BizChina

One of the misconceptions I am always fighting about China is that it has no laws. Even people who should know better are oftentimes guilty of just assuming there is nothing on the books to cover a particular business law matter. Their assumptions oftentimes stem from their having seen companies act in so many different ways, leading them to conclude there is no one right way.

There usually is and if you are a foreign company, your best bet is to follow the law.

If anything, one of the problems businesses face in China is too many laws, some of which are in conflict with others.

The Wall Street Journal just came out with a new site, entitled, China Real Time Report. It appears it will be free for the next couple of weeks and then require a subscription. Not clear to me if the subscription required will be to the newspaper itself (I think this is the case) or something separate. Anyway, it is billing itself as a "vital resource for an expanding global community trying to keep up with a country changing minute by minute," with its postings coming from "the wide network of Dow Jones reporters across Greater China."

Its post, by Sky Canaves, "Do Too Many Rules Erode the Rule of Law?" makes note of China's "too many rules" phenomenon and muses on the results:

It’s not a new revelation that China has a lot of rules.

Last year, there were rules for Beijing residents during the Olympics, and also rules for foreigners who came to town for the games (57 of them!)

This year, in Hubei province, a county government infamously ordered local officials to smoke locally produced cigarettes, while civil servants in the southwestern city of Kunming were ordered to learn 300 English sentences and 100 sentences in Lao, Burmese, Thai and Vietnamese, apparently to promote tourism in the region.

Today’s New York Times looks at some even more bizarre manifestations of rules run amok, such as an edict requiring schoolchildren to salute all passing vehicles on their way to and from school, and the Chongqing rule that “forced unmarried women to pass a chastity test before receiving compensation for farmland appropriated by the government.”

A potential side effect of so many seemingly arbitrary rules is that people may feel more inclined to skirt rules that they disagree with, or are simply too cumbersome to follow on a regular basis, fueling a culture of rule-bending and ignoring.

Not only does China have so many rules/laws, but they change faster (by about ten-fold) than any other country. I previously wrote on this in "China And Doing It By Heart. One Day You Are In And The Next Day You Are Out" and in "China's Internet Censoring. Hate To Say I Told You So, But I Told You So...."

I agree that having too many laws that people skirt leads to a denigration of the rule of law, but I fear the government likes things pretty much as they are. There is a Russian story I always tell that illustrates why I believe China likes so many laws. Many many years ago, an executive of a well known company called me for my views as to how it should handle going into Russia via Moscow. I called a Russian client of mine for the answer. This client is Russian and this client has been doing business with the very top echelons of the Russian government for about 30 years. He definitely told me that this US company needed to win over Moscow's mayor or something would go wrong. He told me he assumed the US company would not want to pay a bribe and he said Moscow's mayor is not going to be interested in that anyway. But, he said this company needed to do something very public to let Muscovites know that the mayor had been looking after the people in allowing this company to come in. My client suggested this American company donate a large sum to a local hospital or orphanage and publicize it with a big ceremony at which the mayor would be the honored guest. He said if this company did not do something like this, they would surely find themselves bogged down in some sort of lawsuit involving noise restrictions or something like that.

I passed all of this information on to the executive, who told me his company had never operated that way anywhere in the world. When I pointed out that his company had yet to go into any place like Russia, he poo-poohed me. My client was right and the American company was wrong. The American company ended up getting bogged down in a lawsuit that my client insisted would have been handled within weeks not years had this company done what my client had prescribed.

Which gets me back to my theory on too many laws. The more laws, the more likely one is to be in violation of one of them. And if everyone is in violation of a law, then everyone is beholden to the good graces of the government to avoid being fined or jailed.

I agree with this WSJ post that the Rule of Law is coming to China, but only ever so slowly.

What do you think?

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.

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?

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.