Legal Affairs
China: Land of opportunity?
Identifying opportunities and challenges of doing business in China
Smart Business Akron/Canton | July 2006
The United States purchases more than $85 billion in Chinese products each year. Virtually every major consumer product retailer in America is sourcing at least part of its product line from China, because it has the labor rates and technical know-how to produce many products for pennies on the dollar, compared to U.S.-sourced products.
In 2002, China surpassed the United States as the world’s leading destination for foreign investment. Now a member of the World Trade Organization (WTO), many of China’s restrictions on foreign investment have been eased or eliminated. Nonetheless, foreign investments there remain highly regulated by the Chinese government.
As a result of China’s emergence, there is a growing interest by U.S. companies to build or expand operations there. This may take the form of supply sourcing and/or setting up manufacturing capabilities.
“While the benefits may be big,” says Tony Dietrich, an attorney with Roetzel & Andress LPA, “the process does not come without great risk. U.S. businesses must be deliberate, cautious and prepared, and not let shortsighted goals dictate their actions.”
Smart Business spoke with Dietrich about issues to consider before establishing operations in China.
Why is there so much interest in China as a business resource?
One of the reasons for the interest is the potential cost savings. Lower tax rates, lower SGA expenses (selling, general and administrative), and lower capital costs are three areas where U.S. companies can see significant financial gains. Beyond that, the known fact of lower labor costs makes China very desirable. In addition, China is experiencing accelerated growth as a consumer goods market. A significant market currently exists, and the potential for growth is staggering. It’s predicted that by 2010, 400 million Chinese families will have purchasing power equivalent to at least $50,000 per year.
Should U.S. businesses explore and consider establishing a supply source or other relationship in China?
There can be many reasons for establishing a relationship in China. However, customer retention is not sufficient reason alone. It is not uncommon for large manufacturers to pressure their U.S. suppliers to establish Chinese supply sources simply because the manufacturer has been unable to do just that. Some manufacturers want U.S. suppliers to make the investment of time, effort and money so they can copy or appropriate successful operations. Establishing a presence and relationship with a supplier in China should be viewed as a growth opportunity that needs to fit into the long-term business strategy.
If a U.S. business wants to pursue opportunities or production capability in China, how can it find a capable and reliable partner and adviser?
Hire an experienced consultant to assist with the entire process. Keep in mind that the number of consultants positioning themselves as China experts has proliferated. Consultants must be carefully screened prior to hiring. Your lawyer, accountant and business contacts may be able to assist you in identifying a qualified consultant.
What are the most challenging issues in establishing and maintaining a Chinese supply source?
The most challenging issue may be dealing with the language barrier and the subsequent problems that may result.
Second, the legal system in China is unpredictable. What exists today cannot be relied upon to approximate, in any manner, the legal systems in other parts of the world.
The third issue is the challenge of establishing and maintaining a personal relationship with your Chinese partner. This requires time, effort and money. I’ve worked with a number of clients entering this market, and no two deals are the same. Circumstances change as the market evolves and market conditions change.
In light of the underdeveloped legal system in China, how can you protect yourself from the appropriation and use of your technology and methods?
Use a partner who is not currently producing your type of product. If you become an important source and outlet for your partner, your Chinese partner will be less motivated to initiate competing activities.
Also, identify an alternative supply source in case the relationship falters.
Finally, make it clear to your partner that you will terminate the relationship if your partner appropriates your technology, and that you will seek to restrain and enjoin sales of similar products in the U.S. and in other countries.
GEORGE A. (TONY) DIETRICH is a partner with Roetzel & Andress LPA, a full-service law firm with 10 offices in Ohio, Florida and Washington, D.C. Dietrich specializes in corporate law and international business law, with an emphasis on business acquisitions and divestitures; corporate finance and corporate governance. Reach him at (330) 849-6601 or gdietrich@ralaw.com. For more information visit www.ralaw.com.
