CHINA ESQUIRE

The American Chamber of Commerce recently published its “2008 White Paper on American Business in China”, which can be found here. ( h/t to Chinese Law Prof Blog) It is a very helpful overview of issues that American businesses will face coming into and doing business in China. The usual suspects are there: IPR enforcement (or lack thereof), human resources problems (the talent pool market), visa issues.

But there are a few encouraging trends in Part I of the report in terms of the way businesses perceive issues:

• Management level HR constraints is the top reported problem for 2008. (37%, up from 29% the year below). Again, I don’t think there is anything particularly new about this. This will be a problem for some time to come, especially in places like Beijing and Shanghai. I expect that this will be more and more of an issue as the 2nd and 3rd tier cities expand as well.
• Lack of transparency is fourth top problem for 2008, cited by 28% of respondents. It sounds pretty common-sensical. However, it ought be noted that this is down from 41% during 2007. That is a big difference in my mind. Especially from the Chinese government, where things aren’t always as transparent as western standards would prefer, this is a big thing. Very encouraging.
• Intellectual property rights infringements is not a newcomer to this list. However, it is the 6th top problem at 21%. And this is down from 26% the year before. I have been saying for the past few weeks that Chinese IP enforcement is getting better. This just validates this in my mind: even American businesses are taking notice, in spite of the rhetoric of the U.S. government at the WTO level.

Everything has gone down. Even bureacracy. (which places 5th) Except for the Human resources problem. I would note that there are some very good resources out there about this. I would start with Andrew Hupert’s China Solved Blog, which I follow and sometimes refer to on this blog. In fact, Andrew had an interesting post on point a few days ago. Other than, be warned that you will face stiff competition (to the point of the absurd at times) for good talent in major cities. Expect this.

So why the blog title? Because Am-Cham is so predictably American in their recommendations. I don’t disagree with any of them. However, it is urging the Chinese government to become more like our own government in how things are run. It won’t be easy. And sometimes, I think it well nigh impossible… at least, in this generation. These changes take time.

For example, the suggestions that Am-Cham came up with the following regarding how to fix deal with the HR problem:

Begin steps to reform the education system to encourage greater creative thinking, problem solving and teamwork. Courses should emphasize curricula that are more project-based and that encourage collaborative learning, which are vital skills in the workplace.

Reduce emphasis on one standardized college entrance examination and focus more on assessing individuals based on various abilities and skills that are applicable to the workplace. This includes team problem-solving, practical innovation and public service.

Re-evaluate the “985 Project” and “211 Project” aimed at strengthening the top universities and improving the curricula in order to propel the top universities to world class institutions in the next 10-20 years. Although we support the Chinese Government’s efforts to increase investment and standards in post-secondary education, these projects should include more cooperation and input from the business community to help ensure that students are learning the skills required to succeed in the labor market.

Relax hukou restrictions for qualified technical or managerial candidates and consider expanding the “Blue Stamp” system to other areas in China beyond Shanghai and Shenzhen.

Creative-thinking? Problem-solving? These are not fundamentally Chinese strengths. And in the current education system which emphasizes rote memorization and regurgitation, they will not be for a long time. So I don’t see these happening. Also, is this something China really wants? From a government level, I would want citizens who are hard working and listen to orders. That’s a cooperative citizenship. Second, where has America gone with its creative-thinking, teamwork oriented approaches? The math and science skills of children have plumetted. Sure, our youth are now great at teamwork–which is good practice for business and other services oriented industries. But even my high school teachers made fun of these “new” and “innovative” teaching methods. Why? Because they often produce poor students with no self-motivation and mental toughness.

I also don’t see the college entrance system changing anytime soon. It’s not just a China thing–it’s present in other Asian countries. It works. I don’t think Chinese college administrations will be ready for an American application system because of the sheer scope of the undertaking. There are going to be far more applicants in China due to its population. Really, this can kill resources in the universities like no other. I also question whether the American obsession with being an A+ student with high SAT scores and a varsity athlete and a humanitarian volunteer and being a participant of many clubs and <insert here> really helps anyone. There is a business for people in America who provide college admissions counseling. And I don’t mean in public high schools. The wealthy actually hire people to help their kids write their essays (”revise” the essay so they say), give guidance as to classes and extracurricular activities, etc. That isn’t really much better.

While I do agree that many of the suggestions would be helpful to American businesses, I want to caveat that they need to be taken with a grain of salt because the ideas are very American. Not that we expected any different.

While I am still talking about intellectual property and IPR enforcement, I thought I would highlight an article I read recently. The Associated Press recently published an article entitled “While upset about piracy, EU is more serene about China than US”. The article reads:

Compared to Washington, the European Union has been serene about piracy in China of its trademarks, copyright and patents. Can that last?

The EU estimates pirated goods cost EU businesses €21 billion (US$33.3 billion) in lost trade annually — about a third of current EU exports to China. But unlike the United States, it has to date not pursued any Chinese piracy cases in the World Trade Organization.

Still, the EU has put China in the category of worst violators of intellectual property. It is the only country in that category because its anti-piracy efforts are so weak that 80 percent of counterfeit goods imported into the 27-nation bloc are Chinese-made.

Again, I would like to know how that figure of 21 billion euros is calculated. As I mentioned before: if it wasn’t for piracy, I really doubt the figures many times.

I also think it can last. Why do all the dirty work of calling China out when America is already more than willing to do that? I think its the best policy.

Mandelson has repeatedly criticized blatant sales of fake goods throughout China that cost European and U.S. businesses dearly. To counter this he has nudged China into a 2007-2011 venture designed to boost enforcement of Chinese piracy laws by providing expertise and training.

“It is important to offer the Chinese all possibilities to put their house in order,” says Luc Devigne, head of intellectual property issues at the European Commission’s trade directorate. “We are not always convinced there is a willingness to stamp out piracy.”

That’s as tough as the piracy language gets at the EU.

I disagree. I think China has done a pretty good of trying to stamp out piracy. It’s true: China has not taken a zero tolerance policy, as evidenced by street vendors continuing to sell pirated products and fly-by-night stores that sell counterfeit goods. But I think the numbers are pretty good: 10% drop in software piracy in years; 76 million discs and other goods confiscated, 13,000 businesses shut down in 1 year (see here); 1.3 billion illegal publications over 20 years (though not all piracy related) (see here). Court cases being won regarding trademark, copyright, and patent. Realistically, there isn’t all that much that China has not already done in my book.

“In America, there are strong feelings of protectionism in the Congress. And the U.S.-China relationship is much more complex, more interdependent. There is America’s huge trade deficit with China. China has leverage over the U.S. because it holds significant amounts of U.S. Treasury debt. And there are security issues like Taiwan and North Korea.”

By comparison, says Innis, Europe “is much more in an appeasement mode with China.”

That is “a bad thing,” says Stuart Newman, head of the Brussels-based Foreign Trade Association whose 100 members include Europe’s biggest supermarket groups and textile importers. “We should be going after China in a tough way on intellectual property rights violations.”

While he favors legal action through the WTO, Newman does not underestimate the job of eradicating piracy in China.

I also disagree. I think the appeasement mode works better. Here’s why: (1) America will be the bad cop, while the EU can be the good cop. Good cop/bad cop works pretty well actually. And I think the EU will end up having a better image for it. Piracy will go down. America is hated. The EU is loved. That’s a win-win if I ever saw one. (2) That is how the Chinese prefer to negotiate. The government knows that IP is a problem. And the government knows that IP enforcement will be important to China’s economy in the future. China is not naive. But to throw that into their face like America does makes China defensive. And it makes China amp up the rhetoric as well. It’s just unproductive. But if the EU can dialog with China and do things in a less-blatant fashion, I think it will encourage the Chinese government to want to work with the EU. I know it sounds so offensive and ridiculous to westerners, but let the Chinese save face where you can. Really, it works.

My take: the EU should stay the course. The EU will benefit from America’s aggressiveness and still get what it wants, while maintaining the favor of the Chinese government and people.

Review time… I didn’t think too many frivolous lawsuits happened in China. In fact, that’s often the criticism I hear about the United States. (think of lawsuits like McDonald’s making you fat, etc.) But here is a case where I think there is a frivolous lawsuit… in China of all places. Not that I don’t understand the sentiment behind the lawsuit. I do. But to actually allow this one to go to court? Let’s just say that if it does, China’s legal system will remain a laughing stock of the modernized world.

First the news itself:

A group of Chinese lawyers have sued CNN, saying remarks by commentator Jack Cafferty in which he called Chinese “goons” violated the dignity and reputation of the Chinese people, a Hong Kong newspaper said.

The Beijing-backed Wen Wei Po said the Beijing court had yet to accept the case, which comes amid a wave of criticism in China against Western news outlets in the wake of recent unrest in Tibet and disruptions to the Beijing Olympic torch relay abroad.

China’s Foreign Ministry summoned CNN’s Beijing bureau chief last week and demanded an apology after Cafferty said Chinese products were “junk,” adding the remark: “They are basically the same bunch of goons and thugs they’ve been for the last 50 years.”

One of the 14 lawyers who launched the case told the newspaper Cafferty’s remarks “seriously violated and abused the reputation and dignity of the plaintiffs as Chinese people, and caused serious spiritual and psychological injury to the plaintiffs.”

The lawyers sought the restoration of the Chinese people’s reputation through publications and in the media and asked for 100 yuan ($14.31) in damages, it said.

In response to the Foreign Ministry’s initial demand for an apology, CNN said there was no intent to cause offence and that Cafferty was offering a “strongly held” opinion of the Chinese government, not the people.

I know that China does not have free speech. But to allow civil liability for editorial comments will surely chill speech in China. Or even worse, force media outlets to censor… and of course, that will force the journalists to take underhanded jabs at China. Which will really screw up the desire for us to have factual, unbiased reporting. And of course, for more local news outlets without the reach of CNN in China, I can see reporters publishing stories with those local outfits to criticize China.

Either way, this will not help China. I think it will make the attacks nastier. People know Cafferty mouths off, and no one takes him all that seriously. I think this will encourage other reporters–who the public does take seriously–to adopt an anti-China stance. You mess with one journalist, you mess with all of them. But don’t tell the Chinese government that, because the government seems to stick its head in the sand when it comes to smart PR campaigns.

Of course, it wouldn’t be Chinese unless it had China sized damages. Reuters reported:

A Chinese primary school teacher and a beautician have filed a suit against CNN in New York over remarks they say insulted the Chinese people and are seeking $1.3 billion in compensation — $1 per person in China, a Hong Kong newspaper reported.

Seriously, $1.3B in damages?! Can we say groundless? Again, if you want to make China’s courts the laughing stock of the world, you would allow damages based on pure speculation and without any merit. Otherwise, give me a break. I really hope the court tosses this one out.

Here is Donald Clarke’s take on the law itself:

Chinese law does allow damages for what under US law would be considered merely insulting expressions of opinion (and therefore non-actionable) - I’m thinking of the case in which a journalism professor sued a web site for posting a student’s derogatory opinions about him and his teaching materials. (Discussed here.) Thus, under existing Chinese law, I think the Dalai Lama, Nancy Pelosi, Chris Patten, and Chen Shuibian might have a good case against Xinhua and various Chinese government officials (although of course the prospects of their being allowed to sue and win are, to say the least, remote). The problem here, though, is different: can individuals who feel offended by a general derogatory reference about their group do anything about it? (Let’s assume for the sake of argument that Cafferty was including all Chinese, and not just the government.) To allow this kind of suit is opening a real can of worms. The relevant precedent in this case might be the Zhengzhou lawyers who sued the Shenzhen Public Security Bureau because they were offended at the PSB’s insulting banner about Henan criminal gangs. (Discussed here.) That case ended in a mediated settlement, though, so we don’t have a court ruling. Still, I guess it’s significant that the court accepted the case in the first place, and didn’t throw it out immediately as not stating a claim. At the same time, though, the court in question was a Zhengzhou court, and in any case may not have analyzed the complaint in terms of whether or not it stated a claim for which relief could be granted.

I couldn’t agree more. If China thinks it’s a dandy law to allow to use against foreigners, just wait until people realize that it works against the Chinese government, which is just as slanderous and malicious as any other government. (like Nancy Pelosi and the Olympics opening ceremony)

Even worse, just imagine Chinese individual citizens using this against each other. It will get ugly. Because Chinese people don’t sue… unless there is a real vendetta. Loss of face is a cause for such a vendetta. So I foresee that this could become the precursor to some of the ugliest, scorched earth cases in court if allowed unchecked. If I were the court, I would want no piece of this.

Of course, the Chinese government right now doesn’t seem to think this. The article from Reuters goes on:

Asked if China supported the action against CNN, Foreign Ministry spokeswoman Jiang Yu characterized it as “spontaneous activity by Chinese civilians”.

“We will wait and see CNN’s response,” Jiang told a news conference, referring to the Foreign Ministry’s request for a full apology.

“We hope CNN will take this seriously, because what CNN said and did has not only hurt China’s feelings, but also CNN’s own image.”

I normally don’t take aim at the government. But this time around, I must say: the only one looking stupid and hurting its own image is China.

In summary, this is bad policy. Of course, it will be hugely unpopular in China if CNN got away. But for reasons having to do with policy and rule of law, it would be wise for the courts to drop this case really fast.

Matthew DeFlorio published an article with the ABA International Law Section’s International Law News. It doesn’t directly relate to China, but I think its tips are very applicable. A number of his suggestions are based not only in common sense, but quite a bit of experience as well. However, a number of them are not cheap… and so it’s up to you to decide whether its worth it to protect your IPR. I am going to get the answer will be “yes” in a number of cases.

The article, entitled “Supply Chain Security and Its Impact on IPR” reads in part:

Protecting IPR through supply chain security can occur in a number of ways, either through tangible investments or as intangible process changes. . . . Developing new or improving existing processes for business partner selection and internal communications and data flow represent typical intangible enhancements that can provide additional security. Owners have improved their IPR protections by emplying some or all of the following options.

Visibility. Making assets and products more visible throughout the supply chain can protect against cargo theft and damage and prevent products from becoming instruments of illegal trade. Companies achieve this by investing in satellite tracking systems such as GPS, product protection technology such as EPC, or RFID. These systems provide real-time location status and tamper evidence that enables their use greater control over a shipment’s chain of custody from production to point of purchase.

No argument here. However, I just want to note that these sort of systems will cost more. Not a big revelation. But when profit margins are getting thinner by the day, a number of businesses–likely SMEs–won’t want to pay for these costs. At that point, you need to think about just how valuable your IP is and make a proper business decision.

Physical protection. Businesses protect building structures and cargo handling areas by installing fences and video surveillance equipment, and by controlling access to sensitive areas by employees and visits. These measures benefit IPR by protecting product and shipment integrity while discouraging access by unauthorized personnel.

Again, no argument. However, this needs to be strictly done at all levels. Including, your Chinese manufacturers/suppliers. Sourcing from China is likely a weak link in your chain. How many factories are going to protect in this way? Not many. So be careful and make sure you trust your suppliers. I really expect most companies, even SMEs, to be doing some of these things… but only in the US and not overseas.

Standards. Many companies will benchmark processes and activities, thereby establishing minimum performance requirements . . . . Specific methods for reporting fraud and illegal pursuits have become commonplace and are required for public companies under Sarbanes-Oxley. Such process discipline leads to quicker, more assured compliance while reducing confusion and inefficiency in the movement of goods through the supply chain.

Note that this is true for companies under SOX. In other words, U.S. publicly traded companies. Not your Chinese manufacturers. Reporting requirements and processes are not easily implemented in China. It’s not the same as doing it in the U.S. or even Japan. Chinese work culture is very different. Trying to convince your satellite office employees in China to do so… that’s going to be directly related to the effectiveness of your local manager.

Business Partners. Increased scrutiny of current and potential business partners leads companies to investigate beyond financial soundness and into the previous business conduct and security measures undertaken by the potential partner. Due diligence with this investigation will ensure a secure supply of materials, prevention of unauthorized characters tainting your supply chain, and enable early detection of security breaches due to enriched communication and collaboration. . . . IPR owners benefit through cost avoidance; smoother transit means quicker time to market, allowing for decreased inventory levels and the redirecting of funds previously earmarked to compensate for potential criminal activity.

I cannot reiterate this point enough. First, due diligence–thoroughly done–is your friend, even if it costs time and resources. Do it. And of course, do it regularly… check up on your suppliers on a routine basis. Quality fade isn’t the only problem if you are trying to protect your IP. Really, intellectual property is as valuable as your weakest link. So make sure your partners are doing a good job. Drop in unannounced regularly. Second, it also means that you can’t just go onto Alibaba and expect that this is good enough. It isn’t. Don’t think you can just find someone off a directory listing or at some trade even… it’s never that simple. Whoever you go to, do your due diligence.

And of course, as many people have reiterated time and again… Register your IP in China. (Thanks Dan!)

The International Law News, which is the American Bar Association’s (ABA) publication for the International Law Section, published an article by Richard Gruner entitled “Intellectual Property in the Four Chinas”. You might be wondering if there are four Chinas in the first place since most people think there is one China… unless you are a firm supporter of Taiwan, which is technically the Republic of China. That would give you two.

On that note, Professor Gruner argues astutely:

The analysis of IP laws and their enforcement in China has been hobbled by oversimplifying China itself. A number of astute observers of the developing business environments . . . in China have recognized that there are at least four distinct regional situations–that is, the “four Chinas” within the [PRC]–that are developing as the country emerges into a period of greatly heightened commercial activity.

The regional characteristics . . . of the four regions fo the PRC discussed here create four very different sets of opportunities and problems for IPR holders. The impactof IP varies in different regions of the country because a combination of local differences in types of dominant businesses in local areas, variations of the local political clout of businesses that infringe IPR, and the ability of local officials to grant or withhold strong IP enforcement due to the regional nature of IP enforcement mechanisms in China.

I cannot agree more. China, while it is trying to unify its laws and enforcement of IP law (and other laws, for that matter), is a huge nation. I keep reminding people that China has a landmass that is far more comparable to the entire EU than to America. (yes, there are many geographically challenged Americans) Inevitably, there are bound to be differences. If people forum shop in the U.S. because courts are different, imagine forum shopping in a landmass that encompasses more than three times the population. I think you get the picture.

Gruner identities the Four Chinas as:

1. The municipalities of Beijing, Shanghai, and Hong Kong, and the surrounding areas under the direct control and influence of these cities, which are both commercial centers and heavily industrialized.
2. Coastal China, the areas near China’s coastline other than the major urban centers of the First China, which are often mixed economies with many large scale manufacturing activities conducted at low product cost.
3. Inner China, regions immediately inland from the coastal sections of China, which are heavily dominated by agriculture.
4. Outer China, the western provinces of China and desert areas, which consist mostly of economies of mineral and oil extraction.

Again, this should be no surprise to China watchers. The differences between the “tiered” cities mirrors some of these observations.

Gruner observes that in the First China, “local authorities have strong motivations to pursue IPR enforcement as a means to both reward and enhance local innovators and to entice outsiders . . . to inject new technologies into the local economy through IP licensing.” He approximates the level of IP interest as being similar to those of highly technical western counties like the U.S.

Coastal China’s manufacturing “involves technologies originating in other parts of China or copied (often without proper IP licenses) from foreign sources. The interests of this region are thus largely tied to the . . . profitability of local manufacturing without any reciprocal concern over the lack of IP-based rewards for local innovators.” Gruner concludes about this area:

This region represents the greatest challenges for IP enforcement in China due to both its present economic interests in weak IP enforcement and the breathtaking scope of its infringement capacity in large-scale, low-cost manufacturing of unlicensed goods covered by IPR.

Inner China, on the other hand, will find IP enforcement largely irrelevant except “IP-protected products or services used in agriculture.” On the whole, inner China is more like “unindustrialized portions of Africa.”

Finally, outer China also finds IPR enforcement irrelevant except where mining and oil extraction take place, because businesses “may have significant opportunities to use advanced technologies. While there may be some local innovation in these technologies . . . , these are probably outweighed by the commercial advantages of tolerating infringement.”

Given all of these facts, Gruner argues that a multi-regional view of IP in China is necessary. I agree.

Xinhua is reporting that China destroyed some 47 million copies of illegal publications this past Sunday. And it gives even more numbers from the past 20 years. The article reads:

Chinese authorities destroyed 47.18 million pornographic and illegal publications on Sunday as part of an ongoing campaign to strengthen intellectual property rights (IPR) protection.

More than 17 provinces eliminated more than 1 million pieces each, with Guangdong topping the list, destroying 12 million, or a quarter of the total.

China has attached great importance to IPR protection, which has been considered as a national strategy to help build an innovative country, said Liu Binjie, director of the National Copyright Administration.

According to official statistics, China has in the past 20 years closed down 238 pirate disc production lines, solved more than 400,000 cases of IPR infringement and confiscated more than 1.3 billion illegal publications.

Official statistics show that last year, 2,967 people were arrested for suspected violations of IPR. Public security departments investigated 2,283 cases of IPR infringement and made arrests in 2,008 cases, involving 1.49 billion yuan (about 213 million U.S. dollars).

These are nothing to laugh at. Sure, it’s still the tip of the iceberg, but it isn’t true that China is doing nothing and looking the other way at intellectual property infringement. At least, let’s look at the cold hard facts and not the BSA and MPAA propaganda.

Stan Abrams at China Hearsay commented on my last post about this matter, which noted that China’s IPR enforcement is actually quite laudable:

welcome to my world. Misery loves company, and trying to explain why IP enforcement is now much better in China compared to the state things were in several years ago is a thankless task. Furthermore, explaining how some of the statements made by the trade associations can actually set back the political debate can be dangerous for us practicing lawyers.

I can’t tell you how many times I run into people who think that China is an IP black hole without laws in copyright, trademark, or patent. That is completely wrong. While China isn’t quite at par with the United States in terms of its enforcement, we all know that intellectual property protection has been increasing in China: there have been cases where foreign companies win trademark lawsuits (Starbucks v. Shanghai Xingbake Cafe Corp, here) and even patent suits (Motorola, here). Courts are enforcing IPRs, thank you very much. There is already one case where damages were out the roof: G2000. (See China Business Law Blog) The government has been conducting a lot of raids. Sure, you can walk through the streets of Beijing or Shanghai and see pirated DVD vendors. But really, the numbers are encouraging: 1.3 billion publications and 400,000 cases in 20 years.

I think its time for the west to recognize that China is cleaning up its act and there are IP laws in place and being enforced. The next time a business person comes up to you and says “China doesn’t have an IP laws”, give them the facts. Or point them here.

There were a pair of articles last week at the Financial Times that talked about how companies are investing in the Asian M&A market while the western markets (American and European) aren’t do so well. The West’s pain will ultimately be China’s gain it seems.

The first article is entitled, “Asia’s M&A market shows its mettle” and it reads:

The mergers and acquisition market in Asia is holding up better than in Europe and North America, underlining easier access to funds in the region and the global expansion drive by Chinese and Indian companies, according to bankers.

Since the start of January, M&A transactions in Asia-Pacific have amounted to $236.5bn, a fall of 5.8 per cent from a year earlier, according to data from Dealogic. By comparison, the M&A declines in Europe and North America are respectively 31.8 per cent and 37 per cent.

Chinese and other Asian investors are injecting capital into Western financial services companies that have been hit by the collapse of the US subprime market.

Of course, this should come as no surprise to people who know that the Asian market is still growing… at least, it is in China, where “ slow growth” is the catch phrase.

The other article from FT ( h/t to China Digital Times) is an example of one such company, GE, which got hammered on its earnings due to the faltering U.S. economy. GE is investing 2 billion dollars into Chinese markets, with the hopes of increasing its revenues to $10B by the year 2010. Talk about aggressive:

General Electric plans to invest up to $2bn in acquisitions and other deals in China over the next three years as part of a strategy to double its revenues in the country.

The world’s biggest industrial company, which stunned investors last week when it announced its worst quarter of financial results in five years, is looking to hire a team of 20 “in-house investment bankers” to conduct the deals in China.

The aggressive investment plans, which will include acquisitions and joint ventures, underline GE’s intention to expand its China business rapidly at a time when its domestic operations face a slowing US economy.

GE plans to increase its 2007 revenues in China of $4.4bn to $10bn by 2010, which would require the company to expand more than twice as fast as the economy’s double-digit rate of growth.

“The wider problems in the credit market and the signs of a slowing in the overall global economy have not entered the picture [in China],” said Mr Bertamini.

The comments come just days after GE slashed its full-year earnings forecast because of the effect of the credit crunch.

China Venture News was optimistic about GE’s future in China:

With GE’s good record on clean technology and Beijing’s new emphasis on environmental issues, the company may be able to find its way into some sweet deals in the coming years

While I am not able to really comment on GE’s ability to succeed or fail in its aggressive stance in China, the China M&A market remains as one of the few places for western companies and venture capital/private equity to invest. It makes sense: the western economy isn’t doing well, shift the money to where the economy is doing much better. I don’t think it takes a rocket scientist to figure this out.

I have been hearing that the M&A work at law firms is slowing down. It doesn’t have to be. There are plenty of firms still quite busy because they are doing American or European cross-border M&A into China and other Asian countries. If you aren’t prepared to do Chinese M&A work, then it really is time to learn. There are plenty of resources out there, such as stuff from China Briefing, which can give you a very basic understanding of the law, and numerous conferences. You owe it to yourself to get educated.

This call to go west isn’t just for businesses looking for opportunities: it is siren call for lawyers as well.

Practising Law Institute (PLI) is doing a multitude of international and China related conferences that give out Continuing Legal Education (CLE) credits.  This one is in New York only (sorry SF folks), but is available via webcast on June 3 from 9am - 4:45pm.  Here is the introductory information from the PLI website:

The global environment requires the sophisticated estate planner to know and understand how to provide multifaceted strategies for building and preserving the assets of non-resident alien clients and resident clients with assets abroad. Skilled structuring and administration of foreign trusts with multinational beneficiaries require a firm understanding in regulatory requirements. Understanding various estate, tax and immigration issues and how they intersect and work together is imperative. This program will give you important fundamental concepts and sophisticated issues in multinational tax and estate planning. This program will also provide you with the tools you need to serve your multinational clients best.

What You Will Learn

• Explore how proposed legislation may impact the tax treatment of expatriates
• Learn how to structure non-resident alien investments in U.S. real property and operating business interests
• Discover how new UK tax reforms will impact international planning for high-net-worth clients
• Learn the basics of U.S. federal taxation of investment products
• Develop tips on pre-immigration tax planning as it relates to foreign trust interests
• Examine case studies of unique tax and estate planning scenarios
• And much more!

Who Should Attend

Attorneys specializing in estate planning, insurance or tax, accountants and financial planners with multinational clients, trust officers of U.S. and foreign banks, and anyone whose fiduciary responsibilities require an awareness of the current trust rules.

The faculty is comprised of American tax attorneys who have an international focus:

Robert C. Lawrence III, Cadwalader, Wickersham & Taft LLP, New York, NY
Howard J. Barnet, Jr., Carter Ledyard & Milburn LLP, New York, NY
Robert L. Dumont, Principal, Deloitte Tax LLP, New York, NY
Ellen K. Harrison, Pillsbury Winthrop Shaw Pittman LLP, Washington, DC
Alex Jones, Director, Deloitte & Touche LLP, London, GBR
Kenneth Klein, Mayer Brown LLP, Washington, DC
Michael G. Pfeifer, Caplin & Drysdale, Chartered, Washington, DC
Jane Tse, Special Counsel, Cadwalader, Wickersham & Taft LLP, New York, NY

While tax is not my cup of tea, it is definitely an important field to cover.  Law students, you can even take PLI courses at heavily reduced rates: a mere $25 with scholarship application.  (which is often and easily granted)

China has been trying to crack down on intellectual property violations for some time now. (a friend of mine used to do this sort of stuff for a living and he has some exciting stories) That being said, it seems that to the west (and not just America), China can never win. It’s IP enforcement is never good enough. And so we constantly hear “China’s IPR violations blah blah blah…” Let’s just think about this for a moment in light of articles like these.

The AP recently published an article entitled “China defends anti-piracy efforts” ( h/t to China Digital Times):

Officials defended China’s efforts to stop rampant copying of movies and other goods, saying Thursday that 4,322 people were convicted of product piracy last year and promising special efforts to protect Olympics-related trademarks.

China is the world’s biggest source of illegally copied goods and trade groups say violations are growing despite increased penalties and repeated crackdowns. The illicit trade is fueling tensions with Washington, which has filed a World Trade Organization case over Beijing’s failure to stamp it out.

In an annual report, the agency said authorities seized nearly 76 million pirated movies, software discs and other goods last year and shut down 13,170 piracy-oriented businesses.

Yi said courts convicted 4,322 people of product piracy, though he said he did not know what penalties they received.

Officials said they are making special efforts to prevent unlicensed use of Olympics-related logos and other property ahead of the Beijing Summer Games in August.

Yes, it may be the largest source of the world’s IP violations–copyright, trademark, and probably even patent too–but we’re talking about numbers here. China has over 1 billion people. Let’s multiply the rampant amount of Kazaa and Torrent downloading the United States by over 3 times and see how much the numbers look as scary. Or think about other nations which are much smaller. I am sorry to say this, but IP violations are a fact of life in many cases. And to continue to say that China isn’t trying can only be frustrating to the Chinese government and borders on being a falsehood. Sure, the government could always do more. But it’s doing something. 76 million discs and 4,000+ convictions is nothing to sneeze at. Especially where the West has accused China of being a lawless society–well, you try to convict 4,000+ people of IP law violations in a lawless society and see how you do.

So who is fueling a lot of this? Let’s continue with the article:

Chinese markets are awash in illegally copied goods ranging from software and Hollywood movies to designer clothes, sports equipment and medications. Industry groups say Chinese and foreign companies lose tens of billions of dollars a year in potential sales to piracy.

Washington filed a WTO complaint in April 2007 accusing Beijing of violating its trade commitments by failing to stop product piracy.

Film studios have won lawsuits against pirate DVD vendors and have begun filing cases against Web sites accused of allowing downloads of unlicensed movies.

But some 93 percent of DVDs sold in China are unlicensed, according to the Motion Picture Association, which represents Hollywood studios. Many are sold openly on sidewalks in Beijing and other major cities.

In a report last year, the Business Software Alliance said 82 percent of software used in China is pirated, thought it said that rate was down from more than 90 percent in earlier years.

So we have the MPAA and the BSA involved. These are clearly special interest groups. And trust me, they are good at embellishing the truth with alleged facts and figures. The BSA claims that software publishers have lost billions and billions of dollars due to software piracy worldwide. Really? I don’t think so. Because if people couldn’t pirate your product, they wouldn’t buy it at all. It’s too expensive for most people outside of certain industrialized nations. In fact, I am willing to believe that software companies in places like China benefit because they have a virtual monopoly through piracy. And in the end, businesses will begin to pay for the software as the US retains its role as a sock puppet for the BSA.

The MPAA too. Only the MPAA would have the audacity to sue ordinary citizens for downloading movies. Well, they did. Yes, it got the message across. Did it stop the decline in movie attendance? No. You have DVDs to thank for that. (which people actually purchase… and many times, people purchase after seeing a pirated version and they like the movie enough to own it)

I am not anti-IP law. I am anti-MPAA and anti-BSA though. These are 2 organizations that I wish would just go away.

Software piracy has dropped by about ten percent in recent years. 10 percent… in a nation of 1 billion plus people? That’s amazing. And especially with the Chinese view of the law (China Law Blog did a beautiful post on this comparing the Chinese v. American view of the law), that is really amazing. Let’s give credit where it is due: the Chinese government is doing an excellent job in starting to enforce IPRs. Yes, there is always much more to do. But we are talking about stemming a flood. (or drinking from a fire hydrant) It will take a LONG time before IP is as highly regarded as it is in America. (though we in America actually despite IP wonks) But for now, can we just applaud the government’s efforts?

Silicon Hutong did a post yesterday about Krispy Kreme’s strategy to break into China–Shenzhen to be specific. And while many China consultants try to model and/or describe best practices, its always helpful to look at bad practices–both as a teaching lesson and to laugh at a little. After all, just because people like Krispy Kreme donuts doesn’t mean they will be successful in China. And if you have a popular product, don’t think you can just traipse into China either.

From the post:

China Economic Review is quoting Krispy Kreme’s HK CEO explaining why the confection pushers are planning to start their invasion of the People’s Republic of China in Shenzhen.

“Shenzhen is a migrant city, many are from the north, and the people are more receptive to fried products.”

Krispy Kreme is doomed in China.

Well, we don’t know that its “doomed” in China yet. But I agree with this idea. Why start a western brand that can easily target ex-pats and then expand? What’s clearly lacking isn’t necessarily common sense. It’s the business plan. In other words, I don’t see one. In fact, CER here seems to indicate that both Dunkin’ Donuts and Mr. Donut have some ideas and direction. I don’t see any from Krispy Kreme. That’s my main problem.

First, any company that would stoop to concocting such a nonsense justification for locating a high-value franchise somewhere is engaged in some high-level self-delusion. I would bet that real reason they’re going to do Shenzhen first is that the HK CEO is getting stuck with the job on the mainland, probably likes his mid-levels flat, and doesn’t want to be flying to Beijing or Shanghai all the time. Shenzhen, on the other hand, is 45 minutes from Central by car.

Second, if Krispy Kreme was really serious about China, they wouldn’t hand the responsibility to a guy in Hong Kong. They would do their research and put a guy on the ground in Shanghai, Beijing, or somewhere else in China to act as representative, get to know the local government, and find local franchisees. Behaving like you need to enter China from Hong Kong, then Shenzhen, is a modus operandi far more appropriate to China’s circumstances circa 1990.

I agree with this. Any company that is serious about doing business in China needs people on the ground. Whether its to manage your business or do your due diligence, you must have someone there locally. If you are a foreign MNC, you need to transfer key people to China to be on the ground: decision makers. Yes, decision makers in China–that seems like a foreign concept. But it’s important. Due diligence and commitment to doing business in China is key.

Third, if Krispy Kreme really understood the way into China, they would start someplace where there are a lot of people who already like donuts, can’t get them, and will form long, slavering lines outside their door each morning. If you’re afraid of Shanghai, go with Beijing. Call me crazy, but tens of thousands of American and Canadian businesspeople, students, diplomats, and families seem like a built-in market for a store or ten, better (especially initially) than a million or two migrant workers and their factory bosses.

Alas, Krispy Kreme appears content to sit in Hong Kong and wait for the franchisees to come to them, and then invade the market slowly.

No debate from me. Don’t do anything half hearted if you plan to go into China. Do it all the way. Be full steam ahead. Because the market is dynamic enough that you will probably get eaten alive by everyone else who is running into China. China is not the place for you to dabble. You can do that at home and be a mom-and-pop shop.

So if you plan to go in to China: (1) have a business plan. A good one. One that you believe in. But just have one. (2) have people on the ground. Move them there if you have to. Hire trusted consultants there if you have to. Make sure there is local decision making power and authority. (3) be aggressive. This isn’t the market to “test”. This is a place when you either kill or be killed.

The Hutong concludes:

Fortune in China usually tends to favor the brave and the wise. Be both.

I couldn’t agree more.

An article that was sitting in my mailbox that was just waiting for comment was entitled “EU and US team up on Chinese toys” from BBC News. It’s a little old, but since the news was not covered on any of the blogs I frequent, I thought I would talk about it:

The EU and the United States have agreed to work closely to persuade Chinese toy-makers to improve the safety of their products.

Millions of Chinese-made toys were recalled in 2007 after safety concerns about lead paint or detachable magnets.

EU commissioner Meglena Kuneva said, after talks with her US counterpart, Nancy Nord, that the world’s two major economies had to speak with one voice.

“We are pro-open markets, [but] not compromising on safety,” she said.

China has pledged to step up the way it monitors products.

Ms Nord, chair of the US Consumer Product Safety Commission, said she wanted the EU to agree to a global set of product safety standards.

Bringing the two systems together would be “for the benefit of consumers; it is certainly for the benefit of product manufacturers”, she said.

Currently, the EU uses a CE mark but European consumer groups have called for a stricter standard awarded by an independent regulator.

First off, how will the EU and the US “persuade” Chinese toy makers to improve their safety? They won’t. That is more or less an impossibility. Chinese toy makers are in this business because they want to make money, and because they sell to larger multinational companies, I don’t see how western governments are going to persuade anyone in China to do anything. So this is actually a mislabeling in my mind.

That’s not to say the EU and the US have no power. They have power on businesses sourcing from China but based in the U.S. or other countries in the west. In other words, your business. In the U.S., civil and criminal liability are already deterrences against harmful products. Add regulatory penalties to the list. That’s not too much of a threat, but just having to deal with government inspections, the time wasted on such a process, and sheer nuisance value does make this a possibility.

And so I will continue to preach quality control and due diligence. Especially quality control because quality fade is still very real. (think Greek Olympians)

My other thought is regarding a “global” standard. Who determines this? I have a hard time seeing a real consensus here. And of course, what effect can it have on consumers? A lot. If other countries raise the ceiling ridiculously high (which is desirable), then imagine the increase in costs for products worldwide. Do you think China as the world’s manufacturer will help the pinched consumer in America who fears a recession? No. I like the independent regulator idea. But I just can’t see this working out in a beneficial way for most people.

And of course, we go back to the quality fade problem.  You have a regulator certify a product.  You have some random, but not-too-often type of inspections.  You are asking for quality fade.  And Chinese suppliers will give you in a heartbeat.  QC and due diligence can only do so much against economic realities.  So watch out.

Ultimately, it’s probably so that the EU and America can wring their hands when problems arise and say “I am innocent”.

The China Daily mentioned in an article last week ( h/t to China Digital Times today) that some of China’s new ideas for a food safety system won’t just be suggestions: they are being drafted into a new law.  That is indeed interesting.  Here is how the article reads in part:

The new product identification and tracking system, which has been in the spotlight recently over concerns it may raise production costs, has been written into the draft food safety law, a senior quality control official said Tuesday.

The system has become part of the draft food safety law and will become a legal obligation for all food companies if it is passed by the Standing Committee of the National People’s Congress (NPC), Pu Changcheng, deputy director of the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ), said at a working conference in Beijing.

“It allows every stage of a product’s production and distribution cycle to be tracked.”

Food companies, however, have argued the system will increase their production costs. More than 20 firms, including Nestle, Mars, Coca-Cola and Pepsico, have submitted a joint petition against the system to the legislative affairs commission of the NPC Standing Committee and State Council Legislative Affairs Office.

The system will require new equipment to be purchased, will slow production, and changes will have to be made to packaging and design, the firms said in the petition.

In a report submitted to the AQSIQ, the China National Food Industry Association said all 40 of the food companies it surveyed last month said the system will raise their production costs, and 31 said it will lead to price rises of up to 15 percent.

“More importantly, the system is of little use in ensuring product safety, as it doesn’t deal with the quality of raw materials,” Li Yu, scientific and regulatory affairs director of Mars China, said.

“Also, the system doesn’t apply to small food plants, and they have the most problems,” he said.

Well, I have many thoughts regarding this sort of a law.  First, it is very encouraging that the government is stepping up to the plate regarding food safety regulation.  Standards are fine, but laws are required if you want broader enforcement.  Will this law have any real teeth?  Only time will tell.  (Charlie McElwee and I had some discussion about enforcement of China’s new environmental laws, and the conclusion was the same: we can only hope that enforcement steps up)  But it is a very positive step in terms of possible enforcement.

Second, it means the government is acknowledging that there are issues with food safety.  And it isn’t just foreign countries’ imports (think the whole pet food and shrimp scandal, and China’s backlash)–they are acknowledging that domestic products also need regulation and enforcement.  Yes, China needs to become more transparent.  But things like this (and the admission that the 3 gorges dam is an environmental disaster) gives me great hope that this country will indeed become more and more transparent.  And be able to better dialog in a somewhat more western manner with criticisms and problems domestically.

Third, there is a big question of who is going to receive the toughest treatment?  I suspect it will be the foreign and multinational enterprises, those with larger pools of resources, that receive the brunt of this.  Because it is enforcement, but it is also with a somewhat Chinese sense of fair play.  I think some Chinese companies will get theirs as well, don’t get me wrong.  But indeed, it is the Nestles and Mars & Company’s that have the most to lose.  And so they will have to eat the rising costs.  (or worse, pass them on to the consumer, and only add to Chinese inflation)

Is there a benefit to this for them?  Of course.  If they implement and other companies don’t, then I expect that Chinese citizens with some means will start buying the more expensive, but more likely safe products, en masse.  Not everyone will be able to, but the Chinese wealthy and middle classes sure will.  If you have the means and you have only one child, will you feed him garbage?  Over your dead body.  No, everyone wants to buy with confidence.  It is not a Chinese-only thing.  So expect the premium products to control just that a–a slight premium.

Finally, just to be a little cynical, what will happen when some of the more shady Chinese food producers realize that Nestle and Mars sells well?  Compete?  No.  (Some will)  But I can see what happens in smaller markets by smaller, fly-by-night producers: counterfeiting.  And then we have an IP / trademark problem on our hands.  But we will cross that bridge when we get there.