Thursday, August 4, 2016

Doing Business in and with the People's Republic of China - Compliance and Legal and Social Audits

 Many companies, big and small, are either doing business with companies (and people) in China or are thinking of doing this. If you don't think you are, just look at the seller on Ebay, As an American attorney who lives in Shenzhen China (near Hong Kong) here is some basic general advice (feel free to contact me for more information):
I.                   Methods of doing business with the Peoples Republic of China:
There are several methods of doing business with the People’s Republic of China. The easiest way is just to purchase goods (manufactured or otherwise) or sell goods, without any activity or presence in China. Historically, this is the reason Hong Kong became an economic powerhouse. Foreign companies dealt only with Hong Kong entities, and left it the their Hong Kong counterparts to deal with China. This has simplicity and minimization of risk as a principal advantage. Of course, hiring a third party company (such as one based in Hong Kong) can help avoid “having a presence” in China.

Nonetheless, as discussed below, depending on the nature of the Buyer’s/Manufacturer's business, and their specific needs and concerns, some of the issues discussed below still apply. For example, in the “Social or Moral Audit” scenario, it doesn’t really matter where title to the goods passed, nor does it matter if the financial side of the transaction is secure (for example COD with inspection), if one’s company becomes the subject of very bad publicity.

Furthermore, it is common for factories in China to copy or overproduce (for their own benefit) the goods for which they are contracted to manufacture for their clients. Similarly, sell a hot product to your purchaser in China, and don't be surprised if a good portion of what they are really selling turns out to be a Chinese manufactured copy of what they agreed to purchase exclusively from you.

One client of mine designed women’s clothing. Her Chinese factory was scheduled to begin production, and she came to China to supervise quality control. Before going to the factory, as was her practice, she used to visit local Chinese boutiques. She was shocked to find her designs being sold in some boutiques under a different label. In fact, this was so common (and China was perceived to be so poor), that many companies haven’t even cared so long as the sales remained in China and under a different label. Of course, the risk for counterfeits, and sub-standard products all being exported to your markets remain. So even a company with no presence in China should have concerns (which can be addressed) with proper auditing. Furthermore, don't underestimate the size and wealth of the Chinese marketplace, nor the technical abilities of their factories. They have the money and expertise to buy and sell whatever can be bought and sold.

Of course, depending on how the transaction is structured, financially and legally, quality control can also be a big issue. An audit can supervise production and reject, on the spot, defective products, avoiding both delays and disputes, and even rejection by customs (in your country) when the goods are imported into your (foreign) country.

The need for proper protection becomes more acute if any intellectual property is involved. That includes trademarks, copyrights, and patents. China does offer protection for such property, but it is not automatic. Nothing should be taken for granted. Registration in China is necessary, and should be done promptly and correctly. It should be noted that China is notorious for taking advantage of foreign companies who fail to protect their intellectual property rights in China, or who delay in doing so.

The other side of the “picture” are companies who desire (or require) a presence, to some extent, in the People’s Republic of China. That may be merely an occasional visit from you or your employee (the foreigner) to discuss a purchase of goods. Or perhaps you will find it profitable to establish a foreign owned and managed company in China (whether a factory or retail sales). Each of these implicates additional needs for legal and other compliance protections. The greater your presence in China, clearly, the more you need (as both a legal and practical matter) to be protected and concerned.

Such issues are discussed below.