China Esquire

Most of the China law blogs have been highlighting debates about what sort of entity (wholly foreign owned entity or joint venture, see e.g.) to form when your American or European clients decide to enter China–whether to market to the Chinese, find a new supplier in China, set up a factory in a 2nd tier city, etc. But CNN ran an interesting article yesterday that focuses on Chinese investment coming to set up shop in the U.S. and other places. In other words, the exact opposite.

The article reads ( h/t to CDT):

Amid the torrent of clothes, electronics and toys surging out of China comes a little-noticed export: international companies.

For centuries, individual Chinese have sought their fortunes abroad, creating Chinatowns around their restaurants and shops. Now, Chinese firms are going global, pushed by a government turned capitalist, pulled by untapped markets and armed with bundles of money from a thriving economy back home.

Auto plants are popping up in Latin America. A sprawling commodity bazaar promises a provincial Swedish city new life. A car parts distributor is snapping up ailing companies in the U.S. Rust Belt, a TV factory hums in South Africa and a high-tech firm is landing contracts to revamp the Persian Gulf’s telecommunication networks.

Chen and his fiancee, Joy Chen — both took American first names — moved from Shanghai to Atlanta to set up shop for General Protecht Group Inc., a company controlled by his father.

The Chinese corporate presence is still small overseas, but it’s growing fast:

• Chinese companies invested more than $30 billion in foreign firms from 1996 to 2005, nearly one-third in 2004-05 alone, according to an analysis by Usha Haley, a professor of international business at the University of New Haven. Computer maker Lenovo Group helped launch the frenzy in December 2004 by announcing it would acquire IBM Corp.’s personal computer unit for $1.75 billion.
• In the United States and Canada, Chinese firms now have about 3,500 investment projects, compared to 1,500 five years ago, according to an estimate by Maryville University professor Ping Deng. Large state-owned companies jumped ahead; medium and small private firms are catching up. Total investment in the U.S. is between $4 billion and $7 billion, Ping estimates. In Europe, Chinese acquisitions last year alone totaled $563.3 million, according to research company Dealogic.
• Last year, 29 Chinese firms debuted on U.S. stock exchanges, just two shy of the total for the previous three years combined, according to the Bank of New York Mellon Corp.
• The number of U.S. visas issued to Chinese executives and managers who transfer to U.S. posts within their companies nearly doubled to 2,043 between fiscal years 2004 and 2007. The current fiscal year is on pace to top that, U.S. State Department statistics show.

Chinese businesses are not just establishing offices and factories overseas. They also are developing and selling products under their own brands, rather than simply supplying Western firms in search of cheap manufacturing.

Unlike the Japanese, whose 1980s arrival in the U.S. was at first greeted as a threat, Chinese businesses are being courted by states including Michigan, California, Illinois and Georgia.

Few Chinese companies have been in the U.S. longer than the American subsidiary of the auto parts giant Wanxiang Group, which incorporated in 1993. The founder of the home company is one of China’s richest men. His son-in-law, Pin Ni, led the Chicago-area subsidiary from cheap parts supplier up the value chain by buying or working with companies that were distressed — owing to competition from China.

Wanxiang America Inc. has been welcomed for saving manufacturing jobs. Illinois has proclaimed a Wanxiang Day and Michigan offered the company subsidies.

“Even today you want to say, is there enough Chinese companies in the United States?” Pin asks. “I would say no.”

I am not sure if I now ready to sing the praises of Wanxiang America in the way that this article does, but this does provide an interesting thought. We have seen China flex its economic muscle in allowing some of its banks to go public and making heavy economic investment in Africa. It’s only a matter of time when we see more Chinese companies going head-to-head with American and European MNC’s. (maybe not competing head-to-head yet, but in the future it seems possible)

And of course, with such movement into America, guess who benefits? It’s not just the American workers who get jobs. It’s also the lawyers who will be helping such Chinese enterprises setup shop here. If you thought the choice between WFOE and JV was bad enough, you haven’t seen anything yet. In California alone, there are numerous corporate entities to choose from for such businesses:

• Corporation – S-corp, C-corp, or close corporation
• Limited Liability Company (LLC)
• Sole Proprietorship
• Partnership (general)
• Limited Partnership
• Limited Liability Partnership (LLP) – not applicable to the average Chinese business, but I have heard that some Chinese law firms are beginning to move into town.
• Professional Corporation (PC) – same comment

If this wasn’t bad enough, in other parts of the U.S. you have the business trust, the limited liability limited partnership (LLLP), the series LLC, etc. Sounds like Alphabet Soup to me.

And this doesn’t mention combinations of these various forms. Prime example: foreign investment engaging in a joint venture with an out-of-state entity could form a closely held California corporation for asset holding and then form an LP or LLC with the out-of-state entity. This allows pass-through taxation to the California corporation and the out-of-state entity, where you want taxation, and not at the joint venture level.

What’s a company to do? You can buy a publication like CEB’s Selecting and Forming Business Entities (disclosure: 2 partners at my firm wrote the chapter on Limited Partnerships and I “contributed” to this year’s major revision due to Re-RULPA, Corporate Code 15900-15912.07). And then pull your hair out trying to determine which iteration of Alphabet Soup is actually better. Or you can find a good lawyer. Or the more likely scenario for Chinese clients, both. (and then drive your lawyer crazy too… I can’t tell you how often this happens!)

In the future, I will try to cover some of the pros and cons as to particular entity structures versus others. But in the meantime, choose your poison. There sure are a lot of them to pick from.

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