “each region therefore has its own consumer preferences and business needs.”

2.  Speak the Same Language.  Companies that are serious about doing business in China should supply company information in Chinese and be prepared to initiate contact in Chinese.

3.   Find the Right Partner.  The article has this to say on determining whether or not to do business with a Chinese company:

It is critical that companies make sure that their partners are reliable and that they have the right motivation. Make certain your client or partner is able and willing to do all he says he will do in the contract. Ensure that it is in your partner’s best interest to perform as agreed. Is it in his interest to assist you to protect your brand or other intellectual property rights? Be careful that your partner is allowed by law to fulfill the promises in the contract. Check the reliability of information on your partner or customer by using independent sources.

4.   Have Clear Contract Terms.   The article provides sensible advice in this arena, as follows:

When entering into a contract with a Chinese partner you must be careful. Do not attempt to enter into an agreement without sound legal advice. Have your own legal counsel. In your contracts, specify exact terms of payment and performance standards. Set time lines. Pay careful attention to details, such as initialing pages of contracts and signing properly. Scrupulously follow the contract yourself or expect to pay a high price. Do not rely on legal advice from your Chinese partner. Beware of claims that Chinese law requires specific covenants in your contract. Verify this with your own counsel. Do not agree to provisions in a contract that are not under your control. For example, if your client or partner wants you to specify in the contract that he must visit your production facilities in the United States, remember that you cannot guarantee that he will receive a visa. This could invalidate your contract. Do not assume that local or provincial officials actually have the authority to give you permits and permissions. Verify their claims of authority through independent sources.

I would add to this that you should have the contract in Chinese as well as in English.  This will greatly increase the likelihood of its enforcement in Chinese courts.

5.  Ensure Project Viability.   The article warns against relying on “promises of subsidies, special considerations, or non-market sources of income to create a profit. If subsidies are offered, they should be used to augment profit, not create it. Make certain your partner has the authority to offer subsidies and verify from independent sources that the subsidies will actually be paid.”

6.  Avoid Prohibited Agreements.   The information given in this section is so important I set forth all of it as follows:

Creating viable contracts and agreements is challenging in any business transaction. However, given an unfamiliar business environment, many companies can be unwitting victims of illegal agreements. Be familiar with the overarching rules governing agreements at all levels of jurisdiction. U.S. companies often enter into agreements in China with promises from local officials that central government rules will not be enforced in the provinces. Indeed, often they are not. Problems arise when these rules are suddenly applied, sometimes retroactively, leaving a company with little recourse. You must be ready to follow all WTO-compliant regulations. Seriously question any agreement in which you are told you can ignore or avoid these rules. Also, make sure that your managers know all relevant U.S. laws such as the U.S. Foreign Corrupt Practices Act. You should be aware that China is also cracking down on corruption. You do not want your business to be associated with corrupt officials or illegal practices. Be aware of Bureau of Industry and Security regulations on the transfer of dual-use technology to China. U.S. law prohibits transfer of some sensitive technologies without a license.

7.  Practice Problem Prevention.  “Try to anticipate possible problem areas” and “have an escape strategy for each stage of the project, even if you do not plan to use it.”

8.  Do a Thorough Risk Analysis.  “Use more than news media sources or your immediate partners to evaluate the market. Do not have a corporate risk analysis policy for China that is different than you would have for any other country. If a project is too risky, do not do it even though it is in China.”

9.  Expect Fierce Competition and Pricing Pressure.  Chinese brands are strong and gaining market share in many sectors.  Chinese competitors, particularly those from the state-owned sector, often enjoy very low costs of capital.

10.  Protect Your Intellectual Property.   “If you have a successful product or brand name, most likely you will be a target for intellectual property pirates.”   Protect your IPR through proper registration.

11.  Getting Paid.  The article offers the following advice on getting paid:

Pay careful attention to how you get paid, when you get paid, and in which currency. If you want to be paid in U.S. dollars, be certain you are able to convert profits. Be advised that not all companies have rights to provide payment in foreign currency, and payment may be arranged through a “window company.” Inquiring about a company’s payment process should be an important part of screening for partners. Use letters of credit and other financial instruments to protect yourself. If you do not want to use a letter of credit, require your partner to make advance payment. Remember that Chinese companies usually do not use terms that allow unsecured payments after delivery of goods. For example, payment terms of “30 percent letter of credit, 70 percent payment, 120 days after delivery” would not be customary in China. For most large projects, terms of “70 percent advance payment, 30 percent letter of credit” would not be unusual. Never agree to unsecured payments after delivery.

12.  Look Before You Leap.  “China is a rapidly changing market that requires a great deal of caution and patience. Companies should test the water carefully before jumping in. With proper preparation, however, firms can position themselves to profit from China’s growth in the years to come.”

Anyone have any to add?

  • China Law Blog Has Made Some Great Posts Lately.

    China Law Blog, a site based in both the U.S and China, has made some great posts lately commenting on China business news and regulatory developments, including reports on the slow but positive changes in Chinese IP enforcement policy. But…