Before my law firm hires anyone, we make sure they do not have a problem with swearing. Because I do. I know I shouldn't, but darn, certain swear words are absolutely critical for communication. But when I started this blog, I swore (pun intended) I would strive never to write anything I would not want my kids to see. This meant not swearing. Now that my youngest recently turned twelve, I am constantly tempted to really let loose and I have never been more tempted than today. But I have chosen to abstain and use weird quasi-British language in the post title instead.
My temptation stems from my anger at always having to deal with (or clean up from) the messes created due to a strange belief that if someone is Chinese, no matter what their education, training, and/or experience, that person must be expert on both Chinese and international law. Let me explain.
I have had it with US companies believing their Chinese-American Vice-President (or whatever) is somehow qualified to practice International law. Let me back up.
Many of our clients that do business in China have someone in their company driving their China business. This person is typically a Chinese-American who has been living in the United States for ten or more years. This person is oftentimes an engineer or some other technical person. This person typically is good at his or her job and has risen to a trusted position. This person is usually trusted by the company and the trust is usually justified.
In spite of this Chinese person's lack of ANY legal training or business training, this person is typically chosen to be the lead person to start up operations in China. The company is of the view that because this person grew up in China (even though this person probably has never done any real business there and has not been back but for a vacation or two in the last ten years) this person must know everything about the legal and business aspects of starting and running a company in China.
Everything.
Now step back, if you would, and think about the absurdity of that. Please.
Now once this Chinese person is put in total charge of bringing his or her company into China, what is this person to do? Can he or she tell the owner "hey, wait a minute, I left China at 15 years old, and I am an engineer, not a marketer and not a lawyer?" He or she could, but is this going to happen? Of course not. This person instead is delighted to have been essentially handed an entire country to run and this person is going to run with it. So this person acts like starting and running a foreign company in China is a piece of cake.
Now I would not have a problem if these companies simply went with their Chinese "experts" and did not call us until they want us to scrape them off the floor. We have gotten a million such calls from companies that have gone into China with just their Chinese VP giving the legal advice and our response to their problems is nearly always the same: "Your chances are not good, but for a lot of money we can try. Oh, and the next time you go into a foreign country, you might want to consider hiring someone who actually knows what the f--- they are doing." Okay, so I've never really said that, but darn, I have really wanted to.
But now that Americans are getting "smarter" and word has gotten out on how badly other American companies have fared by going into China the wrong way, they are starting to call us before it is so late that all I can tell them is how badly they have done things. And one would think that would be good, right? Well, not always.
For you see, some of these companies want us to "oversee" their trusted Chinese VP and that is where the problems lie. We have had a number of these in the last year and they tend to be really bad news. I am going to explain some of these, but be vague enough, and mix the facts enough so that there is no way anyone can identify themselves. In other words, these stories are all based on facts, but any resemblance to anyone living or dead is purely coincidental. The bottom line on all of these is that the American company (and in one case British company) start out all worried about how my law firm's involvement might be seen as "stepping on the toes" of their Chinese VP.
1. Science related company contacts us about going into China. Owner brags about his Chinese VP. Chinese VP has PhD from top US university, in some sort of science. Chinese VP has been with company for 20 years. I later learn Chinese VP speaks Cantonese, not Mandarin. Chinese VP has a great government contact that will set this company up in a top tier science park at a terrific deal. Company wants to hire my law firm to "make sure" everything is being done correctly from the legal side. I quote our flat fee price for forming/registering a China WFOE (Wholly Foreign Owned Entity) and the owner then asks me if we can lower it because his Chinese VP will be doing "nearly all" of the work. I tell him that his company can pay us by the hour and that way we will only be charging for what we do and the more his Chinese VP can do, the less we charge. The owner is delighted. He tells me he is not so much concerned with the money, he just does not want to appear to look as though he does not trust his VP.
So we start working with this Chinese VP and within about 2 minutes, it becomes apparent to us that this guy knows zero about forming a China WFOE. Zero. We end up spending around six hours just explaining the basics to him and we bill only three hours for this.
This VP then comes back to us with a lease agreement that is both totally bizarre and absolutely unacceptable for a WFOE. There are certain requirements for WFOE leases and these requirements can vary from city to city. We spend massive time explaining to this guy why this particular lease will not work and what needs to be done to get one that will. We end up pretty much having to write a full lease in Chinese by way of explanation.
And we again write off about half our time on this. And so it goes.
We send our bill to the client and guess what, his Chinese VP complains about the time we spent on it. Of course he does, because if his boss knew how long we spent trying to get the Chinese VP up to speed, the Chinese VP's role in China would be jeopardized.
How did I handle this? I told the client that what we were doing was not working and that if we continued to work with his Chinese VP on an hourly basis in forming the WFOE, we would probably end up charging FIVE times our normal flat fee rate for WFOE formation. I told him we could either do the WFOE at our normal flat fee, with credit for all time already billed, or he just tell us what he thought to be the fair amount for what we had already billed and we go our separate ways.
2. Technology related company contacts us with a tax question regarding its Joint Venture (JV). The company tells me what it is planning to do and I tell them their plan will not work. The company is planning to gain a 50% interest in a Joint Venture by contributing nothing to the joint venture besides some Intellectual Property (IP). I tell this company Chinese law requires the foreign company in a joint venture to contribute at least 80% in cash for joint venture ownership. I tell this company that I have seen these situations before (with increasing frequency, actually) and it will not end well for him. The Chinese company gets the Western company's technology with the Western company believing it is getting ownership in the Joint Venture company, when in reality it is not. But this guy insisted his deal was good because his Chinese VP had told him it was good and because the local government had approved it. I told him that we would not represent him on a deal we knew would fail.
3. Joint Venture Number 2. British company comes to us a few years ago with Joint Venture papers that purport to give it exclusive distribution rights for the joint venture's product outside China. The British company's Chinese VP has already signed off on the deal but the company wants a lawyer to look at it before they actually sign, but just to confirm everything is okay. We look at the papers (in Chinese) and notice that the exclusive distribution rights are coming from the Chinese joint venture partner company, not from the joint venture itself. We explain why this will pose problems for our client why we do not think it was an innocent mistake. The Chinese VP is furious with us and tells the company we do not know what we are doing. Fortunately, the British company understood exactly what was happening and it ended up walking away from this Chinese company. This British company ended up going into China on its own and it has thrived.
I once talked about this Chinese VP phenomenon with a couple of Chinese lawyer friends of mine and they told me that Chinese companies love doing business with Chinese VPs because they know the Chinese VP is in an impossible situation. They said that the Chinese companies build up the confidence of the VP by praising his knowledge of China and by welcoming him or her into the club of people who "really know how business is done in China." The Chinese company then flips around and takes advantage of the VP's unwillingness to lose face by admitting he or she needs help. I am of the view that these Chinese VPs are seldom on the take; rather, they are the ones being taken.
What are you seeing out there?
UPDTATE: Someone has complained very vociferously about this post, claiming I have unfairly generalized. I disagree, but nonetheless want to make clear that I am absolutely not saying that no Chinese Vice President knows Chinese law. What I am saying is that Chinese law for foreign companies is very particularized and the only people I know who truly understand those laws and all of their nuances are the lawyers who deal with them every day.
The same is generally true with respect to the United States as well and I wrote a post on this a few months ago, entitled, "Registering Your Trademark In The US And China On The Cheap." In that post, I talked about the problems I was seeing with companies' failing to hire proper trademark counsel for their US trademark filings and how those failures were impacting their China business.
The bottom line here is that the smart way to go is to retain the right person for the job and the right person to do legal work is an attorney. I have many non-lawyer clients who are very knowledgeable about law, but they would not hesitate to admit their legal knowledge does not usually rise to that of an attorney. And I would think they would also recognize that having grown up in a country does not make one an expert in that country's laws, particularly those laws that relate to foreign business.
Was I off base here?
Read more: Your Chinese-American VP Don't Know Diddley 'Bout China Law And I Have Friggin Had It.
Morgan Stanley economist Stephen S. Roach sounded a stark warning on the global economy Monday.
"For those of you counting on the American consumer to snap back, forget it--it's not going to happen," Roach said. "Consumers are as overextended as they've ever been," and it will take them at least three to five years to retrench and dig out of debt, particularly with high U.S. unemployment rates of 9.8%, he said.
The implications for the global economy are bleak. He predicted that China will be forced to spend billions more on a stopgap stimulus plan next year. "By mid-2010, China will be hit by a reality check," which is that Chinese exports will stall because U.S. consumer spending will not have regained its previous strength.
Roach predicted China would embark on a second stimulus plan to help the nation through the slow recovery in the global economy.
But more than that, Roach said in a speech Monday that the Great Recession is serving as a long-running crisis that will force Asia--particularly China--to change its pattern of serving as the world's factory. It has already forced American shoppers to stop serving as the world's shoppers.
In the Asia of the future, Asia's 3.5 billion consumers need to be encouraged to spend more and save less, Roach said.
"Today's Asia remains very much dominated by an increasingly China-centric export machine," Roach said. China successfully and dramatically grew its economy with strong government support for export-led growth since it began its move toward capitalism in 1978. But more than 30 years later, Roach said the time has come for a shift in strategy. "Asia must change the model."
China is now the world's third-largest economy, nipping at the heels of second-largest Japan, and China has gone from a nation of peasants to a nation with a large and fast-growing middle class of hundreds of millions of Chinese.
Why aren't they spending more? The lack of a strong safety net has led many Asians to increase their savings as they get richer, rather than spending a larger portion of their newfound income.
To get China's consumers spending more of their incomes "requires a massive investment in the long-neglected social safety net in China," Roach said.
In China, more than 65 million workers lost their "iron rice bowl" of health care, pensions and other benefits when they lost jobs at defunct state-owned enterprises shut down over the past 15 years as China embraced capitalism.
Shell-shocked Chinese who still had jobs began saving more and more in case they or family members urgently needed health care, or faced early retirement.
Eswar Prasad, a professor at Cornell University and senior fellow at the Brookings Institution, has calculated the dramatic rise in China's household savings rate: In 2000, it stood at 27.5%, but by 2008, it had increased to 37.5%. While consumption has been falling as a percentage of GDP, China's exports have been rising.
Because U.S. consumer spending accounts for such a large proportion of the global economy, without a rebound, the outlook is bleak--for a comeback in China's exports and for a comeback in the global economy.
"We are in a weak recovery," Roach said. "There could be a relapse, a double dip."
Got an email the other day on Chongqing that went as follows:
Long-time reader _________from Chongqing here. Hope all has been well with you.
First, I'm not sure how this could work into a post, or whether it is simply of interest, but there has been fascinating political and cultural developments here in Chongqing over the last year, mostly due to the entrance of new(ish) general secretary Bo Xilai. He has made headway into cleaning up the city's notorious controlling mafia (possibly an un-spoken reason MNCs had historically chosen Chengdu over Chongqing for their base in western China???), pushed to clean up mafia-related and property-related corruption within the city government (the deputy director of the city's PSB was just arrested), and has made a cultural impact through his push for "5 Chongqings" (Forested Chongqing, Healthy Chongqing, Smooth Transportation Chongqing, Safe Chongqing, and Liveable Chongqing) - an attempt at establishing an underlying philosophy for future policies and decisions, and the encouragement of sending Maoist slogan text messages and singing Communist revolutionary songs. While some have compared this last policy as a new "cultural revolution", it has seemingly been well received by the public at large. A friend summarized Bo Xilai's current M.O. as "cleaning the local government of the filth, while still trying to maintain the average people's faith in that same government".With that said, these sorts of changes should affect the business environment of Chongqing, possibly to a great degree. And what have I seen on the ground? There are more foreigners in town than before, more MNCs, more companies establishing businesses, and more entrepreneurial small-medium sized businesses getting started. Granted, most of these businesses are in established industries (mostly auto supply and manufacturing, industrial manufacturing, and logistics), but there is growth you can feel. Whether foreign companies were affected by the Chongqing mafia in the past or present is not something of which I have any knowledge. I understood the minimum capital requirements for a WFOE were recently lowered as well. Whatever the cause, it feels like there is growth here.
In hindsight, my firm has been seeing the same thing in that over the last six months or so we have definitely had a pickup in business involving Chongqing, though I have to admit we were starting at a pretty small base. Much of our work has been related to the transportation/logistics sector.
What are you seeing out there? Is Chongqing really going to be the next big thing.
UPDATE: China Translated just did a post on Chongqing, entitled, "Make No Little Plans." It is a guest post by someone named "Don Johnson." I have a China client with that name. Same person?
I will be speaking at a Chinese drywall seminar in New Orleans next month and that means I am on an email list that I think consists of others who will also be speaking at this seminar. Seeing as how this email list consists of around 100 people, I do not believe I am violating any expectations of confidentiality by publishing what transpired on it today.
I get an email from Gary Rosen, who has a PhD in biochemistry, proclaiming the "Chinese manufacturers are NOT the ones to blame for problem drywall." According to Rosen, there is"good quality drywall manufactured in China at International Organization for Standardization (ISO) qualified factories that have US recognized quality control approvals such as UL and ASTM" and this stuff is, "by definition, NOT problematic." But China also makes drywall for local consumption that is not made at ISO qualified factories and is does not have UL and ASTM approval. According to Rosen, it was this drywall that was imported in the US and it is this drywall that is causing the problems.
Rosen goes on to lay blame right at the feet of the US companies that brought the bad drywall into the United States:
The problem is that US distributors purchased and then imported the domestic quality Chinese drywall rather than much better quality drywall made for the export market. If US distributors would have all purchased the good export stuff there would not be any problems at all.So why blame the Chinese? They certainly have the right to made lower quality less expensive product for their local consumption. Investigative reporters should be focusing on why US drywall distributors chose to purchase the lower quality Chinese domestic product rather than purchase export quality product. The answer will certainly turn out to be – they saved money by buying junk Chinese domestic board. Investigative reporters should be focusing on why builders actually used this nasty smelly stuff rather than rejecting it.
Rosen then attacks US builders' quality control systems:
What about the US builder’s quality control systems? Surely products used in the construction of homes have to be evaluated prior to use when not purchased from a well known US manufacturer and not approved/ certified by well known quality control bodies like UL, ISO, and ASTM? Again, where were our quality control systems?
Rosen was actually responding to a Miami Herald, quoting a number of US lawyers on the difficulties in suing Chinese companies for drywall problems. Seems these American lawyers are getting pretty testy.
The article talks about the 300 drywall lawsuits currently pending in New Orleans Federal Court and asks "who's going to be on the hook for any damages courts might award?" The article then outlines some of the tactics the plaintiffs' lawyers are considering for trying to collect and guess what? None make any sense.
The lawyers are "considering" suing "U.S. investment bankers who financed the Chinese companies, and seizing ships that brought the drywall to the United States." With all due respect, the odds of either of these tactics generating any cash are pretty much zero. First off, it would surprise me if any of the Chinese drywall manufacturers were financed by "US investment bankers." Does anyone disagree with me on this? Second, I also doubt very much that any US court is going to set aside 200 years of US (and a couple more hundred years of British) jurisprudence and find the investors liable. I certainly hope not as I own shares in drug and tobacco companies and by this logic, I could be held liable for injuries caused by those companies.
The arresting ships idea is probably even more ludicrous. What these lawyers are proposing is to do something that has, as far as I know, never been done anywhere in the world or at any time in the long history of shipping, and that is to find the shipper liable for having shipped a perfectly legal product. Not only has this never been done, but if it were done, it would probably destroy the shipping industry as we know it and, at minimum, raise the price of pretty much every single product worldwide. Can you even imagine a system where shipping companies are forced to guarantee the quality of every single item they ship? I can't and if any of my law firm's shipping companies get their vessels arrested over this, you can bet we will be counterclaiming for wrongful arrest.
And it is not just plaintiffs' lawyers who are getting mad. U.S. District Judge Eldon Fallon found one Chinese company, Taishan Gypsum Co., in contempt of court for ignoring the suits. And though I am on record in this post ("China Tooling/China Consulting -- I Told You So") for stressing the importance of abiding by Federal Court orders, I do not for a minute believe the Taishan Gypsum is going to care one whit about what some U.S. judge has to say. If Taishan Gypsum conducts no business in the United States or in any of the very few countries that typically enforce U.S. money judgments (I very much doubt any country enforces U.S. contempt orders) U.S. court orders almost certainly mean little to nothing to it. Most US judgments against Chinese companies have no value beyond the Chinese company owner's belief that it will preclude his/her son or daughter from attending UCLA.
The article then states how US lawyers "said Chinese companies are virtually insulated against liability in U.S. suits because suing them through international court is costly and time-consuming and civil judgments in U.S. courts are not enforced in China." I agree with the part about US court judgments not being enforced in China, but I do not know what they mean by an "international court." International courts are not going to take a drywall case so I am going to assume that Chinese courts was meant here. Again, these lawyers are wrong. Suing in Chinese courts is way cheaper and way faster than suing in US courts. The problem with suing in a Chinese court in a case like this is not the time or the cost, it is the damages. Chinese courts are incredibly stingy (by US standards) with damages for pain and suffering and lost profits. A win in a Chinese court might mean no more than a full refund for the cost of the drywall.
But at least one lawyer believes the future for plaintiffs' lawyers in these drywall cases looks bright because....well....because he really really wants it to:
Herman said plaintiffs' lawyers were up to the challenge. "I think we can bust the dam in this case," he said. "You're talking about billions of dollars" at stake, Herman said. "We're going to find some ways to make them responsive."
The next email came from Ervin Gonzalez, a plaintiff's lawyer out of Miami, who has this to say:
The Chinese are to blame because they sold defective dry wall, damaged thousands of homes, hurt consumers and caused billions of dollars in damages to be sustained by American homeowners and businesses. The Chinese Companies do business in the United States and should be responsible for the damage they have caused to American home owners and businesses. If the Chinese Companies are not willing to be accountable and responsible for their acts and omissions they should not do business in the United States. If any American Company provides a defective product, that Company would be responsible and accountable in a court of law in the United States as well as in the Country where the defective product was sold. Your comments blaming only the American companies, who certainly are legally responsible for this dry wall debacle, ignore the basic principles of justice, equity, accountability and responsibility that our civil justice system is built on. While I have enjoyed reading your scientific reports, I must say that your editorial supporting the Chinese makers of defective dry wall lacks any basis in law, equity, fairness and common sense.
I was interviewed yesterday by the Center on the Global Legal Profession and was asked what has surprised me in my practice of international law. Among my answers was how how so many American lawyers still refuse to recognize that foreign country's laws tend to be very different from ours and that U.S. law does not cover the entire world. As much as we U.S. lawyers (myself included) wish it would, it just doesn't and it never will.
So what of the Chinese drywall? Who is responsible and who should be liable and who will be found liable and who will need to pay? I have no idea who is responsible and I said that in my email to the group:
As someone who devotes the bulk of his law practice to China (representing mostly Western companies, but a few Chinese companies as well), I find this whole discussion bizarre and a little bit scary. There are good Chinese manufacturers and there are bad Chinese manufacturers. There are Chinese manufacturers that manufacture to spec and there are Chinese manufacturers that do not manufacture to spec. And there are American companies that get bad product from China because they do not know how to get good product from China or because they simply do not care whether they get good products or not. And there are American companies that get bad product from China even though they did pretty much everything one can do to prevent getting bad product.Unless one has had really close involvement with what transpired between the Western companies and the Chinese companies involved in the drywall mess, I do not see how one can confidently assess blame either way between the Chinese and the Western companies. I am not speaking to legal responsibility here, I am talking about blame. My experience in these situations is that most of the time, there is plenty of blame to go around.
Who should be liable? Whomever is responsible.
Who will be found liable in the US courts? Whomever is responsible.
Who will need to pay? See above.
For more on these issues, check out the following:
-- Who Needs International/Foreign Law? Not Us, We're Americans
-- Suing Chinese Drywall Manufacturers. Why All The Bother?
-- Will Your US Judgment Be Enforced Abroad? Not China, But Maybe.
-- Enforcing Foreign Judgments in China -- Let's Sue Twice
-- Taking Judgments To China (And Korea), Let's Not Sue Twice
-- Chinese Drywall. If You Think That Is Bad.....Just Wait
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