1. China Legal Risk Analysis
I have lately been doing a fair amount of what I call legal risk analysis for companies that do business in or with China. This mostly consists of my looking at the legal positioning of those companies and then helping them formulate a plan to reduce their China risks with legal tools. My goal with the legal risk analysis is to reduce a company’s risks by doing what I call “lightening their China footprint” in a way that minimizes business disruption. This often involves restructuring how they are in China and how they deal with their physical and intangible assets there.
Thanks to the news yesterday regarding Airbnb leaving China, I have a perfect “poster child” example of a company that is lightening its China footprint and appears to be doing so correctly. The below is my armchair analysis of Airbnb’s leaving China.
2. Airbnb’s History in China
I will start with a bit of history on Airbnb in China. In November, 2021, Axios (Bethany Allen-Ebrahimian and Jacque Schrag) wrote a story, Airbnb hosts Xinjiang rentals on land owned by sanctioned group, thoroughly describing the issues Western companies face by doing business with China, and especially in China — which is not too dissimilar, though perhaps a few years behind, what has been happening to Western companies that do/did business with Russia. The Axios article lays out the facts as follows — everything below is a direct quote from the article, but for the two small portions in brackerts , which are my own comments.
I directly pulled nearly the whole article because it provides a great example of the sorts of dueling laws, regulations, and reputational issues faced by companies that do business in/with China while also doing business in/with the West. I also wanted to use nearly the entire article because the accumulation of the facts laid out by Axios gives a great sense of how complicated these sorts of issues are and of how thin the needle Western companies must thread to continue doing business with China. If you read the Axios article, I’m guessing your reaction will be like mine, which is “yeah, now I totally understand why AirBnb chose to get out of China.” Last week, in NBA owners, mum on China relationship, have more than $10 billion invested there (by Mark Fainaru-Wada and Steve Fainaru) I was quoted on the sort of betwixt and between difficulties Western companies face by doing business in China:
“Nobody really wants their name associated with China, but what can they do?” said attorney Dan Harris, whose firm Harris Bricken represents many companies that do business in China. “They’re sort of betwixt and between. If they say what Americans want them to say, it’s death in China. If they say what China wants, it’s death in America.”
Here is the Axios article, nearly in full:
- Airbnb has more than a dozen homes available for rent in China’s Xinjiang region on land owned by an organization sanctioned by the U.S. government for complicity in genocide and forced labor, an Axios investigation has found.
- The listings expose Airbnb to regulatory risk under U.S. law. They also land yet another American tech company in the crossfire between the U.S. and China.
- Airbnb told Axios the company believes the sanction does not apply to these listings and that it implements guidance provided by the U.S. Department of Treasury to comply with sanctions.
- China is promoting tourism in Xinjiang where it is carrying out genocide. [See today’s BBC article on newly uncovered evidence of this genocide.]
- Airbnb’s operations in Xinjiang “pose an unacceptably high level of regulatory and reputational risk for the company in the United States,” Isaac Stone Fish, founder and CEO of Strategy Risks, a firm which specializes in assessing China and Xinjiang-related risk, told Axios. [Last month, Isaac and I co-led a webinar on China’s increasing risks and you can get a great sense for some of those risks we discussed at that webinar by reading China Business Risks: The Questions We Got.
- “We take our obligation to comply with U.S. Treasury rules incredibly seriously. OFAC rules require Airbnb to screen the parties we are transacting with, not the underlying landowners,” Airbnb spokesperson Christopher Nulty said in a statement provided to Axios.
- “We screen all hosts and guests against global government watchlists, including OFAC’s Specially Designated Nationals and Blocked Persons list, including the hosts associated with the listings raised by Axios,” Nulty said.
- “Sanctions compliance is not a check-the-box exercise. There are other considerations within the compliance regime that go beyond pure transaction screening with the immediate counterparty,” said Alex Zerden, a former Treasury official who worked on Global Magnitsky Act sanctions who is founder of Capitol Peak Strategies, a digital asset and risk advisory firm.
- Axios identified 14 Airbnb listings on land owned by the Xinjiang Production and Construction Corps (XPCC), a large paramilitary organization that has long controlled vast swaths of Xinjiang’s land, natural resources and economy.
- In July 2020, the Trump administration sanctioned the XPCC under the Global Magnitsky Act for complicity in ongoing genocide and repression targeting ethnic minorities in the region.
- The sanctions “prohibit all transactions” that “involve any property or interests in property” of the XPCC.
- The XPCC operates some of the mass internment facilities in Xinjiang where various outlets report 1 million or more ethnic Uyghurs have been detained, subjected to torture and indoctrination, and forced to renounce their religious beliefs.
- In July 2021, several U.S. federal agencies issued an advisory to U.S. businesses, warning that continuing to operate in Xinjiang “could run a high risk of violating U.S. law.”
- OFAC relies largely on companies to self-report compliance issues, and it has issued a detailed framework for companies that emphasizes a “risk-based approach to sanctions compliance.”
- Information connecting numerous Airbnb listings with XPCC-owned land is publicly available, in some cases on Airbnb’s own website.
- One Airbnb listing states it is located at the XPCC Cavalry Regiment’s Seventh Company, near the scenic Nalati Grassland in Yili Prefecture, and advertises that guests can experience “XPCC cavalry culture.” A listing, the Mobei Kangyang Hotel, states it is located at an XPCC regiment on the outskirts of the city of Shihezi in northern Xinjiang. Another rental is listed in Chinese under the name “XPCC Farmhouse.”
- “Stays in China have accounted for approximately 1% of revenue for the last few years. While China has been a very minimal part of our financial success, we believe China is an important part of our purpose to connect people from around the world,” Nulty said.
- What to watch: Whether Airbnb can satisfy both U.S. and Chinese demands regarding its operations in Xinjiang.
- The bottom line: “Airbnb serves as a stark reminder for other U.S. businesses operating in Xinjiang: Better to close Xinjiang operations quietly, rather than risk a scandal in the United States or China,” Stone Fish said.
3. Airbnb Leaving China
My law firm’s international lawyers have been helping companies negotiate their exits from China, by among other things, helping them figure out where to go instead of or in addition to China. We also have been helping them set up in other countries, do deals involving other countries, protect their IP in other countries, and draft necessary contracts in other countries. In the last few months our international lawyers have been kept nearly as busy with countries like Vietnam, Cambodia, Mexico, Indonesia, Thailand, Malaysia, Turkey, India and Pakistan as with China.
The above is but an introduction to what we see as China’s diminished future for foreign companies. Since pretty much the inception of the US-China trade war we have seen it as more than a trade war. At first, we saw the US tariffs as an effort by the United States to get China to “open up” and “act right” on things like the internet and IP. But because we did not see China changing on these things, we did not see the trade war ending.
The New York Times article then notes how Airbnb never did particularly well in China: “Airbnb, which has operated in China since 2016, is retreating from the country after struggling to compete with local ‘superapps’ that charge lower fees and less per night on average than in other regions, said a person with knowledge of the situation.” My summary of this is that China is a very tough market for foreign companies in most industries. This has always been true and this that goes way beyond just “local superapps.” China’s government controls China’s economy, from the macro to the micro, and foreign companies — especially those that communicate directly with the Chinese people — are reviled and feared by the Chinese government and have never been allowed to fairly compete. Google, Facebook, Amazon . . . the list goes on and on.
The Times article then notes how “the pandemic compounded Airbnb’s business woes.” Well sure, but if Airbnb had been thriving before China started locking down so many of its cities, it almost certainly would have waited out the storm.
Per the New York Times, Airbnb will be shutting down its roughly 150,000 listings in China but it will continue its business serving Chinese tourists traveling outside China. “It will keep its Beijing office open with a few hundred employees, the person added.” To this I say yes and no. My “yes” part is that of course Airbnb will continue its business serving Chinese tourists traveling outside China. Why wouldn’t it? I mean, if I owned a 7-11 in Seattle, I would continue my business “serving Chinese tourists traveling outside China.” So why is this even mentioned at all? I’m virtually certain it is mentioned because Airbnb is stressing this fact so as to do as much as it can not to offend the Chinese government on the way out. This is only smart.
In How to Move Your Manufacturing Out of China Safely, I lay out the risks in leaving China and how to minimize those risks. I did not come out and say this in this post, but I should have: hell hath no fury like a manufacturer scorned. Writ larger, hell hath no fury like a China scorned. The truth is that so long as you have any employees or assets in China (and Airbnb no doubt has both), it is not a good idea to piss off important and powerful people in China. Airbnb is smart to emphasize its continued connections to China as it is heading for the exits. This is the yes part.
The “no” part is Airbnb keeping a company and employees in China. Again though, it is smart of Airbnb to say this, but I will bet that within two years at most, Airbnb will not have any employees in China. I say this because if Airbnb really wants to lighten its footprint in China — and all indications are that it does — keeping employees in China will eventually not be worth it. Shutting down a China subsidiary typically takes at least a year, usually more, and I am guessing that Airbnb will in fairly short order begin the process of slowly shutting down its company in China and slowly laying off its employees there. Just to be clear, I have no inside information on this; I say this based entirely on what I have seen from the foreign companies my law firm has helped get out of China. It just is not worth the hassle and the reputational risks to have a company and employees in China unless the company and the employees are absolutely necessary for China.
This is especially true for companies that deal with data, and that is just about every company. The Wall Street Journal article on Airbnb’s China exit, notes how “a former deputy director of the Federal Bureau of Investigation resigned in 2019 from his position as Airbnb’s chief trust officer over concerns about how the company shares data with Chinese authorities.” We wrote about the Chinese government’s rapacious appetite for foreign company data in China’s New Personal Information Protection Law Forced Out Yahoo and Linkedin: Will YOU Be Next. Data issues are an additional reason not to be in China unless you must be.
Bottom Line: China is becoming increasingly difficult, but leaving China is not so easy either, and must be done correctly.