Just got back from the other Washington and as I always do when I return from any trip, I unloaded my briefcase of all the articles I read on the trip that I thought important.  In my new stack was one that I have unloaded at least two or three other times, never quite sure what to do with it, but also unwilling to just throw it away.

It is a Time Magazine article on Apple in China, but because I saved only the first page of it and I cannot find it on Google, I am not even sure when it ran.  I’m guessing it was at least a couple of months ago.  The reason I can’t just toss it is because I keep coming back to one paragraph that I just love.  Here it is:

Apple’s relationship with the People’s Republic embodies some of the global economy’s brightest opportunities but also its thorniest dilemmas.  An American tech giant decide must decide how much to adapt its practices in a faraway land.  Should Apple represent the best of the West in the Middle Kingdom, or must it conform to the less salubrious way China Inc. operates?  From China’s side, how much longer will an increasingly nationalistic government allow foreign companies like Apple to profit so handsomely on its shores?  Caught in the middle are the 1.3 billion Chinese whose toil in factories and taste for luxury products will dictate the future of the world’s marketplace.

I just think this paragraph does a great job summing up so many of the China issues with which so many are grappling, including the following:

We welcome your thoughts.

Update: It comes from Time Magazine’s International edition, June, 2012.

Interesting BusinessWeek story, entitled, “Apple vs. Google: Starkly Different China Experiences,” comparing Apple’s China successes with Google’s purported failures.  The thrust of the story is that Apple succeeded in China by holding back on doing business in China while Google failed because it moved too fast.

I agree with the first half of this equation but I disagree with the second half of it.  Google’s alleged failures in China (I say alleged because in looking at what Google faces in China, I am actually impressed with all that it has accomplished) are far too complicated to ascribe solely to its having gone into China too early.  I am not even sure Google’s so-called early arrival in China has had any impact on its China business at all.

The BusinessWeek article contrasts Google’s go-fast approach with Apple’s go-slow approach:

In its rush to get into China fast, Google made mistakes. It had to fight in court just to get the Microsoft executive, Kai-fu Lee—four years later, Google was still badly lagging Baidu and Lee had left the company. Google also couldn’t decide what it wanted to do about China’s censorship rules. Eventually the company decided to relocate its search service outside the mainland rather than succumb to Chinese censors, a move that won kudos from free-speech advocates in China and overseas but also embarrassed the Communist Party leadership and jeopardized Google’s other China plans. It now has just 16.6 percent of the Chinese search market, according to Chinese research firm Analysys International. Baidu has 78.5 percent.

With its haste to penetrate the China market, Google even ended up with an awkward-sounding translation for its name in Chinese: Gu Ge—which sounds a bit like Google but means “valley song,” a rather odd, amorphous phrase.

No such problems at Apple, whose name in Chinese is simply Pingguo—Mandarin for apple. Apple successfully took the long view when it came to finding Chinese partners for the iPhone. The company negotiated with the market leader, China Mobile (CHL), but was willing to walk away and team up with the No. 2, China Unicom (CHU). That was a major risk because Unicom not only was much smaller but also had a reputation for poor service

The article implicitly says that going slow on China is the best way to go and I just do not believe that is always the case. I just do not believe there is any one-size fits all answer on doing business in China.  I recently received a couple of emails that highlighted that for me.

The first is from someone who wanted free legal advice on closing down a China WFOE.  I have modified the email to hide any possible identifiers, and it now reads as follows:

I wonder if I could ask for your advice on this (I read an article on your blog and thought you might be able to assist).

I set up a WOFE in last year with me (from the US) and another American.

My partner and I decided to part ways and I bought him out (although that wasn’t formally completed), and then due to a lack of capital I was unable to keep the business running with the office requirements etc. I then set up a cheap office for 6 months, but then returned to the US.

We did not register the company properly and we never set up a Chinese bank account. We did not receive any money, and we do not have any debtors, we did not hire any staff or pay any salary. Our registered capital was 250,000 RMB, which we just transferred in, and then took straight out.

I was wondering what you think my options are for this going forward? I have been told that it would cost 20,000 RMB to close down the company officially by going to the relevant departments — however I am not sure if we decide to go down this route how much we would end up paying – I don’t trust that it would be only 20,000 RMB.

A friend who opened a Rep Office said that he let his Rep Office close, and has never had any visa issues. And a Chinese friend says that I should let it go and there will be no problems.

My co-founder (whose name is still on the company as a shareholder) has a small WOFE in China and I am concerned about the consequences for him.

I also intend to travel to China in the future and set up another company.  I can speak Chinese and I have many friends there and I definitely do not want to close any doors there.

There is some urgency since we have to file the annual report within a month, so I’m guessing if we don’t file this then fines will start to add up and it may be a bit more messy to close.

Appreciate any advice you might give.

My initial instinct when I get an email like this is to respond by pointing out the specific complications and nuances involved in both the questions they are asking and in what they are seeking to do, but that would take me far too long.  With this particular email, I also was chomping at the bit to point out that just because he has one friend who let his Rep Office close (note that it was not a WFOE) without visa issues (so far) no more means that smoking is harmless because I know someone who smokes like a chimney and is still going strong at 77.  But instead, what do is write back something along the following lines:

I’m sorry, but there is no way we can even begin to give you any worthwhile advice beyond telling you that every situation is different and dependent on the facts. For me to even be able to think about the best solution for you, we would need to first think of the additional facts we would need from you to access your situation and then work with you in gathering up those additional facts.  At that point, we would then need to figure out the applicable legal issues and research them.  From there we would want to speak either with lawyers in the appropriate city (or cities) and the appropriate government officials as well.

My e-mail is really just a long-winded lawyer’s way of saying, “Dude, it really depends on the specific circumstances; there is no one size fits all.”

The other email I want to discuss is one I received today from a highly qualified China business consultant. It was this consultant who alerted me to the BusinessWeek article and he did so with the accompanying email:

I for one advocate a go-slow approach for most companies intent on entering the China market. Top speed usually ends up in a crash landing. People don’t seem to realize that if they truly want to be in the China market trying to be first in means having to plow your own path. The market has just begun to grow and slow and steady wins the race. Companies need to understand that many consultants will push them to enter China quickly (no matter what) simply because that is how they make their money.

His email is really just a long-winded China business consultant’s way of saying, “Dude, it really depends on the specific circumstances; there is no one size fits all.”

What do you think?  Is the first mover advantage for China all that it is cracked up to be?  Should all companies go slow in China or go fast, or like we lawyers are always saying, does it really just depend?

 

Bill Dodson over at the This Is China blog did a post on what I see as a very common issue for companies doing business in China: the disconnect between China and the home office.  The post is entitled, “A GAP in Understanding China” and its focus is on the GAP company in China.

Before I start discussing Bill’s post, let me state right off the bat that I am always hesitant to criticize a company too early for what it is doing in China. I explained (in great detail) my thinking on this in the post, “The Apple Way To Succeed In China. They Did It My Way.”  In that post, I responded to a CNBC writer who had criticized Apple for 1) failing to “take into account local consumer preferences,” 2) “Failing to Choose the Right Partner,” 3) “Failing to Launch globally all at once” and to a blogger who described Apple as “having failed terribly” due to 1) the cost of its phone, 2) its marketing strategy, and 3) its competition:

But let me start out by stating as clearly as possible that I do NOT think Apple is failing in China. I do not know exactly how well or how poorly it is actually doing there, but the reason I am certain it is not failing there is because it has not been there nearly long enough for anyone to say it has failed, or even that it is failing. Apple is a big company and I am quite certain that it plans on being in China for the long haul and until the long haul is over, one cannot ascribe failure to it. Apple is still in the “getting its feet” wet stage in China and it is not fair to pass anything close to final judgment on it until it has gotten well past this stage. I again urge everyone to read the book, Chocolate Fortunes, to better understand how it can take a long time and a lot of money for a big company to establish a consumer foothold in China. Let’s just say Apple’s conduct in China has not caused me to even think about selling even one share of my stock.

I then explained how large companies that go into China invariably start out slow as they are gaining a lay of the land and went on to say that Apple was succeeding in China because it was doing what it had always done and not “bending” to China, as so many had called on it to do:

Here’s my own, more concise explanation. Apple stuck to its knitting.

Let me explain. Just about whenever I speak on China or am on a China panel, and am asked what it takes to succeed in business in China, I emphasize the need to stick to your business’s already established principles. To me the key explanations from Paul’s post are how Apple refused to go into China with its iPhone unless it would be free to make it a real iPhone in China, just like everywhere else and on how China waited until China’s consumers could afford its products, rather than giving them a cheap substitute in the meantime.

I am not saying companies should never create products just for China (because in many cases, they absolutely should), but I am saying that companies that bend so far as to lose sight of who they really are, are not likely to succeed.

In Dodson’s post, he talks of going to a GAP store in Shanghai and for the first time bought his Chinese wife a t-shirt, the coolness of which he would need to explain to his wife. Dodson then went on to discuss a fascinating and revealing conversation he had with an American buyer for the GAP at that store that day:

This is the first item I’ve ever bought from GAP for my (Chinese) wife: a loose-fitting berry-red T-shirt with a GAP in darker red printed on the front. I’ll have to explain to my wife, though, why she’ll have to consider the logo cool, which seemed to be a point not lost on the American buyer for GAP with whom I spoke that same day.

“Our greatest challenge right now is getting the local consumers to understand what GAP is all about,” the Buyer explained to me. We chatted on the shop floor of GAP’s Shanghai store. “And they [Chinese people] think we’re a little expensive.” I explained to the young lady that I had recently inhaled sharply at the price of a men’s sweater I had taken a fancy to. It was as expensive as any in a major American city.

She commented on how Chinese tastes also lean a bit more to complicated designs and and color schemes. I joked about the addition of rhinestones to some of the GAP designs. She acknowledged Chinese tastes could on occasion be a bit gaudy. Which, though, brought me to an important point about the degree to which GAP was localizing its offerings.

“At first we chased Japanese styling into China,” she explained to me. “We didn’t know the Chinese market, so we had a learning curve”.

I noted Uniqglo seems to be doing incredibly well in China. “The Uniqglo at Times Square in the second-tier city of Suzhou packed the customers in during its opening days, and continues to have customers when other shops in the outdoor mall area are empty – including the South Korean brands,” I said.

She acceded, “We see Uniqglo as our competition. They are doing extremely well in China. Interestingly, in New York, Americans claim their clothing is too little,” she laughed. Of course, we both agreed, Americans tend to feel constrained by East Asian sizes for clothing. “We admire the variety of colors Uniqglo has, for instance, for polo shirts. The Chinese will buy theirs, but don’t consider buying ours – even though ours are cheaper!” Still, I asserted, GAP had work to do to localize their products.

“You know,” I said slyly, “1969 was a bad year in China.” 1969 is the latest ad campaign for GAP jeans and shirts. The idea is to elicit the idea of the fun and freedom of the era in AMERICA. Some of the clothing even brandishes a 1969 logo next to the GAP trademark. In China, the Cultural Revolution was in full swing in 1969 and no one but Mao Zedong and the most righteous of the Red Guard were having fun.

She hesitated, rolled her eyes. “I know,” she said. “But GAP’s plan is to rationalize it’s offerings around the world so that a store in New York City will have the same as the store in San Francisco and in Shanghai.”

Though its children’s lines are a hit in China, it looks as though GAP will have to go full circle on the localization issue before they’ve figured out this latest historical misstep.

Dodson’s conversation beautifully illustrates what may be the two biggest tensions companies face when they go into China.  One is localization versus world-wide standardization.  The other (and very much related) is the relationship between the home office and the foreign office.  As a lawyer, I would never purport to know where on the spectrum a company should fall on these two issues but I do know enough to know that it will be different for every company and may even be different for every product.

Optimally balancing the scale between standardization/localization and home office rule/country rule is always going to take time and require constant calibration. GAP may still get there yet.

What do you think?

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Apple iPad Event
Apple iPad Event (Photo credit: Wikipedia)

Bloomberg News just came out with a story, entitled, “China Court Encourages Apple, Proview to Settle Dispute,” describing the latest goings-on between Apple and Proview in their fight over the “iPad” name in China:

A Chinese court is mediating talks between Apple Inc. (AAPL) and Proview Technology (Shenzhen) Co. in a bid to get the companies to settle their dispute over the iPad trademark in the country.

“On the one hand, we are trying to process this case, and on the other, we are working on encouraging both sides to settle,” Zhao Le, an official at the foreign affairs office of the Higher People’s Court of Guangdong, said by telephone yesterday. Zhao said he had no further information on the effort.

On Feb. 29, the Guangdong court heard Apple’s appeal against a lower court ruling last year that Proview owned the iPad trademark in China. Proview, a failed maker of computer displays, has filed separate complaints alleging that Apple’s sale of iPad tablets in the country infringed intellectual- property laws.

“We started work, through the mediation of the court, on trying to get both sides to settle,” Roger Xie, a lawyer for Proview, said by phone. Before issuing rulings, Chinese courts typically initiate proceedings for litigants to settle, he said.

None of this is any surprise.  We have helped oversee about a dozen Chinese litigation matters and all but one of those was fairly routine. The one that was not fairly routine was “sticky,” in that the law was clear but the law also would require the court to issue a ruling that it clearly would not want to issue. The Apple-Proview case is what I would describe as a highly sticky case in that the law seems to favor Proview, but a ruling for Proview does not favor China. The court should rule one way, but it really does not want to do so.

When I say the law seems to favor Proview, please understand that I am basing this strictly on media reports and that there is a very real possibility I have it all wrong. But to put it simplistically, it seems that Proview tricked Apple into believing that Apple had purchased the iPad name in China from Proview when, in fact, under Chinese law, Apple had not.  I am going to ask you to go with me on this and just assume that the law/facts favor Proview.

Because the politics and the economics certainly do not.

If Proview defeats Apple in their various Chinese lawsuits, the end result will almost certainly be that Proview will end up owning the iPad name in China. That would not be a good thing for China. The world would freak out even more about China’s IP protections and at least some foreign companies would cite this case to justify not going into China, not selling their product into China, not working with Chinese companies, and even not buying from China. None of this would be good for China.

The second way in which a Proview court victory would hurt China is that it would probably lead to Apple moving its iPad manufacturing (or at least some large parts of it) out of China. If Proview is deemed to own the iPad name in China, Apple will not be able to use the iPad name at all in China unless it pays to license that use from Proview. If the Chinese courts hold that Proview owns the iPad name in China, I do not believe Apple will pay Proview even one Yuan for the licensing rights to that name because doing so would set such bad precedent for Apple. A holding that Proview owns the iPad name would also mean Apple would not sell iPads (and other Apple products?) in China again. Note that Apple has yet to release its newest iPad in China. How do you think the lose of iPad related jobs will play among China’s masses? How do you think the loss of the iPad at retail will play among China’s elites?  I am quite certain the Chinese government is thinking about these things.

So what can the Chinese government do? A lot.

Back to the “sticky” case we had in China. Every China case we had before that sticky case either settled or was ruled on shockingly quickly. But our sticky case just languished. Six months at a time would go by with nothing.  Then when our Chinese lawyers would ask the court what was happening on our case, the court would tell them that we needed to settle. The other side was being told the same thing. Between the lower court and the appellate court, this went on for more than three years.  The courts eventually did rule, but of course our case had nowhere near the significance of the Apple-Proview one.

So what is going to happen in the Apple-Proview case? It has to settle.  It just has to. There are certain cases where not settling could be so horrible for one or more sides that settlement has to happen. Picture two people fighting at the edge of a cliff. There are times where both parties go off the cliff, but that becomes less likely when you have a powerful and self-interested third party moderating.
The Chinese government is that third party in the Apple-Proview case and you should just assume that the courts are taking their direction straight from Beijing’s highest echelons.

The problem with my firm’s sticky case was that both sides knew that a compromise court ruling was extremely unlikely; either one side or the other would win big. We were representing a foreign plaintiff and the amount at stake was large enough so that any settlement might prove devastating to the defendant. This mad settlement all the more difficult.

Since Apple has One Hundred Billion Dollars cash on hand it can easily afford to pay to resolve the Proview case. It just not want to do so, and certainly not in a way that will make it appear to be admitting defeat. The Chinese government is going to need to come up with a face-saving solution for Apple that will involve Apple maybe indirectly paying off Proview while receiving some sort of major bone from the Chinese government. Something that will give Proview money and yet still allow Apple to claim an overall victory.

This case just has to settle and it will.

Bet on it.

Just read a Bloomberg News article, “Proview Using ‘IPad’ Name is Harmful: Apple,” that quotes me on the Apple-Proview dispute, as follows:

“It’s not really trademark law, it’s about whether the trademark was legally transferred or not,” Dan Harris, a Seattle-based lawyer with Harris Bricken who handles cases on intellectual property in China, said before the hearing. “Proview Taiwan agreed to sign over the trademark, but Proview Taiwan didn’t own the trademark.”

I see the case as being about authority. Authority to sell the iPad trademark. Who had the authority to sell the iPad trademark to Apple back when Apple (acting through a third party intermediary) thought it purchased the trademark for iPad in China back in 2009?  Let me explain.

If you bought the Brooklyn Bridge from me, you would not own it. Why not? Because I cannot transfer title in the Brooklyn Bridge to anyone because I do not own it in the first place. This analysis should be the starting point for analyzing the Apple-Proview case. I say this because it appears that Apple bought the iPad China trademark from a company that did not own it. Apple (again, acting through a third party intermediary) bought the iPad China trademark from a Taiwanese company called Proview Electronics Company, Ltd. (“Proview-Taiwan”) at a time when a Shenzhen company called Proview Technology Shenzhen Co, Ltd. (“Proview-Shenzhen”) actually owned it.

So the big legal issue in China is not really a trademark issue, it is an ownership and authority issue. The ownership of the trademark when it was allegedly sold is not really in doubt; it was owned by Proview-Shenzhen. The real question is whether Proview-Shenzhen authorized Proview-Taiwan to sell the iPad trademark to Apple and that is mostly what is being argued in the Chinese courts.

To modify the Brooklyn Bridge analogy, let’s say that you bought a house from Mr. Jones and it turned out that Mr. Jones did not own the house, but rather, his wife, Mrs. Jones, owned the house. If Mr. Jones and Mrs. Jones were in the midst of a divorce and she had told him not to sell the house and had told you that she owned the house and so Mr. Jones could not sell it to you, your claim to own the house through the purchase would probably be pretty weak. But let us suppose that Mr. and Mrs. Jones were happily married and Mrs. Jones was right there during the negotiations for the sale of the house and never said a word about how she was the one who actually owned it. Well your claim to own the house would be a lot stronger.

The Apple-Proview case is dealing with similar factual issues, as can be seen in the Bloomberg article. In other words, it looks like a factual mess.

And that is not the only factual mess. Remember how I keep saying Apple used a third party intermediary to try to buy the China iPad trademark. Well, Proview-Taiwan is suing Apple in the United States about that, claiming that the way Apple sought to buy the iPad name constituted fraud and unfair competition. My initial reaction upon hearing of this lawsuit was to assume it had little validity. I assumed this because it is quite common for big companies (small ones too) to try to buy something through a third party intermediary so as to avoid revealing to the seller how much the desired item may really be worth and I had never heard of a lawsuit being brought over that.  But in reading, “How Apple snookered Proview to get the iPad trademark,” I am not prepared to just laugh off that lawsuit.

So what should your takeaway be from the Apple-Proview case? Nothing more than that you need to be sure that the company with whom you sign a contract is the right company. I know this sounds basic, but this sort of thing happens more than you can imagine in international deals.  I personally have worked on at least two joint venture deals gone bad where the American company had signed an agreement involving the wrong party. In both cases, the American company thought it had a deal to be the distributer of the Joint Venture’s products outside China, but in fact, the agreement actually said that the American company would be the distributer for its Chinese joint venture partners’ products. And since the Chinese partner did make products that the American wanted to distribute….

For more on the Apple-Proview case, check out “Apple v. Proview. China Trademarks And So Much To Learn” and if you want still more, go over to China Hearsay, where Stan Abrams has written nearly a dozen posts on this case. And for you law-geeks out there, click here for a copy of the just-filed Amended Complaint (along with some interesting exhibits) in Proview’s U.S. litigation against Apple.

Just read a CNN article entitled, “When will workers share in Apple’s wealth?” This article was written by Scott Nova, executive director of the Worker Rights Consortium, a “labor rights-monitoring organization that investigates working conditions in factories around the world. 

Nova attacks Apple on many fronts in his article, but it is the following that really got me thinking:

And if Apple genuinely “cared about every worker,” it would pay every worker a living wage — enough for workers to achieve a minimally decent standard of living, support their families and even save a bit toward a better future. Today, barely 1% of the retail price of an Ipad goes to the workers who make it; 33% goes to Apple’s profits. Apple’s profits are so high, and its global labor costs so low, that it could triple the wages of its 700,000 manufacturing workers and help them achieve a living wage (just a few dollars an hour in China), and still make $40 billion a year. A wage increase of 16% to 25% at Foxconn, announced today as Apple’s public relations blitz reaches a crescendo, doesn’t come close.

Where did Nova get his numbers regarding what constitutes a “living wage” in China. And what does constitute a living wage in China? Does that not depend on the city? What about the fact that Foxconn typically provides its workers with room and board, in addition to their salary.

Again though, what constitutes a “living wage” in China? What do you think?

UPDATE: Stan Abrams over at the always excellent China Hearsay did a post, entitled, Profit Sharing and China’s Living Wage, did a post taking Nova to task for, among other things, using “squishy language” and for the following:

This [calling for Foxconn to pay its workers a decent wage] sounds great and quite reasonable, but of course the writer has no idea what “minimally decent” means in China, in Shenzhen or anywhere else. He doesn’t know what it takes to support a family here, and I guarantee that the complex matters of health, education and housing expenditures and their related effects on savings are matters that he did not research prior to writing the Op/Ed.

FURTHER UPDATE (2-24-2012): The New York Times just came out with an article, entitled, “How Much Do Foxconn Workers Make?” that seeks to discern exactly what Foxconn employees make.

 

A reporter called me the other day on the Apple-Proview trademark kerfuffle. She kept wanting me to give her a quote on what foreign companies should take away from this dispute and I kept parrying with her, unable to give her just one. I kept finding myself saying “it’s probably more complicated than that.”

Let me back up a bit. As many of you no doubt know, Apple is in a massive trademark fight with a Shenzhen-based company called Proview. Near as I can tell, the facts are as follows:

  • Proview-Shenzhen registered the iPad trade-name before Apple had ever manufactured an iPad.
  • Proview-Taiwan (a Taiwanese company that is not the same company as Proview-Shenzhen) entered into an agreement with Apple (or, more accurately, a company acting on Apple’s behalf) to sell its Asian iPad trademarks to Apple.
  • Apple claims that agreement with Proview-Taiwan included the PRC iPad trademark, but Proview is claiming otherwise.
  • Apple sued Proview (I think Proview-Taiwan, but I am not sure) in Hong Kong and the Hong Kong court ruled that Apple is entitled to use the iPad trademark on the Mainland.

Here is where it gets so complicated and here is how I see it:

  • Proview-Shenzhen still shows up as the owner of the iPad trademark in China.
  • It is not clear if Proview-Shenzhen ever contracted with Apple to give Apple the China iPad trademark or any sort of license to use that trademark.
  • It appears that Proview-Taiwan did enter into some sort of trademark sale or licensing agreement with Apple (again, actually the company acting on Apple’s behalf), but since Proview-Taiwan did not own the PRC trademark for iPad, there are some real issues as to the validity of such a sale or license.
  • Did Proview-Taiwan have any interest in the PRC iPad trademark such that it could transfer or sell that interest to Apple?
  • Did Proview-Shenzhen ever agree to sell or license its iPad trademark to Apple?

What I find really difficult to believe is that Apple and/or Apple’s attorneys would have done a deal to acquire rights to the iPad trademark in China without having done real due diligence on that trademark. Basic due diligence would have revealed that the PRC iPad trademark was registered to Proview-Shenzhen and at that point, Apple would have required Proview-Shenzhen (not Proview-Taiwan) sign on to the contract to assign or license the PRC mark. So the first thing to be learned from this (maybe) is to do your due diligence and make sure that when you are buying something or securing a license to something that you are in fact doing so with the company that is actually authorized to sell or license that item.

This all came to the fore when Proview-Shenzhen started asking trademark officials in various Chinese cities to start pulling iPads from store shelves because those iPads infringe on Proview-Shenzhen’s trademark.  Some cities are pulling iPads from store shelves and this is obviously not good for Apple. [Full Disclosure: I have a disproportionate percentage of my retirement savings wrapped up in Apple stock]. Some cities seem to be refusing to do so, in what appear to be political, not legal, reasons.

Now Proview-Shenzhen is saying that is going to ask China customs to block exports of Apple’s iPads from China because they infringe on Proview-Shenzhen’s trademark. The media (and even Proview-Shenzhen itself) seem to believe this will not happen because it would look so bad for China politically. This is where the real lesson lies. If you are not Apple, I can pretty much assure you that all of your iPads would be off the shelves in China by now and they would also not still be leaving China via export. The real lesson then is on how to prevent this from happening to “your” trademark and that lesson is really quite simple. If you want to avoid your product getting pulled off shelves in China and/or prevented from leaving China, make sure that the trade-names and trademarks you put on your product (or on its packaging) are actually registered (or licensed) to you in China. And just to be clear, “in China,” for purposes of China’s trademark law, does not mean in Hong Kong or in Taiwan or in Macau or in the United States or in Australia or in any other country. If you want China trademark protection, you must register the trademark in China.

For more on China trademark law, check out the following:

Here are some articles for those who want to read more about the Apple-Proview fight:

Just don’t say we didn’t warn you.

UPDATE: Stan Abrams over at China Hearsay has two great (recent) posts on this dispute. The first post, “Apple vs. Proview: The Assignment Agreement!” contains Stan’s analysis of the Trademark Assignment Agreement between Apple (actually it’s stand-in entity) and Proview. Stan does a great job of analysing the Assignment Agreement, which really is by far the key issue involved in the case. I completely agree with all that Stan says about the Agreement and I add one thing to it. If you think you can properly assign a Chinese trademark without using an experienced attorney to draft the contracts and oversee the agreements you are wrong. And if you think that after reading Stan’s post, you are flat out crazy.

The second post, “What Have We Learned About China’s IP System? Answer: nothing,” posits that the issues in this matter involve a commercial dispute, not IP. I generally agree with this. The heart of the issue is how you secure ownership or rights to someone else’s trademark.

Got an email from a client/friend yesterday with a link to an Industry Week Article and a note saying that I needed to give this “CLB’s dumbest article of the month award.” We do not actually have such an award (should we?) so for that reason alone, it is not in contention. Bad articles on China abound, but this one stands out because it is in a very influential magazine and because much of what it is wrong on has been repeated so often I fear it is beginning to pass for truth.

The article is in IndustryWeek Magazine and it is entitled, “Why Is China Cheaper?” It is written by Michele Nash-Hoff, President of ElectroFab Sales. She is also the author of the book, Can American Manufacturing Be Saved?

The main point of her article is that China manufacturing is cheaper than US manufacturing for reasons that go far beyond wage disparities. I do not dispute that point, but I do dispute much of what she says in support of that claim.

Her article starts out well by describing the costing differences between manufacturing a stuffed teddy bear and a Frisbee. Ms. Nash-Hoff points out that about 70% of the cost of manufacturing the teddy bear goes to labor, whereas the labor costs make up only around 20% of the cost of manufacturing the Frisbee. She then notes how because China deals in such massive quantities of the plastic resins that go into the Frisbee, its material costs for the Frisbee will be “as low as it could be.” I am not sure whether Ms Nash-Hoff is saying that the plastic resins will cost less in China than in the United States and I am not sure whether that is true or not.

Ms. Nash-Hof then tells us that labor is cheap in China because China has “one billion people living at the poverty level.” This is by far the highest number I have seen listed for those living at or below the poverty level in China but so be it.

As a result, wages have finally been rising by about 15% per year over the past four years. It took suicides by workers in the summer of 2010 to achieve additional improvement in wages and working conditions at plants that were more like prison camps with dormitories for workers to live on site and fences around the buildings so workers couldn’t leave the premises.

Okay.

This argument contains its own flaw. Wages in China have increased (fairly briskly) every year since the late 1980s and the average wage for workers in urban areas was four times higher in 2006 than in 1995. As Ms. Nash-Hof herself points out, wages have been rising “by about 15% per year” since 2006. With these statistics, is it really fair to claim that it took “suicides by workers in the summer of 2010” to achieve additional improvements in wages? Also, is she implicitly saying that it is not fair to the United States that China has so many poor people and that those people should not be employed? Or is she saying something else?

Ms. Nash-Hof’s third reason for China being cheaper is that China’s workers receive “nothing” when they are injured on the job:

Third, there are the costs of compliance to health and safety regulation and environmental regulations. These costs are less expensive in China than in the United States because the Chinese government imposes few health and safety or environmental regulations. China doesn’t provide workman’s compensation insurance for their workers so workers hurt on the job don’t receive any compensation when they are injured to the point that they are disabled.

Ms. Nash-Hof is both right and seriously wrong in this argument. Of course the cost to comply with health and safety and environmental regulations is way less in China than in the United States. I say “of course,” because even if China’s regulations were exactly the same as those in the United States and even if the enforcement of those regulations were exactly the same in China as in the United States, compliance would still be considerably cheaper in China. Compliance would be considerably cheaper in China because medical care and wages (and pretty much everything else) are considerably cheaper in China than in the United States.

But beyond that, Ms. Nash-Hof is right to claim that China does not enforce health and safety and environmental regulations nearly as rigorously as the United States, but she is flat out wrong to claim that China does not have workers compensation when it does and she is also flat out wrong to claim that “workers hurt on the job don’t receive any compensation when they are injured to the point that they are disabled” because they almost invariably do. Again though, a worker who loses a finger in China might get $500 while a worker who loses a finger in the United States might get $50,000. I wonder if Ms. Nash-Hof is seeking an increase in workers compensation in China or a decrease of it in the United States?

Ms. Nash-Hof then argues that China’s VAT law works in its favor as against U.S. manufacturing:

Next, there is the cost of taxes and duties. China is one of over 150 countries that utilize a Value Added Tax (VAT) system. It is a tax only on the “value added” to a product, material, or service at every state of its manufacture or distribution. The VAT rate is generally 17%, or 13% for some goods. Chinese companies receive a VAT refund from the government for materials of products produced for export. American imports to China are charged a VAT, but the U. S. doesn’t have a VAT to charge Chinese imports.

Help me out here readers because I am just not seeing it. Maybe I am missing something here, but I do not see how China’s VAT has anything to do with its manufacturers being able to produce for less. I just do not understand how charging the VAT for domestic sales, but refunding it for exports reduces Chinese manufacturing costs. Could I not argue that the VAT actually increases manufacturing costs by reducing domestic sales and thereby making it tougher to achieve economies of scale? Is not this exactly what pretty much every country does with its VAT and exactly what U.S. states do with their sales tax?

Ms. Nash-Hof then makes a completely off-base factual argument that I am seeing and hearing much more frequently of late, which is that foreign companies cannot go into China without a Chinese partner:

In addition, the Chinese government requires foreign firms to have a Chinese “partner” company, who maintains the majority interest, takes most of the profits, and has the real control of the company.

This is just false. Completely 100% false. When I wrote a Wall Street Journal article on China Joint Ventures back in 2007, “only 27% of new foreign-invested businesses used this legal mechanism [Joint Ventures] in 2006, compared to well over 50% in 2001.” I would guess that percentage is less than 20% today. China allows foreign companies to go into China alone in just about all industries other than media, military and mining.

Ms. Nash-Hof also gets it wrong when it comes to China R&D and technology sharing:

More seriously, China now requires U. S. companies to share their technology and relocate their R&D centers to China if they want to have access to Chinese markets.

This statement is just so wrong I hardly even know how to attack it. First off, there are hundreds of thousands of U.S. companies that have “access to Chinese markets” without having any presence in China at all. Every U.S. company that sells a product or a service to China has “access to Chinese markets” and many (most?) of those companies are not even in China, much less sharing their technology and relocating their R&D centers there. Then there are the foreign companies in China that do no R&D there and zealously protect their technology. China does not require U.S. companies set up an R&D facility in China or share their technology with China to have access to China’s markets. Apple Computer, KFC, The Gap, McDonalds, Price Waterhouse, and an endless list of other American companies that are thriving in China give lie to this bizarre claim. There have been instances of what Ms. Nash-Hof describes (see the Chevy Volt), but fortunately, that it is not the norm.

Unsurprisingly, Ms. Nash-Hof also attributes the China Price to China’s undervalued currency:

Above all, there is the ever-present currency manipulation, where China undervalues their currency by an estimated 30%-40%, which simply makes every product that China ships out 30-40% cheaper than those of a potential American competitor.

I am not going to dispute that the Yuan is undervalued, but 30-40% seems high to me. Is it?

Lastly, Ms. Nash-Hof talks about dumping and I am not going to fight her on that.

What do you think? Am I being too harsh on Ms. Nash-Hof? Is she right?

I just think that with election season upon us, it is more important than ever that we get our facts right.

I just recieved the following e-mail, which I quote in its entirety:

Legal remedies now abound for companies victimized by Chinese counterfeit stores

China, widely considered the world capital of counterfeit and knock-off consumer goods, has created a buzz in recent weeks with reports that entire U.S. stores, including the iconic Apple store, Ikea, and Dairy Queen, are now being counterfeited with startling accuracy. While much has been made of this phenomenon, very little has been written about the legal remedies that U.S. companies may have against the Chinese infringers that may be damaging their brands. Mark Zolno, chair of the Customs and International Trade Practice at Katten Muchin Rosenman LLP in Chicago, notes that while at one time, partnering with an IP law firm in China to file suit against the infringer was an exercise in futility, in the last few years, Chinese courts have begin enforcing domestic IP sanctions against Chinese nationals.

“In addition to seeking remedies in Chinese courts,such conduct also violates the WTO agreement and China is a WTO member,” Mr. Zolno says. This would allow a U.S. copyright or trademark holder to file a complaint with the U.S. Trade Representative’s office under section 301 of the Trade Act. The USTR would contact the Chinese government and press it to take action the Chinese infringer to cease such activities. If the Chinese government refused to act in response to the USTR’s complaint, sanctions against Chinese exports to the U.S. could be imposed, such as additional duties or quotas on select Chinese products.  The additional duties or quantitative restrictions would be enforced by U.S. Customs and Border Protection.

Mr. Zolno is available for comment on the current counterfeiting situation in China and legal remedies available to U.S. companies. Please let me know if you would like to speak with him.

Best,
Jason

Jason Milch
Vice President, Public Reputation Services, Jaffe PR
808 Woodbine Lane, Northbrook, IL 60062

jmilch@jaffepr.com
Direct: 312-379-9406
eFax: 267-545-5679
Twitter: twitter.com/jasonmilch

I responded to Mr. Milch by asking that he remove my name from his email list and noting that the email was “deceptive bull—t.”

It is.

It may be great in theory, but come on.

How many times has what this email makes out to be easy ever happened? I mean really.

If your store is being copied in China, do you really think it makes economic sense for you to go to the WTO about it? Do you really think that your doing so is going to lead to the Chinese government taking prompt action against the store? Do you really think that the USTR is going to take up a cudgel on your behalf over a routine trademark or copyright infringement in China?

This email is not only unrealistic, it is either overly vague or just plain wrong on the law.

Someone with a U.S. trademark generally has no rights to that trademark in China. In other words, if I own the trademark for Brand X on water bottles in the United States and someone in China starts calling their water bottles “Brand X,” there is no law to stop that company from selling Brand X water bottles in China unless I registered “Brand X” in China or Brand X for water bottles is a well-known mark. If I were to go to my U.S. Trade Representative on this, he or she would no doubt tell me to work within the laws to protect my trademark. The odds of the U.S. government using my complaint to start a trade war are about the same of Troy McClure becoming President of the United States tomorrow.

In other words, it just ain’t gonna happen.

Wikipedia does a nice job setting out the way things really are under Section Mr. Zolno’s beloved Section 301:

Section 301 authorizes the President to take all appropriate action, including retaliation, to obtain the removal of any act, policy, or practice of a foreign government that violates an international trade agreement or is unjustified, unreasonable, or discriminatory, and that burdens or restricts U.S. commerce.  The law does not require that the U.S. government wait until it receives authorization from the World Trade Organization (WTO) to take enforcement actions, but the U.S. has committed itself to pursuing the resolution of disputes under WTO agreements through the WTO dispute settlement mechanism, which has its own timetable.

We typically handle our China IP theft matters by sending out cease and desist letters and then suing if those do not work. From now on I think I’ll just call President Obama and hand them over to him. Yeah right. That’s the ticket.

Oh, and last time I checked, Ikea was Swedish, not American, but hey, if US laws are going to rule the world, we might as well just take over all the big stores as well.

I give Jason Milch a Zilch and Mark Zolno a NoGo.

What do you think?

Just got back from watching Mike Daisey’s one man play, “The Agony and the Ecstasy of Steve Jobs” at the Seattle Repertory Theater.  It was an absolutely amazing show and I highly recommend it. It was hilarious, thought provoking and, near as I can tell, unfailingly accurate.  I cannot recommend it highly enough; it is truly a must-see.

To grossly summarize the play, Steve Jobs is an “asshole-visionary” who has done amazing things at Apple, but in doing so, willfully ignores how Foxconn, which makes “all of our shit” grossly mistreats its workers, some of whom are as young as twelve. Daisey spent weeks in Shenzhen talking with factory workers and factory owners there to gather up material for the play and what he describes completely jibes with what I have seen there.  His recounting of meetings with factory owners in conference rooms with business cards and interminably boring Powerpoint presentations definitely was totally spot-on and had me laughing so hard I could barely stop. As Daisey so aptly puts it, Powerpoint is to communicate with other people in the same room as us.

During the show, I thought often of the book, The China Price, by Alexandra Harney, which I have previously discussed here and in this post on the ten best books on China business.  If you watch this play or read that book, you are forced to conclude that factory life in China is mostly brutal and that Western notions of Corporate Social Responsibility (CSR) have had very little impact on that. Daisey talked a lot about how the Western media is failing to report what is really happening there because as he put it, governments seek to block information getting out because that works.

At one point in the play, Daisey referred to a Wired Magazine article, written soon after the Foxconn suicides, as having been written by “useful idiots.” My problem with applying that term to Westerners who are always so quick to whitewash what is really going on in China is that few of them are idiots. Rather, they are calculating businesspeople who have chosen to come down on the money side of the equation.

What do you think?

UPDATE: A number of commenters have rushed to defend Foxconn with the argument that it treats its workers better than many/most other companies in China. My response to that is that I do not believe Daisey would necessarily say otherwise. I think he focuses on Foxconn simply because it is so big and because it is so representative of what goes on in China’s factories.

A reader sent me a link to a just out PC Magazine article on Foxconn, entitled, “Foxconn Factories: How Bad Is It?” Pretty bad, according to the article.

I realize it is easy to criticize Foxconn without providing any solutions, but that is not the point of this post. My only goal with this post is to put out there the way things are so as to make it more difficult for people who should and do know better to act as though things are otherwise.

UPDATE:  3-18-2012  Turns out Daisey “stretched” the truth.  For a great post explaining how he did this and the effect of what he did, I recommend China Hearsay’s, “Would-be Apple Killer Mike Daisey Goes Down in Flames.