No, we are not going to become the Vietnam Law Blog, but I just could not resist using this post today.

I was in Vietnam (mostly Hanoi and Ho Chi Minh City) last May when Vietnamese rioters, sparked by anti-Chinese sentiment following China’s installation of an oil rig in disputed waters in the South China sea, attacked several hundred foreign-owned factories in a few provinces outside Ho Chi Minh City. Ironically, the biggest targets were not China-owned factories, but factories owned by Taiwanese, Hong Kong, and Singaporean investors whose companies play vital roles in the complex supply chains on which so many foreign-owned manufacturing entities in Vietnam depend.

The foreign business community immediately scrambled to assess the situation. Will Taiwanese, Hong Kong and Singaporean investors pull out of Vietnam and not come back? How will the complex and sensitive supply chains be affected? What will foreign investors from the U.S., Japan, Europe and other countries do? What are the implications for foreign investment in Vietnam?

Four months later, having just returned from yet another Vietnam trip, I am convinced that Vietnam has weathered the fallout from the May riots. Through July of this year, foreign direct investment in Vietnam hit $6.8 billion, up 2.3% over the same period last year and the Asian Development Bank predicts the Vietnamese economy will grow 5.5% this year and 5.7% next year. Not bad given the current state of the global economy.

According to a survey by the American Chamber of Commerce Singapore and the US Chamber of Commerce, the results of which were released last month, Vietnam remains second only to Indonesia among ASEAN countries as a priority destination for future U.S. business investment. 75 percent of the Vietnam respondents (made up mostly of American companies) expect their Vietnam businesses to expand and 57 percent expect their workforces to grow in 2014. 66 percent of the respondents see their profits increasing in 2014 and 82% predict profits to increase in 2015.    Even Chinese, Taiwanese and Hong Kong businesspeople remain bullish on Vietnam. On September 29, 2014, the South China Morning Post reported that “investors including those from China have resumed operations in Vietnam” since the riots, noting that “government efforts to maintain peace and the underlying strength of the economy have managed to retain capital in the country.”

What gives? I see the following as some of the key reasons why Vietnam has done so well lately in terms of foreign investment, and why it is likely to do so well going forward:

  • Riots are not likely to recur. The Vietnamese government, which was caught off guard and embarrassed by the riots, has “gotten the message” and has made clear that such lawlessness will not be allowed to happen again
  • Vietnam remains attractive. Vietnam’s relatively low cost labor force, personal safety, stable government and favorable geographic location combine to make Vietnam attractive for foreign investment, particularly in comparison to other countries in the region. Taiwanese, Hong Kong and other companies affected by the riots neither want nor need to relocate to Cambodia and Bangladesh, as some were reportedly considering.
  • Improving  infrastructure. Though Vietnam’s less than ideal infrastructure remains a problem for many foreign investors, the pace of improvements has increased and foreign investors seem willing to remain patient. Construction has commenced on Ho Chi Minh City’s first subway line and the government recently announced a plan to build new expressways and railways and to improve its airports and seaports by 2020.
  • The Trans Pacific Partnership (“TPP”).  Though it is unlikely we will be seeing a final TPP Agreement within the next year or two, this will eventually happen and when it does, Vietnam will be one of its biggest beneficiaries. Vietnam is already considering a Draft Decree Implementing the Customs Law, which reportedly will include common commitments in the TPP and the EU-Vietnam Free Trade Agreement, as well as the WTO Trade Facilitation Agreement. Vietnam is warming to free trade.
  • The Vietnamese government is becoming a better “listener.” In an apparent concession to Japanese enterprises that are considering relocating their production lines from China to Vietnam, the Vietnamese government has postponed implementing restrictions on importing used machinery into Vietnam. Foreign businesses are seeing this sort of thing and they appreciate it. Again, Vietnam is warming to free trade.

The foregoing means that Vietnam will remain an important country for foreign investment and one of the leading “China Plus One” countries for companies seeking to expand their business in Asia.

A Vietnam consultant friend of mine sent me a Stratfor article (from about a year ago) talking about how rising labor costs in China were slowly causing low-end manufacturing to leave China for other countries, seeking my thoughts on the article. Stratfor’s theory is essentially that clothing manufacturing and mobile phone assembly are precursors to other industries and those two industries are already starting to leave China:

Even though the movement of two indicator industries — garment manufacturer and mobile telephone assembly — signals change, this is a transition that is as yet pre-statistical; few if any reliable trade numbers or volumes now exist to plot the contours of this shift. But it is, Stratfor has concluded, a shift that is already well underway.

Stratfor sees the following sixteen countries taking over (not necessarily completely) low end manufacturing from China, though “[T]he outlines of this group, what we call the Post-China 16, or “PC16,” are only now coming into focus. Indeed, the specific countries may change and the precise roles they play in this transition — their success in following the path China has trod — remain to be fully seen.

Stratfor came up with its list not by “looking for the kind of large-scale movements that would be noticed globally, but for the first movements that appear to be successful. Where a handful of companies are successful, others will follow, so long as there is labor, some order and transportation. Some things are not necessary or expected. The rule of law, understood in Anglo-Saxon terms of the written law, isn’t there at this stage. Things are managed through custom and relationships with the elite. Partnerships are established. Frequently there is political uncertainty, and violence may have recently occurred. These are places that are at the beginning of their development cycle, and they may not develop successfully. Investors here are risk takers — otherwise they wouldn’t be here.”

Stratfor does not see any one of these sixteen countries assuming the “factory to the world” mantle:

There is no single country that can replace China. Its size is staggering. That means that its successors will not be one country but several countries, most at roughly the same stage of development. Taken together, these countries have a total population of just over 1 billion people. We didn’t aim for that; we realized it after we selected the countries.

The point to emphasize is that identifying the PC16 is not a forecast. It is a list of countries in which we see significant movement of stage industries, particularly garment and footwear manufacturing and mobile phone assembly. In our view, the dispersal of industries that we see as markers of early-stage economic growth is already underway. In addition, there are no extreme blocks to further economic growth, although few of these countries would come to mind as having low political risk and high stability — no more than China would have come to mind in 1978-1980. I should also note that we have excluded countries growing because of energy and mineral extraction. These countries follow different paths of development. The PC16 are strictly successors to China as low wage, underdeveloped countries with opportunities to grow their manufacturing sectors dramatically.

Here are the sixteen:

  1. Mexico
  2. Dominican Republic
  3. Nicaragua
  4. Peru
  5. Ethiopia
  6. Kenya
  7. Uganda
  8. Tanzania
  9. Sri Lanka
  10. Bangladesh
  11. Myanmar
  12. Laos
  13. Cambodia
  14. Indonesia
  15. Philippines
  16. Vietnam

I find Stratfor’s analysis fascinating, but I am not so sure. I especially like how I have the benefit of analyzing the article a year later.

Booz & Company’s Strategy + Business website ran an article entitled, Is China the World’s Next Rust Belt?  The article is by John Juliens, a Booz partner out of its highly regarded Shanghai office. Despite the title, Juliens sees China manufacturing continuing to grow because the following five factors “likely more than offset the impact of China’s eroding labor cost advantage”:

1. Domestic demand. China’s rapid economic development will continue to add millions of new consumers to its already huge customer base. The country is, or soon will be, the world’s largest market for a wide range of goods, many of which need to be manufactured close to where they are consumed. In addition, Chinese tastes are sufficiently particular for it to often be necessary to design (and manufacture) products specifically for local customers. Technological developments, such as miniaturization and 3-D printing, will further enable these trends.

2. Urban–rural divide. China remains a highly diverse country with a wide gap between urban and rural incomes. In fact, almost two-thirds of its people still earn less than US$5,000 per year. In contrast to the nation’s more developed coastal regions, China’s less-developed inland regions continue to have low labor costs—suggesting that manufacturing activities could be shifted to retain the country’s labor cost advantage.

3. Operational excellence. To date, few firms have truly optimized their Chinese operations. This leaves substantial room for productivity improvements through, for example, more efficient machines and production setups, minimization of defects, leaner supply chains, and improved labor productivity.

4. Frugal manufacturing. China’s competitive advantage already goes far beyond cheap labor. For example, Chinese firms are often quite innovative in reducing costs by redesigning manufacturing processes, substituting cheaper “good enough” materials, and using simpler off-the-shelf components.

5. Investment versus comparative advantage. Economic theory dictates that when labor costs rise, businesses move elsewhere. However, countries can offer investment incentives to attract or keep businesses, and I believe that such incentives often trump the underlying comparative advantage. China, like Singapore—the country it most seeks to emulate—has the financial means and the will to wield this tool effectively.

I am not going to try to match either Juliens or Stratfor in analysis, but I am going to tell you that what our China lawyers have been seeing definitely more closely jibes with Juliens’ analysis than it does with Stratfor’s. We have seen straight line increases in interest in China manufacturing, both by companies already manufacturing in China and by those looking to start. If anything, I have been surprised by how unwilling both sets of companies are to explore other countries and by how those that have looked at other countries still so often choose China. Now admittedly, my law firm’s expertise/reputation in China is going to slant things towards China, but what I keep hearing from the newbies is how easy China makes it to get started and what I keep hearing from those already doing business with China is how easy it is to ramp up there.

In, China Factories Moving In Droves To Cambodia/Vietnam/Myanmar/Malaysia. NOT. we wrote on what we were seeing and nothing has really changed since then:

The article [Wary of China, Companies Head to Cambodia] does an excellent job at setting forth exactly what my law firm is seeing among its clients, which include the following:

  • Small clothing and shoe companies that seriously looked at moving operations to Vietnam or Cambodia but then chose not to do so because it would be “too difficult” to set up a supply chain in those places.  Just as described by Ms. Olchanetzky above.
  • Mid-sized and large clothing and shoe companies that have put their toes into Vietnam or Cambodia by doing a bit of outsourcing from those countries or by setting up small factories there.
  • Many companies of all kinds sending people to scope out Vietnam or Cambodia and, more recently and to a lesser extent, Myanmar.
  • Many companies looking at adding facilities or offices in Thailand or Malaysia or Indonesia, believing that those three countries are going to thrive in the next decade as ASEAN’s economic importance rises.
I actually think that my own law firm’s Asian plans are the norm, at least if our conversations are a good yardstick. Our clients are always asking us about our plans for more offices in Asia and we tell them something along the following lines:

Right now, our Vietnam, Cambodia, Thailand, and Myanmar work is all being done out of our existing offices by our traveling to those countries and working with the people we know there. Much of our work in those countries involves the basics like helping our clients contract with existing companies there and helping our clients register and protect their intellectual property there.  As more of our clients establish a permanent presence in some of these countries, we will look more seriously at opening a new office to serve that region.

The response to the above was invariably, “that makes complete sense and is pretty much how we are approaching things as well.”

But since we wrote the above posts, our Vietnam work has greatly increased and we view Vietnam as a viable China substitute on both ends of the manufacturing spectrum, but maybe not the middle. What we are seeing with companies manufacturing in Vietnam is that really large companies are going into Vietnam manufacturing with their own factories and SMEs are going into Vietnam to have things like clothing and rubber duckies manufactured there. What we are also still seeing is that China is still the place for most other manufacturing.

More importantly — and this holds true for both Vietnam and China — what we are really seeing is more and more companies looking to places like China and Vietnam as markets, not just as manufacturing centers.

Having said all this, however, we fully recognize that what one small US law firm is seeing now is not a great indicator of what is going to happen three, five, ten or twenty years from now, especially since much of the increase in our Vietnam work is no doubt due to Vietnam’s close connections with China.

So what is going to happen three, five, ten or twenty years from now? Will China be a rust belt? Will clothing still be manufactured there? Which if any of the Stratfor 16 can we expect to be ascendent and when? Answers please.

A while back we brought on a fully qualified Chinese attorney as a paralegal in our law firm. This person was working on obtaining her paralegal certificate at a local university. I asked her why she was pursuing a paralegal certificate, rather than going for an LLM degree (an advanced law degree), as is commonly done by China licensed lawyers in the United States. Her response was that she knew many Chinese lawyers who had obtained an LLM degree in the United States and not a single one of them had been offered a lawyer job in the United States. I told her that I too was not aware of any foreign lawyer who had obtained a US lawyer job.

I then went on to tell her that our firm does not hire LLM graduates for three reasons. The first is that we have no idea how qualified they are for practicing law in the United States because the LLM programs vary so much in what they teach.  The second is that we have no idea how qualified they are for practicing law in the United States because it seems that just about everyone graduates from US LLM programs with a 3.8 G.P.A or higher, leading us to believe that LLM grading is neither rigorous nor meaningful. Third, and oftentimes most importantly, most US states (at least as far as we know) do not allow LLM graduates to sit for their bar exam.

Which is why our lawyer hires have US (or US equivalent) J.D. degrees.

And this is NOT to criticize LLM degrees. Rather, it is to highlight how much they have changed in the last twenty years, without really having changed at all. Twenty years ago, foreign lawyers came to US law schools for LLM degrees and then they returned to their home countries. Their reason for securing a US LLM degree was to improve their English language skills, increase their understanding of American culture, and make connections with American lawyers and potential clients. All of these reasons made (and still make) complete sense and for that reason, a number of the top international lawyers in Asian countries like China, Vietnam, and Korea, have US LLM degrees.

But maybe around ten years ago, there was a large influx of China attorneys seeking US LLMs with the idea of securing jobs in the United States. US law schools — who make small fortunes off each foreign LLM — generally do nothing to dissuade these students from coming. And so they keep coming with the hope of American lawyer jobs that seem pretty unattainable. What then happens to these LLM graduates from China? It is my understanding that many (Most?) return to China and some get non-legal jobs.

What are you seeing out there and what do you think?


Had a great discussion with a bunch of our China lawyers the other day regarding how so many of our clients are expanding in Asia beyond China and of how so many of them have an Asia strategy, of which China is just one large part and usually initial part.

We then talked of how this has changed the work we do as their lawyers, especially in IP.

Five years ago, our typical manufacturing client would call us for legal help in starting a factory in China or for outsourcing their product manufacturing to a Chinese factory. With the former, we would help them set up a Chinese entity (either a WFOE or a Joint Venture) and with the later, we would draft an OEM Agreement. In both cases, we would discuss their intellectual property and typically help them file for a trademark or a patent in China, occasionally a copyright. Most of these companies were new to Asia, though some had operations in Europe.

Things are very different these days.

Many of our manufacturing clients have been making product in China for years and they are now calling us to add some other Asian country (usually Vietnam or Indonesia) to their manufacturing mix or because they now want to sell their China-manufactured product in China and/or somewhere else in Asia. These companies either have an Asia strategy or are seeking our help in formulating one. Whereas five years ago, a common question for us was “Shenzhen or Suzhou,” today we equally often hear “Hanoi or Jakarta?” Five years ago, we would get asked what we knew about “exotic” places like Yantai. Today it is exotic places like Da Nang.

Needless to say, it is not just manufacturing companies that need to guard their IP in China. Software companies, gaming companies, food and beverage companies, and consumer goods companies are registering their IP in Asia at what feels like a record pace. Balancing all the talk of a China manufacturing slowdown is the year by year increases in disposable income.

The “China-plus” strategies of our clients means that our IP discussions need to go well beyond China to include pretty much all of Asia. Five years ago, only around twenty percent of our clients needed to consider trademark or patent or copyright registrations in a country other than China. They were new to doing business in China and so they needed IP protection there. We would ask about their IP needs for the US and for Europe, but they had been in both places for so long that they were invariably covered.

Today, about half of our clients need IP protection in an Asian country other than China. Fortunately, most Asian countries (Japan, Korea, Vietnam included) have IP regimes quite similar to China’s. The real key for foreign companies expanding beyond China with their products is to be sure to recognize that whatever IP you registered in China probably provides you with little to no protection outside of China. In other words, in most cases, you must register your IP in whatever Asian country in which you are doing business. Also note that in your IP analysis, you must treat Macau and Taiwan and Hong Kong as countries completely separate from the PRC.

Got it?

A few months ago, a couple of our China lawyers did a project for a company looking for various ways to bring its internet game to China.  Now that the project is over, I cleaned up my files and came across an initial email interaction between the client and me, that went something like the following (the point of which is that China’s internet is different from the West, and legally complicated):

Q. How can we register trademarks in China? We’ve already registered them in the United States and in Vietnam (that’s a long story), but now we are ready to register them in China. What do we do?

A.  You register trademarks in China pretty much like anywhere else, which means that you firs figure out the appropriate category/class and then you register your trademark in that category/class. The thing about China though is that if you register your trademark in video games, you have zero protection from someone using your trademark on their t-shirt or even in their book. Add in the fact that all of this has to be done in Chinese and you can see how difficult it is. Then there is the separate issue of copyrights, which may or may not protect some of what you are doing.

Q.  Is there anything special about internet games in China?  
The legal issues relating to the internet in China are just so numerous as to be impossible to discuss without my knowing more about your intentions. The really short answer is that foreign online content is illegal in China and some people make a fortune from it and others go to jail.
Dealing with the internet in China is usually quite expensive; most who go in on the cheap end up getting everything stolen.
We represent two large companies involved in businesses similar to that to which you aspire and we are constantly having to deal with China IP issues for them.

BBC did an hour-long show today with Nassim Nicholas Taleb, author of the groundbreaking book, The Black Swan: The Impact of the Highly Improbable.   Taleb’s thesis is that we humans tend to be “blind” to major (a/k/a black swan) events.

During the show, an audience member who announced that he was from Vietnam, asked Taleb whether there are any cultural differences regarding black swan events.  Taleb and the announcer then did a fairly short riff on how failure is a “badge of honor” in Silicon Valley and on the West Coast of the United States, but is viewed far more negatively on the East Coast of the United States and in England, and even more to be avoided “in Asia.”

I am going to be speaking at the Plastics News Executive Forum in Tampa in late February on protecting your IP in China, and as a bit of a prelude to that, I am participating next week in a free online webinar that asks “Can China Innovate?”  Now I do not think that I would be giving too much away by saying that my answer to that question is, yes, of course it can, because it has.  Rather, the question is what changes must we see in China for it to increase its innovation so as to even come close to the United States as an innovation powerhouse?

The bulk of my talk is going to focus on the legal aspects of China IP that need to change/improve for China to increase its innovation, but the BBC show really did get me to thinking about the cultural aspects as well.  Does China have a risk averse culture?  I don’t think that is true overall, especially since it is extremely entrepreneurial.  Yet, it also strikes me that far too many of China’s best and brightest view a government job as their highest and best use/opportunity and governments are just not going to be the font of much innovation.

So does Mainland China have a culture well suited for innovation?

You tell me.

What do you think?


I am constantly telling our clients that just because something happens one way in Shanghai does not mean it is going to happen the same way in Datong.  It is more than cliche to say that China is a big and diverse country.  Shanghai has some of the most sophisticated infrastructure in the world, while some people still live in caves in rural Henan.

But people often forgot that this applies to the Chinese legal system too. Some courts use strong international standards, while some…not so much.  When helping our clients decide where in China (or even Vietnam or elsewhere in Asia) to locate their businesses, the quality of the legal structure is a factor, the extent of which is going to depend on the nature of the business.  We have talked a number of software and gaming companies from locating “out in the provinces” to save money by convincing them that they need to balance their intellectual property risks against those savings.

I was starkly reminded of that the other day after learning the details of an IPR dispute ongoing in China right now that underscores how much the location of your court can influence the court decisions rendered.

The case involves Knowles Electronics, a US company that makes many of the components in the smartphone or tablet you’re reading this on now. They are the company that made the microphone used by Neil Armstrong during the moon landing.

The other company is GoerTek, a Chinese competitor from Weifang, Shandong.

The case involves competitors fighting with each other in courts from Suzhou to Weifang over the IP to tiny microphones. And also unidentified men accompanied by armed police officers who are alleged to have come to the factory and caused disruption of operations.

We’ll get there.

I won’t bore you with too many of the details. If you are a regular reader you probably get the gist. I’ll just lay out a few to set the stage:

  • Knowles began filing Microelectromechanical Systems (“MEMS”) patents in the US the early 2000s and beginning in 2003, it sold millions in the highly popular early Motorola RAZR phones.
  • Nearly all high-end smartphones in the market—Apple, Samsung, Blackberry—today use Knowles MEMS technology.
  • Major competitors in the market, like Chinese company AAC Technologies Holdings, Inc., license the technology from Knowles, indicating there is little dispute in the market about who owns the technology.
  • Knowles has a major MEMS manufacturing facility in Suzhou and it sold its 15 millionth microphone produced in China in 2004, and 100 millionth the next year.
  • In 2008, GoerTek began producing products similar to MEMS microphones.

So it appears GoerTek is claiming to own technology that either Knowles pioneered or that was in the public domain before GoerTek sought patents, and the two companies have been disputing the IP for some time.

Knowles filed suit in the US and has also taken action at the US International Trade Commission. GoerTek countered by filing suit in its hometown of Weifang.  Knowles sued GoerTek in Suzhou, where Knowles has major operations.

This using multiple lawsuits to jockey for position/best venue is nothing new.  We lawyers even have a name for it: forum shopping.

Here’s the rub.

In its Weifang home court, GoerTek procured an Evidence Preservation Order and a Property Preservation Order within five days of filing the case, which is “highly unusual,” particularly given the complex nature of the claims.

Then on July 31, Weifang officials went to Knowles’ factory in Suzhou to execute the preservation order, which normally would mean securing just enough evidence to show infringement.  But in this case, the Weifang officials allegedly seized a large number of Knowles microphones in what seems to have been an effort to disrupt Knowles’ operations.  The Weifang court also imposed restrictions on the disposition of some of Knowles’s Suzhou assets, even though there was little chance Knowles would just up and leave a country in which it had been operating for twenty years.  Are you getting the picture here?

But China is a big country, and Suzhou — a hotbed of foreign investment — is not Weifang.  Officials in places like Suzhou oftentimes understand that if their region/country is going to move from being the factory to becoming a sophisticated and high-end research and manufacturing country, IP rights will need to be respected.

Many top-tier companies have set up shop in Suzhou and the way that Suzhou courts tend to handle their international cases is one of many reasons why it remains a prime investment destination, even though its costs are on the high side for China.

Knowles brought an action before a Suzhou court and filed a petition for an Evidence Preservation Order against GoerTek. The Suzhou court spent about a month examining Knowles’ petition and then issued its own Evidence Preservation Order.  A representative from the Suzhou court then went to Weifang to execute the order against Goertek, but Goertek denied him entrance.

In the meantime, the Weifang court fined Knowles RMB 1 million for having failed to comply with the earlier Suzhou raid that involved the seizure of so many Knowles microphones.

What does all of this mean for you and your intellectual property in China? What does all of this mean for your plans for doing business in China? It means that just as you need to think long and hard about taking your IP overseas at all and just as you need to think long and hard about taking your IP to China, you also need to think long and hard about where you operate in China.

Cause like we are always saying: China is a big country, and that means that you can end up in an innovative, forward-looking jurisdiction or you can end up in a city from old China where friends and guanxi still trump the rule of law.  It also means that a lot more than costs should go into your decision on where to locate.

The good news is that by-the-book efforts like those of the Suzhou courts do show that slow but sure progress is being made in China’s legal system, but partly cloudy skies/areas clearly do remain.

What do you think?

My friend Kent Kedl co-wrote an article for the Moscow Times today, entitled, Why Russia Is Just as Good as China.  In that article, Kent (who knows China as well as anyone) tries to argue that businesses should be just as interested in Russia as they are in China and that corruption in Russia is no better or worse than corruption in China:

For some reason, investors find Russian corruption harder to metabolize. It is puzzling. The problem is as corrosive in one country as in the other.

Wrong, wrong, wrong.  Dead wrong.

And I say this based on my law firm’s own experiences and on the experiences of foreign businesses, as reflected in the leading corruption indexes.  Let me start out by saying that I love Russia.  Or more accurately, I loved it when I was younger.  I studied Russian.  I have been to many Russian cities.  But I knew Russia and Russia is no China.  Not even close.

Let’s start with corruption.  Transparency International ranks China 80 out of 177 countries. Russia is 127, right between Pakistan and Bangladesh.  World Audit ranks China 61 out of 150 in corruption, with Russia at 110.  I have noticed the difference in concrete ways.

In Doing Business In China. Not That Bad, I compared corruption in China to corruption in Russia:

Back in April last year, I spoke at an Economist Magazine Business Without Borders event on China.  I mostly spoke about intellectual property protections in China, but my introduction dealt with China’s legal system as a whole.  Video of my introduction (but not the whole talk, near as I can tell) is online and was referred to me today.  I watched it and liked what I saw and I had it transcribed, per the below.

What I liked is how I try to put China and its legal system in their proper perspective, which is sometimes necessary.  It is sometimes necessary because we Westerners too often compare China to from whence we come, rather than to other countries closer to where China is socioeconomically.  This causes China to seem worse than it is, and also tends to exaggerate the difficulties in doing business in China.

Here’s my spoken intro, transcribed:

I’m going to start out not really focusing so much on intellectual property, but talking about China’s legal system generally. I’ve been dealing with emerging market countries for the last 20 years or so, mostly helping American companies navigate emerging markets. And my focus in the last 10 years has mostly been on China. In comparing China to other emerging market countries, my conclusion is that China’s legal system is actually more advanced and less corrupt than just about any other emerging market system.

And I’m not the only person who believes this.

As I was driving in this morning I was listening to BBC interviewing a Russian oligarch who was talking about how great Russia is for business, and he mentioned that Russia is actually better than China for business. And the interviewer called him out on that and said well you’re saying that, but no one else seems to say that. And he quoted a number — which I was going to quote today — which is that Transparency International (which is the most respected and the leading ranking of countries on corruption) ranks China 75 out of 176 countries, so it’s actually in the top half in terms of the least corrupt countries. The World Bank ranks China 91 out of 183 in terms of ease of doing business. And in my firm’s own experience, China is not that bad.

We have registered thousands of things with the Chinese government — trademarks, copyrights, licensing agreements — and not once have we ever been hit up for extra money. That’s not true in a lot of other emerging market countries where you do get hit up for a fee to expedite things. But you’re not really being hit up with a fee to expedite things; what they’re essentially telling you is if you don’t pay the fee to expedite your trademark application, your company trademark application is going to go into that “dark corner” over there.  And that generally does not happen in China.

Now, just yesterday, the new AmCham China member survey came across my desk. This is a survey of American companies that do business in China, and one of the questions asked of the members who have been involved in intellectual property litigation in China was what their impression was. And 63% of those members said that they were either satisfied or very satisfied. Now to me that’s an amazing number, because here in the United States, the word “satisfied” is usually not a word that’s associated with litigation.

So, I’m not saying China is perfect, it definitely is not and there are major issues there, major issues of corruption, major issues with its legal system, but what I am saying is for the average American company, it’s not that bad at all. And those are the sorts of things I am going to be talking about later.

I have been to China probably five times as often as I have been to Russia and yet I have been shaken down for bribes by police officers in Russia more than once and that has never happened to me in China.

I have a lawyer friend in a Russian province who tells me that it is a known fact (and trust me when I say that he knows) that 12 out of approximately 15 judges are on the take.

Now let’s talk about costs and safety.  Russia can be an incredibly expensive country to visit.  I remember a few years ago when one of my firm’s lawyers went to Moscow and I saw his $900 a night hotel bill.  I asked him why he needed to stay in such an expensive hotel (in Moscow).  His reply was that it was a Courtyard by Marriott and the Marriott was $300 a night more.  He went on to say that one pretty much has to stay within a certain area of Moscow for safety reasons and there just are not that many hotels there.

Violence against businesspeople is also more common in Russia than in China, not that it is unheard of in China. I am basing this both on the experiences of my clients and of what they tell me, and on what I have read.

Saying that both have corruption is meaningless.  The United States has corruption.  Even Denmark has corruption.  The issue though is not the existence of corruption; the issue is how prevalent it is and how much it impacts foreign businesses seeking to do business there.  Everything tells me that it is far worse in Russia than in China and I think I would be hard pressed to find anyone who disagrees with me on that.

I am not saying that American companies or European companies or countries from anywhere outside China and Russia should be ignoring Russia because I do not believe that at all.  I think Russia has a wealth of opportunities for those who have the staying power to cut through its difficulties.  Heck, we represent a number of foreign companies that are thriving in Russia and some of them have been doing so for going on twenty years.  What I am saying though is that Russia is difficult, for so many reasons, and if you are going to go there, it behooves you to understand this before you leave.

Please note that I am also NOT saying that China is not without its own major problems, because it isn’t.  And I am not saying that doing business in China as a foreign company is easy (or even fair), again because it isn’t.  But again, it just isn’t as bad or as risky as Russia.  It just isn’t.

I just got back from a long trip to Vietnam, which generally ranks a few notches below Russia in the various corruption indexes.  And yet I am very bullish on Vietnam for many reasons — not the least of which is that the US has deemed it to be in its political best interests to do whatever it can to assist Vietnam — and our practice there just keeps on growing.  At the same time, just as with Russia, its “difficulties” should not be downplayed.

One interesting thing in the Russia/China comparison is that we have found Russian companies are better able to function in countries in which bribe-paying is not a wise way to go, and we wrote about this in Bribe Paying Countries. China Is Second Worst:

We have confronted bribery issues head on many times with both Russian and Chinese companies and they virtually always respond very differently.

Let me explain.

A couple of times, Russian companies have strongly hinted or just come out and suggested that we pay off government bureaucrats or judges to get things done. Each time they have done that, I have made very clear that my law firm will not be a part of that and that if they are not comfortable with that, they should fire us right then and there. I then point out to them that their Russian lawyers referred them to us because we know how to handle things in the United States and the right way to handle things in the United States is NOT by paying a bribe. Every time I have had this discussion, it has worked. Sometimes, in fact, the Russian company has come back and said that they had mentioned our conversation to their Russian lawyers and their Russian lawyers had said we should not be fired.

Our results with Chinese companies have been very different. They tell us that “so and so told them that they can get this done in two weeks because they know so and so at the government and they know how the system works.”  We tell them this is not how the system works and, in fact, what they are proposing to do is only going to turn something relatively easy and straightforward into something difficult and illegal. The Chinese company often acts like we are a bunch of naive idiots and moves on, which is fine by us.

Anyway, I think the difference between Russian companies and Chinese companies (and yes, I realize I am generalizing from a relatively small sample) is that the Russian companies are much better able to adapt to where they are doing business. They simply have a better understanding for the fact that just because they do business one way in one country does not mean they must do business that same way in every country. I do not have any illusions about whether the Russian companies who choose not to pay bribes in the United States are paying bribes elsewhere, but I am impressed with how they are able to do things correctly in the United States. Far too many Chinese companies seem unable to believe that not all countries do business the same way.

Anyway, Russia is worse than China, it just is.  But it does have its opportunities and it should not be ignored.
Kedl concludes his article with the following:
In the world of compliance, we talk about “adequate measures” that a company takes to protect itself against corruption. But the recent probes into health care companies in China are forcing companies to redefine the meaning of “adequate.” For example, one adequate measure is due diligence: doing background checks on suppliers, distributors and other third parties with whom you will do business. The same is the case in Russia. Whether you’re doing business in central Moscow or the provinces, you need to know as much as possible about your partner and the potential risks that a company presents to you.

In most environments, a quick look at a business database and a credit check are sufficient. But in China, where neither databases nor credit checks are possible, “adequate” due diligence means sending people out to discreetly talk to the partner’s customers, vendors, regulators and former employees to get a deep sense of who the company is and how they do business. Russia presents a strong parallel here, as well. Quick database or credit checks are either hard to come by or fail to present a complete picture.

Many of the problems with health care companies in China today are a result of not doing adequate due diligence. Who cares if there are a billion Chinese customers if you’re going to destroy your company and your reputation in trying to reach them?

So Russia may not have a billion potential customers. It may also be a popular whipping boy for its business behavior. But companies who avoid Russia because of corruption and rush into China because of its market size are missing the point. Both countries contain the same risks, and each harbors significant reward.

I agree with virtually all that he says directly above. Russia and china do “contain the same risks” in that any company doing business in either country should conduct the sort of due diligence Kedl calls for and they also should require their employees participate in full-fledged anti-corruption training taught by outside professionals.  But the degree of risk is different.
I think in the end though, it really comes down to the company and its product/service and its expertise and its risk tolerance.
I’m just saying….
What do you-all know?

The mainstream media has given massive coverage to workers in China holding Chip Starnes, the president of an American company, hostage for alleged non-payment of wages.  Just as we usually do whenever a hostage taking hits the press, we ran our own blog post, The Single Best Way To Avoid Being Taken Hostage In China, setting out how to avoid getting yourself into just such a situation.  And just as we always do, we link back to all of our prior posts on the subject, to let everyone know that “we told you so.”

But how common are these foreigners being taken hostage situations and how worried should you be?  I was called by three reporters yesterday asking me the commonality question.  I told all of them the same thing, which was essentially as follows:

We learn of a foreigner getting held hostage in China probably once a month.  We learn about this from the media (as in the case of Chip Starnes), from spouses and co-workers calling us to see what we can do, and from readers who simply email us.  My law firm has worked on a handful of these cases over the last five years.  They really are not all that complicated in that one almost never has any choice but to negotiate.  We have used Chinese lawyers to try to get the police to end the stand-off, but that has never worked. Heck, in at least two of the cases we have handled, the police were actually assisting.

The common theme in every hostage taking we have handled (and I think of which I am aware) is money; money allegedly owed for a breach of contract, for wages, or for a personal injury. But the person with whom you really should be talking is my friend in Shanghai at an international risk consultancy company because I know that his company constantly handles China hostage situations.

As for whether these hostage takings in China are getting more or less common, my answer is yes and no.  How’s that for a lawyer answer?  I do not think they are getting either less or more common in the sense that they are either increasing or tapering off due to societal or legal or cultural reasons. Instead,  I think that they are starting on a new increase and I expect that they will continue to increase as China’s economy slows.  As I mentioned earlier, these hostage situations stem from money allegedly owed and now that China’s economy is in a downturn, we can expect there to be more situations where Chinese companies and individuals believe they are owed money and more situations where Chinese companies and individuals will feel compelled to take things into their own hands to get paid. With this we will no doubt see more hostage situations.

Does this sort of thing happen outside China and as much?  I don’t know enough to make comparisons, but I assume this sort of thing goes on in most emerging market countries.  I know it has happened in Vietnam and I know it has happened in Russia, where someone I know was held upside down out a third floor window until he agreed to pay a dubious debt.  So yes, it definitely happens outside of China but I just cannot quantify it.

So what is the answer then about the numbers?  Who really knows?  But what I find so interesting is the initial response my China risk consultancy friend gave by email to the first reporter that contacted him (I was cc’ed):

We work on several cases of unlawful detention like this per month (and, depending on the month, sometimes several per week) … this kind of thing is that prominent in China these days.

I look forward to seeing the articles.

In the meantime though, how worried should you be?  Not that worried. And here is why.

First off, not a single client of my firm has ever been involved in a China hostage situation.  Every time we have been called in to assist on one, it is for a new client. And much of the time, assisting consisted of little more than telling the company that they probably would be better off paying the USD $10,000 claimed, as opposed to paying my law firm to try to contest the amount owed while their employee indefinitely remains guarded in an office by three men or in jail for an indefinite stretch.  But the real point is that all have avoided this problem and the reason they all have avoided it is because they simply do not go to China when there is that risk.

Just the other day, a client of ours called us while walking down the street in a smaller Chinese city.  He told us that he had gone over there to look into what his company should do now that one of its suppliers had just shut down.  During the conversation we learned that the Chinese company had shut down owing its employees all kinds of money and our client was calling us to discuss our assisting in his company possibly buying the factory.  We quickly told him to leave town.  Now.  We explained how if he went to the factory and explained who he was, the workers might well kidnap him.  We have dealt with this exact situation.

Foreign company buys product from Chinese company.  Chinese company shuts down and foreign company goes to Chinese factory to see what is going on and to see if its already paid for (or not) products may be sitting in inventory.  Chinese workers learn of the foreigner in their midst and grab him or her (it is almost always a “him” but I am aware of at least two cases involving a “her”) and demand that the foreign company pay the outstanding wages. The foreigner explains how they too have been hurt by the shutdown and they certainly do not owe anyone in China any wages.  The Chinese workers see things very differently.  Their explanation is that they worked hard to make product for the foreigner and the foreigner got the product and the workers never got paid and so now the foreigner needs to pay the workers and if it does so, he or she will be freed and they can even leave with their product.  The fact that the foreign company already paid once for the product is simply irrelevant.

Anyway, our client left safely.

Not only are these hostage situations generally preventable, but (and I know this is only small solace) these situations in China do not typically involve violence in that the person taken hostage is usually not beaten nor killed.  I am not saying violence never happens, but I am saying that I am not aware of an instance where it did.  Should you be so worried about being taken hostage in China that you do not try to conduct business there?  No.  Should you at least consider the possibility of a hostage situation.  Yes, you should at the first sign of any sort of potential dispute.

What do you think?

UPDATE:  One of the articles for which I was interviewed just came out and I was provided a copy of it.  This article was written by Leslie Pappas of Bloomberg BNA.  I was provided with a pdf of the article, but it is hidden beyond a paywall.  I wanted though to highlight the portion of this article quoting my Shanghai risk consultancy friend, who I can now reveal to have been Kent Kedl of Control Risks.  Kent highlighted the commonality of these China hostage situations and the benefits of thinking and planning before acting when a hostage situation is possible:

The commercial element of the Starnes case is “typical” of other hostage situations in China, which are increasing as the economy slows, according to Kent D. Kedl, the Shanghai-based managing director for Greater China and North Asia for Control Risks, a global risk consultancy based in London. ”

“We work on several cases of unlawful detention like this per month — and, depending on the month, sometimes several per week,” Kedl told BNA in a telephone interview June 26. Unlike countries such as Mexico and Nigeria, it is extremely rare in China for a company executive to be kidnapped and held for ransom, Kedl said. In China, cases usually arise because of a commercial dispute, which may involve a company’s employees, distributors, suppliers, or other affiliates. “It’s someone who gets upset and doesn’t know what to do,” Kedl said.

Control Risks has seen a “sharp increase” in hostage situations in China in the past two years, Kedl said, and has seen an increase in threats and actions against company management and foreigners. Kedl attributes the change in part to China’s slowing economy, as companies reassess their businesses in China and in some cases start to restructure–news that often comes as “a shock” to workers. Restructuring “is an anathema to most Chinese employees,” said Kedl. “It’s been nothing but growth for the past 10 years. . . . In China, business hasn’t come and gone. It has only come.”

Companies need to think through all aspects of a downsizing or restructuring, including the compensation strategy, the communications strategy, and relationships with local officials before they undertake a restructuring, Kedl said: “It is the company’s responsibility to think through what they’re doing and think through what could happen.”

I agree.

I spent much of last week in Chicago meeting with “China people” and “talking China” and I left there with one inescapable conclusion:  China is changing.  No drum roll please.

Of course China is changing you are saying, but how?  The conclusion is that China is getting more difficult for foreign companies, but why and how?  The following was the consensus:

  • China’s government does not like large private companies, be they American (Apple and Yum Brands spring to mind) or even Chinese.  China likes State Owned Entities that operate as much to advance the interest of the state as to make a profit.  Worries about the economy stop the government from going much beyond putting big companies in their place.
  • China wages keep rising and China’s government is fine with this.  But this has and will continue to have repercussions.  It means that production costs are rising in China and that is leading to its own set of changes.  Really large companies (the Intels, Canons, Toyotas of the world) that are able to build or maintain essentially self-contained operations in a country like Vietnam are doing exactly that. Companies that need substantial outside assistance are just starting to look more seriously at other countries for their manufacturing.  On the flip side, many SMEs have little choice but to stick with China for their manufacturing because only China has the infrastructure to make what they need at anything approaching a reasonable price.  Also, many companies are looking to move into China or to expand their China operations so as to capture the China market.  If you think this sounds contradictory, you are right.  On May 1, the Wall Street Journal did a story entitled, “Not Made in China: As Labor Costs Keep Rising, More Factories Flee To Vietnam” on one page, and a story on another page, entitled, “Welcome To General Tso’s Motors,” on how “China is becoming GM’s global export base.”  In other words, China is no longer an “automatic” for American companies, not that it ever should have been.
  • In addition to increasing wages, China is becoming more difficult because of its legal enforcement.  I hesitate to use the word “difficult” here because whenever I do so, someone usually writes to complain about how China has every right to enforce its laws and we as foreigners should not be complaining.  China does have every right to enforce its laws and it is definitely doing so against foreigners, particularly its tax and customs laws.  This stepped-up enforcement is increasing legal and tax costs for virtually all foreign firms doing business in China.
  • Countries like Bangladesh are not going to replace China.  Certainly not in the short run and probably not ever. We all know Bangladesh is not even close to being big enough or populated enough or with sufficient logistics to replace China.  I have always thought Bangladesh is a bad idea for American companies.  I thought this before the fire and before the building collapse and before the killings in the streets by Islamic extremists.  I have thought it because I just do not think it worth it to a company to locate in a place like Bangladesh, where the safety risks, both for Americans and for workers is so high. Even before the fallen building and the riots, I was sensing that more American companies are coming round to this view. It is also clear that even better functioning China alternatives like Vietnam or Thailand or even Indonesia are all far more difficult (at least right now) for SMEs than is China. Many are improving though and it the number of SMEs realizing this is definitely increasing.

What do you think? What are you seeing out there?