Applying a Chinese Approach when coming to China. This article is the first of a series printed in San Francisco in 2004

 This Article first appeared in the April 14, 04 issue of The Recorder.
       "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, contented and almost smug. The Hong Kong based Asia VP 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. A potential client approaches us to ensure their business plans; 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--but we are attorneys from California and are used to being manhandled. We nod and smile, exchanging business cards and promising 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 them the profitability of working in a predictable context. This also allows the US based customers willing to engage directly here two benefits. One is the substantial cost savings of avoiding the 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 one never noticed before.
        Now, 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 being given 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 to 4 Million USD worth of product out of Southern China each month, so there is a substantial bit of money on the table flowing to the 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 ten 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 gentlemen running that operation here went to 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 on the costs of not recognizing a Chinese way of doing business. They are a United States based firm with a simple consumer electronic product they wanted to manufacture here. It was not even a high tech situation, which would require more caution. The patent had been secured some year or so earlier, the market analysis looked good and they really just needed a manufacturer. If they played their cards right, they might even make the Christmas season early. They did what many of us would. They hired someone they 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, headed for Hong Kong and hired an attorney and a manufacturing company, as he was directed to do.
       They 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. For 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 impact their 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 their position long-term, the Hong Kong manufacturing company hired counsel in China to file a Chinese patent. The idea here was to prevent the US client from backing out of the deal, for 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 fourteen months of hourly-billed work we are very close to a final resolution that will allow this United States Company to reacquire all their intellectual property and drive forward to production. But the transaction leaves a bad taste, for use and our client.
       That negative feeling, that distrust is one of the primary goals we set to eliminate by moving here 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 it needs to 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 United States timeline. There is one major stumbling block to the creation of that compressed timeline. It is not at all clear what is inside or outside the law at any given moment. It is not a matter of there being no law here so much as it is that the changes are so rapid that often by the time new laws are printed those changes have been modified once 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.
       It is going to remain and continue to increase as one of the major manufacturing sites in the world. It is here to stay. But, China will be able to resist changes from the outside for the foreseeable future, so we shall have to sew together legal and cultural understanding one transaction at a time. If you are on the way here, think of it more as a voyage to the other side of the world that will have challenges but ultimately be rewarding---and less of a mega huge market and cheap place to do business. It can provide both benefits, but can also send you packing and licking your wounds wondering what happened. It depends on the time commitments made at the start.