China risks

My law firm has a long history of representing fishing and other food companies. The reasons for this are that we are located in Seattle and food companies went international early.

By about five years ago, nearly all our fishing clients were doing something in China. Most were either buying farmed fish from there or were shipping over their ocean caught fish and crab for processing there.

One very internationally sophisticated client of ours was doing neither. We were scheduled to meet for lunch regarding problems he was having with one of his Russian deals and my plan was to tell him why he should be sending his product to China for processing, like just about everyone else. I started out with a set-up question as to why he was not shipping his product off to China, where processing would be “so much cheaper,” expecting him to follow that up with questions for me as to what he should be doing to get going on that.

Instead, he gave me a great explanation as to why he was not doing it, which explanation is vaguely summarized as follows:

I flew over there a few months ago and met with three top fish processing plants near Qingdao and Yantai (both in Shandong province, where so many Seattle and Alaska fishing companies ship their product). I saw what they did and the quality was good. But in the end, I decided the savings would not be worth it and here’s why. I figured they would save me five cents a pound, but I would be giving up way too much for that. For that five cents, I would be taking away much of my ability to monitor the safety of my product. I would also be incurring the risk of having a large amount of our product sitting in China right when import duties are raised. Not only that, but as we both know, things can go wrong on these foreign deals that just would not go wrong over here. I also do not want to get into a situation where all my product is going over to one country for processing. I like having the processing done here. Yes, it does cost us a bit more, but the shipping logistics are much easier and I am less tied to shipping rates. And you know what, I actually would be willing to pay a little more to keep some jobs in Alaska and to keep using the same people I have been using for so long. I know those people and I trust them and that has to be worth something, right?

I have thought back to that conversation many times since it occurred and I’ve told a ton of people about it as well.

I thought of it when one of our oldest and best clients was driven to the brink of bankruptcy when massive amounts of its fish product were held up for months at US customs during a China food scare that had nothing to do with them. And I thought of that conversation today when I read a WSJ China Journal post, entitled, China Flu Fears May Take ‘Natural’ Out of Sausage Casings.

Seems US sausage companies have been sending their sausage casing raw materials to China for processing, but with China now banning the importation of US pork products, these sausage companies are facing real production problems:

China last year took in 18,355 metric tons of casings, valued at $65.3 million dollars, based on data from the U.S. Meat Export Federation, whose motto is “Putting U.S. Meat on the World’s Table.” On a volume basis, casings last year accounted for about 35% of variety meats and 11% of total pork and variety meat exports to China.

China has banned imports of pigs and pork from Mexico as well as all U.S. states and Canadian provinces that have reported swine flu cases. U.S. and global health officials have stressed that swine flu cannot be transmitted through pork.
Kevin Smith, USMEF’s director of export services, characterizes the casings dilemma brought on by the trade restrictions as a “priority issue” because of the lack of an alternative market for this kind of processing.

“Right now most of our packer members are faced with the decision on whether or not to continue to produce this product, which would be a huge blow to most of our members’ bottom lines,” said Smith. “Currently, the pre-casing intestines are being packed in salt and stored and that process may at some point be discontinued, forcing packers to potentially render excess volumes of intestines.”

Synthetic casings may be considered as an alternative, said Smith. He said, however, that the quality and system used in China makes natural casings cheaper.

I am absolutely not saying do not outsource to China, but I am saying that in measuring the rewards of doing so, you need to remain ever mindful of the risks and try to put some monetary amount on those risks, including those that cannot yet even be determined.

What do you think?

Photo of Dan Harris Dan Harris

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network. 

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network.  His work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

He was named as one of only three Washington State Amazing Lawyers in International Law, is AV rated by Martindale-Hubbell Law Directory (its highest rating), is rated 10.0 by (also its highest rating), and is a recognized SuperLawyer.

Dan is a frequent writer and public speaker on doing business in Asia and constantly travels between the United States and Asia. He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed Dan regarding various aspects of his international law practice.

Dan is licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at his firm, Dan focuses on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.