That Western Vibe: When Staying in China Makes Sense

Our regular readers know that, generally speaking, the authors of the China Law Blog believe China and the U.S. will continue to decouple, making it increasingly difficult/risky to do business in China. See Alleged US-China “Micro” Deal Does Not Mean a Thing For Most. But our China lawyers continue working with many clients and fielding many inquiries from companies that either “cannot” or will not stop doing business in China. For many companies, staying in China makes sense. See Why NOW Is a Good Time to Double Down on Doing Business in China and Complicated Trade Relationships: Dig In or Diversify? Probably Both. This is true for various reasons: (1) China is a valuable consumer market that the company does not want to abandon (e.g. Apple, Coke and multi-level marketing companies), which is referred to as “being in China for China”; (2) the company has competent professional Chinese business partners; (3) the company has Chinese employees who are valuable to the company’s business and its future foothold in China; (4) it is too expensive for the company to leave China for reasons other than 1-3 above; and (5) it is not technologically feasible for the company to move its manufacturing or its operations to another market, such as Vietnam, Thailand, Philippines, Malaysia, Mexico, Singapore, etc. in the near term.

The NBA is currently deciding whether it is willing to just stick to basketball or let the lure of potential China profits dictate its policies, and the NBA conundrum describes the generally positive scenario for many U.S. businesses with strong intellectual property, whether it is their brand, their content, or their know-how. One key question facing companies in deciding how to navigate China business is: “Can you produce a product or service so unique that it is both valuable to Chinese consumers and that virtually cannot be pirated in the Chinese marketplace?” The NBA is a prime example of this uniqueness because China cannot duplicate the star-laden Houston Rockets or Golden State Warriors, though some brilliant CCP hacker could probably deepfake Yao Ming or Xi Jinping’s face onto any basketball team and create an elite Chinese basketball team, which would certainly be entertaining to watch. (The NBA issue also highlights the vicissitudes of Chinese public goodwill, of which all companies need to remain hyper vigilant.)

Recently I spoke with a client who is in the content creation business, which is a form of artistic expression, something that China’s governmental policies and collective social consciousness model have struggled to foster and replicate. I am not implying that China does not have quality brands and products or that the Chinese generally are not creative, but they do not have that “Western vibe” that is still so valuable to quality-conscious Chinese consumers, even if the “made in U.S.” moniker is losing some traction in the Chinese marketplace. The U.S. company creates marketing content for Chinese brands, and one of its current Chinese customers with a Chinese brand portfolio of its own wanted to engage in some type of “joint venture” with the U.S. company to leverage the Chinese company’s connections and the U.S. company’s content creation. This joint venture will be built on years of experience and relationship building between the U.S. and Chinese companies. Both companies are bringing their unique assets to the joint venture, and neither company has the wherewithal to duplicate what the other is bringing to the JV table.

This prospective relationship can work if it is built upon sound business principles, and my advice to our client went like this, based on the documents I reviewed from the Chinese side:

  1. How well do you know your prospective JV partner? Even though you have been doing business for years together at arm’s length, you need to do additional due diligence on the company (see China Company Research: The 101).
  2. This is not going to be a 50/50 relationship. You should push for at least 50% ownership of the venture and ensure that you have control over appointing the Representative Director and the General Manager, as well as  being sure to control the company’s seal or chop. Without these you will be at the mercy of your Chinese partner.
  3. Are you sure you want to engage in an entwined relationship like this, even if you are able to get everything in #2 above? You may want to continue providing services in exchange for a fee so that you do not have the ongoing uncertainty surrounding when and if you will ever see any profits from this venture.
  4. Think critically about what type of relationship to form (entity-based or contractual-based), especially what will provide the optimal business or contracting structure to maximize the likelihood that your Chinese counterpart will hold up its end of the relationship.
  5. Where will the JV have its primary assets, especially its bank account(s)? Plan that at some future date you will need to sue and collect funds from the JV or your counter-party and determine whether you can accomplish that in the U.S. or whether you will have to go to China to do that.
  6. If you are going to go in as a minority owner, you should assume that you will have no real say in anything related to the business. If you cannot get everything you want in #2 above, then you need to be able to pull out of the relationship quickly if the Chinese side does not deliver. Your governing contract (the Joint Venture Agreement) should ensure you can do this without potential ramifications.
  7. Remember that you are providing the creative content to the relationship and that this gives you leverage. Use it to your advantage as much as you can.

As we have mentioned in prior posts, our clients that moved quickly to diversify away from China have generally fared better than those that did not. However, there are reasons to stay in China and even to engage anew with China, and every company should take a dispassionate appraisal of their China plan regularly and modify as necessary. Your China cost-benefit analysis is not anyone else’s.

How are you planning on addressing these issues?