Fellowes Brought to its Knees in China: Blame the Joint Venture?

Fascinating article by Matthew Robertson, Fellowes, American Stationary Giant, Brought to Its Knees in China. A couple of readers sent me the article and both commented on how it proves what “you are always saying about Chinese joint ventures.” I am not so sure it does.

The article is about Fellowes, one of the leading manufacturers/sellers of paper shredding products, and of its joint venture problems in China:

There are few paper shredders in the world that can rip an A4 piece of paper into 2,000 pieces, and come with functions like SilentShred, SafeSense, and “100% Jam Proof”—and most that do have the name “Fellowes” printed on top. But consumers may soon be able to buy, say, the deluxe Powershred C-480Cx, without the Fellowes brand, because the company’s entire business in China has been stolen by its joint venture partner.

Fellowes is accusing its joint venture partner, Jiangsu Shinri Machinery Company of having taken over the joint venture facility in China and continuing to churn out Fellowes products.

According to the article, the joint venture “would continue churning out shredders with the Fellowes’ name, using Fellowes’ proprietary machinery, while Fellowes controlled both those [joint venture] companies because it appointed the management, according to the terms of the joint venture agreements.”

Wait a minute. As we are always saying, simply because a joint venture agreement gives the foreign company the right to appoint management does NOT mean the foreign company controls the joint venture. For more on this, check out Avoiding Mistakes in China Joint Ventures and Joint Venture Jeopardy.

According to the article, for years everything was going well for Fellowes in China, but then in 2009, a power struggle ensued at Jiangsu Shinri and one brother took over from another and the “new” brother” “attempted to force through radical changes to the joint venture contract, which would have shifted power, control, and profits to the Chinese side.” Jiangsu Shinri also illegally seized the joint venture “company seal and business license in an effort to force Fellowes to hand over its 100 percent-owned assets to the joint venture, including its production tools, which are the intellectual property of Fellowes.”

Jiangsu Shinru is also said to have engaged in the following tactics:

Zhou [the new brother] insisted Fellowes assign the joint venture other business interests it had in China; he tried to raise prices on the products by 40 percent; demanded Fellowes invest an additional $10 million into the business; and cut a $3 million payment dividend. When Fellowes demurred from carrying out those demands, he escalated the pressure.

The dramatic moment was in early August 2010, when Zhou, under the aegis of Shinri, blocked the gates of the joint venture facility with security guards and trucks, preventing people from going in and goods going out, effectively shutting down production. Shinri expelled and confined the managers, moved funds from the joint venture to a Shinri-controlled bank account, sent packing the 1,600 joint venture employees, and at night, drove a truck into the facility and stole Fellowes-owned injection molding tools, some of them weighing several tons.

The worth of the products already manufactured and blocked—what Fellowes in his testimony said are “feature-rich, IP-protected”—is $100 million. This includes 70,000 completed paper shredders, going to rust in the factory.

Shinri also won’t let Fellowes recover the over 1,000 custom molding tools, the fruit of decades of refinements of engineering designs, worth $10 million. And it is most probable, according to people familiar with the matter, that Zhou intends to obtain these high-value items in a fire sale enforced by the local court that he has influence over.

Not surprisingly, this has been disastrous for the business:

Because the shipments were blocked, the joint venture was unable to pay its suppliers—the 120 odd Chinese businesses that deliver all manner of metals and plastics that are the makings of the shredders. So 80 of these suppliers sued, and the joint venture became insolvent.

The Changzhou Intermediate Court has started proceedings to liquidate the joint venture, auction off all its assets, including the equipment, land, molding tools, and those unshipped shredders, to satisfy the debts of the joint venture accrued as a result of Shinri’s activities.

To counter this, Fellowes has mounted a Congressional letter writing campaign, but this has borne no fruit.

I hate analyzing situations like this based on newspaper articles because in almost all instances, the article fails to answer key questions necessary for such an analysis. For instance, has Fellowes brought suit in China? If not, why not? Is it because what Jiangsu Shinru is doing is legal in China because the agreement(s) between Fellowes and Jiangsu Shinru were not drafted so as to prevent this sort of thing? Why are you painting the Chinese court as being so terrible for seeking to sell the assets of the joint venture at auction? It sounds as though the joint venture is at a stalemate and selling the assets may be the only legal solution at this point. Is that not the case? Are you aware that when there is this sort of a business stalemate the courts in most countries will often require selling the business? Why did Fellowes think bringing in a U.S. Congressperson would help in this situation? And again, why is Fellowes seeking to politicize this dispute rather than handling it in a court? Is it because it did not set itself up well enough with its contracts and its IP filings so as to be able to pursue a legal remedy?

The article talks of how Jiangsu Shinru is strong locally and implies that the local Chinese court does its bidding. Even assuming this is true, is this also going to be true of China’s appellate courts? If it is so clear that particular equipment belongs to Fellowes, why does Fellowes not sue for the return that equipment? Does Fellowes’ contract(s) with Jiangsu Shinru clearly set out the specific equipment that belongs to Fellowes? The article implies Jiangsu Shinru is using Fellowes IP. Is that really the case? Is Jiangsu Shinru using IP in a way that violates the joint venture contract(s)?  Is Jiangsu Shinru violating Fellowes IP that Fellowes registered in China?

I need more information about the Fellowes joint venture to be able to draw any lessons for clients from it. Nonetheless, the article is certainly worth a read as yet another cautionary tale on doing business with China.