china employee due diligencePeople lie.

Especially on job applications.

A widely cited US study from 2017 found that 85% of applicants lied on their job application. Another study from 2015 found that only 56% of job applicants had lied, but either way, the number is huge.

Why do job candidates lie? For most, it’s a combination of two things: they think their lie will help their candidacy (especially if they think resumes are being screened by a computer), and they don’t think anyone will do a background check. The most common lies are about job skills, followed closely by lies about job responsibilities. An estimated 15% of candidates list jobs that they never held (George O’Leary or Marilee Jones, anyone?).

China is no different from the US in this regard, and in many ways it is worse because Western companies are unable or unwilling to perform due diligence on job applicants. Seeing a market opportunity, I started my own company in 2009 to help Western companies with their China hiring, with a particular emphasis on background checks and screenings. And boy, do they need the help.

Overall, we reject 72% of all candidates for dishonesty, usually for not having the ability they said they did. We have found that salespeople and general managers lie 80% of the time; engineers lie 65% of the time; and people working in finance lie 59% of the time. They lie because they think they can get away with it.

One candidate said he recently left his company when a headhunter called. We found out he was fired three years ago and his detailed stories regarding his accomplishments over the last three years were all fantasy.

Candidates often give us a cell phone number for a former boss that turns out to be the phone number of their friend pretending to be the boss. And even if we get the right number for the boss, Chinese bosses are usually unwilling to speak ill of a former employee even when it’s justified. Our strategy is to take detailed interview notes with the job candidate, and then ask their former boss to confirm the who, what and where of important projects. We often learn that the boss, or someone other than the candidate, actually managed the project in question.

Ronald Reagan is credited with popularizing the Russian proverb “trust, but verify” during his 1980s negotiations with Mikhail Gorbachev. The phrase is ambiguous, but is generally agreed to mean that people should earn your trust, rather than be assumed trustworthy until proven otherwise. I wish the latter was a good business strategy in China but it is not. China has many wonderful people and fantastic job candidates. But it also has a lot of people willing to lie and cheat to get ahead, and they are often the ones who get the interviews.

What are you doing to ensure you hire the “right” candidates?

*This post was written by Jim Nelson, President of SHI Group Recruitment, a China-based employee recruitment agency that focuses on helping Western companies find and hire good employees in China.

China employment lawyerOn April 18, Grace Yang, our lead China employment lawyer, will be putting on a webinar on “Employment Laws for Female Workers in China.” To call this webinar timely would be an understatement, as the issues involving female employees in China could not be more relevant/topical/important.

The live webcast will be this Wednesday, April 18, 1:00-3:15pm PST / 2:00-4:15pm MST / 3:00-5:15pm CST / 4:00-6:15pm EST.

LawProCLE, who is putting on this webinar, describes it as follows:

Foreign companies doing business in China face complex China labor and employment issues every day and issues related to female workers require additional attention. The Chinese government has high expectations regarding how employers must treat female employees, especially those who are pregnant, nursing or on maternity leave. Employers need to know and follow the national, provincial and municipal laws and regulations regarding protection of female employees. Female employee disputes are increasingly common in China and both the government and the courts are getting increasingly tougher against employers that fail to treat their female employees appropriately.

This webinar will give you the information you need to spot employment law issues relating to your female employees and arm you with ways to avoid and mitigate problems.

Grace’s talk will focus on the following:

  1. The key China employment laws on protection of female workers
  2. The employer rules, regulations and policies you need for your China employees
  3. What you need in your employment toolkit to reduce your risk of sexual harassment claims
  4. Female employee special leaves
  5. Female employee terminations
  6. China employer audits

LawProCLE describes Grace as follows:

Grace focuses on international business and China law. She is Harris Bricken’s lead attorney on China labor and employment law and recently authored a book entitled the China Employment Law Guide. Grace is admitted to practice law in the States of New York and Washington. Grace received her bachelor’s degree from Peking University School of Law (“Beida”) and her J.D. from the University of Washington School of Law. During law school, Grace won “Best Written Contract” in the University of Washington Contract Drafting & Negotiation Competition and the Pro Bono Student of the Year Award for her involvement in several community-based volunteer legal service projects.

Grace has spoken at a ton of seminars and webinars on various different aspects of China employment law and always to rave reviews and you do not want to miss this one.  For more information and to sign up, click here.

 

Doing business with China
State dinners are nice, but….

The following is a guest post by Adrián Cisneros Aguilar.* A Spanish language translation is directly below the English version.

Over the past decade, I have come to the reluctant conclusion that most Mexican companies are unwilling to spend the time or the money to get timely, experienced, and appropriate help when doing business with China. I cannot tell you how many times in just the last year a Mexican company has come to me for my “quick” advice on “a few key terms” of a deal they are just about to close without having ever conducted even the most basic legal due diligence. Is the Chinese side a real company? Are they dealing with an authorized representative? Is the deal legal under Chinese law? Will they have any recourse if something goes wrong?

Mexican companies doing business with China (and many of the business consultancy firms advising them) do not seem to care about these questions, and it stems from a false distinction between “business” and “legal” affairs. A company is both empowered and constrained by business norms, but those norms have no meaning without a legal framework. It’s not one or the other – it’s both. And comprehending the importance of both business and legal affairs is all the more important in countries like China where the law is often interpreted with an eye to both politics and the economy. But few Mexican entrepreneurs see law that way – they only care about the deal, and they tend to think of the law as an obstacle.

Many Mexico experts boldly claim that Mexico can rely on its treaty network to expand its imports and exports, but this is a triumph of theory over practice. Few Mexican companies truly understand how to conduct business internationally, as witnessed by the underutilization of the free trade agreement network already available to them. According to a report by the Congressional Research Service, approximately 80% of Mexican exports go to the United States (don’t get me started on the amount of FDI we get from America), but most Mexican companies are not familiar with the applicable terms of NAFTA. This lack of sophistication leads to bad business decisions. I regularly receive emails from Mexican companies that have fallen for the Chinese bank switch scam and hope that I can help get their money back.

Having worked with many Mexican companies in improving how they do business in China and with China, I worry that too many Mexican companies continue to ignore the law (largely because they don’t care about it) and never truly become “international.” Plenty of Mexican companies buy low cost off-the-shelf Chinese products to import into Mexico and there are also a number of Mexican companies that intermittently supply products to China with little or no added value. But how many Mexican companies have strong investments in China or regularly sell large amounts of product there? Not many.

To put it bluntly, if our government and our companies do not start spending more money for high-level assistance to get more sophisticated about China, our government’s current international diversification strategy will fail, at least for China. Before we spend more money encouraging Mexican companies to go abroad (or at least to somewhere other than to the United States), or promoting Mexico as a target for foreign investment, we need to spend more money educating Mexican companies on how to conduct business internationally. We need to get them to think more about the importance of the relationship between China law and business.

Otherwise, we’re just going to be spinning our wheels.

For more on business between Mexico and China, check out the following:

 

*Adrián Cisneros Aguilar is the founder/CEO of Chevaya (驰亚), an Asia-Pacific internationalization services company. Adrián has a Doctor of Laws from Shanghai Jiao Tong University and an LL.M. in International and Chinese Law from Wuhan University.

 

En los últimos diez años he llegado a concluir, si bien renuentemente,  que la mayor parte de las empresas mexicanas simplemente no están dispuestas a invertir el tiempo y el dinero necesarios para obtener ayuda oportuna, experimentada y adecuada para hacer negocios con China. No saben cuántas veces fui contactado el año pasado por alguna empresa nacional buscando mi “rápida” asesoría sobre “algunos puntos específicos” de una transacción que estaban a punto de cerrar, sin haber realizado la más básica debida diligencia siquiera.  ¿La contraparte china estaba debidamente constituida? ¿Estaban los mexicanos lidiando con un representante legalmente facultado de la empresa china? La transacción, ¿era legal bajo el Derecho chino? ¿Tenían claros los recursos o medios para hacer valer sus derechos si algo salía mal?

Ni las empresas mexicanas haciendo negocios con China (ni las consultorías de negocios asesorándolas) parecen preocuparse acerca de las cuestiones anteriores, lo que es consecuencia de la falsa distinción que hacen entre lo “comercial” y lo “legal.” Una empresa es, a un tiempo, empoderada y constreñida por reglas de negocio, pero esas reglas carecen de sentido sin un marco jurídico. No se trata de privilegiar una sobre la otra-ambas son relevantes. Y comprender la importancia, tanto de las cuestiones de negocio, como jurídicas es aún más trascendente en países como China, donde la norma frecuentemente se interpreta teniendo en cuenta consideraciones políticas y económicas. Sin embargo, pocos empresarios mexicanos ven al Derecho de esa manera: sólo les importa cerrar el trato, y tienden, por tanto, a concebir al Derecho como un obstáculo para lograrlo.

Muchos expertos mexicanos aventuradamente afirman que México se puede valer de su red de tratados internacionales en vigor para aumentar las importaciones y exportaciones, pero aquí es donde la realidad supera a la ficción, la verdad. Pocas empresas mexicanas verdaderamente entienden cómo realizar negocios internacionales, algo de lo que puede dar cuenta la subutilización de la red de tratados mencionada y que está a su disposición. De acuerdo con un reporte del Servicio de Investigación Académica del Congreso de EE.UU., aproximadamente 80% de las exportaciones mexicanas van a EE.UU. (y no me hagan hablar acerca de la cantidad de IED que viene de ese país), y aun así, la mayoría de las empresas mexicanas no están familiarizadas con los términos aplicables del TLCAN. Esta falta de sofisticación lleva a malas decisiones de negocio. Cotidianamente soy contactado por empresas mexicanas que han sido presa de la llamada “Estafa de Suplantación de Cuenta Bancaria China” esperando que les ayude a recuperar su dinero.

Habiendo trabajado con muchas empresas mexicanas en mejorar la manera en que hacen negocios en y con China, me preocupa que demasiadas empresas siguen ignorando la ley (en muy buena parte debido a que no les importa el Derecho) y, por tanto, nunca se internacionalizan realmente. Con sus excepciones, muchas empresas importan de China productos producto terminado de bajo costo, y también existen algunas empresas que, intermitentemente, proveen productos a China de poco o ningún valor agregado (agroproductos, recursos naturales, etc.). Pero, ¿cuántas empresas mexicanas tienen fuertes inversiones en China o venden regularmente grandes cantidades de producto? No muchas.

Seamos claros, si nuestros sectores público y privado no empiezan a destinar más recursos a obtener apoyo especializado de alto nivel para sofisticarse acerca de China, la actual estrategia de diversificación comercial del Gobierno Federal va a fallar, al menos, para China. Antes de que sigamos gastando dinero en animar a las empresas mexicanas a ir al extranjero (o al menos, a un lugar que no sean los EE.UU.), o promover a México como un destino para flujos de IED, debemos gastar en educar a las empresas mexicanas acera de cómo hacer negocios internacionalmente. Necesitamos que éstas comiencen a pensar más acerca de la importancia de la relación entre Derecho y negocios en China.

De otro modo, nos la pasaremos perdiendo el tiempo, haciendo cosas que no logran nada.

Para más información acerca del clima de negocios entre México y China, chequen los enlaces siguientes:

* Adrián Cisneros Aguilar es el fundador y Director General de Chevaya (驰亚), una empresa de servicios de internacionalización para Asia-Pacífico. Adrián es Doctor en Derecho por la Universidad Jiao Tong de Shanghái y Maestro en Derecho Internacional y Chino por la Universidad de Wuhan.

 

Doing Business in Myanmar Burma

Robert Walsh, sometime Seattle resident and long-time friend of our law firm (we worked on a number of China deals together and we — Dan and Steve — met up with him on our last trip to Myanmar), has spent the last four years in Myanmar, where he operates a vibrant business consultancy. Robert is fluent in Chinese and Korean and, amazingly enough, Burmese (multiple dialects), having learned Burmese while working in the U.S. Embassy in Yangon many years ago.

Robert has been sending us email updates from Myanmar for some time and we post some of them on here. Back in 2014, it was Myanmar: Open For Business? and in 2013, it was Myanmar Foreign Investment. Difficult And Expensive, But Opportunities Are There. In our 2013 post I mentioned that my law firm had “been involved in a few Myanmar matters, but truth be told, Myanmar is a difficult place in which to do business and many of the companies going there are bigger companies mostly looking to get in now and make money later. In the last year.” Since that time, our Myanmar work has actually shrunk as interest in Myanmar by SMEs has greatly waned and their non-China Asia focus these days seems to be more on Thailand and Vietnam. Early last year, in A Report from Myanmar from an old China Hand I talked about how much had changed, due in large measure to the relaxation of sanctions.

Today’s post is on how optimism is waning as things just keep getting worse.

1. The electricity situation here is going to get worse before it gets better.

a. Foreign oil & gas companies are pulling out of their offshore blocks en masse. They had a requirement to drill or walk away, and they are walking away. Low gas prices drive part of it, but also the royalties schemes with the Burmese government are the other part. Prevailing wisdom is that they will return later when the blocks go up for bid again, and offer a lot less and drive a harder bargain with the Burmese government.

b. Several of the schemes for producing more electricity have hinged on gas coming in from offshore. The 2 gas turbine plants running are getting their gas for free from the government, from the Yadanar fields that have been in production since the 90’s.  But production is dropping in quantity and quality and Thai TPP has first call on it. 

c. The government has given a green light for companies to do LNG, but the only credible one is led by Total. We have already been approached by one group of unqualified Burmese rent seekers who have had a gas turbine project on the back burner for more than 4 years, who now say that they want to add a LNG gasification plant.  They are offering nothing more than a 60-acre parcel that they don’t seem to own yet, but want 20% equity in the thing.

d. Coal is what the IFC and world bank are pushing the government, but there is a lot of grassroots-level pushback. A lot of communities have suffered pollution from coal-burning cement plants, and there is concern for waterways as well. Still, a so-called “clean coal” plant would be 5-7 years in the making, and would also require importing all the coal, as there is no source of suitable coal in the entire country.  

e. All of this, and electricity demand is growing 15-20% year-on-year.  The government still subsidizes costs of electricity and consumers pay very little of the costs of delivery. Last year the costs of subsidies were north of $900 million, with $358 million of that for Rangoon Division alone.  The government will not grant a power purchase agreement (PPA) to any foreign or domestic provider that covers CAPEX and running costs, let alone allow for a decent return, so private power providers are staying away. Raising rates for the consumer to the point where costs of delivery are covered is regarded as political suicide.

f. With the above in mind, consensus is that it may be as late as 2025 before we see something positive in the electricity sector.


2. Politics in general. 

a. The consensus is that Burma’s political reforms plateaued more than a year ago and are in fact in a gentle backslide. Readers will note that National League for Democracy head Daw Aung San Suu Kyi (ASSK) has been stripped of a few honors, and is in fact held in some mild disdain by many outside the country. 

b. In her defense, the military still holds control of the key ministries of defense, home affairs, and borders.nationalities. I can tell you from long and painful experience that out in the provinces it’s still 1965, as all of the authorities at the state, district, township, all the way to the village level are still appointed by the military-led home affairs ministry. 

c. On the other hand, ASSK has been decidedly unwilling to weigh in on the racial strife in Rakhine state, and her attitude towards the various ethnic armed groups is pretty much “it’s my way or the highway”. As a result of her unwillingness to play a part the groups that have any combat power at all have taken to the field again. None want to sign the national ceasefire agreement until they get what they want. The only signatories to the agreement are groups that have not fired a shot in anger for decades. Still, some trouble has recently been brewing with signatories the Karen National Union, who are pissed at Burmese Army encroachment into territory that was agreed to be off-limits.



3. Everybody and his brother wants to build and operate special economic zones and industrial parks.

Here, there, and everywhere.  Even the Korean government Ministry of Land & Housing is doing a 600-acre park(KMIC/ Korean Myanmar Industrial Center) about 100 miles north of Rangoon, jointly with a Korean private company.

a. We cannot understand the drive for these parks, especially in areas where the roads and other infrastructure, -to say nothing of electrical power availability- are in general lacking.

b. A key thing, one I focus on whenever I talk to developers of these things is: “Which companies have already weighed in as tenants?”.  The answer is invariably “nobody yet”. 

c. A lot of the developers are either ignoring or worse yet, -ignorant- of certain facts about Burmese workers.  They are not highly mobile, like the hundreds of millions of Chinese who gravitate to Shenzhen and other Chinese megacities for work. My best guess is that 4/5th of these parks are sited in areas where labor is going to be a problem.

d. For the garment manufacturing sector, the lack of US GSP for textiles and garments has really slowed things up. Last week the government passed a daily minimum wage of MMK 4800 (USD $3.63), and the factory owners bitched a blue streak. 

4. When Trump tore up the TPP.
Many describe this action as “pressing pause on American plans for Asia”. Well, the Chinese have not pressed pause, but rather accelerated plans. Not too long after Trump’s inauguration ASSK spent time in Beijing getting initiated into resumption of Burma’s status as a Chinese client state.  

a. The Chinese are now everywhere in Burma, pursuing developments that are all rather land-intensive.  In addition to the Kyaukhpyu SEZ up on the NW coast, they are going after another 4-5 developments each over 5000 acres.  What they all have in common is a lack of focus on fundamentals.

b. For its part the Burmese government is overwhelmingly receptive to all of this, as the Chinese are looking at other big-ticket infrastructure things that no other donor government is looking at doing.

c. As an aside, the current Burmese government still does not issue sovereign debt. A lot of the ADB and other sovereign wealth fund loans have gone to private concerns like Yoma/FMI.

d. And of course the Chinese are in no way, shape, or form inclined to carp on Burma’s human rights situation.
e. I was on a 4-month project in Magway division last summer, and a cast o’1000’s of Sinopec people were all over Burma’s onshore oil patch doing seismic work. In another year parts of the division are likely to become a forest of drilling rigs.

5. FDI is flat, and declining.
But the Burmese do not seem to understand how to incentivize investment, because they are so bound to the cronies; they simply will not allow investment conditions that might conceivably afford a foreign company an advantage over locals. 

a. The only exception to the rule I can see is telecoms, with Ooredoo and Telenor getting licenses in early 2014. But those two companies were flummoxed to see the Japanese KDDI/Sumitomo step in and work with the legacy government MPT to revitalize what should have been a failing competitor. And more recently the Vietnamese Army VietTel paired with the Burmese Army UMEHL to form a 4th contender, MYTel/MecTel.  

b. Some sectors like mining still require foreign companies to take on local partners, most of whom offer little in the way of value. Still, in the border areas controlled by favored (and not-so-favored) ethnic armed groups, there’s not shortage of dirty smash & grab mining operations. Most are for gold, some for tin, others for antimony.

c. Oddly enough, the areas where completely level free market playing fields exist are the areas under government-granted autonomy to the various ethnic armed groups, e.g. DKBA, KNU, and the UWSA areas (as noted above).

d. As of a few weeks ago the US was waaaaaay down the DICA-published list of investment source countries. If you can get its website to kickstart itself, the Directorate of Investment and Company Administration is here.

e. Entertaining to read was the 2017 State IG report on AmEmbassy Rangoon. According to the IG report:

-There are now around 127 American direct hires assigned to the embassy, and an additional 388 or so as local hires/local nationals. I have no idea what they do all day. None whatsoever. Our prospects and prestige here have pretty much sunk that low; it’s possible that nobody in the Hitler’s Bunker-modeled embassy building knows this.

-The embassy has at least 71 leases for housing for which it pays at least $10.7 million a year. Just this number makes the embassy the single biggest American economic player in Burma. If all that is spent on office space for USAID and its contractors is figured in, we could be talking north of $100 million/year just for expatriate quality-of-life maintenance. Staggering. Naturally USAID’s contractors bill back all of that overhead, which is likely deducted from whatever was allocated for Burma aid. That would explain why I don’t see much evidence of USAID doing anything in the areas of Burma I work and know best.

-Puzzling is that the IG points out that 5 people in the embassy produce 5 different translated local media reports per day. I guess foreign service officers no longer read newspapers in the local language at the start of their work day. (The report does note that language training prior to assignment only enables our diplomats to engage in greetings and informal chit-chat) Go here for the whole thing.

6. We do indeed have an American Chamber of Commerce chapter here, but most members are local companies.
The chamber does not do a hell of a lot. The New Zealand and French chambers are very active and do a much better job of engagement. Still, American involvement in Burma’s economy is waaaaaaaay down the list, as reflected in the Myanmar Investment Committee’s monthly stats. China (of course), Korea, and Japan are the big hitters. In terms of American economic activity, Coca-Cola is the most visible.
a. We do have a Hard Rock Cafe now, started by a couple of Crony Princelings, but as they can’t seem to properly manage it, and are usually out of a lot of menu items, the place is not popular.
b. Other US brands here are Ford (RMA Group Thailand) and Chevy (AA Medical Group). Neither brand is exactly punching above its weight against used Toyota products and the Korean offerings. Nearly 2 million cars have gone on local roads since the last letter. The government is now wisely stipulating that cars coming in be less than 2 years old and be left-hand drive (the majority are Japanese used cars less than 7 years old, and right-hand drive).
-I bought the very first off the local assembly line Suzuki Super Carry Kei truck. The Japanese cleverly used the way-back machine to incorporate 1960’s design and technology which is dirt-simple and appropriate for Burmese countryside conditions. Electronic nothing, points and condenser, carburetor. $5700 delivered, with Rangoon city plates, vice triple that for a used truck from Japan.
 Burma Law Firm
c. Out in the sticks where I work, US farm machinery manufacturers have once again screwed the pooch by not sending in an “A Team”; they’d rather find a local dealer and half-assed support it. Kubota owns the market now, having figured out a way to offer financing to whole villages for a package of everything needed to plant and harvest rice. Older Burmese farmers have nostalgia for Ford and John Deere tractors, and every once in a while I run across the bones of one of these in out-of-the-way places.
-I had a major jade mining company looking for new heavy trucks; could not get any US maker on the plane to come for a meeting. That $57 million all-cash deal went to Komatsu. The buyer had been vetted for all sorts of US Treasury stuff, so that could not have been the problem.
d. As with China, we have KFC and Pizza Hut, franchised from YUM! by local moneybags Serge Pun’s FMI/Yoma. Both are popular but face stiff competition from Lotteria and other established local and foreign brands. FMI/Yoma spent awhile sorting out the supply chain, as YUM! actually has standards for what goes in their food.

7. Americans are leaving.
A few weeks ago we had American lawyer Eric Rose announce that he was throwing in the towel. He had been one of Burma’s biggest boosters, and carried a lot of water when it came to sanctions lifting. He will be missed.

As always, if any you should find yourself in Burma, I’d be more than happy to help.

Doing business with ChinaPresident Trump’s presidency has changed the trade relationship between China and the United States, of that there can be no doubt. But how and what other changes are in store? For answers to these questions and a whole lot more, I urge you to go to One Year In: The Trump Administration’s Impact on Key International Business Regulatory Areas. This event is being put on by the International Practice Section of the Washington State Bar Association and will take place in Seattle AND online exactly one week from today (Thursday, March 8) starting at noon and going until 1:30 p.m. This event is described as follows:

During its first year, the Trump Administration has made critical regulatory and policy changes impacting key international business regulatory areas including international trade (customs laws, import laws), immigration, and national security (export controls, economic sanctions, foreign direct investment).  Join our panel of experts as they describe what has changed officially in the last year in each of these areas and how presidential tweets and speeches have left some areas of uncertainty.  Our panelists will also prognosticate as to where the Trump Administration is headed in each of these key regulatory areas in 2018.

It will have the following three speakers:

Emily Lawson – Harris Bricken, LLP, Seattle
Michelle Salter – Davis Wright Tremaine, LLP, Seattle
Larry Ward – Dorsey & Whitney LLP, Seattle

Emily is a key part of our firm’s International Trade Group where she helps our clients achieve import and trade compliance and defends their interests before government trade agencies and courts, on matters involving Customs compliance, antidumping, countervailing duties (AD/CVD), economic sanctions and U.S. export controls compliance.

Go HERE to register to attend live and HERE to register for the Webinar portion of this event. CLE credits are available for both live and webinar attendance.

Do not miss this!

China e-commerceE-commerce for Foreign Invested Entities (FIEs) in China is in upheaval. Beginning with the much discussed liberalization of the investment cap for foreign entities conducting e-commerce business in China, and most recently with the draft e-commerce law, big changes are afoot. This post briefly summarizes the more important changes, briefly assesses their effect in practice, and speculates as to the underlying trends and future developments.

Backdrop. As pretty much everyone already knows, China’s retail e-commerce market has grown massively in recent years.  Matthew Crabbe gives some interesting totals and projections: firstly the Chinese online retail market was worth a total of 120.8 billion RMB in 2008, rising to 6,433.9 billion RMB in 2017, including B2C and C2C sales, with B2C overtaking C2C in 2015.  Cross-border e-commerce (Haitao –  defined as goods sold from outside China into China, not including foreign goods sold within China) as a proportion of B2C online retail was 1.3% in 2011, growing to 4.8% in 2017. This means the market estimate is 303.8 billion RMB in 2017, which is significant compared even to the total US online retail market, for example.

Summary of China’s e-commerce reforms. Since 2001, the Foreign-Invested Telecom Enterprises (FITE) Regulations have contained an investment cap on foreign investment in Value-Added Telecoms Services (VATS) businesses of 50% ownership.   There is now a limited exception to this relating to e-commerce business. The following brief timeline will illustrate the main events:

14 March 2011: China’s 12th Five Year Plan contains a broad injunction for the economy to move from an export-led manufacturing economy to a consumer economy.

7 January 2014: the “MIIT SHFTZ Opinion 2014” made it possible for Foreign Invested Entities (FIE) in the Shanghai Free Trade Zone (SHFTZ) to own a 55% share in for profit e-commerce businesses with nationwide reach, an increase from the previously allowed 50% investment cap for (VATS) business under the FITE Regulations, thus meaning that a nationwide reaching e-commerce entity could be majority foreign-owned.

13 January 2015: the “MIIT SHFTZ Opinion 2015” took the changes in the MIIT SHFTZ Opinion 2014 further, by allowing 100% ownership of an e-commerce business by a Foreign Invested Entity in the SHFTZ.

10 April 2015: Part IV s20 of China’s 2015 Foreign Investment Catalogue made an explicit exception for e-commerce when discussing the investment cap of 50% in VATS business. This change was widely understood as removing the limitations on investment ratio in the nationwide regime for e-commerce FIEs.

7 May 2015: The State Council E-Commerce Opinions contain an instruction to various Chinese governmental bodies to remove the current investment cap for FIEs in e-commerce businesses, expanding the SHFTZ liberalization nationwide. Various simplifications relating to licensing were also included. (see China E-Commerce: The New Rules for discussion of the State Council E-Commerce Opinions.

19 June 2015: MIIT Circular 196 appears to be the implementation of the State Council E-Commerce Opinions, and it allows foreign equity ratios in e-commerce businesses to be raised to 100%, explicitly stating that this is a nationwide extension of the SHFTZ pilot program.

27 December 2016: the Draft PRC E-Commerce Law was published. It applies to all e-commerce business within China, including e-commerce businesses outside China that sell into China. It differentiates between third-party e-commerce platforms (e.g. TMall and Taobao) and other e-commerce operators, such as self-operated retail portals. Chapter 5 deals specifically with cross-border e-commerce. However, detail is lacking, and its main point seems to be that China wishes to promote development of “cross-border e-commerce,” which is defined as “imports and exports of goods or services through the Internet or other information networks’.” Chapter 5 deals in particular with customs clearance, “electronization,” and personal information.

There have also been a number of other initiatives, such as e-commerce pilot zones, for example in Hangzhou and elsewhere.

What is behind the reforms? On the face of it, there seems to have been major progress in opening the Chinese market to international e-commerce operators. As is so often true when it comes to doing business in China, all may not be as it seems. It is hard to ascertain what is happening fore foreign companies seeking to do e-commerce in China, but since the above changes were implemented, very few VATS licenses have been issued to FIES. One example is Heiwado (China) Co., Ltd, a Chinese WFOE reported to have two Japanese shareholders and a market capitalization of around US$50 million, and which has been involved in traditional and online retail in central China for several years. See First WFOE Obtains VATS License From MIIT.

So what is going on?  There are several possibilities.

Firstly, one factor may be “bringing order to the market” and eliminating legal grey areas. Much of the selling of foreign goods online in China has consisted of informal grey-market imports, often brought into China as personal goods in suitcases and then retailed on Taobao via “Taobao Agent Purchasing.” This means goods are entering the Chinese market without the relevant customs clearance, duties, and product standard compliance. China has a strong incentive for bringing this industry within the scope of its regulation.

A related point is that although the FITE Regulations contain strict investment caps in telecoms business, foreign investment in telecoms is in fact pervasive in China, through the controversial Variable Interest Entity (VIE) structure. Another argument is that removing the investment cap for e-commerce companies is a pragmatic move to enable full compliance by foreign-invested e-commerce businesses. Why though bring e-commerce businesses under the regulatory umbrella, but not other internet businesses? One hypothesis is that full compliance in e-commerce is seen as an achievable and desirable medium-term aim, with overall benefits to China, whereas the policy pressure on other areas of the internet pushes in the opposite direction, with no desire to liberalize and allow foreign participation.

It is also important to remember that discussion of “cross-border e-commerce” in China includes outbound as well as inbound e-commerce. In fact, the focus of the policy seems to be on encouraging outbound e-commerce. One much-discussed theme in the development of China’s economy has been inviting foreign partners in, learning from them, then applying this knowledge internationally once it has been digested by Chinese entities. Opening the market with one hand, and yet maintaining restrictions with the other hand gives the illusion of liberalization while allowing domestic companies to dominate the market. With respect to examples like Heiwado, it is really a very minor player. One interpretation could be that an example like this makes little impact overall, and yet helps maintain an illusion that the market is opening.

Interestingly, online selling on domestic Chinese third-party retail platforms like Taobao is now relatively easy for foreign businesses. This in some ways represents an ideal scenario for China. If inbound cross-border e-commerce takes place under supervision of a Chinese entity, Chinese government oversight is much easier and Chinese businesses get a piece of the pie. For the foreign retailer, this is also a low-risk strategy. The availability of this alternative may be a strong factor in the apparent lack of applications for e-commerce VATS licenses by WFOEs. Does conducting standalone e-commerce in China as a WFOE even make commercial sense?

From the point of view of foreign investment in third-party retail platforms, the dominance of the domestic players presents formidable obstacles to the market. It is probably more plausible for Alibaba to take on eBay and Amazon internationally than vice- versa. Interestingly, Alibaba, the owner of Tmall and Taobao, is itself structured as a VIE. See Why Alibaba is good for China VIEs.

Future developments. China’s removal of its e-commerce investment cap does not appear to have led to any great increase in market access for foreign investors. However, it does fit into a general picture of increased access to the Chinese market for foreign goods, albeit on Chinese terms. Although the e-commerce market as a whole will continue growing, Matthew Crabbe’s prediction is that the Haitao market will peak at about 5% of total online retail sales in China. If that is correct, China’s e-commerce gold rush may not be quite what everyone expected, and today’s status quo is also the shape of things to come. The future of China’s e-commerce market lies largely in selling through established Chinese channels.

* This post was written by Edward Hillier, a New Zealand-qualified lawyer and researcher. This post is based on academic research he submitted to Anglia Ruskin University in 2017 for his LLM dissertation entitled New Opportunities in Online Retail For Foreign Investors in China. The author would like to thank Matthew Crabbe of Mintel for market and retail industry insight.

China trademark registration
When it comes to China trademarks, listen to Ricky Bobby

When talking about the China market one of the first things China experts often mention is that China is a first-to-file country. In short, this means (with very few exceptions) whoever files first for a trademark owns it. The policy can cause countless headaches for brands interested in China, and even for those who are not. Below are a few examples of why trademarking is important regardless of your intentions to enter China.

China Sales through grey markets may already be happening. China’s grey markets are huge and even if you are not officially selling your product in China, your product is likely available in China.

Daigou, meaning “buy on behalf of” are sending many hard-to-get products to China. They also specialize in products that are costlier in Mainland China due to regulations and taxes. The daigou market was estimated to be worth $6.5 billion in 2015 and is driven largely by students and young professionals living and traveling abroad.

329,000 Chinese students studied in America in the 2015/2016 year, with five-fold growth in the past decade. The number of Chinese students in the US is double the next largest source of students, India, according to the Institute of International Education. Starting a daigou business often begins by fulfilling friendly requests from friends and family back in China and sometimes expands into a business with tens of millions of dollars in revenue.

Daigou will not only increase your domestic sales, but often increase awareness of your brand in China should you wish to enter the market later. One of the first things we do for our clients looking to take their products into China is a Chinese language Internet search to determine existing brand recognition there. Not infrequently, our clients are surprised by how well-known and even in demand their brand already is in China. If daigou are already selling your product into China and you haven’t registered your trademark there, someone else may already have done so or is likely to do so.

Someone else registering your trademark in China will at best be just squatting on it, hoping to sell it to you for a handsome profit should you ever wish to enter the China market. A worse scenario for you is when someone registers one or more of your key trademarks in China and actually uses the trademark to sell their own products with your brand in China, such as what the large sports brand Qiaodan did with the Michael Jordan trademark. This sort of thing is not only frustrating, but it can harm your brand’s reputation among those Chinese shoppers who buy your brand from daigou or while traveling outside China, and make it more difficult for you to enter the market in the future. We have had clients who have chosen not to enter China because someone has already registered and is using their brand name there.

Chinese manufacturers producing products with your branding for China oftentimes will also export “your” products to other foreign markets. With 12% of China’s exports estimated to be counterfeits, this is a real risk and this means that not only might you be blocked from selling your product in China (and having your reputation damaged there), these risks can extend well beyond China as well.

China’s Connected Travelers may already know your brand. With the rise of outbound tourism, the army of selfie-taking Chinese visiting your land could also be buying your brand and building awareness for it back in China. In 2015, 2.6 million Chinese visited the U.S., growing 73% from 1.5 million in 2012 according to US Customs data. Shopping remains the most popular activity for traveling Chinese and Chinese travelers are also the highest spending travel group in the U.S., averaging over $10,000 per tourist per trip according to Xinhua.

Damage to your brand in China could harm the attractiveness of your products to Chinese tourists. Even if you don’t think your product appeals to Chinese tourists, you may be surprised. Chinese tourists are going further afield and looking for authentic local products such as one man’s retirement project in Tasmania found out with Bobby the Bear.

No interest in China? Failing to trademark can still get you! Even if your company has no interest in doing business in China, you still might have good reason to file your trademarks and protect your IP in the Middle Kingdom. Take for example the famous California fast food establishment, In-N-Out Burger, which had no immediate plans to enter China. Four California-educated law graduates trademarked the chain’s legendary menu items throughout Asia and Europe. Opening their restaurant Caliburger in Shanghai, they promised many of the well-known In-N-Out staples such as Double-Double, Animal Style, and Protein Style burgers and fries, and even included an iteration of the iconic palm tree on their branding. See Trademark Registration for Companies That WON’T Be Doing Business In China. Do You Want Some Fries With That?

In-N-Out saw this as a risk to their brand, given how connected America’s West has become with Chinese tourists, students and migrants, and also with Americans visiting and living in Shanghai.  A confidential settlement followed – rumored to involve a significant sum of money – and Caliburger changed its burger names and décor then closed up shop in Shanghai and has now expanded to the States.

It’s not only competitors in China against which you must be on guard, but also your own partners. It’s much better to protect your brand upfront no matter what your China ambitions. Though my company has had clients who’ve won back their trademark from squatters in China who weren’t actively using the trademarks they had registered in China, doing so has always been significantly more expensive, time-consuming and stressful than if they had just simply trademarked their brands in China earlier. Save yourself the troubles; whether you are currently selling overseas or simply open to the possibility of doing so (and maybe even if you are not) covering your bases ahead of time by filing for a trademark in China is essential.

 

* This post was written by Ann Bierbower of China Skinny. China Skinny is a marketing, research and online agency based in Shanghai with offices in North America and Europe. I asked Ann to write this post because we are always emphasizing the need to register your brands and logos as trademarks in China from a legal perspective and I thought it would be good to have someone set out the branding case from a marketing perspective as well. I am a big fan of China Skinny’s newsletter; it is one of the few to which I subscribe. Earlier this month, Ann wrote another post for us, entitled, China Trademarking that Resonates and I urge you to read that one as well.

 

China trademark registration
Choose your China brand wisely

Trademarks protect your business name, product names, domain names, logos and slogans. If you are doing business with China or even just planning to do so, these all need to be a part of your China trademarking plan in both English and Chinese. Prior to filing though, it is important to thoroughly think through the branding you plan to use in China.

Picking a Chinese Name and Slogan

Your brand’s name, slogan and logo are likely to be the crusading identities of your brand in China, so picking the right components for these is imperative. Merely translating your brand name and slogan rarely works well for China because of the nuances in Chinese language. A straight translation may not resonate with your target audience and therefore, localization of your brand identity is a must, even if it’s only a small tweak.

Many counter that they will only use their English name in China, as Chinese will then attribute their product to being imported and therefore more valuable. The need for a Chinese name is still there. Even among English speakers in China, nearly all are more comfortable in their native language, especially when scanning a crowded shop shelf or shopping on their smartphone.

A Chinese name and slogan is also important for China’s animated social media landscape. If a brand becomes popular and does not have a Chinese name, the internet users of China are likely to pick a name for such brand and it could be something unsavory. You want to create your own social media friendly name before locals pick one for you.

There are numerous examples of Chinese names gone wrong, of which Airbnb is the latest, thus it is important to ensure the name resonates through on-the-ground testing with your target market. Brand names in China are important to consumers, much more so than in the West. It can make or break your sales and getting the right combination of brand meaning and pronunciation is a fine art when launching a product into Chinese markets.

Consider Your Logos and Leading Images

Localization should also be considered for logos as different images and colors can have powerful meanings and association that vary from one culture to another. Testing these images is imperative to developing China–specific and global marketing strategies. For example, many products use their county’s flag or map on their products. As many products have this signifying factor this may not set the product apart and worse, could even confuse or even offend Chinese consumers. They may not know what each flag or country shape represents.

Trademarking is recommended if you are interested in selling your product or your service in or to China and trademarking collateral that resonates should not be overlooked in this process.

 

* This post was written by Ann Bierbower of China Skinny. China Skinny is a marketing, research and online agency based in Shanghai with offices in North America and Europe. I asked Ann to write this post because we are always emphasizing the need to register your brands and logos as trademarks in China from a legal perspective and I thought it would be good to have someone set out the branding case from a marketing perspective as well. I am a big fan of China Skinny’s newsletter; it is one of the few to which I subscribe.  

China CopyrightsOn Friday June 23, in collaboration with the National Copyright Administration of China, the United States Patent and Trademark Office will be putting on a one-day conference on legal protections for sports broadcasts. This event will take place at the Novotel Beijing Peace Hotel and run from 9:00 a.m. until 5:00 p.m. that day.

There is no charge to attend.

The leader of our China entertainment group, Mathew Alderson, will be speaking at this event. This event will explore the different ways countries protect the creative content of live events, with a particular focus on broadcasts of sporting events. As China continues to develop amendments to its Copyright Law, now is an opportune time for an in-depth discussion in this area.

The program will bring together US, Chinese, and European government officials, academic leaders, and industry representatives to discuss the importance of providing legal protection for sports broadcast programs, including the role of copyright protection, how sports broadcasts are currently protected in China, the United States, and the European Union, and international perspectives on the subject. Go here for more information on the event and here for more information on how to register or can just contact Ms. LIU Jia and provide her with the following registration information:

1. Your full name
2. Your organization
3. Your full position / title
4. Your email address

Hope to see you there.

China Entertainment LawThe leader of our China entertainment group, Mathew Alderson, will be speaking on a panel at Peking University School of Law on June 21st. The panel is entitled “Looking Beyond: Opportunities and Challenges.” It will be part of the 2nd Annual China-US Entertainment Law Conference, presented by Peking University School of Law, the US Patent and Trademark Office, Loyola Law School Los Angeles, and the Beijing Film Academy. Mathew’s panel will be one of four dealing with current issues in China film, TV, gaming and music. These issues include fair use of live game streaming, copyright protection of live broadcasts, music licensing issues, protection of celebrity names, risk management, and talent agency contract dispute resolution.

The titles of the other three panels are:

  • Year in Review — Recent Developments in the China-US Entertainment Industry
  • IP Issues in the China-US Film, TV, Music and Gaming Industries
  • Other Issues in the Film, TV, Music and Gaming Industries

This is a major event for which the organizers have assembled a great cast of Chinese and foreign experts. For further details see this flyer: US China Entertainment Law Conference.

Go to this link to register.

We hope to see you there.