The First Question for Doing Business in China: Is it Legal?

China business

A couple weeks back, I moderated a Doing Business in China seminar at which two lawyers speakers went through the steps for forming a China WFOE. My two cent contribution was on the need to make sure that what you are planning on doing in China is legal, and to do that before anything else. I then proceeded to tell (probably for the hundredth time) of a company that called me many years ago to retain my law firm to handle their China WFOE formation.

The company calling me was (and probably still is) a high powered New York City PE firm and they proceeded to tell me right out of the gate of how they were working with a company that had spent $500,000 researching the market in China and it was clear there was a huge need for their services and they would be the first foreign company in China to provide such services. As they were talking, I kept thinking of how there is indeed a huge need for foreigners to provide such services, but the reason no foreign company had yet done so was because those services were on the prohibited list for foreigners.

A short digression here. China has what it calls its Catalog for Guidance of Foreign Investment. This catalog divides businesses into three categories: encouraged, restricted, and prohibited. Generally, foreign companies are allowed to operate an encouraged business on their own, as a Wholly Foreign Owned Enterprise (WFOE). Restricted businesses typically must be done by foreigners via a Joint Venture (JV) and foreign companies cannot operate a prohibited business at all.

So instead of my offering to form this company’s WOFE, I instead asked if they had done any legal research regarding the legality of their proposed business in China. They told me they had not, and they then retained us to research it. That very same day we got back to them confirming my suspicion. The business they had spent the last year and $500,000 researching was prohibited to foreigners.

Many love to tell of how “thirty years ago such and such company went into China in XYZ industry even though XYZ industry was clearly forbidden to foreign companies and now such and such company has X billions of dollars in sales in China.” Carrefour is oftentimes the example used. And though there are plenty of true stories like this, the key is they were all about thirty years ago and doing that today would almost certainly not end well.

I thought of this today when I read Report: Amazon Kindle store hit by regulatory trouble in China. According to the article, “Amazon’s new Chinese Kindle store is reportedly being investigated by Chinese authorities over charges that the store does not have a license to sell e-books in the country.”

China’s GAAP (General Administration of Press and Publication) agency requires that digital publishers operating in China must receive at least one of four licenses to publish, copy, distribute, or import ebooks, according to blog site MIC Gadget.
But Amazon allegedly did not obtain any of the required licenses. Instead, the company reportedly borrowed a license from one of its partners, which is against the law in China. Amazon did apply for a business license to run the store, MIC Gadget said, but that process is likely to take a long time to be approved.

The article goes on to talk about the “stiff competition” Amazon will be facing in China’s ebook market and also notes how “Amazon’s former China chief told Reuters this year that the company hopes to bring the Kindle to China within the next two years.”

So what is going on here?

Let me start out by making very clear I have zero inside information and so whatever I say about what Amazon may be doing is pure speculation. With that out of the way though, there are a number of plausible explanations, including the following:

  1. The article is completely wrong. Amazon has all the required licenses.
  2. Amazon made a mistake and did not realize it needed all the licenses mentioned in the article. This is unlikely.
  3. Amazon made the decision to start selling its Kindle before obtaining all necessary licenses.

If either number one or number two above are true, there is little more for me to say. But let’s assume for a moment number three is true. If true, there is some explanation for it. Amazon is a huge company. Amazon has a ton of money.  Amazon is not exactly unfamiliar with spending massive amounts of money to gain market share and then worrying about profits later. Is that what Amazon has done here? Maybe. If it is, is this in some way instructive for your business? Unless you have something approaching Amazon-like money, probably not.

The bottom line here is that if you are a normal foreign company looking to do business in China, the best way for you to go about that is to first make sure what you are proposing to do in China is legal in China and then do everything necessary to make your business legal in China. It is that simple.

What do you think?

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