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.

China complianceThe below post was written by Richard Bistrong, who recently returned from a long China trip where he met with all sorts of companies to assist them in their compliance efforts. Richard is CEO of Front-Line Anti-Bribery LLC  and a contributing editor of the FCPA Blog (a truly great blog, BTW). In 2010 he pleaded guilty to a conspiracy to violate the FCPA and served fourteen-and-a-half months at a U.S. federal prison camp. He now consults, writes and speaks about compliance issues. He was named to Compliance Week’s list of Top Minds in 2017 and was one of Ethisphere’s 100 Most Influential in Business Ethics in 2015. 

 

In today’s compliance environment, though we see a robust debate on what the new US administration might mean for anti-bribery compliance, the new ISO standard, and the recent DOJ “Evaluation of Corporate Compliance Programs” memo, those weren’t on anyone’s “what keeps me up at night” moments during my recent visits to  China. Yes, those are all meaningful topics for the field of practitioners, but from conversations at graceful Buddhist restaurants (with thanks to my hosts for indulging my vegan preferences) to live engagements and panels, much of the focus was on the “what happens when local customs conflict with the rules” dilemma. And that’s not to say that there’s an inherent conflict in China between ethical business practices and commercial success, but in an emerging market environment, with a young, dynamic and engaged workforce, the challenge is daunting, and not to be ignored.

The Importance of Defining Success. Compliance programs in China, like anywhere else, address the importance of lawful and ethical conduct, but during my visits, I saw a profound focus around “how to execute on both values and objectives,” in an environment where people are extremely focused on success, and the rewards of success. This desire to succeed manifests itself in a way that’s much different in an emerging economy than in a developed one. Employment with western based brands are coveted jobs, and commercial teams are anxious to demonstrate their ability to execute on financial objectives – in other words, to succeed. But that goal driven model often widens what’s a cultural and operational disconnect between the support functions at HQ and those forward based teams which are deployed in less supervised locales. And you can’t bridge those gaps with compliance paperwork and contracts.

Servant Leadership. One executive’s initiative was to call on mid-level leadership to be “servant leaders.” That really captured my attention, as he empowered his executive teams to push power down into the organization instead of up. As defined in The Center for Servant Leadership, a “servant-leader focuses primarily on the growth and well-being of people and the communities to which they belong.” Though traditional leadership generally involves the accumulation and exercise of power by one at the “top of the pyramid,” servant leadership is different. “The servant-leader shares power, puts the needs of others first and helps people develop and perform as highly as possible.” Yet another reminder as to why it’s so exciting to be back in the field — these are the business practices that one can only learn via immersion, and you don’t get that from the home office.

As to some more of the challenges, yes, anti-corruption was a big part of it, but not the only part. In China, corruption can intersect a work-force in both directions, as bribe payers as well as receivers. Commercial personnel who are responsible for dealer, intermediary and distributor networks might be subjected to requests for bribes, passed through those third parties to government officials — a set-up that’s familiar. But in China, employees are also exposed to the receiving side of corruption, as dealers might want to curry favor for discounts, product allocations or marketing allowances through corrupt offers.

In an environment based on relationships and hierarchy, that’s a complexity that might be hard to appreciate unless you are in front of it. It’s much more than anti-corruption compliance; it’s about ethical conduct in a broader sense, on hours and off. And those offers don’t come, or they don’t start, with brown bags of cash or numbered off-shore accounts. A dealer offering his beach flat for a holiday weekend to an employee might seem innocent enough, until a situation arises where that dealer might need a special allowance or discount. It’s a peril that often hides under the radar of friendship and association.  It’s part of what’s called the “dangerous charm” of third parties. After all, who wants to say no to a friend?

That’s just part of how I engaged in a discussion where there was an appreciation and focus on how to develop a commercial workforce free of conflict of interest, and how to inspire commercial leaders to embrace their roles as brand ambassadors. And those efforts were backed up, including by my own experience, with a “you can’t hide bad conduct behind your third parties,” and “what you don’t know can hurt all of us.” We spent a lot of time sharing with the workforce how they have an obligation to know the values and integrity of the people they do business with, and not to switch their ethical radar “off” after the third-party vetting process. In China, with state investment and divestment in industry and commercial entities, risk can quickly change over the life of a relationship.

In sum, those are just a few of the elements to which I was honored to engage. Having spent the better part of ten years living and working overseas 250 days a year, this was my first visit to mainland China. It left me wanting more, to return, and to read more about China’s role in today’s global economy along with its internal struggles as to how that gets implemented. China is experiencing what I heard called the “new normal,” where the period of exponential growth is slowing down, creating yet new challenges for commercial teams to succeed in a tightening marketplace. It’s a fascinating place, I found it personally contagious, and felt privileged to play some role in how to engage and inspire China’s commercial and compliance leaders to work together as each other’s ambassadors.

China Mexico economicsIn part one of this series, I discussed former Mexican Ambassador to China Jorge Guajardo’s opinion piece on what he saw wrong with the China-Mexico economic relationship. In this, the conclusion, I will present Guajardo’s proposed solution and offer my own advice on how Mexico should deal with China.

Ambassador Guajardo’s analysis of the China-Mexico economic relationship is misguided, but his proposed solution is even worse. Explaining that Mexico should focus on “defending access to the markets we have got, endeavoring to open new ones and fostering the domestic market,” he then calls for “a campaign in the U.S. promoting the benefits of free trade” under the argument that “China is the problem and Mexico is the solution.” Guajardo does not specify the details of such a campaign, other than that it should be carried out “with dollars and cents” by hiring lobbyists in America who will be “clarifying the lies” in order to restore Mexico’s image in the US.

In other words: Mexico should now lecture the U.S. on the benefits of NAFTA and explain why it should be kept in place. Does anyone think this is a good idea? At this point in history, and for a variety of reasons, the U.S. is deeply conflicted about the benefits of globalism. Mexico’s response should not be to double down on free trade, but to craft a strategy that protects Mexico’s interests in the U.S. regardless of what happens with NAFTA. This doesn’t mean rejecting all U.S. deals; it means using the current economic situation as a prod to (1) develop Mexican industries and (2) expand Mexico’s presence in other markets, markets that have been underdeveloped for far too long because NAFTA has made it so easy for Mexican companies to rely on the U.S. market.

Without any solid facts or arguments, Ambassador Guajardo’s article borders on anti-China sentiment and does not offer any constructive advice on how to deal with a country that, whether we like it or not, is here to stay and bound to become one of our major trading partners and investors alongside the U.S.

Accordingly, I would like to offer the following as a corrective to Ambassador Guajardo’s piece:

  • If Mexico is to attract Chinese investment, it must insert Chinese companies into its value chains in a way that transfers technology and know-how and enables local growth. As an initial step, Mexico should stop seeing China as either a factory of cheap goods, a faceless market for products, or a source of deep pockets. The latter point is particularly important now that Beijing is tightening its capitol controls.
  • To compete successfully in China, Mexican companies must internationalize. This means becoming more sophisticated in all respects, and developing the capacity to comply with China’s laws and regulations and its written and unwritten standards. I keep hearing calls for Mexican companies to diversify in light of the potential closure of the U.S. market, but no one seems to be asking whether Mexican companies even have this capability. In my experience, Mexican companies are too used to having an essentially captive market in the U.S. that will buy products regardless of quantity or quality. And they have become accustomed to receiving foreign investment that is specifically and exclusively geared toward making products solely for export – which means these investments aren’t helping to enhance local industries. In this regard, treaty promotion is a necessary part of designing sensible business strategies and the Mexican government needs to do more to raise awareness.
  • If Mexico wants to compete with China in the long run, it should invest in innovation to create value-added products, and not just invest in making processes more efficient and cutting costs. According to a recent article in a major Mexican newspaper, “[d]ue to uncertainty over … Donald Trump’s economic policy, 80 percent of companies in Mexico prefer to compete by reducing costs and streamlining their processes, rather than by innovating.” This means Mexican companies usually engage in downward competition (margin and cost-cutting to attain permanence), instead of upward competition (investing in long-term innovation conducive to growth). As Peter Thiel would say, Mexican companies are failing to “go from zero to one” even in the face of increased American protectionism. As the article pointed out: “There is no lack of money in Mexico; it is not a problem of [lack of] resources, but of ideas.”

I couldn’t agree more. It is for the sake of these new ideas that I also say Mexican business groups should partner with their American counterparts and push our respective governments for a joint response to our mutual China issues. Of course, this would involve knowing how to deal with each other first. Our finding common cause with U.S. companies would provide more far-reaching benefits than attempting to enter new markets in a rush, as a hastily concocted strategy to whatever Trump comes up with next.

Ironically, the China threat (whether real or perceived) might ultimately lead to even greater North American integration. Given the current state of the world, you don’t need to be a geopolitical expert to conclude it better for allies to stick together.

The above is a guest post by Adrián Cisneros Aguilar. Adrián is the founder and CEO of Chevaya (驰亚), an Asia-Pacific internationalisation 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 el post anterior, hablé acerca del artículo de opinión escrito por Jorge Guajardo, ex-Embajador de México en China, en el cual señalaba lo que veía mal en la relación ecónomica entre México y China. En este post, concluyo presentando la solución propuesta por el ex-Embajador y ofreciendo mis propias sugerencias acerca de cómo debería México tratar con China.

El análisis de la relación económica bilateral que realiza el ex-Embajador Guajardo está equivocado, pero peor está la solución que propone. Tras explicar que México debería enfocarse en “defender el acceso a los mercados que tenemos, buscar abrir nuevos e impulsar el mercado interno,” llama a “una campaña en Estados Unidos promoviendo las bondades del libre comercio”, que use el argumento de que “…en materia de comercio internacional, China es el problema y México es la solución.” Ahora, Guajardo no especifica el contenido de dicha campaña, fuera de mencionar que ésta debería llevarse a cabo “con pesos y centavos,” contratando despachos de cabilderos y publirrelacionistas que “aclaren las mentiras” para así recuperar la imagen de México en EE.UU.

En otras palabras, para el ex-Embajador, México ahora debería sermonear a EE.UU. sobre los beneficios del TLCAN y explicarle por qué debería permanecer en vigor. ¿Alguien creerá en verdad que ésta es una buena idea? En este momento en la historia, y por razones muy diversas, en EE.UU. se hallan sumamente confundidos acerca de las ventajas de la globalización. La respuesta de México no debería ser, por tanto, insistir en el libre comercio, sino crear una estrategia que proteja sus intereses en EE.UU. independientemente de lo que ocurra con el TLCAN. Y esto no significa rechazar todo negocio con EE.UU., sino utilizar la situación económica actual como un trampolín para (1) desarrollar la industria mexicana en general y (2) expandir la presencia de México hacia otros mercados, mismos que por mucho tiempo se han dejado de lado porque el TLCAN ha hecho muy fácil para las empresas mexicanas depender del mercado estadounidense.

Sin hechos o argumentos sólidos, el artículo de Jorge Guajardo raya en un discurso anti-China y no ofrece ninguna sugerencia constructiva para tratar con un país que, nos guste o no, ha llegado para quedarse y está destinado a ser el principal socio comercial e inversionista de México, junto con EE.UU.

Así pues, me gustaría presentar aquí las siguientes sugerencias, como una rectificación a la opinión del ex-Embajador Guajardo en el artículo que nos ocupa:

  • Si México quiere atraer inversión china, debe insertar a las empresas de ese país en sus cadenas de valor, de forma tal que transfieran tecnología y know-how y posibiliten el crecimiento económico endógeno. Como un primer paso, México debería dejar de ver a China como una fábrica de productos baratos, como un mercado más que recibirá sus productos, o bien, como una fuente de dinero a raudales. Este último punto es particularmente importante ahora que Pekín está endureciendo sus controles sobre la salida de capitales.
  • Para competir en China con éxito, las empresas mexicanas deben internacionalizarse. Esto significa que deben volverse más sofisticadas en todos los aspectos, y desarrollar su capacidad para cumplir, tanto con la legislación china, como con sus estándares escritos y no escritos. Sigo escuchando exhortos a las empresas mexicanas para diversificarse, de cara a un potencial cierre del mercado de EE.UU. Nadie parece preguntarse, sin embargo, si las empresas mexicanas son siquiera capaces de efectuar tal diversificación. En mi experiencia, las empresas mexicanas están demasiado acostumbradas a tener en los Estados Unidos un mercado esencialmente cautivo, que compra sus productos sin importar su cantidad o calidad. Se han acostumbrado, también, a recibir inversión extranjera única y exclusivamente destinada a fabricar productos para exportación-lo que significa que dichas inversiones no ayudan a potenciar las industrias locales. En este sentido, la promoción de tratados internacionales es un elemento necesario para desarrollar estrategias de negocios sensatas y el gobierno mexicano debe hacer más para crear conciencia acerca de sus beneficios.
  • Si México quiere competir con China a largo plazo, debe invertir en investigación y desarrollo para crear productos con valor agregado, en lugar de invertir solamente en optimizar sus procesos y reducir costos. De acuerdo con un artículo publicado recientemente en un periódico de circulación nacional, “[d]ebido a la incertidumbre por la política económica [de]…Donald Trump, el 80 por ciento de las empresas en México prefiere competir reduciendo costos y haciendo más eficientes sus procesos, en vez de innovar.” Esto quiere decir que las empresas mexicanas recurren normalmente a una competencia hacia abajo (recortar márgenes y costos para conseguir permanencia), en lugar de recurrir a una competencia hacia arriba (invertir en innovación y desarrollo a largo plazo, con miras a lograr crecimiento). Como diría Peter Thiel, las empresas mexicanas no están “yendo de cero a uno”, ni siquiera frente a un creciente proteccionismo estadounidense. Como se señalaba en el artículo: “[n]o está faltando dinero en México, no es un problema de recursos, sino de ideas, es lo que está haciendo falta en estos momentos.”

No podría estar más de acuerdo con este último punto. Es por el bien de estas nuevas ideas que también digo que los grupos empresariales mexicanos deberíamos hacer equipo con nuestros homólogos estadounidenses y presionar a nuestros respectivos gobiernos para que den respuesta conjunta a las cuestiones con China que nos afecten mutuamente. Por supuesto, esto implicaría saber primero cómo tratar los unos con los otros. El que hagamos causa común con las empresas de EE.UU. derivaría en beneficios de una trascendencia mayor que los que nos podría traer el intentar entrar a nuevos mercados a la carrera, como producto de una estrategia “sacada de la manga” para lidiar con lo que sea que Trump tenga en reserva para México.

Irónicamente, la amenaza china (real o percibida), podría ser la que lleve a una mayor integración de América del Norte. Dada la situación mundial actual, no necesita uno ser experto en geopolítica para concluir que es mejor, para países aliados, mantenerse unidos.

Esta entrada es una participación invitada de Adrián Cisneros Aguilar, quien es 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.

Mexico exports to China

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

Jorge Guajardo, Mexico’s former Ambassador to China, recently published an opinion piece titled “Dejemos a China por la Paz” [“Let’s Leave China for Good”], which was quickly and enthusiastically retweeted by Jorge Castañeda, former Mexican Minister of Foreign Affairs and one of the leading shapers of Mexican foreign policy.

When I read the article, I was shocked by Guajardo’s profound lack of understanding about the Mexico-China bilateral relationship, and his overall negativity. To be sure, China’s rise has created problems for Mexico. But it has also created opportunities, and we must be clear-eyed about both.

Guajardo, at the end of his piece, asked Mexicans to “defend our interests, clarify the lies [and] promote the truth.” This response is my effort to do exactly that.

1. Guajardo claims it is useless to partner with China because “China protects its markets [by] preventing entry of Mexican products [and] even if China were to open its markets, there is little market for what Mexico exports.” This is a gross exaggeration. The Mexican Ministry of Agriculture has been working to expand Mexico’s agricultural exports to a number of countries and as a result of negotiations last year Mexico is now exporting pork and dairy products to China.

The larger problem is that many Mexican companies lack the size or sophistication to meet Chinese demand, both in terms of quality and quantity. Mexican exports to the U.S. have long faced similar problems, but it has been far easier for them to find a U.S. buyer who will accept smaller quantities and/or varying quality.

Indeed, the inability to meet foreign markets’ demand is so prevalent that one of my company’s main services is to gather several companies (usually SMEs) in the same industry, train them as a group, and then enable them to sell their products, as a group, in Asia (usually China). This collective approach enables these companies to enter large markets with the confidence they can meet market demand while minimizing their exposure. Our success with this approach further underlines the short-sightedness of Guajardo’s comment. It’s also worth noting that this approach is in line with the Mexican Ministry of Economy’s policy to develop Export Networks [Redes de Exportación or Redex].

2. Guajardo argues that Mexico and China have no future in cooperation because they are in fact competitors since both countries are export-oriented manufacturing economies that primarily sell to the U.S. and to Europe. For years, scholars and businesspeople from Mexico and China have offered opinions and action plans to alleviate imbalances in the Sino-Mexican economic relationship. Full disclosure: this issue is near and dear to my heart as it was the subject of my doctoral dissertation in China. There are in fact many ways in which China and Mexico in fact economically complement each other, including the following:

  • China’s demand for Mexico’s resources and raw materials;
  • the appreciation of the RMB, which has increased labor costs in China, making it more attractive for foreign manufacturers to relocate their facilities to Mexico to serve the North American market (“nearsourcing”);
  • the recent Mexican energy and telecommunications reforms, which widely opened these sectors to foreign investment;
  • the opportunity to decrease the Mexico-China trade deficit by having Chinese companies manufacture in Mexico via value-added investments, thereby creating jobs and transferring technology and know-how; and
  • China and Mexico’s common membership in economic blocs that could easily allow the creation of regional value chains and enactment of supportive policies.

3. Guajardo wrongly contends that lack of demand for Mexican products in China is the reason for Mexico’s enormous trade deficit with China. First of all, Chinese demand for Mexican products is slowly increasing. But the reason for the relatively low demand by China for Mexican products is not so simple as that Chinese people don’t want or need Mexican products. I have already discussed the inability of Mexican companies to meet Chinese demand. Another reason is that China has many more barriers to market than the U.S., from geography to language to regulations. But perhaps the biggest problem is Mexican companies too often believe China wants only cheap products and then fail to realize that to sell effectively to China they need to understand and cater to Chinese buyers. More than once I have heard Mexican companies say their marketing plan is to label their product as being Mexican, thereby capitalizing on China’s desire for foreign, exotic fare. This limited vision is self-defeating, because it fails to take the Chinese market seriously. China’s consumers are becoming more sophisticated and more demanding of original, high quality products. To succeed in China, Mexican companies need to meet the real life needs of the China market.

Yes, there is resentment in Mexico toward China because of the flood of Chinese imports that have displaced local manufacturing (especially in the textile, footwear, and toy industries). But as Guajardo’s piece suggests, this feeling is not so much anti-China as it is anti-globalism. And it must be acknowledged that at least some Mexican companies brought this on themselves by shifting manufacturing and/or sourcing to China in an effort to maximize short term profits.

In my second and concluding part of this series, I will discuss Guajardo’s proposed solution – which is even more misguided than his analysis – and offer my own advice on how Mexico and its companies can should profitably deal with China.

*Adrián Cisneros Aguilar is the founder/CEO of Chevaya (驰亚), an Asia-Pacific internationalisation 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.

 

Jorge Guajardo, ex-Embajador de México en China, publicó recientemente un artículo de opinión intitulado “Dejemos a China por la Paz”, el cual fue rápida y entusiásticamente retuiteado por Jorge Castañeda, ex-Secretario de Relaciones Exteriores y uno de los principales diseñadores de la política exterior mexicana.

Cuando leí el artículo, quedé impactado por la profunda falta de comprensión de la relación de México con China exhibida por Guajardo, así como por el tono negativo de sus opiniones en general. Cierto, el ascenso de China ha ocasionado problemas a México. Pero, también ha traído oportunidades, y debemos ser bien conscientes de ambos.

Al final de su artículo, Guajardo nos pide a los mexicanos que “[d]efendamos nuestros intereses, aclaremos las mentiras, promovamos la verdad.” Pues bien, esta respuesta es el esfuerzo de un servidor para hacer precisamente eso.

1.  Guajardo contende que es inútil buscar asociarse con China porque los chinos “…protegen sus mercados impidiendo la libre entrada de productos mexicanos [y] aún si lo abrieran, hay poco mercado para lo que nosotros exportamos.” Ésta es una grave exageración. La Secretaría de Agricultura, Ganadería. Desarrollo Rural, Pesca y Alimentación (SAGARPA) desde el año pasado ha trabajado bastante para aumentar las exportaciones de productos agroalimentarios mexicanos a nuevos países y, como resultado de estas labores, México ya exporta derivados de carne de cerdo y lácteos a China.

Pero, el problema de fondo aquí es que muchas empresas mexicanas carecen de la envergadura o la sofisticación necesarias para satisfacer la demanda de China, tanto en términos de calidad, como de cantidad. Por mucho tiempo, las exportaciones mexicanas a EE.UU. se han enfrentado con problemas parecidos, pero ha sido mucho más fácil para ellas hallar a un comprador estadounidense que acepte cantidades menores de producto y/o una calidad variable.

En efecto, la inhabilidad de las empresas mexicanas de satisfacer la demanda y los estándares requeridos por los mercados internacionales es tan común que uno de los principales servicios ofrecidos por mi empresa es agrupar varias empresas (normalmente, PyMEs) que pertenezcan a la misma industria, capacitarlas/sofisticarlas y entonces facilitarles vender sus productos en grupo en Asia (en China, por lo general). Este método colectivo les permite a estas empresas incursionar en grandes mercados con la confianza de que pueden satisfacer la demanda del mismo, mientras minimizan sus riesgos. El éxito que hemos tenido con este método reafirma la poca visión del argumento del ex-Embajador. Y cabe señalar que nuestro método es acorde con la política de la Secretaría de Economía de desarrollar Redes de Exportación (Redex).

2.  Guajardo argumenta que “[e]n China no hay nada para México”, pues de hecho, son competidores que “…[han] encauzado [sus] economías hacia la exportación de manufactura…ambos [compitiendo] por los mercados más grandes, Estados Unidos y la Unión Europea.” Por años, académicos y empresarios de México y China han emitido opiniones y planes de acción para compensar los desequilibrios en la relación económica bilateral. Y para que lo sepan, esta cuestión me es especialmente importante, siendo incluso uno de los temas que toqué en mi tesis doctoral en China. Existen de hecho muchas maneras en las cuales China y México se complementan económicamente, entre ellas, las siguientes:

  • La demanda china de los recursos y materias primas de México;
  • La apreciación del yuan chino, la cual ha incrementado los costos de la mano de obra y de personal en ese país, volviendo más atractivo para los fabricantes extranjeros reubicar sus instalaciones en México para atender al mercado norteamericano (“nearsourcing”);
  • Las recientes reformas energética y de telecomunicaciones, las cuales han abierto consierablemente estos sectores a la inversión extranjera;
  • La oportunidad de disminuir el déficit comercial con China al invitar a sus empresas a fabricar en México a través de inversiones de valor agregado, creando así empleos y transfiriendo tecnología y know-how; y
  • La participación, tanto de México como de China, en los mismos bloques económicos y organismos internacionales, lo cual fácilmente permitiría la creación de cadenas regionales de valor y la promulgación de políticas de apoyo.

3.  El ex-Embajador Guajardo sostiene erróneamente que “México tiene un déficit comercial enorme con China. En pocas palabras, los chinos no compran lo que nosotros vendemos.” Además de que la demanda china de productos mexicanos está aumentando lentamente, la razón de la relativamente baja demanda de productos mexicanos en China no es tan simple como decir que los chinos no quieren o necesitan nuestros productos. Ya he mencionado la inhabilidad de las empresas mexicanas para satisfacer la demanda china. Otra razón es que el mercado chino tiene muchas más barreras que el estadounidense, de la lejanía al idioma a la legislación. No obstante, el mayor problema radica en que las empresas mexicanas muy frecuentemente creen que China desea sólo productos baratos, sin darse cuenta que para vender en China de forma efectiva deben comprender y atender a los consumidores chinos. Más de una vez he escuchado a empresarios mexicanos decir que su plan de mercadeo consistirá en etiquetar su producto como “netamente mexicano”, capitalizando así el deseo de los chinos por comida extranjera, exótica. Esta limitada visión de las cosas los pone en desventaja de antemano, ya que no toma al mercado chino con la seriedad debida. Los consumidores chinos se están volviendo más sofisticados y exigen cada vez más productos originales y de alta calidad. Así, para tener éxito en China, las empresas mexicanas necesitan escuchar las necesidades cotidianas reales del mercado de ese país.

Sí, existe un resentimiento en México hacia China debido a la proliferación de importaciones chinas que han desplazado a la industria nacional (especialmente a la textil, de calzado y la juguetera). Pero, como señala el mismo artículo de Guajardo, este sentimiento no es tanto en contra de China como en contra de la globalización en general. Y debe reconocerse que, al menos en algunos casos, han sido las mismas empresas mexicanas las que han causado dicha proliferación al reubicar la fabricación y/o la proveeduría de sus productos a China, en un intento de maximizar sus utilidades en un corto plazo.

En mi segundo y último post, hablaré de la solución propuesta por el ex-Embajador Guajardo –la cual es más equivocada que sus mismos argumentos- ofreciendo mis propias sugerencias sobre cómo México y sus empresas podrían sacar partido de sus tratos con China.

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.

On Tuesday, April 18, China Law Blog’s Dan Harris will be speaking on China IP at the Global Sources Summit in Hong Kong. This summit is designed to teach entrepreneurs and small businesses how to create and build an Amazon FBA (Fulfillment by Amazon) business.

How to protect your China IP eventDan will speak on protecting your intellectual property from China, focusing on the following:

  • How to choose the right China manufacturer
  • How to identify the IP assets you need to protect
  • How to structure your China manufacturing deal
  • How to drafting your China manufacturing contracts to protect your IP
  • What you should know about trademarks, patents, copyrights, and licensing agreements
  • What to do when you’ve been copied

Forbes listed the Global Sources Summit in its top twelve conferences you should attend in China. You can register for the event here. Group discounts are available.

 

 

 

Doing business in ChinaOn March 30, China Law Blog’s own Dan Harris will be putting on a webinar on the legal aspects of doing business in China, with a focus on how to structure your Chinese operations and deals so as to protect your IP. This webinar is being put on by CommercialLawWebAdvisor, which describes it as follows:

Companies often cannot afford not to do business in China. Whether producing goods there or selling to the Chinese market, companies that engage in business with Chinese partners need up-to-date legal advice on how to protect their technology and other intellectual property (IP) interests from being counterfeited, pirated, or otherwise misappropriated. As IP theft is one of the top issues facing businesses operating in China, there are substantial risks companies must identify and address proactively to protect their valuable IP assets. Deals made in China can threaten IP rights not just in China, but in markets around the world. Understanding the Chinese IP landscape and how to manage the pertinent issues can go a long way to safeguarding your client’s valuable IP interests.

Please join Dan Harris as he explores the nuts and bolts of constructing a good business deal with a Chinese partner, what your agreements should include, and how to manage the Chinese IP rights framework to minimize your client’s IP-related risks.

WHAT YOU WILL LEARN
This webinar will cover:

  • How to choose a good Chinese partner
  • Identifying the IP assets that need protection
  • How to structure your deal
  • Drafting your deal papers
  • Drafting China employee contracts to protect your IP
  • IP registrations: What you should know about trademarks, patents, copyrights, and licensing agreements

YOUR CONFERENCE LEADER
Your conference leader for “Doing Business in China: Structuring Your Deal and Protecting Intellectual Property” is Dan Harris. Dan is an attorney with Harris Bricken, LLP, in Seattle. He is internationally regarded as a leading authority on legal matters related to doing business in China and in other emerging economies in Asia. Forbes Magazine, Business Week, Fortune Magazine, BBC News, The Wall Street Journal, The Washington Post, The Economist, CNBC, The New York Times, and many other major media players have looked to him for his perspective on international law issues.

Dan writes and speaks extensively on Chinese law with a focus on protecting foreign businesses and his China Law Blog is regarded as one of the best law blogs on the web today. The ABA Journal recently named the China Law Blog to its Blawg Hall of Fame (a designation given to the top 20 law blogs of all time).

This session is recommended for corporate and in-house counsel and really for any attorney who advises companies or organizations on China and on China IP issues. It also is good for intellectual property attorneys looking to learn more about China IP law and what makes it so different from common law countries.. Find out more about costs and registration here and for a $35 discount use promo code cw17bc.

We hope to “see” you there.