The other day, I spoke with a North American company that was seeking to get its tooling back from its former Chinese manufacturer.  This company’s domestic American lawyer had drafted a manufacturing contract with the Chinese manufacturer that was completely silent regarding ownership of the tooling/molds.  When the American company started getting bad product from its Chinese manufacturer, the American company requested the manufacturer return the tooling/molds.  The Chinese manufacturer claimed to own the tooling/molds.  The American company claimed that was not possible because it had the tooling/molds made by someone else and it had proof of payments that would prove this.

On top of this, the American company kept telling me that its lawyer insisted that it owned the tooling/molds.  He stopped saying this when I asked whether the lawyer claiming this was the same lawyer who had represented them when it contracted with the Chinese manufacturer.

I told the American company that it essentially had three choices.

  1. Get new tooling/molds made.  The American company told me that would take months and was unacceptable.
  2. Sue the Chinese manufacturer to try to get the tooling/molds back.  I said that would take months and since the American company did not have written and signed proof (preferably in Chinese) making clear that the tooling/molds belonged to it AND not to the Chinese manufacturer, I did not know who would prevail.  Either way, this would take many months. The American company told me that this was not acceptable.
  3. Try to negotiate a purchase price for the tooling/molds from the manufacturer, maybe at half their value.  The North American company let me know that having to buy its own tooling/molds back from its Chinese manufacturer was incredibly unpalatable, as compared to its other options, this was its best one.

What should the North American company (or more particularly, its lawyer) have done to prevent this horrible situation?  They should have explicitly (because if it isn’t explicit it pretty much doesn’t exist when it comes to China) put in their agreement with the Chinese manufacturer that the tooling/molds belonged to them and they should have explicitly put in the contract that the Chinese manufacturer would sustain liquidated damages of $10,000 for every day that it failed to return the tooling/molds. And they should have done this in Chinese and they should have gotten the contract sealed/chopped by the Chinese manufacturer.  This is what Chinese manufacturers understand and, more importantly, this is what Chinese courts understand and will enforce.  And because of this, as far as I know, we have never had a client whose tooling/molds have been held for ransom.

Early this evening, I listened to the last two minutes or so of a BBC radio show that seems to have been about a book writing anthropologist who writes about Papua New Guinea’s hundreds of tribes.  I got to hear him essentially sum up by saying that the tribes of Papua New Guinea deal with modernization/materialism one of the following three ways:

  1.  Seeking to reject it entirely and stick entirely to their old ways;
  2.  Seeking to integrate it into their existing ways, creating a synergy between the two:
  3.  Seeking to have it replace their ways, whole hog.

The North American company and its lawyer are not too dissimilar from the Papua New Guinea tribes that insist on sticking to the old ways no matter what they face.  Both essentially insist on going on with their lives as though nothing new had been introduced to them.

I received the following email this morning:

Your blog is interesting because it talks about project failures at the operational level. I bought couple of books you reviewed on your blog and the anecdotes of success they contain have been interesting and inspiring. Now, I am more interested in some material (in addition to your blog) that will provide insight on spotting major flaws in the operationalization of a project.

I’m in consumer research and I often tell clients how they should target a specific segment, what they need to do next. I have never been able to educate them on what NOT to do, and what major mistakes they need to look out for. That’s because I’ve never actually worked in their position (ie. actually executing a specific strategy).

It would be great if you write your own book or post more about failures. Case examples are much more insightful than ideological or CEO-level visionary “stuff”.

Seems this person realizes that China is different and that learning comes from this recognition.

The South China Morning Post recently ran an aptly entitled article by INSEAD Professor, Micheal WittBusinesses often fail overseas because the world is much less ‘global’ than they assume. The article is subtitled, “Key decision-makers often underestimate just how big, and important, global differences are.”

Its premise is that “many companies do not reach their full potential abroad” due to “incomplete preparations.”  It states that “surprisingly, many companies, even large multinationals, do not analyze the competitive landscape of the local [Chinese] market to determine whether it is possible to operate profitably.”  Foreign companies end up being surprised by the level of competition in China simply because they went into China without ever analyzing it.  Sort of like the North American company/lawyer who were surprised at losing their tooling/molds simply because they never even considered seeking to determine whether the rules on such things might be different in China than in North America.

The article notes the irony that “the tendency to fall for the fallacy that the world is indeed ‘flat’ increases with corporate seniority.”  Though the reason for this is “natural, as senior executives extrapolate from their own experiences within a confined international elite,” it also is “highly problematic, because it leads key strategic decision-makers to underestimate just how big the differences are. And as the international business literature has shown time and again, what kills companies abroad is their inability to handle these differences and deal effectively with the attendant ‘liability of foreignness.'”

It goes on to discuss how institutional variations occur between countries and at “the most fundamental level, they show themselves in what a society accepts as the legitimate purpose of doing business.”  Western business schools generally teach that firms exist to maximize shareholder value, but the writer’s

But according to Professor Witt’s research, few societies and senior managers outside the Anglo-Saxon world accept this view:

To simplify very crudely, Hong Kong firms exist to produce family wealth; German firms, to produce needed goods and services for society; Japanese firms, to provide benefits to their employees; and South Korean firms, to keep highly conflictual demands by controlling families and hostile stakeholders in balance.

Few companies ever pause to consider these issues and their implications when expanding abroad. Many an international partnership was, foreseeably, doomed from the beginning because fundamental objectives did not match.

Do you think about such things?  I do all the time.  I mean, why do some companies seem to just coast into China while others stumble in and never recover?  What more should we be writing about to help those seeking to do business in China or to sell to China?  For what it is worth, I would say that the knowledge North American companies looking at doing business in China is both considerably higher today than it was even five years ago and considerably higher than the knowledge Chinese companies have about doing business in North America.  Do you agree on that?

Not that long after the fall of the Soviet Union, I, along with others in my law firm, had to spend considerable amounts of time in fairly remote places in Russia like Vladivostok, Petropavlovsk-Kamchatsky and Yuzhno-Sakhalinsk. Things were very uncertain in that part of Russia back then and we developed certain rules to protect ourselves. For instance, we always made sure that each person had at least enough cash to buy a last minute flight to Moscow and then from there back to the United States. Before leaving, we also would contact our Russian friends (including the spouse of a Russian Federal Marshall and a couple of Vice-Governors) to ascertain where they would be while our people were there (most did not have cell phones or email) and to confirm that we could contact them if anything would happen. In other words, we planned our escape route before we even went.

A few years back, I went to Papua New Guinea to recover helicopters for a Russian client. PNG (for the conoscenti) was in the throes of various insurrections at the time (I think this is nearly always the case) and I would be going to Goroka, which was fairly near at least one of them. I spent days planning the trip and set up all sorts of contingency plans. I even grew out a beard and bought a backpack to look like a hiker, not a businessperson.

When I was a kid, I lived in Istanbul, Turkey, for around fifteen months. At the start of my stay there, everything was great, but during our last month, there was a military takeover and it was a bit jarring to see two blank-faced 17 year olds from the villages on my buses holding machine guns. i can remember my parents meeting with consular officials to plot out an exit strategy if things turned for the worse.

One of the things I have always liked about China is that none of these sorts of thing are really required.

Or are they?

It seems like every time I talk with serious China people these days, they want to talk about what is going to happen in China regarding treatment of foreigners and governmental oversight (a euphamism). I have no idea, but I do get the sense that both the media and foreigners with a business stake in China are downplaying things. In fact, I think this almost has to be the case. I say this because the media are overwhelmingly in Beijing and Shanghai and because cognitive dissonance or sheer self-interest would cause the businessperson to have those views.

Be that as it may, I am not sure one needs to believe in some sort of imminent change in China to believe it at least makes sense to be ready for it. I can tell you that virtually all companies big enough to retain risk consultancies are doing so. Frankly, I am always amazed people do not think about these sorts of things more often.

Many years ago, I had a long-time client call me to ask for my assistance on an Iraq deal he would be doing. This was not long after the fall of Saddam. I told him I wanted no part of it and that I thought he was crazy to be planning to go there. I strongly suggested he would be better off staying alive for his children than making a few more million dollars. He was initially irritated with me but called me back a couple of weeks later to tell me I had been right and he was done with Iraq. I swear it was only days later that I learned of American businessperson Jeffrey Ake (who I had heard speak in Seattle only days earlier) go missing in Iraq. Mr. Ake remains missing.

The greater the risk, the greater the money. But the greater the risk, the greater the risk.

So good for Joseph Sternberg of the Wall Street Journal for writing this article (the title to which I dare not mention) on the need to be aware of and prepare for China risks. It is just wrong to assume and act as though things cannot and will not change. As Sternberg notes, “four months ago, no one would have predicted imminent mass unrest in Tunisia, Egypt, Syria, Bahrain, Yemen or Libya” and he warns companies to “consider managers trying to evacuate staff, safeguard physical property or keep supply chains operating as smoothly as possible.”  He then provides “a brief guide to keeping your business afloat if China goes kablooey”

  • First, “recognize that it really could happen. Human nature is to assume the status quo will continue indefinitely.”
  • “Understand where your vulnerabilities lie.” You may already have “a detailed list of expat staffers in China, their addresses and dependents, to aid in a worst-case evacuation” but you should also “track executives who might be visiting, in case one of those should happen to be in town” when something series goes down.
  • Think about your specific risks. “Are your factories identifiably ‘foreign’ and is that likely to be a sore point in the eyes of local residents? Have you previously stirred controversy for hiring lower-wage workers from other regions instead of locals? Are you in a controversial industry, such as a heavily polluting one, that could make you a target…?
  • What about China’s role in your supply-chain? “The key is to diversify supply chains, a practice some—though by no means all—companies already have adopted. This is not necessarily cheap. But those companies that invest in a little excess factory capacity in another country or buy insurance against supply-chain disruptions may one day find the additional expense a price worth paying.”
  • Think ahead as to how you will “respond to varying degrees of disruption. What events would trigger a factory closure for a couple days, or a reduction in factory hours, or moving workers’ dependents to another area, or in the worst case an evacuation of expat staff entirely? Who would make those decisions, based on what sources of information, and how would the decision be communicated down the line. And so on.”

Say what you will, I say there is nothing wrong with being prepared.

Because of my need for excessive euphemisms here, I urge you to go read Mr. Sternberg’s entire article here. I also note that I am going to need to be doubly careful regarding comments and warn that we may have to edit some of them. That being said, what do you think?

A reader sent me a link to a post from the very controversial blog, Atlas Shrugged. The post is entitled, “A Case of Perjury: Mohamed Bary’s Vast Web of Lies.” The gist of the story is that the Sri Lankan parents of a 17 year old Rifqa Bary are being denied the return of their daughter by a Florida judge because the family has been unable to document that they are in the United States legally. It appears the judge is denying the daughter’s return both for immigration reasons and because her parents’ credibility has been so damaged by their apparent history of immigration untruths.

The reader asked me if I am aware of anything like this having happened in China or the United States with Chinese businesspeople and whether “something like this” can impact one’s business in China.

HECK YES it can.

I am aware of all kinds of instances where one’s immigration status has harmed a business.

Many years ago, I was involved in an international litigation matter involving two Russian fishing companies. One of the key witnesses for the Russian company on the other side was a woman who had secured a US visa based on her extensive education and experience in the fishing industry in Russia. She had secured this visa by claiming a college degree from one of Russia’s best fishing institutes and by claiming to have spent many years working for one of its largest fishing companies. Somehow or other, my firm’s Russian paralegal extraordinaire had acquired a copy of this person’s visa application and had noticed that her college degree from a college in Town A had been stamped by someone in Town B. My paralegal told me this was the equivalent of a Harvard degree with an official Yale stamp on it. In other words, it could never happen if the degree were not a fake.
Our next move was to depose this person and depose her we did. At her deposition, we asked her a whole series of questions intended to make clear we knew she had lied to get into the country. Among the questions we asked were the following:

1. Who was your favorite professor? She said she had no favorite.
2. Name one of your professors. She said she could not remember any.
3. Name one professor at the entire college. She said she could not remember any.
4. Who was your best friend at college. She said she was too busy studying to have had any friends.
5. Name one fellow student at your college. She said she could not remember.
6. List the classes you took. She gave some sort of vague answer.
7. Name some of the buildings on the campus. She could not remember any.
8. Describe the campus. She gave some incredibly vague description.

We asked the same sort of questions regarding the fishing company at which she had allegedly worked in Russia and we got the same sort of answers. It was fun.
And guess what, this key witness for the other side never showed up to testify at trial, which greatly strengthened our case and probably helped us prevail. I have no doubt her failure to appear stemmed from her fear of her illegal immigration status being exposed.

A few years later, I was contacted by a Russian-American company that wanted my firm to sue an American company over a debt. I pushed my client about skeletons in his and his company’s closet and he admitted he was in the United States on a student visa and so should not have been working at all. We talked about how his bringing this case might expose him to visa issues and how he should think long and hard about bringing the case. He chose not to and I assume this meant he would be walking away from a not insubstantial debt.
We have had to tell a number of foreigners in China the same thing when they have sought our help in collecting on a debt in China or in suing their Chinese partner for having run off with what the foreigner thought was its own business. If you or your business are not legal in China, you have pretty much foreclosed your ability to sue anyone, no matter what they do to you.

A handful of times (usually during periods of stepped-up visa enforcement), my firm has been contacted by foreigners with illegal businesses in China who have either been denied re-entry into China or have been told to leave. These people are desperately seeking our help to get them back into China. They are desperate because their profitable China based businesses cannot function without them. The odds of our being able to help them are slim.

One of the most underrated benefits of having a Wholly Foreign Owned Entity (WFOE) in China is that entity’s ability to hire foreigners and those foreigners’ ability to secure Chinese work visas (Z visas). These companies are legal and they have standing to sue and since their employees are working in China legally on Z visas, they have nothing to fear by testifying on the company’s behalf.

One of my favorite stories is when I went to Papua New Guinea to help a Sakhalin Island client secure the return of two helicopters. When I landed in Port Moresby, I was asked if I was in the country as a tourist or for business. The tourist visa was something around $35 and the business visa was something around $350, but I said “business” and I paid the much higher fee. I then flew to Goroka where I met the next day with the governor of the Eastern Highlands Province, Malcolm “Kela” Smith. I was told “Kela” means bald man. The first thing Mr. Smith did when I met with him was to check my passport. When it revealed I was there on a business visa, I could sense a change in his view of me. Though he never confirmed this to me, I am convinced that had my passport revealed I was in PNG on a tourist visa, Mr. Smith would either have had me thrown out of the country or he would have refused to meet with me because I was in the country illegally. Kela Smith ended up meeting with me and with my client and within a day or two we had a deal whereby my client would get his helicopters back.

The bottom line is that if you are going to be doing business in a foreign country, particularly China, it pays to do so legally and it pays to have the right visa. Don’t mess around with China immigration.

A few years ago, I went to Goroka, Papua New Guinea, to recover two Kamov Helicopters on behalf of a client/friend from Sakhalin Island, Russia (man, I loved writing that sentence!). I flew from Seattle to Honolulu, from Honolulu to Sydney, Australia, from Sydney to Cairns, from Cairns to Port Moresby, and from Port Moresby to Goroka. And then, after negotiating the helicopters back, the same return trip. Papua New Guinea is said to have a “cargo culture” in which the natives treat outsiders better than natives. That certainly seemed true for me.

I went to the grocery store (and when I say “the” I mean the only) one day and saw all of the locals get searched by rifle toting security guards both when entering and leaving the store. I came and went untouched. The same thing happened at the airports. The locals would have their bags opened and rummaged through, while my bags were never opened. I was scheduled to leave Goroka to return to Australia on a Wednesday but the plane (again, “the” means “the only”) plane did not arrive. Without my having to do a thing, I was given a front row seat for the next day’s flight.

The weight limit for carry-ons was 8 kg and a local right in front of me was stopped by a stewardess for trying to bring on a small bag and told, “You no go on de plane wit dat.” Me, I wanted to be sure I made my connecting flight from Goroka and I was let through without question, toting a bag that must have weighed at least 15 kg. Ah, the joys of being a foreigner.

There can be a bit of that in China as well, though I have always viewed it as somewhat of a more double edged sword there. Lucy Hornby, on her Reuters sponsored Countdown to Beijing blog just did a great post, entitled, “Being a foreigner, the ticket to privilege?” (h/t to All Roads Lead to China).

Ms. Hornby starts out by revealing how easy it was for her, as a foreigner, to get tickets to the Beijing Olympics:

I did this entirely legally. I want lots of guests to crash at my apartment in August, and see this huge moment for China. So when the first round of the ticket lottery opened, I filled out the online forms, met all the deadlines, and picked the maximum number of tickets — mostly for semi-final events where I thought I would have a better shot.

The tickets aren’t just for guests of course. I myself can’t wait to sit in the stands for at least one competition, and soak up the excitement. But I didn’t even bother to apply for the Opening Ceremony — I knew I had no chance, and anyway, applicants were limited to one ticket only. Who wants to be all alone in a crowd?
I got about three-fifths of the events I wanted, or 17 tickets for six events. That puts me among only 5 percent of Olympics tickets applicants, according to a membership survey by the American Chamber of Commerce.

Most Chinese I’ve told say the decks were stacked in my favor. “Of course you got tickets, you’re a foreigner” was the first reaction from my colleagues, taxi drivers, and anyone else I told.

An informal survey revealed many of them had given up halfway through the lottery process, which I also thought was a little daunting. Or they only applied for the opening and closing ceremonies. Or only popular weekend events. But still. Their reaction also shows how much Chinese citizens assume that the system will never work in their favor.

Hornby then notes how many former foreigner privileges are now being given to all who are wealthy, foreign or not:

Fast forward 13 years, and most of the privileges of being foreign, versus being Chinese, have morphed into being wealthy versus not. It’s pretty easy to get train tickets nowadays, if you book through an agency for a small fee, but the migrant workers still wait for days in line at the station.

What do you think?