BizChina
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When I started this blog, I swore I would never do a post apologizing for not posting nor would I ever do a post making any sort of excuse for not posting. We are all busy and I hate excuses and unless one thinks this post violates that pledge, I am proud to say I have stuck by it.
In fact, instead of not posting when I get crazy busy, I just tend to get more biting and ornery so if any apology is necessary, I apologize in advance for that.
I also must dedicate this title to my Canadian international trade lawyer friend, Cyndee Todgham Cherniak, with whom I shared a podium at the just completed American Bar Association International Law Section Meeting in Miami. Cyndee commented to the crowd on how "shocking" my titles sometimes are and I thought of her when I penned this one.
My ire today stems from perfectly fine domestic US lawyers who, for some unknown reason, deem themselves able to practice international law. They are not. Last week, I got an email from an unnamed company that had doubts as to the legality of its arrangement with someone it described to me as their independent contractor in China. I then did what i always do when someone uses the US term, "independent contractor." I stopped him and told him that this person is an employee working without a written employment contract and his company is at risk for this.
The laws on this are clear in China. If an individual works for your company, that person is an employee of your company and that individual is covered by China's labor laws. This means the failure to have a proper written agreement and the failure to have a well-crafted employee manual might mean a large penalty for the company and/or an employee for life. If you want someone to work for your company without being your employee, you must contract for that person's work through a third party company. In other words, that person must be employed by some other company and your company must contract with that other company. See "Wanna Get Sued In China? Your Ex-Employees Can Help. Part II, The Corporate Counsel Edition."
But here's the really good part. This person then told me that his company has a written agreement with this person making very clear that this person is an independent contractor and not an employee and would this solve his company's problems. He then told me he had just sent me a copy of this contract and would I please look at it. I did and I wrote the following email in response (altered only slightly to hide any markers that might reveal the company involved):
My firm has a closer relationship with ____________ than just about any other firm and I have heard nothing but good things about Ms. __________'s abilities as a labor lawyer. Two of my best friends, ____________ and ___________ are lawyers there and we are always referring work back and forth. I say this to moderate that this agreement is not worth the paper on which it is printed. I’m sorry, but there is no other way to put it. There is absolutely no way this contract has any validity in China and suing this person in _________ [state] [as per the contract] will be a complete waste of time and money.There is just no way that a contract calling a relationship one thing is going to make it that one thing. It would be like you and me signing a contract saying Seattle is in Oklahoma. We can do that, but it is not going to change the reality. Under Chinese law, this person is an employee and a US contract purporting to claim otherwise will never see the light of day in a Chinese courtroom, nor should it Chinese courts hire out their own translators so even if it did make it to court there (which it would not), it will likely say something very different than what is here in any event. This is why it almost always makes sense to have contracts in Chinese, not English.
The other problem with this document is that it calls for disputes to be resolved in _____ County Superior Court. My firm has dealt with this issue many times for both US and Chinese companies and I know exactly what will happen if you sue this person in _________county. You will win because she won’t show up. You will then take your judgment to China, where it has zero value whatsoever. Zero. Here’s a post I did on this a few years ago: Enforcing Foreign Judgments in China -- Let's Sue Twice. But it’s even worse than what I said and here’s why. This contract probably stops you from suing her in China because her defense there will be that you two agreed that any dispute would be handled in the United States and you already did that and won, so you cannot now sue her in China. We crafted that argument (with a Chinese law firm) on behalf of a Chinese company and they won on it.
At this point, however, I am more concerned about getting you legal than I am about your contract with this person. The real questions that need answering all revolve around what you are doing in China now and what you hope to be doing there a few years from now. It is the answers to those questions that will determine how you should proceed.
A year or so ago, I gave a talk to the Alaska Bar Association entitled What Lawyers MUST Know About China and I then did a blog post with the same name. In that post, I talked about how I should have subtitled the talk, "the biggest mistakes foreign lawyers make when dealing with China." I would love to give a somewhat more general talk on the eight (lucky number) things every domestic lawyer must know about international law, but right now I am having trouble getting past the first one, which is don't do it. Seriously, I think that would make a great topic for a talk and I would love to hear what items you think belong on the list.
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I am fascinated with China as a consumer market. It has 1.3 billion people and if one reaches just one percent of the market.....
Joel Backaler over at China Observer blog just came out with a post assessing McKinsey's newest report on China's consumer market. The post is entitled, "One Country, Many Markets – McKinsey’s Alternative Method of Analyzing Chinese Consumers," and it describes McKinsey's newest innovation of dividing China's consumer market by clusters, as opposed to region or cities. I buy into the cluster approach, as does Joel, though with some reservations:
So, if you can’t consider China’s market at the country level, then what is the most appropriate way to divide up China? At the provincial level? At the city-tier level?McKinsey’s answer to this question is: Neither. McKinsey suggests an alternative approach, which they call a “Cluster Map.” They divided China into twenty-two city clusters, defined as “groups of cities that are developing around one or two large hub cities.” The twenty-two clusters are broken down by size with Kunming and Taiyuan classified as “Small clusters,” Xiamen-Fuzhou and Chengdu classified as “Large clusters” and Shenzhen and Hangzhou classified as “Mega clusters.”
What does all of this “clustering” accomplish from a China business strategy perspective? First, in terms of industry composition, clusters develop around certain industries. The report cites Shanghai’s automotive industry as an example. Due to SAIC and GM’s successful joint venture, a developed network of automotive parts suppliers has emerged in the suburbs and cities nearby. Additionally, McKinsey found that clusters offer a more accurate depiction of consumer preferences as income differences across city tiers decrease.
I think the city cluster analysis is an innovative way of approaching China market strategy. That said, I am still not convinced it is the best approach or that a best approach exists at all. The key takeaway from my perspective is that the days of looking at “The China Market” are over. Companies are scrambling to find a more tailored approach to be successful in China’s many markets, adopting multiple strategies to gain access to their portion of the coveted 1.3 billion consumers.
Not only does McKinsey divide China into clusters, but it also lists out each cluster's percentage contribution to China's GDP. A couple of things struck me by this list (which can be found on page 9 of McKinsey's report). First, is that 92% of China's urban GDP comes from these 22 clusters. Second, that the "Shandong byland" cluster comes in a pretty close third, right after Shanghai and Beijing in terms of its contribution to China's GDP. Shanghai and Beijing (called Jingjini) each contribute 10.8% while Shandong contributes 9.0%.
This strong showing reinforces something that many of our clients have been doing of late and that is launching their businesses in Qingdao or Dalian, rather than in far more expensive Shanghai or Beijing. They are telling us that they prefer this so-called second tier cities because they are good places to check on their concepts in China, at a slightly lower rate than if they were to do so in Beijing or Shanghai. Now of course Qingdao is not going to serve as a perfect stand-in for Shanghai, but it ought to at least be a good indicator.
What do you think?
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One of the things we lawyers have to live with is secrecy. Put simply, if we reveal client confidences we can lose our licenses. This necessarily leads us to be über careful.
I have been uber careful about not mentioning a transaction in which my firm represented the Chinese company VanceInfo. The transaction was between VanceInfo and Expedia and I was not comfortable writing anything on it until I was 100% certain it had gone public. Working with VanceInfo's in-house legal team, my law firm provided the US side legal representation in negotiating the contract with Expedia and related activities.
But even now, I am constrained from revealing anything substantive beyond that which has already been made public. I have to be particularly careful because VanceInfo is a publicly traded (NYSE) company. But I wish to highlight this deal because I see it as a harbinger of the sort of thing we will all be seeing more of from Chinese companies as they expand worldwide.
So I waited and waited and never saw anything.... Until now.
I saw that VanceInfo started following me on Twitter and so I checked out its Twitter page and learned it consists (so far) of one Tweet, and that one Tweet links over to their September 23, 2009 press release announcing its deal with Expedia on which my firm and I worked so hard.
The press release states the following:
Beijing, September 23, 2009 -- VanceInfo Technologies Inc. (NYSE: VIT) (“VanceInfo”) (the "Company”), an IT service provider and one of the leading offshore software development companies in China, today announced the official launch of an offshore development center (“ODC”) in Shenzhen, China with Expedia, Inc. (“Expedia®”), the world's leading online travel company. The opening ceremony will be attended by Chris Chen, Chairman and Chief Executive Officer of VanceInfo and Pierre Samec, Chief Technology Officer and Global Executive Vice President of Expedia®. After the successful completion of a four-month preparatory and transitional period, VanceInfo established the ODC in accordance with the multi-year contract with Expedia signed in May 2009. The two companies have worked together to build a global delivery team in the ODC that provides design, development, testing, production, and maintenance of online travel services platforms, enabling Expedia to enhance the core platforms and services while improving time-to-market and increasing competitive agility."We are pleased to be selected by Expedia following a stringent vendor selection process that involved many outsourcing players in China,” said Chris Chen, the VanceInfo CEO. “Our collaboration with Expedia has reached a new milestone with the seamless and successful completion of multiple project transitions while launching the new ODC. Leveraging China’s unique talent advantages, we are committed to delivering first-class IT services with flexible delivery models to support Expedia’s global expansion.”
VanceInfo has built and currently operates ODCs for multinational corporations in technology, telecom, financial services and manufacturing industries. This new Shenzhen-based ODC marks a breakthrough for VanceInfo in the travel and transportation industry and is anticipated to further enhance the Company’s overall global delivery capabilities to service major outsourcing initiatives of multinational clients.
VanceInfo was formed in 1995 and it already has more than 7000 employees worldwide and three offices in the United States, including one in Seattle, which is also where Expedia is based.
We are honored to have represented VanceInfo on this important deal and to have had the opportunity to work with so many great people on its management team.
Read more: China's VanceInfo "Done Good" And We Are Honored To Have Helped.
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Advertising Age Magazine just came out with its list of "20 Blogs Marketers to China Should Be Reading " and I like it. I like it not just because it lists China Law Blog (though I will admit I have trouble seeing past that), but because it provides a diverse list of blogs, every one of which I consider to be good.
I like how it includes well deserved classics like Danwei and Peking Duck, deep think blogs like China Beat and James Fallows, top newcomer blogs like Aimee Barnes and China Smack, not boring legal blogs, China Hearsay and IP Dragon, and cutting edge China marketing blogs like China IWOM and China Youthology.
I also like how its list is alphabetical, which calmed me a bit after I realized that was the case and it was not ranking us at #10.
If you are interested in China (and that is why you are here, right?) I urge you to check it out.
What blogs are missing?
Read more: Ad Age's 20 China Blogs For Marketers. Oh, And Everyone Else Too.
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We are writing about joint ventures so often these days because we are seeing a pronounced resurgence both in companies wanting to go into Chinese joint ventures and in companies coming to us needing legal assistance with their failed and failing joint ventures here in China. We have often expressed cautions about joint ventures in the past, and nothing we have seen recently causes us to change our mind.
In many cases we are not able to effectively assist the foreign party in a troubled JV because their original joint venture agreement has been so poorly drafted as to preclude any real assistance. We usually attribute this to the foreign company's originally misinformed view that "China has no law" or that the "JV contract is not worth the paper it is written on." Based on this view misguided view of Chinese law, the foreign joint venture participant failed to secure good legal representation when it went into the joint venture deal, leaving us with little or nothing to work with in terms of fixing the joint venture problems. The foreign joint venture participant has made basic mistakes that make it impossible to use the very effective Chinese laws and legal system to resolve the problems that have arisen in the JV.
Some examples of the basic mistakes are:
-- In order to resolve a joint venture dispute, it is an absolute requirement that the issue be resolved in China, either through litigation in the Chinese courts or through arbitration with CIETAC, BAC (Beijing Arbitration Commission), or some other legitimate Chinese arbitration body. Foreign partners often provide in the JV agreement, however, that litigation or arbitration must take place outside of China, either in the home country of the foreign partner or in some expensive and well known arbitration forum like Stockholm or London. This type of provision does little to nothing to protect the foreign partner and makes it impossible to resolve any disputes in China, where the problem exists.
To take an example, many clients come to us complaining that the JV's representative director has highjacked the operations of the China joint venture company and is operating without supervision and against the wishes of the board of directors. To effectively address this issue, it is imperative that we proceed in court in China directly against the rogue director. However, if the JV Agreement provides for jurisdiction outside of China, we are effectively precluded from taking such direct action.
This is only one way that foreign participants in JVs sabotage their own chances at resolving disputes. Other examples are:
-- Failing to hire their own independent legal and accounting advisor during the formation process, thereby relying on the Chinese JV partner for all of the formation legal work. This is a guaranteed disaster, and it still happens every day. We have seen US companies that have put tens of millions of dollars into a Chinese joint venture, using no legal counsel at all, using the legal counsel of their joint venture partner, or using a local Chinese lawyer who has no experience with foreign joint ventures and no real incentive to protect their foreign client. We had one client who when he first came to us boasted of the great job his Chinese lawyer had done for only $600. When we pointed out how his joint venture so heavily favored the other side that his multi-million investment would likely never yield him a penny, we began to suspect he no longer thought of his counsel as such a bargain.
-- Relying on a majority share interest to control the venture, rather than exercising effective control through the right to appoint the representative director and the general manager.
-- Relying on a personal guarantee from the Chinese JV partner as a substitute for failing to properly document the project.
-- Failing to provide clearly for protections for the foreign partner, assuming share ownership is sufficient to provide adequate protection.
-- Failing to carefully monitor capital contributions and the use of contributions to capital, assuming that accounting reports will be adequate to reveal the fate of money contributed.
Though the above looks like a long list, I often see joint ventures where the foreign participant has made every single one of these mistakes and more that I have not mentioned. When this happens, we as lawyers are severely constrained in terms of what we can do to help. But this is not because China has no law or because Chinese contracts are worth nothing. It is because the failure to properly form and manage the JV has made it impossible to proceed. This blame for this generally falls on the shoulders of the foreign JV partner, not on the Chinese side or the Chinese system.
Joint venture agreements are really no different from any other contract. The better the agreement, the less likely there will be problems and the more likely there will be a quick and inexpensive resolution to whatever problems arise.
Read more: China Joint Ventures Again. This Time We Blame The Victims.
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