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Many years ago, a number of people (china consultants, in particular) were applying the concept of quality fade to China. The idea was that once a foreign buyer became comfortable with its Chinese manufacturer, it could expect that manufacturer to start skimping on quality to save money. In other words, your product might go from being 10% copper to 5% copper without your Chinese manufacturer telling you of the change. Or your laptop bag handles might go from being strong enough to hold a laptop to not being strong enough to hold a laptop. Nearly everyone, it seemed (including me) bought into the idea of quality fade.
I no longer do.
And not only am I not sure it is a persistent phenomenon, I am also not even sure that the concept is relevant even if it is.
First though, I am going to discuss what it is that has caused me to re-access “quality fade” so many years after I (or it seems anyone else) has used (or even thought of) that term.
The Wall Street Journal ran a story, entitled, Chinese Asbestos in Australia? Blame ‘Quality Fade, in which it talked of how ”two leading Chinese car companies, Great Wall Motor and Chery Automobile, confirmed that they are recalling 23,000 cars and trucks they’ve sold in Australia because asbestos was discovered in their engine and exhaust gaskets.” The article (wrongly I think) describes these mistakes as defying explanation. Greg Anderson, a very thoughtful and knowledgeable China consultant (with a focus on automobiles) asks on his Facebook page whether “Chery and Great Wall are the victims or perpetrators of ‘quality fade.’” [Note that this post was set to run years ago, but has been sitting in the "draft" folder ever since]
Who cares? And is the entire “quality fade” concept simply another way of trying to make China look bad? Is it racist even?
I do not think it racist, but I also have come not to believe it fair either.
Let me explain.
I just got back from speaking at a massive consumer products fair in Las Vegas on sourcing product from China successfully. As you can imagine, I talked a lot about preventing quality problems. I did not bring up a statistic I was once told by a higher up at the US Consumer Protection Agency on how China has product safety/recall problems at a rate of at least six times that of any country every single year. And this is per product made, not overall. I am not going to dispute that China is probably the worst country on earth in terms of making products “right.”
But something one of my audience members told me after my speech has really stuck in my head. After the show and by way of small talk, I asked an audience member what he thought of the products show. I expected him to say something like “it’s huge” and then move on. Instead, he launched into a very sophisticated and thoughtful discussion on how almost everything at the show was junk and on how he had always thought that as we became wealthier and as our technology advanced, product quality would improve. Instead, he said that people just don’t care about quality any more. I told him of how Nordstrom was thriving and his response to that was because they are becoming somewhat of a bastion of quality and so they are getting people from other stores because of this and of how most Americans have become focused on price to the exclusion of quality.
He then went off on how it is America’s fault that China produces “crap” and it is our fault because we buy it. He analogized it to our blaming foreign countries for our own cocaine problem. He then talked of how he had sought to have a product well made by a Chinese company and the Chinese company said that it was making similar products for ten or so other American companies and that none of them were requiring that it make the product at the standards required by this guy and so no matter what the price, “it would be too difficult and they were not interested.” This guy insisted to me that his quality standards were not all that high and that they were pretty much the same as the quality standards at which he made the product in the United States years ago.
Why then is “quality fade” irrelevant. It is irrelevant because in the final analysis you will get the quality you demand and if you don’t get that quality, it is up to you to go elsewhere to attain it.
What do you think?
For more on sourcing product from China, check out the following:
- It’s Not “Quality Fade.” It’s Oversight Fade. It’s Not “Poorly Made.”It’s Poorly Managed, at All Roads Lead To China
- China OEM Agreements. Why Ours Are In Chinese. Flat Out
- How To Get Good Product From China; Specificity is THE Key To Your OEM Agreement.
- China OEM Agreements. Ten Things To Consider
- China OEM Agreements. Yet Another Reason To Have One
- China Supply Agreements. Why The “Perfect” OEM Agreement Should Cost Less
- OEM Agreements With Your China Supplier. Not Just For The Big Boys
- The Five Steps To Successfully Buying Product From China.
- China Manufacturing Agreements. Make Liquidated Damages Your Friend.
There is some truth to an old expression about China employees, “once hired, never fired.” Terminating a Chinese employee is rarely going to be easy, but if that employee is on probation, you do have a better chance of not getting sued for doing so.
China does allow probationary periods for Chinese employees, but only if done right. The maximum term of the probationary period depends on the term of the employment contract. If the employment contract is for between three months and one year, the probationary period can be for up to one month. If the employment contract is for between one year and three years, the probationary period can be for up to two months. For fixed-term employment contracts of three years or more, and for employment contracts with no fixed term, the probationary period can be for up to six months.
If the employment contract terminates upon completion of an agreed assignment or if the employment contract is for less than three months, there can be no probationary period.
An employee may be subject to only one probationary period with the same employer and this holds true even if the employee leaves that employer and then rejoins it.
Any probationary period must be set forth in the employment contract. If an employer enters into a separate agreement with its employee for a probationary period, the probationary agreement will be void and there will be no probationary period and the employer will be deemed to have entered into a fixed-term contract with the employee. This is done to prevent an employer who becomes unhappy with its employee from putting that employee on probation after the hiring.
My firm’s China lawyers draft all China employment contracts in Chinese as the official language (and in English as a translation for our clients) because we have heard instances of Chinese courts refusing to recognize English language employment contracts after finding that the Chinese employee did not fully understand them. We consider English language employment contracts in China to be the equivalent of a Chinese language employment contract in the United States; they make no sense at all.
In the last couple of years, we have seen a tremendous increase in cases involving U.S. companies (and lawyers) wanting to sue Chinese companies for Chinese manufactured product that has injured someone. These cases coming to us typically involve one of the following scenarios:
- A US retailer or importer is being sued by someone injured by a product sold or distributed by the American company. The injured party has sued the retailer/importer/distributor because suing and collecting from the Chinese manufacturer will be so difficult. The retailer/importer/distributor (or its subrogated insurance company) wants our assistance in figuring out who to sue in China and how to go about doing so.
- A US lawyer representing an injured consumer wants our assistance in figuring out who to sue in China and how to do so in a way that will actually lead to the injured consumer receiving real money.
- A US company or US lawyer just secured a judgment against a Chinese manufacturer and wants our assistance in figuring out how to collect on that judgment.
So what do we usually suggest?
Suing Chinese companies in either the United States or China is difficult.
If you sue the Chinese company in the United States, it will likely claim that the United States lacks personal jurisdiction over it. This can be very effective for the Chinese company that does business only in China and that has been smart enough to set up an intermediary company in Hong Kong (usually) that ships the product to the United States. Here’s the scenario: China company manufactures widget and sells it to Hong Kong company. Hong Kong company then sells the widget to American company and China company then claims it never did any business with the United States and thus cannot be subject to personal jurisdiction there. The trick then becomes trying to show that the Hong Kong company is essentially the China company. This is not going to be easy.
Even assuming that you can convince a US court to assert jurisdiction over the Chinese company, the Chinese company may not even bother fighting against your getting a judgment against it. The problem is that Chinese courts do not enforce US judgments and so for your US judgment to have any value, you must be able to use it to collect from the Chinese company outside of China, in a country that will enforce your US judgment.
You can usually sue the Chinese manufacturer in China, but this approach has its own set of difficulties, ranging from the difficulty in securing evidence to enforcing any judgment (which will probably be a lot less than the judgment would be in the United States).
But there options beyond suing in the US and China. Many countries enforce US judgments and so US companies must start “thinking globally” in deciding what actions to pursue against Chinese manufacturers.
When we are brought on to assist in seeking compensation from Chinese manufacturers, the first thing we do is to seek to locate where the Chinese company has assets. We then research whether the country (or countries) where the Chinese company has assets will enforce a US judgment.
For example, assume the Chinese company has assets in Korea, Canada or England. If you can get a money judgment against the Chinese company in the United States, you likely will be able to “convert” that US judgment to a Korean or a Canadian or an English judgment and then use that judgment to collect on the Chinese company’s assets in the particular country.
As Chinese companies continue going global, you can expect it to become easier to collect on judgments against them, so long as you realize what must be done to accomplish that.
For more on what it takes to sue a Chinese company, check out the following:
- Suing Chinese Companies In US Courts. The Pros And The Cons.
- How To Sue A Chinese Company. Part I. Jurisdiction And Service Of Process.
- How To Sue A Chinese Company. Part II. Discovery.
- How To Sue A Chinese Company. Part III. Litigation Strategies And Enforcing Judgments
- Enforcing Foreign Judgments in China — Let’s Sue Twice
- Chinese Companies Can Say, “So Sue Me.”
- Taking Judgments To China (And Korea), Let’s Not Sue Twice
- Will Your US Judgment Be Enforced Abroad? Not China, But Maybe
- Why Suing Chinese Companies In The US Is Usually A Waste Of Time
One of the tougher issues we as China lawyers face is what we call the Home Office/China Office tension. These situations are tough for us because we are so often put smack dab in the middle.
Let me explain.
On the one side you have the US home office, often replete with well trained in-house attorneys and accountants and businesspeople. On the other side you have the China office, often replete with foreign and Chinese employees who have been hired based on their knowledge about doing business in China and for their ability to figure out how to get things done in China. The US home office has very little knowledge about China and the China office has very little desire to follow every rule in China when doing so will lead to increased costs and/or decreased sales/profits.
That puts us in the uncomfortable position of being the buffer between the two offices, explaining to the US office why it must do xy and z in China and then having to fight off the China office who does not think xy and z are really necessary.
One of our China attorneys wrote me the following email regarding one of these situations and because it is so typical, I thought it would be good to share, with all identifiers stripped from it:
In case you have any doubts, Mr. Y. [the American who heads up the China office] will get along perfectly with ____________ [a China consultant whom we believe to be corrupt]. They see the world in the same way.
However, CleanCo [the made up name for our client] has told me that it wants to obtain venture funding from real people in the United States. You can imagine what a connection with ________ [corrupt China consultant] would do to that plan. Mr. Y runs the China office in the way that is typical of _______[the China city in which it is located]. In that sense, Mr. Y. is right that we don’t understand how China works.
However, he is wrong. We understand very well how China works because we know full well that the way China works is not going to be acceptable to any legitimate VC group.
This is the problem in CleanCo. Mr. Y says this is the way it is done in China and when he says that, he is absolutely correct. That is probably what the advisors to GSK said to them and look what happened there. The same will happen to CleanCo if it keeps relying on a guy like Mr. Y. to determine how it conducts business in China.
When I talked to _______ [at CleanCo's US office], he said: I want a China operation that will pass muster according under Wall Street due diligence standards. This is what we are tying to give them. However, Mr. Y. does not understand that and he has no intention at all of delivering that. So, at this time, CleanCo needs to decide what kind of China operation it wants.
No matter what, CleanCo needs to realize that if you run a crooked ship in China, you can be run out of town in just one day. That is their risk and that risk is very real.
However, this is a classic case where their ENTIRE China operation rests on Mr. Y. So they cannot easily get rid of him. It is a very difficult situation. This is a serious matter and it requires careful consideration by CleanCo. Considering what anybody can read on the web in about one hour as to what is happening these days to American companies, it is quite incredible that we are even having this conversation. At any rate, I will say it again that the issue is how CleanCo intends to operate in China. As long as it works through Mr. Y, the straight way will never work and he seems incapable of understanding that the China in which he did business twenty years ago has changed drastically. More troubling, he may be right that the [key] product cannot be manufactured in China “the straight way”. It’s a big deal and it cannot be swept under the rug at this point.
I am quite sure that many of you are quite familiar with the above tensions and we would love to hear what you think.
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 manufactuing 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.
This post is the second in a series of posts by Grace Yang, one of our China lawyers resident in Beijing. Grace has her B.A. from Beijing University and her J.D. (law degree) from the University of Washington. Grace is licensed to practice law in Washington and New York States and she will be sitting for the China bar exam this fall. The below post and the one that preceded it stem from a recent project/memo Grace did for one of our American clients doing business in China.
In my last post, Paying Your Non-Chinese Employees In Your China WFOE Part 1, I discussed how China requires WFOEs report the combined U.S.-China salary of their employees and pay the tax on that combined salary when appropriate. The applicable rule is the Circular of the State Administration of Taxation on Income Tax Paid by the Enterprises with Foreign Investment and Foreign Enterprises for Their Employees on Behalf of Their Enterprises Abroad (Guoshuifa  No. 241) (“Circular No. 241”).
Circular No. 241 applies only when the Chinese entity and the foreign entity are “related.” That of course leads to the question of what “related” means in this context. Because the term is nowhere defined, it is unclear whether an indirect connection between the US entity and the Chinese entity would be considered “related” under Circular No. 241.
Is it therefore possible to get around the taxes by having “your” China employees work for a US company separate from your regular US company? We advise against that because Chinese law has already defined the term “related” companies quite broadly in other contexts, which convinces us that it will do so under this circumstance as well. Specifically, two entities are considered “related” if (1) there is direct or indirect ownership or control with respect to capital, business operations, purchases and sales, (2) there is direct or indirect ownership or control by a third party; or (3) there are other kinds of mutually beneficial connections. If the Chinese tax authorities apply this broad definition, they would likely conclude that the China WFOE and your US company are related enterprises and then find that Circular No. 241 requires the WFOE to report and pay taxes on your employees’ full salary if they work in China for more than 183 days in a calendar year.
What about using an employee dispatch service to try to get around the combined salary problem? Our China attorneys have discussed this with multiple China government officials and each time we have been explicitly told that dispatch agencies are not allowed to dispatch foreigners because a foreigner’s work certificate must specify the employer of the foreigner, and when using a dispatch agency no employer can be specified. Using a dispatch agency also risks the Chinese authorities concluding that you did so to evade taxes, which will then lead to their imposing any taxes owed, plus interest and penalties.
To repeat what I said in the last post, there is simply no way around the fact that if your employee resides in China for 183 or more days, both you and your employee must pay tax on that employee’s combined U.S./Chinese salary.
This post is by Grace Yang, one of our China lawyers resident in Beijing. Grace has her B.A. from Beijing University and her J.D. (law degree) from the University of Washington. Grace is licensed to practice law in Washington and New York States and she will be sitting for the China bar exam this fall. The below post stems from a recent project/memo Grace did for one of our American clients doing business in China.
We are often asked whether it is legal to pay a non-Chinese employee from both the China WFOE and from a company outside China (usually the US parent company). The answer to that question is an easy yes, but the tax issues that arise from that are where things get difficult.
It is perfectly legal for an American company to pay its American employees from both China and the United States. However if your American employees are resident in China for more than 183 days in any calendar year, you must pay taxes in China on the combined U.S.-China salary of your employees. This obligation to report and pay taxes is stipulated in the Circular of the State Administration of Taxation on Income Tax Paid by the Enterprises with Foreign Investment and Foreign Enterprises for Their Employees on Behalf of Their Enterprises Abroad (Guoshuifa  No. 241).
The Circular on Questions Concerning Tax Payments for Wage and Salary Income Gained by Individuals without Residence within the Territory of China (Guoshuifa  No. 148), mandates that if your employee works in China for less than 183 days in a calendar year, he or she is obligated to pay taxes only on that portion of salary received from the China WFOE when he or she was in China.
But if your employee works in China for more than 183 days but less than 365 days and so long as your employee did not live in China for a full year prior to this year, your employee must pay China taxes on the salary paid by the China WFOE and on the salary paid by your US entity during the period he or she is in China. In other words, your employee must pay taxes on whatever salary was earned in China, no matter who pays it.
If your employee works in China for over one year, but less than five years, your employee must pay China income taxes on the salary received from the China WFOE as well as on the salary received from your US entity during the time your employee is in China.
Don’t let the above throw you off, it is actually quite simple: if your employee works in China for 183 or more days in any calendar year, both you and your employee must pay tax on the combined U.S.-Chinese salary. There is no way around this obligation. We advise our clients to take this seriously, because failure to comply with this rule can result in penalties for both the WFOE and for the employee.
The problem is that foreign companies have customarily ignored this rule and while Chinese tax authorities have recently become much more aggressive in enforcing it. The issue normally arises when the employee applies to renew his or her visa. If the employee has resided in China for more than 183 days, the local tax authority will request a copy of the employee’s US tax return. If the employee fails to provide the US return, that employee’s visa gets denied. If the employee does provide the U.S. tax return, the tax authorities assess the tax, along with interest and penalties.
Our China attorneys are aware of several cases where foreign employees were denied entry into China after 183 days of residence for failing to report their combined salaries. We also are aware of multiple cases where the Chinese tax authorities took very aggressive penalty actions against WFOEs for failing to report and pay taxes on the combined salary of their high level China company managers. The risk of noncompliance is therefore significant.
So what should your WFOE do? Report the combined salary and pay the full tax, or ensure your employee resides in China no more than 182 days in any calendar year. In part II (coming tomorrow), we explain why you really do have no choice in this.
A few months ago, co-blogger Steve Dickinson, Greg Buhyoff (our lead Vietnam lawyer), and I went on an extended legal/business trip to Ho Chi Minh City and Hanoi, during which we met with around a dozen Vietnamese lawyers. One of the questions we asked nearly all of these lawyers (mostly because we kept getting different answers) was “what should we be putting in our contracts with Vietnamese companies, by way of a venue provision?” In other words, which of the below options would be best for our mostly American (with a smattering of European and Australian) clients:
- Litigation in the courts of the home country of our client.
- Litigation in the courts of Vietnam.
- Arbitration in Vietnam.
- Arbitration outside Vietnam.
- Litigation in the home country (within America or Europe or Australia) has the big plus of providing to the home company its greatest chance of prevailing. Litigation in America, Europe and Australia also tends not to require a large upfront filing fee/arbitration fee. But the downsides almost always outweigh the plusses, with the biggest downside being that neither Vietnam nor China will enforce the court judgments of most foreign countries. So if you are suing a Chinese or a Vietnamese company overseas and you prevail, you likely will have no means for collecting on your judgment/enforcing your judgment in either China or Vietnam. If the Chinese or Vietnamese company has assets in a country that will enforce such a judgment, then it is a different story, but that is rare. We only rarely write contracts with Chinese or Vietnamese companies that call for litigation outside of China or Vietnam, respectively. It also bears mentioning that litigation is public and has the potential to be the most expensive option of all.
- Litigation in the courts of Vietnam or China. The biggest plus for litigating in a China or a Vietnam court is that the courts in both countries are best equipped to enforce a judgment, be the judgment a monetary one or one requiring the Vietnamese or Chinese company to do something, such as stop violating intellectual property rights. The biggest downside of the courts of both Vietnam and China is that they tend not to be well equipped for handling complex commercial matters and they are sometimes biased against foreign companies. These negatives are much greater in Vietnam than in China and for that reason our China contracts far more often call for litigation in China than our Vietnam contracts call for litigation in Vietnam.
- Arbitration in Vietnam or China. The biggest plusses for arbitrating in Vietnam and China are that it is quite possible to have good arbitrators, have an arbitration in English, and have good chances of enforcement. The minuses are that it is also quite possible not to have good arbitrators and to have an arbitration in Chinese or Vietnamese. The costs can also be high and enforcement (particularly of a non-monetary award) can be slow. The other day a China lawyer proudly told me that he never lets his clients agree to arbitration within China. The reality though is that Chinese companies (especially SOEs) are increasingly mandating in-country arbitration (this is also true of Vietnam). If you are going to do an arbitration in either China or Vietnam, it is absolutely essential that your arbitration provision be written so as to avoid the numerous pitfalls possible with this.
- Arbitration outside Vietnam and China. The biggest plus with this is that you can choose wherever you want (Hong Kong, Singapore, Geneva, New York, Toronto, Sydney, Stockholm, wherever) and you can fairly easily get great arbitrators. The biggest minus (truer of Vietnam than of China, but true of both) is that enforcement of a foreign arbitration award can be slow and, even worse, can also be spotty. Be very careful here in that both Vietnam and China prohibit foreign arbitrations of certain disputes.
It is common to read articles with statements like this: “Contrary to popular belief that enforcement of arbitration awards in China is very difficult, statistics show that less than 10% of arbitration awards are set aside by Chinese courts”.
This is very misleading. Talk to those who actually work on arbitration enforcement and the picture is reversed: most awards are settled rather than enforced, and although courts hardly ever set aside awards, they do nothing at all – which of course favors the Chinese party.
It really does just depend….For more on litigation versus arbitration, check out the following:
- How To Write A China Contract. Arbitration Versus Litigation. Say Where?
- How To Sue A Chinese Company. Part I. Jurisdiction And Service Of Process
- How To Sue A Chinese Company. Part II. Discovery
- How To Sue A Chinese Company. Part III. Litigation Strategies And Enforcing Judgments
- How To Sue A Chinese Company. Part IV. Arbitration In The U.S. And Suing In China
- Taking Judgments To China (And Korea), Let’s Not Sue Twice
- Why Suing Chinese Companies In The US Is Usually A Waste Of Time
- How To Write A China (CIETAC/BAC) Arbitration Clause
- Arbitration In China. Get Used To It.
- Litigation And Arbitration In China. No Surrender. Ever.
- China Courts. You Ain’t In Kansas Any More
- China Sex, Mistresses, And Improper Payments, And What They Mean For Your China Business Litigation
- China Sex, Mistresses, And Improper Payments, And What They Mean For Your China Business Litigation. Part II, The Contracts Do Matter Edition
Not easy issues. What do you think?
Okay, no sooner do I tout a list of ten keys for doing business in China but a loyal reader sends me another such list by which he swears. This list was created by Michael Witt, an INSEAD Professor of Asian Business and it makes up a Forbes article, entitled, The Ten Principles For Doing Business In China. It is described as “ten insights intended to help your business be successful in its China operations” and it too contains excellent pointers for foreign companies doing business in China.
Here is that list with my comments in italics:
1. Do your homework. When China operations get into trouble, a lack of preparation is a common theme. Very true. I hate to say this, but in my experience, foreign companies that get in trouble in China are usually at fault for not having better prepared.
2. Beware of industrial dynamics. A common cause of losses in China is that foreign firms are so focused on market growth rates that they neglect the basics of competitive analysis. In the beer industry, for instance, more than 20 foreign brewers entered in the mid-1990s, each of them planning to capture on average 15 percent of their market segment. In a market lacking clear differentiation, they also found themselves competing with around 600 local brewers, many of them subsidised by local governments. Some expected these issues to disappear over time, but almost twenty years later, the fundamental situation has changed little. Many industries in China resemble the beer industry, with overcapacity, high levels of fragmentation, subsidised local competition, and foreigners willing to absorb losses from their “strategic” investments. Agreed. This also fits into the overall need to prepare.
3. Take your time. Many companies want to get on the ground quickly. In one case, the CEO told his head of strategy to get China operations going within six months. Time pressure of this sort can create problems later on. It tends to result in sloppy planning and analysis. It shifts the attention from finding the right partner to finding any partner, regardless of partner fit. Moreover, it weakens your hand in negotiations. Your Chinese counterpart will know how to use your time constraints against you, and you will walk away with a worse deal. Completely agree. In my experience, there is a direct correlation between speed and quantity of mistakes. Again though, this fits into the overall need to prepare.
4. Chinese society is collectivist. Chinese society is collectivist in that individuals identify with an “in-group” consisting of family, clan, and friends. Within this, cooperation is the norm. Outside it, zero-sum competition is common. Zero-sum competition means that your Chinese counterpart may not believe in win-win solutions. One can observe this, for instance, in the tendency to re-open negotiations just as everything seems settled, especially if one seemed too ready to agree with the negotiated terms; one’s counterpart may interpret this as an indication that s/he has not bargained hard enough. Absolutely true, and foreign companies that ignore this do so at their peril. For more on negotiating with Chinese companies, check out How To Handle Chinese Negotiating Tactics, How To Handle Chinese Negotiating Tactics. Part Two, How To Handle Chinese Negotiating Tactics. Part Three.
5. Mistrust and opportunism are endemic. There are two opposite ways of extending trust. One is to trust until given reason not to; the other is not to trust until there is enough evidence of trustworthiness. China takes the latter approach. The zero-sum competition already noted creates an incentive to take advantage of people outside the in-group. As a consequence, the Chinese tend not to trust people outside their in-group. Take your cue from them. Completely agree. Foreign companies doing business in China should not be afraid to show a lack of trust. For more on the need for conducting due diligence in China and how to conduct due diligence in China, check out the following:
- Seven Rules of China Due Diligence
- China Due Diligence. It Is Different.
- Let Me Tell You About China Due Diligence
- Giving China Due Diligence Its Due
- China M&A. The Extreme Basics On Due Diligence.
- How To Really Really Investigate A Chinese Company
- Giving China Due Diligence Its Due, Part II. Don’t Be A Sucker.
6. Trust is interpersonal and takes time to build. A common safeguard against opportunism is to build relationships of trust with persons who matter for your business. Unlike in the West, the creation of personal friendship is a prerequisite of doing business. Building friendship takes time, which is another reason to avoid rushing into things. Besides numerous invitations to sports and other events, one key element in building trust is long dinners during which everything but business is discussed. In these, alcohol plays an important role. Learn to drink intelligently. Seasoned negotiators dispose of the alcohol into their water glasses or into the wet towels most good restaurants make available. This is true, but plenty of business with China gets done these days without these sorts of personal relationships.
7. Notions of “out-of-bounds” behaviour do not necessarily match. Chinese negotiators occasionally push beyond what their Western counterparts consider appropriate bounds. For example, the representatives of a large Western firm were negotiating the distribution rights for one of their products. Their Chinese counterparts closed their initial pitch by threatening to use their political connections to prevent distribution of their products if they did not receive the rights. In another case, the Chinese party got their Western guests drunk to prevent them from being effective in negotiations the following morning (which, on the Chinese side, involved a completely different set of people). These sort of things do sometimes happen but smart companies generally have little problem in dealing with them.
8. Chinese society is hierarchical. Company decisions are typically reached in a top-down manner, with only the very top of the pyramid involved in decision-making. Mistrust puts limits on delegation, and supervisory control at each level is high. Be aware in negotiations that the decision is ultimately made at the very top. If your counterpart is not part of that group, s/he is typically not authorised to make major decisions but must report back to the top for instructions. Completely true.
9. Government in China is decentralised and in important respects, bottom-up. Conventional wisdom holds that China’s governmental structure is highly centralised, with all key decisions made in Beijing. In reality, Beijing directs little of what happens throughout the country, especially in far-flung regions. To be sure, if Beijing truly wants something to happen, it will. Expect conditions to vary by location. In addition, to the extent you need to negotiate with government, it is crucial to involve the local government. Even if you have agreement from Beijing, if the local government wants to thwart you, it will. Generally, you want to be sure that both the applicable local government and Beijing are okay with your China business plans.
10. Be conscious of the large picture. Most of the growth in China since 1978 has come from private small and medium-sized enterprises. Today, they make up about 65 percent of Chinese GDP. If so, fierce competitive battles seem likely for the future, and easy access to state money for these firms means the playing field will not be level. Government may be on your side as long as your technology is needed. Keep this in mind when selecting a partner for cooperation or considering market entry. Sure.
I think the above list is highly accurate, but as far as being helpful for conducting business in China, I prefer Hupert’s. What do you think?
Law schools want money. Law schools make money off their tuition. This means law schools want as many qualified students to enroll (within limits, of course) and this also means that they do not want their enrolled students to drop out. Law schools oftentimes try to entice students to enroll in their schools and to stay in their schools by touting what law students find sexy. Law students often find international law sexy. Law schools often tout their international law courses/programs and tout an international law career path so as to appear sexy to their students.
The above poses problems, mostly centered on the fact that there are incredibly few international law jobs for recent law school graduates. Incredibly few.
Let me explain, using the Seattle lawyer job market as the example.First though, let me give you a greatly oversimplified primer on American law firms. There are the mega firms that do high level business work and there are the boutiques that do high level business work. The boutiques tend to be made up largely of lawyers who once worked at the mega firms. For the most part, only these firms do international business work. Even in a very international city like Seattle, there are really only a handful of firms that truly do much international legal work. Now let me give you a greatly oversimplified primer on the hiring practices of the mega firms and the high level boutiques. These firms are obsessed with hiring people with high grades from highly rated law schools. Why? Because those “numbers” are the easiest way to “grade” potential lawyer applicants. Is this the best way to grade potential applicants? No, but it is the fastest and the easiest and if you are looking at a stack of 500 resumes and 250 of the people behind them have done amazing things with their lives and seem like truly stand-up people, you need to do additional filtering. This means that these law firms filter down to the ten or twenty they will interview by taking only really good students from the top law schools and maybe only the top 5-10% from a mid-ranked law school. Here is where the problem arises. Since nearly all international legal work is done by the mega firms and the high end boutiques and many mega firms do not do much (if any) international law and hardly any boutique law firms do any international work, this means that law firm international law jobs are going to be limited only to the best students at the best schools. On top of this, many (most) big law firms do not have recent law school graduates work on many (or any) international law matters. The feeling is that young lawyers must first become good at corporate law or tax law or dispute resolution or labor law or IP law or whatever before they get tasked with the additional layer of complexity of working on an international matter. What the above means in real life for law students seeking an international law job with a law firm is that their class rank/school rank is going to be absolutely critical in determining their chance of getting an international law jobs and that even top ranked students from top ranked law schools with fluency in an important language for business are not likely to get an international lawyer job at a law firm right out of law school. Now to the real point of this post. Too many law schools either intentionally or negligently put into the heads of their students that getting an international law job is no more difficult than getting any other law job. From my perspective, I feel as though the law schools prefer to leave it up to people like me to burst their students’ bubbles and I have done that more than once. And though I do not enjoy it, I take a certain pride in it, because I believe that by doing so I am helping young lawyer wannabes, not hurting them. One example highlights my myth busting work. Many years ago, I gave an informational interview to a middle of the class student from a law school ranked in the mid 100s about international law jobs at law firms in Seattle. I met with this student because I am friends with one of her professors and he really wanted me to speak with her. At our meeting I learned that she was fluent in French and was looking for a job in Seattle doing international law involving France. I was blunt, and I told her the following (note that I was less blunt than appears below, but the below has any niceties removed):
- If we added up all the Seattle-France legal work done by all of the law firms in town I doubt there would be enough work to keep one lawyer busy full time.
- I do not believe there is a single law firm in town that will view your fluency in French as a plus factor in deciding whether to hire you. In fact, if you emphasize your desire to do France work, I think most firms will consider that to be a negative because they will think that you are more interested in dreaming about France than in doing the nitty gritty legal work the firm generates.
- What law firms in town do international law? I mean really do international law, not just mention it on their website?
For more on what it takes to become a China lawyer/international lawyer, check out the following:
- So You Want To Be An International/China Lawyer, Part V. Know The Fromm Six. (2014)
- So You Want To Be An International (China Lawyer), Part IV. Do You Really? (2013)
- So You Want To Be An International/China Lawyer? Part III (2008)
- So You Want To Practice International Law/China Law? Part II (2007)
- So You Want To Practice International (China) Law? (2006)
What do you think?
Had lunch the other day with a bunch of people I consider to be China experts (to the extent there is any such thing). During our lunch, GSK’s China corruption issues came up and we mused as to what was really happening in China by way of anti-corruption enforcement. The following views were expressed:
- China is serious about corruption and it is starting with the pharmaceutical industry because corruption is so entrenched there. China is going after both domestic and foreign companies, but we are just hearing more about the foreign companies. This is just part of China’s desire to reduce corruption because the Chinese people are really sick of it.
- China is doing what it always does, which is killing the chickens to scare the monkeys. The foreign companies are the chickens and the domestic Chinese companies are the monkeys.
- China is focusing on its pharmaceutical industry because its citizens are unhappy with medical care pricing. Why not go after a high profile foreign company to show the people that the cause of high medical care prices is foreign companies and we the government are aggressively working to solve the problem.
- China is focusing on foreign pharmaceutical companies because it wants to do what it can to level the playing field for Chinese pharmaceutical companies. The pharmaceutical industry is of critical importance for China (both domestically and worldwide) and it does not want foreign companies dominating this industry.
- Nobody really knows where and when the Chinese government will strike next when it comes to corruption. We all just know that it is striking a lot more often than it used to and striking against a much more varied list of companies (the smaller foreign companies that have gotten hit have for the most part managed to stay out of the news).
- If you are a foreign company doing business in China in an industry the government deems important, you should be extra worried/cautious.
- Be careful out there and make sure you do whatever you can not to have your company become a China statistic. For help on that, check out that score check out The Double Standard “Tax” On Foreign Companies Doing Business In China. What To Do?
What are you seeing out there?
As China’s economy continues to contract, our China lawyers are getting an increasing number of inquiries from companies seeking to sell their China WFOEs. In fact, we are aware of the following currently on the market:
- A Shanghai consulting WFOE
- A Beijing consulting WFOE
- A Dalian manufacturing WFOE
Back in May, in Buying And Selling China WFOE Shell Companies. Not In My Lifetime? we wrote about the difficulties inherent in selling/buying a China WFOE:
The thing about off the shelf WFOEs is exactly that: they are off the shelf and not customized. And that is where all of the problems arise. Let’s take as an example a WFOE that someone tried to interest me in many months ago. That company was in the IT outsourcing business in a second tier city. So right there, its only real potential buyer is someone who is interested in doing IT outsourcing in that second tier city. Because if the buyer of that WFOE is interested in doing anything other than IT outsourcing, it will need to petition the government to expand or change its business scope. Similarly, if the buyer is interested in doing IT outsourcing in some other city, it will need to petition the government to move its WFOE or it will need to set up a branch in that other city, and thereby have to maintain two offices. When you throw in the fact that anyone buying a WFOE will need to conduct due diligence on it to make sure that it truly does have no liabilities of any kind (including, tax, employee, environmental, tort, etc.) and you can quickly see why forming a WFOE is going to be safer and probably equally as fast and cheap. The biggest benefit in buying a shell WFOE would be speed, but it is going to be the rare instance where saving a few months will warrant the extra risk.
In WFOE Shell Company? You’re Kidding! The China Business Hand Blog nicely sets out how difficult it can be to sell a China WFOE, and this from someone who actually did it!
The China Business Hand blogger, Steve Barru, formed a WFOE in China in 1993 but when he took a job in 2005 he sought to get out from under that WFOE. As he puts it, he “could close the business and walk away or try to sell it, [but] …. it turned out that neither option was simple or straightforward.”
At first Barru thought that closing it down would be easy, but it being China, he was wrong about that:
Closing down the business and moving on seemed the easiest way out. Until I discovered that terminating a WFOE license involved getting approval to do so from the long list of government agencies that had approved the license in the first place. To make matters worse, shuttering the business would cost me around $2,000 in fees of one kind or another.
If I had been leaving China altogether in 2005, I would have settled up with my two employees, gone to Hong Kong to convert the company’s remaining Chinese funds to US dollars, and gotten on a plane home, letting Chinese government officials sort out what to do with an abandoned WFOE. Alas, my new job was in Beijing, so this was not an option.
I went to the primary licensing authority, the Bureau of Industry and Commerce, to ask if there was a formal procedure of some kind to make the company inactive (aka: a shell company). Nope. As long as the company existed, I would have to file monthly tax reports, complete the statutory annual audit and license renewal procedures, and meet all of the many reporting requirements of other agencies. The fact that the company would not be engaged in any business activity made no difference whatsoever.
It being so difficult and expensive to shut down his WFOE, Barru then sought to sell it, which too proved difficult:
Selling the company, even for next to nothing, quickly moved to the head of the line. But transferring the business license and my legal person status to the wannabe new owner involved far more than filling out a couple of forms.
It was the buyer who had to jump through the bureaucratic hoops. For all intents and purposes he went through the same process one goes through to establish a WFOE. With one key difference – he did not have to invest new capital in the company. The original US $70,000 in registered capital (that I had put in and had later managed, for the most part, to take out) was all that was required. Since registered capital for a WFOE had increased to US $200k by 2005, there were demands for additional investment, but rather convoluted negotiations eventually got around this obstacle. Fortunately, the buyer was located in Nanjing. The need to move the WFOE to a new locale would have been a deal breaker.
Eventually, after several months of discussions and chopping forms, all the questions about registered capital, business scope of the company, the good character of the new owner, and the license transfer had been answered and the sale was complete. The price probably covered my express mailing costs and bought me a couple of dinners. But I was out from under what had become an enormous, very time consuming headache.
As Barru so accurately observes, forming and running and even closing a business in China is going to require you to get up close and personal with your local bureaucrats:
The fact is, when you are doing business in China, the local government where you operate is your de facto partner. Chinese bureaucrats were involved in every aspect of my business over the years, sometimes in reasonable ways but on occasion as meddlesome pests sticking their noses into strictly business decisions. Even the end of my days as a WFOE owner involved getting government officials to, in effect, give me permission to let my business go.
The same holds true today, though just recently there have been some efforts in China to make WFOE formation easier, but so far we have yet to see it.
Got an email the other day from a China business consultant I know. The email (modified a bit so as not to hide information) follows:
A quick question/insight into the Chinese business mind. We are set to go to China next month with a client and I suggested we hire a professional translator to go with us, but the Chinese company on the other side “blew a gasket,” citing confidential business information and claiming we should not bring a translator because they have a close relationship with the government. I suggested that they find a translator they trust and that seems to have been ignored.
Why the absolute insistence that no translators be allowed? Doesn’t this beg the obvious question. This Chinese company is generally doing what we want them to do overall but we would like some clarity in our discussions and we certainly want more clarity in our correspondence.
They translate for us what they think we need. Just a bit frustrating.
Any curbside thoughts?
Yes. Many. Someone is definitely being played here and there are the following markers of this just in your short email:
- “Close relationship with the government.” This doesn’t have anything to do with your desire/need to have a translator and I am concerned this is their subtle way of threatening you. Seems they may be saying that if you do bring a translator, they will use their close relationship with the government to prevent your client from doing business in China.
- Of what are they afraid? Why don’t they want a translator? Honest and legitimate Chinese companies tend to want clarity; dishonest and illegitimate Chinese companies tend to want obfuscation. Our China lawyers oftentimes tell our clients this when it comes to drafting contracts and it applies with even greater measure when all you are seeking is to use a translator.
- It should be more than “a bit frustrating” that they translate for you only what theythink you need; it should scare the heck out of you.
I know I cannot turn back time, but what you really should have done was to have gone over there with someone to translate and then just introduce that person as someone there on behalf of the company. That person should not be Chinese and should not look Chinese and that person should never speak Chinese in the presence of the Chinese company. In other words, that person should be your stealth translator. It may be too late for you to pull that off, but that would have been my advice to you a few months ago. I can tell you story after story about the great stuff foreign companies doing business in China have been able to learn from stealth translators but I will save that for a later day.
What do you think?
A friend emailed me a post the other day and asked me if I agreed with him that it was the “most helpful post your blog has done for helping foreign companies doing business with China.” My response was that I wasn’t sure, but that it certainly ranked up there and that it had been so long since we did that post (more than seven years), I would run it again. Certainly though the advice in that post holds equally true (or more so) today as it did way back then.
Here is that post:
If you are doing business in or with China, you have to check out ChinaSolved. It is operated by my friend Andrew Hupert, who also operates DiligenceChina, [link no longer exists] which is one of the best China business blogs. ChinaSolved is shaping up as a terrific resource on doing business in China. It is already chock-full of useful business advice.
Its article, “Ten Commandments for Westerners In China,” [link no longer exists] is typical of the site’s excellent and straightforward advice for foreign companies doing business in China. And I found myself agreeing with nine out of ten. Here goes:
- “Know what you don’t know” (for many westerners, this is by far the most difficult challenge.). Any similarities between China and “back home” are purely accidental. This is a completely different culture. Do not be fooled by surface similarities or by local people who “seem to get it.” Sources of reliable information are your #1 asset.
- China is still a communist country – and there is absolutely zero chance of that changing any time soon.
- You have to show up to win. You must be physically present and put in the “face time.” There is no “autopilot” in China business. If you feel that you are too busy to learn about China, then you are certainly too busy to be successful here.
- If things worked well here in China, then there would be significantly fewer opportunities for competent westerners. Try not to get too frustrated by the challenges you face.
- Time does not mean money here. Chinese business people do not believe in “opportunity cost.” Even simple negotiations can drag on for a long time. Avoid getting sucked into an endless cycle of meetings that don’t accomplish anything.
- Truth, honesty, good-will and long-term benefit are all culturally-specific concepts. Don’t expect your western standards to carry over here. Win-Win is not standard operating procedure here. Do not fool yourself that your long-term relationship with a local partner means anything.
- Don’t check your brains in at the border. You wouldn’t hand over your company’s money, intellectual property or trademarks to a virtual stranger in Sydney, London or San Francisco and expect to make a windfall. Don’t do it in China. The people that are offering to open doors for you are the same ones that can lock you out. Beware of people who peddle their “powerful friends and great connections.” They can use them to hurt you as well as help you.
- Due Diligence becomes more important when the language and systems are unclear, not less important. Don’t settle for the “least worst” deal or partner. Partners don’t get more honest and relationships don’t improve as the amount of money involved increases.
- China will still be here next year, and in 5 years. Don’t be pressured into signing a contract or making a deal because you are afraid of “missing the boat.” The boat has been here for 4,000+ years.
- Having a sense of humor helps. Having a Plan B helps even more.
I agree with all but number 6. I understand why ChinaSolved felt it necessary to put it in here, but I think it is wrong.
Truth, honesty, good-will and long term benefit are not culturally specific concepts and long term relationships with local partners mean a lot. I think ChinaSolved felt the need to put this in here to make up for the common mistake of Westerners equating a week of good businesses meetings and friendly dinners in China with being set for life. All of us (China consultants, China accountants, and China lawyers alike) who represent Western companies that are doing business with China could fill a book with stories of China deals gone bad. So let us just take it as a given that Western companies constantly make the mistake of trusting too much, too soon.
But, I personally have also have seen enough to fill a book about excellent, mutually beneficial relationships between Chinese companies and Western companies. And, at least as far as I know, every one of those successful long term relationships was based on trust and mutual long term benefit.
So I say we downsize to just nine commandments.
What do you think?
When our China lawyers are asked to assist foreign companies in determining where to locate in China, the first thing we do is ask that they fill out a long questionnaire to better enable us to gauge what is and what is not important in their choice of China location.
We ask our clients to rank various items by level of importance to them, including a whole slew of quality of life issues like local education and healthcare. We will be adding a new one: concern about pollution.
The survey looked at 74 Chinese cities and of those 74, not a single one met the World Health Organization’s recommendations for 2.5 micrometers or less of particulate matter.
In reviewing the Greenpeace list, I note the following regarding China cities in which foreign companies commonly conduct business :
- The six most polluted cities (Xingtai, Shijiazhuang, Baoding, Handan, Henghui, Tangshan) are all in Hebei province. The seventh worst city is Jinan (did I call this or what?). Xi’an is 9th worst, Tianjian is 11th worst, Beijing is 13th worst, Wuhan is 14th worst, Chengdu is 15th worst, Hefei is 17th worst, Changsha is 20th worst, Nanjing is 24th worst.
- The following cities did fairly well: Qingdao came in at 47 out of the 74 cities, just ahead of Shanghai at 47, and Guangzhou and Dalian at 55 and 57, respectively.
- The 10 least polluted cities included Xiamen, Fuzhou, Kunming and Shenzhen.
I would venture to say that nobody who does much business with China does not know at least one person who has not left China because of its pollution, usually out of concern for their kids. Because two of our firm’s China attorneys reside in Qingdao (the others are in Beijing), we are also aware of a number of people/companies leaving cities like Beijing, Xi’an and Chengdu for relatively less polluted Qingdao.
I see this pollution list as important and I would venture to say that foreign companies will be using it as a factor in determining where to locate in China.
What do you think?
China veteran Andrew Hupert (of ChinaSolved) recently did a post listing his daily China reads for business. Andrew puts the following sites on his feedly.com reader (I too use Feedly) and he says he spends 15-30 minutes a day skimming these sites for China business information.
Though I have no beef with any of the sites on Andrew’s list, I think it is too long by about half. I would therefore suggest that if you are looking for a list of China business sources that you start with the below, but either right away or over time, tailor the list to your particular China business needs.
Here’s Andrew’s list:
China Business Intelligence Sources Basic (news, finance & business)
- Want China Times
- China Business Review
- China Business Blog
- South China Morning Post
- China Post Online
- McKinsey China
- China Real Time report
- Committee of 100
- China tracker
- All Roads Lead to China
- China Smack
- Tea Leaf Nation
- China Media Project
- Jing Daily
- People’s Daily
What would you eliminate from this list? What would you add to it? The comment lines (as always) are open.
Just came across an interesting post with a not so interesting title on the China IPR Blog: IP Developments in Beijing. The post starts out discussing how “due to the rapid increase in IP cases in the Beijing Number 1 Intermediate Court, particularly IP cases involving patent and trademark validity, the Beijing Intermediate Court will split its Intellectual Property Tribunal in two” with the number one IP Tribunal hearing mostly trademark and unfair competition cases and the number two IP tribunal hearing mostly patent and copyright cases.
The post then notes that the Beijing court (which hears about 10% of all China IP cases) has seen its case load increase from “4,748 cases in 2008 to 11,305 in 2012, an increase of nearly 150%,” with copyright cases representing about half the total.
This is important for foreign companies doing business in China and here’s why.
- Rational human beings do not generally spend money on something that is not going to bring them any benefit.
- Bringing a lawsuit in China always costs money (China court filing fees tend to be fairly high), oftentimes a relatively large amount of money.
- Chinese businesses tend to be made up of rational human beings who understand the value of an RMB.
- Chinese businesses must believe that they can get the Beijing IP court to give them redress for alleged IP infringements or they would not pursue the lawsuits.
- Chinese businesses must, in increasingly large numbers, believe that they can get the Beijing IP court to give them redress for alleged IP infringements or they would not be increasing the number of IP lawsuits they are pursuing.
- Chinese businesses are almost certainly correct in their belief that suing before the Beijing IP court will give them redress.
- If Chinese businesses are correct in their belief (and they almost certainly are, see number 6 above), that means that IP enforcement, at least through China’s courts is improving.
Independently of the above, you would have a tough time finding a China lawyer who does not also believe that IP enforcement in China is improving, particularly with respect to trademarks.
IP enforcement/IP protection is improving in China for two main reasons. First, Chinese companies and foreign companies alike are now realizing that it makes sense for them to register their trademarks, copyrights and patents in China so that they have an opportunity at being able to protect them (in the courts, among other places). And two, China’s courts are increasingly realizing the importance of protecting IP in China, largely because Chinese companies increasingly want them to grant IP protections.
What this all means for those of you doing business in China is that you too should be jumping on the IP registration bandwagon. For more on protecting your IP in China, check out the following:
- How To Protect Your IP From China. Part 1. The risks China poses to intellectual property and how companies can determine how those risks should influence their actions.
- How To Protect Your IP From China. Part 2. What we, as China lawyers, look at in trying to protect our clients’ IP from China and what you, the company, should be looking at and doing to protect your own IP.
- How To Protect Your IP From China. Part 3. Negotiating tactics Chinese companies often employ in an effort to take advantage of your intellectual property.
- How To Protect Your IP From China. Part 4. The basics of what goes into Chinese contracts, particularly those related to protecting your intellectual property.
- How To Protect Your IP From China. Part 5. The most common situations companies face where they must focus on protecting their IP.
What are you seeing out there?
Time takes a cigarette, puts it in your mouth
You pull on your finger, then another finger, then your cigarette
The wall-to-wall is calling, it lingers, then you forget
Oh how how how, you’re a rock ‘n’ roll suicide
You’re too old to lose it, too young to choose it
David Bowie, Rock ‘n’ Roll Suicide
Had a great lunch yesterday with four people who provide professional services to companies (PR, consulting, and legal). All five of us do a lot of work relating to China and much of the lunch focused on various aspects of doing business in China — ranging from whether American retirement homes can succeed in China to how to capture service business from Chinese companies.
There was an interesting split on the last issue, with three of us of the view that it is not worth the time to pursue Chinese companies as clients. To roughly quote one of the people at the lunch: I can remember back when I used to try to get Chinese clients how they would just milk me for information and then end up not hiring anyone at all for their project.
Yup. I can remember those days also, and the only reason my memory is somewhat faded is because my law firm stopped making any effort at getting Chinese clients a long time ago. We spend no money on that nor any time either. Why? Because it makes no sense to spend twenty hours for the possibility of getting a bad client when we can spend five hours for the possibility of getting a good client.
Sorry, but that’s the truth.
My good friend Andrew Hupert would likely say the same thing. Heck, he pretty much did say the same thing in a post he did on his ChinaSolved blog, entitled, Doing Business in China – You Want it When? In that post, Andrew had this to say about doing business with Chinese companies:
You might be tempted to fork over too much information too fast – especially if the Chinese side is holding out the promise of a lucrative, long-term contract. Expat service-providers know that if the Chinese side is in a hurry to get information – even if it is in the name of performing a needs assessment or RFP – then they have to be on their guard. Western consultants have logged countless hours of unpaid labor for potential Chinese clients that simply wanted someone to scope out the business problem and outline an action plan. The actual contract is then awarded to a friend or family member.
* * * *
Regular readers of ChinaSolved and ChineseNegotiation.com know that we believe Chinese deal-makers use time as a strategic variable. They rush you when they want information and stall when it favors them. There’s nothing wrong with this, as long as you understand what is happening and take an active role.
Next time you are pitching a China company for your service business, ask yourself, do I have the time for this?
What do you think?
I wrote this post in April of last year and while going through draft posts just realized that I failed to post it back then, and so I’ve updated it and posting it now.
I get at least twenty emails every week from law students/young lawyers expressing interest in becoming an international lawyer (or a China lawyer) and asking essentially what courses they should take to achieve that goal. My response is always something like the following:
First, do what it takes to become an excellent lawyer, then focus on the international side. In the meantime though, get fluent in a language that matters to you and make yourself international by traveling and by reading.
In other words, get educated, get smart, and get international. Not terribly helpful, I know, but true.
Last April I read an article that really resonated for me. The article was written by William Henderson, a professor at the Indiana University Maurer School of Law and one of the most knowledgeable people alive on the legal profession. The article is entitled, The Fromm Six, and it sets out a “competency model for law students called the Fromm Six.
The article starts out with the following background:
One of the greatest people in legal education that you have never heard of is a man named Leonard Fromm. Fromm served as Dean of Students at Indiana University Maurer School of Law from 1982 to 2012. On February 2, 2013, Dean Fromm passed away after a relatively short battle with cancer.
I want to discuss an innovation that Dean Fromm contributed to legal education—a contribution that, I predict, will only grow over time. This innovation is a competency model for law students called the Fromm Six. But first, let me supply the essential background.
After several years in counseling and adult education, Dean Fromm joined the law school in 1982 to preside over matters of student affairs. Over the course of three decades he quietly became the heart and soul of the Maurer School of Law. Dean Fromm was typically the first person that new students met during orientation—the law school administrator who completed character and fitness applications for state bar authorities and the voice that called out their names at commencement (with an amazing, booming tenor). During the three years in between, Dean Fromm counseled students through virtually every human problem imaginable. His most difficult work was done in his office with his door closed and all his electronic devices turned off. It was private work that was not likely to produce much fanfare.
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One of the cumulative benefits of Dean Fromm’s job was the ability to track the full arc of lawyers’ careers, from the tentative awkwardness of the 1L year, to involvement in the school’s extracurricular events and social scene, to coping strategies for students not at the top of their class, and the myriad, unexpected turns in our graduates’ professional careers. During his tenure he interacted with nearly 6,000 students and stayed in contact with a staggering number of them after graduation. Invariably, he saw the connection between law school and a student’s subsequent success and happiness later in life (noting, in his wise way, that professional success and happiness are not necessarily the same thing).
In 2008, I started collaborating with Len on a project to construct a law school competency model. Our first iteration was a list of 23 success factors which we constructed with the help of industrial & organizational (IO) psychologists. Although valid as a matter of social science, the list was too long and complex to gain traction with students. In 2010, the faculty who taught Indiana Law’s 1L Legal Professions class got together and reduced the list of competencies to 15. Once again, we found it was too long and complex to execute in the classroom.
During the summer of 2011, as we were debriefing the challenges of another year in our competency-based 1L Legal Professions course, Dean Fromm said, “I have an idea.” A short time later, he circulated a list of six competencies that were appropriate to 1Ls and foundational to their future growth as professionals. Finally (or At last), we now had a working tool! Moreover, none of the professors teaching the Legal Professions course, including me, wanted to revise a single word—a veritable miracle in legal academia.
And thus the Fromm Six was born. This is that six:
Self-Awareness. Having a highly developed sense of self. Being self-aware means knowing your values, goals, likes, dislikes, needs, drives, strengths and weaknesses, and their effect on your behavior. Possessing this competence means knowing accurately which emotions you are feeling and how to manage them toward effective performance and a healthy balance in your life. If self-aware, you also will have a sense of perspective about yourself, seeking and learning from feedback and constructive criticism from others.
Active listening. The ability to fully comprehend information presented by others through careful monitoring of words spoken, voice inflections, para-linguistic statements, and non-verbal cues. Although that seems obvious, the number of lawyers and law students who are poor listeners suggests the need for better development of this skill. It requires intense concentration and discipline. Smart technology devices have developed a very quick mode of “listening” to others. Preoccupation with those devices makes it very challenging to give proper weight and attention to face-to-face interactions. Exhibiting weak listening skills with your colleagues/classmates/clients might also mean that they will not get to the point of telling you what they really want to say. Thus, you miss the whole import of what the message was to be.
Questioning. The art and skill of knowing when and how to ask for information. Questions can be of various types, each type having different goals. Inquiries can be broad or narrow, non-leading to leading. They can follow a direct funnel or an inverted funnel approach. A questioner can probe to follow up primary questions and to remedy inadequate responses. Probes can range from encouraging more discussion, to asking for elaboration on a point, to even being silent. Developing this skill also requires controlling one’s own need to talk and control the conversation.
Empathy. Sensing and perceiving what others are feeling, being able to see their perspective, and cultivating a rapport and connection. To do the latter effectively, you must communicate that understanding back to the other person by articulating accurately their feelings. They then will know that you have listened accurately, that you understand, and that you care. Basic trust and respect can then ensue.
Communicating/Presenting. The ability to assertively present compelling arguments respectfully and sell one’s ideas to others. It also means knowing how to speak clearly and with a style that promotes accurate and complete listening. As a professional, communicating means persuading and influencing effectively in a situation without damaging the potential relationship. Being able to express strong feelings and emotions appropriately in a manner that does not derail the communication is also important.
Resilience. The ability to deal with difficult situations calmly and cope effectively with stress; to be capable of bouncing back from or adjusting to challenges and change; to be able to learn from your failures, rejections, feedback and criticism, as well as disappointments beyond your control. Being resilient and stress hardy also implies an optimistic and positive outlook, one that enables you to absorb the impact of the event, recover within a reasonable amount of time, and to incorporate relevant lessons from the event.
I knew Len Fromm, which is to mean I thought the world of him. And for that reason, I did not want to write this post back in April as I was worried that my sadness at Dean Fromm’s death was clouding my judgment and forcing me to go gaga over his six.
But in re-reading it I realize how great the list really is and how much it deserves further dissemination for reasons that have nothing to do with memorializing a truly decent man.
Dean Fromm’s list just works. Law students and young lawyers, go talk to older lawyers you respect and I am confident you will find that they would agree. And the list works for what it takes to succeed as an international lawyer as well, which should be no surprise, since international lawyering is really no different than any other kind of lawyering. If you want to succeed as a lawyer, work on the six. I particularly love the line about silence, as it took me years to realize how valuable silence can be in getting people to reveal things, even things they never intended to reveal.
The scary thing about the Fromm Six is that we lawyers tend not to be very good at many of the things on the list. Lawyers are trained (maybe even over-trained) to be rational, logical and unemotional and to focus on merit. But life, and thus lawyering, is not always so simple. Dean Fromm’s list thus tilts much more towards EQ than towards IQ, and rightfully so.
For more on what it takes to become a China lawyer/international lawyer, check out the following:
- So You Want To Be An International (China Lawyer), Part IV. Do You Really? (2013)
- So You Want To Be An International/China Lawyer? Part III (2008)
- So You Want To Practice International Law/China Law? Part II (2007)
- So You Want To Practice International (China) Law? (2006)
I am still gaga over Dean Fromm’s list and I am going to make it a part of my future email responses. What do you think?