Many years ago, an American credit reporting company called seeking help with forming a subsidiary in China. This company told me of their extensive and expensive market research demonstrating that China had a tremendous pent-up demand for their credit reporting services. As I listened, I kept thinking that unless the law had changed recently, foreign companies were prohibited from engaging in such business without a Chinese joint venture partner.
So I asked politely if anyone had determined whether their planned business would be legal in China. They paused and said they had not, and I suggested that we do so straightaway. After ten minutes of research, I reported back that credit reporting was barred to foreign entities seeking to go it alone. This company never went into China.
Flash forward to the present. Organic, cruelty-free cosmetics have become big business, including in China, where many who can afford such things would not be caught dead putting made-in-China products on their skin. American cruelty-free cosmetic companies are being contacted in droves by Chinese companies seeking importation and distribution deals…
Thrilled at the prospect of a massive new market, the American companies are flying to China, meeting with prospective partners, and negotiating “understandings” for getting their cosmetics to the Chinese consumer. There is only one problem with all this: foreign-made cruelty-free products are not legal in China.
Though China recently removed its animal-testing requirement for most domestically produced cosmetics, all imported cosmetics must still be tested on animals (with one minor exception). This means that cruelty-free American cosmetics companies must choose among (1) not selling their products in China, (2) conducting animal testing to secure government approval in China, or (3) re-branding their products for China and conducting animal testing. The first choice means no money from China. The second choice may damage the company’s reputation and sales outside China. The third choice may allow the company to avoid damage to its reputation, but only if consumers differentiate between the brand and the company. So far, all of the companies who have contacted the China lawyers at my firm have chosen not to sell their products in China, rather than subject them to animal testing. The companies simply are not willing to risk the reputational damage, though some other cosmetics companies are diluting their cruelty-free claims to sell in China.
The point here is simple. Before conducting market research or flying to China or engaging lawyers to form a subsidiary, you should first determine whether your business plan is even legal in China.
Dan Harris is a founding member of Harris Moure, an international law firm with lawyers in Seattle, Chicago, Beijing, and Qingdao. He is also a co-editor of the China Law Blog. You can reach him by email at firstname.lastname@example.org.