Our China lawyers are constantly getting asked how China’s slowing economy and China’s declining relations with the West will impact business with China. Those who ask us these questions usually expect a simple answer, like “not well.” It is though more complicated than that. We have been seeing the following (some of which we predicted, some of which we did not):
1. The Chinese government has been pushing hard to get foreign companies to set up WFOEs and Joint Ventures in China or to stay in China, at least for now. See The China-US Trade War. It’s All Good Inside China! China seems to realize its declining economy needs foreign capital.
2. The Chinese government has done nothing to stop foreign companies from registering their IP (trademarks, copyrights, patents, and licensing agreements) in China.
3. The Chinese government is trying to stop money from leaving China for investments outside China, but this started even before the trade war. See Getting Money Out of China: NOT This Way.
4. Foreign companies with Chinese employees are facing increasing pressure not to terminate employees and doing so has gotten considerably more difficult. See Terminating Your China Employees Just Got Tougher.
5. Foreign companies doing any sort of deal with Chinese companies are facing more IP theft than ever. See below.
6. Foreign companies operating in China illegally are getting in big trouble. See below.
7. Foreign companies selling their products in or to China are getting worried, many of them assuming they will face a steep downturn. But will they? See below.
Increased IP Theft
The big thing our China lawyers are seeing these days is an increase in Chinese companies sacrificing their relationships with foreign companies by stealing foreign company IP. We wrote about this in Your China Factory as your Toughest Competitor and in China Trademark Theft. It’s Baaaaaack in a Big Way. Our China IP lawyers are seeing this in all industry sectors, especially technology. Why are China companies so willing to risk losing out on future business? When times are bad, greater risk becomes necessary to pay employee wages and to stay alive. We’ve become fond of pointing out that “since you will essentially be educating your Chinese counter-party in how to compete with you, you need contracts that will at least limit what they can do when they do so.”
Many China businesses are suffering from China’s slowing economy and from international businesses moving to Vietnam, India, Mexico and elsewhere. Many Chinese companies rightly believe they must compete with their foreign customers and partners just to survive.
Our law firm is getting roughly triple the usual number of emails/calls from foreign companies seeking help in trying to remedy/stop their Chinese suppliers and customers and partners from using their IP. Without a good contract and/or good international IP registrations, there is often little we can do. See China Contracts: Make Them Enforceable Or Don’t Bother and 8 Reasons to Register Your Trademarks in China. The best way to protect against this is to do so when you still have leverage and before your Chinese counter-party has run off with your product, your software, your design, and/or your customers. For what you can do to protect yourself from this sort of competition see China NNN Agreements and China: Do Just ONE Thing: Register Your Trademarks AND Your Design Patents, Part 1.
Increased Legal Enforcement in China
In every China downturn for the last twenty years, the Chinese government has gone after foreign companies operating illegally and this one has been no different. Why should the Chinese government allow illegal businesses to compete with domestic Chinese businesses without paying taxes, especially in a downturn? It shouldn’t and it doesn’t and going after illegally operating foreign is exactly what the Chinese government has been doing for months now. China typically goes after foreign companies that pay individuals in China without paying the required employer and employee taxes. See Doing Business in China Without a WFOE: Will the Defendant Please Rise. If you have “independent contractors” in China, you should not go to China until you change how you are doing business in China. See Doing Business in China with Deportation or Worse Hanging Over Your Head and Hiring A Chinese Employee Without A Chinese Entity. Good Luck With That.
What is always saddest about these crackdowns is that some businesses that thought they were operating legally are not, either because they misunderstood the laws or because someone lied to them about having done the required registrations and paid the required taxes. See How’s Your China WFOE? Please Check. Does the scope of your China entity (your WFOE or Joint Venture) really include exactly what you are doing? See Forming a China WFOE: Scope is Key. Are you really paying all your taxes? China has gotten quite good at finding and punishing foreign companies that do not pay what they owe in taxes.
You would likely be shocked at how often foreign companies are deceived by their own people into believing that what they are doing in China is legal when it isn’t or that they have paid for something required when they have not. And then there are still those who operate illegally “because everyone does it.” See A China Compliance Checklist for the basics on how to avoid China legal problems.
Selling Products to China
I have always found fascinating how macro economic issues (something like a country’s economic downturn) can have such widely varying micro economic impacts. By this I mean that when an economy starts tanking, the impact of this on particular businesses can be all over the map.
I first became starkly aware of this during the 1997 Asian Crisis, as I spent a large amount of time in Korea that year. A Korean newspaper did a story on the drop in imported goods coming into Korea. Now I do not remember the numbers very well, but I think imports had declined about 20%. But the really interesting part was how unevenly this fall in imports was among various products. The one that stands out for me is that some fruit (I am 99% sure it was either kumquats or quinces) had gone from $20 million in imports the year before to absolutely zero. Zero. The reason given for this was that it was a luxury item and luxuries were no longer in demand. Some staple food products (including some fruits) had seen virtually no decline.
I have a lawyer friend who represents a huge number of medical practices. He told me of a surgeon client of his whose practice had been decimated when insurance companies reduced their payments and stiffened their reviews. Again giving my best guess to the numbers, he said surgery rates had declined about 5% across the board in the country, but one surgeon client of his had seen his income go from something like $650,000 a year to around $50,000. There were various reasons this had happened, but obviously this particular surgeon contributed a lot more than most of the others to the overall 5% decline in surgeon payments. I am also reminded of how pizza sales tend to increase or at least hold firm in recessions, while most restaurants see a decline in business.
I mention all this because I have seen very little on how China’s decline has impacted businesses differently. Some of my firm’s clients are reporting either no downturn in their China sales or actual increases, while others have been hit hard. With the exception of companies that sell physical products, the hardest hit have been those that rely on Chinese companies sending large sums of money outside China. Go to Cramer: This earnings period revealed ‘brutal truths’ about US-China trade to see what investment guru Jim Cramer has to say about the varying impacts China’s downturn is having on publicly traded companies.
What are you seeing out there?