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ShenZhen, China — “Yes, your idea would conform to the technical requirements of Chinese law, but we would advise against it. �” The client rose, thanked us for our time and excused himself so he could report back to the home office in Palo Alto. He was relieved, content and almost smug. The Hong Kong-based Asia vice president for a Silicon Valley high-tech company was going to be able do things in China the way he wanted and was not going to violate Chinese law. Several times a month this happens. Potential clients approach us to insure their business plans — that their choices and preferences for doing things in China are not going to run afoul of local legislation. Then our advice not to engage in a proposed course of action, even if legal, is brushed over like a day-old newspaper and we are excused. As a boutique transactional firm in Mainland China we are used to being brushed off — especially since moving out of that tall chrome and silver building last year — and as attorneys from California, we are used to being manhandled. We nod and smile, exchange business cards and promise to stay in touch in the future. A few months later the phone call comes. “Can you help us put the cat back in the bag? Our Chinese partners have stolen all our IP and filed a Chinese patent in their own names. They are now suing us for ownership of a design we gave them to manufacture for us.” In such a situation there are, of course, remedies and solutions that can be put in place. But it would have been much more cost-effective to apply a Chinese approach to a Chinese business deal in the first place. Now, why would counsel that is paid by the hour ever advocate a more cost-effective way to do business? The answer is simple. Successful clients are happy clients. The client’s life is kept much more simple and our practice remains able to focus on forward-looking solutions instead of remediation. And, in general, it is much more fun to set up and manage relationships here correctly the first time. Otherwise, resurrecting a deal can feel like untangling so much overcooked spaghetti. In a broader context, it also fosters negative feelings on both sides of the transaction. China is a rapidly developing country and is making great strides to catch up and keep up with the West, but it still has a long way to go. Only by promoting transparency in each deal and each contract are we able to show our clients the profitability of working in a predictable context. This also gives U.S.-based customers willing to engage directly here two benefits. One is the substantial cost savings of avoiding setting up an office or hiring Hong Kong-based agents. The second is that spending the time to engage the Chinese in a China-specific context opens many doors never noticed before. Of course, this takes much more time than we might be used to spending on any given situation. Price, quality and delivery terms can be agreed to easily. So, why do we need to spend so much time negotiating, talking, eating and going on tours of China when we are only here to sign a deal? I don’t know how to answer that question, but a short and true anecdote is illustrative. There is a European importer that has a staff here in China. That staff is really here just to oversee and coordinate the containers full of product on their way to Europe each month. Nothing more. Now, this company moves $2 million to $4 million worth of product out of Southern China each month, so there is a substantial bit of money on the table flowing to Chinese factories. The orders tend to be relatively stable, and the European staff in China has been here for almost 15 years. However, if that European staff is not available in the office or via cell phone for more than a week or 10 days, the Chinese factory will occasionally not fill the typical monthly order. Why? Each and every month for almost 15 years, millions of dollars have been flowing from Europe to the Chinese factories. Why would they prejudice a future position by not meeting the monthly orders? I do not know, but this is a true and repeated situation for one of our clients here. If he does not �make the rounds’ and have dinner, play golf or whatever informal social situation the Chinese factory has come to expect, then occasionally his standing orders will not be met. The European gentleman running that operation here went to a university in Beijing 20 years ago. He speaks many of the local dialects around China and has settled into a long-term life here in China. I assumed he would be able to explain in some rational way why his suppliers would act as they do, occasionally missing an order if he does not keep his informal relationships up to date. “Because they are Chinese,” he tells me. “It is not a positive or a negative or a judgment call in any way. It is just a different world, and if you want to operate here, you have to operate on Chinese terms.” Wasting a Year A client from the recent past is illustrative of the costs of not recognizing a Chinese way of doing business. It is a U.S.-based firm with a simple consumer electronics product it wanted to manufacture here. It was not even a high-tech situation, which would require more caution. The patent had been secured about a year or so earlier, the market analysis looked good, and the company really just needed a manufacturer. If it played its cards right, it might even make the Christmas season early. The company did what many of us would. It hired someone the executives knew and trusted, a former employee who was now out on his own. “You can handle this China situation for us, right?” The consultant hit the ground running; he headed for Hong Kong and hired an attorney and a manufacturing company, as he was directed to do. The company never made the Christmas market that year — or the following year. Soon after signing the contracts in Hong Kong, the client discovered that the Hong Kong attorney and manufacturing company both hired people across the border, on the mainland, to do the actual work. Because people in Hong Kong do not speak the same language as people on the mainland, and as the manufacturing was going to be in Southern China, local assistance would be required. Now, it is true that there is some synergy between Hong Kong and the Mainland, but the almost two centuries of British presence stamped a unique model on the way business is done in Hong Kong. That business is done in Cantonese not Mandarin, which is the language of the Mainland. So, the client spent six months trying to terminate the added layer of cost in Hong Kong that would affect its bottom line. Six months of attempting to wiggle out of an avoidable contract with Hong Kong agents also angered and worried the Hong Kong agents. To defend its position long term, the Hong Kong manufacturing company hired counsel in China to file a Chinese patent. The idea here was to prevent the U.S. client from backing out of the deal because the Chinese patent could be called on to shut down production on the Mainland or an attempt to take the product to another manufacturer. After 14 months of hourly billed work, we are very close to a final resolution that will allow this U.S. company to reacquire all of its intellectual property and drive forward to production. But the transaction leaves a bad taste, for us and our client. That negative feeling, that distrust, is one of the primary goals we wanted to eliminate by moving to Mainland China. There is much happening here, much more than can be properly characterized on CNBC, CNN or in any seminar on “How to do business in China.” But relationships must be handled, massaged and negotiated in a manner acceptable on this playing field, not the one in the United States. What is true in many parts of the world is especially true here. You get what you negotiate: from land costs, tax rates, expatriation of profits, security of intellectual property and consistency in product quality. All can be negotiated, but unfortunately not on a U.S. timeline. It is not at all clear what is inside or outside the law at any given moment in China. It is not a matter of there being no law here; it’s just that the changes are so rapid that often by the time new laws are printed, those changes have been modified again. However, it is possible to pin down the local, regional or national government on any of those critical issues. It is even possible to contract around possible future changes in the law. That has been an acceptable strategy here for 20 years. But it cannot be done overnight. China is one of the major manufacturing sites in the world. It is here to stay. But China is also resisting change from the outside. For that reason, we shall have to sew together legal and cultural understanding one transaction at a time. If you are on your way here, think of your experience in terms of a voyage to the other side of the world replete with challenges and rewards, rather than just a mega market and cheap place to do business. While China can provide the latter, it can also send you packing and licking your wounds, wondering what happened. Michael Sylvester is a California attorney and senior partner of Sylvester & Associates, international counselors operating exclusively out of Shenzhen in Southern China. He can be reached at [email protected] lawonline.cn.

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