China Esquire

Was reading China Law Blog’s treatment of Chinese branding and trademarks here where Dan Harris takes issue with a Newsweek article, which states in part:

The simplest explanation for China’s failure to build global brands is cutthroat domestic competition. In most product categories, hundreds or thousands of firms compete for domestic market share, leaving profit margins razor thin. . . . And because foreign brands have taken much of the market’s high end, most companies are forced to compete on cost, leaving little room for investment in R&D or marketing. . . . Finally, the recent string of product recalls—including poisonous pet food and faulty tires—has left consumers wary of made-in-China goods.

Of course, I would take issue with this article as Dan does. His thoughts, and mine, after the jump.

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Checked my mail the other day only to find a copy of Paul Midler’s book Poorly Made in China: An Insider’s Account of the Tactics Behind China’s Production Game. In it, Paul defines and talks about the problem of quality fade, which I am sure I must’ve talked about last year when I was on a posting rampage. (For those of you who don’t know, quality fade refers to when a factory starts out producing high quality products and then later turns out inferior products by cutting corners to save costs)

The Economist already ran a brief review/summary/introduction to the book here. I haven’t read it yet, but definitely looking forward to it, as is Mrs. China Esquire’s father, who is a sociology professor and interested in such topics. I plan to review when I take my paternity leave next month, so stay tuned for more information on the book.

For now, let’s just say that I can’t wait to read it.

And so this brings me to part 2 of my NERA notes—the part presented by Fei Deng, who talked about the role of nationalism in this deal.  Unfortunately, she decided to start with imperialistic times and talked about things like the Summer Palace, and Chinese humiliation.  Not any of my favorite of topics.

But then she went back to Coke-Huiyuan.  More after the jump.
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While I was driving this morning, I heard on National Public Radio (NPR) locally that James Fallows is speaking about China’s Economy this morning.  (the talk is right now, but because I am in meetings, I cannot listen at the moment)  He’s talking about his article for next month’s The Atlantic entitled, ” China’s Way Forward.”  But I figured that some of you may be interested.  Details about the program and link after the jump.

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Yes, I realize that I haven’t posted much in the last few weeks….  but I promise that part 3 of my copyright infringement series will come very soon.  I haven’t had time to post it given the Holiday season rushing upon us.  (Happy belated Thanksgiving to all!)

That being said, I am thankful that my blog made the roster at Chinalyst for the 2008 China Blog Awards, along with many other fine law and business blogs.  For those who follow my blog, please vote!   You can find China Esquire on that page link, and then click on the “+” sign under the points tally.

I will have some personal updates up soon as well–there have been some exciting things going on and I can’t wait to share with everyone!

To my fellow nominees, I wish you the best!  Now, let’s rock the vote…

Not an angel.  An “Angell”, as in Boston’s Edwards Angell Palmer & Dodge.  The National Law Journal picked up very briefly on this story today:

 The 600-lawyer Boston-based Edwards Angell Palmer & Dodge is entering the Chinese legal market through an association with the newly formed firm Lister Swartz, comprised of two long-time Hong Kong attorneys.

Martin Lister, an Edwards Angell partner with more than 20 years in practice in London and Asia, and Kristi L. Swartz, a Hong Kong attorney who operated for a dozen years as the sole principal of Swartz Solicitors, have formed Lister Swartz. The two attorneys specialize in corporate and securities law.

“Expanding our client service capacity formally into Asia is consistent with the Firm’s strategy,” Walter G.D. Reed, managing partner of Edwards Angell, said in a written statement. “Hong Kong is the right place for us to be and in direct response to the needs of our increasingly global client base. I’m pleased that Lister Swartz will lead EAPD’s efforts in Hong Kong.”

Both Lister and Swartz are trained HK solicitors (see here), so it looks like Edwards Angell may be here for the long haul. Very interesting that the firm isn’t aiming for Beijing or Shanghai first, as it seems like those are the hot places to go for firms aspiring to build China practices.  However, HK seems to me to be a good choice that is overlooked.  I hope this office does well.

Really interesting article from Time today entitled “ Why China Won’t Come to the Rescue” that discusses why China isn’t about to invest to save battered American financial institutions.  I think the reason can be summed in 2 ways:

1. Been There, Done That…
2. I’m Not Falling For That One Again…

Basically, China is not about to play the fool twice and throw its money away.  Here’s the article:

If “once burned, twice shy” isn’t an old Chinese proverb, it probably should be. As Gao Xiqing, the chief investment officer of China’s $200 billion sovereign wealth fund, meets in New York City this week with Morgan Stanley CEO John Mack to discuss increasing the Chinese government’s stake in the venerable — and flailing — investment bank, he bears an obvious burden. Last December, the CIC (the China Investment Corp.) invested $5 billion for a 9.9% stake in Morgan Stanley. On paper, that investment is now down more than 25%. Worse, Beijing paid $3 billion for a piece of the Blackstone Group just ahead of the private-equity firm’s initial public offering last June — an investment that occurred about a nanosecond before the so-called subprime crisis began annihilating value on Wall Street and beyond. Fairly or not, the Blackstone stake has since become the symbol in China of a naive bunch of foreigners getting hooped by Wall Street sharpies. It’s been the subject of withering public scorn in China and has drawn pointed private criticism from the highest levels of the Communist Party, banking sources in Beijing and Hong Kong have said. The message: Never again.

Well, not entirely.  Read on:

The answer, if the recent behavior of other sovereign wealth funds and foreign private equity houses is any indication, may be to deliver, in person, a simple message: No. Not again. Not unless you structure a deal in such a way that we simply cannot lose. Otherwise, goodbye. That, in effect, is what Sameer Al Ansari, the CEO of Dubai International Capital, told Wall Street earlier this summer.  “There are a lot of other compelling places to look for investments these days,” he said.

To the extent that sovereign wealth funds are talking to desperate-for-capital bankers in the U.S. — and, as Gao’s trip shows, they are talking — the terms of the discussions, one senior Hong Kong–based banker said today, are likely to be very harsh for any potential recipient of capital: “You’re basically looking at structuring a deal at this point in which there is no downside — none. Even if a company goes under, like Lehman, you’re first in line to get paid a return on your assets. Take it or leave it.”

Now this should prove interesting from a lawyer’s perspective.  Why?  Because as an American lawyer, I can think of almost no good reason why you should structure a deal so one-sided if you still have any duty of loyalty to your client.  Obviously avoiding catastrophy is probably a good reason.  But I can also imagine that in good times, that attorney’s tail is on the line for borderline malpractice…  or at least, if not malpractice, I wouldn’t be returning as a client.  That’s a very tough line to tread.  And not many lawyers are quick to write up such agreements for their clients where they lose big time.

Of course, clients are stubborn and will force their lawyers to do crazy things at times.  I think money, the bottom line, and the power of economics may have something to do with this.  But as an attorney, it’s not fun being in that position.

From a business perspective, it’s almost ironic that Wall Street–the proverbial powerhouse of international financial markets–may be getting taken to school by Sovereign Wealth Funds.  But then again, SWF’s have something that Wall Street desperately seems to need–cold hard cash.  But given the current environment, you gotta do what you gotta do.

And there’s a bit more:

Now, moreover, even if valuations in the U.S. financial sector get more appealing should the market rout intensify, there’s another factor in play: governments in East Asia and the Gulf want their funds to help domestic companies, not foreigners. On Thursday, for example, Beijing’s CIC announced it would make investments in three of China’s biggest commercial banks — Industrial and Commercial Bank of China, Bank of China and China Construction Bank — that themselves are getting hurt by an economic slowdown and a real estate slump at home. “This is a significant policy initiative aimed at supporting China’s leading financial institutions at a time of global turmoil,” says Jing Ulrich, chairman of China securities at JPMorgan in Hong Kong. It’s another way of saying to CIC’s Gao Xiqing, If you come home from New York having increased our stake in Morgan Stanley, it had better be the sweetest deal anyone in Beijing has ever seen.

I just couldn’t resist throwing this part in.  Nationalism, yes.  But a necessary nationalism?  Yes.  China isn’t stupid.  Why throw away your money in America when you can throw it away in China?  And helping your own country’s economy?  It’s a no brainer.  (not like my post on Coke and Huiyuan, that is a different shade of nationalism)

What’s this have to do with the American side?  Its what the end of the article is: American financial institutions must make these deals really sweet for the SWFs like CIC.  Or they aren’t getting any of the money.  Sounds like a terrible dilemma to be in really.  But that’s business.

Seems like Coca-Cola isn’t all the rage in China with the Huiyuan deal.  This has been receiving little coverage on the blogs–I think only Stan Abrams has covered this more than once.  (see his main post here)  But I read this AFP article entitled “ Chinese firms try to block Coke’s juice company takeover: report” and had to at least post it:

A group of Chinese drinks makers are to submit plans to the government they hope will block Coca-Cola’s takeover of China Huiyuan Juice Group, state media reported Monday.

A consortium has prepared three plans and handed them to the Ministry of Commerce to keep the Huiyuan brand in Chinese hands, the Beijing Morning Post reported, citing an unidentified official at one of the companies.

The ministry says it will review the proposed 2.4 billion-dollar friendly takeover of the Hong Kong-listed company, according to the principles of a market-oriented economy.

No it won’t.  Let’s be honest: market oriented economy happened already when Huiyuan decided to sell out to Coke.  That’s the market at work.  This isn’t.  This is about government protectionism and meddling.  (not that the U.S. doesn’t do this either, so don’t get me wrong)  I just want to clarify that this is a smokescreen if I’ve ever heard one.

The consortium’s proposals include breaking up Huiyuan and selling it to different Chinese firms or purchasing it with a yuan-denominated fund set up by domestic companies, the newspaper reported.

Another proposal would see the government giving the green light to the merger but retain the name and then sell it on to Chinese companies, the report said.

Okay, so the first is what I would normally expect: cut up the business.  Normal procedure for corporate raiders and hedge funds, so nothing new.  And it does make sense if China wants to protect Huiyuan–parse it out and let other companies keep the brand.

It’s this second proposal that is really ludicrous to me.  Do you really think that Coke would want to buy Huiyuan if it can’t retain the name?  Really?  I can’t.  Coke isn’t there to just buy another supply chain…  that brand name has to be worth something for Coke to buy it, as opposed to deciding to ramp up its own operations in China.  And if the brand had no worth, then this consortium wouldn’t care.  But as we all know, it is valuable…  and that’s why this second option is plainly ridiculous.  (or patently obvious for you IP types)

Expect to see Coke hit the eject button if this ever happens.

And of course, I had to include this:

“It’s not because of narrow nationalist feelings,” the report quoted an unnamed official from one of the consortium companies as saying.

He suggested the deal could kill a champion Chinese brand if allowed to go ahead.

Yeah right.  Coke won’t kill off a Chinese brand if it can make money off of it.  It may integrate the brand or tinker with it, but kill?  That’s a bit too harsh if you ask me.  But really, it’s nationalism.  It’s the same thing that happened when Budweiser announced that it would be taken over…  the U.S. consumers were none too happy about it though the reality is that they wouldn’t be able to know the difference if anyone didn’t say anything.  Same here I would wager.  But because there is nationalism at play, that’s what could motivate such a consortium to head for the MOC.

Really, if it isn’t nationalism, what is it?  I can’t think of a good reason myself.

Sorry for the last minute notice on this, but I thought better late than never.  The Investment in China Shanghai Business Club is hosting its “Shanghai Business & Investment Social Networking Evening” on September 10 at 7pm at 748 JuLu Road (near FuMin Road) in Shanghai.  Here’s the pitch:

The social networking evening intends to provide an effective platform for businessmen in Shanghai to communicate and cooperate. In particular, this event is dedicated to facilitate investors and enterprises seeking investment to strike a deal. Do bring your  executive summary or business plan to the gathering, a good number of investors have been invited.

And the networking event also has some content in the form of discussion on the issue of “Bad Debt in U.S.-China Trade”.  Sounds interesting enough:

As the sub-prime loan crisis occurred with the increasing trade between the U.S. and China, many U.S. companies have not been able to pay for the products and services provided by their Chinese suppliers. The amount of this unpaid debt/bad loan has reached to a significant level, and it has severely affected the operation of  numerous Chinese exporters, of which many went to bankruptcy. As a well-established Chinese law firm based in Shanghai, China, we closely collaborate with U.S. law firms to help these Chinese
companies collect their debts. We will hold a series of seminars for Chinese exporters in Zhejiang, Jiangsu and Shanghai to share the current status of debt collection process.

Got to love the AFL-CIO’s hand in American politics.  Normally, I couldn’t care all that much about what the unions say during the presidential politics season because they don’t say anything interesting.  (around these parts in San Francisco, the unions end up being more of a nuisance because of periodic picketing and because many of my friends in management complain that they have these employees also have the worst work ethic)  So surprise surprise when I saw this CNN blog post today.  Apparently, 50,000 of these things are going out today.

So does anyone really believe that John McCain is sending 2.3 million jobs to China?  That seriously has to be one of the most ignorant views that you can take.  Does any really believe that Barack Obama, rockstar he may be, can bring those jobs back to America?  Sorry, they are gone.  The global village concept may not be in full swing, but multinational corporations know better than to bring jobs back to America.  If not China, there’s always Vietnam, India, etc.  Sourcing is cheaper.  Period.  (okay, not always, but usually)  No president is going to change this trend anytime soon.  Either McCain or Obama.  (sorry folks)  I’ve always said its up to the people in the U.S. to learn value added services and industries.  And that is in fact what has happened over the years as a result of this global sourcing move.  And so I just had to laugh at this ad because I found it so absurd.

What is more disturbing?  Some of the comments that appeared on the post.  Let me quote some:

expose the fruad Mcempty suit for the fool he is.
All for shipping American jobs abroad.
he and his wife have gained millions from selling American jobs.

THANKS AFL-CIO!!!! Keep up the great work and just think you didn’t even have to sink to the repuglicans low and lie, you just simply told the truth. hahahahahah
And john williams san diego, ca. – don’t forget bushy and cheyney and keating 5 (mccainy)

I don’t know why anyone would believe this frankly.  But then again, this is America.  At least many commenters did appear to understand economics:

Haha. Are they serious? One man is to blame for the loss of 2.3 million jobs to China? And that one man is a Republican Senator from Arizona!?! Pfftbahahaha. I wouldn’t expect anyone in the AFL-CIO to understand global economics but come on. If someone is offering to do a service cheaper and more efficient wouldn’t you go to them? It’s why people shop at Wal-mart and not at the cute mom and pop store on the corner. Give me a break. “They took our jobs!”.

And another:

WOW, implementing trade aggreements = job losses. That’s one hell of a conclusion.

DHL maybe chinese, but uh, I don’t see chinese people dropping off packages at my door.

Jobs go overseas because American Unions push them away. That’s right, the truth hurts. Unions might offer some protection to the average worker, but it also keeps the productivity down for employers. 10% of the hardworkers carry the load of the 90% that are slackers. Employers are forced to cater to the lowest demominator and the only person that really gains from it is the slackers and the union bosses.

Well, if American voters look dumb to you in China, perhaps it’s because they may be…  I think I will move back to law and business again tomorrow.

CNN Money ran an article today entitled, “China wholesale prices surge”.  Of course, the news isn’t really all that new to anyone following the effects of inflation in China over the past year or so.  However, the rate of inflation is rather disturbing: its the highest rate in 12 years.

China’s wholesale inflation in July accelerated to its highest rate in 12 years, adding to the government’s headaches as it tries to rein in surging consumer prices, according to data reported Monday.

The producer price index was up 10% in July over the same month last year, the highest rate since 1996, the Xinhua News Agency said, citing the government’s statistics bureau. The index measures the price of goods as they leave the factory.

Analysts have warned that rising costs for energy and raw materials would push up Chinese wholesale prices, squeezing thin profit margins for companies and adding to pressure for retailers to raise consumer prices. The government is due to announce July consumer inflation on Tuesday.

The July rise in the producer price index, or PPI, exceeded analysts’ expectations and was a sharp jump over June’s 8.8% rate.

The cause of such inflation?

Producer prices for raw materials, fuel and power rose 15.4% in July over the same month last year, up from June’s 13.5% rate, Xinhua said.

So again, nothing terribly new.  Steel prices, oil/gasoline prices, etc. have been going out the roof over the past year.

What does this mean?  Watch out for your suppliers wanting to raise rates on you.  In fact, if they aren’t doing it already, don’t be surprised to see it happening in the near future.  Also watch out for future costs of sourcing and production to increase.  What I’m saying isn’t exactly rocket science.  But the warning is still worth making given this news.

Don’t agree with me?  CNN Money also ran a companion article entitled, “In China, outsourcing is no longer cheap” that I will try to get around to talking about tomorrow.

Saw an interesting article in The Recorder, which is an affiliate of the National Law Journal and the American Lawyer. The article is entitled, “ MoFo Got Game(s)” and discusses the legal work that the firm did for the Olympics, which started today:

When the Olympics start tonight, Morrison & Foerster partner Kelly Crabb and some of his colleagues will be able to breathe a little easier.

Over the last six years, Crabb and Steven Toronto, the head of the firm’s Beijing office, have led about 40 lawyers from MoFo offices worldwide in representing the Beijing Organizing Committee for this year’s Games.

The firm, the BOC’s only international counsel, is handling a wide range of issues, including helping protect the intellectual property, a major source of funding for the organization.

Wow, only 40. I am surprised as I thought there would be even more work than that. Still, I am sure that MoFo has made out quite well from its exclusive deal with the BOC.

The firm began representing the committee in 2002 and Crabb, an entertainment lawyer in Los Angeles, estimates that he has spent at least 40 or 50 percent of his time in any of the intervening years on BOC matters. And while it has been good for his practice, it has also been good for his firm.

“It’s been a very helpful calling card for conversations with potential clients,” said firm chairman Keith Wetmore. MoFo will also use the event to entertain clients, he said, and has run its own series of internal Nintendo Wii competitions “to keep the games in the forefront of the minds of our personnel.”

It seems like this could be a boon to the firm. After all, MoFo, while it has had a China presence, has had a hard time trying to distinguish itself against other firms that are out there like Paul Hastings, which is one big fish in China. Even friends who were at MoFo have admitted that MoFo’s China practice, while growing, is not a top tier practice there… yet. Given that the Olympics has been such a big deal, this is great PR for the firm.

And while Olympic IP includes cute cartoon mascots, Crabb says the government took trademark matters very seriously. The city of Beijing and then the national government enacted laws protecting the Olympic symbols and followed up with strong enforcement, Crabb said.

“I listened to my client give a talk, and during his talk he said in 2007 there were 450 cases of enforcement,” Crabb said. “By April of this year, there were already 500 cases.”

Ah yes, it wouldn’t be the Olympics without the Fuwa, or in English, the “Friendlies”. (of which I note that only one of them is even recognizable as a Panda–Jingjing) China takes these little guys and gals very seriously. And while a little annoying at first, they can even grow on you over time. (scary)

I was actually shocked at the lack of piracy of Olympics goods while I was there since I wanted to find some cheap T-shirts for my friends’ children. Nada around where I was in Beijing, Shanghai, Hangzhou. So I applaud MoFo and the Chinese government for their vigilance in protecting the IP regarding the Fuwa. I can only hope that the government will realize that this sort of vigilance toward other IP is just as useful as well.

I don’t know about you, but I will be enjoying the games myself.  Hopefully they won’t interfere with posting too much…