Helping New Entrepreneurs Understand Today’s China Business Environment

I have recently spoken with many entrepreneurs still growing their businesses in the United States. When I talked with them about their international plans, many were interested in expanding internationally, but lacked a viable roadmap and resources for doing so.

As they learned about my expertise in China and greater Asia, our discussions coalesced around their immediate questions. If you are a new entrepreneur trying to get a feel for China and what the current geopolitical landscape might mean for your international expansion, this post is for you.

To what extent will the Chinese government’s industrial policies, like Made in China 2025, affect foreign companies doing business in China’s manufacturing sector?

Today’s China is interesting because the government is past the point where it purposely hid its ambitions for China to supplant the U.S. as the unipolar political and economic leader of the world. From a western perspective, China’s change in policy from “biding our time” to the current “China’s time has arrived” is refreshingly direct and unambiguous (see here).

This is good for foreign companies because we are all on notice now. For companies that have been doing business in China for many years and have seen this firsthand before it was officially announced, this reality is not new. For new entrepreneurs who are either young or just starting to understand how the China-US relationship has changed, this tension feels new and perhaps a little overkill.

But Made in China 2025 is a good example of Chinese industrial policy that impacts many important industries and countries because China is still firmly in the middle of many supply chains and has no intention of giving up that position quietly. The ten key sectors in this industrial policy basically encompass everything that I would call either cutting-edge, necessary to China’s humanitarian sustainment/growth, or both:

  • Electric cars and new energy vehicles
  • Next-generation IT and telecoms
  • Advanced robotics and AI
  • Agricultural technology
  • High-tech maritime engineering
  • Aerospace engineering
  • High-end rail infrastructure
  • Emerging bio-medicine
  • Advanced electrical equipment
  • New synthetic materials

Do I need a China-facing contract? What is the balance found between Chinese and U.S. business contracts and/or law?

To Western eyes, Chinese law and contracts seem far too short. They can leave much to interpretation and mutual assumption due to the language, culture, and legal system, whereas U.S. laws and contracts are often comparatively more detailed, which can aggravate Chinese parties not used to Western legal interactions and legal systems.

The foundational difference is the way the two legal systems operate. The U.S. is based on English common law, which relies initially on laws (high level from legislative bodies), then regulations (more detail from executive/implementation bodies), and finally on judges (ultimate decision makers).

China’s legal system is based on a civil law system, which provides some guidance to contracting parties while leaving little autonomy to judicial decision makers, who apply the existing laws and regulations to the fact pattern and do not extend their judgment beyond that scope.

Ultimately, these differences matter in the enforcement context, but they also matter in how contracts with Chinese parties are presented and negotiated. For contracts that depend on China-facing operations, we will write them in what feels like bullet-point format to ensure that the Chinese side and a Chinese judge do not get lost in the excessive legalese typical to British Commonwealth-derived contracts. See Drafting China Contracts That Work.

For someone starting a new project in China, what legal issues do they need to take care of before they ever go to China or ever start talking/working with someone there?

Everyone should trademark their brand names and/or logos in China through China’s trademark office before they go to a trade show in China or interact with Chinese companies that could potentially become their competitor. Potential competitors include current and would-be suppliers. See China Trademark Registration Q&A.

What are the legal issues surrounding doing business in China without having an office or legal representation in the country (e.g. coming in to sign a contract or inspect a factory/production run)?

Companies can send personnel on limited trips to China to meet potential business partners, briefly inspect production runs, and attend trade shows. Anything more than these limited and infrequent activities may require some type of official presence in China.

This presence can be established through a representative office, which is really only authorized to test the market but can include renting office space. Anything resembling normal business activities like hiring employees directly, amassing raw materials, manufacturing, or providing services requires establishing a joint venture or subsidiary company, a/k/a China WFOE.

Where do you see foreigners most commonly make mistakes or have problems with Chinese partners/suppliers?

Most companies that get into trouble fail to conduct normal due diligence on their prospective partners. This means they fail to discover ahead of time whether their business partner actually has an office or manufacturing facility, has been paying taxes, has an export license, is involved with ownership or management in a competing company, or has ties to Chinese government entities that are fond of economic spycraft.

It is common for problems to arise where the U.S. or foreign company has only been using purchase orders rather than comprehensive contracts with the Chinese side. Many companies operate under the notion of “an acceptable threshold of noncompliance.” Companies do this internally and with their external partners. But when a breaching counterparty’s activities go outside those acceptable bounds, a purchase order relationship leaves the other side with little to no meaningful enforcement mechanism to threaten or actually use against a breaching counterparty.

Lastly, almost every China-facing M&A project with which my law firm has been involved has included unauthorized independent contractors. In China, there is no such thing as an independent contractor, which can get the “independent contractor” and the non-Chinese company into trouble with Chinese tax and social insurance bodies.

The above are a few of the issues new entrepreneurs should understand about China to better ensure that their first steps are on solid footing.