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How Not to Be in China


Chovanec nails it and his tweet instantly reminded me of something I noticed in a recent email from a China consultant I have known for years. His new email address was for a strange sounding company so I followed the url from that address and discovered this China consultant now has two companies. One that focuses on helping U.S. and European companies set up in China and navigate doing business there, and another company that focuses on helping U.S. and European companies LEAVE China. This new company focuses on helping these companies find a new country or countries in which to land or manufacture and on protecting these companies from China as they are moving out.

I have no doubt both of these companies are eminently capable of providing businesses with valuable services, but I am a bit troubled that these services are not provided together in one company. My concern is that the old company will unflinchingly pitch the benefits of China to businesses that contact it about going into China or growing their business in China while the newer company will unflinchingly pitch the benefits of leaving China to businesses that contact it about their China concerns.

Now just to be clear, the new and old businesses to which I am referring have NOTHING whatsoever to do with either Patrick Chovanec or Isaac Stone Fish, the person whose new business merited congratulations from Chovanec.

In my view, the better way to handle the China “stay or go question” is within one company and I say this because there is no one answer to that question.

1. China Joint Ventures All Over Again

In deleting old emails, I also came across one from a company that helps foreign companies find joint venture partners in China and elsewhere in Asia. The email from this well-known and highly regarded company was asking to talk to me about “working together” on joint ventures, but it appeared that before talking to me, the sender wanted to make sure that I was not 100% opposed to joint ventures in China. I laughed when I saw this because it brought back memories of the old days when we were well-known for opposing joint ventures — based in large part on the following two very widely disseminated and influential articles we wrote on the risks of China joint ventures:

1. Joint Venture Jeopardy, in the Wall Street Journal in 2007. In this article I wrote how the number of China joint ventures was declining and would continue to decline, and for good reason.

2. AmChamChinaJV, in AmCham China’s Magazine in 2008. In this article, co-blogger Steve Dickinson wrote about how the structuring of Chinese joint ventures so often serves as a trap for the unwary.

Anyway, for many years after these two articles were published, many emails we received from companies exploring China joint venture deals would start out saying, I know you don’t like joint ventures. In 2010, I even had a friend ask me once if these articles had “killed” our China joint venture business. I explained to her how those articles had actually had the opposite effect in that our China joint venture work soared after those articles came out and I have always attributed that to two things. One, smart companies want honesty from those with whom they do business, and that includes their international lawyers. Two, many of these companies came to us because they liked our skepticism regarding joint ventures and they figured that if we “blessed” what they were proposing, then it must be good. I know that conversation was in 2010 because I remember writing China Joint Ventures: We Love Them AND We Hate Them the next day as a sort of position paper on China joint ventures. The money quote from that blog post was: “We like the appropriate and necessary joint ventures; we just think it a mistake to consider a joint venture as the default method for entering China.”

2. We Were Early on the China Risks

I am getting deja vu all over again on the China stay or go question. As regular readers know, we were very much in the forefront on talking about the risks of doing business for China and in proclaiming US-China tensions as the New Normal. In The US-China Cold War Starts Now: What You Must do to Prepare we laid out our history of being fast out of the blocks on concerns about China:

Since the very beginning of US-China trade negotiations, we have been unequivocally negative on the likelihood of a deal and we have taken huge amounts of heat for that, via hate e-mail, online, and even from some of our own clients who accuse us of being too cynical or too negative about China. Our response to all of this has been consistent. NOW is the time for foreign companies (especially those that sell their products to the United States) to work hard on reducing their China footprint.

We first publicly sounded this warning in October, 2018, in China, the United States and the New Normal, though we had been warning our own clients about this for months. This “New Normal” post was an attempt to get in the face of those who had been sending our lawyers hate mail because we had in a September 2018 post predicted manufacturing orders from China were declining and would continue to decline:

I got a badly written and angry email yesterday in response to my post, On the Impact of China Tariffs: Is This a Dead Cat Bounce? In my post I predicted a decline in manufacturing orders from China, starting in the next few months. The email accused me of “hating China” and wanting “to impede its peaceful” rise and of being “jealous of its progress.” All this because we have lately been writing how so many of our law firm’s own clients and so many others are leaving China, or looking to leave China. We have been getting quite a lot of these sorts of emails lately

In April of this year, the Wall Street Journal quoted me in a cover story, Trade Deal Alone Won’t Fix Strained U.S.-China Business Relations, saying the following:

“There is no way any deal between China and the U.S. will cause everyone on both sides to say, ‘We were just kidding,’” said Dan Harris, managing partner at Harris Bricken, a law firm that specializes in investment with China. “The tariffs and the arrests and the threats and the heightened risk have impacted companies and that will not go away.”

Then on May 4, 2019, (one day before President Trump’s May 5 tariff tweet that changed everything) I wrote The US-China Trade War: Winter is Coming on how no matter what happens in the US-China trade war, things would NOT revert back to the way they had been:

The acceleration of this decoupling trend has been unleashed and no trade deal is going to end that. Why would it? The tariffs may disappear or be reduced but the tension is going to remain and my law firm’s China lawyers and international trade lawyers are seeing evidence of this everywhere, both in how the US treats Chinese companies and how China treats US companies. The US is cracking down hard on China deals with US companies on national security grounds. And China is doing what it can to stop its own companies from dealing with the United States.

We then listed out our previous blog posts on what foreign companies should do in light of the tariffs imposed against China — much of which information is relevant for the tariffs that will go into effect at 12:01 a.m. THIS Friday:

And so began our steady stream of posts exhorting companies to look more closely at countries other than China.

That post then went on to talk about two of our clients who sought to move quickly to get out of China and how we helped them do so:

The first company is a big U.S. company that makes electronics and I cannot get more specific than that. The head of this company “loves” geopolitics and from day one he was convinced there would not be a quick deal between the United States and China, no trade deal could solve the issues between China and the U.S., and problems between the two countries would be ongoing for decades. This person declared his company would within six months reduce its purchases from China by 50% and be out of China entirely in nine months and he wanted my law firm’s help with the following to achieve this:

    1. Deciding the countries to target for its purchases.
    2. Figuring out how to pressure its existing China-based suppliers to move outside China.
    3. Figuring out whether to manufacture on its own in countries outside China.
    4. Protecting its IP outside China.
    5. Drafting its manufacturing contracts with the companies outside China.
    6. Making sure its products made outside China would for tariff purposes truly and legally qualify as having been made outside China.

*      *      *      *

The second company is a start-up that makes children’s products. This company initially came to us for a China NNN Agreement. I asked whether its products would be subject to the “Trump tariffs” and I was told yes. I then asked why it was having those products made in China, rather than in Thailand (I picked Thailand both because it seemed like a really logical product to be made in Thailand and because my law firm has worked on a lot of successful manufacturing deals with Thailand — we even have a lawyer, a Thai Business Specialist and an International Manufacturing Specialist who speak Thai.

The response to my Thailand suggestion was very positive, but I was then told that the company “did not even know where to start with Thailand.” I said we could help pretty much every step of the way and we did and the new products will soon be coming to market, with lower costs than they would have been in China and 100% tariff free. I am guessing this client too will use its made-in-Thailand-ness as a selling point, because let’s face it, American and European consumers tend to have a much better “feeling” about Thailand than they do about China, especially with something like a child’s toy.

The next section of that blog post was entitled “The US and China Are and Will Continue to Fight Over Just About Everything” and it was there that we again stressed that the fissure between the United States and China would continue and why. And then to hammer the point home, the following section was entitled “This is the New Normal” and it talked about how so many companies were looking to leave China:

So to at least some extent, those who assumed China-US relations would soon return to how they were before the United States initiated its first round of tariffs were either not reading enough or were misinterpreting what they did read. Nonetheless, I completely get where these complaining companies are coming from because most of my own law firm’s clients that were having their products made in China last year are still having their products made in China right now this is mostly because leaving China is neither fast nor easy.

Some of our clients have left China entirely, moving their production to Thailand, the Philippines, Mexico, Indonesia, Vietnam, India, Taiwan, Sri Lanka, and the Ukraine, among others. Some of our clients have diversified their supply chains away from China, while remaining in China. Others are working on exiting China entirely. Many though — and for various reasons — feel they have no choice but to remain in China for the short term and even beyond. So yes, there are some companies that should have left China 6-12 months ago but didn’t, but there are more companies that simply could not leave China fast enough to avoid this next round of tariffs.

In September 2018, in How to Leave China AND Survive, we wrote about how difficult it is to stop having your products manufactured in China and how to do that in a way that minimizes myriad potential problems. I would urge anyone looking to move away from China to read that post before instituting any actions that might lead anyone in China to think you might be leaving.

But if you are going to leave China, where should you go and how even should you go about determining this? And what can you do to try to secure an exemption from these new tariffs? In China/U.S. Tariffs and How to Fight Back, one of our international trade lawyers explained how to try to secure an exemption to previous tariffs and much of what was written there will apply to this new round of tariffs as well.

I am about to do something we have literally never done even once in any of our other 4,781 blog posts and something I swore to myself we would never ever do: I am going to suggest you reach out to my law firm for assistance. I swore we would never do this because I have never wanted anyone to view this blog as an advertisement for our law firm because I’ve always known that would be the kiss of its death. We don’t accept paid advertising and we never will and we have never suggested in any blog post that anyone contact us.

But what is happening with China right now is extraordinary and it will no doubt lead to tough times for many companies. Finding a landing spot other than China is not easy, but between the international lawyers and foreign business specialists at my law firm and the many fine consultants and manufacturers we know around the world, we definitely can help and we want to help. Our international trade lawyers can help as well in trying to get your products exempt from the upcoming tariffs as well. So I do urge you to reach out to us.

I do not want to see more articles quoting companies that were not prepared for this mega-storm or do not know what to do in the face of it. And if we can’t help you, we will endeavor to recommend to you those who can. Of course there are many companies that cannot or should not leave China. China is the second largest economy in the world and it has a billion+ people and so it cannot be completely written off or ignored.

And just as we are seeing so many of our manufacturing clients beating down the doors to get out of China, our China WFOE formation work is at its highest level (by far) in the history of our law firm. This means we are on the one hand working to get many clients out of China, while at the same time working to get many of our clients more deeply embedded into China with their own Chinese companies.

What sort of companies are going into China? Mostly tech companies and companies that sell their products and services to China. Most of these companies either do not care much about the tariffs or are going into China because of the tariffs. For example, one company that does a lot of manufacturing in China is going into China to start selling its made in China products there, while at the same time looking to have its products made outside China for selling to the United States. As I am always saying, lawyers thrive on change, whether the change is for the better or for the worse.

We will over the next few months be writing a lot about what is happening and providing more specifics on how best to respond to it. I apologize for the length of this post; there is though so much to say and I did not feel it could wait to be strung out over many days.

Winter is upon us. And as much as it pains me to say this, the US-China cold war starts now.

3. Here’s to Nuance and How it All Just Depends

So note how even at my most strident, I never say all companies should leave China and that is because that would have been silly. There are many companies that should leave China, many companies that should stay in China, and many companies that are not in China that should be going there. Just as not all joint ventures are bad, going into China is not bad for all companies. Or to use my absolute favorite “lawyer language,” and one of my favorite ways to start an answer to any client question: it depends.

Should your company be in China or doing business with China or not? It depends. Stay tuned for part two of this blog series in which I lay out some of the things that should influence your connections (or lack thereof with China). In that same post, I will also talk about how since our very first China transaction our position (as reflected in our position on joint ventures) has always been that even if it does make sense to go into China or to do business with China, for many companies, the best way to do so is the least risky smallest China footprint way possible.

 





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