Went to dinner with a Shanghai friend the other night.  This is someone who has been living in China nearly twenty years and speaks fluent Mandarin and Shanghainese.  This is a “China guy” who really knows China.

A couple of his stories resonated.  One was about how his best client fired him.  Here’s that story.  My friend was tasked with making sure that his client’s product was made right and  delivered on time. To a large extent, this meant that his role was antagonistic to that of the Chinese manufacturer.  My friend constantly had to make sure that the Chinese manufacturer did things a certain way, and especially that no bad product pass through. To put it more bluntly and relevantly, my friend was costing the Chinese manufacturer money.

The Chinese manufacturer didn’t like that and so it mounted a campaign to get him fired.

For months, the Chinese manufacturer would tell my friend’s client of how my friend didn’t know China, didn’t know the product, and wasn’t doing a good job. These comments were the softening blows.

Then one day, the Chinese manufacturer intentionally did whatever it could to anger my friend.  It worked and he got angry.  The Chinese manufacturer secretly taped my friend yelling and swearing at them and they sent that video to my friend’s client, explaining how this was what they constantly were having to face from my friend.  The client fired my friend.

My friend also talked of how when he visits Chinese factories, it is fairly common for someone to run ahead of him, screaming that he speaks Shanghainese so as to be sure that nobody reveals anything to him that he should not know. He talked of how the Chinese manufacturers are always trying to undercut him because he knows what he is doing and knows how to keep them on the strait and narrow.

Before Shanghai, I had breakfast in Beijing with another very experienced China guy — a European who has spent the last 13 years in Beijing assisting European companies who also.  This person also speaks fluent Mandarin. He had two great “China stories” for me, both very similar. In both, he had, simply by being “a white guy who speaks Mandarin” been able to hear about large scale bribery taking place.  And in both cases, when he reported what he had heard to the European companies, they both got angry at him and ceased to have anything more to do with him.

I know it may be stretching things a bit, but I see a commonality running through all three incidents, and I also see something with which we as China lawyers often must deal. Oftentimes, when we are trying to help our clients better their negotiating position vis a vis their Chinese counter-party, the Chinese company tells our client that we are not licensed Chinese lawyers and therefore we don’t know Chinese law.  We typically deal with this by pre-empting it; we tell our clients early in the process to expect the Chinese counter-party to say things like this and we describe how dividing and conquering is one of the oldest and most used tricks in the book.  Then when it happens, our clients usually just take it in stride.

I don’t want to get all nationalistic here, but the reality is that the person you hire to assist you in China is a lot more likely to be looking out for your interests than the Chinese company with whom you are doing business or seeking to do business.

That just makes sense, doesn’t it?

What do you think?

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.