One of the tougher issues we as China lawyers face is what we call the Home Office/China Office tension. These situations are tough for us because we are so often put smack dab in the middle.

Let me explain.

On the one side you have the US home office, often replete with well trained in-house attorneys and accountants and businesspeople. On the other side you have the China office, often replete with foreign and Chinese employees who have been hired based on their knowledge about doing business in China and for their ability to figure out how to get things done in China. The US home office has very little knowledge about China and the China office has very little desire to follow every rule in China when doing so will lead to increased costs and/or decreased sales/profits.

That puts us in the uncomfortable position of being the buffer between the two offices, explaining to the US office why it must do xy and z in China and then having to fight off the China office who does not think xy and z are really necessary.

One of our China attorneys wrote me the following email regarding one of these situations and because it is so typical, I thought it would be good to share, with all identifiers stripped from it:

In case you have any doubts, Mr. Y. [the American who heads up the China office] will get along perfectly with ____________ [a China consultant whom we believe to be corrupt]. They see the world in the same way.

However, CleanCo [the made up name for our client] has told me that it wants to obtain venture funding from real people in the United States. You can imagine what a connection with ________ [corrupt China consultant] would do to that plan. Mr. Y runs the China office in the way that is typical of _______[the China city in which it is located]. In that sense, Mr. Y. is right that we don’t understand how China works.

However, he is wrong. We understand very well how China works because we know full well that the way China works is not going to be acceptable to any legitimate VC group.

This is the problem in CleanCo. Mr. Y says this is the way it is done in China and when he says that, he is absolutely correct. That is probably what the advisors to GSK said to them and look what happened there. The same will happen to CleanCo if it keeps relying on a guy like Mr. Y. to determine how it conducts business in China.

When I talked to _______ [at CleanCo’s US office], he said: I want a China operation that will pass muster according under Wall Street due diligence standards. This is what we are tying to give them. However, Mr. Y. does not understand that and he has no intention at all of delivering that. So, at this time, CleanCo needs to decide what kind of China operation it wants.

No matter what, CleanCo needs to realize that if you run a crooked ship in China, you can be run out of town in just one day. That is their risk and that risk is very real.

However, this is a classic case where their ENTIRE China operation rests on Mr. Y. So they cannot easily get rid of him. It is a very difficult situation. This is a serious matter and it requires careful consideration by CleanCo. Considering what anybody can read on the web in about one hour as to what is happening these days to American companies, it is quite incredible that we are even having this conversation. At any rate, I will say it again that the issue is how CleanCo intends to operate in China. As long as it works through Mr. Y, the straight way will never work and he seems incapable of understanding that the China in which he did business twenty years ago has changed drastically. More troubling, he may be right that the [key] product cannot be manufactured in China “the straight way”. It’s a big deal and it cannot be swept under the rug at this point.

I am quite sure that many of you are quite familiar with the above tensions and we would love to hear what you think.

  • I have also seen the opposite. The American boss tries to understand fully how China works, but the GM of his China office plays dumb and seems surprised when his boss suggests they might have to play by dirty rules.
    When I see this, it’s pretty clear that the China GM gets bribed left and right but wants to maintain the appearance of ethical practices.
    It’s even more obvious when the China GM manages a factory rather than a sales/sourcing office. With all the government officials to please, there is no way the China GM ignores what game is played on the ground.

  • Ward Chartier

    Having been the GM at manufacturing operations in China for three Western multi-national companies, it is not only possible, but preferable to follow home country laws and China laws simultaneously. Yes, some people pursue short term results by tap dancing on the slippery slope of corruption, but the long term risks are undeniable. I have never taken such risks, followed the China laws, maintained good relations with the various China government bureaus, passed all parent company internal audits, and ran operations that met or exceeded parent company targets.