China is in the midst of what appears to be a concerted government crackdown against foreign companies doing business in China. This has led many of our clients to ask themselves (and our China lawyers): “Are we at risk, and if so, how much risk?” Our quick answer is always “yes. Hard to say.”
The risk usually depends on all sorts of factors, including the following:
1. How does the Chinese government categorize/view your China business’s industry?If your China business is in a restricted industry or one in which China’s citizenry has major concerns (food and medicine are classic examples), your risk is almost automatically high. If your China business is in an industry that requires you to joint venture with a Chinese partner, your risk is also almost automatically high. Ditto if your business is in an industry the Chinese government views as its own province, such as SAAS, cloud computing, the internet, publishing, and telecom. Andrew Hupert at ChinaSolved makes a similar pointwhen he notes how China’s “bureaucracy is much more tolerant of overseas companies that spend than of overseas companies that earn in China.”
2. Do the Chinese people consider your industry to be their government’s responsibility? Health care and education immediately spring to mind and we have had a number of our clients in those two areas have been subjected to intense government scrutiny for activities that probably would have been ignored in other industries. See GSK (not our client).
3. Does your China business rely on cleverly written contracts designed to get around China law? Chinese courts generally do not look kindly on companies that do this. As noted by our own Steve Dickinson in a recent article, “Chinese law contains a clause that deems all contracts concealing illegal intentions in a lawful form; to be invalid.” As your China business has only void contracts to rely on, the risk of this type of arrangement is high. If you are in China via a VIE (quasi alliteration intended) you have been warned. See China VIEs. Avoid, Avoid, Avoid.
4. Do you know what your Chinese staff are doing? As much as we hate to say it, but virtually every instance we have seen of foreign companies getting into trouble in China involved a foreign company that gave too much leeway to its Chinese staff. This alone increases your risk as there is an inherent conflict in that your Chinese staff will want to do things the “China way” but you will be judged by the government against the “foreign standard.” For more on this, check out the following:
- China Compliance: Don’t Rely On Your China Staff
- China Compliance: Don’t Rely on Your China Staff, Part II
- China Compliance: Don’t Rely on Your China Staff, Part III
- China Compliance: Don’t Rely On Your China Staff, Part IV
5. Ultimately, what is the culture of your China business? Are you relying on “strategic” relationships to work around the letter or even the intent of China’s laws? Do you know well those with whom you are doing business? Are things happening at your company that make you uncomfortable? Do you feel like things are happening at your company behind your back? If you answered “yes” to one or more of these, you are probably at high risk.
If you are serious about mitigating risk with your China business in the current environment, get serious about compliance by doing what you can to improve your answers to the above questions.
UPDATE (by Dan Harris): My long-time friend Jeremy Gordon will on October 1 be coming out with a book, entitled, Risky Business in China: A Guide to Due Diligence. I have talked enough with Jeremy about his upcoming book, seen enough portions of the book, and also worked enough with Jeremy enough to be able to guarantee this will be a great book and to urge everyone to buy a copy. Amazon describes it as follows:
Risk is a major reason that companies fail in, or fail to enter, China. This unique book demonstrates how correctly-applied due diligence can not only reduce business risk in China, but also provide excellent business intelligence to support negotiations and business relationships. Based upon the author’s twenty years of consulting experience in China, this practical book is packed with real-world case studies of failures and successes, providing a valuable and detailed ‘road map’ to avoiding the most high-profile pitfalls of business in China.
I believe it.