Going to War with your Chinese Supplier and 4 Ways to Prevent it

Todays post is an aggregation of two post I read last week that work well together:

1st Post
Last week I read an article on China Law Blog about a worrying trend that they are witnessing:
-In the past, when a Chinese factory provided bad product, they would usually admit it, and blame it on either a subcontractor or a supplier.
-Now they deny it and threaten to sue you if you do not pay whatever is still “owed”.

The explanation for current quality problems is the economic downturn and the fact that factories need to cut costs relying on lower quality components. But the key point in the article is the strategy shift on how to deal with serious quality problems with your Chinese supplier: (Read the full article here)

Today, the tactic is to threaten to prevent the American company from “ever doing business in China again” or, more specifically, to seize the American company’s product at the border. We take these threats very seriously and they have altered our approach to these sorts of cases.

In the past, if an American company was seeking $200,000 in damages from a Chinese company for bad product, we would most of the time seek to dissuade them from even bothering to pursue litigation. []

But the strategy changes if the Chinese company threatens to close you down. We have dealt with cases where US companies were unable to buy from any Chinese supplier without paying 100% upfront because their alleged failure to pay had caused China’s export insurance agency to refuse to insure payments from the US company. We have also dealt with way more than our share of cases where someone or something from our client was held hostage in China to secure payment.

If a US company is facing the situation above, our advise is that they sue the Chinese company somewhere, usually in the United States. Being able to show the Chinese insurance company, the Chinese police, or the Chinese border patrol agents, that you have sued can be invaluable. Your complaint against the Chinese company shows that the situation is not as simple as the Chinese company is making it out to be. Your complaint shows that the Chinese company is not necessarily owed anything at all and that you are not clearly someone who does not pay your debts.

Of course, if your company has no intention of continuing to do business with China and your personnel will not be going there again, then the best strategy probably would be to just walk away, just as in the old days.

2nd Post

When I read the article I left a comment with what I thought was the best (and obvious) advice you can give to anybody sourcing from China: “Quality Control ALWAYS, even with good suppliers”

And right afterwards, I read another article at the Quality Inspections Tips blog entitled “The 4 ways of checking product quality before shipment”. As preventing a problem is always better than having to fix it, I thought this post was a good extension to what we have previously read.

These are the 4 ways Renaud Anjouran describes in his blog (you can read his complete post here)

1.Inspections by external inspector(s) in the factory
Pros:
The final random inspection is the “standard” way of checking quality. Suppliers are used to it.
It is easy to set up and relatively inexpensive, even with many different suppliers in many different places.

Cons:
The supplier might interfere in several ways: only showing a part of production (usually because they are late), bribing the inspector, or shipping other products if the inspector does not stay until the container is sealed.
If the purchaser only sends an inspector after production is over, and if the inspection is failed, the supplier might refuse to rework the goods. He might wait until the purchaser is obliged to deliver his own customers’ orders.

2.Final inspections on a platform
This solution is popular with some large buyers.
Pros:
Inspectors are more productive (no need to travel), and the goods can be shipped immediately after acceptance.
No risk of supplier interference.

Cons:
Suppliers often resent this solution. If the inspection is failed, they have to pay for the transport back to the factory, sort & re-work the goods, and submit them again.
Not suitable for small and irregular volumes.

3.Piece-by-piece inspection in the factory -If you want to check 100% of production
Pros:
The defect rate in the shipment is very close to zero after this 100% check.
The manufacturer sees what is rejected and needs to re-work it.

Cons:
Suitable only for large and regular volumes in one geographical area.
Can be expensive, depending on the number of inspectors to station in the factory

4.Training & auditing internal inspector(s) in the factory
Pros:
Much lower cost than sending third-party inspectors
In addition to controlling the products’ quality, the inspector can report on production status

Cons:
You need a high level of cooperation from the manufacturer (no interference at all)
There might be many complications if you purchase through a trading company

What is your experience? Is it getting tougher to negotiate quality problems with your suppliers? Do you always check quality before shipment?

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China Business Environment 2011-2012

I have received an email from a subscriber who attended AmCham Shanghai presentation of its 2011-2012 China Business Report (315 US-based companies with operations in China surveyed). I share bellow what he felt were the main conclusions from the presentation but first I would like to thank him for taking the time to share this information:

 

1 China is a highly profitable market for those with a long term investment in it. 

I thought the profitability number (78 percent vs 79 percent last year) was rather high, but then looked at the length of time the survey respondents had had a physical presence in China – 80 percent of the companies surveyed have been in China for more than five years, 10 percent have over 20 years’ experience and only two percent of respondents have been in China for less than two years.

 

2 China is a maturing market.

Legal and regulatory challenges (those which are usually unique to China, in one way or another) are a constant. So progress on this is not being made (bad). But, the challenges US companies are more worried about now are “normal” business challenges – rising costs, scarce talent, growing local competition coming from the private sector.

China has become an essential market for multinationals, going beyond a mere supportive role for companies’ worldwide operations. In 2011, 66 percent of the companies report their revenue growth in China exceeded that of their operations worldwide.

 

3 In China for China

US companies are meeting these challenges by localising their China operations, and are increasingly focused on the domestic market – “in China for China”.

Some key figures to back this statement:

  • 58 percent of the companies produce goods or services for China as their primary strategy
  • 71 percent of companies sell and support products and services uniquely designed for the China market
  • 90 percent have expanded their operational footprints in China to include sales offices and research and development centers (R&D), in multiple locations outside Shanghai
  • 80 percent report “high” or “moderate” priority for staff localization
  • 61 percent report “high” or “moderate” priority for manufacturing localization

 

4 US companies in China are driving US exports

  • 62 percent of the companies report they import parts or finished goods from the U.S. into China
  • U.S. exports make up 32 percent of their China sales by value.

 

5 Short term optimism for China

Confidence is still relatively high. There is no evidence, from the survey outcomes, that US companies feel exposed to risks that have been talked about lately like those related to the housing market, the financial sector or to China’s reliance on exports to Europe.

What are your views?

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China Automotive (Autoparts) Industry: “To Be or Not To Be” In China … And 5 Reasons To Be

I have had two chances to explore the autoparts industry in China. The first time was while I was working a foreign government agency promoting investment and trade into China. Then again a year ago, when I met and interviewed Mr. P. M. García Sola, Project Manager China at Kunshan Inautek Automotive Components Co. Ltd. His company is a WFOE that manufactures and sells auto components in China.

These two interactions gave me an opportunity to experience the “to be or not to be in China” dilemma.

When I was working with the foreign government agency, I was shocked to see how difficult it was to convince autoparts companies to participate in the Shanghai Auto Show. The main reason seemed to be the IP risks involved. Companies feared being copied. And not just companies, part of the problem was also that a lot of people in our organisation were so afraid of the IP risks involved in a China operation that they were not too motivated to promote attendance.

When I met Mr. Garcia Sola last year, I experienced a completely different story. He was in the process of setting up a China factory, and he obviously had strong views about the fact that you must set up in China if you are a strong player in this industry. These were his reason not to miss out on this opportunity:

The obvious reasons that make China a “must be there” market for strong players in the automotive / autoparts business:

1.China is currently the largest automobile manufacturer in the world.
If you have an international commitment, there are a few markets you will be considering (due to cost competitiveness): China, Brazil, Mexico (serving the US market) and India. Sometimes we talk about North Africa, we have been talking about North Africa for the last twenty years, but it is still very unstable. China is by far the largest automotive industry by volume.

2.China is a fast growing market for the automotive industry, and it will continue growing.
There is still room for growth in this market due to:

– an increasing number of families that can afford to buy a car (the expanding middle class)

– the potential for road and highway infrastructures to expand

3.All top foreign car makers operate in China.
As an already well-established supplier for car makers we already have a competitive advantage versus other suppliers

4.Cars manufactured in China are sold mostly in the domestic market.
So I would read that as potential for incremental sales for foreign autopart companies that settle here.

And his reason to overcome IP fears:

5.Copying your IP is easy, stealing your clients in the automotive industry is not.
In the automotive industry, they may copy you in the customer service area / market (replacement parts). But automotive companies are extremely careful about who their suppliers are. A lot of companies manufacture and sell our same product, but in China there would be a maximum of two companies that would meet similar standards to ours. You need strict quality control processes and standards that not everybody can match. It is too risky for automakers to switch to the local companies that may copy you. I remember being told a story about a foreign company producing windmills. They were copied but when the moment to start arrived, it just did not work. That was the best marketing campaign for them.

What are your views?

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Top Legal / Regulatory Challenges in China

As I mentioned in one of my previous posts, AmCham Shanghai has released its 2011-2012 China Business Report, a detailed and comprehensive report that covers major issues companies face in China. Today I will focus on legal/regulatory challenges, as perceived by AmCham survey respondents (315 US-based companies with operations in China).

The report reminds us that China is not an easy place for business, and one of the reasons is the fact that the country’s legal framework is still in the process of being built. Even if the law is fully developed, the application and enforcement can be uneven, especially in areas outside Tier 1 cities (Shanghai, Beijing and Guangzhou). Bellow you may find the key legal/regulatory challenges identified ( % indicates that a challenge “seriously hinders” or “somehow hinders” business).

Key legal/regulatory challenges in China

1.Bureaucracy (74%)

2.Unclear regulatory environment (72%)

3.Lack of government transparency (67%)

4.Tax administration (66%)

5.Customs clearance delays (62%)

6.Customs and trade regulations (61%)

7.Difficulty enforcing contract terms (61%)

8.Obtaining required licenses (58%)

9.Difficulty in litigation (50%)

10.Domestic protectionism (between provinces) (49%)

11.Legal restrictions on market access (49%)

The list is topped by the same challenges we have seen in last year´s reports: bureaucracy, an unclear regulatory environment and a lack of government transparency. It is important to highlight that 71 percent of respondents say the regulatory environment in their industry has either “not changed” or “deteriorated” over the past year.

Responses to legal/regulatory challenges vary by industry but the less affected one seems to be the auto industries. As a well established industry in China( and a welcomed one) it does not so much perceive regulatory challenges as a major issue (it scores lower than any other on the question about challenges seriously hindering their business).

 Are these also your regulatory challenges?

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10 Tips for Doing Business in China

Anne-Laure Monfret, author of “Saving Face in China: A First-Hand Guide For Any Traveler To China” published last month an article entitled “10 tips for doing business in China” at That´s Shanghai.
I reproduce here the ones that I´ve often heard from business people with substantial China experience:

3. Resist the temptation to jump in if your Chinese counterpart remains silent.
Silence is the true friend that never betrays.

4. Make an effort to speak a little bit of Chinese.
Learn to use and understand the basic Chinese survival vocabulary.

She also includes the following tips under “speaking a bit of Chinese”:
a) Don’t say an abrupt “no” to your Chinese staff or counterpart, but instead say “I will consider it.”

b) Usually understand “mei wenti, no problem” is “you wenti, there is a problem,” and “yes” is “yes, you are the boss,” not necessarily “yes, I agree with you.”

c) If you don’t want to say “yes” or “no,” which may cause a loss of face, simply answer “maybe.”

d) Make sure that what you say is not completely misunderstood: state, ask your listener to restate, ask information questions rather than yes-no questions, confirm, clarify, check.

e) Try to understand everything. It’s just impossible. Accept that sometimes there are things you cannot explain. Instead, just move on and keep your eye on the ball.

I would personally group them under “Effective Communication” rather than speaking Chinese, as it is all about what your Chinese contact really means and about the potential cultural inadequacy of some of our own comments/reactions.

6. Adopt a positive attitude.

7. Spend time giving face. You can be sure it will be returned one day.

9. Don’t think for a minute you can do it all by yourself.

10. Make your negative remarks and comments in private, one-to-one, discreetly, not publicly, behind the scenes, internally, away from eyes and ears, when there’s no one around… have I emphasized that enough?
This is the number one rule in China!

You may read the rest of her tips here.

Would you like to add yours?


 

A Joint Venture Survival Guide. 22 Facts and 22 Practical Tips- (3 posts compiled)

The following post compiles the complete “A Joint Venture Survival Guide” series. I´ve compiled it to help sharebility & bookmarking. If you had not read them before, I recommend it as it has got really good reviews. I hope you find it  useful.

Joint Ventures (J-V) in China can go well, and can also go very wrong. When the latter is the case, problems come up from where you less expect them. “Mike Smith” (not his real name) spent two years in rural China supervising his employer’s interest in a Chinese joint venture where they were the majority partner (deal signed before he landed there). His case falls within the second category I’ve mentioned (I would in fact say that all that could go wrong went wrong) but that has given him invaluable lessons on how to ensure things are done right. He has also met on the way a number of joint-ventures facing quite similar challenges to the ones he experienced.

We met to talk about his time representing the foreign partner and I’ve drafted “A Joint-Venture Survival Guide” based on his experiences, opinions, tips and comments (which means some of these tips will only apply only to manufacturing joint-ventures). 

Some introductory thoughts

1. China is a noble and good society… but when it comes to doing business, the value system changes. Ripping off a foreigner may be seen as a clever thing rather than a bad one.

2. Beijing, Shanghai and Guangzhou are in a universe of their own. Drive just 100 km away into central China and reality changes. It is a hardship environment and corruption is readily encountered.

3. You may have successfully set up joint-ventures and businesses in other countries. Do not assume China is going to be the same. You are lost without an expert if you are going to deal with a local partner.
“My company had successfully set up J-Vs across the world, and nowhere did they face the situations they faced here. They assumed they knew it all, and that was a big mistake”.

The Essentials”
4. The foundations for your success will be laid before you sign the deal.
Preliminary work is essential, and I cannot stress this enough. Once you have signed you are helpless. And later on, once your million dollars are in China, you will not be able to get them out unless you exit the J-V. There is plenty of room for disaster so make sure you dig into every single hole to figure out where the problems may be.
! Tip: This is the time to get as much information as you need. You need to be able to access all books, information about operational manual, … You may hear the somewhat overused sentence “What is the problem? Don´t you trust me?”. Well it is not about trust, it is about business, and companies that have nothing to hide will share the information with you. 

5.Confidentiality and know-how protection will be difficult in a small cities. All the legal issues about this will be judged in the city in which it happens, which means that if you have a company in Shanghai and someone “copies” your product in Ningxia, the legal procedure will be carried out in Ningxia so you will be dealing with all the difficulties of operating in a place that is not a j-v business hub.
! Tip: We are a European SME. If that is also your case you canhave free brief advice from the European Chambers of Commerce. Also a free advice for intellectual property, copy right, etc in China IPR SME Helpdesk

6. A GOOD consultant/advisor: Priceless.
You need real in-depth expertise to pull this one off successfully:
! Tip: “J-V conflict resolution and dissolution in China is really complicated compared to other countries. Consultant/Advisor companies have an instinct for knowing the real situation” 

7.[On consultants] … But find the one suited to your size
“The reality on the ground for SMEs is quite different to that of MNCs. We don’t have their leverage and muscle power and we deal with different issues/situations. It is essential to get on board a very good consultant but I wouldn’t recommend one of the big ones. I think they are better suited for big companies.”
! Tip: MNCs are often interested in high tech, setting up R + D centres, the pharmaceutical industry, medical issues and they will find some decent protection from the Local Government. In the case of SMEs that do business outside big business hubs, protection will be very difficult to guarantee and there will be unimaginable issues unless they hire the right consultant/advisor. And believe me, consultant/advisor big names will not help you to find the back door of your J-V.

8. Sign the right “pre-nup”
You obviously don’t want your relationship to go wrong, but if things happen you need to have put in place the right “break-up” conditions.
! Tip: Always use the Chinese or Hong Kong Arbitration Court. Most companies feel more comfortable with international arbitration, but what do you do when your Chinese partner doesn’t show up or doesn’t comply with the resolution? It needs to be done in China or Hong Kong where the resolution will be mandatory and enforceable.

9. Your Potential Partner is Well Connected … Maybe Good, Maybe Bad
Experience: It is quite common to be taken on the “big tour”, introduced to the city mayor, the bank’s president, and all sorts of top-end contacts. Your partner will put especial effort into making a great impression and showing you how easy doing business in China is going to be if you deal with him.
! Tip: Do not be dazzled by your partner’s connections …They will not necessarily be used for your benefit.
The fact that your partner is well connected is good (you obviously don’t want to end up with a nobody), but it is also a fact that at times those connections are only used for their own benefit.

10. Financial Reports: “I can’t live with or without you”
Financial reports: you need them, if only because when things go wrong you will be the first one fired if you did not order a financial report. But just be aware that reports can easily be falsified, and a lot of relevant information may be missing.
Experience: I will not get into too much detail but let’s say that I have even seen the falsifying process in action. Do not believe everything you read, and be aware that there will be facts/realities that are not reflected in those reports.
! Tip: There are things you will only get the feel for if you base yourself at your potential clients´ workplace. My recommendation would be to place your trusted person (who by the way should be China-knowledgeable and understand what he/she is looking for) at the company´s site . You need to see how the factory works, how many workers there are, their accounting, their stock control ….

11. Tax Planning: “Tax Breaks. Do not believe all you hear”.
While you are negotiating the joint venture you will be promised a lot of benefits. Tax breaks are a common tool to lure you into a location that needs to be developed. A lot of companies start operations in a location partly because they have been offered corporate income tax exemptions or reduced/zero import/export duties. It is also common to find that the day you to try to apply for them, you are told that the central government has changed the regulation and they can no longer grant you the benefits they promised.
Experience: We were promised tax exemptions on all those tools and parts required for our product manufacturing. It did not happen. Not even once.
! Tip: As mentioned in tip number 5 , it is essential to get the support of a good consultancy firm. Your investment should also make sense regardless of the tax exemptions or other promised benefits.

12. Let me guess: your Chinese partner wants to contribute the land to the joint venture.
Experience: The Chinese partner always wants to contribute his own properties to the J-V. But, can he give you actual proof of the real land value? These are common situations to encounter:
– The real value of the land, does not correspond to what your partner is claiming.
– The audited value presented and paid by your Chinese partner has been (easily) falsified.
– All sorts of excuses to justify the absence of a purchase document stating the real value they paid: “Government does not give invoices. We got a good deal …” . Do not fall for them.
In our case, we got an independent valuation of the land. It was worth 30% less than what our partner claimed.
! Tip: Do not fall for excuses. A land purchase should be properly documented. Beware if is not.

Experience: We wanted to buy land for the JVC. Our Chinese partner finally presented what he deemed was the best possible location and the required size(we felt it was too big). The land value would be considered capital contribution by the partner. He presented an alleged Government document stating the land value. The document had no seal so we suspected something was wrong and requested an independent valuation. The land value estimation was 200,000 € cheaper than the value presented by our partner. Our company´s President trusted the partner so they decided to take his word on this (by that time MD was already suspicious about the partner). The land was purchased, the invoice was never seen. He showed us an ownership title and the land became his capital contribution. Later on I managed to located the real purchase documents and the deal had been sealed at a 400,000€ cheaper prize.

13. Does your land have a license to have a factory built on it?
You need to watch out for this one. Chinese companies often ignore this step. You may find sizeable companies operating (100 employees, tax bureau number, social security …) without the license to legally operate a factory/company on their land
. That may not be a problem while you stay together (they will surely have their ways to ensure there are no problems). But in the event of a split you may face one of these two situations:
– You want to sell it but you can’t because there is no licence
for the construction done.
– You want to operate it alone, but being a foreign company you will find the government inspection at your doorstep day one. And they will close it due to lack of permits.
! Tip: Make sure you know all the licenses the business needs to operate legally. If your partner claims to have the license for that land already, you need to see it. If licenses are pending have your expert/consultant involved in that matter.

14. Building the Factory- Oh Nightmare
This is another potential source of conflict. You will probably trust your partner to lead the factory construction works.
Experience: “…a workshop building would not progress and when I inquired I would get “We have run out of money”. Digging into the contracts details I would find a lot of irregularities like missing contracts, unsigned contracts …”
! Tip: “If your project involves building a factory, I would recommend to budget for 15% to 20% extra cost vs. agreed amounts. Timewise, I would build in an extra 40% as a buffer. Penalties should be included and quantified in your contract. And as mentioned before, always use the China or Hong Kong Arbitration Court”.

15. Check Company Operational Manuals.
Very often there is nothing written on how operations should function. When you land there and try to organise things you do not even know where to start. And what is worse, your Chinese partner is not interested in changing anything as he feels it has been working for him for years before you arrived.
! Tip: The trusted person I advise before to place in your prospective partner´s operation should check out the operational manuals and whether the company works in compliance with them. If there are no manuals in place, you should request them to record their existing processes so that you can discuss them and negotiate before the deal signature. 

16. Money Hole #1: Company employees & Social Security.
There are a couple of “black holes” that are often used to suck your money away: the stated number of employees in the company and the payments to social security. You need to get two proofs here:
– Proof of the total number of employees in the company
– Proof that they are paying Social Security for
those employees.
Do not accept their word for this.
E
xperience: Our partner kept swearing that the company had 74 employees. My calculation was that there were no more than 50 employees in the company. I asked them to prove their claim but there were no contracts to be seen. When I asked for the bank transactions to assess the amount of money we were investing in overheads I was told it was paid in cash. When I asked for the receipts signed by the employees they said there were none.
I was not alone in this situation. I encountered other companies facing exactly the same challenge.
! Tip: You need to check this when you are negotiating and you still have bargaining power. If you discover this when you have already invested several million dollars you will be helpless. Do not accept their word on this. In China they file Social Security online. They have a website where they can access, through their company name and password, all their social security, accounting and fiscal (tax) data. Request to have access to this while still negotiating.

17. Money Holes #2: Stock Control
Companies often do not have good stock control in place and this is another big “black hole” your money will slip through.
Experience: You are told they bought 10 units of a product and they just purchased 5. When you try to investigate in detail they tell you there are not stock control systems in place, or the switch off the computer, or they tell you it does not work …
! Tip: Make sure you have access to all the policies and procedures manuals before you sign a deal. And once you have access, make sure you assess whether the policies and procedures are really happening or not. It is also quite possible that they do not even exist
The people from the purchase department should be “your people”. If that does not sound possible it is better to create the department from scratch and hire a local purchase manager of your choice, that you can trust, to ensure proper control.

18. Money Hole #3: Accounting
How many accounting books is your partner keeping? Make sure you keep a tight accounting process.

Experience: I always used to work late. One evening I happened to walk through the accounting department and somebody had forgotten to lock away the accounting books. To my surprise, the number of accounting books was higher than what I thought our company was keeping. I did not need to be too smart to figure out what was happening. Our partner was using fake purchase orders to divert money into his own personal accounts. Our accounting team was also keeping the books for his own company, which by the way was not supposed to exist any longer but should have merged into the J-V.
! Tip: Make sure you have unrestricted access to all cabinets and locations where information is stored.
!
!Tip: Keep a very strict monitoring of the accounting. All expenses must come with proof of purchase,authorised and signed by you or your team.Fa piao (we could translatefa piao as “super-receipts – receipts that are hand-stamped and recognised for tax and other purposes)”
are difficult to audit as they usually come without a description of the expense.
!!!Tip: Develop a good relationship with the CFO
!!!!Tip: Purchases should come with double signature (CFO and your representative) on set days (probably not necessary more than three times a week as purchases are planned in advance)

Other things that could go wrong
19. Technology Transfer – IP Risks
A fact you should be clear about is that your partner is likely to end up copying your technology.
Experience: Our target market was China, so our J-V was supposed to manufacture a product more sophisticated than the existing competition in China but not as technologically advanced as our products in Europe. In order to do that, we needed to transfer some know-how to our Chinese partner. I strongly suggested against it but at that time, it would have been equivalent to giving up the project and I still did not have physical evidence of what was going on.
My fears were soon proved right and I caught them copying our electronic cards … And later on I found out about them copying machinery and tooling.
!Tip: Well, you have no way to control it. Fingers crossed and good luck (do not forget we are talking “deep China” and not main business hubs). If all steps have been taken correctly things are more likely to go better.

Most business people I´ve met in China share a view that the new generation of Chinese business people who have studied abroad understand how to do business for the long term rather than for immediate and dishonest gain.

20. Company Seal- Always with You.
In China documents can be signed and stamped with the company seal. Back home contracts would not be valid unless you have signed them. Here the company seal is enough to make a contract valid … so
!Tip: Never leave your Legal Representative seal with somebody else. If you absolutely need to, be sure you can trust that person 100% as that seal is equivalent to your own signature.

21. Be ready to test your endurance
Experience: My Chinese partner was responsible for my house utilities. Once I was left without power for several days, another time I had no running water for three days. I also got internet connection discontinued.
People around me also suffered. I went through three finance managers who left the company shortly after I hired them. I remember the case of one of them who would systematically arrive at the canteen to be told there was no food for him. These are highly paid professionals who have no interest in going through that hell when they can have a nice well paid job somewhere else.
!Tip: I think when you have reached this stage, things are going really bad. In this case, it could be safest to control your house contract and utilities directly (probably through somebody you trust).

22. Beware of direct communication between your partner and your headquarters.
When you start proving to be a “damned nuisance” in your partner’s life he may try to get rid of you in different ways. He may contact your headquarters and try to make you look like inept or make them believe you complicate your life (and everybody else´s) with non-existent problems and issues.
Experience: In my case the Chinese partner kept calling my company’s president and emailing the board of directors in order to undermine their trust in me. I was very lucky because in the end I managed to get access to all sort of documents that proved we were being ripped off. But I’ve later on met other people who lost their positions due to pressure from the Chinese partner.
!Tip: Invest in “Educating your Headquarters” before you start operating in China. Headquarters don’t like to hear bad news. And some of the stories you will tell them are so unbelievable that they may end up thinking you have gone China-mad.

So what are your tips and experiences in Chinese joint ventures? You can leave a comment or contact me to share it in a longer form!

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Top Business Challenges for Foreign Companies in China (2011-2012)

AmCham Shanghai has released its 2011-2012 China Business Report. The report insights are based on a survey conducted amongst some of its corporate members ( 315 US-based companies with operations in China participated in it).
I will share some of their key findings in the next few posts. Today I will focus on business challenges and highlight some news.

Key Business Challenges in China (%) (*)

  1. Rising Costs   (91%)

  2. Human Resource Constraints    (90%)

  3. Increasing Competition    (83%)

  4. Lack of Market Maturity    (73%)

  5. Corruption/Fraud   (61%)

  6. IP Infringements      (54%)

  7. Unfair procurement practices   (54%)

  8. Preference for Domestic Companies   (53%)

  9. Labour Unrest (e.g., from restructuring)  (37%)

  10. Lack of Infrastructures    (36%)

  11. Business Disputes    (27%)

 (*) % that answered that a challenge “seriously hinders” or “somehow hinders” their business

 It is difficult to compare these results to last year´s results because this time the challenges have been divided into regulatory/legal and business challenges while last year they were presented in a common list. Still there is something that clearly stands out: “Rising Costs”. Not mentioned last year in the top 10 challenges it makes now a strong appearance at the top of the list.

 Some of the biggest challenges presented last year (bureaucracy, unclear regulatory environment, lack of transparency) are still perceived as important issues and top the list of regulatory/legal challenges.

Coming soon, more on China challenges.

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Arbitrating your China Disputes

via Wikimedia Commons

China Law Blog published this month a series of three posts about “Arbitrating your China disputes”, by China arbitration expert Dr. Clarisse von Wunschheim. The posts discuss the current debate about where to arbitrate your China disputes, with two main schools of thought:
-Arbitration in China: in order to improve your chances of enforcement
-Arbitration outside China:in order to improve your chances of winning.

This is a summary of some key points in her posts: (but I recommend you read this very interesting series: post I, post II and post III)
-On the two schools of thought, Dr. Wunschheim believes that both of these approaches miss the point, and that the question of where to arbitrate is intimately linked to the parties’ expectations and needs and should therefore depend on a series of case-specific factors.

-Some legal context:
a) Under Chinese law only parties to a ‘foreign-related contract’ may choose a foreign dispute resolution forum.
b) For a case to be considered foreign-related, at least one of the parties involved must be of foreign nationality.
!! Foreign companies too often overlook the fact that their Chinese subsidiaries, including joint ventures or wholly owned entities, are considered to be Chinese entities established under Chinese law.
c) Under most modern arbitration laws, the law applicable to the arbitration clause is the law chosen by the parties (in the absence of an explicit choice, it is the law of the place of arbitration)
!! But, Dr Wunschheim states that enforcement of a foreign award rendered based on an arbitration agreement which disregards the forum selection restrictions runs a serious risk of being refused enforcement.

-So, what to do?
Dr Wunschheim does not believe this means you should refrain from entering into such arbitration agreements. She states that the key questions are: ‘What do the Parties want?’, and then ‘Which option is more likely to give them that?
She believes that lawyers focus too much on enforcement issues.
Studies show that in most cases, there is no need to resort to enforcement. The same seems to apply in China, where less than 10%of the total volume of arbitration cases are believed to result in enforcement proceedings.
There are a lot of other positive ‘endings’ to arbitration than enforcement, including amongst others:
-Amicable settlement before rendering of an award, (25% according to Queen Mary/PWC Survey 2008- and, with regard to China, 20-30% CIETACandBAC reports);
-Voluntary compliance with the award (50%, according toQueen Mary/PWCSurvey 2008 , and ‘high’ with regard to China according toCIETAC’s Secretary General);

Various studies conducted in recent years reveal that the parties firstly seek a fair and neutral process entitling them to resolve their dispute in a way that is acceptable to both of them. Sometimes, the parties just want a decision on a dispute:
-In order to move forward, and the expression of this dispute in monetary terms is more a ‘tool’ rather than an aim in itself
-A determination of the facts and liability for insurance or other similar purposes
-To create a basis for renegotiation of their business arrangements

So, it seems the expert feels there is no right or wrong.And I will finish with Dr. Wunschheim initial statement: the question of where to arbitrate is intimately linked to the parties’ expectations and needs and should therefore depend on a series of case-specific factors.

 What are your views?

 

 

Chinese Negotiation: 4 Tips to Succeed in “Times of Silence”

By Matthias M. via Wikimedia Commons

Have you ever been in a Chinese negotiation where suddenly everybody goes silent? It is not uncommon and it does not happen by chance.

One of my interviewees, an expat who had gone through a substantial amount of negotiation while setting up a manufacturing plant, observed on the topic of Chinese negotiations:

“Silence plays a very important role in negotiation. Our Chinese business contacts know we tend to feel very uncomfortable with silence. We become uneasy. Hence they use silence during negotiations to strengthen their position”

This conversation came back to my mind recently while I was reading a newspaper article about recruitment tips “Listening skills a winner for job hunters” (Waikato Times, Saturday January 14, 2012) based on insights by Jeffrey Kurdisch in the Washington Post.

One of the tips in the article reflects that very same comment. I reproduce it here because it is as valid for job hunting as it is for negotiation and life in general:

“Be comfortable with silence
Several recruiters have told me they use silence as a tactic to see how job-seekers respond. Negotiations research suggests that people who are uncomfortable with silence tend to share information that may put them at a competitive disadvantage. Savvy job seekers accept silence during a conversation and are careful not to talk about things that will reduce their employability. They also use silence moments as an opportunity to check on their own non-verbal communication (sit up straight, project self-confidence, no distracting mannerisms). If you feel the need to break the silence, try asking questions.”

Silence is also used in a range of situations in which you need the other part to open up and share information. One of my relatives, who was a marriage counsellor till retirement, says “we often used silence during a counselling session to allow people the time and the opportunity to share things that they needed to bring out”.

So, silence is widely used to bring information out. And, in a business negotiation, information is power. So be aware of your reactions to silence and follow in your own negotiations the advice Mr Kurdisch was giving to job hunters- that we could translate here into negotiation tips:

Tip#1. Be comfortable with silence

Tip#2. Do not feel pressured by silence into talking about things that will put you at a competitive disadvantage

Tip#3. Use silent time to review your negotiation strategy/tactics

-Tip#4. Break the silence with questions, if you feel the need to talk (this way you will not give away information)

By the way, my interviewee was very relaxed about silence. His tip was aligned with the ones specialists suggest: “Just take silence as a brief break in your negotiation. Take that time for reflection and thinking about how the negotiation is going and how to take it forward”

What do you think? Have you ever faced a silent room in your Chinese negotiations?

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Related Posts:
36 Tips on How to Deal or Negotiate with your Chinese Suppliers
Sourcing from China: Who are the Happy Buyers?

A China Joint Venture Survival Guide. 22 Facts and 22 Practical Tips (III)

This is the third post of the series entitled “A China Joint Venture Survival Guide” based on Mike Smith’s experiences as his company’s representative in a Chinese joint venture. If you have not read our previous posts you can read them here:
A China Joint-Venture Survival Guide (I)
A China Joint-Venture Survival Guide (II)

A Joint-Venture Survival Guide (III).(Tips 16-22)

“Watch Out for the Money Holes”
16. Money Hole #1: Company employees & Social Security.
There are a couple of “black holes” that are often used to suck your money away: the stated number of employees in the company and the payments to social security. You need to get two proofs here:
– Proof of the total number of employees in the company
– Proof that they are paying Social Security forthose employees.
Do not accept their word for this.
Experience: Our partner kept swearing that the company had 74 employees. My calculation was that there were no more than 50 employees in the company. I asked them to prove their claim but there were no contracts to be seen. When I asked for the bank transactions to assess the amount of money we were investing in overheads I was told it was paid in cash. When I asked for the receipts signed by the employees they said there were none.
I was not alone in this situation. I encountered other companies facing exactly the same challenge.
! Tip: You need to check this when you are negotiating and you still have bargaining power. If you discover this when you have already invested several million dollars you will be helpless. Do not accept their word on this. In China they file Social Security online. They have a website where they can access, through their company name and password, all their social security, accounting and fiscal (tax) data. Request to have access to this while still negotiating.

17. Money Holes #2: Stock Control
Companies often do not have good stock control in place and this is another big “black hole” your money will slip through.
Experience: You are told they bought 10 units of a product and they just purchased 5. When you try to investigate in detail they tell you there are not stock control systems in place, or the switch off the computer, or they tell you it does not work …
! Tip: Make sure you have access to all the policies and procedures manuals before you sign a deal. And once you have access, make sure you assess whether the policies and procedures are really happening or not. It is also quite possible that they do not even exist
The people from the purchase department should be “your people”. If that does not sound possible it is better to create the department from scratch and hire a local purchase manager of your choice, that you can trust, to ensure proper control.

18. Money Hole #3: Accounting
How many accounting books is your partner keeping? Make sure you keep a tight accounting process.
Experience: I always used to work late. One evening I happened to walk through the accounting department and somebody had forgotten to lock away the accounting books. To my surprise, the number of accounting books was higher than what I thought our company was keeping. I did not need to be too smart to figure out what was happening. Our partner was using fake purchase orders to divert money into his own personal accounts. Our accounting team was also keeping the books for his own company, which by the way was not supposed to exist any longer but should have merged into the J-V.
! Tip: Make sure you have unrestricted access to all cabinets and locations where information is stored.
!!Tip: Keep a very strict monitoring of the accounting. All expenses must come with proof of purchase,authorised and signed by you or your team.Fa piao (we could translatefa piao as “super-receipts – receipts that are hand-stamped and recognised for tax and other purposes) are difficult to audit as they usually come without a description of the expense.
!!!Tip: Develop a good relationship with the CFO
!!!!Tip: Purchases should come with double signature (CFO and your representative) on set days (probably not necessary more than three times a week as purchases are planned in advance)

Other things that could go wrong
19. Technology Transfer – IP Risks
A fact you should be clear about is that your partner is likely to end up copying your technology.
Experience: Our target market was China, so our J-V was supposed to manufacture a product more sophisticated than the existing competition in China but not as technologically advanced as our products in Europe. In order to do that, we needed to transfer some know-how to our Chinese partner. I strongly suggested against it but at that time, it would have been equivalent to giving up the project and I still did not have physical evidence of what was going on.
My fears were soon proved right and I caught them copying our electronic cards … And later on I found out about them copying machinery and tooling.
!Tip: Well, you have no way to control it. Fingers crossed and good luck (do not forget we are talking “deep China” and not main business hubs). If all steps have been taken correctly things are more likely to go better.
Most business people I´ve met in China share a view that the new generation of Chinese business people who have studied abroad understand how to do business for the long term rather than for immediate and dishonest gain.

20. Company Seal- Always with You.
In China documents can be signed and stamped with the company seal. Back home contracts would not be valid unless you have signed them. Here the company seal is enough to make a contract valid … so
!Tip: Never leave your Legal Representative seal with somebody else. If you absolutely need to, be sure you can trust that person 100% as that seal is equivalent to your own signature.

21. Be ready to test your endurance
Experience: My Chinese partner was responsible for my house utilities. Once I was left without power for several days, another time I had no running water for three days. I also got internet connection discontinued.
People around me also suffered. I went through three finance managers who left the company shortly after I hired them. I remember the case of one of them who would systematically arrive at the canteen to be told there was no food for him. These are highly paid professionals who have no interest in going through that hell when they can have a nice well paid job somewhere else.
!Tip: I think when you have reached this stage, things are going really bad. In this case, it could be safest to control your house contract and utilities directly (probably through somebody you trust).

22. Beware of direct communication between your partner and your headquarters.
When you start proving to be a “damned nuisance” in your partner’s life he may try to get rid of you in different ways. He may contact your headquarters and try to make you look like inept or make them believe you complicate your life (and everybody else´s) with non-existent problems and issues.
Experience: In my case the Chinese partner kept calling my company’s president and emailing the board of directors in order to undermine their trust in me. I was very lucky because in the end I managed to get access to all sort of documents that proved we were being ripped off. But I’ve later on met other people who lost their positions due to pressure from the Chinese partner.
!Tip: Invest in “Educating your Headquarters” before you start operating in China. Headquarters don’t like to hear bad news. And some of the stories you will tell them are so unbelievable that they may end up thinking you have gone China-mad.

So what are your tips and experiences in Chinese joint ventures? You can leave a comment or contact me to share it in a longer form!

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