BizChina

By Arthur Kroeber Is China’s credit binge a financial time-bomb waiting to blow the country’s much-vaunted economic miracle to smithereens? Beijing has long bet that the problem of bad loans can be solved by pushing off the day of reckoning into the future, with rapid economic growth reducing the size of the problem. So far that [...]

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?