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Dan Harris 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.

China manufacturing lawyers

This worry is leading many Chinese manufacturers to view their foreign buyers as likely to eventually leave them and that makes them less interested in doing what it takes to maintain a good long term relationship. For purposes of this post, it also makes Chinese manufacturers a lot more likely now than even a year ago to as quickly as possible purloin whatever they can from their Western buyer so as to be able to as quickly as possible compete with the Western buyer with the Western buyer’s own product.

The China lawyers at my firm have a front row seat to all this because we get emails from many Western companies whose products are being copied weeks after they first meet with a Chinese manufacturer. In the old days (of about a year ago), it usually took years and a deteriorating relationship between buyer and manufacturer before the manufacturer would start directly competing. In other words, Chines manufacturers used to wait until they believed they could make more money selling YOUR product than they could making your product for you before they would compete. Today, many Chinese companies have made the calculation that they can make more money selling your product starting on day one.

What’s all this got to do with mold ownership agreements? A lot.

One of the best ways to stop or slow your Chinese manufacturer from competing with you is by legally blocking it from using your molds for anything other than making products for you. There are a lot of ways to accomplish this, but oftentimes the best way is with a relatively simple mold ownership agreement that makes clear the molds belong to you, your manufacturer cannot use them for anything other than making product for you, and your manufacturer cannot hold on to them once you seek their return. For more on the benefits of protecting your molds (and tooling as well) from China, check out the following:

There are a whole host of other things you can and in many cases should be doing to protect against your own China manufacturer, but a mold agreement is oftentimes a good and relatively cheap start. See Protecting Your Product From China: The 101. 

What are you seeing out there?

 

China lawyers

Our China lawyers get a steady stream of emails from companies seeking our help in recovering money lost in China scams or just telling us about the scams and asking us to report the scammers to “the police, the government, the State Department, the Embassy, and/or the consulate. Many of these emails also request that we write about the particular scammer on our blog or on our China Law Blog Facebook page.

Less than one percent of the time we probe a little further to see if there is any chance at all of a financial recovery, and we do so only in those matters where the losses are in the six figures or higher. We never report anyone to anyone and we never name names here on the blog.

Why not?

We don’t report anyone to anyone because if we did so we would be spending hours a day doing so and all without pay. We cannot just take what someone tells us and go to anyone with it as their lawyers. Our job as lawyers is to do our best to determine what is true and what isn’t and to dig into the facts to come up with as much as possible that might be helpful to government and law enforcement authorities in finding the culprits. Equally important, I have serious doubts that any government body in any country does much with these scams. So instead we tell the writers that they should do these things on their own.

Why though do we not name names here on the blog? Why don’t we have a list of scammers on here? For the following two reasons.

In many cases of alleged fraud, it is not clear at all that there has been a fraud. Here is one recent example. A Mexican company bought $60,000 in t-shirts from a Chinese clothing company. The Chinese clothing company sent the requisite quantity of t-shirts and the Mexican company alleges that they were of such poor quality as to be a scam. Was it a scam? I have no idea. Did the Mexican company have a written contract with the Chinese company specifying the quality of t-shirts it would be buying? I have no idea. Did the Mexican company spend $10 per t-shirt or $1 per t-shirt? I have no idea.

In many (most?) cases of alleged fraud, the name of the company is NOT the company that committed the fraud. Fraudsters often claim to be with a particular legitimate Chinese company but they really are not and a quick check of their email address reveals this. Guess what, people. It is extremely unlikely that a legitimate Alibaba employee will be emailing you from a qq email account. Many times the person behind the fraud is not Chinese and is not based in China; they are simply claiming to be with a Chinese company to pull off the fraud. We are not going to list company names when we have zero clue whether the names of the companies listed had anything at all to do with the alleged fraud.

I do note though that there are many sites that do name names and it does make sense to do an internet search before you send it money. Indeed, in most cases, additional due diligence is warranted.  See China Business Due Diligence.

Your thoughts?

China laws and business are very different from the West, of this there should be no dispute. China lawyers

And yet, our China lawyers oftentimes get emails from potential clients telling us that they have drafted a contract for China and asking us whether we would revise that contract to “make it work for China.” Our initial response to this is to say yes but to warn them that our fees for doing so will almost always be the same as our fees for our drafting the contract from scratch. The reason for this is because, with very few exceptions, the contract we are given is so different than what is required for China that its only benefit is that we can pull some (never all) of the terms we need for drafting the contract.

But guess what, that benefit almost never outweighs the harm. Let me explain.

Much of the time when we are given a draft contract that contract is a result of weeks of negotiations between the Western company and the Chinese company. If our China attorneys then substantially revise the contract and our Western company client then sends the substantially revised contract to the Chinese company, the Chinese company is rightly irritated because it believed it had a deal or was on the verge of a deal with the Western company, even though it really wasn’t.

But most of the time, the draft contract we are given is so far afield from what is needed that instead of our China lawyers being able to draft a new contract, our China lawyers instead have to tell our client that it really needs to start back at square one. Most of the time the draft contract we are given is so internally contradictory and so rife with provisions that literally do not work at all under China’s laws, that the first thing we need to do with our client is figure out exactly what it is trying to accomplish with the deal.

And then, once we have that figured out, the next step is usually to draft (in English and in Chinese) a term sheet to send to the Chinese company to determine whether drafting a contract will ever be warranted. Oftentimes, there is a critical provision that the Western company and the Chinese company never previously discussed and on which they are at clear loggerheads. The term sheet quickly reveals this and the parties then choose to go their separate ways. Oftentimes, there is a critical provision that simply cannot legally work and without that provision one or both sides do not want to go forward with the transaction and the parties then choose to go their separate ways.

We see these sorts of looming problems so often with draft agreements that I have drafted the following “template” explanation, which I then modify to fit the particular situation:

We reviewed the draft contract you sent us and we think it premature to begin drafting a contract based on it. Some of it is contradictory, some does not make sense, and some is almost unworkable or illegal. It also fails to address critical deal terms.
What we need to do here is to work with you to figure out what exactly you are seeking to do and then use that to determine whether the Chinese side will be on board with that or not. Once we are clear on what you are seeking to do here, we then draft a term sheet in English and in Chinese and use that to see whether a deal is possible. If a deal is possible, we then move forward on drafting the contract. If it is clear that no deal is possible on your terms, you then determine whether you want to compromise or walk away.
We will charge considerably less to develop the term sheet than we would charge to draft a full-fledged contract. This means that If it turns out no contract is warranted, you will have saved quite a lot of money. If it turns out a contract is warranted, much of what we will have done to develop the term sheet will apply to what we will need to do to draft the subsequent contract.
The above is our advice, but obviously what you do is up to you in the end.
Please let us know.

China Law Professor Donald Clarke sent me a great article this week from New York Magazine, entitled, How China Drove Out Mister Softee. Professor Clarke’s email with the link said the following:

Thought you might like this. Interestingly, it is NOT a story of “guy skirts rules, naively trusts Chinese partner, gets screwed.” It’s “guy does everything absolutely by the book, has reliable Chinese partner who does not screw him, and still gets screwed by changing political atmosphere.” For him to get competition eventually is quite normal, and the competition wasn’t using a trade name similar to his. But the rules were not evenly enforced.

This is the sort of story I both love and hate. I love this sort of story because it is interesting and important but I hate it because I constantly and aggressively stress to my clients the need to follow China’s laws to the letter and with that I ought to be able to tell them that by doing so they will have no problems. I also hate this sort of story because it reveals the cynical truth that the reality is really more the opposite: if you do not follow China’s laws you will have a problem. If you do follow Chinese laws the odds of your having a problem will go way down, but hey, it is no guarantee. Truth is that as a foreign company doing business in China you will be a target and this means you must follow the laws to avoid being an easy and legal target but even if you do follow the rules you are still a target.

Quick aside. Why the Jim Carey clip about “messing with the doo?” Two reasons. One, It’s just a great clip. And two, I love soft-serve ice cream and I have fond memories of eating Mr. Softee ice cream when visiting my grandmother in New Jersey. So I see China’s messing with Mister Softee as the equivalent of “messing with the doo.” But I digress.

So if you read the New York Magazine article, you will learn that Turner Sparks brought New York’s iconic Mister Softee trucks for the first time to China” back in 2007 and eventually built his ice cream empire to ten trucks and 25 employees in Suzhou. You will also learn the following:

Mr. Sparks did local TV and newspaper interviews and was a fixture at school and corporate events, where he and his team doled out waffle-cone soft-serve to thousands. During one corporate party at Bosch, an international electronics company, he sold $9,000 worth of $1 cones in just two hours.

Competition was scarce, because he essentially invented the Suzhou ice-cream-truck market. “All these trucks were just going nuts, doing really well. Huge lines all the time,” he told me. “Everyone knew Mister Softee.”

He planned an ambitious expansion, and lined up investors to back it: He wanted to quintuple his fleet to 50 trucks, add more storefronts, and move into new territory.

More importantly, you will learn how tough it can be to do business in China, because you will learn that instead of expanding his business in China, Mr. Sparks ended up leaving China “with just enough money to reinvent his life as a New York stand-up comic.” and that “what happened to Sparks is an illustration of how the landscape has shifted for foreign businesses in China since current premier Xi Jinping has taken over the country, and the climate has become considerably less hospitable for foreign business — small ones, in particular.”

The article talks about how things began to change for foreign companies in China starting in 1978 and how Sparks was able to build up his ice cream empire:

They created a local supply chain from scratch, finding vendors for cones, straws and soft-serve mix at a Shanghai food-and-drink expo. Using secret blueprints from Mister Softee, the truck was built in Nanjing by a company that makes telecommunications trucks, armored vehicles, and ambulances. Workers were hired from a job fair, with many long-distance drivers jumping on the opportunity to work locally and try something different. To give the soft-serve the same taste as back home, they shipped the milk in from the U.S.

Suzhou officials worked with Sparks to create a new kind of business permit for their ice-cream trucks, called a Qualified Mobile Vendor License. It let them operate the trucks, but only as “delivery vehicles” for two stores. The license also required they have a staffed office and were restricted to operate at certain spots around the city. The solicitousness of Suzhou officials wasn’t unique. All around China, local governments were inviting in foreign businesses, easing the cost of doing business with tax breaks, and giving them friendly government liaisons to help them navigate the labyrinthine bureaucracy.

Then you will learn how the ice cream empire fell apart, for reasons that will likely not be unfamiliar to most foreign companies that operate in China — taxes and thieving employees who then go out and illegally and even violently compete:

The first inclination Sparks got that things were changing was around 2012, when a local official called him into his office and accused Sparks of not paying enough in taxes.

“Immediately, I knew it was a shakedown,” he said. “This guy was an idiot. He was like, ‘There’s money, I need some.’”

Sparks declined the man’s offer and left, but says that meeting was his first experience with the corruption he’d often heard about in China. Soon after, two new drivers alerted Sparks to a longtime scam by his eight other drivers. They were quietly making extra soft-serve sales and pocketing the money for themselves. Because Mister Softee was a cash business, office workers would count drivers’ ice-cream cones at the start and end of their shifts to make sure they weren’t stealing. To circumvent that control, drivers bought their own cones. When Sparks started measuring the ice-cream mix instead, the drivers would buy extra cones and mix, too.

Eventually, he instituted random checks on drivers and fired several on the spot when they were caught with more mix in their trucks than they had at the start of the day. Soon after, his tires outside his apartment were slashed. Then a fired driver showed up at Mister Softee’s office and threatened to kill the workers there.

Things got more bizarre. In early 2013, just a few weeks after they were fired, Sparks’s former drivers resurfaced with their own unlicensed ice-cream trucks, with knockoff names including Baby Bear, Snow Princess, and Mr. Big. These drivers would park along Mister Softee trucks’ routes to poach customers. Plus, they didn’t have the special city license, which allowed them to operate without having to open storefronts or an office, and they could sell wherever they wanted.

Conway was too far away to help out as problems started cascading. Cai, meanwhile, had moved to the suburbs about an hour away and was starting another printed circuit board business, so had no time to lend a hand.

*   *   *   *

Perhaps the slashed tires and death threats were unique to Mister Softee, but local officials’ deciding to yank support was downright typical of the changing times.

For the record, nothing that happened to Mister Softee in Suzhou is “unique.”

The article then goes on to rightly note that foreign companies that bring technology or know-how that China hasn’t developed on its own are still very much welcome in China, but the others not so much. “One in four foreign businesses are scaling back in China or say they plan to, and most say they feel increasingly unwelcome, according to a 2018 survey from the American Chamber of Commerce in China.”

The article extensively quotes Anil Gupta, professor of University of Maryland’s Smith School of Business, “who’s been researching and writing about China for 25 years” and who has this to say:

Gupta added that blatant knockoff enterprises are so common in China that it’s almost a wonder Mister Softee’s easily replicated business wasn’t copied sooner. Plus, local officials and courts are more likely to back the local knockoffs to support Chinese businesses — to hell with the permits.

“With 99 percent confidence, I would say this was destined to happen,” Gupta said of Mister Softee’s fate. “I would say that God couldn’t even save this business.”

What or who exactly killed Mister Softee. China:

After receiving one-year permits for his trucks without fail from 2007 through 2012, Mister Softee’s permits were withheld without explanation and Sparks couldn’t reach government officials for months to clear up the issue. When Sparks finally heard back from government officials in mid-2013, they told him they would figure out a way to regulate the new trucks. Nearly a year later, with Sparks still operating without a new permit, officials proposed holding a lottery to dole out Suzhou permits to Sparks and the knockoff trucks. Around that time, police started ticketing Mister Softee trucks for parking illegally in spots they’d been working for years.

By 2015, it became clear the lottery would never take place and Sparks’s new round of investment crumbled.

“Part of it was a relief, to know it was over,” Sparks told me. “You feel, obviously, helpless.”

Over the next year, he wound down the business, paid his remaining staff and sold off the trucks so some others could spread the gospel of neighborhood soft-serve to nearby cities.

In early 2016 on a Friday, Mister Softee’s tumultuous foray into China quietly ended with Sparks, his lawyer, and accountant filing liquidation papers and figuring out who they still owed money to. Sparks had already sold off the office furniture to his ice-cream cone supplier.

Ignoring for a minute whether any deity could have saved Mister Softee, was there anything it could have done to survive China? Maybe. Were a company like Mister Softee come to me today, I would likely recommend that instead of going into business in China, it seek our a licensee in China for its name and its ice-cream know how and its trucks look and feel. Indeed, my law firm a few years ago did a licensing deal on behalf of a regional American ice cream that has worked out very well for the American company. I constantly find myself trying to steer clients away from what I call “theoretical massive profits” that can allegedly be realized by going into China as a WFOE or a Joint Venture in favor of a licensing or distributing deal. See Forming a China WFOE: Needed or Not. See also my Forbes Magazine on this: Want Your Product In China? Try Using A Local Distributor.

Welcome to China 2018 people.

What are you seeing out there?

UPDATE: Literally minutes after I wrote this I received an email from a China lawyer friend who said I should have talked about how Mister Softee could have prevented “at least some of its problems” by having made its employees sign non-compete agreements. I don’t think those would have worked because China’s courts generally will not enforce those against any but high level employees and I do not think ice cream truck operators would qualify as high level employees. See

China lawyers

Though we’ve written about this many times previously, I’m writing about it again today because my law firm’s China lawyers have been seeing a lot more of this lately, especially as against European companies. I am not sure why the increase. Anyone have any clues?

Anyway, we have been getting a number of emails lately from companies asking us if what their Chinese counter-parties are asking them to do is is legitimate or not and, unfortunately, a number of emails from companies telling us what happened to them and asking us to write about it on here. I note that these companies have asked us to name the Chinese companies that scammed them, but we do not do that for the simple reason that many scammers usurp the names of legitimate Chinese companies and the last thing we want to do is stigmatize those innocent companies.

The scam we are seeing is pretty much the oldest (certainly the most utilized) China scam against foreign companies. It works like this. Chinese company emails foreign company expressing interest in buying products or services from foreign company and then quickly negotiates a contract with the foreign company do exactly that. Once the contract has been agreed to, the Chinese company tells the foreign company that it must go to China to meet the Chinese company CEO and/or some government officials for a contract signing ceremony.

The below are some of the emails we have gotten in the last month or so:

We are a small company in _________Spain [we have offices in Spain and our website is in Spanish and some of our blog posts are in Spanish so we get a disproportionate number of emails from Spanish companies) and I was just victimized by a “come to China to sign the contract” scam. I read about these scams on your blog, but only after it happened to me. We are a small education company and we lost nearly $10,000 so would you please tell me whether it is possible for you to recover any of this money for us.

We spent weeks working out the terms of our contract with them and then another couple of weeks planning our visit to Chengdu to meet with them. our time.

I believed they were real because they never asked us for any money before our trip to China. Two of us from my company worked on this project and I have to admit we never suspected anything.

We researched the company thoroughly and they appeared to be a real company with a real website and a real domain name and their emails came from that domain name and our phone calls to them were to the telephone number on their website.

But after we signed the contract with them in Chengdu, we were asked to pay for a dinner to celebrate. We did not feel that we could say no because we had gone all this way and they told us that it was important that we pay because there would be government officials there. They even told us that they would make the first payment early if we did. Our dinner was absurdly expensive and when it came time to check out, the not so nice hotel they put us in was as well.

By the time we got back, their website was gone and I then was certain we had been scammed. They don’t answer my emails anymore.

We looked up the the Chinese company and it never existed. This took us less than five minutes and had this Spanish company done this before beginning its negotiations (as it should have done), it would have known this. I am writing about this scam because the other ones would have been a bit more difficult to spot because they used the names of real Chinese companies, but changed the email addresses slightly and gave different phone numbers. In one case, the city in China which the meeting took place was about 1000 kilometers from the home city of the real Chinese company.

The thing that makes these scams so insidious and so successful is the amounts that are taken. Usually they are between USD$5,000 and $10,000. Here’s the thing about amounts like this. Few people care. By this I mean the police in China don’t really care because they have more important things to do. The police in the foreign country don’t care because they have more important things to do. And the lawyers can’t take these cases because there is so little at stake and the odds of ever getting anything are incredibly slim. Our firm has taken on many multi-million dollar international fraud cases (mostly involving companies that paid millions of dollars for products they never received or invested millions of dollars in projects that were never real) and, generally, it takes at least $10,000 in attorney time (usually at least double this) for basic investigatory work to determine whether there is a real shot of recovering. So the sad bottom line with these scams is that the scammers virtually always get away with them and are free to operate and keep perpetrating them. In other words, these scammers are no doubt still out there and with each scam they hone their craft.

Here are some basic rules to follow when negotiating any sort of deal with a Chinese company, especially one where the Chinese company is claiming it will be paying you money:

  1. Do at least really basic due diligence on your Chinese counter-party before you spend any time or money. Don’t be afraid to ask them for a copy of their business license and then have someone who knows what they are doing look at it. I am just guessing here, but it seems like most of the time if you ask for this the scamming Chinese company will just move on to an easier mark.
  2. Always book your own travel to China, especially your hotel.
  3. Don’t go to China at all for a signing ceremony. Our law firm has drafted literally thousands of contracts between Western companies and Chinese companies and I don’t think there has been a single time where anyone was asked to go to China to sign the contract and I don’t think there has been a single time where any of our clients have done so. This is true of big Chinese companies (both SOEs and privately held entities) and small Chinese companies.

Most important of all, don’t get too greedy, don’t move too fast, and don’t be anything but super careful. Lastly, don’t be afraid to challenge your Chinese counter-party on what they are telling you. The legitimate Chinese companies rarely resent having to prove themselves; in fact most welcome it.

What are you seeing out there?

China trademark registrations cheap

I love when a reader sends me a link to an old blog post and asks whether “it is still true.” I got one of those today about a post we wrote way back in 2006, entitled, Protecting Your China Intellectual Property: China IP Registrations are the “Bare Minimum.

It was a super-short post that essentially said that if you want to have any hope at all of protecting your IP in China and from China you need to register that IP in China:

Just came across this excellent McKinsey Quarterly article, “Protecting intellectual property in China: Litigation is no substitute for strategy.” [link no longer exists] The article is on China Intellectual Property (IP) protection strategies.

I like how this article stresses that legal tactics (such as registering and enforcing your IP and contracting to secure your trade secrets) are the “bare minimum of what companies involved with China must do to protect their Intellectual Property Rights (IPR).” The article states that companies should also factor IP protection into their strategic and operational decisions and it gives good examples on how to do this. It even has a nice pyramidal graph, grouping by importance what companies should do to protect their IP in China. My firm’s China IP lawyers love the graph and they’ve been sharing it lately with clients!

I often find myself saying essentially the same thing to companies doing business in China or with China. My shortest spiel on protecting your IP from China usually goes something like this:

China is not a terribly good country when it comes to intellectual property protections, but most of those who lose their IP to China do so not because China is so terrible at protecting IP but because they themselves were so terrible at protecting their own IP. If you choose a good Chinese partner, if you have the right (China-centric) contracts in place, and if you register your IP in China, the odds are overwhelming (but definitely not 100%) you will be fine there. Choosing the right partner is key because if you are going to do business with a thief, the other two things will not protect you much. So this is the absolutely bare minimum. Beyond that, I always say that it’s critical that you register your company name/brand name/product name in China (even if you are just manufacturing there) because it will be really bad if a Chinese company rips off your product and starts selling it for half of what you charge (especially if the Chinese company that does that is your China partner) but it will be a lot worse if it can legally sell your product with “your” name on it for half. When that happens, it’s usually lights out for the business. And yet China trademarks are really quite cheap.

And now that so many of our clients are having their products made in Asia outside of China (Vietnam, Thailand, Korea, Cambodia, etc.), I should note that all of the above holds true with equal force pretty much throughout Asia.

Do you agree?

 

China lawyers

Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments or phone calls as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a quick general answer and, when it is easy to do so, a link or two to a blog post that provides some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

One of the questions both our China lawyers and our international trade lawyers have constantly been getting of late — from clients, from readers, and from the media — is when will the US-China Trade War end.

Most of us respond by saying that it is too early even to foresee an end because the terms on which it is going to end are not the least bit clear.

What will the United States require for this trade war to end? Will it require simply that China buy more American goods? If that were all it wants it would have ended months ago. Does it want China to open its economy to foreign companies? Does it want China to stop with the IP theft? We believe it is the latter two and for that reason we do not see the trade war ending soon, if ever.

We say this because we do not see China making anything resembling major concessions on either of these two things and we say this in part because China refuses even to concede these are real issues. Two things from this week enforce our position on this.

  • A number of my firm’s China lawyers attended an event earlier this week to welcome the new China Consul-General from San Francisco. Former US Ambassador Gary Locke kicked it off with a five or so minute talk about how there are many issues between China and the United States but there is the possibility of resolving them and he went into how nobody in the room wanted anything but for relations between the United States and China to improve. The Chinese Consul-General followed this up with a 45 minute speech which he read straight from his notes on how pretty much nothing of which the U.S. was accusing China was actually happening. How can there be resolution of problems when there is not even agreement on whether the problems are real or not?
  • The PRC foreign ministry and government media (in Chinese) have lately been encouraging the Chinese people not to be angry with the American people using language like the following: “The Chinese people and the American people are friends. The American people do not think China is doing anything wrong. President Trump and his team are acting against the will of the American people and the basically friendly relations between the people’s of the two countries. China is confident the will of the people will be recognized and the people of the U.S. will force President Trump to back down.” Again, no admission of any wrongdoing but add to that the idea that it is merely President Trump pushing his own agenda and you get the strong sense that China’s plan is to try to wait out the trade war until the United States has a new President.

Bottom line: Right now there has been little to no (really just no) recognition by China that it has done anything to justify the trade war. Until China admits there are real issues we do not see China making real concessions and until China makes real concessions we do not think it even possible to guess as to when the trade war will end. We see President Trump’s “very good phone call” with President Xi as President Trump trying to influence the mid-term elections with “good news.” In the meantime, companies that export Made in China products to the United States are looking for alternatives, and fast. Would the Last Company Manufacturing in China Please Turn Off the Lights.

NOTE: Whenever we write anything that it is less than sunny about US-China relations we get a ton of backlash from people saying either that we have no clue or that we are out to sabotage this or that or that we are saying things just to generate more business. To which I merely note that our blog is called the China Law Blog and well over half of my law firm’s international legal business is China. We have every incentive to say only good things about doing business with China but we also have a greater incentive to do our very best to tell the truth as we see it and that is what we will continue to do.

What are you seeing out there?

China lawyer

Our China lawyers had a team meeting yesterday and as is so often the case at such meetings, much of the meeting involved our talking about what we have been seeing lately. We mostly focused on the following trends:

  1. Six months ago, we rarely worked with our firm’s international trade lawyers. Sure, we would occasionally call one of them in to help with a sticky customs issue or a client concerned about getting hit with antidumping or countervailing duties, but these days we find ourselves working with them constantly. Companies that are getting hit or will soon be hit with having to pay 25% tariffs are looking for help in figuring out how to have their Made in China products made elsewhere so that they can legally avoid having to pay the tariffs. See China Tariffs and What to do Now, Part 1 and China Tariffs and What to do Now, Part 2.
  2. Six months ago, about 90% of the international contracts we drafted involved China or the EU. That number is now nearing 60% as our existing and new clients are diversifying outside China.
  3. International litigation is on the rise. We are reading about this we are seeing it. This is happening because of the uncertainty and the disruptions stemming from the tariffs. With disruptions and uncertainty comes disputes.
  4. China is more open to foreign businesses than it has been in years. Forming a WFOE is a bit faster, cheaper and easier than it was just a few years ago, especially if your WFOE will be operating fully legally. Check out The NEW Steps for Forming a China WFOE.
  5. Chinese factories are copying and selling their foreign customers’ products faster than ever before. Almost every week we hear of a Chinese factory that sold its foreign customer’s product before or right after shipping out the foreign customer’s first order. The tariffs are causing Chinese factories to question the viability of a long-term relationship with their foreign buyers and they are simply calculating that they can make more by selling their customers’ products online themselves. In the past, our lawyers did not push back when start-up companies wanted to test their product in the marketplace before spending for a contract to protect against their Chinese manufacturer competing with them. Now though we make very clear that this a very bad idea because by the time market strength has been determined, there may no longer be a product to sell. See China Trademark Theft. It’s Baaaaaack in a Big Way, China and the First to Market Fallacy, and Protecting Your Product From China: The 101.
  6. Following the law makes sense if you are going to be doing business in China. The number of companies coming to us with big China legal problems has gone way down but the number of companies coming to us to proactively present big and small China legal problems has gone way up. This is a good thing because it means foreign companies have come to realize China has gotten both serious and effective at enforcing its laws as against foreigners. See Doing Business in China Without a WFOE: Will the Defendant Please Rise for a good example of where China has really cracked down against foreign companies and see China Employer Audits: The FAQs for a good example of the sort of thing foreign companies are doing in China to avoid future legal problems.

What are you seeing out there?

international lawyersThe title is an exaggeration, of course. But with my law firm’s international lawyers fielding a steady stream of client requests for help with leaving China for Vietnam, Thailand, Malaysia, Cambodia, India, The Philippines, Indonesia, India and Turkey (mostly), it does sometimes feel as though within three years nobody will be making widgets in China anymore.

On top of the client and potential client calls, we have also been getting a steady stream of reporters asking us for permission to talk to our clients leaving or looking to leave China. We tell them that for various reasons, none of our clients are likely to want to discuss their leaving China and then they usually tell us that they “understand.” See How To Terminate Your China Supplier: Very Carefully and How to Leave China AND Survive.

With the extreme reluctance for anyone specific to say that they will be leaving China, whenever we write about companies leaving China (especially when we do so on our China Law Blog Facebook page) we get hit with invective against us claiming we are making this stuff up because we hate China. Well guess what everyone, there is now strong factual support for what we have been saying for the last few months. A huge chunk of American companies are looking to move their manufacturing from China.

Reuters reporter  Sue-Lin Wong did a story yesterday, entitled Many U.S. firms in China eyeing relocation as trade war bites, on how “more than 70 percent of U.S. firms operating in southern China are considering delaying further investment there and moving some or all of their manufacturing to other countries as the trade war bites into profits, a business survey showed on Monday.”

In this business survey of 219 companies by the American Chamber of Commerce in South China, “64 percent said they were considering relocating production lines to outside of China.” And just as our international lawyers are seeing and just as we have been reporting, “the trade war is shifting both supply chains and industrial clusters, mostly towards Southeast Asia” — in other words, Vietnam, Thailand, Malaysia, The Philippines, Cambodia, Indonesia and India. “U.S. companies reported facing increased competition from rivals in Vietnam, Germany and Japan, while Chinese companies said they were facing growing competition from Vietnam, India, the United States and South Korea.”

This has led to a slow-down in orders for manufacturers in China:

Customers are slowing down orders or not placing them at all, Harley Seyedin, president of AmCham South China, told Reuters.

“It could very well be that people are holding back on placing orders until times are more certain or it could very well be that they are shifting to other competitors who are willing to offer cheaper products, even sometimes at a loss, in order to get market share,” he said.

“One of the most difficult things about market share is once you lose it, it is very hard to get back.”

Companies in the wholesale and retail sectors have suffered the most from U.S. tariffs, while agriculture-related businesses have been most hit by Chinese measures, the survey found.

The survey was conducted between Sept. 21 and Oct. 10. I would bet the percentages would be even higher if the survey were conducted today and much higher still after January 1, when U.S. duties are set to rise sharply.

“Around 85 percent of U.S. companies said they have suffered from the combined tariffs, compared with around 70 percent of their Chinese counterparts. Companies from other countries also reported similar impacts as their American counterparts.” This too reinforces what our international trade lawyers have been seeing, which is that our European clients have been nearly equally impacted because so many of them sell their products into the United States.

The problems extend beyond just tariff costs as “nearly half the companies surveyed also said there had been an increase in non-tariff barriers, including increased bureaucratic oversight and slower customs clearance.”  It is not clear whether these customs problems are being felt in China or the United States or both, but from what we hear from our own clients, it’s both.

What are you seeing out there?

 

China e-commerce lawyer

 

In the midst of our international lawyers handling a massive influx of foreign companies that manufacture in China looking to get out of China (See How to Leave China and Survive), we are also handling a much smaller (but increasing) influx of companies looking to sell their products online to China. Somewhat paradoxically, we even have some clients simultaneously looking to move their manufacturing out of China while looking to move sales into China.

Many of these companies have attended seminars where someone has told them how easy it is to sell your products online to China. Many have attended Alibaba conferences where Alibaba puts 3-4 foreign companies on stage to have them explain how quickly and easily it was for them to make millions from selling their product on TMall or Taobao or wherever. These companies are almost certainly telling the truth and I know this because I have represented many American and European companies that make millions of dollars a month by selling their products into China. And it is in fact relatively easy to sell your product on one of the leading Chinese e-commerce platforms, particularly if you use one of the many companies that handles all of the logistics for you

The tough part though is actually making the sales and I have personally represented a number of American and European companies whose products barely sell or sell not at all to China. As lawyers, our best advice for determining whether your product will sell well into China and for making sure that it does is to get help from companies and people with actual track records in marketing and selling products to China.

Our job as lawyers when we represent foreign companies that want to sell their consumer products into China is relatively uncomplicated and usually consists of our doing the following:

1. Making sure the product is legal in China and can be legally sold to China by a foreign company without need for any special license or testing or certification. See this Forbes Magazine Article, Do This One Thing Before Doing Business in China.

2. Making sure the contract our client signs with the China e-commerce platform company actually works for and makes sense for our client.

3. Making sure our client’s intellectual property is protected such that a Chinese company cannot immediately start selling the exact same thing with the exact same brand name. In doing this, our China IP lawyers typically start out by explaining how our clients trademarks and patents in other countries will not protect them in China because China is a “first to file” country. By way of an example, this means that (with very few exceptions) whoever files for a particular trademark in a particular category gets it. So if your company’s name is Bill’s Clothing and you sell shirts and you have been doing so for the last five years and some other company (Chinese or foreign) registers the “Bill’s Clothing” trademark in China for shirts, that other company gets the trademark. If you allow some other company to register “your” trademark in China, that other company can stop you from selling your products in China using “your” trademark. This happens all the time and your starting to sell your products online in China is like a bell whistle for trademark trolls. If you want to protect your IP in Mainland China you must register the IP in Mainland China.

But before you just go off and registering a trademark in China you should think long and hard about what you should be registering.  Do you register your English-language name? The answer to this is nearly always yes. Do you create a Chinese name and register that as well? The answer to this is that you usually should. Should your Chinese name be a translation of your English name, a transliteration, or something unrelated? This really just depends, and if oftentimes figuring this out requires both a China trademark lawyer and a China marketer. In Hermès’ China Trademark Case. Do You Know What Trademarks You Really Need? I talked about how my firm’s clients often handle these trademark issues:

In situations where our clients are making product in China for export only and their product has the trademark on it only in English, securing just an English language trademark is usually enough. In situations where a company intends to manufacture its product in China and eventually sell in China, the company must weigh the costs and benefits of securing a Mandarin (or other language) trademark now, or just wait. In situations where the company knows it will be selling its product in China right away, it needs to analyze the options set forth above. In almost all instances where our client’s trademark has actual meaning, they have chosen to trademark both the English and the Mandarin of the word. Rarely do our clients seek a China trademark in a language other than either English or Mandarin. Only around 25% of the time do our clients seek to secure the trademark for a transliterated or phonetic version of their English language trademark. Most of the time, they choose to wait and see how their product does in China and then, if it proves successful, they usually come back and register more on it. Waiting also allows them to see exactly what the Chinese will call their product. The downside to waiting is that someone else may register the name in the meantime.

Companies that are looking to sell their products into China should take a long term approach to their China trademark filings. Sure you are only making shirts now, but what about your plans to eventually expand to pants and jackets and shoes. Should you register your trademark in the trademark classes/categories that encompass all of these ? Do you care if someone makes socks with your name on it? These are just some of the trademark type issues you should consider before you sign your contract with Alibaba to sell your consumer products to China.

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