Wednesday, July 25, 2007

Astute Advice for All Advocates Dealing with China

I just read through the feature article in the May 07 issue of the New England In-House. Titled “Made in China: In-House Lawyers Confront Explosion of Chinese Business Activity”, this is a well researched article with insightful advice that transcends the in-house counsel circle. I tip my hat to John Cunningham for packing so much good stuff in so little space. His article proceeds in five subsections: cultural adaptation, laws & regulations, potential risks, China’s lures & attractions, and due diligence & planning.

He starts off by establishing the background of his article: "The China boom is in full swing, and sooner or later your company will be doing business in China. If you aren’t there now, one of your competitors probably is."

Citing the explosive growth of the Chinese market and its attractions to U.S. companies, Cunningham advises that:

in-house lawyers have to get up to speed now on the intricacies of doing business in China – from bridging the cultural divide to knowing the key differences between U.S. and Chinese laws and regulations.
Then he delves into “crossing the cultural divide” by stating that adapting to the Chinese culture is “perhaps the biggest hurdle” for many foreign firms. To illustrate how to adapt, Cunningham has a few excellent quotes from some experienced China hands (Zhong guo tong, 中国通):

“You must be flexible in your approach to business, and learn to do things the Chinese way,” said Edward Epstein, who works in the new Shanghai office ofAtlanta-based Troutman Sanders.

For example, “time is not money there,” Epstein explained. “And deadlines can’t be
used as a negotiating lever because they just have to get comfortable with you.”

“You must establish a relationship before you negotiate a contract, because in China you only do business with friends,” said Lucia Lian of Goulston & Storrs in Boston...and “you should never talk business during meals.”

Cunningham wraps up the cultural adaptation part with:

“Companies who fail don’t adjust to Chinese culture and values, don’t understand the [Foreign Corrupt Practices Act], don’t localize supply, don’t train and promote Chinese to top levels of their business, or don’t make a commitment that top management physically go there at least four times a year,” Daniels said. [Jack Daniels with Eastbridge Partners]
With respect to Chinese laws and regulations, the article stresses the differences between the U.S. and China; it calls for good Chinese counsel in any “entry team”, because,

For Americans, the Chinese system may look similar, but it is not. While both the U.S. and Chinese systems have central, provincial and local levels of government, and many written regulations, the similarities end there.
Because China has a civil law system, the codes, statutes, and regulations are readily available in Chinese on Chinese websites. Two big problems are inherent: the ability to read and understand them; the accurate interpretation of the law. With assistance of a China-trained lawyer, the first problem will dissolve, but the second problem presents greater challenges, since,

“The rule of law means something different in China,” said Robert Woll of WilmerHale’s Beijing office. “It is more of a planning and control mechanism than a predictor of outcomes. The regulatory framework looks very complex, but you have to understand the agency motivations more than the language to get interpretations

Epstein explained: “An enforcement or approval authority interprets the law with
great discretion there, and that can work in your favor or it can work against you. You can often get an approval in one place and a rejection in another based on the same law.”
Other legal issues with potential for trouble in China-related deals, dealt with in the article, include IP protection, dispute resolution, U.S. anti-corruption law (FCPA), export controls, anti-dumping enforcement. He cautions that U.S. companies need to take these into careful consideration.

Risks abound in a China deal, but the most salient point made in the article is “vetting your partners in any transaction”, which I touched upon in one of my past posts. Another good point made here is the mindset about doing business in China, which is, according to Lian (a bilingual lawyer from China), not just about competition and is also about building relationships.
Cunningham then highlights the lures of the China market. An expanding middle class of more than 200 million is a big piece of consumer pie to grab. Besides the known areas of attraction such as, real estate development, venture capital, low cost manufacturing, sectors like financial services, alternative energy could present huge opportunities because of government incentives and market potential. Therefore, "weaving China into investment strategies is now practically a given."

However, he also cautions:

The best time to go is before you’re pressured into it – when you have good markets and technology, but have time to plan your future in China.
Because of the lure of the China market, Cunningham offers wise counsel through his China experts:

“China has a seductive appeal, but you can’t check your common sense at the
border,” warned Edward Epstein.
(It is hard to imagine that people would do that, but stranger things have happened. Really.)

Cunningham then quotes Samuel Shafner of Burns & Levinson in Boston, who suggests that Americans heed the Art of War-- Know yourself and your enemy, and he said:“It is much more important to have intelligence on the ground in China than anywhere else in the world. You have to find people who know China, who know your business and are trustworthy.”

Beyond that, tax and currency repatriation should also be part of the due diligence and strategic planning.

Overall, this article is an excellent checklist for those in China-related deals, not just in-house lawyers.

Read the whole article here.

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