Chinese Drywall: If You Think That is Bad, Just Wait.

Absurdity, Allegory and China is doing an excellent job in covering the recent problems with Chinese drywall that have cropped up in Florida. AAC has done a series of posts on this issue, the most recent one, entitled, Just Follow the Links, [link no longer exists] which, as its name implies, links over to the previous ones.

As I am always saying, lawyers make for excellent canaries in terms of what is happening and what is going to happen. This is because we oftentimes hear things from our clients before they become public, through either litigation or an announced deal. My law firm has been hearing much more about and/or getting much more work in four areas relating to China. Only one relates to the drywall problem, but all four directly relate to the downturn in the economy.

Here goes. . . .

First, we are hearing of even more incidences (yes that is possible) of China product quality control problems. Chinese companies that are strapped for cash are the most likely to skimp on quality and with more Chinese companies strapped for cash….well you do the math. In How To Protect Your Company From Bad China Product, we wrote how foreign companies can reduce the likelihood of receiving bad product from their Chinese manufacturers and our advice from that post still holds, but the need for foreign companies to follow it has increased.

Second, we are getting an increasing amount of work from foreign companies who want to exit from their Chinese joint ventures. The reason this is happening now is that when times were good, the foreign participants in joint ventures have a tendency to “let things slide.” Now, with profits tanking, they are feeling they cannot just sit back and wait.

Third, and paradoxically enough, we are doing a greatly increased business in forming joint ventures in China. We are getting clients saying that up to a few months ago they were planning on going into China on their own, via a Wholly Foreign Owned Entity (WFOE), but now they want to go the joint venture route to “spread the risk.”

Fourth, we are getting a ton of work from companies owed money from other companies that are either unable to pay their bills or just choosing not to pay the companies calling us. Our international litigation team has more than double the number of breach of international contracts as just six months. As Jeremy Gordon over at China Business Services, puts it, “this is a risky time for payment.”

Are you seeing these same legal/business trends? How are they impacting your business?

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