Doing Business in China Top Diplomats Address Conference

July 2003

BY: BRUCE BELL

Did you know?

In 2002, with U.S. $52.7 billion in foreign direct investment, China surpassed the United States as the world's leading destination for foreign investment.

China accounts for 1/5 of the world's population, yet only 3.5% of the world GDP.

Experts debate China's consumer power; economists put China's middle class anywhere between 25 to 250 million people.

85% of disputes involving China business ventures are relationship issues (supplier, partner, etc.) and do not involve the WTO.

Experts estimate that 70% of real estate in China does not have clear title.

The more than 130 business leaders, government officials and professionals who Philadelphia Department of Commerce and the China Trade Center learned this information and much more from experts with experience in China.

The Conference addressed topics ranging from businesses in China to comparative law, dispute resolution and intellectual property issues and was highlighted by keynote speeches from Dr. Thomas Lee Boam, Minister Counselor for Commercial Affairs, U.S. Embassy in Beijing, and Zhang Hongxi, Consul and Ambassador, People's Republic of China. Gary Biehn, chair of the Business and Corporate Group at White and Williams LLP and a delegate on Philadelphia's recent Trade presentation on initial business considerations in China, and spoke on the impact and importance of World Trade Organization (WTO) compliance and strategies and related legal considerations for doing business in China.

Nearly all of the speakers at the Conference emphasized the abundant economic opportunities available in China, but warned of the need for "doing one's homework" before pursuing these opportunities. Many U.S. based companies are evaluating whether With China's 1.3 billion population, the low cost of labor certainly factors into the equation. Further, as detailed by Ambassador Hongxi, the Chinese economy has grown The Wall Street Journal recently reported an 8% growth in China's economy in 2002 and a 9.9% growth on an annual basis during the first quarter of 2003. Chinese officials report that despite a sharp drop in retail sales than 8.9% over April 2002. 85% of disputes involving China business ventures are relationship issues attended the May 9, 2003 Conference "Doing Business in China" presented by the starting General Mission to China was one of the Conference organizers. Mr. Biehn chaired the first panel Nearly all of the speakers at the Conference emphasized the abundant economic the low cost structure available in China makes the region an attractive source of supply. exponentially over the past twent y years. amid the outbreak of SARS, the Chinese economy still expanded in April 2003 by more than 8.9% over April 2002.

Many of the speakers highlighted the need for thorough due diligence and suggested that expert knowledge of Chinese laws, regulations and customs is necessary to successfully engage in business in China. With China's membership in the WTO effective December 11, 2002, many of the restrictions on foreign investment in China are being eased or eliminated over time. Nonetheless, foreign investments in China remain highly regulated by the Chinese government. As explained at the Conference, under Chinese law, a business falls into certain investment categories for foreign investment purposes (encouraged, permitted, restricted or prohibited) based upon the classification of the business' industry. This business classification is critical in determining how to proceed with the business project and whether the business may be wholly-owned by a foreign investor or requires teaming with a Chinese partner. Dr. Boam spoke of several situations where U.S. companies or investors had failed in Chinese business ventures because they did not properly perform appropriate due diligence on the partner in China or improperly structured their business. Dr. Boam half-jokingly remarked that the complexities and minefields associated with doing business in China answered the age old question "why did God invent lawyers?" The rate of failure can be reduced by the use of experienced counsel, and conducting thorough due diligence on all persons with whom one does business in China, including using private investigators and independent accounting firms. Mr. Biehn, who has assisted clients in starting and developing businesses in China, also reviewed several ways to "test the waters" before entering into business with Chinese partners, including the use of representative or branch offices.

Moreover, there are inherent differences in the use of contracts in the U.S. and China. In the U.S., contracts define and memorialize the rights and obligations of the parties for enforcement in the event of a dispute. In China, as noted by Dr. Boam, the main purpose of a contract is to outline appropriate economic incentives so that it is in the best interest of the parties to fulfill their contractual obligations. Resorting to the Chinese legal system for enforcement of contracts was not recommended by most of the Conference presenters because the Chinese legal system has not yet fully developed and courts and judges are extremely territorial. Instead, arbitration clauses which require resolution of disputes outside of China under different rules should be used. However even then the enforcement of arbitration awards in China remains uncertain. Strategies regarding intellectual property protection, a continuing problem in China, were also addressed. For instance, if a U.S. company is concerned that its Chinese partner may misappropriate certain intellectual property to produce and sell certain products to the U.S. company's customers, the U.S. company can protect itself by entering into exclusive contractual relationships with its customers.

Finally, there are marked cultural differences in accepted business negotiation styles between the U.S. and China. In the U.S., parties generally negotiate issue by issue and it is generally considered bad form to reopen issues on which negotiations have been concluded. In contrast, Chinese negotiations often include the "clawback" technique, in which the Chinese partner renegotiates past issues lost in exchange for concessions on open issues. Such a technique comes as a surprise for the uninitiated and often results in lengthy, aggravating and unsuccessful negotiations with Chinese counterparts. Experienced negotiators can often increase the chance of success and reduce the time required for negotiations by playing by the Chinese rules.

For more information on the Global Transactions practice and other services provided by the Business and Corporate Group of White and Williams LLP, please contact Gary P. Biehn at 215-864-7007 or biehng@whiteandwilliams.com. Bruce A. Bell, the author of this piece, is an associate in the Business Department of White and Williams LLP.