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

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

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

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

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

Grace’s talk will focus on the following:

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

LawProCLE describes Grace as follows:

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

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

 

China distribution contracts
China distribution contracts

Last week, in China Distribution Contracts: The Questions We Ask, we wrote about some of the initial questions we ask our clients for whom we are drafting China distribution contracts. That post started out discussing how forming and then operating a China WFOE is difficult and expensive — see Forming a China WFOE: Ten Things To Consider and Doing Business in China with Deportation or Worse Hanging Over Your Head on why having a WFOE is a must if you will be doing business within China. We then discussed how our China lawyers have been seeing many more foreign companies choosing to sell their products to China via distribution relationships rather than via a WFOE. For the basics on what it takes to establish and document distribution relationships with Chinese companies, check out the following:

Today’s post focuses on some of the additional questions we often ask our clients that have retained us to draft their distribution agreement with a Chinese company or companies. As with last week’s post, it consists mostly of an amalgamation of emails from our China attorneys seeking more client information and providing additional client assistance before drafting a China distribution agreement.

1. How are you planning to deal with warranties? A standard approach is for you to draft the warranty and then have your distributer pass on this warranty to consumers without any changes. Under this approach you will need to work with your distributor to design an appropriate warranty that a) works for your products, b) works for your company and your distributer, c) meets market demands, and d) complies with Chinese law.

The alternative is to allow your distributor to provide whatever warranty it wants to consumers. Your warranty is with the distributor and you will not cover any warranty beyond that which you have specifically agreed with your distributor. Under this sort of arrangement you have no contractual relationship with the consumers and the consumers have no legal basis to assert warranty claims against you. They are limited to making claims only against your distributor. This option is consistent with the legal status of a distributor that buys and then resells your products. However, under this approach you no longer control the nature of the warranty and many of our clients do not want to give up this control.

Much can depend on the nature of your product, your consumers and your trust in your distributer. We should discuss all of these things by telephone.

2.. Determining the sales price to consumers. Normally, the distributor is free to set the prices it wants for the products, since it has purchased the product and therefore owns them. However, many of our clients wish to exercise at least some pricing. Absolute resale price maintenance is not legal in China so you cannot dictate the sales price. You can, however, require your distributor to work with you on pricing and even set a pricing product range, both maximum and minimum. Please advise on how you want to proceed on the pricing issue.

3. What form training will you provide to your distributor? Where will your provided this (in China or in your home country)? How will training costs be determined and who will pay those costs?

4. Do you want to require all communications from your distributor be in English?

5. Will your technical documents be translated into Chinese? If yes, who will do this? You or your distributor and who will cover these costs? 

Please advise on the above. We will begin drafting your distribution agree  responses are complete.

China trademark lawyersForming a WFOE in China and then operating that business in China is difficult and expensive. See e.g., Forming a China WFOE: Ten Things To Consider and also Doing Business in China with Deportation or Worse Hanging Over Your Head on why having a WFOE is a must if you will be doing business within China. Because of this, our China lawyers are seeing increasing numbers of foreign companies choosing to sell their products in China via distribution relationships rather than via a WFOE. For the basics on what is involved in establishing a distribution relationship with a Chinese company, check out the following:

Today’s post focuses on some of the questions we often ask our clients that are looking to do distribution agreements with a Chinese company. It consists mostly of an amalgamation of emails from our China attorneys seeking more client information and providing additional client assistance before drafting a China distribution agreement.

 

I have the following basic questions and comments regarding your agreement.

1). For payment terms. The standard is as follows:

a. Shipping terms can be CIF or ExWorks. For products like yours, ExWorks is common, since estimating shipping and insurance costs can be quite difficult. If you do not know the port, you should not quote prices CIF and you should instead quote either Free Carrier (most common) or Ex Works. Either way, your distributor would be responsible for the shipping cost to the port of its choosing. It might be Shanghai for one shipment, it might be Qingdao for another shipment. That would be their decision and you want to leave the terms flexible so they can make the decision in a way that will not put you at a financial disadvantage.

I recommend you do not include price in the agreement but instead provide that your products will be sold at your normal distributor export price pursuant to a price list you will periodically provide to your distributor.

b. China’s letter of credit system is not very effective. If you ship your products before receiving payment for them, you are taking the full risk that the Chinese side will not pay. Our clients usually deal with this in two ways:

i. Conservative manufacturers require full payment before they ship.

ii. Less risk averse manufacturers ship on 30 days after the date of shipment (Net30) terms. These manufacturers provide for the right to shift to payment before ship terms if there is a problem.

2. You indicate wanting your proposed distributor to make advance payment for enough product to cover three months of projected sales. You need to specify an exact amount that must be purchased of each product and you also need to specify the sales terms. Your situation is further complicated by your not having Chinese government import approval yet for any of your products. For the first shipment, even where Net 30 terms are standard, most manufacturers require payment in advance of shipment. If you are not able to provide specific details in the agreement, we will provide that the exact terms of the first shipment will be determined after import approval is received. The agreement will terminate if that purchase is not completed by some certain date.

3. You have provided us with the sales milestones you want for your China distributor. This is always a good idea in a exclusive distributor arrangement but more detail is necessary, including the following:

a. You have discussed milestones for only one of your products. Will you have milestones for your other products as well? If yes, when will they be established and in what quantities?

b. Sales milestones for China distributors are usually set on a quarterly basis and not broken down by province. In formulating your sales milestones, you probably will want to account for the fact that there is not yet China government approval to import your products. If you plan to set sales milestones now for your other products we can do that as part of this agreement.

c. You can, of course, set the sales milestones at whatever level of specificity you desire. This is a business matter, not a legal requirement.

The issue of sales milestone is usually a big issue in this kind of agreement, so setting the milestones in a way that is clear and simple to understand is important.

4. When there is an exclusive agreement the term/length of the agreement becomes of critical importance. The normal procedure is to provide for a term long enough to give the Chinese distributor time to earn back its efforts in promoting your products. A three year term is typically the minimum, with five years more common. Most China distributors that plan to put in substantial work to market and sell your products will require the distribution agreement to automatically renew if they achieve their sales milestones. The China side will often want a provision saying that if the parties cannot agree on new milestones after the end of the first term, renewal will be automatic based on some predetermined formula. Chinese distributors that do not require something like this are oftentimes not planning to do the work necessary to succeed.

You mention wanting either party to be able to terminate the agreement with 90 days notice. Though such a provision is legally acceptable under Chinese law (which generally is far more liberal in what it allows in these agreements than either the EU or the United States), this sort of provision will normally be rejected by a serious distributor. Why would they do all the work necessary to get your product into China and to become well-known in China only to have you shut them down for any reason and with only three months notice?

5. When selling products in China, you need Chinese and English trademark protection for each product that will be sold. Serious distributors will insist that such protection is in place. Our China trademark lawyers can handle the appropriate China trademark registrations or you can have your distributor take care of this on your behalf as your agent. In either case, you should take care of the trademark registrations as soon as possible See China Trademarks: Register Yours BEFORE You Do ANYTHING Else. If your distributor takes care of this for you, you will want to ensure that the registrations are done in your name and not in theirs.

6. Your distribution agreement must be enforceable in the PRC. To make it enforceable we will draft it with Chinese law as the governing law, with the Chinese language as its controlling language, and with enforcement is in a Chinese court. For why we draft these contracts this way, check out China Contracts that Work and China Contracts: Make Them Enforceable Or Don’t Bother.

7. The confidentiality agreement you attach is not enforceable in China. See Why Your NDA is WORSE Than Nothing for China. Rather than draft a separate agreement, we will insert standard China NNN (non-use, no disclosure, non-circumvention) language into the main agreement.

8. The concepts of “hold harmless and indemnify” are pretty much foreign to the Chinese system and there is no effective commercial insurance program for this sort of coverage. We therefore normally provide a simple statement of the parties’ basic duties and liabilities. We normally provide that the distributor will be liable for damage caused to you by their actions in violation of the agreement. Since your proposed China distributor is a relatively small company you should assume it lacks the financial wherewithal to deal with a major claim and you should consider securing your own insurance.

9. I note that you are expecting your China distributor to do a fair amount of work prior before there will be a flow of products that will provide an income stream to your distributor to do that work. It appears you intend for your distributor to do this work at its own expense. In that regard:

a. Have you discussed this with your distributor? Have they agreed?

b. If you are expecting this preliminary work to be independent of the distributor achieving its sales milestones, the agreement should give you the right to terminate the contract if your distributor never does the preliminary work or does an inadequate job at it, solely in your discretion. You can do this by basing termination on your distributor’s failure to meet an early milestone or  by providing for a separate right to terminate. We should discuss.

 

For more on doing China distribution deals check out the following:

 

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

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

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

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

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

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

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

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

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

 

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

 

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

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

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

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

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

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

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

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

 

China litigation lawyers attorneys arbitrationAmerican and European companies often reach out to my law firm after having spent 4-6 months trying to reach a settlement with their Chinese counter-party and then given up. These companies tend to be quite frustrated and I find telling them that what has  happened to them is actually quite common and that Chinese companies rarely settle disputed matters early. Reaching settlement with a Chinese company without a live case or arbitration is very difficult.

Chinese companies tend to view litigation differently from Western companies. Western companies generally know litigation to be very expensive, very risky, and very time-consuming and they typically strive to avoid it. Chinese companies tend to be reluctant to engage in serious good faith settlement negotiations for fear the opposing side will view their having done so as a concession that their position is not all that strong.

Often, Western companies will engage in months and months of settlement negotiations with the Chinese side barely budging and/or constantly changing its negotiating position. Eventually the Western company gives up and calls one of our China lawyers for help in deciding whether it should just walk away or pursue litigation.

Faced with these matters, our China attorneys typically do the following:

  1. Review all relevant contracts.
  2. Gather up all relevant facts.
  3. Research the Chinese company.
  4. Conduct any necessary legal research.
  5. Review the settlement negotiations. Carefully.

Items 1-4 above are going to look very familiar to Western lawyers, but item five less so. This is because, settlement negotiations in the Western world usually cannot be used as evidence at trial or arbitration, but this evidentiary exclusion generally does not apply in Chinese courts or before Chinese arbitral bodies. Because of this, Chinese companies will sometimes drag out settlement negotiations in an effort to get YOU to put forth even lower (or even higher) settlement amounts and then use YOUR lowest/highest settlement offer to argue that YOUR case is worth a lot less or a lot more than you are now claiming. They will also use your factual admissions against you.

Western companies tend not to be prepared for this and we constantly see them saying things in writing like “though we admit we could have been clearer in our instructions to you” or “we do not dispute that if we had spotted this sooner our damages would have been less.” Very roughly speaking, Western negotiators often use “win-win” tactics in an effort to meet their opponent half-way. Using this sort of tactic in trying to settle with a Chinese company can be dangerous. In Chinese Business Negotiation – Guarding Your Virtue, China negotiation expert Andrew Hupert extorts companies “to stop bargaining like an American and give away nothing for free”:

Are you a withholding, passive-aggressive manipulator who makes promises he can’t or won’t keep? Well, maybe it is time to start — at least in China. No one buys the cow when they can get the milk for free. In China, technology, IP and business methodology is the milk of profitable transactions. If you’re giving it away too early or too cheaply, then you are the expensive cow no one buys. Sorry.

*    *    *    *

Americans new to Chinese negotiation think they can build up a bank of good will and trust by “front loading” their benefit package. Novices think that doing business in China is about having Chinese partners owe them favors. They are kidding themselves — and forcing conflict. If the Chinese side of the deal feels that it is ahead of the game, their best move is to terminate the partnership and lock in their gains — not wait around for you to collect on what you feel is owed to you.

Hupert is correct. According to Hupert, Americans seek to demonstrate their good will be over-delivering, hoping to build up a goodwill bank that will be reciprocated by the Chinese side. The Chinese side often encourages this by talking up the importance of the relationship or by acting as though it really truly does want to resolve the dispute. I have found that Korean and Japanese companies value “the relationship” considerably more than the typical Chinese companies, but far too many Americans think China and Korea and Japan are pretty much the same on this, but they most certainly are not. Hupert explains China “relationships” in the real world:

Win-Win type negotiators often feel that the best way to approach a negotiation is to demonstrate their good will, trust and value by “over-delivering.” They feel that if they provide the Chinese side with what it wants now (technology, brand, product designs), that the Chinese side will feel obligated to reciprocate later (distribution, execution, quality control). The western side has read up on guanxi and harmony, and believes this is the way to develop loyalty and respect.

Hupert sets out five ways to protect yourself in and from China and the following portions of his advice apply to settlement negotiations as well:

  • Don’t project your desires on your Chinese partners. Find out what they really want. Assume nothing.
  • Know what you want. Withholding is easy. Knowing what you want from your China counter-party is tougher. Good negotiators in China are able to articulate a graduated list of goals and demands. Prepare for a “YES” when you negotiate.
  • Ask for a specific plan for your future together and negotiate the specifics of what the Chinese company is offering.
  • Walk away smiling, if you have to. Some Chinese negotiators are too grabby for your own good. Don’t stick around hoping things will magically get better on their own because they won’t. If a China deal is going to die, than quick and clean is the best way. Don’t hang around to get abused and battered, praying that they’ll eventually see what a great partner you could be. Get the hell out of there now.

Despite the long odds of settling with a Chinese company without first filing for litigation or arbitration, our China dispute resolution lawyers usually (but certainly not always) counsel our clients to at least try, but to be careful when doing so. Among other things, we urge them to do all that they can to protect the confidentiality of their settlement communications and yet still be mindful of every communication they send. Make clear on all your settlement communications that they are “Without Prejudice and for Settlement Purposes Only.” Doing this will make it less likely your communications show up at trial or arbitration, but it will not guarantee it. We also urge them not to move too quickly off their initial positions, unless and until they see real and permanent movement from the other side. We also work with them to help figure out when good faith settlement negotiations have ended and why at that point the risk of continuing to talk usually outweighs the possible benefits of doing so.

What have you seen when trying to settle with a Chinese company before litigating or arbitrating?

For more on negotiating with Chinese companies check out the following:

Artificial Intelligence AIFor more than a decade, the Chinese government has been working to push the Chinese manufacturing sector up the value chain. More recently, the push from the central government has become more formalized, resulting in the 2015 issuance of the State Council manufacturing modernization manifesto: Made in China 2025《中国制造2025》(State Council, July 7, 2015). Made in China 2025 focuses less on the types of products to be manufactured and more on the methods of manufacturing. It is okay to continue making rubber duckies, so long as the process for doing so is modernized. That is, massive automated factories churning out thousands of identical items with minimal human intervention.

The Chinese government has made clear it believes the largest and most successful manufacturing companies in the world have achieved that status in large part through software/information technology. This has led China to focus on artificial intelligence (人工智能). The Chinese government experienced what Will Knight at the MIT Technology Review has termed China’s AI Enlightenment. The process started with the issuance by the State Council of A Next Generation Artificial Intelligence Development Plan (新一代人工智能发展规划 July 8, 2017) setting forth a plan for AI development in China. The plan will progress in three stages, concluding in 2030. The final goal is ambitious: by 2030, China’s AI theories, technologies, and applications will lead the world, making China the world’s primary AI innovation center.

We are now in Stage 1 of the AI Plan, covering the period from 2018 to 2020. The first stage plan has been issued by the PRC Ministry of Industry and Information Technology (MIIT). The plan is set out in the Three-Year Action Plan for Promoting Development of a New Generation Artificial Intelligence Industry (2018–2020) (促进新一代人工智能产业发展三年行动计划 (2018-2020年)(December 12, 2017, Ministry of Industry and Information Technology (MIIT), Science and Technology Department).

Artificial intelligence is a vast field. The term means many things to many people. To cut down the field and make its objectives clear, the 3 Year Plan proposes concentrating on seven technical sectors:

  1. Intelligent Connected Vehicles (ICV) (智能网联汽车). It has long been a goal of the PRC government to push its huge but technically primitive domestic auto manufacturing sector into new directions. The electric car program has not been successful, so MIIT has begun to push ICV technology. This is embodied in its recent Guide for Establishing an ICV System (Discussion Draft) issued by MIIT in June, 2017 ( 智能网联汽车 国家车联网产业标准体系
    建设指南 (智能网联汽车)(2017 年)(征求意见稿)(MIIT, June 12, 2017)
  2. Intelligent Service Robots (智能服务机器人). This is not manufacturing robotics and automation.
  3. Intelligent Unmanned Arial Vehicles (UAV, i.e. drones) (智能无人机). This focuses on drones rather than self-driving vehicles (passenger autos and trucks).
  4. Computer Aided Medical Imaging Diagnosis Systems (医疗影像辅助诊断系统). If China cannot develop more doctors, maybe they can automate the diagnostic systems.
  5. Video Image Recognition (视频图像识别). This technology includes facial recognition, a major focus of recent PRC government efforts for surveillance and control.
  6. Artificial Audio Intelligence (AAI) (智能语音). This is a major focus of Tencent/Wechat as part of their most recent cloud computing platform. In the U.S., this sector is focused on smart homes. It is not clear what Tencent is planning.
  7. Computer Translation (智能翻译). AI got its start at MIT with John McCarthy in the 1950s. A major focus of the MIT project was machine translation. They failed, setting AI research back for decades. The problem still has not been solved.

Many of the hot topics in AI are not mentioned in the Three-Year Plan. For example, there is no mention of machine learning, neural networks, custom AI IC chips and other recently fashionable technologies. Perhaps this is being done and simply has not been mentioned. Or perhaps the list of potential projects has been pruned to allow for more focus. As I have noted above, some of the choices are surprising, focusing on problems different from what we might expect.

It is always difficult to know what conclusions to draw from PRC government issued development plans. The typical plan is full of buzz words and lofty aspirations and short on specifics, like who will do it, how will it be done, and how will funding be arranged? The Three-Year Plan is no different. In fact, the ratio of buzz words to concrete planning is higher than in most.

In this case, by looking at the list of fields that will be promoted, we can though gain at least some insight into the current direction of AI development in China. The key thing to understand is that AI development is already taking place in China. Chinese companies like Baidu and Tencent and Alibaba are not waiting for government support. They are obtaining funding outside China and they are moving forward aggressively in developing products in the AI sector.

I see two big questions regarding AI in China. One, will Chinese universities and company R&D departments develop the theoretical underpinnings of AI, or will the Chinese remain dependent on the research done in other countries? Two, as with information technology in general, the AI sector in China is dominated by private companies neither owned nor controlled by the Chinese government. This lack of control has allowed these companies to take an innovative and market directed approach toward their development of AI. Will the Chinese government allow this independence to continue and what will be the impact if the government seeks to get more directly involved in these private companies?

How do you see the future of AI in China?

 

China joint venture lawyers
Smile. The fake China joint venture scam is easily avoided.

Our China lawyers have over the last few months have been getting way more emails and phone calls from foreign companies (U.S. and European) either telling us they’ve been scammed or seeking our assistance in determining whether they are about to get scammed.

Anyway, in recognition of this recent in scamming, I am writing (again) about the sorts of scams we usually see, along with providing tips on how to avoid them. In Part 1, I wrote about the scam of tricking someone to come to China to sign a deal. Part 2 was on the scam of getting money for supplying products and then supplying nothing or, more commonly, something that isn’t even close to what the foreign company bought and paid for. Part 3 was on the switched bank account, which is — by far — the most difficult to avoid scam. Part 4 was on a scam where a Chinese company gets you to provide it work or services (or perhaps even product) in return for stock or stock options that you can never really own because you are a foreigner. Part 5 involved a fairly recent, increasingly common, and highly sophisticated scam whereby a Chinese company claims to be interested in investing in a foreign company but in reality it has that interest only so far as it can use it to steal your IP.

This part 6 post is on what we call the fake China Joint Venture, and it is an oldy but a goody and — dare I say it — one of my favorites. The reason I say it is one of my favorites is because anyone who falls prey to it brings it on themselves, at least in part. Our China lawyers have seen this one quite often and as far as I know, it has always involved an American company, which I fear says something about American naïveté.

This scam is really very simple and it pretty much always goes down the same way. It starts with a Chinese company convincing a foreign company to do a joint venture. The foreign company then contributes something to the joint venture to secure its ownership stake in it. This contribution virtually always consists of money, but it also often involves other assets as well, such as intellectual property, equipment, personnel (usually unpaid) or know-how. The Chinese company says it will handle the setting up of the joint venture and the foreign company readily agrees to this.

But instead of actually setting up a real joint venture with the foreign company having an actual ownership stake in the new company, the Chinese side simply takes the assets from the foreign company and does nothing official towards forming a joint venture. Most of the time the Chinese company never even sends the foreign company any remotely official documents regarding the alleged joint venture, but sometimes it sends fakes. Either way, the end result is that the foreign company believes it to be the part-owner of a China joint venture and it starts acting accordingly.

Usually for years everything is fine, but then the foreign company begins to wonder why it has never received any money whatsoever from the joint venture when it now seems to be doing so well. So they contact their supposed joint venture partner (the Chinese company) and then when they fail to get any answers, they contact a China lawyer to look into bringing a lawsuit. The China lawyer does some quick research (and by quick, I mean really quick) and then realizes there is no joint venture.

In some circumstances it may be possible to sue individuals and companies outside China for fraud but for that to work you need for the foreign country to have subject matter and personal jurisdiction and even if both of these jurisdictions are present, one must still effect service of process under the Hague Convention and, perhaps most importantly, have some means of collecting on any judgment awarded. Foreign courts are not going to be quick to claim jurisdiction over the ownership of a company in China and Chinese courts are certainly not going to be very quick to say that a foreign court has the power to determine ownership of Chinese companies. All this combines to mean that in most instances the duped party has no good recourse.

How do you avoid this scam happening to you? Very very simple. You retain a qualified lawyer early on to make sure a real joint venture gets formed with your company as one of its owners.

China lawyers for China scamsOur China lawyers have over the last few months have been getting way more emails and phone calls from foreign companies (U.S. and European) either telling us they’ve been scammed or seeking our assistance in determining whether they are about to get scammed.

Anyway, in recognition of this recent in scamming, I am going to write (again) about the sorts of scams we usually see, along with providing tips on how to avoid them. This is part 5 of the series. In Part 1, I wrote about the scam of tricking someone to come to China to sign a deal. Part 2 was on the scam of getting money for supplying products and then supplying nothing or, more commonly, something that isn’t even close to what the foreign company bought and paid for. Part 3 was on the switched bank account, which is — by far — the most difficult to avoid scam. Part 4 was on a scam where a Chinese company gets you to provide it work or services (or perhaps even product) in return for stock or stock options that you can never really own because you are a foreigner.

This part 5 involves a fairly recent, increasingly common, and highly sophisticated scam whereby a Chinese company claims to be interested in investing in a foreign company but in reality it has that interest only so far as it can use it to steal your IP.  The Chinese company usually starts out by claiming a strong interest in sending over a lot of money in return for a small ownership interest in your company. Many times, the Chinese company will talk about how its investment is not for short term profits, but to help you do an IPO from which everyone will get rich. This all sounds good, but with this comes usually comes something like the following from the Chinese company:

Our company will become one of the owners of your U.S. entity. And since we will be co-owners of the technology underlying your product, there is no reason for you to protect the technology from us. There is no reason to enter into any sort of confidentiality agreement (like an NDA or an NNN Agreement). We do not want legal or financial hurdles to get in the way of the IPO that will make us all wealthy.

So the foreign company provides its technical information to the Chinese company it now sees as its partner and benefactor. In return, the Chinese company starts using your IP and never funds its alleged investment. And for good measure (and to set itself up for a force majeure defense), the Chinese company will often then blame the Chinese government for its inability to get money out of China to fund the investment.

By using this “fake investment” technique, the Chinese company has legally or quasi-legally acquired the technology while paying little or nothing for it and there is nothing the foreign company can do. And it is true that foreign investment from Chinese companies must be approved by the Chinese government. So what is there to say?

On the software side, we usually see the the Chinese company offer to invest a large sum in the foreign company and as part of its grand plan, it will propose to set up a company in China that will eventually be owned by the foreign company. It will then arrange for the software technology to be released to the Chinese entity without restriction. Why should the foreign company spend time and money licensing its software to this Chinese company that it will eventually own a part of in any event. Oh, and this Chinese company will surely be doing an IPO very soon anyway.

In this scheme, there are various delays in getting approval for both the investment in the foreign company and in providing for foreign ownership in the Chinese entity. After two or three years of delay, and after the Chinese company has extracted all of the technology/information it requires, it apologizes for being unable to secure Chinese government approval to invest in the foreign entity and for not being able to give the foreign company any ownership in the Chinese entity because foreign investment in Chinese domestic companies is pretty much prohibited. See yesterday’s post on the China Stock Option Scam.

The end result is that the Chinese company has acquired the foreign technology virtually free of cost and there is usually nothing the foreign company can do about that.

For another common way in which foreign companies are tricked out of their IP, check out China and The Internet of Things and How to Destroy Your Own Company.

 

China stock options lawyer
Don’t be tempted by ths China stock option scam

Our China lawyers have over the last few months have been getting way more emails and phone calls from foreign companies (U.S. and European) either telling us they’ve been scammed or seeking our assistance in determining whether they are about to get scammed.

Anyway, in recognition of this recent in scamming, I am going to write (again) about the sorts of scams we usually see, along with providing tips on how to avoid them. This is part 4 of the series. In Part 1, I wrote about the scam of tricking someone to come to China to sign a deal. Part 2 was on the scam of getting money for supplying products and then supplying nothing or, more commonly, something that isn’t even close to what the foreign company bought and paid for. Part 3 was on the switched bank account, which is — by far — the most difficult to avoid scam.

This part 4 is on what our China team calls the China stock option scam — a relatively new, relatively sophisticated scam that has left many tech people and small tech companies in its wake.

This scam starts out with a Chinese company offering stock ownership as an alternative form of payment. The typical scam usually goes like this. The Chinese company — usually in the tech sector — is in desperate need of the expensive skills or knowledge of a foreign person or entity. The Chinese company tells the foreign tech people or entity that it “needs your services but because we are just a start up we will need to pay you in stock instead of cash.”  So, instead of paying cash, the Chinese company offers founders’ stock or employee stock options in their Chinese entity. Just as is the case with Silicon Valley founders stock/stock options, the idea here is that the Chinese entity will go public (“do an IPO”) and the stock it has given out will then provide its recipients with big returns.

Unfortunately, this is nearly impossible because foreigners cannot own stock in Chinese domestic companies not already listed on a stock market. So any such option or stock transfer is void from the start. Foreigners are not permitted to be shareholders of Chinese domestic companies, nor does China recognize the concept of nominee shareholders. Chinese companies will also use this Silicon Valley approach of offering a stock option package as a key benefit in the employment package. By offering stock options, the Chinese company can pay less and secure greater loyalty, while still exploiting the skills and extracting the knowledge of foreign individuals in developing an innovative software or other high tech product.

This exploitation/extraction period typically lasts one to three years, at which point the Chinese company tells the foreign individual, “sorry, the Chinese government has now informed us that we cannot issue stock options to you.” Sometimes, to better hide the scheme, the Chinese company will propose a series of fantasy work arounds, such as elaborate nominee schemes illegal under Chinese law. These proposals often convince the foreign person to waste another year or two with the Chinese company. But, in the end, the result is always the same. The Chinese company defaults on its promise to provide the foreign individual with stock in the company and the foreign individual is left high and dry. Since the founders stock/stock option scheme was void from the start, there is nothing the foreigners can do to enforce their rights in China, since they never had any such rights.

A similar scam is often perpetrated on foreign entities. The foreign entity has a technical service of great value to the Chinese tech company. The Chinese company then says: “We need your services, but we are growing so fast we simply don’t have the ability to pay you in cash for that. However, since we are growing so fast, it is certain we will soon do an IPO on the Shanghai stock exchange. So, instead of paying you in cash, we will agree to pay in you in stock options. Our stock will in the end give you way more money and by working with us, you will gain entry into the lucrative Chinese market and highly profitable work with other Chinese companies will follow.”

This scam results in the same sad result as the employee stock option scam. First, as with employee stock options, a foreigner cannot own stock in the Chinese entity, so the option is void from the start. Second, the private Chinese entity never does an IPO on the Shanghai market, so the whole concept was an illusion. Third, the only thing the foreign entity achieved was to identify itself as an easy mark and there will be no future profitable work available to it in China. Finally, the foreign company does not figure out the scam until after it has already transferred its service or valuable information to the Chinese entity.

There are a couple of elegant variations Chinese entities use to implement the Chinese stock scam. In the rare case where a private Chinese company actually completes an IPO, the listing is on a foreign exchange: usually either Hong Kong or the United States or London, where due to Chinese law requirements the actual listing entity is not the Chinese company for which stock options or stock were purportedly given. Instead, the listing entity is some form of subsidiary or other affiliate of the Chinese company, so that when the IPO does actually take place, the holder of the scam option or stock in the Chinese company can legitimately be told: “your stock option (or stock) is with the Chinese parent company; you do not have an option with the affiliate actually listed. Sorry.”

For all intents and purposes, private companies in China are  locked out of China’s domestic IPO market. See this Wall Street Journal article from yesterday. On the other hand, such companies have become attractive targets for private equity financing. But the story here is the same. The private equity financing occurs in China, resulting in a big payout to existing shareholders of the Chinese entity. The foreign stock option holder looks for an equivalent benefit. The Chinese entity then responds: this was a private equity deal, not an IPO. You did not own any stock at the time of the private financing, so you are not entitled to any benefit.

The way to avoid this scam is easy. Do not accept promises of stock options or stock in a Chinese company in place of employment compensation or payment for services. Any Chinese company that makes the offer of payment in stock is either ignorant of the requirements of Chinese law or intentionally committing fraud. Either way, foreign individuals and companies should refuse to work with a Chinese company in return for stock or stock options.

UPDATE: I got the following email today:

Nice series. There’s a new variation that has been tried on me and that’s blockchain “tokens” in a Chinese company “about to do an ICO” in lieu of cash. Since China takes an incredibly dim view on ICOs as a fund raising mechanism, this is an even more fraught method of “payment” than sham stock options. Of course the answer is “well, we’re doing our ICO outside of China, to which the response is “the company won’t be worth much if you’re in prison, though, will it?”

Good point.

China lawyers China scams
Muster your forces against China scams

We constantly write about this particular China bank scam  because our China lawyers constantly get contacted by smart companies that have fallen victim to it. I personally received two emails in the last month from companies (one that were bilked out of between $63,000 and $155,000.

Last year the Wall Street Journal wrote about how there has been an increase in criminals break into email accounts and change bank-account information to capture payments intended for suppliers:

The increasing prevalence of the schemes has drawn the attention of law enforcement. Attackers who once pretended to be executives directing subordinates to transfer money are using new techniques, including malicious software to break into email systems and redirect the payments, said Rick Alwine, a supervisory special agent with the Federal Bureau of Investigation’s Cyber Division.

And as the Wall Street Journal noted, these bank account scams are increasing and most involve China:

In an analysis of 44 recent fraudulent transfers, 84% of the transfers went to accounts in China and Hong Kong where it is more difficult for victims to recover their money, the FBI alert said. The FBI says it has logged nearly 18,000 reports of business email scams since 2013 accounting for $2.3 billion in losses, and complaints about these scams more than tripled last year, compared with 2014.

The Wall Street Journal describes these scams as follows:

When the buyer sends an order, the scammers step in, ultimately intercepting the seller’s invoice and changing payment instructions before sending it back to the buyer. With the modified invoice, funds are sent to the criminals instead of to the seller.

This scam usually involves your regular Chinese supplier asking you to make a payment or payments to a new bank account, though it sometimes can involve your very first payment to a new Chinese supplier. Then even after you make the payment or payments, your China supplier insists you still owe it the full amount (oftentimes with added fees) because it never received your payment. When you explain to your China supplier that you in fact did pay it, your supplier points out that the bank account to which you sent the funds is not theirs and that you still owe the money.

The Wall Street Journal article then discusses how easy they can be to pull off and how difficult they are to stop, but provides no solutions;

True business email compromise is almost invisible to both victim companies involved in the transaction,” he said. “It’s going to take a lot more effort to stop it than a simple reminder to phone the CEO before wiring money on his behalf.

But there are solutions and they do involve a lot more than reminding your people “to phone the CEO before wiring money on his behalf. We advocate every business do the following to minimize its chances of falling victim to this common scam:

  1. Get to know your suppliers who speak English (if you don’t speak Chinese) and get your supplier’s landline phone numbers as that cannot be hacked. Call if you have any concerns.
  2. Get your supplier’s bank account information in advance and ask them to refer to “bank account information document” on their invoices, rather than listing out full bank details every time.
  3. Check your bank account every day, maybe even twice a day. If you catch a wire early enough you can sometimes stop it.
  4. Do a first small wire to confirm the account.
  5. If possible, paying your Chinese suppliers to their bank accounts in mainland China as that is generally safer than paying them overseas, be it Hong Kong, Taiwan or anywhere else.
  6. Have a special procedure set up with your suppliers for confirming bank account changes .
  7. Have an internal procedure for confirming all payments over a certain amount.
  8. Get an insurance policy that covers computer hacking or fraud and make sure it covers this sort of scam. We actually have had good luck convincing insurance companies that they need to pay off on such policies.

What can you do if you have already been victimized? We do the following when retained by a company victimized by this fraud:

1. We determine whether there are any insurance claims to be made. This is usually your best chance of recovering all your losses, but do not expect your insurance company to pay without a fight. We help by explaining to the insurance company how these scams happen and why you are entitled to coverage under your policy and we get the Chinese supplier to help as well.

2. We try to get some monetary contribution from your Chinese supplier by letting it know that it was (or might have been) their computer system the scammer hacked and therefore it should pay at least some of our client’s loss. Much depends on our client’s relationship with its Chinese supplier and on what the Chinese supplier perceives its future relationship with our client will be.

3. We work with our client to minimize problems with its Chinese supplier and if that relationship needs to be severed, we counsel them on how to do so without creating all sorts of new problems. See Why Changing China Suppliers Can Be So Risky.

4. We seek to determine if there is any chance to recover anything from the perpetrator. This is an expensive and time-consuming process and there must be a lot of money involved for it to make much sense. Nonetheless, we find that our at least having run this option to ground helps immensely in dealing with both the Chinese supplier and with our client’s insurance company, neither of whom want to pay anything until they are convinced that our client has done everything it could do to try to recover from the crooks themselves.

Be careful.