A friend emailed me a post the other day and asked me if I agreed with him that it was the “most helpful post your blog has done for helping foreign companies doing business with China.” My response was that I wasn’t sure, but that it certainly ranked up there and that it had been so long since we did that post (more than seven years), I would run it again. Certainly though the advice in that post holds equally true (or more so) today as it did way back then.

Here is that post:

If you are doing business in or with China, you have to check out ChinaSolved. It is operated by my friend Andrew Hupert, who also operates DiligenceChina, [link no longer exists] which is one of the best China business blogs. ChinaSolved is shaping up as a terrific resource on doing business in China. It is already chock-full of useful business advice.

Its article, “Ten Commandments for Westerners In China,” [link no longer exists] is typical of the site’s excellent and straightforward advice for foreign companies doing business in China. And I found myself agreeing with nine out of ten. Here goes:

  1. “Know what you don’t know” (for many westerners, this is by far the most difficult challenge.). Any similarities between China and “back home” are purely accidental. This is a completely different culture. Do not be fooled by surface similarities or by local people who “seem to get it.” Sources of reliable information are your #1 asset.
  2. China is still a communist country – and there is absolutely zero chance of that changing any time soon.
  3. You have to show up to win. You must be physically present and put in the “face time.” There is no “autopilot” in China business. If you feel that you are too busy to learn about China, then you are certainly too busy to be successful here.
  4. If things worked well here in China, then there would be significantly fewer opportunities for competent westerners. Try not to get too frustrated by the challenges you face.
  5. Time does not mean money here. Chinese business people do not believe in “opportunity cost.” Even simple negotiations can drag on for a long time. Avoid getting sucked into an endless cycle of meetings that don’t accomplish anything.
  6. Truth, honesty, good-will and long-term benefit are all culturally-specific concepts. Don’t expect your western standards to carry over here. Win-Win is not standard operating procedure here. Do not fool yourself that your long-term relationship with a local partner means anything.
  7. Don’t check your brains in at the border. You wouldn’t hand over your company’s money, intellectual property or trademarks to a virtual stranger in Sydney, London or San Francisco and expect to make a windfall. Don’t do it in China. The people that are offering to open doors for you are the same ones that can lock you out. Beware of people who peddle their “powerful friends and great connections.” They can use them to hurt you as well as help you.
  8. Due Diligence becomes more important when the language and systems are unclear, not less important. Don’t settle for the “least worst” deal or partner. Partners don’t get more honest and relationships don’t improve as the amount of money involved increases.
  9. China will still be here next year, and in 5 years. Don’t be pressured into signing a contract or making a deal because you are afraid of “missing the boat.” The boat has been here for 4,000+ years.
  10. Having a sense of humor helps. Having a Plan B helps even more.

I agree with all but number 6.  I understand why ChinaSolved felt it necessary to put it in here, but I think it is wrong.

Truth, honesty, good-will and long term benefit are not culturally specific concepts and long term relationships with local partners mean a lot. I think ChinaSolved felt the need to put this in here to make up for the common mistake of Westerners equating a week of good businesses meetings and friendly dinners in China with being set for life. All of us (China consultants, China accountants, and China lawyers alike) who represent Western companies that are doing business with China could fill a book with stories of China deals gone bad. So let us just take it as a given that Western companies constantly make the mistake of trusting too much, too soon.

But, I personally have also have seen enough to fill a book about excellent, mutually beneficial relationships between Chinese companies and Western companies.  And, at least as far as I know, every one of those successful long term relationships was based on trust and mutual long term benefit.

So I say we downsize to just nine commandments.

What do you think?

Let me start out by making very clear that I have no direct knowledge of any facts relating to GlaxoSmithKline’s recent troubles in China relating to bribery allegations.  Let me also make very clear that I have no direct knowledge of any facts relating to the recent arrest of Peter Humphrey — a respected China hand — who was apparently an outside consultant to GSK. Nonetheless, I cannot resist at least repeating some of what is being said out there and dishing out a few of my own comments.

I have spoken with no fewer than four reporters relating to the GSK case, including one who called me to discuss the case two days before the Chinese government did anything about it. In all instances, I have happily provided the reporters with responses to general questions, but always begged off on specifics, of which I have none:

1.  Are risk consultancies in China notorious for being conduits for bribery?  Not as far as I know.  Are travel agencies notorious for being conduits for bribery?  I did not know that they were, but I have now read that they are.

2. Is foreign companies engaging in bribery common in China?  Not as far as I know.  Of course, our clients are not going to be telling us about those sorts of things either. I also think that it is way more common in some industries than others and I understand it is fairly common in pharma.

3. Had you heard anything about GSK paying bribes before I called you? No.  First I heard anything about them was when a reporter told me that he had heard that five high level GSK employees were being paid $5,000 a month, every month, for travel expenses.  He asked me if any of my clients did anything like that and I said that I didn’t think so and that I thought that sounded pretty weird.

4. A couple reporters asked me if I know Peter Humphrey and what I know about him.  I said that we had met way back in 2008 in Beijing and that I had corresponded with him a few times since then and that I had absolutely no dirt on him at all, not even a bad word by someone else. In fact, a number of people I know and greatly trust are incensed at his arrest. The reporters would typically then ask me if I knew why he had been arrested and whether his arrest meant that it was now “open season on consultants in China.”  I said that I did not know why he had been arrested but I did not think his arrest meant open season on China consultants.  I have to believe that the Chinese government — rightly or wrongly — believes it has some evidence of wrongdoing by Humphreys.  I also have been around long enough to know that the arrest of someone (in any country) does NOT mean the person is guilty.

5.  Most of the reporters who called me wanted to talk about my posts over the years on how China cracks down on foreigners for political reasons whenever the economy slows. To which I would say, “that’s true.”  Then they would ask me whether China was cracking down on GSK so as to make life easier for China’s domestic pharmaceutical companies.  I would say that I did not know that to be true but that I had heard (from one of the reporters actually) that the Chinese press was playing up the arrests as having reduced pharmaceutical prices, and that sort of pitch plays into our political theme.  China wants to do what it can to keep its citizens happy and reducing drug prices is certainly a good way to achieve that.  And doing it as part of a China bribery investigation is a major two-fer.

6.  Virtually all of the reporters asked me what is to be learned by what has happened to GSK?  My answer is usually something really profound and deep like “don’t pay bribes.”  The follow up question to that is always, how does a company make sure that doesn’t happen?  My response to that is to talk of having an anti-bribery program in place that clearly forbids illicit conduct, makes clear that illicit conduct will not be tolerated, and constantly watches out for it.

7.  A few of the reporters asked me something along the lines of whether GSK had “fallen down on the job.”  My response was that I did not know both because I did not have the facts and because I am not an expert on the “job” of preventing bribery.  See How GlaxaSmithKline missed red flags in China in which various people very knowledgeable about China differ on this issue.

For more on bribery in China, check out Bribery In China. Is It Worth It? and Bribery In China As A Waste Of Money.

What do you know?

Very interesting post today over at the All Roads Lead To China Blog, entitled, In Defense of the China Consultant. It caught my eye because it starts out saying that it was inspired by a recent post on here, “China as Currency Manipulator. Why Can’t We All Just Get Along? According to All Roads, this post, along with a number of other posts on other blogs, dealt with whether a China Consultant is needed and how to pick one.

The weird thing is that my post to which All Roads refers, never once mentions the word “consultant” and, near as I can tell, had absolutely nothing to do with the issues All Roads raises in his post. I am not sure if All Roads mistook someone else’s post for mine or if he accidentally linked to the wrong post on our blog. Either way, I am glad for his mistake as it now gives me the opportunity to agree wholeheartedly with him and to expand a bit on his post.

All Roads’ post talks of how there “has never been a true debate about the role of a consultant, or how firms should look to work with these people/ organizations. A debate that I would say is sorely needed. Not because I think that there is anything wrong with the ‘China consultant’, but because I feel there is a disconnect between the value that these people/organizations provide, what the client needs, and how an engagement should be structured for success”

All Roads then provides two very good and very recent examples in his work as a China consultant where his clients hired him to consult on China and then failed to heed his advice, at their own peril. All Roads then concludes his post by nothing that “there is absolutely nothing wrong with the ‘China Consultant’.

I agree 110%.

And because I am not a China consultant, my perspective is fully neutral.

Clients are always asking me and other lawyers in my firm for business advice and we are always very reluctant to give it. We are reluctant to give it because we are lawyers not consultants. If a client asks us whether we think their business should locate in Shanghai or in Chengdu, we might tell them that Shanghai courts/judges are much better than Chengdu courts/judges and so their IP will likely be better protected in Shanghai than in Chengdu, but we are not the people to talk to about rental rates, wage rates, electricity prices, water rates, quality of work force, etc. We have some idea of those things because we hear about them all them time from our clients, but our knowledge is mostly anecdotal.

We refer those clients to China consultants. If they have questions regarding how they can best get their product from Qingdao to Quincy, we refer them to logistics consultants. If their question is whether their office in Dalian will really be that much cheaper than in Shenzhen, we refer them to real estate consultants. If their question is how much it will cost for them to build such and such kind of facility in Chongqing, we refer them to China operational consultants. If their question is where they should go for good and cheap widgets, we refer them to sourcing consultants. If the question is whether it makes sense for them to translate their English brand names into Chinese, we refer them to branding consultants. If their question is whether there is a need for their product or service in China, we refer them to marketing consultants. If they need help with financial or tax matters, we refer them to financial and/or accounting consultants.

Occassionally, clients push to have my law firm do these sorts of things for them and our response to that is always the same: if you want to pay lawyer rates to have us do things at which we have never claimed expertise, you can, but I strongly suggest you use those who actually do these things ever day. We are batting 1000 in that no client has ever retained us for any of the above. And that is because I view China consultants as absolutely critical in many circumstances. I often then tell them to be suspicious of lawyers who claim to “consult” in addition to practicting law.

I have worked with dozens of “China consultants” and, almost without exception, I have found that when used properly, they bring real value to the companies that retain them. Until today, I never even knew there was a dispute about this, but if there is, please let the record reflect that I stand with the consultants on this one.

What do you think? Consultants, good or bad?

I never knew writing this blog would give me such incredible power.

A couple of days ago, I did a post, entitled, The Basics of Getting Your Business Into China By WFOE/WOFE. That post briefly mentioned setting up a WFOE (Wholly Foreign Owned Entity) in “lesser known cities that encourage specific types of business development.” Kevin Smith of the Weifang Radish blog picked up on that line and posted a comment on how he thought his former town, Weifang, is a good place for foreign business:

I really love how “setting up in new industrial zones that are eager for overseas investment or lesser-known cities that encourage specific types of business development” is mentioned. When I was living in Weifang I got to know a number of businessmen engaging in or setting up business in Weifang. All of them expressed to me how impressed they were by the price and quality of office space and other resources available in and around the city. Furthermore, some of them had lived in or been in China multiple times on business over the years, and so weren’t just wide-eyed newbies. If I were an entrepreneur looking towards China, I would probably set up a business in a lesser-known Chinese city.

So in my follow-up comment to Mr. Smith’s comment, I “ordered” him to provide more information on doing business in Weifang:

You have two choices. Either you will write a long post on your blog, explaining why you would set up your China business in Weifang or some other second tier city (is Weifang, second or third tier?), and exactly what sorts of business make sense for Weifang and why. Perhaps 3 pages, minimum, single spaced.

Or, you will allow me to grill you on all of this via telephone or e-mail.

I am leading a one hour session in early May at a big time doing business in China Seminar in SFO and the session I am leading is on second tier cities. Pick your poison, big guy.

He wisely chose not to allow me to grill him directly and wrote the blog post instead. It is entitled, “Why Do Business in Weifang,” and it is excellent.

The post starts out listing some points as to why it makes sense to locate a business in China’s smaller cities:

  • It is easier to get to know top government leaders in small cities. For example, in Weifang I met and chatted with the Mayor and Vice Mayor on more than one occasion, and I’m just a foreign teacher. I think this is a major benefit. How likely would it be for me or a person running a small to medium sized business to meet and chat with the city leadership in Beijing?
  • Smaller cities have cheaper real estate prices. I don’t know about business properties, but for residential you’d pay about 2k RMB/sq meter in Weifang out towards the edge of the city (only about 10 minutes from downtown by car) and nearly 10k RMB/sq meter in Haidian in Beijing if you were looking to buy.
  • Smaller cities have lower wages. Teacher at Weifang University made between 1k and 4k RMB a month [roughly $125 to $500 USD]. No one made over 4k (officially anyway), not even the president of the university. I know this because I’ve seen the payroll. I’m not sure how much teachers at Beihang [in Beijing] make, but there sure are a lot of nice new cars on this campus, so I’m pretty sure that the answer is more than in Weifang, where the few teachers who had cars were the ones married to businessmen.
  • Smaller cities typically have less pollution and less traffic and thus are easier to get around in.

The post then goes on to describe Weifang as follows:

  • It is a third tier city.
  • Grade A office space for cheap prices.
  • Infrastructure is just as good as in larger cities – reliable electricity, Internet, telephone, cellular, roads, rail, even an airport (small but nice, not some scary relic of the Cold War) with daily flights to Beijing and Shanghai.
  • Located smack in the middle of the Shandong peninsula making it a major hub between the larger cities of Qingdao, Jinan and Yantai. Because of its location, it is a good place to set up headquarters if a company has branches or often does business in each of those cities.
  • Good hotels and conference space. Weifang has one five star hotel and at least seven four star hotels. Also, because most of the year these hotels are underused, good prices can be had.
  • Just under two hours from Qingdao International Airport, which has flights to Seoul, Busan, Tokyo, Osaka, Fukuoka, Nagoya and Hong Kong in addition to around thirty domestic locations.

Mr. Smith then lists the following as possible business opportunities in Weifang:

  • Outsourcing manufacturing for diesel – Weichai is a large SOE that manufactures diesel engines for China Rail.
  • Outsourcing manufacturing for toilets – Milim is a large company that manufactures toilets for Gerber.
  • Outsourcing manufacturing for pharmaceuticals – Yaxing Chemical is a large company that manufactures pharmaceuticals for Bayer.
  • Trade in textiles – according to an African-Australian friend of mine in this business in Weifang, there are lots of textiles factories in and around the city.
  • I have met American and South African entrepreneurs of medium-sized businesses who were outsourcing the manufacture of children’s furniture in Weifang and looking to outsource the manufacture of pipes used for plumbing and were strongly considering setting up a Joint Venture in Weifang with a local company there.

Excellent post and Since my law firm’s China attorneys are always working with American companies in trying to figure out where to locate in China and so any information like this is always helpful .My own thoughts:

  • Weifang has a population of 8.5 million. I have never been to Weifang, but I have spent considerable time in Qingdao and in Yantai (two of my favorite cities in China), both nearby and in the same province (Shandong). Co-blogger Steve Dickinson has spent even more considerable time in Zibo, also in Shandong, and he has told me much about it. This does not for a moment mean “I know” Weifang, but it does allow me to put it in some context.
  • I like and agree with Kevin’s point about it being easier to get to know the powers that be in smaller cities. Big companies get to know big city mayors, smaller companies rarely do. However, it is typically less important in the bigger cities for smaller companies to have dealings with the city’s higher ups.
  • I am certain Kevin is right that business space and labor will be far cheaper in Weifang than in Beijing or Shanghai. I am also not surprised by Kevin’s touting the benefits of Weifang’s high end physical infrastructure and reduced pollution and traffic. I am not surprised because all of this holds true for Qingdao and for Yantai as well.
  • But, unless your company has someone fluent in Mandarin with substantial business experience in China, I can see Weifang being very difficult. Weifang just will not have the experienced, bi-lingual China consultants, China accountants, and China lawyers of Beijing, Shenzhen, or Shanghai. Not really a reason to avoid it for OEM, but a very good reason to think long and hard about setting up an office there.
  • Weifang is also not going to have the expat social life of Beijing or Shanghai either. Granted, there are many who do not care about this, but it has to be tougher to find a good American manager for Weifang than for Shanghai.  I also think it would be tougher to find a good Chinese manager or engineer for Weifang than for, let’s say, Suzhou. Weifang also will not have the healthcare or the expat schools of a Beijing or a Shanghai.
  • Kevin did a great job outlining possible business opportunities in Weifang. It sounds like Weifang is doing just fine economically and I wonder about it as a location for foreign retail, like fast food, hotels and clothing. How much foreign retail is already there? Shandong is a big food production region. How connected is Weifang to that? Are foreign companies coming in for food?

As always, the comment lines are open, and I urge anyone with views on other second and third tier Chinese cities to pipe up.

Excellent post on negotiating in China at the new China business Blog, Chinese Negotiation/Negotiating in China [link no longer exists]. The is entitled, “Negotiating in China — Trust is just the beginning [link no longer exists] and it is geared to the foreign company  doing its first deal in China.

The post rightly posits that in any negotiation with a Chinese business, “TRUST is going to come up early and often.” But the “trust” that must be discerned actually involves the following:

  • Can you trust their intentions?
  • Can you trust their ability?
  • Can you trust their judgment?

The post then goes on to explain each of these three questions.

Intentions. Do they plan to fulfill the terms of the contract or not? Are they honest and reliable? This is the most basic type of due diligence in China, and it’s relatively easy to spot those with bad intentions: they are the ones who can’t give you references from past satisfied customers or partners. Make sure you get current referrals, and check them carefully.  Be sure that you are discussing the same individuals, not just companies or associations.  You also have to make a value judgment about the people giving you the reference, so don’t cut any corners here.

Ability. This is equally important. There are plenty of China businesses and China consultants who are completely honest and completely incompetent. Good intentions are great, but don’t mean a thing if the person you are negotiating with doesn’t have the ability to do the job you need done. Chinese counter-parties often underestimate the complexity of the task they are agreeing to or misunderstand your standards. Get very specific very fast about jobs they have done in the past. Make sure you are clear about their experience. Did they actually do the work you are discussing, or were they part of the team that did it? Beware of generalists when you need a specialist. Talk about deadlines and schedules, and be wary of unrealistic estimates. Find out what they WON’T or CAN’T do. A competent supplier or consultant will know their limits, and won’t take an assignment that they can’t handle.

Judgment.  Standards are different in China, and your idea of an adequate solution may be very different than your potential partner. Expats in China often complain about jobs that they consider to be 75% finished. You need to establish a “meeting of the minds” with your counter-party. Don’t be satisfied with vague statements or simple agreement. Drill down to details, and pose scenario-type questions. It is notoriously difficult to draw out the true opinions and feelings of Chinese business people, but that doesn’t mean they are being dishonest or evasive.

The post goes on to discuss how Chinese companies spend way more time than Westerners in getting to know those with whom they are doing business and though you “may walk away from your initial meeting with lots of simple answers and agreements” those “don’t really mean as much as you think they do.”  The post’s wise advice on this is not to be “afraid to ask naive questions or rephrase the same idea several times”:

If anything doesn’t sound 100% right, then take the time to explore it thoroughly. Experienced China negotiators know that what seems simple and clear at the beginning can quickly turn complex and confusing after money changes hands ‘ even if it is only a relatively small deposit or up-front payment.

All good advice, to which we add the following:

  • Go into your negotiations prepared. Far too often our China lawyers have had Western clients who insist on a particular term from their Chinese counterparts that no Chinese company can give or ever gives. If every manufacturer of widgets in China requires at least a 60 days turnaround time, you are wasting your own time and money by insisting on 10 days for you.
  • As a corollary to the above recommendation, we are big fans of using an already tested contract to gauge the bona fides or good faith of a Chinese company. For instance, my law firm has been using the same China NDA (non-disclosure agreement) for so long that we can in large measure assess the legitimacy of Chinese manufacturers just by how they react to it. Legitimate Chinese companies always eventually agree to it (usually rather quickly, but sometimes with reasonable modifications). The illegitimate Chinese company refuses to sign, usually claiming such agreements are “never” signed in China or are “illegal.”

For more on negotiating in China, check out the following:

If you are doing business in or with China, you have to check out ChinaSolved. It is operated by my friend Andrew Hupert, who also operates DiligenceChina, [link no longer exists] which is one of the best China business blogs. ChinaSolved is shaping up as a terrific resource on doing business in China. It is already chock-full of useful business advice.

Its article, “Ten Commandments for Westerners In China,” [link no longer exists] is typical of the site’s excellent and straightforward advice for foreign companies doing business in China. And I found myself agreeing with nine out of ten. Here goes:

  1. “Know what you don’t know” (for many westerners, this is by far the most difficult challenge.). Any similarities between China and “back home” are purely accidental. This is a completely different culture. Do not be fooled by surface similarities or by local people who “seem to get it.” Sources of reliable information are your #1 asset.
  2. China is still a communist country – and there is absolutely zero chance of that changing any time soon.
  3. You have to show up to win. You must be physically present and put in the “face time.” There is no “autopilot” in China business. If you feel that you are too busy to learn about China, then you are certainly too busy to be successful here.
  4. If things worked well here in China, then there would be significantly fewer opportunities for competent westerners. Try not to get too frustrated by the challenges you face.
  5. Time does not mean money here. Chinese business people do not believe in “opportunity cost.” Even simple negotiations can drag on for a long time. Avoid getting sucked into an endless cycle of meetings that don’t accomplish anything.
  6. Truth, honesty, good-will and long-term benefit are all culturally-specific concepts. Don’t expect your western standards to carry over here. Win-Win is not standard operating procedure here. Do not fool yourself that your long-term relationship with a local partner means anything.
  7. Don’t check your brains in at the border. You wouldn’t hand over your company’s money, intellectual property or trademarks to a virtual stranger in Sydney, London or San Francisco and expect to make a windfall. Don’t do it in China. The people that are offering to open doors for you are the same ones that can lock you out. Beware of people who peddle their “powerful friends and great connections.” They can use them to hurt you as well as help you.
  8. Due Diligence becomes more important when the language and systems are unclear, not less important. Don’t settle for the “least worst” deal or partner. Partners don’t get more honest and relationships don’t improve as the amount of money involved increases.
  9. China will still be here next year, and in 5 years. Don’t be pressured into signing a contract or making a deal because you are afraid of “missing the boat.” The boat has been here for 4,000+ years.
  10. Having a sense of humor helps. Having a Plan B helps even more.

I agree with all but number 6.  I understand why ChinaSolved felt it necessary to put it in here, but I think it is wrong.

Truth, honesty, good-will and long term benefit are not culturally specific concepts and long term relationships with local partners mean a lot. I think ChinaSolved felt the need to put this in here to make up for the common mistake of Westerners equating a week of good businesses meetings and friendly dinners in China with being set for life. All of us (China consultants, China accountants, and China lawyers alike) who represent Western companies that are doing business with China could fill a book with stories of China deals gone bad. So let us just take it as a given that Western companies constantly make the mistake of trusting too much, too soon.

But, I personally have also have seen enough to fill a book about excellent, mutually beneficial relationships between Chinese companies and Western companies.  And, at least as far as I know, every one of those successful long term relationships was based on trust and mutual long term benefit.

So I say we downsize to just nine commandments.

A couple days ago, we did a post, entitled, Your Mold Done Gone To China And It Ain’t Never Coming Back, stressing how those doing China OEM Agreements need good contracts to protect their production molds and tooling. Earlier today, we did a post, entitled, China Consultant: Protect Thyself, focusing on how China consultants without good contracts with their clients are setting themselves up for legal problems.

I never expected to be proven so right. So soon. And certainly not in the same lawsuit.

The Bowling Green (Kentucky) Daily News just ran a story, entitled, Holley in Midst of Legal Struggle Over China Deal, that goes a long way in proving the importance of having good contracts when doing business in China, particularly when that business involves molds or consultants.

According to the article, about two years ago, Holley Performance Products began securing materials from China. Holley’s website describes itself as “the undisputed leader in fuel systems for over 100 years. Holley carburetors power every NASCAR team and every NHRA Pro’Stock champion. The Holley line also includes performance fuel pumps, fuel injection, intake manifolds, cylinder heads & engine dress’up products for street performance, race and marine applications.”

Seems that in February of this year, Holley was sued by Doug Smith, “an Ohio-based consultant who helped the company [Holley] secure a supplier in China.” Smith sued Holley for allegedly circumventing Smith by “using his supplier in China without his authorization.” Smith claims to be “on the losing end of the deal after spending more than 185 days in China helping Holley.”

Apparently angered about the alleged circumvention by Holley (see our consultant post to avoid this happening to you), Smith decided to”repossess” Holley’s tooling.  Holley did not take too kindly to Smith’s actions and sued for the return of its tooling:

‘In my last trip to China, I went to all the suppliers and repossessed their tooling,’ Smith said. ‘We had a counterproposal on the table on a Thursday night, but by Friday morning, I had a FedEx package on my front porch with a lawsuit to get their tooling back that they didn’t pay for.’

On November 9, 2006, United States District Court Judge Joseph McKinley issued an injunction ordering Smith return the tooling:

‘The judge gave them a temporary restraining order to give the tools back that Holley hasn’t paid for,’ Smith said. ‘And they’re trying to put me in jail right now. It’s absolutely amazing, they’re trying to put me out of business. It’s like legal stealing.’

Attorney Todd Olhms, who represents Holley, said that Judge McKinley issued a contempt order against Smith for not returning the equipment. The judgment ordered Smith pay Holley $10,000 per day until Smith complies with the court’s order to return the equipment.

Oh, and one more bit of advice for consultants and EVERYONE else: when a Federal Court judge issues an order requiring you to do something, you do it, and you do it even if you do not really want to do it and even if you do not think it is fair. Failing to obey a court order constitutes contempt of court and, as Mr. Smith has learned, the penalties for that can be quite severe.

China’s recently stepped up effort to root out foreign companies doing business in China without being registered to do so has caused a rash of China consultants to retain the China lawyers in my firm.

From our work in forming China WFOEs for these consultants, we have learned that many China consultants are falling dangerously short in various other legal aspects of their business as well. Indeed, if we were to single out the foreign businesses in China most often guilty of underestimating their legal risks, it would be China consultants. China consultants seem to have been in China so long that they have lost sight of the fact that when push comes to shove (or as we lawyers like to say, when a deep and easy pocket needs to be found) they are the American/European/Australian company that is going to need to answer for what happened. These China hands also fail to recognize how much China has changed in the last decade and that doing business in China today is just not the same as it was five years ago. Not even close. If you are a Western consultant hired by a Western company to assist in China, you must realize that if something goes wrong for your client you will be your client’s first choice for legal redress.

What can go wrong? And what can you as a China Consultant do to prevent or ameliorate it? Overall corporate planning to protect your personal assets is an absolutely necessary first step. Beyond that however, and more specifically to China, you can do a lot to protect your client and thereby protect yourself.

We have seen the biggest problems with sourcing consultants that assist in finding Chinese manufacturers. A typical sourcing project, might go like this:

  1. Western company retains a product sourcing consultant to find the best Chinese widget manufacturer in terms of cost/quality/dependability.
  2. Consultant requests and secures sample widget from manufacturer.
  3. Consultant meets with countless Chinese manufacturers in search of the best one.
  4. Consultant recommends company Z in China to manufacture 100 million widgets.
  5. Consultant is to be paid a percentage of the manufacturing costs.
  6. Company Z starts manufacturing the widgets.

By this point, I am guessing the sourcing consultants reading this are saying, “yes,” while the China attorneys out there are already apoplectic. Let’s deconstruct this hypothetical project and note where the consultant has potentially harmed the client and needlessly taken on huge liabilities for itself.

  • The sourcing consultant agreed to find “the best” widget manufacturer. Is that best in China or best in the world? What if the widget manufacturer charges one hundred dollars a widget for the 100 million widgets, but your client’s competitor finds another widget manufacturer who will do it for ninety dollars. Are you liable for the difference? Even worse, what if your client’s competitor gets the same Chinese widget manufacturer to do 100 million widgets for ten dollars less? Do you really think a US jury is going to believe you were doing your best when your fee was a percentage of the final costs? Are you responsible for the Chinese manufacturer’s late deliveries? For the Chinese manufacturer’s bad product?  Is it clear exactly what your percentage is going to be based and have you set things up so that your client cannot just go around you? The Solution: Use a well-crafted written contract to make clear exactly what you will and will not do. Put in a non-circumvention provision to make sure you get paid.
  • If you take a sample to China and start showing it to potential manufacturers without FIRST putting in place various safeguards, you are courting disaster. The sample could be used for counterfeiting. We had a consultant call one of our China lawyers in a panic after returning from China to learn that one of the manufacturers to which he had shown a sample had already started manufacturing the product for someone else using the consultant client’s trademark which it had gleaned from the Internet. The Solution: Never show a sample or product plan or reveal your trade name(s) without first making the Chinese manufacturer sign a China-centric NNN Agreement (essentially a hopped up NDA that protects against competition, circumvention and disclosure). Chinese manufacturers tend to be quite familiar with NNN agreements and if you give them a simple and reasonable one, in Chinese, they will sign it.
  • You the consultant must do more than simply negotiate the price and delivery dates or you should at least make clear in writing that these are your only tasks. Typically, product sourcing consultants oversee the OEM contract with the manufacturer and by doing so, they face major liability issues if that contract is not up to snuff. You are the “China guy” and your client is counting on you to guide it through China’s business minefields. You are the one who is supposed to know anything and everything about what it takes to do business in China. Equally importantly, with the manufacturing of its product, your client is probably turning over to the manufacturer all sorts of critical intellectual property. Your client probably thinks that its existing patents, trademarks and copyrights will protect it in China, but a court will expect you as the China expert to know better. The Solution: Put in writing with your client that you will not be providing it with legal advice and that it will need to retain its own lawyer to draft the OEM agreement with the Chinese manufacturer. Put in writing that it is your client’s responsibility to protect its intellectual property in China and that to do so, it must register its IP in China, either through a lawyer with whom you connect them or independently).

Just remember that your client sees you as the expert at doing business in China and it is looking to you for help in all areas and if you fall short in any way, you are at risk for a lawsuit.

China consultant, protect thyself.

Today at the Doing Business in China seminar that I have been attending in Chicago (The China Forum) Steve Ganster of Technomic Asia spoke on becoming China Ready. Technomic Asia “supports SMBs [small and medium businesses] to accurately and efficiently assess their Asia opportunities and then crafts a strategy to exploit them.”   Mr. Ganster is the author of The China Ready Company, of which I have heard nothing but good things. Mr. Ganster was kind enough to give me a copy of his book, which I will eventually read and describe.

I was hugely impressed with Mr. Ganster, who clearly knows business, clearly knows China, and clearly knows what it takes for foreign companies doing business in China to succeed. Mr. Ganster won me over by beginning his talk with the Yogi Berra quote that “you have to be very careful about where you are going because you might not get there.”

Mr. Ganster discussed how with all the good resources and all the good China consultants, there is no excuse for going into China naively. He talked extensively about how to determine if your company is ready to do business in China. He said American companies commonly overestimate their market in China. He also talked about how one should make sure to retain control over one’s China operations by being sure to retain control over all key management functions.