Chinese negotiation strategies

1. The “Just One More Thing” Negotiating Tactic

For the last six years, China and the EU have been negotiating a new (and massive) investment/trade agreement. This week, at the last minute, China tossed out “one more thing”: the right for Chinese companies to invest as equals in EU nuclear power technology.

I learned about this when a loyal reader (and long-time Asia resident) sent me a link to an article on this, along with the suggestion that we blog about this “one more thing” negotiation tactic. Great idea.

Writing about this negotiation tactic is a great idea because our China contract lawyers see it constantly — in fact, we saw it the very same day we read this article.

In our case, a client had been negotiating an NNN Agreement to protect its intellectual property from its Chinese manufacturer, and at the last minute, the manufacturer dropped in a new provision that would essentially allow it to copy our client’s product. Yes, you read that right. Right when our client believed its manufacturer would sign the NNN agreement, they changed a few words that would have eliminated all the protections our client was aiming to implement. This is incredibly common.

2. How to Fight Back Against the “Just One More Thing Negotiating Tactic”

What should Germany do now that China dumped a massive impediment at its feet in the last stage of negotiations? What should you do when this happens to you and your company?

Many years ago, I was drafting a contract for a client who had studied Zen Buddhism and had extensive China experience. We were negotiating a deal with a Chinese company and every time the Chinese company would stall or push too hard or lie or agree to nine out of ten things one day and then three out of the same ten things the next day, my client’s response would be, “We will be the rabbit.”

According to this client, “being the rabbit” was a Zen concept of fighting back by not fighting at all, like a rabbit that goes limp when attacked by an eagle. So when the Chinese company would come back with massive changes from the day before, my client would send the Chinese company a nice email saying something like, “I understand your new position and we will be reviewing it and responding when appropriate.” And then he would do nothing. For a long, long time.

Eventually, the Chinese company would come back and accuse my client of delaying the deal and it would reiterate how everyone needed to close the deal quickly. At that point, my client would say something like, “I understand why you are in such a rush, but we are more concerned with doing the deal correctly than quickly, so if you have any ideas on how we can speed this up, please let me know.”

The Chinese company would get so frustrated it would start backtracking on its backtracking and essentially return to where it had been before it had tried to gain more ground against our client at the last minute. I got the sense the Chinese company was simply not used to a Western company displaying Zen-like patience and this threw them off their game.

I often find myself instructing clients to “be the rabbit” in the face of a counter-party’s proposed last-minute changes (which they almost always planned from the start to include). Another of our lawyers is less Zen about how to fight back against the last-minute change tactic and he advocates just telling the Chinese company in no uncertain terms that we will never do a deal with you that contains your last-minute change, end of story.

3. Stick to Your Strategy, Don’t Be in a Rush

These two tactics are essentially the same and both emphasize not backing away from your original negotiating strategy in the face of a last-minute proposal. If you do go along with the Chinese company’s last-minute proposal — either in whole or in part — you almost certainly will have just opened yourself up to one or more new last-minute proposals. “Just one more thing” becomes “and one more thing”. “And another thing”.  It’s always something.

In its negotiations with the EU, the Chinese side is undoubtedly hoping domestic political pressures will cause the EU to grudgingly accept proposed last-minute changes just to get the deal done. Germany in particular has been pushing for a deal by the end of the year, after which it will hand the EU presidency to Portugal. Germany is Europe’s biggest exporter to China.

Over the years we have published many posts offering advice on negotiating with counter-parties in China, and only a few months ago Matthew Alderson recapped a report written in 1982 by the eminent Sinologist Lucien Pye, commissioned by the U.S. Air Force, that outlined how Chinese negotiate with foreigners. Know your adversary!

In negotiating (not only with China!), it’s best to bear in mind the words of legendary negotiator Kenny Rogers, who said, “You’ve got to know when to hold ’em, know when to fold ’em, know when to walk away, know when to run.”

Listen HERE or stream on SpotifyApple PodcastsGoogle PlayAmazon MusicStitcher, or Soundcloud!

The large-scale shift to telework brought on by the COVID-19 pandemic is prompting businesses around the world to explore new avenues to engage with clients and friends. Harris Bricken is no exception, and we are happy to provide this podcast series: Global Law and Business, hosted by international attorneys Fred Rocafort and Jonathan Bench.

In Episode #36, we are joined by Lingling Zhang, a Presidential Diamond Wellness Advocate with doTERRA International LLC. We discuss:

  • Lingling’s experience moving from China to the U.S., including how she was received in the U.S. and how her decision was viewed by her Chinese colleagues.
  • The IT (information technology) industry in China vs. the U.S.
  • How Lingling’s IT experience prepared her to succeed after her significant transition away from IT and into health and wellness.
  • Why the prevalence of health and wellness companies, including those focused on essential oils and other nutraceuticals, have been increasing and will likely continue to increase.
  • The challenges of overseeing and managing a team across multiple countries and time zones.
  • How dealing with individuals across borders makes those international borders matter less and brings people together foremost as people, no matter the languages, countries, or cultures.
  • Reading, listening, and watching recommendations from:

We’ll see you next week when we sit down to discuss our reflections on 2020 and predictions for 2021 for the blog and for international law and business.

If you have comments on this episode or if you’d like to suggest topics for future episodes, please email globallawbiz [at] harrisbricken [dot] com.

And please follow Fred and Jonathan on social media to stay informed on upcoming guests and topics:

China lawyers

Night before Christmas so slow day today, so I will use it as an excuse to reminisce a bit.

In August, 2019, in what now seems like an eternity ago, in Hong Kong for International Business: Stick a Fork in It, we were — as far as I know — the first to declare the end of Hong Kong.

It seems like an eternity ago, because when we wrote this, it struck many as a revelation and it was highly controversial. We got hate comments and hate mail and we were mocked by others. My favorite was the email I got from a Hong Kong lawyer, who called me a liar, a moron, and a no-nothing and promised I would be exposed for all of these things in the next year when none of what I said would come true. Most importantly, he said that Hong Kong would always remain very much separate from the PRC and my even questioning its ability to maintain a separate legal system showed my stupidity.

If you read the comments to that post, you will have the pleasure of seeing someone call me “a piece of turd” and another person tell me that I “don’t understand anything about arbitration.” But in all fairness, the comments also reflect many who agreed and many compliments of our blog as well, with my favorite being the following: “I don’t know why it is that this blog is the one that always seems to be the one to say what everyone is thinking, but it is exactly that that puts this blog at the front of my reading list every morning. Everyone has been talking about what you say here just nobody wrote about it yet.”

Our law firm “not being so tied to China” is truly the key. We are neutral in China in terms of our business and by that I mean that we think of ourselves more as international lawyers than as China lawyers and this means that if someone comes to us to draft a manufacturing contract for China, we say sure and we put one of our international manufacturing lawyers fluent in Chinese on it. But if someone comes to us to write a manufacturing contract for Mexico, we do the same thing, but with one of our international lawyers fluent in Spanish — better yet, we put our Mexican licensed and domiciled lawyer on it.

Anyway, I think with all that has been happening with Hong Kong of late and with so many others lately proclaiming the end of Hong Kong — A Farewell to the Hong Kong I Loved in Bloomberg earlier this week — I thought now would be a good time to reprise our much earlier proclamation on Hong Kong and let everyone have a go at it, to see how well it stood up. So without further ado, here you go.

I challenge you to say “one country two systems” with a straight face.  

For the last few months I have been relentlessly asking everyone I know in Hong Kong or who used to be in Hong Kong or who at one time contemplated setting up a business in Hong Kong how what has been happening in Hong Kong has and will or would impact their doing business in Hong Kong. Based on those responses and on my own experience with how international companies operate, I foresee the following:

    1. Companies that were deciding between Hong Kong or Singapore for their Asian headquarters will choose somewhere other than Hong Kong.
    2. Growing companies with offices in Hong Kong and with offices somewhere else in Asia will increase their hiring outside Hong Kong and decrease or eliminate their hiring in Hong Kong.
    3. Companies with offices in Hong Kong and with offices somewhere else in Asia will be move personnel from their Hong Kong office to their other offices.
    4. Fewer contracts will be drafted with Hong Kong as the venue for arbitration.
    5. Companies will move their Hong Kong bank accounts elsewhere. It is no coincidence HSBC stock hit its 52 week low today.
    6. Travelers will choose somewhere other than Hong Kong as their Asia stopover. It is no coincidence Cathay Pacific stock hit its 52 week low today.
    7. Many Hong Kongers will eventually go elsewhere.

I am not saying any of the above will be noticeable tomorrow or even a month from now, but I am saying that all of the above have already begun and all of the above will accelerate once China’s army goes in at full force, which is pretty much inevitable. Within two years Hong Kong will be a very different place than it is today and within five years it will hardly be recognizable for those of us who have been there within the last five years.

Since the inception of the US-China trade war, this blog has been relentlessly downbeat about the US-China trade war and its impacts. Way back in October 2018, we called the US-China trade war the “New Normal” and in Would the Last Company Manufacturing in China Please Turn Off the Lights, we forecast an inevitable sharp decline in China manufacturing. On May 8, 2019, in The US-China Cold War Starts Now: What You Must do to Prepare, we warned of a “straight line decline in US-China relations” and we laid out what businesses should do in response to that. Long before that, my law firm brought on three additional sourcing experts experienced with product sourcing from Southeast Asia and with other countries outside China.

Our gloomy predictions have angered many, and I get it. What we are saying is not pleasant, especially for those with companies or livelihoods that depend on free trade with China or on Hong Kong remaining as Asia’s leading business hub. But please understand that we are only calling things as we see them, not as we want them to be.

As for Hong Kong, we are now suggesting our clients (and you) (1) consider places like Singapore and Bangkok as your Hong Kong replacement, (2) implement plans for your Hong Kong personnel, (3) cease using Hong Kong arbitration clauses (except with Hong Kong companies), and (4) avoid going there, if possible. If corporate responsibility or data protection are at the core of your business your Hong Kong decisions are more pressing.

What are you doing about Hong Kong?

Would love to hear your thoughts about Hong Kong today and Hong Kong tomorrow.

No matter what though, take care everyone and stay safe, and have a Merry Christmas.

The China thrill is gone
photo by Bdarby78

A recent Twitter thread from Sari Arho Havrén hit home, as it so perfectly captured my own feelings. She tweeted:

Sometimes I miss Hong Kong and Mainland China so much that it physically hurts. 30 years of my life has been tied to China. I have lived in four Chinese cities (incl HK twice). Strings run deep and so does sadness. I don’t know if others remember the exact moment of realisation, the personal critical moment when you realised the direction XJP was taking China, and all started changing. I literally looked at myself in the mirror multiple times asking myself if I was still true to my values or was I selling them in order to go on w biz as usual. I asked other foreigners how they felt, some shared my yet indescribable thoughts, some totally disregarded my sentiments as slander. Doves and hawks were born, we just didn’t know it back then (this was around 2013/2014). It wasn’t an exact day that I would remember (like where you were when Berlin Wall fell or Princess Diana died) but it was a sentiment of gradually growing discomfort that I still haven’t been able to free myself from knowing my feelings are nothing compared to mainland or HK dissidents who had or have to abandon their home.

When Xi Jinping took office in 2013, I was living in Shenzhen. Whenever I read Western media hopes that Xi might potentially be China’s Gorbachev, I recalled one of my courses at the Foreign Service Institute (FSI) in Virginia, which among other topics covered cable-writing (a cable is basically a report, in the State Department’s fusty parlance). In one class, a 2000 cable that came out of the Embassy in Moscow (or possibly the Consulate General in St. Petersburg) was hailed as the epitome of what good reporting from the field looks like. The topic was Vladimir Putin’s recent ascension to power, and the reporting officer made the bold claim (based on a careful analysis of Putin’s track record) that Vova would be a reformer. (To be fair to FSI instructors, I took the course in 2004, when it was not quite as clear that the cable’s predictions were totally wrong.)

This historic cautionary tale, together with comments from my Chinese friends, made based on Xi’s actual background and record, meant I had no expectation that Xi would become a democratic reformer. That said, I felt he would probably be an improvement over drab Hu Jintao, whose vision for China appeared uninspiring. I even posted a syrupy message on WeChat wishing President Xi the best on his mandate and hoping that China would be a better place at the end of it, or something along those lines.

As with Sari, my own disenchantment took place gradually, yet there were a couple of moments that have stuck with me. A few months after Xi took office, I moved to Hong Kong, but continued to travel to the Mainland regularly for business. As happens when you stop seeing someone regularly, changes of all kinds became more noticeable. One evening, walking around Shamian Island in Guangzhou, I saw what can only be described as a 大字报 (big character poster) along the driveway of a government building. Traveling around China, I had seen contemporary examples of old-school propaganda, but never anything like that in Guangzhou, generally seen as a city with little time for ideology. In fact, a tiled announcement calling for compliance with family planning rules in one of the alleys near the Garden Hotel stood out as a relic — to the extent that I made a point of photographing it.

I also photographed the sign on Shamian, but instinctively felt wary of doing so openly. A Chinese friend to whom I sent the image contemporaneously said that it was the sort of thing she had only seen in books. Though I do not remember the exact content of the message, I clearly remember the lingering feeling of unease. It made me glad to have moved to Hong Kong.

A few months later, I was back in Guangzhou. More often than not, I stayed at local hotels during business trips, but this time I was at a new Marriott property in Tianhe, close to where I needed to be on that trip. As I settled into my room, I noticed a copy of one of Xi Jinping’s books on governance on display. Curious, I sat down by the room’s picture window to thumb through it. A note on the book made it clear it was not complimentary, but could be purchased for ¥120, as I recall. No Bible, no Book of Mormon (for which Marriotts are famous), just Xi. Looking out the window, I saw a large digital display affixed to the building across the street. At regular intervals, the 12 Core Socialist Values scrolled down (“Harmony … Patriotism … Rule of  Law …”).

Since my days as a diplomat had long passed, and I no longer got paid for reporting such cutting observations, I decided to put Xi to the side and get some real work done. I booted up my computer and connected to the internet. First, I got a message warning me to comply with relevant rules. Not the standard message you get when you log on to a public network, but one of these ominous warnings from Chinese officialdom. Soon I realized there was no VPN, the first time I recalled that happening at an international-brand hotel. It felt as though a small oasis had been razed over to make room for more desert.

Another measuring stick of how things were changing was the availability of SIM cards. Back in the late 2000s, these were easily purchased from street vendors. But over time that stopped being an option, and you pretty much had to go to China Mobile or other service providers and show your passport. During one of my last trips to China, I was able to pick up a card at Guangzhou East station without any rigmarole, but the next time I went to that shop, I had to get my photo taken and my passport scanned.

Perhaps it was the desired effect, but as time went on I started scaling back my trips to China, to reduce the amount of time I actually spent in-country. During my early days in China, I relished the opportunity to travel. I would schedule trips so that I could stay in new cities for the weekend, or at least overnight. As tired as I was after long days of meetings, I would drag myself out to go for walks, to get a sense of the place I was visiting. This is how I became acquainted with China, pounding the pavement of cities and towns, even when there was not a lot to see in the conventional sense. The search for the rush of exploration was part of what kept me in China for many years, and of what made me move back to the Mainland twice after my initial departure in 2007.

But over time, I became that guy, the one with his suitcase at the back of the meeting room, sneaking out ten minutes before time, rushing to the airport for the flight back to Hong Kong. Whereas during my first two stints in Hong Kong I would happily cross the border for a weekend getaway, or even just to have dinner with friends in Shenzhen, I now needed a good reason (usually business-related) to go back. The thrill was gone.

And then they came for Hong Kong too.

Immigration Lawyer

About a decade ago, I had been working with Damjan DeNoble, who was at that time a health care consultant in China but wanted to go to law school. Towards that end, he asked me to review his “personal statement” for his law school application to the University of Michigan. I reviewed it and liked it so much I asked him if I could run it on the blog. He said yes, but wanted to hear back on his application to Michigan first. Damjan was (to no surprise by me) accepted to University of Michigan Law and he long ago graduated from there and he is now killing it as the founder of an immigration law firm in North Carolina on the cutting edge of legal tech.

I secured Damjan’s permission to run his law school personal statement on our blog because it very nicely (and personally) sets forth what it can be like to try for a small foreign business to operate in China and deal with its laws. I also like how upbeat it is, especially as we are right now in the holiday season.

So here goes, better late than never. Enjoy.  .  . .

Commitment Negotiations, by Damjan DeNoble.

After receiving my college degree, I went to China and enrolled in a four-month business and Chinese language program at Beijing University. I stayed in Beijing for the next two years, working as a pizzeria restauranteur, dabbling as an importer of Croatian canned food into China, and founding an Asia-based healthcare consulting business. Accompanying this last venture, I started the Asia Health Care Blog which has become popular in its own right. By far the most important thing I did, however, was propose to my girlfriend with a carved wooden ring bought from a Tibetan street vendor.

Steadily throughout this two-year sojourn, notions I held of legality were challenged by a system of law enforcement which demanded I not only know what is legal, but also what is ‘negotiable’. My social acumen, on the other hand, was constantly challenged by shifting cultural terrain. Daily, during my first year in-country – what veteran travelers call the ‘adjustment period’ – I wanted to pull my hair out due to all the negotiating I had to do with straightforward issues like getting salary on time, retrieving deposits on untarnished apartments, or convincing contracted business partners to respect the terms of signed agreements. But, as my understandings of guarantees in China matured, I learned how, in most cases, one’s negotiating position was largely a matter of perception, and that negotiating away from a guarantee often works better than negotiating towards one.

In the Beijing restaurant industry knowing a few key police inspectors is the difference between long term profit and loss. Because Chinese regulations are selectively enforced and because they change faster than one can retrieve them at the ministries, business owners must, instead, entrust their future to the regulators themselves. It is the regulators who enforce the law and it is up to them to define laws’ negotiable areas. By the time I was a staked member of The Kro’s Nest restaurant, and after we had opened a flagship seven hundred square meter pizza bistro inside Worker Stadium Park, dinners with the police had already become a predictable, Friday night ritual. Dressed in after-work plain clothes, officers of the Sanlitun Police Department would sit down on our terrace rocking chairs. Compliments would be made all around, and inevitably Kro and I, the only two foreigners, would be complimented on our Chinese language skills.

We took this time to get the low down on any new regulations, negotiate away from our need to strictly adhere to some of the less sensible ones, and, of course, negotiate down on any upcoming fines we were bound to face. For their part, the policemen developed a good sense of the people they were dealing with in their area of jurisdiction and received a nice meal or two on the house.

Considering that (1) our business was unlicensed through June of 2008 and (2) neither Kro nor I ever had work visas, this whole situation is rather remarkable. The way Yuenjie, the principal Chinese owner of Kro’s Nest partnership, explained it, “This isn’t corruption. It’s cooperation.” We were demonstrating an adherence to the men carrying out and defining the law, and, in so doing, we committed to being ‘harmonious’ citizens of the Sanlitun police district. Whether or not any laws were being broken was entirely dependent on our continued good behavior – defined as any behavior that did not have the potential to embarrass the police office.

In stark contrast to the long process of scrutiny I was used to with Beijing businesses, I learned that the criteria for entry into the Croatian market was much less strict; to operate one simply had to show up and be Croatian. On my first night out to dinner with the Croatian embassy staff, I learned that due the rareness of my particular profession – out of fifty Croatians in China, I was the only businessman – the ambassador’s office had, “on my reputation alone,” designated me as the China ‘go-to guy’ for an Adriatic sardine manufacturer. I was reminded that my ethnic identity, even with an American passport, was non-negotiable and that the greatness of Croatia had peaked with the initial waves of euphoria after an all too misguided war in 1991. What else could explain the sudden advent of a “go-to guy” reputation for a twenty-three year old with a business resume that goes as far as “he runs pizza restaurants in Beijing”?  It turns out that the embassy sensed it was being pushed around by Chinese business interests and wanted help. I somewhat jokingly suggested they expand their entertainment budget and lobby for increased funds to struggling Croatian universities.

My now-fiancée came to visit after I had already been negotiating my way around China for fourteen months. By this point I was wrapping up my involvement with the food industry and starting to look into various healthcare research gaps in Asia. While still in the cab from the airport, she commented on how remarkably patient I had become with life and with people. At the time, I thought the comment quite strange. Now, looking back, I realize that my perspective on time and my beliefs about what degree of mental toughness constitutes patience had become almost antipodal to hers. I had adjusted to new circumstances where moments and promises like ‘get back to you soon’, and ‘sure, no problem’ operated on a unique plane of space-time parallel to, but different from, the one she was familiar with in America.

The fact that I moved back to America this past September, and left much of China behind in order to support her through medical school might, therefore, appear to be a rash decision. But, if China taught me anything it is that commitment to relationships is non-negotiable.

China contract translationsThe other day I was emphasizing to a new client the importance of having one of my law firm’s international lawyers translate the contract we would be writing for this company and why we could not agree to let someone with the client do this translation. I then told her of a recent example that highlights why we are so obsessive with contract translations.

United States company contracts with Chinese company to have the Chinese company make product for the United States company. United States company tells Chinese company it is absolutely critical the product be delivered by August so as to be in the stores for the Christmas season. United States company calls my law firm in September asking for our help in forcing the Chinese company “to live up to the contract.”

United States company sends me the contract, written in both English and in Chinese, and it says the following:

  • Chinese language controls.
  • English language version says product must be delivered by August 10.
  • Chinese language version essentially says “Chinese manufacturer will do its best to deliver the product by August 10, but if circumstances prevent it from meeting that date, its only requirement is to try to get the product out as quickly as it can.”

So I review the contract and then I ask the American company whether it knew that only the Chinese language version was relevant. One company said it knew this and the other said it did not. The company that knew only the Chinese language version was relevant told me it had used someone in their company who speaks Chinese to review the Chinese language version and she “must have missed” the difference regarding the delivery dates.

Bottom Line:  If you are going to agree to a Chinese language contract, you have no excuse for not knowing what it says. Oh, and this admonition applies to at least some extent pretty much everywhere in the world.

Our China lawyers have done quite a lot of work for medical device makers and other companies that supply product and services to Chinese hospitals and we have always told those companies the following:

China hospitals are under considerable, sometimes intense, government pressure to buy local, but in the end, they generally do want the best product at the cheapest price. What this means is that if your product is truly the best and the cheapest product by a wide margin you will probably get the sale. But what this also means is that if your product is just marginally better than a Chinese competitor product and your product is a little bit more expensive you may not get the sale.

What can you do to increase your chances of making the sale? Try to look more local.

What does it mean to “look local”? This means the procedure for the sale to the Chinese hospital must look the same as a purchase from a Chinese manufacturer. The more the sale appears to be domestic, the better your chance of making the sale. This means the purchase must be denominated in RMB and the purchase must be made from a Chinese company. If you force the hospital to pay in dollars for a direct purchase from a foreign manufacturer, you are not likely to succeed in selling your product or your services to a Chinese government owned hospital. This advice of ours holds true for any China industry with heavy Chinese government involvement. For instance, China’s environmental industry is very similar.

In more detail, there are the following levels of “local” for making a sale in China, starting with the least local:

1. No China presence. No China distributor or sales agent. No China agent. Just your company based in Toledo, Ohio, Bilbao, Spain, or Baja, Mexico, making medical products and trying to sell those products to China. With this structure, you are not likely to ever make a sale to a Chinese owned hospital unless you have no legitimate Chinese domestic competitors.

2. Your company is in the United States or the EU or Australia, but it has a China distributor or sales agent that imports the product into China and then sells it to the Chinese hospital in RMB. This constitutes a domestic sale and it is generally the minimum required to have a good chance of selling success as against Chinese domestic competitors.

3. You form a China joint venture and that company sells your U.S. or EU or Australian made products to China’s hospitals.

4. You form a China WFOE and that company sells your U.S. or EU or Australian made products to China’s hospitals.

5. You form a China WFOE or joint venture and that company uses a domestic Chinese distributor or sales agent to sell your product to China’s hospitals.

6. You form a China WFOE or joint venture and that company actually makes your medical products and sells to China’s hospitals. Under this approach, you would create a Chinese brand identity for the product, registering a trademark for the Chinese name of the product. Since these entities are, technically, Chinese entities, the sale would constitute a sale by a Chinese company to a Chinese hospital, which meets the basic requirement for a domestic sale.

7. You form a China WFOE and that company actually makes your medical products and uses a Chinese distributor or sales agent to sell your product to China’s hospitals. It is almost certain you will need to use an established Chinese distributor or sales agent, since these traditional traders control the market. If you set up this sort of arrangement, you should be certain to use an appropriate China product distribution agreement.

8. You form a China joint venture and that company actually makes your medical products and sells them to China’s hospitals.

9. You form a China joint venture and that company actually makes your medical products and uses a Chinese distributor or sales agent to sell your product to China’s hospitals.

10. You license the manufacturing of your product to a Chinese manufacturer. The Chinese manufacturer manufactures your product, makes the sales to China’s hospitals and pays you a royalty on each sale or per year. The Chinese manufacturing comapny sells the product through its normal distribution channels. If you set up this sort of arrangement, you must be sure to use an appropriate China licensing agreement.

This last approach is the most “local.” It is also the result the Chinese government wants most to see when it makes its “buy local” announcements. The idea is to pressure foreign medical device makers to transfer their technology to Chinese companies. Of course, medical device makers resist the pressure to make this kind of transfer. However, the Chinese government has shown it is quite willing to use its purchasing and persuasion powers to “encourage” technology transfers. Medical device makers interested in entering the China market should try to become as local as feasible. Those who are serious about entering the China market should even consider the licensed manufacture alternative, since in some circumstances this may be the only way to make significant sales in China.

China IP theft

1. Chinese Manufacturers Will Copy and Sell Your Products; It’s What They Do

Literally every single day this past week, the international IP lawyers at my law firm received at least one email from an American/European/Australasian company on how their Chinese manufacturer was selling their products at wholesale and/or at retail to others. These emails usually concluded by asking our lawyers what they would charge to sue these Chinese manufacturers.

Our response would be to ask whether these American/European/Australasian companies had a written contract (or even anything else in writing) forbidding their Chinese manufacturer from copying their product. And then, when none of them had any such writing, we would tell them that we were not interested in suing the Chinese companies.

 

2. You Need a Written Contract to Protect Yourself from Your Chinese Manufacturers

One of these emails expressed surprise at what their Chinese manufacturers were doing to them, to which our response was as follows:

If your Chinese factory were not stealing your designs and using your name I would have been surprised. Truth is they do that pretty much every time (and it is perfectly legal) unless you have a contract or IP registrations that can prevent that. At this point, my advice would be to find a new factory as soon as you can because once their sales of your product on their own behalf have taken off, you are just a nuisance and their next move will no doubt be to keep raising your prices until your business is completely crushed and you no longer exist as a competitor to their selling what was once your product. 

There is probably nothing to do about them making your product (at least nothing that would make economic sense) but – as I always tell people – it’s bad enough when your product is copied and sold for 40 percent less than for what you sell it, but it’s usually lights out for a small business when the Chinese company can sell “your” product for 40 percent less with “your” name on it. So at this point the best thing we can do for you is to seek to secure your brand name as a trademark in China and in those countries in which you are selling your product. I urge you to read Manufacturing in Asia: Let’s Talk United States and Canada and Mexico and EU Trademarks.

Without a written and China-specific contract, there is essentially no good recourse against a Chinese manufacturer that copies and sells your product. It may be possible to bring a trade secret claim but these are really tough and really expensive cases.

In fact, in the last couple years, we have seen a massive increase in Chinese manufacturers taking on new customers with the SOLE intention of selling the products of those new customers. We are seeing a large increase in Chinese manufacturers low-balling their pricing to lure in foreign companies simply to flip around and steal and start selling the foreign company’s product. If you are getting manufacturing pricing that is too good to be true, it probably is and you are probably dealing with a manufacturer that wants your business just so it can steal from you. And as we mentioned in the email above, once the Chinese manufacturer has gone to market with your product, it will usually increase your pricing sky-high or simply refuse to make your product for you any longer.

The same holds true for stealing your trademark.

 

3. You Also Need a China Trademark to Prevent Your Chinese Manufacturer from Stealing Your Brand Name

In China Trademark Theft. It’s Baaaaaack in a Big Way, we wrote how China trademark theft had massively increased and what companies can do to stop it:

Starting about a year or so ago, our China trademark lawyers started getting a ton of China trademark theft calls and the number of those calls has been accelerating ever since. Why has the tide on trademark “theft” come in again? Two reasons. One, there is hardly a sole in China who does not know how to get around the prohibition on an agent registering the trademark that rightfully should go to the foreign company for whom it is acting as an agent. If your manufacturer in Shenzhen wants to secure “your” trademark in China it will not register it under its own name as it knows that cannot work. So instead of registering the trademark under its own Shenzhen company name, it will ask a cousin or a nephew in Xi’an to register it under its company name, making it nearly impossible for you to invalidate the trademark. Two, many Chinese factories are hurting right now and they desperately want to improve their profit margins. What better way to do so than to sell a product under a prestigious or well-known American or European brand name — or even just any brand name? See Your China Factory as your Toughest Competitor.

Our China trademark lawyers have been getting so many trademark theft calls of late that they now have a somewhat formulaic email response to those. The following is an amalgamation of a few that recently crossed my desk.

I am sorry to hear that someone has registered your brand name as its trademark in China. Our China trademark lawyers have handled many similar situations and we would love to try to help you with this.

The first thing we usually do in these situations is figure out some basis for challenging this Chinese company’s trademark filing. Our favorite challenge is non-usage of the trademark for more than three years, but in this case because the trademark is less than three years old, that will not work. Our second favorite is when a former factory does the filing because there are laws against that. But to show that it is the former factory, we almost certainly would need to show that the company that actually filed for this China trademark is the same company that you formerly used for your production and that is seldom possible.

If we are not able to get you the trademark you want for widgets, the next thing we do is try to figure out whether there might be a workaround. For example, we had a lawn equipment company that had its brand name filed as a trademark for 17 things related to lawn equipment but the trademark “thief” failed to file for small engines, like those you find on lawn equipment. So our workaround was to get our client the trademark for small engines and then put its name in steel on the engine and then add a sticker or two to the lawnmowers once they hit the United States and Europe where our client sold its lawn equipment. [NOTE: I changed the type of product to make it impossible to be able to identify the company for whom we did this intellectual property workaround]

If none of the above look like they can succeed, we can and should try to buy your name from this Chinese company. Unfortunately, this tends to be a tougher and, more importantly, a more expensive than you likely would expect. We do these buys by lining up a Chinese person (not a lawyer or anyone with any apparent connection to our law firm) in China to handle the negotiations. If someone from our firm were to call, they would will immediately suspect/know we are working for an American company and they will ask for a fortune for you to get your trademark back. It sometimes even makes sense to form a Hong Kong company to do the buy.

Another possibility would be for you to come up with a new name or use another of your names — I am sure you have thought of this and I doubt that it is appealing to you, but it may end up being the only way to go. No matter how we end up proceeding on the name taken from you, I strongly advice that we look at what we can do now to protect whatever other names you use and perhaps your designs as well.

As for your attorneys who you thought had filed for your trademark in China but had not, do you have anything that would indicate you asked them to do so or that they said they would or — better yet — that they said they had actually filed for it? If you have something like that, we could ask that they fund all of the above, assuming that you used real lawyers for this work. See Fake China Law Firms Are The Real Deal and Is This a Real China Lawyer?

Anyway, let’s talk to see if we can help you on this.

Many years ago, the Chinese government was so embarrassed by its manufacturers stealing the brand names of its own customers that it enacted a law making do so illegal. The law essentially says that a Chinese manufacturer that registers the brand name or the product name or the logo of one of its customers as a Chinese trademark does not have a valid trademark. Though nominally well-meaning, this law has been 99.9% ineffective because every Chinese manufacturer knows about the law and so it will not go off and register your brand name, product name or logo as its own trademark because to do so would be pointless because of the law. So the owner of your manufacturer in Shenzhen will instead ask her cousin in Qingdao to register your brand name, product name or logo as his trademark and then there is nothing you can do about it.

 

4. How to Prevent Your Chinese Manufacturer from Selling Your Product with Your Brand Name on it Without Your Permission

So what then should you be doing if you want to protect your product and stop your Chinese manufacturer from competing with you with your own product and then cutting off manufacturing your product for you? Some combination of the below is what typically makes sense:

A. Choose a Good Manufacturer. The more reputable and financially sound your manufacturer, the less likely it is to steal your product. Conduct due diligence on your manufacturer so you know with whom you are dealing.

B. Do Not Reveal Confidential Information without a Signed NNN Agreement in Place. You can learn more about NNN Agreements here. Note that US/Europe/Australasian NDA Agreements do not work. See NDAs Do NOT Work for China but NNN Agreements Do. Note also that it is a good idea to have your Chinese manufacturer put its chop on your NNN Agreement, and on all other contracts as well.  See China Company Chops: The Basics. 

C. Use a China Manufacturing Agreement When You Are Ready to Start Manufacturing. Once you have chosen your manufacturer, you will need a Contract Manufacturing Agreement (a/k/a OEM Agreement or Product Supply Agreement). You can find out more about Manufacturing Agreements here.

D. Get a China Trademark for Your Brand Name and Maybe Your Product Name and Logo Also. If you plan to put your company name or your brand name or your product name or your logo on your products or on their packaging, you should register those as trademarks in China. As we discuss here, this is true even if you will not be selling your products in China.

E. Get a China Patent if Your Product is Unique. 

If you do the necessary combination of the above, your odds of your manufacturer copying your product and/or using your brand name go way way down. If you do not do the necessary combination of the above, at least you will not be surprised when your manufacturer starts selling your product with your brand name on it without your permission.

What are you seeing out there?

Listen HERE or stream on SpotifyApple PodcastsGoogle PodcastsAmazon MusicStitcher, or Soundcloud!

The large-scale shift to telework brought on by the COVID-19 pandemic is prompting businesses around the world to explore new avenues to engage with clients and friends. Harris Bricken is no exception, and we are happy to provide this podcast series: Global Law and Business, hosted by international attorneys Fred Rocafort and Jonathan Bench.

In Episode #35, we are joined by Dominique Tolbert, owner of TLBRT Hospitality, Mesean Spices, and Global MBA student at George Washington University. We discuss:

  • How Dominique’s lifelong passion for food led her down the path of entrepreneurship
  • Dominique’s Liberian heritage’s role in sparking her interest in hospitality
  • The diverse culinary influences that guide Dominique’s work
  • Living in China as a Black woman, and how China reminded Dominique of West Africa
  • Dominique’s perspectives on Liberia, its region, and Africa generally
  • George Weah, Liberia’s soccer star turned president
  • The return of the African Diaspora
  • Reading, listening, and watching recommendations from:

We’ll see you next week when we sit down to discuss sustainable health and wellness with Lingling Zhang.

If you have comments on this episode or if you’d like to suggest topics for future episodes, please email globallawbiz [at] harrisbricken [dot] com.

And please follow Fred and Jonathan on social media to stay informed on upcoming guests and topics:

China future business

I may be later to the party than some of you, but I recently read the lengthy transcript of a speech given by former Australian journalist and later diplomat to China, John Garnaut, entitled Engineers of the Soul: Ideology in Xi Jinping’s China, which was printed on Bill Bishop’s Sinocism website in 2019. Though this speech was given in 2017, it is more relevant and predictive today than it was during the entire President Trump administration leading up to the 2020 U.S. presidential election.

I say that because with President Trump exiting and President-Elect Joe Biden in the wings, we have been fielding more inquiries from companies seeking to reengage with China, deepen their existing ties with China, or enter into business in China for the first time in a long time. In my work, I am seeing this mainly through strategic acquisitions.

I urge you to read John Garnaut’s speech in full, even though it is quite lengthy and you may need to refresh yourself on your USSR and China history and look up some unfamiliar terms like “dialectical,” and “discursive.” But your time spent reviewing what happened at Yan’an in Mao’s and in Xi’s eras will be time well invested. I am of the school of thought that understanding the history and motivations of people in power like Xi Jinping provide insight into why they adopt policies and make decisions the way they do.

John Garnaut’s speech reinforced what I have been reading and seeing in my practice, as well as what we have been blogging about recently, which is that if you want to do business with China, whether as a buyer or seller of goods or services, do not expect a smooth road. In essence, China will continue to paradoxically provide both significant opportunities and upheavals in its business environment. Why? Because the CCP needs to continue to justify its existence as a single party governor over China without growing too big (and in the wrong ways) to result in its failure as a governing body. In China, the struggle is real and the struggle needs to continue. Those of us who are doing business with China and want to do business with China will continue to reap both the benefits and the negative byproducts of this system.

We have been blogging about this pattern – especially the risks – recently:

We have also provided guidance on how to protect your company as you deal with China:

If you are even a casual student of Chinese politics and you do business with China, you will watch with both fascination and trepidation as you see Xi Jinping continue to cement his grip on power within the CCP as the CPP continues to permeate every aspect of Chinese society. We like to call that “governing with Chinese characteristics.”

You will also watch with consternation China’s international influence campaign through its Belt and Road Initiative and vaccine diplomacy. This is called, “international relations with Chinese characteristics,” and Australia is currently in the crosshairs, which may mark the renaissance of doing business with China for U.S. companies.

We are all looking into our crystal balls to determine how specific events will play out under Xi Jinping’s continued governance and Joe Biden’s presidency. I predict many companies doing manufacturing business with China who have continued to wring their hands over the U.S.-China trade war without diversifying their supply chain will be rewarded for not leaving China. I’ll cover that in my next post about Asian supply chain diversification.

But as I alluded to in the title of this post, doing business with China may change you and not for the better. The CCP will continue to influence the way business is done in China, and you may find yourself less worried about IP theft, forced labor, and China’s increasingly bellicose way of engaging with the world. And the optimist in me thinks that all of us doing business with China may be able to exert a positive influence there, one business engagement, one dinner, and one WeChat message at a time. It is increasingly looking like a total divestment from China is not possible or likely, which means that we are back to deciding how we as individuals and businesses will exert our influence on China. Under CCP rule, prepare for the worst and expect something slightly better than that in the near term.