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

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

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

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

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

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

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

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

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

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

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

What do you think?

  • LawDude

    Nice list. Thanks.

  • Simon Says

    I think that the companies that do these things are likely to do well in China and the companies that do not will not. What that blogger describes are the basics and that is why they are so important.