China Business

The "Your Lawyer Doesn’t Understand China Excuse"

China attorney-client privilege

David Dayton at Silk Road International has a great post on China lawyering, without trying to do so. His post, Reasons why a factory doesn’t want you to come see things, posits that if your Chinese factory does not want you to visit, something bad is afoot.

Dayton sets out the excuses he hears as to why it is not the right time for him to visit the factory and then he lists the following as the only possible real reasons:

Regardless of the words used, my experience tells me there are really only a few reasons why you can’t go into a factory to see your product for a scheduled QC visit (or any other reason):

1. They are not as far along in making the product as they should be.

2. They are not actually making the product.

3. They do not want you to see some part of the process for making the product.

4. They do not want you to reject the product or change their processes.

5. They are busy and have scheduled legitimate appointments with others on your requested day.

6. They are closed or are undergoing repairs/inspections/other issues that would not allow you to see the product on your requested day.

Dayton then talks about how since you are the one buying the product, you should be able to come visit and if the reason is numbers 5 or 6 above, you should be able to come out soon in any event. But since this is really a post on handling China legal issues, you will need to read Dayton’s post if you want more information on the factory side.

Dayton’s post is about the legal side in that we China lawyers constantly hear similar excuses and below are are some real world examples:

1. Our client is trying to buy a Chinese factory. We are conducting the due diligence and we determine the first set of books are totally rigged. We ask for the real set of books and we are told we already have it. We say “no deal” and then we are given a second, slightly better set, but not the real one. We ask for various documents the factory is absolutely required to provide the government to operate. The factory then goes and tells our client that we do not understand China and says there is no such thing as these documents and nobody actually provides them to the government. We tell our client how we had no issue in getting those exact same documents in our last five such deals and our client wisely chooses to walk away from this particular deal.

2. Our client is seeking to form a China WFOE and lease a factory in China. When forming a China WFOE, the WFOE-to-be’s lease must comply with various requirements for WFOE leases. Our China business lawyers tell our client we need proof that the landlord has authority to lease the factory and we set out the various documents that would prove that authority. The “landlord” tells our client it has approval from the mayor to lease the factory (it did) and that we foreign lawyers do not understand China and if we persisted in requiring these documents, the deal would be off. Our client said it would abide by our advice and the Chinese “landlord” then produced documents which showed that the property was actually part of a collective and could not be leased to a foreign entity. So again no deal.

3. Our client was looking to do a joint venture with a Chinese entity. Our impression was that the Chinese entity was not really interested in our client for the long term; it merely wanted to strip it of its valuable intellectual property. The deal the Chinese entity was proposing seemed almost too good to be true in that our client needed only to contribute its IP to the venture. We told our client that such a contribution would not be sufficient to make the joint venture legitimate (there has to be a monetary contribution from the foreign side in a China joint venture) and we counseled against going forward. The Chinese company (you know the drill by now) told our client we knew nothing about China and its laws and that the Mayor was behind all this (and again he was). We asked the Chinese company to come up with some law that would justify such a deal and they came back to us with a bizarre and incredibly tortured interpretation of statutes which actually forbid this. Our client (wisely) walked.

I am not saying the Chinese company that says you cannot see their factory or documents that day is always trying put one over on you, but I am saying that most of the time if you have a valid basis for wanting to see the factory or the documents, there is a lot to be gained and learned by sticking by your guns.

UPDATE: Just learned of this post, You Don’t Understand China, which sets forth what is so often meant when a foreigner is told that they don’t understand China:

  1. I’ve done something wrong, but it’s ok because I going to try to cover up my actions with my country’s culture, inadequate legal system or pervasive corruption.
  2. This is China, I’m Chinese, let’s just do what I want to do.
  3. I can’t be bothered to come up with a coherent argument or explanation, so let’s just attribute this problem to your ignorance.
  4. I know more than you, let’s keep it that way.

The post goes on to talk about how “you don’t understand China” gets said a lot in China “as a crutch to dismiss valid concerns by outsiders.”

I like how it then says that “[w]hen you do business in China, if you let anyone say this to you and get away with it, you probably deserve to lose your shirt.” The post also provides an excellent retort: “explain it to me:”

If after saying this you are told ‘no’ or confronted with a multi-layered attempt at obfuscation, then you know what you are dealing with. That person has no interest in helping you, which also probably means you don’t share a common objective. You will need to deal with that misalignment as best you can. If it’s important enough to you, it’s time to invest in finding someone who can answer your questions. This is where the high-priced consultants, or maybe different business partners, come in.

On the other hand, if your genuine interest in hearing an explanation about what you supposedly don’t understand is met by a real attempt to enlighten you, then you have found someone who cares enough about their relationship with you to foster it with knowledge. Dear readers, such colleagues, business partners and friends are worth their weight in gold. Find them and reward them.

Excellent advice.

8 responses to “The "Your Lawyer Doesn’t Understand China Excuse"”

  1. Good points. This is exactly what factory auditors experience with 90%+ of Chinese factories. Let’s say you follow a checklist derived from the ISO9000 series: you ask for written proof of every checkpoint. Chinese factories usually say “yes, sure we do this,” then you ask for a document and you insist you need to see it now… They talk among themselves, and after a while they admit it’s not there to be seen today.

  2. Nice post with some great advice. I have been doing business in China for 9 years and I have seen so many examples of this that I have lost count. One of the ways I deal with it is to just stare at the person who is telling me this and just keep on staring until they say something. Sometimes this really works and I get great information out of them.

  3. Excellent post at SRI Dan. I had a client who had decided to split production of two identical machines to two different suppliers. While I applaud the creative schedule management, this was not a good idea.
    On my first day at Factory A I was pleasantly surprised to find an excellent in house QC system. There was one “expediter” and “project manager” who managed the construction of the machine. They were on-time and an inspection of the machine’s sub-assemblies left me very impressed. There were some small issues with parts that were supposed to be bought commercially that they had in fact chosen to fabricate, but all in all I was impressed and satisfied.
    Factory B – Kept me waiting at my hotel all morning. Driver arrives around 10:30 and says we will meet for lunch first. This is where your business-in-China-Spidey-Sense goes off so bad you might think that there’s a bullet about to hit you. I spent all day/evening/night on the phone with the project managers in China, US and Europe. They raised enough stink that I was allowed into the factory on Day 2. Complete and utter chaos. No project manager. They could hardly even put together a file with the original design drawings we supplied….
    I spent several days a week travelling back and forth 140 km trying to help Factory A build the parts they should have purchased, and manage the fiasco at Factory B.
    What was supposed to be a nice week in Jiangsu province doing a QC trip ended up becoming a 4 week crisis management conference with me and another engineer.
    I guess my point is this. It may cost you a little to send “a body” to the factory every week or two, but it’s prudent.

  4. Yeah, things can be like this in many factories or companies in china. And maybe Chinese has been a sly nation to many international friends so far. But it’s of historic reasons. Poor and densely populated places do churn out cheaters and liers, like china, india, nigeria. But I do believe things can be changed gradually, just give it time. Like the rises of all the giants which are now active in international business arena like Lenovo, Haier.
    on the other hand, so called big international enterprises are usually very trust worthy. But they may suddenly collaps, bringing down millions of other relevant entities, caused by black-box operation, much more intelligently covered up by skillful expertise. eg. Merrill Lynch, Lehman Brothers, Enron.

  5. The best piece of advice I was ever given before I came to China was this. If you would not do the deal in London (or New York or Sydney) don’t do it in China. Meaning that if the structure of the deal is not something that you would accept in your home country, don’t accept it in China.
    It drives me crazy when I hear “you don’t understand China”. It is a red flag when I hear it and it makes me go on alert mode and to start being even more skeptical than I usually am about the deal on the table in China.
    My line I like to use when they say ” you don’t understand China” is “Well, you don’t understand westerners, because in the west, we have rules and procedures and only trust facts that can be verified, not relationships. And if you want to be doing business with a western company, than you need to understand westerners better”.
    Part of the negotiating tactics of China is to make you feel less capable or weak. They will always try and make you feel as if you should be grateful that they have even decided to speak to you about business and you should be kissing their “ass” to do so. Don’t fall for it. Only negotiate, as they like to say, “on mutually beneficial terms”. That means it is a two way street and while you may have to be a bit flexible in accepting some reasonable terms from them, the too must treat you as an equal at the negotiating table.
    So please people, stop offering them trips abroad or other perks to get them to give you business. How many of you fly to London to negotiate a deal with the idea that you are about to offer the Brit across the table a trip to Las Vegas as part of the deal to get him to sign. Or you would agree to help the wife the British GM apply for a visa to go to the US to visit their daughter in University as part of the deal?
    If you would not accept those terms in your own country, don’t accept them in China.

  6. There are several reasons why a foreigner might be told “you don’t understand China,” in my experience sometimes what the speaker really means is:
    • “In fact, you really don’t know that much about China.”
    • “I can’t be bothered to come up with a coherent argument or explanation, so let’s just attribute this problem to your ignorance.”
    • “I know more than you, let’s keep it that way.”
    • “I’ve done something wrong, but it’s ok because I’m going to try to cover up my actions with my country’s culture, inadequate legal system or pervasive corruption.”
    • “This is China, I’m Chinese, let’s just do what I want to do.”
    The simple solution to all of this, say “Explain it to me”. Anyone who bothers to give you a clear explanation probably has interests aligned with yours, those who try to obfuscate are working against you and you probably don’t want to do business with them.

  7. Dan, great article. I am from Suzhou and have to say Your comments in many articles regarding Suzhou are mostly accurate.

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