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 further 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.

To make a long story short, Fellowes is accusing its joint venture partner, Jiangsu Shinri Machinery Co., Ltd., of having taken over the joint venture facility in China and continuing to churn out Fellowes product, but without the Fellowes brand name on it.

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. Wait just 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 co-blogger Steve Dickinson’s article for AmCham’s China Briefing Magazine, entitled, Avoiding Mistakes in China Joint Ventures. You may also want to check out my Wall Street Journal article, entitled, 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 a series of 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] also insisted that Fellowes assign to the joint venture other business interests it had in China; he tried to raise the prices on the products by 40 percent; demanded that Fellowes invest an additional $10 million into the business; and he 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.

As one would expect, all of 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 the sale of the business? Why did Fellowes think bringing in some U.S. Congressperson would help in this situation? And again, why is Fellowes seeking to politicize this rather than handling it in the courts? 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 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 at least sue for the return that equipment? Does Fellowes’ contract(s) with Jiangsu Shinru clearly set out that specific equipment 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?

As regular readers of this blog know, we are not generally fans of China joint ventures. Our view is that if you as a foreign company are not required by Chinese law to form a joint venture with a Chinese company to accomplish your China plans, you would in most cases (but not all) be better off going it alone. In How China Joint Ventures: We Love Them AND We Hate Them, we made our views about China joint ventures clear:

We have developed quite a reputation for not liking joint ventures and that is not really true. Wary would be a better word for how we feel about them. I am always bothered when a client or potential client calls about their proposed joint venture and starts out by saying “I know you don’t like joint ventures.” Are we losing business because of this reputation, or maybe we are getting more because people believe that if we give the go-ahead on theirs, it really is as good as they think it is. Of course, we will never know, but we can at least try to clear the air. We like the appropriate and necessary joint ventures; we just think it is a big mistake to consider a joint venture as the default method for entering China.

Of all the China legal work done by my law firm, our work setting up and dismantling joint ventures is probably my favorite and certainly one of the most lucrative. We charge a flat fee for probably 90% of our China work, but for forming joint ventures, we always charge hourly. We charge hourly because setting up a China joint venture can range from fast and easy to difficult and contentious. It is the rare one that is fast and easy.

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Just to be clear, we love forming joint ventures, but only when they truly do make sense.

We also love taking apart China joint ventures that have gone wrong. And again, we love doing this not for because it is in any way a good thing for our clients, who usually are in dire straits when they come to us with their joint venture problems, but because resolving joint venture disputes is like a chess game, but at our hourly rate.

I am just not sure where exactly to put the Fellowes joint venture in all of this. I need more information. Nonetheless, the article is certainly worth a read as yet another cautionary tale on doing business with China.