BizChina

My firm is constantly getting asked about what it takes to set up a branch office in another city in China. In other words, you already have your WFOE in place in, let's say, Shanghai, and you decide you want to open another office in Qingdao. Or it could be the reverse. What do you do and how easy is it to do it?

I thought of this today because a client wrote me on this and I figured I might as well put my response up here for everyone, so here goes:

Setting up a branch office is really pretty easy. You apply to the local office that handles business licenses and the like. The process for a WFOE seeking to open a branch office is pretty much the same as it is for a Chinese company seeking to open a branch office.

It usually takes only a month or so to complete but can go a bit faster if you want to pay for someone in the particular city to try to speed it up for you.

The exact details vary from city to city, but in general they are going to want to make sure that you have a proper physical office in both cities, that you have a local bank account, and that you are set up to pay local taxes.

That's it.

Got an interesting email the other day regarding the language to use on a contract. It went as follows:

I was talking to someone who was bragging about how great their employment contract was yesterday, and he said "My contract is in both Chinese and English, and it says that in the case of a difference in the translation, the English language version takes precedence."

Am I the only person who sees the potential abuses of this, when given to someone who cannot read Chinese? If the Chinese language version says the opposite, he's screwed, right?

If you choose to answer this question, please answer it on your blog. I'm sure everyone considering employment in China would like to know the answer.

The answer is yes, if the Chinese language version says the opposite of the English "he's screwed." And here is why. And this holds true for all agreements, not just employment contracts.

In China, Chinese language contracts take precedence over any other language, unless the Chinese language contract states that some other language controls. So if a contract is in both Chinese and English and the Chinese version says the Chinese language controls and the English language version says English controls, the Chinese language version will control. Even if the Chinese language version is silent as to which version controls, I am pretty certain the Chinese language version will actually control.

Years ago, my firm was representing Russian company that had an agreement with a dishonest American company (guess what people, it is not always the "foreigners" who pull this stuff). The English language version said that the English language version would control and the Russian language version said that the English and Russian versions had "equal weight." On one critical issue, the English language version said one thing and the Russian language version said either the same thing or something else, all depending on how one interpreted the Russian version. We argued that the Russian version said "something else" and the American company argued that, no, the Russian version, "of course" said exactly the same thing as the American version. We settled before a ruling, but I was not optimistic that our interpretation would carry the day even though we had an email from the American company that helped our argument.

I have written on this before but it bears repeating. If you are going to have your contract in multiple languages, make sure you know for certain which language is going to control. This means making sure you know exactly what all of your contracts say, whatever the language. Having two languages with equal weight is pretty much always the worst "solution" of all because all that does is increase the room for interpretation and delay it until there is a dispute. It is far cheaper and more sensible to get the meaning clear before signing a contract than to pay your lawyers to fight about it later.

For more on the language of your China contract, check out "China OEM Agreements. Why Ours Are In Chinese. Flat Out."

Just finished an interview with a reporter doing a story on Chinese drywall. I gave my usual speech on how there are three main aspects to protecting oneself from bad Chinese product: good relationships, good contracts, and good quality control monitoring. I then focused on the mistakes American companies typically make in their contracts with Chinese companies and why I thought that in most cases, the American companies would probably lose if they were to sue the drywall manufacturers in a Chinese court. For more on what it takes to protect yourself from poor quality Chinese product, check out "Chinese Takeaway -- Protection From Bad Product," "How To Protect Your Company From Bad China Product," "China Products: Forget Trust, Just Verify," "Defective Product Recalls In China. What's That?" "China Product Outsourcing Done Right: A Sort Of Guide," "China Products: Ya Want Quality? I Got Quality," "The Six (Not Five) Keys To China Quality," "Six More Keys To Quality Product Made In China," "Learning From China Product Recalls," "What Every Buyer Of China Product Must Do BEFORE Buying.""China Product Problems: What's Morality Got To Do With It? and "China Products: Quality Costs Extra."

Bottom Line: Doing business in China is not like doing business in Kansas and that means if you are buying product from China you must 1) know with whom you are dealing, 2) have a contract in Chinese that clearly spells out in painstaking detail the specifications of the product you are buying and, 3) have some sort of quality control.

Right after I got off the phone with this reporter, I opened a fascinating email from a reader asking me about a death sentence recently handed down by a Chinese court against against a British citizen. Here's the email:

This caught my attention and it seems like something you might blog about: "British man facing death for a drug trafficking conviction in China."

I know criminal law is not your specialty, so perhaps you know a good criminal attorney who might be interested in writing on the subject.

There is, of course, little information on the case, and there are a lot of open questions. Namely, I am wondering what sort of evidence is admissible in a Chinese court to prove mental illness, ie: can the defense actually submit British medical records (obviously with an official translation)? Do Chinese courts normally execute someone considered mentally ill? My understanding of Chinese criminal law is that the death penalty is basically on the table for all "heinous" crimes committed by a person over the age of 18 and a non-pregnant female. So, even if the court were to accept that the defendant is mentally ill, it would have no bearing on the applicability of the death penalty.

If the defendant is genuinely ill, I would find it morally reprehensible to execute the man. However, it seems to me that the death penalty in China takes no account of mental illness, and the law is the law. I suspect that a mentally ill Chinese citizen might also receive the death penalty for this crime, regardless of mental state. All in all, this seems like one more case of foreigners (namely the politicians involved, lawyers, and the Telegraph) misunderstanding Chinese law and expecting special treatment for a British citizen.

Do you have any thoughts on the matter?

I do not know Chinese criminal law well enough to have any thoughts on this from a legal perspective, but I am running the email for two reasons. One, because it starkly highlights how China is not the West and also because I too would love to get some answers to this reader's questions.

Businesses are secretive. Some more so than others. My firm has a long history of representing companies in the international fishing business. Fishing companies are almost laughably secretive. I say laughably, because they try to keep things secret that the whole world already knows about. Just the other day, a Russian fishing client of ours was in our office revealing the secret of how they had recently switched to using so and so as their new agent in Pusan, Korea. I promised secrecy, but I then pointed out that two people had already called me to ask me why the switch had been made. Another time, a US based company told me that they now had a couple of vessels in the Russian fishery, but that I should be sure not to let anyone know. I went to my office and printed out a couple of articles saying the same thing.

I mention all this because the fear of piracy in China is similar. Everyone is afraid of piracy in China, but really only a small percentage of companies need worry much. Yes it exists, of course, but how much impact does it really have no your business?

With very few exceptions, my firm's China clients have either not been hit with piracy in China or they are too focused on making money from their own products to worry about it much. I do not mean to minimize the problem in China because it is most certainly there, but it is not nearly as much of an impediment to profits as believed. I am writing about piracy today because Shaun Rein just came out with an excellent Forbes article on the subject and I know from our own discussions that our views on it generally coincide. The article is entitled,"How To Deal With Piracy In China" and its subtitle is "It needn't be an insurmountable problem for your business."

Shaun is right.

The article starts out talking about how piracy is an issue of wealth, not morality. I agree. Shaun sees piracy in china declining as china's consumers get wealthier. I agree.

Shaun then calls on how companies selling their software and DVDs in China need to change their sales and pricing strategies. I sorta agree. I say sorta because my firm represents a number of gaming and educational software companies and rather than selling their products on disks, their methods (which have worked pretty well for the most part) have been to sell the product in digital format online with all sorts of security measures. Can these security measures be hacked? I am sure they can. Are these companies making good money nonetheless? I think they are. I know that sometimes companies are very reluctant to lower their prices in one country (let's say China) for fear of angering their customers in other countries. That is certainly a valid consideration and one that every company needs to weigh.

Shaun then talks about how the "the piracy situation has gotten markedly better in the past three years" in the luxury goods arena and how by "the end of next year, China will overtake the U.S. as the second-largest market, after Japan, for genuine luxury products."

Shaun then discusses the results from his company's comprehensive China consumer survey regarding luxury goods:

The vast majority of them told us they would buy nothing but genuine luxury products if they could afford to. Most said they already buy what real items they can and then match them with fake ones.

A 24-year-old secretary in Shanghai said, "Right now I can't afford to buy all real Gucci, so I save to buy a real Gucci bag and match it with fake shoes. But I'm not fooling anyone with the fake stuff. My friends can tell. As soon as I have enough money, I'll buy only real products."

Consumers value the real thing when it comes to luxury items, unlike with DVDs and software. Fakes don't bring them the status they aspire to. Therefore luxury goods companies shouldn't waste time and money suing or raiding vendors of fake goods. They should build flagship stores, penetrate third- and fourth-tier markets and launch marketing campaigns that truly connect with the Chinese to create brand loyalty.

Way back in January, 2006, in a post entitled, "Faked in China -- Protection is Possible," I had this to say about counterfeit consumer goods in China:

Like everywhere else, those in China who can afford the real thing, prefer to buy the real thing. As Chinese wealth increases, and as more and more Chinese companies seek to protect their own brands, counterfeiting will decrease. This is what happened in both Japan and Korea, both of which were at one time, notorious for counterfeiting.

At this point, I do not believe the increased sale of luxury goods in China has anything to do with a decrease in sales of counterfeit "luxury" goods in China. In fact, I would expect sales on both fronts to rise in tandem for quite some time. But, the increase in luxury goods sales does prove out what both Shaun and I have been saying for a long time and that is that though China does have piracy, that has never stopped most good companies from doing just fine.

UPDATE: I just read a comment from someone who says this post is overly simplistic for ignoring the harm counterfeit products, such as medicines and food, cause China's consumers. Though I would not use the word simplistic, I would wholeheartedly agree with the thrust of the comment. This post completely ignores the impact on consumers; it is written strictly from the perspective of harm to foreign businesses. It was written this way not to in any way minimize the huge problem this comment raises, but simply because I wanted to bite off only this small part of the apple.