Less than a month ago, we wrote a post, entitled, How To Form A China Company (WFOE or JV). Hong Kong Entities. They’re Baaaaack. The gist of that post was that my law firm was now favoring the forming of Special Purpose Entities in Hong Kong to hold the soon to be formed Mainland China Wholly Foreign Owned Enterprise (WFOE) or Joint Venture (JV).  We wrote on how our position on this had changed due to China’s having recently become increasingly tough on company formations involving non-Hong Kong companies:

It is relatively easy to prove the existence and organizational structure of a Hong Kong company. The process is straightforward and the Chinese investment authorities understand the documents and readily accept them. This is not true for corporate documents from other countries. The Chinese authorities want documents that are similar to their own. They do not understand foreign company systems, and will often challenge perfectly standard documents from foreign jurisdictions that do not accord with the way they think the world should work. For example, the Chinese authorities will often demand notarized documents. When the notary is from a common law jurisdiction like the United States or England, they will object to the form of the notarization because it does not look like a Chinese or civil law country notarization.

In other cases, we have had Chinese authorities object to United States limited liability company documents because the officers’ titles do not match the equivalent terms in Chinese. For example, in most U.S. jurisdictions, a limited liability company (LLC) does not have directors and officers. Instead, the LLC is either member managed or manager managed. We have had Chinese authorities object to both forms of management because they do not understand the U.S. system. Of course, the issues can be even worse when the investor company is based in a system even more different from China, such as the Middle East, Central Europe or Africa.

All of these sorts of problems are solved if the foreign investor sets up a Hong Kong company and specifies the Hong Kong company as the shareholder of the Chinese WFOE or Joint Venture. For this reason, many of our clients will almost automatically plan to form a Hong Kong company as the first step in the China company formation process.

We received a not surprising amount of blowback to that post, both in the form of comments and in the form of a fairly large number of angry emails.  As I have written many times previously, virtually whenever we say anything that might lead anyone to believe that doing business in China involves little more than just walking in, we get push back, mostly from those whose incomes depend entirely on a smooth flow of China business. Anyway, we received plenty of communications saying or hinting that absolutely nothing had changed in China and that it was either all in our heads or due to our inability to negotiate China’s bureaucracy.

This is the “I told you so” follow-up post.

I just read a Financial Times article, entitled,  “China, India and Russia less business friendly,” on how “executives around the world” think China has become “less friendly towards business over the past three months,” as based on an FT/Economist Global Business Barometers Survey.  This survey is conducted every three months of 1,500 global senior executives.  According to the survey, of the four largest emerging market economies, only Brazil has eased up on business; China, Russia and India have gotten tougher. “The survey comes amid concerns that growth in Brazil, Russia, India and China – together known as the Brics – is slowing.” Brazil was the only one of the four Brics that more consider friendly than unfriendly towards foreign business.

I yearn for the day when China views getting “friendlier” towards foreign business as its best reaction to a slowing economy, rather than getting more “unfriendly.”

What are you seeing out there?


One of our lawyers just returned from the INTA conference in Washington DC, a gathering of nearly 10,000 intellectual property professionals from around the world. A number of speakers at the conference emphasized how using customs to seize counterfeit goods can be a very powerful tool for protecting brand-owners from counterfeit goods.

The European Court of Justice recently set limitations on the ability of European Union (EU) customs agents to seize counterfeit and pirated goods. The decision pertained to two joined cases—one case involved a shipment of electric shavers coming from China (with an unknown destination) that allegedly infringed on the design protection of a Philips product. The other was a shipment of Nokia phones from Hong Kong bound for Columbia. When Nokia applied for seizure of the phones, the request was denied because the goods were not bound for the EU market, and thus could not be considered counterfeit under EU regulations.  Nokia then brought a lawsuit against the UK customs office, but ultimately lost the case.

The European Court held that EU customs agents cannot detain suspected counterfeit goods unless the goods are actually bound for distribution within the EU or unless there are indications of fraudulent diversion into the EU market. This will impact the way brand owners seek protection through EU customs offices regarding counterfeit goods shipped from China, among other places.  It is now critical to understand the final destination of the goods and to look for possible leaks into the EU market—spotting fakes alone, is no longer enough to have the goods seized by EU customs authorities.

The courts in India also recently issued a decision relevant to counterfeit goods coming from China. In a case involving gray market electronics imported from China, the Delhi High Court held that goods bearing an identical or deceptively similar mark to a registered trademark are considered infringing, even though Indian trademark law as written does not distinguish between the importation of genuine goods and fakes. Under this holding goods imported into India using the same or a deceptively similar trademark will be considered infringing if they are imported without the permission of the registered trademark owner.

As for Indian Customs, trademarks can be recorded with the Controller of Customs and trademark rights may be enforced accordingly.  Indian courts have granted sweeping execution mechanisms by granting “John Doe” orders, allowing trademark owners liberty to perform unlimited raids for a period of two months in a local market. In performing raids, local customs commissioners may be accompanied by police, breaking locks and seizing infringing goods. It is our understanding from speaking with local practitioners that before these modernizations, enforcement measures were often hampered by information leaks and were too late to accomplish seizure of the goods in question.

You may be wondering why we are discussing IP enforcement measures in the EU and India, however the common theme in both places is that these sort of cases typically arise from imported counterfeit goods from China. As a brand continues to grow in this global economy, protection and enforcement of IP rights is critical to maintain the brand’s identity and developing good will. Seizure by customs officials is a powerful tool in achieving these goals. Brand-owners concerned about the movement of counterfeit goods may record their trademarks with various customs authorities around the world, adding another layer to their strategy for brand protection. These recent changes in the EU and in India are likely to have major impact on anyone who manufactures goods anywhere, but especially in China.

Just read a very interesting post, entitled, “Will India Challenge China? Not yet.” The post is by GE Anderson over at the ChinaBizGov blog. I know GE Anderson to be one very smart guy (with a Ph.d and an upcoming book to prove it) and one damn fine analyst of things China, particularly those things relating to China’s auto industry.

He wrote his post on India after having spent a couple of weeks there. 

Now before anyone points out the shortcomings of views based on a two week visit, let me stop you by saying I both agree and disagree with you (only we lawyers can say things like that). I disagree because one can get a “sense” of a country in two weeks and then use that sense, coupled with previous readings, to glean and then convey one’s impressions. I buy into the idea that first impressions are far more accurate than often credited and I am a huge fan of the book, Blink.

Before I agree with you, I would like to note that I have never been to India and I do not purport to know terribly much about the country. When I was a freshman in college, my freshman tutorial was on India, but since I read only 4 of the 17 books assigned (who the hell assigns 17 books in a freshman tutorial anyway?), I can hardly claim much expertise from that. I should also note that my father served in India during World War II (who the hell serves in India, anyway?) and he absolutely hated the place from the moment he got there to the moment he left. He spent most of his time in New Delhi, which, as I understand it, is a tough place to love. Anyway, his views of the place have always (rightly or wrongly) overly influenced mine. There is one image that has never escaped him (nor me) and that was his arrival into New Delhi by train, where he saw hundreds/thousands of people squatting by the tracks and defecating. He told me this but once and I have never forgotten it.

When I was vacationing in HoiAn, Vietnam, last year, I met a couple of sisters from England who were there doing charity work. One of the sisters lives in London, the other in Goa, India. The one from London had talked of going to India for the charity work, but the one from Goa had dissuaded her by saying that the “entire country smells of human feces from the moment you get there until the moment you leave.” Since hearing that comment I have asked about a dozen people who have been to India whether that is true or not and about half said “yes” and about half said “no.”I am concerned that Dr. Anderson too has been overly influenced in his assessment of India by what I will call the “feces factor,” for lack of a better term.

Dr. Anderson’s post is absolutely excellent, but as an assessment of India’s ability to compete with China, I worry that it leans too much towards describing filth and chaos. Though you can absolutely count me among those who will go a long way to avoid filth and chaos, I am just not sure how relevant that is in assessing a country’s economic future.

india has its problems but it is moving forward economically. China has its problems (some the same as India, some different), but it is moving forward economically.

But let’s get to the core of this. Can India compete with China? Is that a stupid question in that India already competes (and beats) China in many things, including IT and pharma?  Why must we compare the two? And why India and not Indonesia or Vietnam or Brazil or ….? What is it with the whole India versus China thing anyway?

I’m “opening up the “microphones” here so have at it. But please nobody comment without first reading Dr. Anderson’s post.

Not quite sure why, but I have been writing a lot lately about the risks of operating a business in China. A few months ago, I did a post entitled China Is The Risk. I See Clouds and a few weeks ago I did a post entitled Secure And Insecure Countries. In Light Of Egypt. An Open Thread. Both of these posts talked of the risks of being in China and sought to compare that risk to other countries.

In response to the Egypt post, a loyal reader sent me a link to a super-cool interactive country by country risk map compiled by Aon Corporation, a leading “provider of risk management services.” The map ranks countries from Low Risk to Very High Risk, with Medium-Low Risk, Medium Risk, Medium-High Risk, and High Risk in between those two extremes. The rankings are based on the following:

  • Exchange Transfer
  • War/Civil War
  • Strike, Riot, Civil Commotion, Terrorism
  • Sovereign Non-Payment
  • Political Interference
  • Supply Chain Disruption
  • Legal & Regulatory

Here are how various countries fared:

  • China —  Medium Risk
  • India —  Medium-Low Risk
  • Vietnam —  Medium Risk
  • Bangladesh —  Medium-High Risk
  • Thailand —  Medium-High Risk
  • Singapore —  Low Risk
  • Cambodia —  Medium-High Risk
  • Laos —  Medium-High Risk
  • Hong Kong —  Low Risk
  • Taiwan —  Medium-Low Risk
  • Japan —  Low Risk
  • Russia —  Medium Risk
  • Malaysia —  Medium-Low Risk
  • Indonesia —  Medium Risk
  • Egypt (before the street demonstrations) —  Medium Risk
  • Brazil Medium —  Low Risk
  • Mexico —  Medium-Low Risk
  • South Korea —  Medium-Low Risk
  • North Korea —  Very High Risk

Interesting. What do you think?

For all the many posts we have done on how Chinese companies are expanding worldwide (this is, after all, part 15 of the series), I still doubt there are more than a handful of Chinese companies capable of breaking into Western consumer or high end business markets.

Fairly recently, my international law firm worked with a U.S. home supply manufacturer/wholesaler that had been brought on by a Chinese home supply manufacturer to bring the Chinese manufacturer’s products into the United States. The Chinese company, quite wisely, wanted to use the U.S. company to market and sell its products in the U.S. Amazingly enough however, the Chinese company insisted on retaining its three word, difficult to pronounce, intensely Chinese name as the brand to be marketed here in the United States. The Chinese company simply refused to believe their name would be a huge disadvantage in the United States, where China’s reputation is more for taking American jobs than for quality home products.

It is not just that one instance. How many Chinese companies are admired worldwide for their marketing prowess?  How many Chinese companies possess one of the top 500 brand names? How many Chinese companies are known worldwide for their quality?

Yet the lure/threat of China’s companies going international certainly remains and India’s Financial Express newspaper, in an article, entitled, New MNCs Changing the World Order, discusses Chinese companies succeeding worldwide by paying for outside expertise to do so.

The article sees “a new wave of foreign competitive pressure” “rippling through the U.S. economy, from companies in emerging markets like Brazil, Russia, India and China.” Companies from these countries are seeking to become “world-spanning multinationals — just as Samsung Electronics emerged from South Korea and Toyota sprang from Japan in earlier phases of globalization.”  Brazilian aircraft manufacturer, Embraer, Russian companies like Gazprom and Lukoil, and Indian tech companies like Wipro and Infosys Technologies have already made huge inroads into the U.S. market and more will follow.

According to the article, China will be the largest single source of these new multinationals. It sees Lenovo, Haier, Huawei Technologies, and the Pearl River Piano Group as proof of what Chinese companies can do.

Antoine van Agtmael, author of a new book, The Emerging Markets Century: How a New Breed of World-Class Companies Is Overtaking the World, is quoted as seeing the emergence of these new multinationals as part of “the biggest shift in the global economy since the Industrial Revolution of the 18th century.” According to van Agtmael, the ascendancy of China and India is “a re-balancing of the global economy back to where it was before the Industrial Revolution, when China and India were major powers in the world.”

Chinese and Indian multinationals are able to rapidly gain the expertise necessary to manage complex multinational operations by paying for outside expertise. Peter J. Williamson, a professor at Insead and author of the book, Winning in Asia,  says these multinationals from emerging market countries are “engaging Ogilvy & Mather to do their advertising. They’re using McKinsey for their strategy. There’s been a very big shift in the ability to obtain knowledge that once would have been very slow to build up.”

I think the expectations are too high. Look how long it took Samsung and Korea. And Where is Samsung II?Chinese companies will continue to improve but these things take time. In the short term, I see it a lot more likely foreign companies will succeed in greater numbers at doing business in China than the opposite.

What do you think?

Just watched a ten minute or so movie on Goldman Sach’s website, entitled, “The BRICS Dream” [link no longer exists] (h/t to the Cal Poly MBA Trip Blog).  BRIC is an acronym for Brazil, Russia, India, and China and the movie, “led” by Jim O’Neill, Goldman Sach’s Head of Global Economic Research, notes it was Mr. O’Neill who created the BRIC acronym way back in 2001.

The thesis of this fascinating movie is that over the next 50 years, Brazil, Russia, India and China — the BRIC economies — are likely to become a much larger force in the world economy.  The movie maps out GDP growth, income per capita and currency movements in the BRICs economies until 2050:

The results are startling. At the projected pace, in less than 40 years, the BRICs economies together could be larger than the G6 in US dollar terms. By 2025, they could account for more than half the size of the G6. Of the current G6, only the US and Japan may be among the six largest economies in US dollar terms in 2050. The list of the world’s ten largest economies may look quite different in 2050. The largest economies in the world (by GDP) may no longer be the richest (by income per capita), making strategic choices for firms more complex.

The movie predicts a huge increase in the middle class of these four countries and, interestingly, sees Russia having the highest per capita income among the four, based in large part on its diminishing population.  O’Neill believes this rising middle class of the four BRIC countries will lead to massive car buying, and he forecasts China becoming the largest purchaser of cars by 2050.  The growth of the BRICs will lead to energy consumption worldwide increasing by 2.5% per year, in contrast to the 1.5% increases in the past.  O’Neill sees the stock markets of these four countries doing well even if they institute few structural changes, but becoming “fantastic” if they evolve in terms of their transparency.  O’Neill sees the currency of all four nations rising considerably between now and 2050, with China’s Yuan rising the most, at 289% between now and 2050.

All of these predictions are prefaced by many “ifs” and, as excited as I am about the economies of all four of these countries, (as well as many of the countries Goldman Sach’s calls the “next eleven,” particularly Turkey, Vietnam, Indonesia, Korea, and the Philippines), I recognize that so much can happen between now and 2050 that it is virtually impossible to make economic and investment predictions for 2050 with any real degree of accuracy.  This is even more true of the BRIC countries whose political stability is not rock solid — yes, I know Brazil, India, and, nominally Russia, are democracies.

Does make for great viewing though.

China is more than just a manufacturing center.  It is also more than just a place to save money.  It is a place where money can be made.

Many companies read how China is not yet a consumer society (how exactly is that determined, anyway?) and hear about cut-throat pricing and want no part of China from a selling side.  Our own indirect experience (as the China lawyers/China law firm for countless small and medium sized companies (SMEs) that are doing very well selling all sorts of items in China, both consumer and commercial) tells us there is money to be made.  Articles we read and conversations we have had reinforce this view. Doing business in China means more than just manufacturing in China.

I just read here that Lochan Tea Ltd, a Siliguri, India, based company, has big plans to sell its Darjeeling Tea to China.  Now I know that this venture might flop, but can we not all agree the mere fact this is being attempted speaks volumes about China’s potential as a marketplace?

Big Four accounting firm Deloitte recently issued a report entitled, “India and China: The Reality Behind the Hype” (h/t to the Private Sector Development and Newschecker blogs).  As I was reading the report I took down all the interesting information in it, but I quickly realized there was simply too much to capture in a post.  I therefore can only strongly urge anyone anyone with an interest in either China or India to read it. [link no longer exists] It has all sorts of interesting business and economic information on both countries, with insightful accompanying analysis.

The report concludes by making the following predictions:

1.  Both [China and India] will grow rapidly, taking a much larger share of global GDP.  Yet for the forseeable future, it is likely that China will continue to grow more rapidly than India.  In both countries, the domestic market will become increasingly attractive to global companies.

2.  The division of labor between the two of them will become blurred as both countries excel in services and manufacturing.

3.  Both countries, while remaining relatively poor, will experience rapid growth of the middle class, creating vast new opportunities for Western companies to sell in those markets.

For less sanguine views on China’s future, check out the Global Guerrilla’s post, entitled, “When China Derails.”