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Just about every month I give a talk on how to protect IP from China and just about every speech I start off with something like the following:
If you are doing business with or in China, you have to plan on someone in China making a play for your intellectual property. It’s not a matter of if, but when. It may be your partner, your distributer, your manufacturer, your sales manager, your top scientist, your supplier, or your customer who seeks to take and then use your IP. Big Chinese companies steal IP. Small Chinese companies steal IP. State owned Chinese companies steal IP. Privately owned Chinese companies steal IP. And despite the beliefs of many Americans just starting out in China, Chinese companies with people who speak great English and invite you to their family weddings also steal IP.
In the last few weeks, I received two calls involving companies whose excessive trust led to their getting burned in China. The first call went something like the following:
Caller: My husband is very trusting. He met the seller and looked him in the eye and the guy spoke really good English and my husband just knew that he could be trusted. They had dinner together two days in a row. We sent him $60,000 and now he is not even responding to our emails. My husband has found another supplier and I am wondering if there isn’t something we can do to make sure that he does not do the same thing. My husband insists this guy is also honest.
Me: Reminds me of what Bush said about Putin and look what Putin has been up to lately. I much prefer the Ronald Reagan’s ”trust but verify.” Here’s the thing. My law firm’s China lawyers get at least one call or email pretty much every week from someone who got ripped off or cheated or maybe just shortchanged by someone in China. And probably 99% of those cases, the people calling or emailing us started out trusting their Chinese counter-party. In fact, I don’t remember a single instance where the caller or the emailer told us that they knew from the get go that they were doing business with a crook.
There are a lot of things we can and should be doing to verify that your potential supplier is legitimate. Let’s talk….
The second call was from a company that had spent hundreds of thousands of dollars setting up a subsidiary in China, hiring employees, and hunting down business, only to have its entire team leave the company to form their own. That conversation went something like this [by the way, I secured approval from both parties to discuss their situations here -- in fact, both encouraged that we do so]:
Caller: But I set them up. I gave them good jobs. They owed me. They were my friends.
Me: Did you have a formal written employment agreement with them that set out trade secret protections? Did you have a non-compete agreement with any of them?
Caller: No, because I had worked with all of them for years before I started my China company.
People, I really hate to sound cynical here, but the reality is that if you are doing business in China (or anywhere else in the world for that matter) the most likely people to do you wrong are those whom you trust. The people you do not trust are usually not going to get access to your money or your secrets.
So, yes, you do need contractual protections against even those you trust. Check out Chinese Contracts. Because They Really Do Make A Huge Difference.
What do you think?
Back in the mid-1990s, Jardine Fleming Securities (now part of JP Morgan Chase) came up with the Swoosh Index, which was its theory that once Nike selects a country for its newest factory site, economic growth, rising stock markets, and other foreign companies follow. A Business Week article, entitled, The Swoosh Index for Emerging Markets, explains it:
Nike first started using Japanese plants in 1964. When labor costs there climbed in the mid-1970s, it gave South Korea and Taiwan a run. In the 1990s, production jumped to Indonesia and China, which now account for two-thirds of Nike output. Nike pulled back from Thailand recently ahead of a collapse in stock and property prices. Next up: Vietnam. While production there is now only 2% of Nike output, that’s expected to double within a year.
When choosing factory sites, Nike looks for cheap labor. However, it also picks countries with stable–usually authoritarian–leadership, decent infrastructure, a pro-business government, and a liberal trade regime.
When it decides to leave, that doesn’t signal the end of prosperity. It often means that countries are ready to move on to high-end manufacturing. And democracy.
Many companies watch Nike and then follow Nike into whichever country Nike locates.
Tully’s Coffee is well known for once following an expansion strategy of opening stores adjacent to the opposing coffee giant Starbucks, also based in Seattle. There’s a running joke in Seattle that the easiest way to find a Tully’s is to stand in front of a Starbucks and turn around.
I once sat on a plane next to a hotel chain executive who told me that his company did no independent research on where to locate within Asia: they simply considered new countries in Asia only after learning that the Westin/Sheraton had done so.
For more on choosing your China location, check out the following:
- Where To Locate Your Business In China? Think Electricity.
- Where To Locate In China. Put Pollution On Your List.
- Where To Locate In China? Or Why Weifang Isn’t Suzhou.
- China Factories Moving In Droves To Cambodia/Vietnam/Myanmar/Malaysia. NOT.
- China Business: Location, Location, Location
So what companies should others be following in determining where to locate within China? Nike? Gome? Intel? Starbucks? Tiffany’s? And what about elsewhere in Asia?
And what do you think of this strategy at all? I have to say that I hate it as it both fails to weigh the factors that might really matter to the company looking at where to locate and it fails to account for the huge differences between one company and another.
This is a guest post by Chris Priddy, an international trade and compliance lawyer with our firm.
If your company is engaged in U.S.-China trade, you know that clearing goods through Customs is the critical factor for on-time deliveries and realized budget projections. Streamlined border clearance procedures are in companies’ and governments’ mutual best interests.
President Obama has prioritized a U.S. “single window” process under which companies importing products into the United States from China (or anywhere else) or exporting product from the United States to China (or to anywhere else) will be able to submit nearly all required import/export information on standardized forms. These forms will be accessible to U.S. government agencies through a “single window” computerized system and this will mean that companies will no longer need to complete and file duplicative, multiple forms with different agencies. U.S. government agencies will be able to more efficiently evaluate shipments and work with companies to address issues with particular shipments of goods.
President Obama specified a December 31, 2016 deadline by which U.S. federal agencies must finalize capabilities for using a “single window” system. In addition to the “single window” system, a U.S. federal interagency group has undertaken efforts to evaluate using international classification codes so companies will not need to use multiple identification codes on U.S. import/export documents to reference the same commodity.
Centralization of import and export data under a “single window” system will allow U.S. government agencies to more effectively identify dangerous, prohibited, and non-compliant shipments. It also will better position the United States to better coordinate with other countries to ensure that shipments comply with applicable import or export regulations, applicable duties, and export controls.
Companies involved in shipping goods between China and the United States should seek to stay current on U.S. efforts to implement the “single window” system as doing so will help ensure compliance with all U.S. regulations and cost savings, and as the situation warrants, I will be back with updates.
Yes, we are obsessed with this scam, but only because at least once a week someone contacts us who has fallen prey to it and we really do not like having to tell people that there is pretty much nothing we can do. And like we are always saying, we are seeing smart and sophisticated and internationally savvy companies falling for this one. The scam to which we are referring is when an American or European company (that’s what it usually is) sends its China payment to the wrong bank account, and if you are doing business with China that involves your company making payments to a Chinese company, you should know about it and be on guard for it.
For more background on this scam, check out the following:
- China Fraud. You Are NOT Immune To This One.
- China Fraud Season Starts Early This Year
- China Scam Alert: The Different Company Bank Account. Again.
- Cheated By China. Check Your Insurance.
In a recent post, 7 Tips to Prevent the “Different Bank Account” Scam. Renaud Anjoran at the Quality Inspection Blog sees this scam as occurring “mainly in two forms”:
A crime organization hacks its way into the supplier’s email system and sends invoices to customers. Tracking the people behind these bank accounts is usually impossible.
A salesperson uses her personal email account for work (as is very common), then quits but doesn’t say it to customers, and asks for payment to another bank account.
Most importantly, Renaud lists the following seven things companies can to do to avoid this scam, though he rightly notes that “there is no silver bullet” for doing so:
- Get to know your suppliers who speak English (if you don’t speak Chinese) and get your supplier’s landline phone numbers as that cannot be hacked. Call if you have any concerns.
- Get your supplier’s bank account information in advance and ask them to refer to “bank account information document” on their invoices, rather than listing out full bank details every time.
- Ask your suppliers to fax you their invoice and make sure the sending fax number belongs to your supplier’s company.
- Do a first small wire to confirm the account.
- Have a special procedure for confirming the company name. Note also “that paying a Chinese company in mainland China is safer for you” than paying them overseas in Hong Kong, Taiwan or elsewhere.
- Have a special procedure for confirming bank account changes. “Follow the same procedure as point 5, but also call several people in the company. They will understand your attitude if you tell them you are worried about the “different bank account scam” — they are also a victim when it happens to their customers.”
- Pay by Letter of Credit (L/C). If your supplier will allow it, pay by L/C.
Any more tips?
If you import a product into the United States from China, the odds are good that your competitors can find out about it. And by find out about it, I mean they can easily and very cheaply (sometimes even for nothing) use a service such as Import Genius, Panjiva or Tradesparq or others to determine what you are importing, how much of it you are importing, and even who you are using to manufacture it.
Don’t want your competitors to know from where you are buying your distinctive xyz product? You had better do something to hide it.
But what? The following methods are commonly employed to hide import information:
- Set up your own Hong Kong entity and have that company buy the product from your China manufacturers and then be the shipper. Doing this means that the name of the Chinese manufacturer will not be easy for your competitors to discover, but it will not hide the quantity and the nature of your US imports.
- Have your Bills of Lading made out to your customs broker in the United States. That way, US customs shows your customs broker as the importer and your name stays out of it. The flaw in this though is that if your competitors know through which ports you are importing, they can maybe figure out who is importing your product (your customs broker) and then work backwards to figure out your manufacturer.
- Have your bills of Lading made out to your freight forwarder both in China (as the exporter) and in the United Sates (as the importer). Doing this hides both your manufacturer’s name and your name from your competitors.
- Set up a “dummy” company in the United States for importing of your product. This has the same potential flaw as using your customs broker to receive your product; it does not hide the name of your Chinese manufacturer.
What are you doing out there to protect your manufacturing trade secrets?
We started a China Law Blog Group on Linkedin with the goal of creating a spam-free source for China networking, information and discussion. We now have nearly 8,500 members and, more importantly, a number of lively discussions.
We have had some absolutely terrific discussions, both based on the numbers (a number of the discussions have received around 100 comments and some have gone over 200) and on their substance. Our discussions have ranged from practical (such as, how do I open a China bank account or what are the best practices for a China Joint Venture or what is the most important thing to do for doing business in China) to deep think (such as, what is the future of rule of law in China? or what are the differences in how Chinese companies and French companies are run).
What also boosts the group is its diversity of membership. We have a large contingent of members within China and without. Some members are China lawyers, but the overwhelming majority are not. We have senior personnel (both China attorneys and executives) from both large and small companies and a whole host of junior personnel as well. We have students and we have professors. This mix only contributes to the high level of discussions.
I am most proud of how (at least as far as I know) no spam item has yet lasted on the site for anything even approaching 24 hours.
If you want to learn more about China law or business, if you want to discuss China law or business, or if you want to network with others doing China law or business, I suggest you check out our China Law Blog Group on Linkedin and join up. The more people in our group, the better the discussions.
We will see you there. Click here and join us.
As China inexorably continues increasing its restrictions on hiring personnel via third party employment agencies (sometimes referred to as FESCO companies or as staffing agencies), our China lawyers are more and more often being tasked with helping our clients move their personnel from the third party hiring company to a newly formed (0r even existing) WFOE.
The usual procedure for moving an “employee” from a third party hiring company to a WFOE is as follows:
- Terminate the contracts with the hiring agency. Terminate the contract between your company and the hiring agency and terminate the contract between the hiring agency and your “employee.”
- Upon resignation, the employee is IMMEDIATELY hired by the WFOE pursuant to the standard employment agreements. There is NO time gap.
- Normally, the third party hiring agency is williing to allow you to terminate your contract with them, so long as the employee voluntarily resigns, so long as you pay any fees owed to the employee and to the third party agency, and so long as you sign an agreement freeing the third party hiring agency of any liability surrounding the employee. In many cases, you will want to continue using the third party hiring agency as your outsourced payroll department to take care of the administrative side of salary payment and payment of employer/employee taxes and benefits. If you keep the third party agency on in this capacity, it will usually be delighted to terminate the employment agent relationship to move into a standard benefits processing arrangement.
- The employee will not want to lose the employee’s seniority in the employment relationship.
- The employee will not want to be placed in a setting where they are in a probation period.
Sam Flemming was tracking China social media before most people even knew what social media even was. Let’s put it this way: the first time I discussed social media with Sam he was focused on bulletin boards. Who even remembers those?
Anyway, when Sam talks about social media — and he did recently talk about social media in an article entitled, The luxury of playing Chinese social media, people should listen.
That article consisted of Sam providing a “four-point primer” on China social media, consisting of the following tips:
- Don’t believe all the forecasts. Do not become so enamored with WeChat that you count out Weibo. According to Sam, Weibo is still China’s “water cooler” and China social media is not a “winner takes all” proposition.
- The Chinese are informed, sophisticated, global – and local. Chinese consumers know what is going on with products and pricing around the world, but they want products suitable for China.
- Consumers want to learn about lifestyles, not only brands. China social media is a great way for brands to provide this information.
- Leverage celebrity social power. Celebrities have become “mini media powerhouses” so if you are going to ink an endorsement contract with one of them, make sure that it clearly and appropriately leverages their social power.
I urge you to read the entire article and then let us know what you think.
One of our China lawyers got an email the other day from an American company that just learned it is in trouble here in the United States (yes, I am being deliberately vague here) stemming from having imported and sold a whole slew of electronics products that are listed as UL certified, but are not. The US company designed the product and sold it under its own brand name. They wanted help finding a new manufacturer that would actually secure UL approval for their products, and not use bogus certificates falsely claiming approval.
Our suggestion to them was that they themselves work with UL to secure any necessary approvals, as that would greatly increase the chances of any approval (or even disapproval) being legitimate. The American company initially mildly complained about having to pay for the UL approval themselves, but quieted rather quickly when I pointed out the following two things:
1. It had probably never had to pay for any UL testing with its previous manufacturer or only paid a fraction of the real cost. I am guessing that the Chinese manufacturer got the project by underbidding based on its plan to forge UL certification.
2. If the Chinese manufacturer does pay for UL testing and certification it will both need to charge more for the product (which in turn means that the American company ends up paying for it in any event) and it will — unless there is a clear agreement to the contrary — be the one that holds the UL certification, making it more difficult/expensive for the American company to switch to another manufacturer at some future point.
What do you think?
Every so often one of our China lawyers will get an email from someone who essentially challenges us to tell them why they should hire us. Our response is to patiently explain why they are wrong to think that they do not need a lawyer and to not so patiently tell them that it would probably not be a good idea for us to represent them. We do this because we long ago learned that taking on a bad client is never a good idea and that trying to convince someone to hire you who believes that do not need to do so never works out.
I got such an email the other day from an American company that seemed downright angry that one of our clients “had insisted” that they contact us:
________ at ________ [our client company] insisted that I contact you about our China manufacturing plans even though I have been doing business with China for more than twenty years. ______ tells me that you believe that contracts with China manufacturers can be worthwhile but I know that it is the government there that determines everything. I want to stop my Chinese manufacturers from copying my products and selling them to my competitors. I doubt any contract can do this for me but can you lay out for me exactly how your company can help me, how long it will take and what you will charge. They just signed the attached NDA but ________ keeps telling me that I should have you modify it. If you are going to do that, I will need it back by the end of the week. I also am enclosing a manufacturing agreement my lawyer drafted for me and I would appreciate your point of view as to how realistic it is. We made it very favorable for my company. It is approximately 10,000 words and so I also need to know what you will charge to revise it. I need this back by the end of the week as well.
Here was my response:
I hesitate to spend time on this because I do not think that you will retain us both because you have come to us too late for us to fix your NDA (which, quite frankly, does not achieving what you want it to achieve) and because you are neither going to believe nor like what I have to say. So I instead urge you to read How To Stop Your Chinese Supplier From Becoming Your Competitor and China Contracts. Why Even Bother? and all of the links contained in these.
What you have done so far is unlikely to help you in dealing with Chinese manufacturers. It just does not sound like you have received good advice so far and I have to wonder whether that is because you have been hiring the wrong China attorneys (or no attorneys at all) or if it is because you are not interested in changing how you do business with China.
An American NDA with jurisdiction in Chicago is not likely to have any impact on a Chinese company. What you need is not really a China NDA at all, but an NNN (Non-Disclosure, Non-Use, Non-Circumvention) Agreement that protects you before you have actually chosen a particular manufacturer for your product. This sort of agreement can go a long way towards preventing potential or future manufacturers from stealing your design.
The ability to sue in Chicago is not likely to give you any power over a Chinese manufacturer. The bottom line is that Chinese manufacturers do not fear foreign litigation as much as they fear being hauled into a Chinese court and hit with liquidated damages (or even worse, a pre-judgment seizure of their assets). The goal with our NNN agreements (and of all our China contracts) is to prevent the Chinese company from doing what you don’t want them to do, not so much to beat them if you end up having to sue.
There is no point in our using your existing NDA as a template because it would take us more time to do that than for us to use our own template and then modify that to suit your current needs. More importantly, non-disclosure isn’t really the risk you face; it’s non compete that really matters and your NDA is completely silent on that. Your biggest risk isn’t your Chinese manufacturer disclosing your product to someone else; your biggest risk is your Chinese manufacturer making your product.
I spent five minutes reviewing your manufacturing agreement and that was enough time for me to determine that too also isn’t close to what you need for China. Honestly, it isn’t close for what you would need in the United States either. It does not mention any penalties for bad quality nor does it set forth any sort of timeline. These two things are the most basic provisions one expects to see in such an agreement. It reads as though a non-lawyer cobbled it together from various contracts on the internet. You probably would be better off with no contract at all.
And there is no way that we can promise you anything by the end of the week because we do not even have a good idea yet of exactly what it is you really need. You are going to need to determine whether you are prepared to spend money to do things right in China contractually or just continue muddling through. You know what I would recommend, but of course it is entirely up to you.
I never heard from him again.
Way back in 2007, in a post entitled, Promising China Blog: Ben’s Blog Is Certainly “Cutting Edge”, we highlighted what was then called Ben’s Blog: A Midwesterner in the Middle Kingdom with the following post:
Ben’s China blog came online earlier this year and I have been enjoying it ever since. It is certainly distinctive. To say the least. It is also one of the best China blogs out there right now.
Ben has an undergraduate degree in anthropology and, among other things, he is an ethnographer for Pacific Ethnography. Ben describes himself and the purpose of his blog, as follows:
My name is Benjamin Ross and I am an American originally from Kansas City. I finished college in 2003 and came to China the following year. My reasons for coming to China were that I wanted to experience a lifestyle completely different from my cushy life in the “burbs.” I wanted to be shocked and isolated. I also wanted to learn a foreign language and actually have the chance to use it. For this reason, I did not want to go to a major city like Beijing or Shanghai. Rather, I found a job in Fuqing, a small town located in Fujian province in Southeastern China. For a year and a half I worked there as a University English teacher, until I moved to Fuzhou (the provincial capital in Summer of 2005. My current gig is doing ethnographic research for Pacific Ethnography.
I am also an amateur writer and photographer. Unless otherwise noted, all of the photography on this site was done by me. While in China I have also worked as an interpreter, TV extra, regular game-show contestant, and token white guy. Interesting (and often humorous) things happen in China all the time, so this blog is where I try to keep people up to date of what’s going on in my little corner of the Middle Kingdom.
What makes Ben’s blog unique, however, is Ben’s recent foray into hair cutting (hence the incredibly witty title of this post). Ben is working as a trainee at a local barbershop for less than $100 a month so as to get a better feel for China’s working class.
I will let Ben explain:
As an American living in China, I have spent the last three years of my life enjoying the benefits of being a citizen of a country which is far wealthier than the one in which I reside. I travel around town by taxi. I drink at expensive bars. I eat sushi. I take trips across the country, and when my apartment is dirty, I call a maid to clean it up. My life is not that different from the other several hundred Westerners who call Fuzhou home. We all come to China for the “China experience,” but we still live our lives with the advantages of being Westerners. But what is it like to be one of the 6 million Chinese residents of Fuzhou, especially those of the working class? For us China is fun and relaxing. It’s a place we come to expand our horizons, to learn a culture, to spend our copious free time studying Tai Chi and Chinese cooking or picking up girls at the bar. But for Fuzhou’s working class, there is no such fun and relaxation, no time for hobbies and no money for Tsingtaos at the pub. Work is a way of life and a means for survival.
Tomorrow I will begin a one-month stint as a ?? (trainee) at a local barber shop/salon. The manager will be treating me just like any other beginning employee his first days on the job. I will be starting at the very bottom of the barbershop food chain, and my duties will include sweeping hair, cleaning bathrooms, assisting barbers, and entertaining customers as they have their hair cut. Throughout the month I will have only three days off, and work the rest from 9 am to 8 pm. I will essentially be a slave to my job which for one month pays what I would make in one day of teaching English.
What I hope to gain from this experience is an understanding of what Chinese workers go through on a daily basis. What is it like to work a job 10 hours a day, 6 days a week, for a salary of less than $100 a month? How will this put into perspective my life in China as a foreigner, or my life in America as an American? How does the other half (or in this case 99.9%) live, and how do the respond to a foreigner trying to do the same? I hope to find the answers to these questions, and hopefully have a little fun doing it. I will be keeping my blog updated daily for the next month, so check back regularly for updates, and wish me luck. I’m going to need it.
Now obviously one month in one barbershop is not going to tell us what it is like to be a member of China’s working class, but it will (and has) certainly given us glimpses of that. Fascinating stuff, and I urge everyone to check out Ben’s Blog.
I loved Ben’s blog back then because I loved Ben’s observations regarding the people with whom he worked and their industry.But Ben left China in August 2007 and eventually started pursuing a Ph.d in Anthropology at the University of Chicago.
But hear this everyone: Ben’s Ph.d research involves his “exploring in an ethnographic study of the urban Chinese hairstyling industry, in Fuzhou and Beijing.” In layman’s terms, this means that Ben will again be hanging out in Chinese barbershops and blogging about the same. Who says you can’t go home again? Not Ben Ross, and so it is with great pleasure that I re-list Ben’s Blog, now called Ben Ross’ Blog as a must read for those seeking to better understand China.
I spoke last year at a doing business in China conference where the keynote speaker stressed the need for companies doing business with China to adjust their China business plans to China’s Five-Year Plan. If you want to know where China is going over the next five years, read its Five-Year plan, as China has and will continue to hew closely to it. If your China business plan coincides with China’s Five-Year Plan, your likelihood of success will be considerably greater than if it does not.
The other day my friend Greg Anderson, who also just happens to be one of the most knowledgeable people around on China’s auto industry and the author of the highly acclaimed book, Designated Drivers: How China Plans to Dominate the Global Auto Industry, left the following Facebook post:
If Tesla understood the purpose of China’s green car incentives, they wouldn’t be wasting time on this futile quest. It’s all about pushing Chinese automakers to develop their own proprietary green technology. Reduction of auto emissions is only secondary.
I do not know if Greg is right about Tesla in China, but I do know that I instantly saw in that small post what has happened with so many of my law firm’s environmental clients in their quest to sell into China. When we first started this blog way back in 2006, we were really gung-ho about American companies profiting off China’s proclaimed desire to clean up the environment. We believed that our clients that possessed the best and the cheapest clean-up products and services would thrive in China, but few of them did.
We attributed their failure to thrive mostly to the various governments in China favoring local companies due to payoffs. After seeing Greg’s post, I have to think China’s technology goals might also have been a factor, cause when doing business in China, the policy matters.
What do you think?
The title is stolen from the Warren Buffett line, “You can’t make a good deal with a bad guy, regardless of any piece of paper. And it is so true.
Our China lawyers are always telling our clients the following:
- Legitimate Chinese companies do not want to get sued. In our experience, they are even more concerned about getting sued than are American companies. They do not want to get sued because getting sued is both expensive and damaging to their reputation.
- Crooked Chinese companies do not mind getting sued, because they can always just shut down and they have little to no reputation to protect.
- The above means that a good contract with a good company can be very valuable at making sure the Chinese company does what you want it to do.
- A great contract with a crooked Chinese company has virtually no value at all, because the crooked Chinese company does not much care.
- The above means that you must be careful about with whom you do business in China (or anywhere for that matter). Do your due diligence before you contract.
There are three primary reasons for having a good contract with your Chinese counter-party.
1. Clarity. The first is to achieve clarity. To make sure you and the Chinese company are on the same page. For example, if you ask your Chinese supplier if it can get you your product in 20 days, it will say “mei wenti,” or not a problem, pretty much every time. But if you put in your contract that the product must ship in 20 days AND for every day it is late, the Chinese company must pay you 5% of the value of the order, there is a great chance the Chinese company will get honest with you and tell you that 20 days is impossible. At that point, you and the Chinese company can figure out a more realistic time frame and then you know what to realistically expect going forward. Needless to say, we can give countless examples of this sort of thing, but this is yet another reason why our China attorneys advocate putting your contract in Chinese. Clarity before you start the relationship is critical.
2. Stricture. The second benefit of having a well written Chinese language contract with your Chinese counter-party is that the Chinese company knows exactly what it must do to comply. And, in most cases, it might as well. Let’s use the 20 day example as the example here too. If your Chinese manufacturer makes widgets for 25 foreign companies and five of those foreign companies have very clear time deadlines with a very clear liquidated damages provision in their contracts, and the Chinese company starts falling behind on production, to which companies will the Chinese manufacturer give production priority? Of course it will put the five companies with a good contract at the front of the line. Why wouldn’t it?
3. Enforceability. My firm has written hundreds and hundreds of China contracts and we have never once been called on to litigate any of them nor are we aware of any of them having been litigated. We attribute this to reasons #1 and #2 above, and this just reinforces our claim that good contracts help prevent problems. It also bears mentioning that the World Bank ranks China 19th among 189 countries at enforcing contracts.What do you think?
So before anyone accuses me of being angry, petty and spoiled, let me flat out say that I cop to all of those things.
But here goes.
I am Starwood Platinum – Starwood’s highest level of loyalty in its frequent stay program. According to Starwood, this means the following:
Our highest level, Platinum, is reached after completing 25 eligible stays or 50 eligible nights in a calendar year.
As a Platinum member, you’ll receive all the benefits of Preferred, plus much more: upgrades to best available room at check-in, including Standard Suites.
Our signature Platinum Concierge service to help you arrange just about anything regarding your visit. It’s service tailored to your needs.
Now let me tell you about my last stay at the Beijing Sheraton Great Wall.
I booked three rooms. One for co-blogger Steve Dickinson, one for me, and one for Matthew Dresden, another China lawyer at my firm. When I arrived, I learned that neither my room nor Steve’s room had wireless internet. This was not a problem for Steve because he has a MacBook Pro and so could use the wired network. I travel with a MacBook Air (I love it; it truly has 14 hours of battery life!) and it has no ethernet port. This meant that I needed wireless internet. I was told that to get wireless internet I would need to pay about $100 a night more to upgrade to a suite. I pointed out to them that if there is a suite available I am supposed to be upgraded to it for free in any event, but they wouldn’t budge. So I signed up for the suite. Not an auspicious beginning, and one that turned out to be rife with foreshadowing.
Matthew came a few days after Steve and me, and he brought his wife and his three year old. Steve and I ran into the three of them while they were incoming and they looked exhausted. Flying from Seattle to Beijing with a three year old (heck, even without a three year old) can do that to you. It was about 7 pm and Matthew went with his family to his “non-smoking” room. The room reeked of cigarettes so Matthew requested a new room, which he was given.
Matthew and his family were soon asleep. Big mistake.
Maybe two hours later Matthew heard what sounded like someone coming into his room. He looked up and standing there was a Chinese businessperson, in a suit and tie. He mumbled something in Chinese (Matthew is fluent in Chinese but not so much in this sort of situation) and then scurried out. Matthew got up, double-locked the door and went back to sleep. His family did the same.
Maybe twenty minutes later, a peeved front desk person called Matthew to tell Matthew that he didn’t have a reservation for his room and that he didn’t belong there. Matthew, in late night Chinese, made clear that neither he nor his wife and kid would be moving.
I have never heard of anything like this, have you?
But we’re not done yet, as this is the Sheraton Great Wall….
On check-out day (Steve and I stayed five nights, Matthew and his family stayed three), Steve left early because he needed to go to Shanghai to meet with a client. Matthew and I sought to check out at around 9 am because we had a late morning Shanghai flight. I sought to pay for all three rooms but asked that the hotel not cancel access to Matthew’s room until noon (check-out time) so that his wife and kid could stay there until then. A relatively simple request, one would have thought.
But no, this is the Sheraton Great Wall.
The front desk person looked at me like I had asked him for his first born. He said nothing. For a long time. Finally I asked him to check us out as we had a plane to catch. He said that he was concerned about keeping the room open because of the mini bar. I then looked at him like he had asked me for my first born. But instead of waiting a long time, I rather quickly pointed out to him that if Matthew’s wife should go crazy on the mini-bar during the next three hours, the hotel could charge the plunder to my credit card. He again gave me a long look. This time rather panicked. His look was one of not knowing what to do and not really having the authority to do anything. Should he take me up on my eminently sensible suggestion or should he follow orders and treat a guest like pond scum? I made very clear that we didn’t have all day and that we had a plane to catch.
He then called on someone with apparently greater authority and she came up with the brilliant idea of letting Matthew’s wife and three year old stay in the room a few more hours, but on the condition that the mini bar be locked. I was in too much of a rush (checking out by this time had already taken more than 15 minutes) so rather than pointing out how crappy the service had been and how ridiculous this was, I assented, then paid and left.
When I got back to the US, I wrote Starwood and ranted about the treatment we had received. In response, I got an email from someone at the Sheraton Great Wall, offering her apologies and asking that I stay at the Sheraton Great Wall the next time I am in Beijing. No mention of why they had charged (overcharged?) me for my room and no mention of any sort of freebie.
I wrote her back and asked her why in the world I would stay at the Sheraton Great Wall ever again when the service is so bad there and all they offer me to remedy that is an apology. She then wrote me and offered me an upgrade the next time I go. In other words, after all this, they are offering me exactly what I deserved all along.
So why did I write this post. Two reasons, actually. One because I am angry, petty and spoiled.
The other to highlight how China still has trouble getting things right. Good hardware, bad software, as people always like to say.
Now before anyone points out how ridiculous it is for me to use one hotel to describe an entire nation, I should say that I virtually always experience a number of things like this every single time I go to China. I should also say though that the number of these things does seem to decline with every visit.
Oh, and in all fairness to Starwood, its American side eventually felt compelled to step in and make things right by giving me a bucket-full of points.
What do you think?
I love baseball and basketball and I like football. What I most like about football is that any idiot (myself included) can on Monday morning blame such and such loss on such and such coaching shortcoming. You can, of course, do that in baseball and basketball as well, but it just ain’t quite as satisfying.
Monday morning quarterbacking, that’s me.
Oh, and I love doing it with trials to. The OJ trial? I would have won that one for the prosecution because I never would have done the cross of OJ like that. The William Kennedy Smith rape trail? There’s a reason I stayed up watching just about every bit of it: so I could tell you why I would have won it by destroying Ted Kennedy, not kowtowing to him.
Seriously though, I know for a fact that I’d make a lousy football coach (because I was a lousy basketball coach and I know that game ten times better than I know football) and I do not really believe that I could have changed those two famous criminal trials by dint of my great lawyering. But hey, it’s fun to talk about it.
Consultants and journalists love to talk about foreign companies that fail in China. Why? Because doing so shows how much they know and how they would have done things so differently and so much better. Yeah, whatever.
CNBC did a doozy of a story explaining to China neophytes exactly how dumb various big companies were in failing in China. The big companies being, Ebay, Home Depot, Mattel/Barbie, and Google. Problem is that I am just not at all convinced.
Let me explain.
Home Depot. The article talks of how Home Depot went into China and failed because it just didn’t know China is “not the land of DIY.” According to the article, Home Depot opened 12 stores in China in 2006 and closed everything down six years later, leaving with its tail between its legs.
Really? First off, China is difficult for any foreign retailer. Retail in China is both very different from the United States and not at all easy or inexpensive. Home Depot’s retail operations in China did not succeed; that is obvious. But what is not obvious and what is not mentioned in this article is that Home Depot buys a helluva lot of product from China and, near as I can tell, they are real pros at this. Also not mentioned is what Home Depot actually lost in dollars in China and how those dollars stack up to its earnings. I do not know the numbers here, but I would bet that Home Depot’s China venture was but a blip on a blip for the company overall.
And nobody mentions what Home Depot should have done instead of trying China with twelve stores? Should it have conducted marketing studies? I’m skeptical that would have revealed much. Maybe those twelve stores were its marketing study. Big companies do that sort of thing all the time. Why not if you can afford it? I mean, Home Depot might have spent millions on surveys and marketing studies and focus groups and all that stuff and still have not really known whether its stores would have failed or succeeded without having actually having opened a few of them. I give Home Depot credit for having the guts to go into China first. It might very well have worked out. It didn’t. So what? Does anyone really believe that had Home Depot not gone in we wouldn’t be reading articles quoting pundits criticizing Home Depot for being overly cautious and missing out on 1.3 billion customers?
Mattel. The article rags on Mattel next for having spent $30 million dollars opening a Barbie store in Shanghai. Just by way of a bit of comparison, Mattel’s revenues in 2012 were about $2.1 billion dollars. So spending $30 million on a store that didn’t work (who knows how much Mattel lost in total on this store, but I would guess it was less than $30 million not more) is just not a big deal. And again, let me make clear that Mattel, near as I can tell, is a huge success in China. One store didn’t work and was shut down, but Mattel toys seem to me (from my own observations) to be doing just fine in China and, despite a few hiccups, Mattel buying from China seems to be doing just fine too. It also would not surprise me a bit to learn that Mattel learned so much from its failed store that its increased sales of Barbies to China alone increased by more than the amount it lost on this store. And again, are we to blame Mattel for having tried this? I sure don’t.
Ebay. In the article, an Ebay spokesman says that ”It’s frustrating that people say we failed in China…. [because] from our perspective, we now have a very successful, large, and continuing-to-grow export business.” For all I know that is true. Maybe Ebay’s business in China evolved and is very different from its more visible businesses elsewhere. Which leads me to the next company in the article, Google.
Google. The article says that companies must either do what might be considered “unsavory” or get out. But that simply is false and Google itself is proof of that. I ate in Google’s Beijing cafeteria not so long ago and if the quality of its free food and its bustling and lively cafeteria are any measure, Google-China is doing just fine. And if the people I know who worked at or still work at Google China are any indication, Google knows exactly what it takes to succeed at doing business in China, the Google way. Would it really have made sense for Google to have changed its ethics and its business methods for just one country? What about the impact that would have had on Google employees and customers everywhere but China? Did this article even consider that? Of course not.
Yes, Google search does not have the same percentage of usage in China that it does in the United States, but Google is selling Google ads in China and presumably making big bucks by doing so. Google is a lot more than just its search page and whomever wrote this article should have done at least some investigation into what Google is actually doing in China before proclaiming it a total failure there. Full Disclosure: I am a Google stockholder.
Be wary of the China consultant who publicly criticizes. Or at least realize that he or she is probably doing so as a marketing device more than anything else.
I can’t wait until Monday.
What do you all think?
Despite the increasing restrictions on using employee dispatch companies for hiring of “your” China employees, our China lawyers have seen very little by way of a slowdown in smaller companies choosing to go that route, especially if doing so will allow them to delay having to form a China WFOE that much longer.
The legal issues for foreign companies that use employee dispatch companies are not terribly complicated, with one exception.
The way the whole system works is that you as the foreign company sign a contract with the employee dispatch company for it to hire as its own employee an individual or individuals you would like doing work for your company. The better dispatch companies generally have pretty good contracts for this and so our role as attorneys for our foreign clients is mostly to point out the provisions at which our clients have some negotiating power.
The complication arises in the contract between the employee dispatch company and its/your employee and it is here where we see the most mistakes being made. The employee dispatch company drafts its employment contract with its/your employee to protect and benefit itself, without any real regard for you. In most respects, your interests are fairly well lined up with the employee dispatch company and so for the most part it is a good thing that most of these companies draft good China employee contracts.
But when it comes to your intellectual property, you need to account for the fact that your employee dispatch company does not care at all. And when I say, “at all,” I mean at all. Your employee dispatch company does not care if its contract with its/your employee protects your IP and your employee dispatch company does not care if its contract fails to protect your IP.
For this reason, you have to care and you have to be the one to make sure that the employee contract reflects this. If you want to be sure that the employee does not end up owning your intellectual property, you need to make sure that the employee contract is clear on this. If you want to be sure that your employee signs a contract that reduces the likelihood of he or she running off with your trade secrets, you need to make sure that the employee contract has provisions for that.
Cause if you do not make sure that your China attorneys do this, nobody else will.
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.