BizChina

Ft.com has a fascinating and extremely sad story, entitled, "An accident shows how China treats consumers." (h/t This is China!) It's a great article, but the title is all wrong, at least if you are a lawyer. The title should be "An accident illustrates why it is (almost always) a complete waste of time to sue Chinese companies in United States Courts."

I am sure that most of you will read this article and get all angry and ask, how can this be? I read this article and nod my head and think, been there, done that. That is because just about every month, I get a call from some lawyer, somewhere in the United States, calling me and expecting me to be really interested in the great case he or she is offering me. The case usually goes something like this:

1. I have a $16.5 million judgment against this Chinese company for securities fraud. We got the judgment from such and such US court and "all we have to do now" (I swear they nearly always say this as though they just did 99.9% of the work and I am some 8 footer who merely needs to dunk the perfectly passed ball into the hoop) is get the judgment enforced in China. Do you want to help us on this (again, always asked as though I am going to jump at this alley-oop pass). Slightly irritated, I always like to come right back at them, by answering, in my most blaze voice possible, "almost certainly not." But to keep them on pins and needles a bit longer, I do not explain why, I just ask them whether this company still does any business in the United States, knowing full well that if it did, this lawyer almost certainly would not have called me. Then when they say "no," I ask whether it does business in Canada, England or South Korea (my three favorite countries for enforcing U.S. judgments). They invariably say they do not know. I then tell them that I know of absolutely no way to get their judgment enforced in China and that the best way to seize the Chinese company assets is to go after whatever assets it might have in the US, Canada, England or South Korea. I also say that if there is any way we can contend the case is based on a maritime claim, we could also try seizing any of the Chinese company's US dollars that pass through New York banks as part of a Rule B maritime attachment. The call always concludes with their saying they will look into the Canada/England/South Korea angle and then their never getting back to me.

2. I have a $2.4 million judgment against a Chinese company for breach of contract....These calls then go exactly as per #1 above. I then lecture them on how the next time they do business with an overseas company, they should have an arbitration provision in their contract.

3. I have an $11.2 million tort judgment that includes $8.7 million in punitive damages.....These calls then go exactly as per #1 above, except this time, I have to tell them that even England, Canada, and South Korea will not enforce punitive damage awards and they also tend to be very wary of US tort judgments.

For more on the difficulties in enforcing US judgments in China, check out the following:

-- "Enforcing Foreign Judgments in China -- Let's Sue Twice."

-- "Taking Judgments To China (And Korea), Let's Not Sue Twice."

-- "Will Your US Judgment Be Enforced Abroad? Not China, But Maybe."

I am going to be speaking on this topic in New Orleans on November 11 at the "Chinese Drywall Litigation & Insurance Coverage Update."

BBC radio news did an interview last night with the owner of a company out of Houston, Texas, who had moved his manufacturing from China back to the United States. Unfortunately, I tuned in way too late to hear the whole story, but I heard the following (I think):

1. His company pays its US employees $8 an hour. It was paying its China employees 50 cents an hour.

2. He had quality issues in China. He has pretty much zero defects in the United States.

3. His shipping costs from the new US base are considerably less, though he expects costs to run about $2.50 more per piece.

4. His company makes "Chi" brand hair irons.

I was planning to tie this BBC story in to a post today on various "hidden" costs of manufacturing in China and why the decision to go there for manufacturing is not as simple as some seem to believe. Then this morning I came across an excellent post on this same story on an excellent blog I just discovered. The blog is China Manufacturing Blog. It is written by Dan Feldman, a manufacturing expert who works for a Japanese company's Qingdao operations.

The post is entitled, "Are Manufacturers Heading Home," and its focus is on a recent Wall Street Journal article on the very same Mr. Farouk Shami and his decision to move production back to the US. Feldman quotes Andrew Hupert's blog, ChinaSolved, on the setting sun for China manufacturing:

Due primarily to the fallout of the global economic crisis, but increasingly due to antagonistic policies between China and the U.S. and China and other foreign nations, Andrew Hupert of ChinaSolved writes, "[t]he sun is setting on China as a manufacturing center." And if they are fortunate, "China’s millions of unemployed grads are more likely to end up at a workstation in an office building than on a production line in a factory." Let us not forget that technology, namely the increasing cost effectiveness of industrial automation, also plays a constant role in reducing the size of the manufacturing workforce worldwide.

But Feldman then describes a conversation he recently had with Umesh Tiwari of Utopia Fashion, who set out the following as what his company looks for in determining where to manufacture:

1. raw materials,
2. space for factories,
3. a sizable labor supply,
4. strict governance,
5. political stability,
6. excellent infrastructure and logistics, including a highway system, a railway system, airports, ocean ports, and
7. electricity generation and distribution networks.

"Given these criteria, China still outperforms the Southeast Asian nations, even after the global economic crisis. In response to the crisis, he has pushed the low-end production lines out of China to Vietnam, Malaysia, Bangladesh, and kept the higher-end products for critical customers in China, local to his operation, to control oversight." Amazingly, just a few weeks ago I had pretty much the same conversation with a client of mine who manufactures massive quantities of mid-to-high end jeans in China and my client said pretty much the exact same things.

Feldman concludes his post with the following questions:

What do you think? Does this story foretell the pulling out of manufacturers from low-cost countries? Or will each individual industry and company find a unique solution? What are your thoughts on the related policies being put forward by both the U.S. and China, or other foreign countries and China?

I too would love to hear your answers. Due to my law firm's location in the Pacific Northwest and its historical client base, the overwhelming majority of our clients are in technology, medical or other services, or food. I have always assumed our client mix is very different than a firm based in Cleveland or Detroit.

So what is going on out there in manufacturing? Is China really on the way out? I personally think not. Yes, China is getting more expensive and yes China is high-grading, but does anyone really believe China will not be the factory to the world in 10 or 20 years?

One of our clients is coming to the end of its contract term with the bulk of its China employees. They wrote Steve asking him some questions regarding fixed term employment contracts under Chinese law. Steve's reply is a made to order blog post, so here goes:

Pursuant to Chinese law, you are permitted to enter into two fixed term contracts with an employee. The term of these contracts can be any fixed term that is agreed between the parties. Typically, in China, the term ranges from one to five years. At the end of the second fixed term contract, you have two choices. You can chose not to continue the employment relationship or you can chose to continue the employment relationship under an open term relationship.

An open term relationship requires a written contract. This contract has no term. It terminates only under the following circumstances: 1) the employee voluntarily resigns, 2) the employee reaches retirement age or 3) the employee is terminated for "cause." Termination for cause is complex and difficult in China. There are two basic areas for cause. In the first, the employee has committed a crime like theft or a gross breach of conduct rules, such as arriving to work drunk. In this case, termination is straightforward. In the second, the employee shows up to work on time and follows all the rules, but is simply incompetent. In the current situation in China, it is virtually impossible to terminate an employee who falls into this second category.

Accordingly, you should never enter into an open ended employment relationship with an employee who you suspect will fall into this second category. However, it is often hard to predict. In actual practice, there are various ways companies deal with such employees. However, the fact is that an employee with a "thick face" who is willing to earn minimum wage and engage in dead end tasks is very difficult to terminate under the current Chinese system.

China's labor laws are new, so many of the issues have not yet been fully worked out. However, the trend is towards increased employee protection and not towards more employer freedom. The trend is the same in Europe, so there is nothing unique about the Chinese approach. China follows a European approach and that is the place to look for analogy. The U.S. is NOT the place to look to for guidance; the Chinese system is as different from the U.S. as any system could be.