Doing Business With China

In a seminar hosted by the Practical Law Company at its London headquarters, IACCM members were provided with insights to doing business in China. The presenters were three partners from one of China’s largest domestic law firms.

Naturally, a large part of the meeting was absorbed by the traditional legal concerns of protecting assets and enforcing rights  –  of which more later.  My main interest was to better understand the Chinese perspective. Every day we hear about the risks that foreign firms face when doing business in China, but what about the Chinese experience of dealing with foreign firms? Are the issues really so one-sided?

We know that many of the large Chinese firms are now emerging onto the international stage and encountering first-hand the trading practices and standards adopted in the major trading nations. For them, the way we structure deals and agreements appears rather remote. They are accustomed to more focus on relationship building through physical meetings and less reliance on virtual communication and contracts. The quality of their risk assessment procedures is often high and clearly there is understanding of the legal principles that underlie approaches to risk management.

But the presenters reminded us that most of the big Western corporations are not dealing with the large, state-owned Chinese enteprises. They are buying from far less sophisticated and much smaller companies. Business is typically conducted on purchase orders and the fear of local competition means that they feel they must accept whatever terms the customer presents. These companies lack market and contract sophistication and the foreign corporates frequently take advantage of that. They think little about imposing arbitrary changes to the contract and the level of overdue and bad debt is high.

When taking this context, it puts our concerns over IP rights and contract enforcement into a different perspective. If we are selective in our choice of which contract terms to apply and the extent to which we operate with real integrity, why would we be surprised if our trading partner feels it is alright for them to also disregard the terms when they are inconvenient? To what extent is our behavior contributing to the problems we encounter in China?

And this takes us back to the traditional Legal approach to risk, which tends to be very one-sided in its analysis. There is no apparent effort to see cause and effect when we structure or negotiate our agreements. Hence the meeting focused on the typical basics of the reliability of the Chinese legal system (getting better) and the threat to IP rights (also getting better, but watch out for employee theft, more than corporate theft).

Tomorrow, I will summarize the observations about the Legal system, recourse, governing law, dispute resolution and intellectual property.  For today, I hope that this blog may cause a number of us to think about the extent to which it is our actions that are undermining trust and integrity in contracts and relationships.