You can invest in China on your own by forming a Wholly Foreign Owned Entity (WFOE) or by partnering with an existing Chinese business through some form of joint venture. China is fairly open to foreign investment and in the past several years WFOEs have become the most common vehicle for foreign investment, partly due to investor skittishness as stories about past problems with Chinese equity joint venture partners have made the rounds.
Yet many foreign investors still choose to enter the Chinese market through an equity joint venture, and the particular risks involved with this type of arrangement require careful planning.
With the media recently paying so much attention to foreign (read American and British) businesspeople getting in trouble in China, my firm’s China lawyers have been getting a large number of calls lately from worried Americans based in China. These callers are asking the following kinds of questions, and we are giving the following kinds of short answers (needless to say, our long answers are much more nuanced):
1. Should I leave China? Not unless you or your company have violated Chinese law in such a way that you are at risk for going to jail. Let’s talk about whether or not that is the case…
China joint ventures are notorious for their high failure rate. An old Chinese saying that is often applied to joint ventures is “same bed, different dreams.” Far too often, American companies and Chinese companies rush into joint ventures without ever discussing their respective dreams.
Many years ago, a client about to fly to China to meet with a potential Chinese joint venture partner asked for my help. I compiled a list of issues to raise at that meeting, and have provided a similar list (honed a bit more each time) to subsequent clients facing the same situation. The goal of raising these issues is to determine whether the two companies share the same dreams, and whether the Chinese company is JV worthy. Currently, this list includes the following questions:
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…
Rule number one for succeeding at doing business in China is to have a good partner. The odds of having problems with a Chinese company are much lower when you deal with a “legitimate” Chinese company. That means rule number two is making sure that you are dealing with a legitimate Chinese company.
But how do you do that? How do you distinguish between a Chinese company that is legitimate and one that is not?
The following are the basics for making that determination…
I recently spoke with a reporter who asked me why our clients that had chosen to locate in Vietnam had chosen Vietnam over China. I mentioned lower costs, less competition, and how some had told me that it was because they just flat out preferred spending time in Vietnam to China. He then said, “But it must be strictly the low costs in the end, right?” I said that could not be the case because if companies were choosing their locations on low costs alone, countries like Yemen and Niger would be on the top of their lists, rather than nowhere on them.
We are always getting asked why our law firm has its lead China lawyer and an office in Qingdao — we also have an office in Beijing, but nobody ever asks us why there. The answer is actually quite simple, particularly when compared to the high-level analysis many companies employ in making their location decisions. Steve is in Qingdao because we have had an excellent relationship with Qingdao’s biggest (and I think best) law firm for nearly a decade, and that firm was instrumental in helping us establish ourselves in China. But probably the driving factor in our choosing to locate in Qingdao is that Steve loves the place and loves that he can easily afford to live in a luxury apartment with twelve-foot-high windows overlooking the East China Sea at about half the price (and the pollution) of Shanghai or Beijing. The fact that at least 80 percent of our China work is 2-3 hours from Qingdao by plane only adds to its attraction. Steve is completely fluent in Chinese (as is our other attorney stationed there), and so Qingdao’s small expat community and dearth of people who speak English is no deterrent…
For every 100 Wholly Foreign Owned Entities (WFOEs) and Joint Ventures (combined) my firm helps set up in China, it only sets up one Representative Office. Why so few, when Rep Offices are the easiest entity for foreigners to form in China? Because their inherent limitations mean they seldom make sense.
Representative Offices are aptly named — they are the China representative of the foreign company. A Rep Office is not considered a separate legal entity in China, and it is limited by law to performing “liaison” activities. It cannot sign contracts or bill customers. It cannot supply parts or perform after-sales services for a fee. It cannot earn any money in China or take any payments from a Chinese person or business for any reason.
Rep Offices are pretty much limited to engaging in the following…
American companies make a lot of mistakes in China. And even when they don’t make mistakes, they get frustrated.
I view both of these results as healthy, because mistakes and frustration are par for the course in China, and the sooner companies realize that the better. That said, they could avoid at least some of their heartbreak by following these five principles…
* As I noted yesterday over at Redline, the defense in the NCAA trial is putting up some terrible witnesses. Here’s another example. The NCAA’s expert wrote a textbook. The NCAA might have wanted to check it out before bringing him on to help defend themselves IN AN ANTITRUST CASE. [Twitter / Stewart Mandel]
* Hong Kong lawyers protesting what they see as China meddling. Honestly can you blame China? Ever since Hong Kong let Batman just swoop in and grab that guy, you can’t really trust the Hong Kong legal system. [Reuters]
When it comes to negotiating, Chinese companies view American companies as easy marks: impatient, unfocused and too willing to compromise to avoid losing out. Accordingly, Chinese companies often employ the following three negotiating techniques:
1. Wear down the American side down with endless issues. This tactic actually has two variants. In the first variant, the Chinese side raises a series of issues. Once these initial issues are resolved, the Chinese side then raises a series of unrelated new issues. This process never stops, because the list of issues is endless. The second variant is for the Chinese side to make several unreasonable demands and then refuse to address the American company’s concerns at all. Both variants are designed to induce the American side to concede on all major points out of a desire to keep the deal moving forward….
As part of a nationwide tour, Above the Law is coming to the great city of Chicago.
Join preeminent law firm management consultant Bruce MacEwen, Katten Muchin Chicago managing partner Gil Sofer, and JPMorgan Chase & Co. assistant general counsel Jason Shaffer for a panel discussion (sponsored by Pangea3) on the evolutionary and market forces bearing down on the law firm business model. Come on by Thursday, November 20, at 6 p.m., for thought-provoking discussion, food, drink, and networking.
Space is limited and there will be no on-site registration, so please RSVP
Average law school debt for graduates of private universities hovered around $122,000 last year. With only 57% of new attorneys actually obtaining real lawyer jobs, recent graduates have a lot to consider when it comes to managing their student loan payments. Thanks to our friends at SoFi, today’s infographic takes a look at student loan debt, including the possible benefits of refinancing for JDs…
Kinney Recruiting’sEvan Jowers is currently in Hong Kong for client meetings and still has a few slots available through October 22. Evan will also be in Hong Kong November 14 to December 15. Further, Robert Kinney has been in Frankfurt and Munich this week and is available for meetings with our Germany based readers.
One of our key law firm clients has referred us to one of their important clients in the US, Europe and China – a leading global technology supplier for the auto industry – in order to handle their search for a new Asia General Counsel and Asia Chief Compliance Officer.
Kinney is exclusively handling this in-house search.
This position will have a lot of responsibility and include supervision of eight attorneys underneath them in the Asia in-house team. The new hire will report directly to the global general counsel and global chief compliance officer, who is based in the US. The new hire’s ability to make judgement calls is going to be as important as their technical skill set background.
The position is based in Shanghai and will deal with the company’s operations all over Asia and also in India, including frequent acquisitions in the region.
It is expected that the new hire will come from a top US firm’s Shanghai, Beijing or Hong Kong offices, currently in a top flight corporate practice at the senior associate, counsel or partner level. Of course, the candidate can be currently in a relevant in-house role.