Got an email today from a reader who wanted to let us know how much a particular blog post that we did way back in 2006 had helped his company. The post this emailer was extolling was James McGregor’s China Tips and he wanted to know whether I thought all of McGregor’s advice was still relevant.
Boy do I.
The post listed out the following six tips for doing business in China:
  • The Chinese will ask you for anything because you just may be stupid enough to agree to it.  Many are.
  • Avoid joint ventures with government entities unless you have no choice. Then understand that the partnership is about the Chinese obtaining your technology, know-how and capital, while maintaining Chinese control.
  • If you decide to sell your soul and succumb to Chinese corruption, get a good price and focus on charity work in your old age.
  • Government officials can lie to you, but you must never lie to them. Exclude information, but never provide false information.
  • Any tech company doing business in China should assume that its designs and products are being copied.  When forced to share your technology in China, isolate the pieces from each other so that your partner doesn’t have the whole picture.
  • If your boss wants to come to China to do a quick deal, lose his or her passport.

Let’s go through these tips for doing business in China one by one.

  • The Chinese will ask you for anything because you just may be stupid enough to agree to it. This is completely true. I remember a few years ago when one of our clients was seeking to buy its product supplier. The product supplier started out asking for some absolutely absurd amount and when pressed, admitted to one of our China lawyers that the only basis he had for that amount was that he had heard that American companies “get so excited about doing business in China they will agree to anything.”
  • Avoid joint ventures with government entities unless you have no choice. Absolutely true, but it generally makes sense to avoid all joint ventures with anyone. For more on the problems inherent in China joint ventures, check out the following:
  • If you decide to sell your soul and succumb to Chinese corruption, get a good price and focus on charity work in your old age. Completely agree, and you need to know only two things on this. First, GSK. Second, it is no accident that my firm’s China attorneys are seeing more growth in anti-corruption compliance requests than in any other practice area.
  • Any tech company doing business in China should assume that its designs and products are being copied.  When forced to share your technology in China, isolate the pieces from each other so that your partner doesn’t have the whole picture. Absolutely the case, but this holds true for just about all foreign companies doing business in China, not just tech companies. For more on the dangers of IP theft in China and on how to protect your IP from China, check out How To Protect Your IP From China. Part 1.
  • If your boss wants to come to China, hide his passport. There are actually two schools of thought on this. One school says you do not want your boss to come to China because he will make big mistakes, but the other school says that you do want your boss to come to China because he will make big mistakes and then realize that he’s better off leaving China to his company’s China experts.

What do you think?

I am going to be speaking at USC this weekend and in poring over old PowerPoints (to create a new PowerPoint for my talk), I came across one with a fairly extensive China law bibliography of some of our most helpful posts.  This bibliography is definitely slanted towards the legal issues that confront foreign companies doing business in China.

Here it is:






During the first 25 years of China’s opening up process, joint ventures were the favored vehicle for FDI in China. In 2005, the favored form of investment shifted away from JVs to direct investment through WOFEs (Wholly Foreign Owned Entities). During the last year, however, foreign SMEs have been shifting away from WFOEs and back to joint ventures. An even more dramatic shift has seen SMEs decide not to have any direct involvement in China at all. For these companies, licensed manufacturing and sales has become an attractive alternative.

The shift away from WFOEs has occurred because of the worsening environment for small private businesses in China.  Consider just the following in terms of the shift that has occurred in the last ten years:

  • Taxes: In 2003, WFOEs operated in China tax-free. WFOEs are now subject to basic income tax, VAT taxes and a host of local taxes and fees.
  • Wages: In 2003, Chinese wages were some of the lowest in the world. Now, the wage for the average worker on the coast is higher than in Mexico. In 2004, a WFOE could hire and fire workers at will and employ them for as many hours a week as the workers would tolerate. Now, employment is subject to a strict employment contract law system that makes firing workers difficult or impossible and that requires overtime for work in excess of 40 hours per week.
  • Benefits: In 2003, foreign employers could safely ignore paying benefits to their workers. Now, foreign employers are required to pay benefits to both foreign and Chinese employees that amount to almost 40% of the employee wage.
  • Rent: In 2003, rent in Chinese cities was low by world standards. Employers who located outside the major cities often negotiated free rent merely by agreeing to locate in a rural or relatively undeveloped area. Now, free rent is unheard of and rents in general are some of the highest in the world.
  • Environmental and safety regulations: In 2003, a foreign manufacturer could operate in China with minimal concern about environmental and safety regulations. Now, in virtually all jurisdictions, the Chinese authorities require compliance with relatively strict standards.

As this list of major changes shows, the business environment for foreign investors in China has changed dramatically in just one decade. However, many foreign companies that are planning operations in China assume the situation is the same as it was in 2003. It is a nasty shock to most when they evaluate their potential China operation under the current conditions.

Stated simply, many small WFOEs simply do not “pencil out.” However, because China remains an absolutely critical market for countless foreign companies, simply abandoning the China market is not feasible for many. Companies that must operate in China are starting to shift their Chinese investment plans. We are seeing two trends along these lines:

First, joint ventures are experiencing a revival. In the most basic situations, what the joint venture means is that the foreign investor is saying to its Chinese partner: we cannot make this project work by ourselves in China. We need your help. We will provide you with funding and expertise. What we want from you is management and guidance to allow the venture to earn a profit in this difficult environment.

In addition, more complex forms of joint venture are being considered. Two variations we have seen lately are:

  • The foreign company has technology but no money and no ability to manufacture or market anywhere in the world. The foreign company seeks to do a Joint Venture with a  Chinese company that will provide both necessary funding and the support needed to commercialize the product based on the technology. The structures for these China Joint Ventures are complex and are made more difficult by the antiquated and inflexible Chinese laws on joint ventures, financing and IP protection.
  • The foreign company has an existing successful product that it wants to manufacture and then market in China. Licensing is one option. The other is a complex joint venture. As above, the Chinese side of the proposed joint venture is seen not just as a source of manufacturing expertise, but also as a source of funding.
Years ago, my law firm developed a reputation for not liking joint ventures and there was some truth to that.  We did not like joint ventures that were mainly based on the Chinese side claiming that was our client’s only option.  We did not like joint ventures for joint ventures’ sake when there were other, better options for our clients.  We fully recognize that Chinese landscape has changed and whereas six or seven years ago eight out of ten joint venture proposals that crossed our desk did not make good sense, that ratio has probably completely flipped today, to the point that in the overwhelming number of instances, we make no effort to talk our clients out of their proposed joint venture.
The second trend we are seeing is companies abandoning the concept of directly investing in China and instead moving to a contractual approach. We are seeing this especially with foreign SMEs that are determining they do not have the resources to do manufacturing WFOEs in China. Basically, they are determining that Chinese owned factories are better/cheaper at manufacturing in China than foreigners. This includes multi-nationals such as Apple and HP.

In response, the current trend is to work towards purely contract manufacturing (product outsourcing), with no JV and no WFOE involved. This often involves complex IP issues and can also involve complex issues of start-up funding for the Chinese manufacturer. In connection with this trend, the foreign parties are finding that they need to work with their manufacturers to bring up their level of product quality to obtain required certifications such as HACCP and GMP.

Non-manufacturing businesses are also following this trend. In the creative industries, foreign companies are licensing their expertise to Chinese companies who then do the work on the ground. The same approach is taken even where a final product will be produced, such as a magazine or website.  I estimate that my law firm is doing at least five times this sort of work as opposed to just a few years ago and I am seeing the same sort of numbers with China joint venture deals.

This approach also requires complex contracting. In 2004, few foreign businesses had any faith in the enforceability of contracts within the Chinese legal system. This (justified) lack of faith meant that these contract-based approaches to doing business in China were not considered feasible. China’s dramatically improving legal system (at least with respect to contract enforcement where it is now ranked 19th in the world) has made it possible to shift to contract-based approaches to doing business in China. As with WFOEs, many foreign SMEs and their lawyers are not aware of this improvement in the legal system and continue to make their decisions about their China investments based on outdated, 2003 conditions.

Not sure why (the still bad economy?) but my law firm has been getting a rash of China joint venture deals and possible deals over the last six months or so.  Many of these have involved a United States company that wants to enter into a Joint Venture with its China manufacturer so as to work jointly on manufacturing and marketing and selling some combined product or products around the world.

An email from one of our lawyers to a client doing such a China joint venture recently crossed my desk and I am setting it out below because it provides a good introduction to what is involved in “doing” a China joint venture.

There are two steps in forming an equity joint venture in China. The first is to enter into a written joint venture agreement between the Chinese and foreign participants in the joint venture. The second is to formally register the joint venture as a corporation under Chinese law.

With respect to these two steps, please note the following:

a. Since the JV agreement is required, we will move forward with drafting that document first. Issues related to the JV and its structure can be worked out in the process of drafting this document.

b. Please indicate at this time who you will want to use to actually register the joint venture company. There are several options:

  • The Chinese JV partner can be responsible for the registration process.
  • You can engage the services of the local investment development bureau to handle the registration.
  • You can engage our law firm to manage the registration process. If you want to use this option, I can begin working with you to obtain the required    documents and information required for JV company registration.

For the JV Agreement, I have the following questions:

  1. You have provided your desired company name. Please provide that name in Chinese. English versions of company names have no legal effect in China.
  2. Please provide a one or two paragraph statement of exactly what the joint venture company will do in China. In particular, please describe:
  • The proposed facility.
  • If you will manufacture, what will be manufactured and what will be the source of the materials.
  • If you will import, what exactly will be imported.
  • Where will product be sold? In China, for export or both? What entity will handle sales of product.
  • Will any foreign intellectual property be transferred to the JV?

Please note that, in general, Chinese JV companies are free to sell their own manufactured product. A JV company is also permitted to import product manufactured by its shareholder parent. However, in general, it is not possible for a JV company to operate both as a manufacturer and as an importer of product manufactured by companies other than the shareholder. In your emails, you indicate that you desire to obtain approval for what is normally prohibited. If this is the case, we will need to review this issue with the local governmental authorities. If they will provide you with a special approval, you should understand what that is and then make sure that you hold them to their agreement.

Please also note that a primary requirement for company formation in China is that you have a lease on a premises that is approved for the business approved for the company. For a manufacturer, this means a factory, for a trader, this means a warehouse. However, it is also possible to have an initial address that is simply an office in a case where the business plan contemplates later selection of an appropriate factory/warehouse site. Some jurisdictions will permit this, some will not.

Your proposed registered capital is $2,000,000. This means that the Chinese company will need to contribute the RMB equivalent of $400,000 in cash. Are they  aware of this requirement? Do they have the cash? I assume that your group is also planning to contribute cash. As you mention in a related email, it is best from the start to develop a basic plan for contribution of the capital. There should be a basic business plan that provides how much will be contributed, when it will be contributed and for what it will be used.

China’s legal rules for contribution of capital are as follows:

  • 15% of the total amount of the registered capital must be contributed within 90 days after registration approval.
  • The remaining amount must be contributed within two years.

It is common for local governments to impose even stricter requirements and we will need to check with the local government officials on this point. Note that they do not have the power to make the requirement LESS restrictive; they only have the power to make the requirement MORE restrictive.

You asked us how we plan to draft documents that provide for the contingency of your key Chinese counterpart dying.  Since the shareholders in the JV are corporations, the death of any one person is irrelevant to the future life of the joint venture. We will write the JV Agreement to say that your Chinese joint venture partner company has the right to select a single director for the joint venture and that the director will be Mr. ______ at the outset.  However if you believe that the participation of Mr. ______ in management of the JV is critical, you can provide the following:

  1. Mr. _______ agrees to act as a director.
  2. If Mr. ______ is not able to be a director for any reason (refuses to serve, disability, death, etc.), then the foreign shareholder [you] has the right but not the obligation to purchase the stock of the Chinese shareholder. The purchase price will be $400,000, which is the initial amount paid by the Chinese shareholder. It is your choice whether or not you want to add this provision to the agreement. You could also provide the following: in the event that Mr. _______ is not able to be a director for any reason, then 1) all three directors will be chosen by the foreign shareholder but 2) the Chinese shareholder will have a continuing right to 20% of the profits of the joint venture company. I personally prefer the second alternative since it does not require restructuring the stock ownership.

There are a number of alternative ways to deal with this issue. Please consider the options that I have proposed and let me know whether you need additional information in to make your decision on how to proceed.

You are right to ask about dispute resolution.  Dispute resolution should be in China. You can use the Zhanjiang Courts or arbitration at CIETAC in Shenzhen. Arbitration in Hong Kong will be of little to no benefit to you in resolving any disputes because Chinese courts do not recognize their decisions regarding the corporate governance of Chinese companies.  We will need to discuss the pros and cons of Chinese courts and Chinese arbitral bodies.

We also will need to discuss who you will want to be the Representative Director. The day to day business of a Chinese companies is conducted by the general manager, not the representative director. The representative director role is limited to executing important contracts. This can be done by that person without any need to be physically located in China. In any Chinese company with a foreign representative director, there is always a challenge in allocating responsibility between the two individuals. The key issue is usually control of the company seal (“chop”). However, it is always best to appoint officers who are willing and able to travel to China freely. This is not a requirement, but it does make it easier to operate the company.

In answer to your question about scheduling contribution of capital, yes you are correct that it is an important issue for China joint ventures and one that should be resolved before executing the joint venture agreement.

I trust that the above answers your initial questions and lays out a bit of what we will need to be working on over the next few weeks.  If you have any additional questions based on the above, please don’t hesitate.

This is the final of our three part series on how to handle Chinese negotiating tactics.  Part One can be found here.  Part Two can be found here.

Following on my previous two posts on Chinese negotiating techniques, in this post I will discuss two additional and common techniques used by Chinese companies to drive foreigners mad during the contract negotiation process.

4. Never never land.

The Chinese often will justify its outrageous demands with the vacuous statement that “China is different.” It is shocking how many foreign negotiators fall for this statement and accept such terms. The problem, of course, is that China IS different from many countries. This is a trivial statement, since every country is different from every other country.

The fact is, however, that in terms of laws and regulations, China is not all that different from other countries. Chinese laws are not original. They are based for the most part on foreign models. In addition, as far as foreign investors are concerned, the content of Chinese laws is further constrained by China’s participation in the World Trade Organization (WTO), the World Intellectual Property Organization (WIPO), the Convention on the International Sale of Goods (CISG) and other international standards setting bodies and conventions.

China has worked very hard and successfully over the past decade to bring its foreign investment and business laws in line with international standards. In most cases, China’s laws hew closer to international standards than the often eccentric laws of the United States and England. Chinese laws are based on the civil law standard. What often seems to a U.S. investor as an unusual legal provision is often nothing more than the difference between the common law approach and the civil law approach to certain issues.

Whenever the Chinese side of a negotiation argues that “China is different,” I request that it provide me with a copy of the Chinese statute or regulation that imposes this difference. In over 25 years of negotiation in China, I have never once received a substantive response to this request. On occasion the Chinese side will send over a host of Chinese language documents. To date, it has always turned out that these rules and regulations have nothing to do with the issue at hand and do not impose the rule that the Chinese claim requires that their unreasonable request be accepted. We just wrapped up a negotiation where when the Chinese side did provide us with the law, it said exactly what we had been saying it said all along, just as we knew that it would.

What is “different” about China is that Chinese negotiators do not feel constrained by the rules of good faith negotiation. Thus, when a Chinese company argues that “China is different,” what they really mean is that the fair and impartial laws of China do not reflect the reality of China. The reality is that the Chinese side must take advantage of the foreign side. This means that the foreign side must accede to the unreasonable request of the Chinese side. If the foreign side does not concede to patently unreasonable terms, then no deal can be made.

It is very true in this sense that China is different. However, this is a difference that should not be tolerated by the foreign party to any contract. The response from the foreign side should be first to demand to see the law that requires the unreasonable condition. After the Chinese side fails to provide that law it will usually say something like: “well, the law does not provide for this but our government will not approve the deal unless we include this provision. The response to that statement should be that “if your government will not approve the deal, then we will not do the deal.” This should be made very clear. If the Chinese side does not back down, you should terminate the negotiation.

Let me give an example. It is common in negotiating China Joint Ventures for the Chinese side to insist that the intellectual property contributed to the JV by the foreign partner must ultimately be transferred to the Chinese JV partner. The same is true in many technology license agreements where the Chinese side will say: “sorry, but you cannot protect your IP. You must transfer everything to us at the end of the license.” This situation is obviously the opposite of what the foreign side wants from the transaction. When the foreign side resists, the Chinese side will then play the “never never land” card and state that Chinese law requires such a transfer. In fact, however, Chinese law does not make any such requirement. This is simply what the Chinese side wants out of the deal. Of course, the Chinese government supports the Chinese side, since the free transfer of technology arguably benefits China, so everyone in China is on the same side. Thus government authorities involved will usually do nothing to clarify the situation.

The foreign side will all too often accept the “China is different” justification and go forward with the deal. Later, the Chinese side will drive out the foreign JV partner or terminate the license and appropriate the technology. When that happens, the foreign side will complain about the Chinese law that mandates such a result. However, there was never such a law. It is virtually always a case where the foreign side agreed to a contractual provision that guaranteed its own eventual doom. Chinese law is not at fault. Gullibility in falling for the China is different argument is where the fault lies.

5. Revenge is a dish best served cold.

In the discussion above, I advise that the foreign side strongly resist agreeing to unreasonable Chinese demands and negotiation techniques. I advise that if the Chinese will not back down, then the foreign side should terminate the transaction and return home. My point is the obvious one that the foreign side should not enter into a bad deal or a deal that it does not understand simply because it has been manipulated by standard Chinese bad faith negotiation techniques.

In these tough negotiations, it is usually required that the foreign side just has to say “take it or leave it.” In a surprisingly large number of cases, the Chinese side will “leave it,” even in cases where this decision seems to make little economic sense. Thus, when the foreign side gives the final ultimatum, the foreign side has to be prepared for the Chinese side simply walking away from the deal.

In some cases, however, the Chinese side will back down and will accept restrictive provisions against which it has been vehemently fighting during negotiations. It will accept the challenge and it will “take it,” rather than walk away from the deal. In that case, the foreign side will congratulate itself on their negotiation skills and the fact that it “won” the negotiation.

The problem with this though is that the Chinese side oftentimes does not fully accept its concession and it will treat it as a personal challenge. It will then work to unwind the concession in some way during the life of the transaction. It will focus on taking revenge for its defeat on the contract issue. It will focus on this revenge with little regard for whether it obtains economic benefit from its actions. Even when it will actually suffer economic damage from its conduct, it may still focus on obtaining revenge for its defeat. The passage of time makes little difference. Their only concern is on obtaining revenge.

Why is this? Social researcher Ian McKay has this to say in general about people who seek revenge:

People who are more vengeful tend to be those who are motivated by power, by authority and by the desire for status. They don’t want to lose face.

This description nicely describes the average Chinese business negotiator. They treat contract concessions as a loss of face, and they will focus on getting back their “face” to the exclusion of everything else. The economics of the deal does not matter. What really matters is the balance of power and their face. This attitude is quite foreign to most foreign business people who treat contract negotiations as a purely economic issue and not as a personal matter. It is therefore very hard for foreign business negotiators to understand how this issue can impact their future business relations with a Chinese party.

The issue goes beyond face. If you discuss these matters with Chinese business people you will learn that the Chinese side views the Western approach to contract negotiation as fundamentally unfair. They see the Western insistence on certainty and clarity as fundamentally a bad faith phenomenon. For the Chinese, certainty in contract terms is justified only for a one off, single transaction, “horse trade” style sales contract. The sale of an office building or a single shipment of a commodity is an example of this type of contract.

For any contract that requires a continuing performance over time, the Chinese believe that any attempt to pin them down and impose certainty on their behavior is fundamentally unfair and contrary to reality. For the Chinese, the future is essentially uncertain and the attempt to impose certainty on this uncertain future makes no sense. Any party who insists on this must have a bad intent. Where the Chinese side agrees to such certainty, they do it under protest and they strongly feel that unequal bargaining power on the side of the foreign party has forced them into an inherently unfair transaction. Thus, they do not have moral qualms in taking their revenge by undoing the terms of this inherently unfair agreement at a later date. Their belief that they have the moral high ground fuels their need for revenge and explains why they will seek revenge even in cases where there is no economic benefit.

This feeling runs very deep in China and is difficult to deal with rationally pursuant to the typical Western company business calculation. For foreign parties, it leads to very complex assessments of negotiation strategy. Total victory is seldom useful in China. This then leaves open the question of what sort of compromise short of total victory will result in a contract that is still acceptable to the foreign party.

In my own experience, there are two viable options in dealing with the final battle over key terms. The first is to walk away from the deal. No deal is better than a bad deal, and what looks like bad deal in China will certainly turn out to be just that. Where abandoning the deal is not acceptable, then the foreign side should plan to concede on some issues that are important to the Chinese side so as to provide the Chinese side with some feeling of victory in the conclusion of the negotiation. This concession should always be balanced against an overall assessment of the benefits of the deal to the foreign side. No deal should be concluded in China that does not provide for substantial benefit to the foreign side. Close deals never work out in China. The foreign side needs a lot of room on the benefit side to overcome the constant Chinese pressure to chip away at the foreign benefits at every stage in the process of performance.

What do you think?



When it comes to forming China joint ventures, the biggest issue is obviously whether or not it makes sense to form one. The most important question relating to whether it makes sense to form a China joint venture is usually whether you will be able to work well with your putative Chinese joint venture partner.  And the most important question relating to whether you will be able to work well with your Chinese joint venture partner is whether you and that partner share the same goals and have the same operational plans for the joint venture.

Thus, the quickest way to determine whether it makes sense for you and your potential joint venture partner to delve deeper into negotiating the terms of a joint venture is to determine whether you two are on the same page in terms of goals and operational plans.  A few years ago, a client that was about to meet for a second time with its potential joint venture partner to move further in determining whether to enter into the joint venture and, if so, on what terms, asked me to list out the important issues it should discuss at that meeting.  Earlier this week, I was asked that same thing by another client about to fly off to China for a joint venture meeting.  I was able to find my previous list and I set that out below.

Here are my thoughts on the big picture issues you will want to raise at your meeting:

(1) The business objectives.  Why are you forming the joint venture and what will its goals be?

(2) What will each of you do for/with the joint venture?  Who will be doing what?

(3) Who will be making decisions for the joint venture and what will be the mechanism for those decisions to be determined?

(4) What will each of you be contributing to the joint venture?  Property, technology, intellectual property, money, know-how, employees? What if the joint venture loses money, who will be responsible for putting more money in?

(5) How will disputes be resolved?  It’s relatively easy to write a provision saying that the parties will seek to work out any issues among themselves and if they cannot do so, they will arbitrate in Switzerland.  That’s lawyer language. The tougher question is how will the two of you deal with day to day disputes in a way that the joint venture does not fall apart over litigation?

(6) Confidentiality. Can both parties use JV information for their own businesses? Or can neither do that? Can your own businesses compete with the JV?  Can your own businesses do business with the JV?

(7) How will the joint venture end?  What if one side wants to buy the other out?

This list is obviously meant to be more a list of talking points than a comprehensive negotiation tool, but I would nonetheless love to get your feedback on it. The old saying about joint ventures is “same bed, different dreams.” My thinking on the above was that posing these questions at least tests out the dreams.  Am I missing anything?  Did I include anything that does not really belong?

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.


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.

This is part III of our relatively new series setting forth how we “really feel” about the issues that have generated controversy on our blog over the years.” Part I dealt with guanxi and the comments to that post alone have made it a great read. In Part II we talked of how we love joint ventures because they are typically our law firm’s biggest money maker, but we hate them because they so seldom work out for our clients.

We started this “How We Really Feel” series because we have taken many strong positions over the years, but in some cases those positions have been at least somewhat misunderstood and this new (and irregular) series is intended to clean up misconceptions.

This post is a bit different than the first two in the series because it is a mostly a link-over to an interview co-blogger Steve Dickinson recently did with the Chengdu Living (a must-read regional China blog) right after his talk at the Chengdu AmCham on China’s 12th Five Year Plan.

The Chengdu Living Post is entitled, “Expert Analysis: Interview with Steve Dickinson Of China Law Blog” and it is well worth a read, and not just because it is so complimentary of Steve and our blog. It is worth the read for its discussion on Chinese law and on how that law is so often perceived and mis-perceived by Westerners and on how we (speaking through Steve) really feel about China and about blogging:

Chengdu Living: We know you as one of the authors of China Law Blog, tell us a little about that. When did that get started

Steve: Well, it was an interesting start. Dan Harris (the other author of China Law Blog) and I have have known each other since 1986, we both practiced law together in a big Seattle law firm. He went one way [formed my own law firm] and I went another [taught Chinese and international law at the University of Washington Law School] and in the early 2000’s we decided to get back together to do a program in China. It was Dan’s idea, not mine, to use a blog as our primary vehicle for creating our identity in China.

My idea was, I’ve been working in Asia since 1984, and consistently the law is misunderstood and misreported…. and so I agreed that I would do that [the blog] with Dan under the agreement that I would be able to write about what’s really going on in Chinese law….that’s been our focus with the blog.

*   *   *   *

Chengdu Living: Was the blog created with a business motivation or was that an ancillary effect?

Steven: There was a business motivation, but in 2006 [our first year] blogs were pretty new. We had no notion of what blogs would become or how blogging would become integrated into the business world, so we’ve kind of developed with the blogosphere together.

*   *   *   *

Chengdu Living: It’s interesting that China Law Blog is a category and yet it has such a broad appeal in the China blogosphere. Was it intended to be for a wide audience or were you thinking it would be for people in the [legal] industry and legal trade?

Steven: In terms of what we were thinking and what happened, that’s interesting. In the United States, China Law Blog has been voted several times as the best blog in the legal area, period. Nothing to do with China. And the reason is that most legal blogs are frankly, without personality and quite boring. Where our blog has our two personalities and we let the personalities show through. Most lawyers don’t allow that and so most law blogs have never succeeded for that reason. And it’s still that way. There has not been any improvement in the law world on the blog side. But we’ve enjoyed it. It’s been fun for us.

Chengdu Living: Among readers and clients, what are some of the greatest misconceptions that people have about China or China Law?

Steve: There’s a couple. The first is that, we’re Americans and much of our readership is from the US, Canada, and England. And much of what’s strange about Chinese law is because it’s civil law, not common law. So a lot of what we have to explain is that Chinese law is based on a completely different legal tradition. And that’s the area I enjoy working with, because it’s been my area of research and interest for a long time.

The other, of course, is that most foreigners believe that China doesn’t have any law, period. And so a lot of what we’re doing is just making clear to people where the law is in China and how it affects their daily life and the fact that there really is a law here [in China] and it needs to be used effectively and creatively.

*   *   *   *

The other group we have are people who think we’re full of nonsense and are critical of what we say. And they’re fun to deal with, too. Because there are two groups like that:

  • There’s the Chinese people who think that what we say about China is based on the fact that we don’t understand China. Everything I write is based on Chinese sources, so that’s a funny comment, I believe.
  • There there’s the other group, where we’re not China cheerleaders or detractors, we’re kind of in the middle. And the China cheerleaders don’t like what we write.

Chengdu Living: You do a great job of staying neutral.

Steven: Yeah, that’s our goal. To be as neutral as we can while still being true to our real beliefs.

Dan and I are politically very far apart but we both like and are willing to accept foreign countries and foreign cultures. And we don’t expect them to be clones of our own culture and that’s what gets us through a lot of these things. To have a genuine, not just a respect for, but a genuine affection for foreign cultures, and we both have that feeling about China.

What do you think?

Fascinating article by Matthew Robertson, entitled, “Fellowes, American Stationary Giant, Brought to Its Knees in China.” A couple of readers sent me the article and both of them commented on how it further proves what “you are always saying about Chinese joint ventures.” I am not so sure it does.

The article is about Fellowes, one of the leading manufacturers/sellers of paper shredding products, and of its joint venture problems in China:

There are few paper shredders in the world that can rip an A4 piece of paper into 2,000 pieces, and come with functions like SilentShred, SafeSense, and “100% Jam Proof”—and most that do have the name “Fellowes” printed on top. But consumers may soon be able to buy, say, the deluxe Powershred C-480Cx, without the Fellowes brand, because the company’s entire business in China has been stolen by its joint venture partner.

To make a long story short, Fellowes is accusing its joint venture partner, Jiangsu Shinri Machinery Co., Ltd., of having taken over the joint venture facility in China and of continuing to churn out Fellowes product, but without the Fellowes brand name on it.

According to the article, the joint venture “would continue churning out shredders with the Fellowes’ name, using Fellowes’ proprietary machinery, while Fellowes controlled both those [joint venture] companies because it appointed the management, according to the terms of the joint venture agreements.

Wait a minute. Wait just a minute. As we are always saying, simply because a joint venture agreement gives the foreign company the right to appoint management does NOT mean the foreign company controls the joint venture. For more on ngs, check out co-blogger Steve Dickinson’s article for AmCham’s China Briefing Magazine, entitled, Avoiding Mistakes in China Joint Ventures. You might also want to check out my Wall Street Journal article, entitled, Joint Venture Jeopardy.

According to the article, for years, everything was going very well for Fellowes, but then in 2009, a power struggle ensued at Jiangsu Shinri and one brother took over from another and the “new” brother” “attempted to force through a series of radical changes to the contract, which would have shifted power, control, and profits to the Chinese side.” Jiangsu Shinri also illegally seized the joint ventures’ “company seal and business license in an effort to force Fellowes to hand over its 100 percent-owned assets to the joint venture, including its production tools, which are the intellectual property of Fellowes.”

Jiangsu Shinru is also said to have engaged in the following:

Zhou [the new brother] also insisted that Fellowes assign to the joint venture other business interests it had in China; he tried to raise the prices on the products by 40 percent; demanded that Fellowes invest an additional $10 million into the business; and he cut a $3 million payment dividend. When Fellowes demurred from carrying out those demands, he escalated the pressure.

The dramatic moment was in early August 2010, when Zhou, under the aegis of Shinri, blocked the gates of the joint venture facility with security guards and trucks, preventing people from going in and goods going out, effectively shutting down production. Shinri expelled and confined the managers, moved funds from the joint venture to a Shinri-controlled bank account, sent packing the 1,600 joint venture employees, and at night, drove a truck into the facility and stole Fellowes-owned injection molding tools, some of them weighing several tons.

The worth of the products already manufactured and blocked—what Fellowes in his testimony said are “feature-rich, IP-protected”—is $100 million. This includes 70,000 completed paper shredders, going to rust in the factory.

Shinri also won’t let Fellowes recover the over 1,000 custom molding tools, the fruit of decades of refinements of engineering designs, worth $10 million. And it is most probable, according to people familiar with the matter, that Zhou intends to obtain these high-value items in a fire sale enforced by the local court that he has influence over.

As one would expect, all of this has been disastorous for the business:

Because the shipments were blocked, the joint venture was unable to pay its suppliers—the 120 odd Chinese businesses that deliver all manner of metals and plastics that are the makings of the shredders. So 80 of these suppliers sued, and the joint venture became insolvent.

The Changzhou Intermediate Court has started proceedings to liquidate the joint venture, auction off all its assets, including the equipment, land, molding tools, and those unshipped shredders, to satisfy the debts of the joint venture accrued as a result of Shinri’s activities.

To counter this, Fellowes has mounted a Congressional letter writing campaign, but this has borne no fruit.

I hate analyzing situations like this based on newspaper articles because in almost all instances, the article fails to answer key questions. For instance, has Fellowes brought suit in China? If not, why not? Is it because what Jiangsu Shinru is doing is legal in China because the agreement(s) between Fellowes and Jiangsu Shinru were not drafted so as to prevent this sort of thing? Why are you painting the Chinese court as being so terrible for seeking to sell the assets of the joint venture at auction? It sounds as though the joint venture is at a stalemate and selling the assets may be the only legal solution at this point. Is that not the case? Why did Fellowes think bringing in some Congressmen would help them in this situation? And again, why is Fellowes seeking to politicize this rather than handling it in the courts? The article talks of how Jiangsu Shinru is strong locally and implies that the local court does its bidding. Even assuming this is true, is this also going to be true of the appellate courts? If it is so clear that particular equipment belongs to Fellowes, why does Fellowes not at least sue for the return of that? Does Fellowes’ contract(s) with Jiangsu Shinru clearly set out the fact that specific equipment belongs to Fellowes? The article implies Jiangsu Shinru is using Fellowes IP. Is that really the case? Is Jiangsu Shinru using IP in a way that violates the joint venture contract(s)?  Is Jiangsu Shinru violating Fellowes IP that is registered in China?

As regular readers of this blog know, we are not generally fans of China joint ventures. Our view is that if you as a foreign company are not required Chinese law to form a joint venture with a Chinese company in order to accomplish your China plans, you would in most cases (but not all) be better off going it alone. We made our views on Joint Ventures pretty clear in a previous post, entitled, “How We Really Feel About China, Part II: Joint Ventures. We Love Them AND We Hate Them,” in which we stated the following:

We have developed quite a reputation for not liking joint ventures and that is not really true. Wary would be a better word for how we feel about them. I am always bothered when a client or potential client calls about their proposed joint venture and starts out by saying “I know you don’t like joint ventures.” Are we losing business because of this reputation, or maybe we are getting more because people believe that if we give the go-ahead on theirs, it really is as good as they think it is. Of course, we will never know, but we can at least try to clear the air. We like the appropriate and necessary joint ventures; we just think it is a big mistake to consider a joint venture as the default method for entering China.

Of all the China legal work done by my law firm, our work setting up and dismantling joint ventures is probably my favorite and certainly one of the most lucrative. We charge a flat fee for probably 90% of our China work, but for forming joint ventures, we always charge hourly. We charge hourly because setting up a China joint venture can range from fast and easy to difficult and contentious. It is the rare one that is fast and easy.

* * * *

Just to be clear, we love forming joint ventures, but only when they truly do make sense.

We also love taking apart China joint ventures that have gone wrong. And again, we love doing this not for because it is in any way a good thing for our clients, who usually are in dire straits when they come to us with their joint venture problems, but because resolving joint venture disputes is like a chess game, but at our hourly rate.

I am just not sure where exactly to put the Fellowes joint venture in all of this. I need more information. Nonetheless, the article is certainly worth a read as a cautionary tale.

I spoke last week (for ten minutes) in Atlanta at NACA’s First Annual US-China Business Conference. I posted that speech (the written version of it, anyway) in a post entitled China Legal Issues For Business. The Ten Minute Version. In going through and deleting old emails today, I came across my first, very different version of the speech. Initially, rather than deal with an overall general approach to dealing with Chinese legal issues, my plan was to speak really fast and highlight specific legal issues relating to foreign business in China. Here is the outline I was going to use for that sort of speech, before I concluded it would be too legalistic, boring and scatter-shot:

1. Company Formation

  • Is it legal?
  • Spend AFTER Chinese government knows you are forming.

2. Contracts

  • Who’s your counterparty?
  • Spend a little, save a lot. Be diligent with your Due Diligence.
  • Arbitration is the only solution, except when it’s not.
  • How to get your Christmas lights before Christmas.
  • Contract language/Arbitration language

3. Intellectual Property

  • Register early and often, except patents
  • NDAs are not DOA
  • It’s more than just legal.

4. Joint Ventures

  • Why, why, why? The Peoria test.
  • Control is always critical, yet nearly always illusory.

5. Labor Law

  • How does lifetime tenure for everyone sound?
  • How does overtime for nearly everyone sound?
  • Written contracts for everyone.
  • Employer manual for everyone, to include FCPA and trade secret language

6. Choosing Your China Lawyer

  • English and Guanxi are overrated.
  • Lawyer ethics and confidentiality. Be careful.

7. The law is everything and nothing

  • Ex post facto. Sure, why not?
  • Obsolescence at warp speed.
  • You are not Chinese and you never will be.
  • Assume law in China is nothing like the U.S/Assume it is similar.

Think I’ll use this the next time someone wants me to speak for thirty minutes….