Just got back from speaking at a truly excellent doing business in China seminar at the University of Toronto. I was on a panel where the question was asked whether the rising tensions (real or perceived) between foreign companies and China were due in large part to the changing nature of their relationship with China. The question posited that in the “old days” the typical relationship was that of an American company sending money to China to buy a product, but today, the typical relationship is far more complicated and these increased complications are increasing “tensions.”

My answer was that I had never thought about it in that light, but that it was probably true. I then went on to talk about how the nature of my law firm’s China business has so drastically changed over the years. Whereas five years ago, probably 75% of our business was for companies looking to manufacture products in China, with 25% focusing on businesses that wanted to sell products or services to China, that ratio has pretty much exactly flipped.

When I got back to my computer, I had an email from a retailer asking whether it was really true that it would need to open up a branch office in every city in which it wanted to locate a store.  Our short answer was generally yes.

The big issue today is not so much how to make product in China, but how to sell product and services to China, be that within China or from outside China. Needless to say, the “within China” part is where the complicated legal regulations and hence the tensions can arise.

Twice in the week before I left for Toronto I was interviewed about this “sea change.” Once by a friend writing a book and the other by a reporter. Both of them wanted examples of American companies profiting or seeking to profit from selling their goods or services to China, and I talked a bit about the following, in an effort to show the incredible diversity of ways American companies are “going to China” these days:

  • US company that provides high end remote medical testing. It sells its testing system to hospitals and then does the diagnostics from the United States. It is not forming a company in China; it does this from the United States.
  • US company that provides movie services to China’s leading movie companies. It is not forming a company in China; it does this from the United States.
  • US and Canadian and European companies  that provide online learning to Chinese companies. These companies, pretty much by necessity, are having to work with Chinese domestic companies that possess an ICP license or have the ability to get one. Some of these companies are not forming companies in China, but selling from the United States or Canada or Europe.  Some of these companies are forming companies in China to assist in the selling or to provide support services there.
  • US and Canadian and European companies that sell enterprise level software to Chinese companies.  Some of these companies are forming companies in China and some are not.

I could go on and on with examples of how foreign companies are seeking to profit from China’s rising wealth. The point though is that the legal and business issues foreign companies face in trying to profit from China are usually very different and oftentimes more complicated than those faced by foreign companies that have their products made in China.

If you are sitting in the United States and just buying product from China, your legal issues are going to be both very different and less complicated than someone selling enterprise software to China’s hospitals. The company buying product needs to have a good contract that makes sure its IP is protected and that its widgets are of good quality and arrive on time, but the software company is going to need to deal with pretty much the full panoply of China’s laws. The software company will almost certainly need to form its own Chinese entity (almost certainly a WFOE) for China and then it will need to make sure that it complies with China’s employment laws, antitrust laws, and anti-corruption laws, just to name a few.

Inquiries to my law firm regarding how to deal with both American and Chinese anti-corruption laws have probably quintupled in the last five years and they have probably tripled in just the last eight months — thanks mostly to the Chinese government’s treatment of GSK executives. For more on how foreign companies are needing to step up their FCPA and other anti-corruption compliance programs check out China Bribery. A Few Facts And A Few Tips.  and Rule One For Doing Business In China. No Bribery. Rule Two, Make Sure Of It. and China and the Foreign Corrupt Practices Act.

The legal work that we do to decrease the chances of our clients going to jail in either China or the United States is more important and more pressing and more complicated and drawn out than the work we do to make sure a $300,000 shipment gets to Peoria on time. I say this not to in any way denigrate manufacturers, but to highlight how different (and yes more tense) it is for those on the ground in China as opposed to those able to sit at home and watch the Seahawks crush the Broncos in the Super Bowl. Needless to say the odds of going to a Chinese jail while ordering product from the United States are considerably lower than if you live in China. The same holds true on getting your business shut down by the Chinese Government.

I just read a Forbes article written by Michael Zakkour (or at least by the time I started writing this post).  The article is entitled, The China Luxury Downturn Is Real – Global Luxury Brands Must Adjust and it focuses on what foreign luxury brands are facing in China these days, and what they should/can do about it. Zakkour’s article nicely highlights from a business perspective the huge difference in issues faced by sellers to China as opposed to buyer’s from China. There too the complications and risks are generally with the sellers.

The article talks of how the “premium luxury market slowed” in China in 2013 and of how that trend will likely continue in 2014, especially for those companies that “depend on gifting.” But even that market, according to Zakkour is “still pointing up.”

Zakkour starts out listing a number of factors that have driven growth in the premium luxury segment down to about 2% and he leads it off (rightly I think) by citing to President Xi Jingping’s intent to make “a huge dent in the endemic corruption in Chinese politics and business.”

The article then lists the following reasons why luxury brands should “continue investing in China as a long-term growth market”:

  • After 30 years of exponential  economic growth and development, China’s economy is slowing, but this is relative, from 10% to 6%-7%, which is still robust — luxury purchases will continue to grow with the economy in general.
  • Urbanization and an ever enlarging middle and upper class are fueling further growth for the best things in life – While 1st Tier cities and regions have been saturated, the new growth will come from Tier 2, 3, 4 and 5 cities, representing another potential 300 million new luxury buyers.
  • Current events and government policy are always fluid in China.  When the differences between legitimate and illegitimate purchases are sorted out “this too shall pass.”
  • The accessible luxury market will continue to grow and prosper.

I agree.  The opportunities for making money in China are considerably greater today than they were five years ago and will almost certainly be considerably greater in five years time than now. But selling into China — especially selling from within China — is not the same thing as sending out a purchase order.

Chinese and American businesses are working together (or not) in a different way than they did even five years ago. Their business relationships are getting more complicated and the competition between them is increasing.

A couple days ago, we ran a guest post on Expat Stress in China and we received an unusually large number of fairly strident comments and emails from that post, most of which highlight increased tensions.

Is the business relationship between China and America fraying? And, if so, why? Is the switch from foreign companies manufacturing to selling products and services into China driving this?  Or was the relationship never really all that good in the first place?

What do you think?