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February 28, 2006
Event: Technology Investment in China
The China Institute of New York City, together with Heller Ehrman LLP, have announced a panel discussion on technology investment in China.
When: Monday, March 13, 2006, 4-6pm
Cocktail reception and networking to follow
Where: Heller Ehrman, Times Square Tower, 7 Times Square (Broadway between 41st and 42nd Street) 40th Floor, New York City
Moderator
Paul Downs, Partner, Heller Ehrman LLP, New York
Panelists
(Henry) Hong Liu, Of Counsel, Heller Ehrman LLP, New York and formerly General Counsel at the China Securities Regulatory Commission
Simon Luk, Partner, Heller Ehrman LLP, Hong Kong
Alkesh Shah, Global Sector Head, Technology, HSBC Securities Inc.
David Hall-Jones, Partner, Heller Ehrman LLP, Hong Kong
RSVP to William Krents at wkrents@chinainstitute.org or call 212.744.8181 x125
Posted by Richard at 4:07 PM | Comments (0)February 22, 2006
The Incredible Vanishing Credit Card
[Editor's Note: After our post on counterfeiting (and we thank you all for the wonderful audience reaction), we are forced to admit to a fascination with the "look-alikes" in Chinese business that aren't exactly what they seem to be. Today, we turn to the credit card. Credit cards are a financial tool of recent invention in the West, but in China are much like newborn babes in swaddling clothes. But is there really a living baby in there or a doll made up to look like one?
Despite many obstacles, the Chinese internet community is active, well-educated, opinionated, agressive and very often spot on. Business is not a suspect topic -- but consumer discontent is some form of revolt, no matter how one may cut it. This article by Wu Xiang-hong (吴向宏), a financial blogger, takes the Chinese credit card industry to task. While some of Wu's comments are inexact, he clearly has done his research. We went jaw agape upon reading the allusion to the American Truth-in-Lending Act and Regulation Z, which cap consumer liability in case of unauthorized usage. One would venture to suggest that most American consumers have no knowledge of this law and the benefits it confers upon them. (Many buy the outrageously expensive credit insurance -- completely valueluess -- that issuers routinely flog to the unknowing.)
Wu's post has been reprinted countless times on many Chinese internet sites, resulting in hundreds of comments, generally in agreement.]
The Beautiful Lie of Chinese Credit Cards
In the U.S. and other developed western nations, you needn’t worry when your credit card is lost. American law stipulates that one need only report a credit card stolen within 24 hours (or after discovery of theft), regardless of the amount of the theft, and the cardholder’s loss is capped at $50. Similar law exists in England, stipulating the cardholder’s loss at £50. The remaining portion above that amount becomes the bank’s loss, unless the bank can prove obvious error by the merchant. Actually, many banks implement terms that are even more favorable than the law allows. Not only do they allow more time to report a stolen card, they also take the loss on the $50. That is to say, the bank uses its own credit as a guarantee for all credit card consumption.
In China, all loss owing to the theft of a credit card is borne by the consumer. This makes us aware of the fact that, even though a small plastic card called a “credit card” is running around on the Chinese market, there is no bank guarantee behind it. In all frankness, there is no “credit” in our “credit cards,” and can’t possibly be discussed on even terms with those of the developed nations. The latter truly has a magical feel to it, almost as if one sees the bank when one sees the card itself.
I must elucidate this point because in China the phrase “international norm” is invoked in order to justify bank fees. As an example, in the midst of the brouhouha over annual fees for bankcards in the past two months, some declared that annual fees for bankcards were an “international norm.” Recently, during a similar brouhaha in Shenzhen and other cities where issuers refused to process cards, we also heard a similar tune. Merchants believed that bank processing fees were too high and demanded fees be lowered. The Chinese banking industry retorted that international processing fees run at 2% and that Chinese banks were only half that. So you still want us to decrease fees?
[For detail regarding the Shenzhen brouhouha, see this article.]
Their use of the “international norm” was inaccurate. At the beginning of the year, many experts (including the author) pointed out that most international bank cards do not charge annual fees. The argument that the so-called annual fee is an “international norm” can not be established. And this time, their use of “international norm” is slimy. In the U.S., card processing fees for retail merchants run as cheap as $0.20 plus 1.6% of the transaction, generally averaging around 2%. But the rate for debit cards is as low as $0.40, that is to say, 0.4% for every $100. How can this possibly “average around 2%?” Don’t forget, the bank cards currently used in China are primarily debit cards (requiring a PIN number), which should permit a lower fee rate.
But these details aren’t the core of the problem. The core is the basic standard required for doing business, which is, “you (should) get what you pay for.” If you hope to bring fees in line with international standards, then the content and quality of your product and service must also. In the life of Chinese business, we encounter many things like this – the price tracks international standards, but the content does not.
Our so-called “credit card” is, unfortunately, a beautiful lie. Today, within China, much of the PR makes the public believe that the primary value of credit cards is in allowing people to consume before paying and to overdraw. Looking more closely, the PR attributes the reasons for China’s laggard credit card industry to “Chinese not having the custom of buying first and paying later.” This is completely misleading. It is a fact, even if we look at the origins of the credit card, that overdrawing is only one of its complementary functions.
The core of the credit card business is that the bank’s credit functions as a guarantee for the safety of the transaction between the consumer and the merchant. Use of a credit card can actually be more annoying than the use of cash. On what basis does the consumer and the merchant turn down the annoyance of swiping a card and willingly spend money needlessly on such things as processing and annual fees? The first reason is precisely the safety a credit card provides. Aside from the risk of theft, as we spoke of previously, there are other safety aspects to the transaction. For example, in many transactions, the consumer must first pay or leave a deposit before seeing the product or service. At certain times, the product or service is unsatisfactory, even perhaps defective. In such a situation, purchasing goods in a developed nation, the consumer can return the goods completely risk-free. The bank will reverse the charge, crediting the consumer’s account, or the bank will resolve the problem with the merchant. This system of credit safety is important for many consumer formats, such as TV, telephone and mail-order purchasing. In China, mail-order transactions are the province of fraudsters who blow smoke and wind. In the credit transaction system, the banks remove those fraudulent merchants from the ranks of those who may accept credit cards.
Merchants also enjoy a guarantee of safe transactions. For example, an individual rents a car with a credit card and wrecks it. The merchant can within limits first obtain recompense from the bank. Even if amounts exceed the individual’s ability to pay, even as much as to bankrupt a person, the bank is the only one who sustains the loss. Further, the travel, entertainment and leisure industries commonly take reservations, in which the merchant risks a no-show. But if the consumer uses a credit card to make the reservation, the merchant can receive payment from the card when the consumer does not hold to his end of the bargain.
From the time China’s banks established our credit card industry, they’ve continued to hide from risk, continually refusing to provide credit guarantees. In the very beginning, consumers were required to put up money as security against the issuance of a credit card. Up until today, a Chinese credit card is nothing more than a debit card allowing payment to be postponed. Even more, the quality of service is very far from international standards. Upon what basis can it demand fees similar to those commanded internationally?
Posted by Richard at 1:13 AM | Comments (0)February 3, 2006
Audio: Translation Challenge
Click on the little triangle below to hear today's post, Translation Challenge: "Never Give a Sucker an Even Break."
February 2, 2006
Translation Challenge: "Never Give a Sucker an Even Break"
[Editor's Note: I'm honored to have been asked by IP Dragon to write that blog's first guest post. The result is the essay you see below. Focusing on China's intellectual property issues, IP Dragon is well-written and penetrating. Its author has chosen to remain anonymous. This only increases the allure!]
The world knows of China’s leadership in the business of counterfeiting. If it – Delco car battery, tiger claw, night-scan telescoping mast, Viagra, holy relic of Tibetan Buddhism – can be copied cheaply and sold for profit, some entrepreneur (thief?) will grab hold of the opportunity and shake vigorously.
Counterfeiting harms rights holders. That was an “duh, fer sure, dude” statement. But the 2004 testimony of Anthony Wayne, U.S. Assistant Secretary for Economic and Business Affairs, makes one want to holler “Oh, my God!” as if we’d personally discovered alien seed pods in Santa Mira. [See Invasion of the Body Snatchers.] It is “estimated that U.S. companies' worldwide losses to counterfeiting and piracy range from $200 to $250 billion per year. Most counterfeit goods pass.” That sum exceeds the GDP of many nations.
And yet counterfeit products are rarely interdicted at the borders. China’s share? Daniel Chow, a law professor at Ohio State University, has testified that:
“In 2003, China accounted for 66% or over $62 million of the $94 million of all counterfeit and infringing goods seized by the US Customs Service at ports of entry into the United States. Mid-year figures in 2004 indicate that seizures are sharply higher with $64 million seized in the first half of 2004 alone.”
Extrapolating, Chinese counterfeits may account for US$150 billion of worldwide IP losses. No wonder it is estimated that counterfeiting produces as much as 8% of China’s GDP. Counterfeiting inevitably accompanies – and may very well benefit -- the growth of infant economies. In the 18th century, using cobalt mined in Connecticut, American potters imitated the fabulously popular China blue and white porcelain. And remember that Japan in the 1950s and 60s was rife with fake goods. Or more recently, Taiwan.
So what is the attraction with fakes? Or is this another “duh, dude” question?
In the 1980s, my cousin did business in Taiwan. Being a profligate entertainer of major customers, he once decided to impress by holding an emperor’s banquet (金玉滿堂) at the Hilton in Hsi Men Ting (西門町), the older downtown section of Taipei (台北). The centerpiece of the table was bear paw (熊掌), a traditional delicacy in Chinese cuisine, favored by only the very wealthiest. In the Taipei of the 1980s, a prepared dish of bear paw cost a King’s Ransom of nearly US$750, equivalent to the monthly salary of an office worker. A raw paw was shown to the guests before it was cooked. If I remember correctly, his guests were enormously impressed.
Several years later, a lady who had worked as a waitress in that same restaurant told me there was but one real paw in the refrigerator. Whenever the dish was ordered, the paw was trotted out to show the beaming guests and then immediately returned to cold storage. The chef would proceed to cook whatever meat he might have lying around that was less common than beef – alligator, venison, elk – and far less expensive. !Profit! And with just a little sleight of hand it descends in sheets. The crux of the bear paw con is dual, requiring a customer who’s neither ever tasted bear nor sees the paw cut up and cooked.
Yes, counterfeiting is a classic con. It needs but a sure thing -- a paying customer. An entrepreneur with energy, capital, nerve, imagination and a great product may still fail. The counterfeiting of an established brand requires similar elements, within a business environment favorable to the unimpeded trespass upon individual property rights, to allow the con to flourish. Bear paw is an established delicacy in Chinese cuisine.
Counterfeiters in China have established world-class CD duplication facilities (capital); harnessed the production power of entire villages (energy); threatened the lives of children with fake infant formula (nerve); built secret manufactories or factories in ship containers for mobility (imagination). But there’s virtually no economic risk. Someone else has built and crossed that bridge. The brand has already been established. The buyer is a certainty.
Even at a youthful age, I could not believe the premise of the movie, “The Sting,” (1973) the hit that starred my favorite pseudo-Oreo manufacturer, Paul Newman. Two good-natured gangsters (an oxymoron?) ante significant funds up front to replicate a bookie joint on the off chance they might score many times more dough from their mark. Several times, the scheme was nearly blown. The sucker could have simply walked away. Too much risk for a counterfeiter, don’t you think?
Despite two millennia of discourse and instruction on the Confucian ideal of 天下為公 (usually translated as “the world is a commonwealth”) and its modern diminutive, the Communist slogan, 为人民服务 (“serve the people”), Chinese find impractical, to say the least, the integration of the individual and the family into a greater public “good.” [Is this simply a display of my western liberal arts education or a genuine preoccupation with a beneficial and unifying ideal?] It apparently mandates the sacrifice of individual benefits to complete strangers with whom no bond is valued. Most undesirable. The individual thinks, “Where is the value to me and mine?”
The novel concept of individual rights under the law, often seen written into a subtext of the phrase 合法权益, has been received to a powerfully positive reception by P.R.C. Chinese. Everyone now, it seems, has some individual power. But the larger framework for these rights is barely constructed. The remnants of the old system do not suffice as its foundation. What can be built on detritus?
My strong impression from readings and discussions on this subject is that mainland Chinese view the law as but a tool – a means to an end – whereby individual gain can be gotten at the expense of a rival. They do not respect it as a particularized expression of an encompassing framework established to protect the welfare of the populace at large, despite sloganeering to the contrary. The law is for “me,” but not, more importantly, for “us.”
Until that conceptual foundation has been built – who knows when and if, despite the work by many brilliant intellectuals – the rights you hold in your intellectual property will be the object of stubborn disrespect and counterfeiting will continue to be a staple of the Chinese economy.
Well, dude, maybe that was just a bit too serious. Why don’t we turn to some hilarity for the nonce? Remember W.C. Fields’s epithet that one should "never give a sucker an even break?" [Translate that if you can!] Read this article for the story of a Chinese counterfeiter with a preposterous con who played upon the profundity of his wealthy collector-customer’s inexpertise. In doing so, he collected US$500 and the attention of the world’s media. Ah (deep breath), success!
Posted by Richard at 10:08 PM | Comments (1)
