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Until this past decade, post-Liberation China was entirely unattractive to the American businessman. The promise of China as a spigot of liquid gold had beckoned for 150 years, enriching New England ship-owners in the 19th century China trade and maverick expatriate entrepreneurs in 20th century Shanghai, but tantalizing far more.

Invasion, civil war and 40 years of self-engineered insularity put the proverbial nail in the coffin. The cataclysm that shook one of the most ancient and populous societies effectively convinced Americans that the crystal curio of China had been, if not moth-balled, then shattered for all time.

China became the destination of a handful of wide-eyed westerners in search of an exotic experience. They were, to put it politely, a motley mixture of celebrities and frauds, Sinophiles and language students, tour groups and assorted runaways from the western world. In the late 1970s, Malcolm Forbes rode the “point-bike” in a supremely ridiculous convoy of Harley-Davidson motorcycles through the improverished countryside, imperiously barking demands at stunned local officials. Rarely did an intrepid trekker thrill the world with more memorable creations, but the writer Paul Theroux did, "Riding the Iron Rooster” in the 1980s.

But the times have greatly changed. Or have they? Let me suggest to you that, at least for some American businessmen, they have. A number of Americans have established growing businesses in China that create wealth and opportunity. Having spent a good deal of time in China, they speak mandarin and possess a profound understanding of the “mechanics” of life there.

I am more concerned for the others for whom the dream of an endless trough at which to sup remains the standard by which they uncritically throw in with the overarching sentiment of American business today: “we must be in China by all means.” Even companies that have no business going to China feel they must. They rush into the China market on a wing and a prayer. But, while many large corporations are now making a profit in China, according a recent survey by the American Chamber of Commerce in Shanghai, many American run companies are still out on the wing.

If you are thinking that China is your next frontier, I would like you to first consider these apparently simple, but deceptively complex questions.

1. We’re going to China. Why? What do we think we’ll accomplish there?
2. What is our basis for the answer to question #1?
3. Why do we think we are so sure of our answer to #2?
4. Review your answers to questions 1-3. What have you learned? Do you still wish to proceed?

I will deal with each of these questions in our next post.

In my last post, I posed a series of questions. One might think, erroneously, that in doing so, I wish to turn a business proposition – entering the China market -- into an academic exercise.

To the contary, my intention is to stimulate critical thinking, prior to action. Some businessmen seem overly disdainful of anything that hints at intellectual exercise, even when they themselves can be thoughtful, even shrewd, when it comes to their business dealings. (Yes, even shrewdness, the purposeful manipulation of ideas, people and events for the benefit of one’s own interest, is intellectual in nature.)

At a dinner party with senior executives of a major American corporation, we introduced ourselves. People began with university, and most of the executives had gone to state or community colleges. I was the only person who had Ivy League degrees. After my self-introduction, an exec asked, “So, Rich, now that you’ve gone to Yale, do you think you’re smarter than the rest of us?” I was frozen for an instant, stunned by a question I had never considered anyone would ever ask me, certainly not in public. But I realized that among those fellows, it was not cool to be smart. At least, not overtly.

But I am advising you -- especially if you are not inclined to do so -- to think critically and discuss openly among the relevant staff in your organization what China may mean – if it means anything – to the future of your business. In doing so, you will

• clarify your own goals and your capacity to achieve them

• grasp essential concepts and methods that apply to doing business in China that are inapplicable elsewhere

• discover new obstacles and pathways to the achievement of your goals

• confirm or deny your original expectations with a minimum of investment, prior to a more major one.

So let me rephrase this idea for some of you. “Critical thinking” merely means “careful consideration.” In other words, as the Chinese say: 三思而后行 (think thrice before you act). If you have already decided to enter the China market without applying careful consideration, please reconsider. Yes, reconsider.

Ask yourselves question number one: “We’re going to China. Why? What do we think we’ll accomplish there?”

List those things you believe you can accomplish. Many firms are unable to provide a concrete and thoughtful list. By thoughtful, I do not mean the following: “We will set up an office and begin selling our product there, expand the distribution channel and provide marketing and technical support from the build-house here in the U.S.”

In other words, if you are at the stage where you are already searching for an office in China, but haven’t done the thinking to support that office – you would be surprised at the number of companies in this position – I suggest you hold off a while.

Let’s fill out that amorphous description above, just a bit:

1. Setting up an office

a) Define the functions of this office and those who would staff it.

b) Define support requirements from relevant departments stateside.

c) Pinpoint the location of the office and the coverage that location enables.

d) With counsel, decide upon the legal form of the office and note any restrictions upon your business it may create.

2. Sales

a) List your potential customers, their locations, product lines.

b) Describe how your product(s) fit in the market as a whole and specifically why these potential customers would be attracted to purchase them.

c) Quantify monthly and annual projected sales, cost of sales and market share over the next five years.

d) Decide upon recommended size of sales force or sales support, as well as caliber of talent, required.

3. Distribution

a) Define expected channels: list potential distributors in each region where you expect to do business and your evaluation of each.

b) Create distribution strategy with careful attention to distributor strengths and weaknesses, as well as projected market trends.

c) With legal counsel, evaluate distributorship agreements and discuss in detail potential difficulties enforcing them.

4. Marketing and Technical Support

a) Define marketing and technical support needs from the Chinese customer and distributor viewpoint (not what you can provide, but what is needed.)

b) Brand creation – define the brand you wish to create and the strategy towards that end.

c) Evaluate use and potential cost/benefit of marketing channels, such as exhibitions, the media, product kick-offs, roadshows.

d) Define language needs in-house, as well as cross-cultural differences that affect the message you hope to broadcast.

This list is not exhaustive, but it’s a start. Does it make you think a bit about our first question? Remember what it was: What do we think we’ll accomplish in China?

We’ll proceed in our next post with our second question: “what is our basis for our answer to question #1?” Essentially, we’ll be asking for evidence to confirm our expectations and understanding. Very often, this evidence, collected and viewed with an objective mind, will lead us to ideas and pathways we had never before considered.

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Irrational Exuberance 3, or, Should You Enter the China Market?

[This post is the third in a series designed to help you formulate and evaluate your plans to enter the China market. See this page for links to the audio and text files of prior posts in the series. NB: More recent articles are listed at the top of that page with earlier articles below them.]

If you are American, you may remember Clara Peller and the 1984 advertisement for the Wendy’s fast-food chain. [Click “Watch Now” on this page to view the ad.] She found a competitor’s hamburger wanting and famously asked, “Where’s the beef?”

Dare you look at your own business plan for China and ask of it that same question?

Have you marshaled sufficient evidence that genuinely confirms your expectations? In other words, have you done your homework well? Or will careful and skeptical questioning reveal that your due diligence was shallow, your thinking uncritical and your conclusions erroneous?

Do not let the China Dream become so precious as to obscure what might really be waiting out there for you and your company.

“It was a miracle of rare device,

A sunny pleasure-dome with caves of ice!”

[Allow some beauty into your day and read aloud Coleridge’s brief poem, “Xanadu,” inspired by fantasies of China and a poem heard in Coleridge's dream.]

Often we value our dreams, thoughts and creations too highly, failing to see with a more objective and critical eye, that which we are missing.

With this in mind, let’s take a look at how we might go about looking for “the beef” in the plan.

OK, SO WHERE’S THE BEEF?

Let’s deal with the first paragraph of our hypothetical plan to enter the China market:

1. Setting up an office

a) Define the functions of this office and those who would staff it.

b) Define support requirements from relevant departments stateside.

c) Pinpoint the location of the office and the coverage that location enables.

d) With counsel, decide upon the legal form of the office and note any restrictions upon your business it may create.

Let us also assume that we did some homework and came up with a more detailed plan:

1a) Office function: Company intends to establish a sales office, as a base for management and as meeting area for the sales force during meetings with customers or management. Sales staff are expected to be on the road constantly and will not have permanent desks. Staff expected in China office: sales manager (male), one secretary (female), 5 salesmen (all male). All local Chinese.

1b) Support: Corporate office in the US will provide all sales support, including marketing and technical support.

1c) Office Location: Shanghai, Pudong Area, Financial District. Coverage enabled: nationwide

1d) Legal Form: Rep office, no significant restrictions.

LOOKING WITH A CRITICAL EYE

Now, let’s look at them, one by one, with a critical eye, always asking the question, “Can we really do that?” Here are a few examples of this kind of critical questioning.

1a) Office function:

• Is it practicable or advisable to keep sales staff on the move constantly in China, without giving them a physical location at the office to return to?

• Can or should the sales force be entirely male? Can I hire a male secretary? Should we hire all local Chinese?

1b) Support: What difficulties can we expect to encounter when our sales force is located on the road, 12,500 miles away and 12 hours ahead of the corporate support staff?

1c) Office Location:

• What are the benefits and disadvantages of locating our small office in the Pudong Financial District?

• Can we really cover nationwide clientele from Pudong?

1d) Legal Form:

• Can we conduct sales activities from a representative office?

• Are we really allowed to market, sell and distribute our product without legal or structural restrictions?

We’ll cover the bases, so to speak, in our next post.

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Irrational Exuberance 4, or, Should You Enter the China Market?

[This post is the fourth in a series designed to help you formulate and evaluate your plans to enter the China market. See this page for links to the audio and text files of prior posts in the series. NB: More recent articles are listed at the top of that page with earlier articles below them.]

In our last post, we looked at whether we could find verifiable and creditable substance in our hypothetical plan to enter the China market. We began by addressing our plan with a critical eye, asking of it some difficult questions.

What is a “critical eye” anyway?

Basically, we said, “Plan, you’re the handsomest bit of documentation we’ve seen in a long time. After all, we dressed you ourselves in the finest silk-wool, three-piece, navy pinstripe suit, spit-polished your black lace-ups, gave you a flash coiff and a stunning manicure. But, even though it may break our hearts to do so, we’re going to pause before we walk you out on the runway. We have to ask the question – are you really that good-looking? Or do we have a case of Dr. Frankenstein smiling at the “beauty” of his own creation?”

Americans may not be used to looking critically at anything. Goodness knows, the public schools hardly teach it. In corporate business, we often err on the side of silence, being too sensitive to political gamesmanship to proffer genuine and useful criticism when it is most needed. But here, silence is not golden, but less than brass: plastic.

To every claim that is made, we ask, “Oh, yeah? Says who?” We then carefully review the answer to see if it is based on sound thinking and a solid foundation of evidence.

As an example, we might purchase a 40 oz. bottle of laundry detergent at the store, upon which it reads “25% More!” Should we accept this claim unquestioningly? No, we attempt to validate the claim through questioning.

We might ask, “25% more than what?” Perhaps the bottle explains. Upon perusal, our bottle, in very small print, reads: “Than the 32 oz. Size!” Well, it should be clear to every dolt on the planet that the 40 oz size contains exactly 25% more than the 32 oz size. What then is the benefit? There is none. “25% More!” is nothing but an empty catch phrase designed to lure the uncritical to part with his hard-earned cash.

What if the copy printed bottle does not explain sufficiently? Upon further examination, there is a toll-free phone number for the manufacturer’s “customer assistance hotline.” Pulling the cellphone from our leather holster, we dial, reaching the friendly Mabel, located somewhere near Columbus, Ohio, one of the friendliest states in the country. A dialogue proceeds.

Mabel: Hello, this is the Perky Soap Bubble Company of Columbus, where your pleasure is our business. How may I help you today?

Rich: Hello, Mabel. I have in my hands a bottle of “Cram,” your laundry detergent specially formulated for soiled college students on a tight budget.

Mabel: Yes, sir. That’s one of our best sellers.

Rich: Is it? Well, I was wondering. Just above, the words “Removes Dried-in Stains You Get in the Chem Lab Better Than Any Other Brand,” it reads “25% More!” More than what?

Mabel: Oh, yes, sir. There is 25% more in that bottle.

Rich: More of what?

Mabel: Oh, let me check…of product.

Rich: (not willing to give up the fight yet): You mean of detergent?

Mabel: Yes, now, is there any other way I can help you.

Rich: Wait, wait. Compared to what?

Mabel: What sir?

Rich: 25% more detergent as compared to what?

Mabel: Oh, yes, I see. Than other bottles.

Rich: Do you mean a competing a competing brand or other bottles of your own brand?

Mabel: Let’s see. It says here… Let me ask a supervisor. (Unintelligible. Sounds like: “but he keeps asking me.”)

Bob: Sir? I’m Bob, an assistant supervisor here at the help desk. I can help you with your request.

Rich (fuming ever so slightly): I just told Mabel.

Bob: Oh, yes. Hold on. There is 25% more as compared to our 32 ounce bottle.

Rich: Of the same detergent.

Bob: That’s what it looks like, sir. Can I assist you with anything else?

Rich: No, you see, my weekend free minutes are just about used up.

Do you think I purchased a bottle? No, what looked appealing was clearly more scam than Cram. I never would have discovered this without an intensive critical examination.

So let’s apply this critical method of questioning to our hypothetical plan and see what answers we come up with. In our next post…

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Quick links to Rich Kuslan's "Irrational Exuberance, or, Should You Enter the China Market?" series:

Number 1: Should You Be Doing Business In China? (Text only)

Number 2: What Do You Wish to Accomplish? (Text / Audio)

Number 3: Where's the Beef? (Text / Audio)

Number 4: A Handsome Bit of Documentation (Text / Audio)

Number 5: Says Who? (Text / Audio)

Says Who?

[This post is the fifth in a series designed to help you formulate and evaluate your plans to enter the China market. See this page for links to the audio and text files of prior posts in the series. NB: More recent articles are listed at the top of that page with earlier articles below them.]

In our last post, we began to vet a hypothetical plan to enter the China market. Why? To ensure that we’ve not dreamed up a pie in the sky.

We subject our plan to a barrage of constructive criticism. This is not the time to cavil or exploit an opportunity for political gain, although less ethical operatives will, no doubt, attempt to do so. While maintaining an atmosphere of courtesy, neither need we tip-toe about the sensitivities of the plan’s authors and supporters.

Let’s be clear: we will avoid comments of a vulgar and personal nature, such as the one I once heard in a meeting of corporate executives: “That is without doubt the singular worst idea I have ever heard. What the h--- am I paying you a salary for?”

(That particular Vice-President apparently forgot that the corporation and its investors pay the salaries.)

Stick with the issues at hand. Will the plan work? If so, how? And how do you know? What is your basis for so thinking? Is it a sound basis? Where did you get your information from? Is it a reliable source? Why do you think so?

To those who wish to move ahead rapidly, the discussion such questions engender seem a needless delay, but I would disagree. We wish to reduce the initial exuberance, often irrational – and hence the title of this piece -- that accompanies all planning. Our objective is to substitute, in its place, confidence built upon a solid foundation of verifiable evidence. The answers, and very often, the lack of answers, to incisive questions point up mistaken assumptions, holes in your thinking and errors of judgment. Would you rather stand on thin ice or thick?

Two further benefits. First, a collective discussion allows participants to resolve differences and to define opportunities for further co-operation. Second, when your executive management grills you on the value of your plan, you will be prepared to state with substance why you believe your plan to be viable; and better protected if the plan is not inevitably successful.

Back to our plan. Our first set of action items read:

1. Setting up an office

a) Define the functions of this office and those who would staff it.

Preliminary Plan

Company intends to establish a sales office, as a base for management and as meeting area for the sales force during meetings with customers or management. Sales staff are expected to be on the road constantly and will not have permanent desks. Staff expected in China office: sales manager (male), one secretary (female), 5 salesmen (all male). All local Chinese.

Critical Questions

1. Is it practicable or advisable to keep sales staff on the move constantly in China, without giving them a physical location at the office to return to?

2. Can or should the sales force be entirely male? Can I hire a male secretary? Should we hire all local Chinese?

Discussion

Let’s take these questions in turn. If we have done our homework, what kind of answers might we get? I have briefly noted the basis of my answers as links to supporting evidence.

1. The constantly moving sales force

Before the invention of the mobile office, a sales director I once knew, a Liverpudlian, claimed there was no benefit in affording any outside salesman a desk at the office. “They should be on the road constantly. The more time they spend inert on their arses, the less in front of the customer.”

At least in the U.S., the outside salesman rarely returns to the office. His home and car suffice, and assorted technological gadgetry enables automation of the sales process from remote locations. But what about China?

Chinese salesmen can’t and won’t work from a home office. Practically speaking, the average living space is but 10 square meters (107 sq. ft), according to the Ministry of Construction.

That gives an individual an area of about 10 x 10 feet, inclusive of kitchen, bathroom, bed, etc., in which to perform the tasks performed in the office. Usually, even that living space is shared with other family members. Compare that to the developed nations: “Average total dwelling space in Europe is just under 1,000 sq. ft. In the USA it is1,875 sq.ft for the average household and 1,200 sq. ft for poor households.”

From a cultural perspective, Chinese simply do not accept the idea of working from home. Instead, they espouse the traditional notion that work occurs outside of one’s dwelling. Work in which one spends a substantial amount of time at home, even when genuinely working, is unacceptable.

Secondly, very few Chinese own a car in which to create a mobile office. According to a Goldman Sachs report, “In 2001, China had only 1.5 vehicles per 100 households versus 170 vehicles per 100 households in the USA.” A car may cost as much as five times the annual salesman’s salary.

The Ameican model of mobility will not work. Will another model? In fact, some Chinese sales forces are completely mobile. A direct sales force with which I have some personal acquaintance provides desks only to the office staff and only a handful of the most senior sales directors. Vans, leased by the company in a dozen cities and driven by professional drivers, meet the sales force at an agreed upon location before work begins, drive them to the target region and then return them to the point of origin at the end of the day. A supervisor rides in each van every day of the week. Meetings are held daily on the road in the vans, or in a large hall at the branches or off-site. No salesman has a desk. They are constantly on the road.

Direct sales naturally lends itself to constant mobility. But what about business to business outside sales? Some sales forces are provided with a laptop and a cellphone. Others require that their sales forces make use of personal equipment, but pay for phone usage or access charges. Most Chinese college graduates are computer literate, have little difficulty communicating via email or creating the electronic documentation crucial to the sales process. Internet access is available free of charge at most hotels in China. Phone service is consistent nationwide. Trains and planes run on time. Taxis proliferate. Yes, the completely mobile salesman is a workable concept for China.

And yet, I would not advise it. As a sales manager in China, we want to keep close to your salesman, rather a lot closer than what we are accustomed to in the U.S. Distance implies freedom, and while some of it is a good thing, especially when it contributes to a greater sense of personal responsibility and achievement, too much is a danger. Chinese, in my experience, and remember, I have been a sales manager in China -- this experience forming the basis for my opinion -- are unused to roaming free without much direction. Keep the dialogue going constantly, using the cellphone and the email.

But unlike the direct sales methodology mentioned above, you will never be able to accompany all of your sales staff on their rounds each day, nor would you wish to. But you must maintain the face-to-face connection with each of your salesmen. If not, you will quickly find yourself losing influence over him and out of touch with the client.

The desk roots the salesman in your territory. If not simply for the prestige of having a desk, which many young Chinese find surprisingly thrilling, periodic callbacks to the office for reviews, meetings, an occasional lunch, etc., keep the salesman in your purview and allow you to create a stronger working relationship with him..

The result of our critical inquiry is this: direct sales staff do not require a desk, if a manager travels with them every day. B2B salesmen, on the other hand, require an anchor at the office.

Did you expect these answers when the first prong of the China plan was created? Probably not.

We will turn our attention In our next post to the next question: gender.

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[I would like to express my thanks to Amy Hirter of Holland & Hart and Bob Brown of Greenebaum, Doll & MacDonald, for inviting me to speak yesterday to the American Bar Association, Section of International Law conference in New York City. I found it thoroughly enjoyable and instructive. My remarks of yesterday follow, with audio to come. You will find the quick links to the "Irrational Exuberance" series towards the end of the post.]

Good afternoon and thank you for having me here today. My name is Rich Kuslan and I’ll discuss aspects of global business expansion, with specific reference to China and to the function of the business attorney involved in that expansion. For those of you with a good deal of China experience, my apologies for what might be repetitive information for you, but, I trust, still worthwhile.

China business is a hot topic. When I first became involved in it, in the early 1980s, only a very few Americans, outside of the State Department and Intelligence, showed much interest in China. Now, it seems, just about everyone, even those who don’t have much good reason to go there, feels that he must put at least his toes in the water. Expansion into China can prove to be a positive and profitable experience.

That noted, the Chinese waters in which we wish to warm our toes usually prove murky and deep. What lies down there and, by the way, how far down? And what can we do, working with our business clients, using our skills and talents, to help them through it and ensure maximum protection?

A brief note on the subject of law in the eyes of a Chinese businessman. The Chinese historically and by preference, have maintained social order and settled disputes, not based upon the rule of law, but upon the situation: party doctrine, power relationships, familial networks, friendships and other factors. In fact, from 1949, when the People’s Republic of China was established, until 1978, there was but one law in China, the Chinese Constitution, virtually no one populating the legal landscape and extremely few legal cases. (That said, Chinese heavily practiced mediation at the local level.) Since the promulgation of the next law after the Constitution, interestingly enough, the Criminal Law, in 1978, several thousand laws and regulations have been passed in a frenzy to provide the legal framework for a changed society, from one in which law and procedure was traditionally of little value to one in which they have gained in importance.

But still, there remains a tension in Chinese business society – Chinese in business consider the law only as the merest afterthought, for example, when government approvals are needed, and approach the law with resistance. More recently, viewed as a weapon to gain an advantage over a perceived combatant. Legal considerations are not usually a main ingredient in business planning, certainly not to the extent it is in the west. This is the thinking in the heads of the Chinese executives with whom you may find yourself dealing.

With this preface, I’d like to offer two guidelines you might want to take with you into the Chinese business environment.

1. In China, valuable information is always withheld.

This becomes very important when doing due diligence on a possible partner or distribution channel.

For example, it is common for a Chinese business enterprise, even state-owned behemoths ostensibly under the purview of the state or national government, to have two sets of books (or more), one (most likely accurate) for the use of executive management and the other for the tax authorities. This is common practice – but the official tax return that you are given during your review may not be reliable – so, will you become liable for tax avoidance penalties? Or perhaps there are debts owed by the company, but not included in the public set of books. You may find these debts have now become payable by you.

Important information – more accurate than the books to be given over to the Tax Bureau and thus of greater value – has been secreted. The idea that valuable information is always withheld permeates mainland Chinese society and makes the job of, for example, due diligence, that much more difficult. In passing, I note that where this idea tends to dissolve is in the trusted personal relationship between confidants, one in which valuable information is often shared.

A subset of this guideline is that any information that has any worth is considered valuable and thus confidential. But beware, you might be told information is confidential because it doesn’t exist.

To show you this in practice and also to demonstrate how tightly Chinese businessmen hold what we’d consider ordinary information, I give you a common example in business relating to routine information. The salesman in China, having been one myself, who asks the potentially helpful question of his customer what his plans are for the year upcoming, so that he can sell in the right product for the need or want, usually gets the response that it is none of his business to ask for such confidential information. And none is usually given, at least none that is reliable, and often because no plans have been made. One might think that, when searching for the right distributor, for example, where the power balance generally tips towards the supplier, that it would be that much easier to demand and receive accurate information. But, alas, it is not. The distributor feels he has every good reason and right to provide only that information which he feels will convince you to select him.

Knowing the guideline that valuable information is withheld, our job is to discover what that valuable and accurate information is. Part of the work involves three things, and here I generalize somewhat, 1) the ferreting out of bits of information from evidence that goes beyond words, such as forensic accounting, independent valuation of physical assets, interviews with employees and 3rd parties, even the rumor mill, etc., which all may give clues to the true situation, and 2) the creation of trusting personal relationships with management of the target, and even those farther down the chain, that enables one to receive worthwhile information from these sources that tend to confirm or deny suspicions, and allow one to pass on persuasive fact-based exhortations to management that might shake loose something more likely approximating the truth, and 3) some experience in the local business environment, so that one knows what to look out for. Note, please, that this work as herein summarized does not always remove the cloud cover completely, and often, you will find yourself working in the twilight, indeed, sometimes you may be in the dark, and not get a clear-cut answer.

As a personal example of a situation that worked out to the benefit of the foreign investor, once in South China I was dealing with Company X, a potential joint venture partner. Over the week I spent with them, I was treated from the start in an overly festive fashion, which put my antennae up immediately. During that week, I was provided with information about Company X which, based partially on my experience, I believed was very likely untrue, specifically their sales projections, which seemed high, and debt levels, which, for a state enterprise seemed very low. The foreign company was to rely upon this information as an important basis for its decision to invest, and I was to verify or disprove it. In passing, I note my conviction that my legal training helped me to penetrate the façade, but more on this later.

My initial questioning of this information brought responses of confirmation that the information they provided was accurate, but supporting information was lacking. Later in the week, I began to delve deeper into their bases for the information provided -- Why do you think you will sell X units of this product at this location? Who are your customers? How many installers do you currently have in that location? etc.-- probing for holes and finding many, becoming more uncertain about this company each day, when, by happenstance, I picked up the local newspaper which on its front cover displayed a picture of a new skyscraper along with an article on its investors, including this Company X, which had stated to me it was involved only in the manufacture and sale of its core products. Their investment in the building was staggering for the company’s size and it was speculative as well. Not wanting to broach this topic directly with the managing director of the company – hoping not to embarrass him, at least not publicly – I showed the article to one of his aides. The aide denied it, and the other aides denied it, and then, perhaps partially owing to the friendly relationship I’d created with the MD but more probably spurred on by the shrinking likelihood of success of continued denials, the MD himself confirmed it. My suspicions about the other information that I had been presented were more than likely confirmed. The western company did not invest in this firm. That was the good thing that happened for the western company in this deal.

A note: whereas Chinese in the 1990s were poorly equipped to deal with foreigners, and generally unknowing of and unwilling to meet foreign requirements for cooperative business enterprises, Chinese in 2006 are comparatively more sophisticated, especially those operating in Shanghai, the commercial center, and in Beijing. (To a much lesser degree elsewhere in China.) Many 100s of thousands of Chinese have returned to work in China from western business and legal education, and experience in western companies. So the chances are that you may come upon someone who understands something about you that will make your job slightly easier. But in most cases you will need to educate them on your requirements for due diligence. I use the term “educate” gingerly. Perhaps, out of respect, it would be better to say that you will “discuss cooperatively.” (What you need and why you need it.) But this does not mean that they will be any more forthcoming than anyone else. Keep those “suspicious antennae” up, even while forming positive relationships. Those relationships may very well provide you with the information you are looking for.

2. Approach China critically

I’ve written at my weblog asiabizblog.com about what may be called the “Irrational Exuberance,” with apologies to Mr. Greenspan, of those who are gung-ho, pardon the pun, about establishing an operation in China, without having done sufficient homework and blinded by a certain mystique that seems to be part and parcel of China, in the eyes of the west. Eyes that often wear rose-colored glasses. (Does that describe your client?) Perhaps less rosy in the eyes of those who have a good deal of experience there, but I am shocked and amazed by those who continue to come back after one trip, declare it a paradise of opportunity without seeing or wishing to investigate the concomitant risk.

Sigh... This is nothing new. What was the content of Carl Crow’s book entitled “400 Million Customers.” Can you guess? And it was published in 1934. Indeed, ever since the Empress of China set sail from the New York harbor in 1784, to purchase tea and silks, China has beckoned, with a mystery and exoticism (to the westerner) that exerts a pull like no other.

The antidote to the mystique is rational analysis, given the facts that one can glean, supplemented by instinct and reliant upon experience. Analysis – the understanding of the truth of the situation -- is an important focus. That is, one asks the right questions, and sees the answers intelligently and objectively without the detriment of unbridled optimism. When the answers are insufficient to form a sensible response – more penetrating questions and more evidence are required. If the result is not something you yourself would be willing to defend in front of your company’s board of directors, it’s insufficient.

In the interests of time, I note that I detail the process of analysis in several posts on asiabizblog.com, and will put up easy links to the series at the home page tomorrow.

[EDITOR'S NOTE: Here are the quick links to the "Irrational Exuberance, or, Should You Enter the China Market?" series:

Number 1: Should You Be Doing Business In China? (Text only)
Number 2: What Do You Wish to Accomplish? (Text / Audio)
Number 3: Where's the Beef? (Text / Audio)
Number 4: A Handsome Bit of Documentation (Text / Audio)
Number 5: Says Who? (Text / Audio)]

And I may as well tell you I have been told that this recommendation I provide to clients insults the intelligence of some. And yet how many companies delve deeply – I mean, really deep -- before committing themselves to China? Does your client?

Management, in my experience, while it may be sharp as a tack, often does not feel a pressing need for in-depth examination of business opportunities, preferring instead to go with the gut, based on some information, showing that they are decisive first and will ask questions and solve problems later as necessary. (Of course, there are exceptions. But that has been my experience.) In any case, managers, generally speaking, haven’t been taught the skills, unlike those with legal training, to establish and understand the facts.

However, in the practical environment that modern China offers us, given its opacity and potential for surprise, the attorney offers precisely those critical and analytical skills that allow for great value to be added to the mix.

You may have already given thought to this aspect of your contribution to your client’s success, or perhaps it hadn’t occurred to you. Even if you have, have you suggested that management make use of these skills in such a way? Perhaps it is possible for you, and in doing so, you will expand the pie by adding more of your intrinsic value, so to speak, to the decision-making process. As an integrated member of a business team formed to plan and implement expansion into China, the attorney, who is trained to establish the facts and look at them critically before coming to conclusions, can help to provide the counterweight of reality.

And that brings to an end my remarks. Thank you kindly.

[Editor's Note: None but the most perspicacious non-lawyer is aware that the legal industry remains faithful to the ideas embodied in the medieval guild. A guild attempts to construct barriers to competition, keeping prices and sometimes standards of quality high. One method is to limit entry into the guild. American lawyers, while maintaining a strong semblance of these hallowed guild practices -- accredited qualifications, in-house training, seven years of "indentured servitude," etc. -- haven't been particularly successful in limiting entry. The law schools -- the variable the American guild can not really control -- have generated far more talent than the field can practically absorb. Neither, evidently has the Chinese equivalent of the lawyer's guild been successful in policing its sphere of control, until very recently. We are grateful to CCH Hong Kong Limited, and especially to Elaine Wong, its Publishing Manager, and Mia Prieur for this excerpt of Mia's report on the reaction of one guild to the apparent advances on its territory of another.]

The Shot Heard ‘Round the World: A Brewing Revolution Against Foreign Law Firms in China?

— Including Exclusive Interviews with Richard Wang and Martin Hu of the Shanghai Bar Association

Mia Prieur

Another hot summer is preparing to descend on Shanghai and slow down this fast paced city. But even as some are planning their vacations, others are preparing for a battle. The first shot was fired by the Shanghai Bar Association (“SBA”) on 17 April when it posted a memorandum on its website entitled The Situation of Illegal Business Activities Practised by the Foreign Law Firms in Shanghai is Severe (“Memorandum”). The Memorandum broadly accused foreign law firms of unauthorized practice of law. Rumours quickly circulated that the Memorandum was part of a government effort to reign in or even eliminate foreign law firms. The only facts available on the record are that the Memorandum was approved unanimously by the SBA’s Special Committee on Foreign Affairs and that it was approved by at least one high ranking official at the Shanghai Bureau of Justice (“Shanghai BOJ”) who was present at the time of the meeting.

To understand more about the background leading up to the Memorandum’s posting and what it means, China Legal Watch (“CLW”) talked to Richard Wang and Martin Hu. Wang is the Vice-chairman of the SBA and Chairman of the SBA Special Committee on Foreign Affairs that initiated the Memorandum while Hu is Vice-chairman of the Committee. This is the first time they have accepted interviews from the foreign press since the issue of the Memorandum. For these interviews, both speak in their SBA capacity.

Interview with Richard Wang

CLW: Why did the SBA post the Memorandum now?

Wang: The dissatisfaction with what is going on in the legal community has been building up over many years. This issue of foreign law firms giving Chinese legal advice to their foreign clients has continued for too long and gone too far — it has reached a boiling point. There has to be a movement in order to achieve changes in this community. Members of the bar: we need dramatic change in the foreign legal community; we need a revolution.

CLW: How did things reach this state?

Wang: It is due to the lack of supervision over the foreign law firms from the Shanghai BOJ and [its superior organ] the Ministry of Justice (“MOJ”). The foreign firms are openly violating the regulations, and very little is done about it. There seems to be no partnership anymore between the local and foreign law firms. The local government received complaints from the local firms but has done very little about it.

CLW: Does the Memorandum represent the members of SBA or the government?

Wang: Yes. When the Memorandum was circulated among the leaders of the SBA, there was no dissenting opinion written, and a unanimous decision was reached by the Committee. One of the Shanghai BOJ chiefs approved it as well. He was present when the Memorandum was discussed and he expressly approved it.

The SBA took that as a signal from the MOJ to act on this matter.

CLW: How should foreign firms view the Memorandum?

Wang: The Memorandum should be considered a warning notice to the foreign law firms that they cannot continue their illegal activities.

CLW: There are statements that one of the prime factors behind the Memorandum was the economic pressure local firms feel from competition and, especially, the competition for young lawyers. Is this true?

Wang: The Memorandum is not about business, it is about the professional bar — judicial matters, not individual matters. Foreign law firms must act according to the Administration of Representative Offices of Foreign Law Firms in China Regulations (“Regulations”). Local law firms do feel some economic pressure from paying more money to associates to keep them from leaving for foreign law firms. However, employment is not a big issue behind the
Memorandum.

CLW: What do you think the Shanghai BOJ will do?

Wang: According to an official at the Shanghai BOJ, they have already found evidence of wrongdoing, and they are considering taking action on these foreign law firms. Foreign law firms cannot carry on with the violation of the Regulations if they intend to continue working in the Shanghai legal community.

Interview with Martin Hu

CLW: What triggered the posting of the Memorandum?

Hu: There were two main factors. The SBA notices deep concern among Chinese law firms about the foreign firms’ increasing non-compliance with the Regulations. Complaints in this regard about foreign law firms from Chinese law firms and both Chinese and foreign companies have increased. There simply has been no effort made on either side, Chinese or foreign, to draw the line on activities that violate the Regulations.

Another reason is to protect the clients and maintain the professional reputation of the legal profession, Chinese and foreign. It is just so ridiculous that some foreign law firms on one hand give so-called “qualified” legal opinions or draft contracts under Chinese law with the disclaimer that they are not allowed to interpret Chinese law, but on the other hand charge clients full-fledged fees and act as if they are Chinese law experts. As time goes by, this becomes very misleading to the clients, which is very irresponsible on the part of the foreign firms. This causes harm to the clients and the profession and therefore should be changed.

CLW: Is that why the Memorandum takes such a strong tone?

Hu: The purpose of writing the Memorandum in this tone is to make the public pay attention to what is going on. There is abundant evidence that some foreign law firms have crossed the line and are still pushing as if the line does not exist. The situation is indeed severe, and is harming the Chinese law firms, the clients and the reputation of the entire legal profession. The SBA needs to let the public know how serious this situation is in China. The foreign law firms must comply with the WTO agreement, and the regulations of the State Council and MOJ while practising law in China.

CLW: Law firms are businesses too. Is this about business and profits in the legal industry?

Hu: Lawyers are not business people. Lawyers have a responsibility to educate the public to be lawful citizens. Lawyers must play a positive role in building a rule of law society. My hope is that some day China will become a more democratic, rule of law country. But with that said, the Chinese legal community must be given a fair chance to grow in order to play a role in the future changes in the society and in the growth of this country. It would be difficult
to imagine that a rule of law society could be successfully built in China without a strong Chinese legal community.

CLW: There are charges that the Memorandum is about protecting local lawyers from competition, and not about protecting the public or the clients. What is your reaction to those charges?

Hu: That is not the case. Of course there are economic issues. But as I said before, the purpose of the Memorandum is to first respect the law, and second to protect the clients and maintain the professional reputation of the entire legal profession, Chinese and foreign. As Shanghai further develops into an international financial centre and as the government opens up more sectors to foreign investment, investors are pouring in. There is enough business for all of us.

I’m concerned about such charges because they are diverting the issue here. The public and the clients will be better protected if the foreign law firms abide by the Regulations and work with Chinese law firms in a more cooperative way. In fact there are federal regulations in the US for publicly listed companies stipulating that public companies may not hire lawyers who do not follow the law of the jurisdictions where they practise. The unauthorized practice of law by some foreign law firms is putting their clients at compliance risk. I also believe that some foreign law firms engaging in the unauthorized practice of law are in violation of the bar association rules in their home countries.

CLW: What is the goal of the Memorandum?

Hu: The goal here is to set the course in the right direction so that a win-win environment can be achieved for both sides to work together. The foreign law firms have the responsibility to inform their foreign clients, and bring awareness to their foreign clients and professional insurance providers about the regulations of this country. They need to draw the line and respect the rule of law. Furthermore, they should set examples in this legal community by informing their clients that they should not be treated as Chinese law experts or practitioners
and that they would work with Chinese lawyers to better serve the clients.

Sub Rosa

So far, it looks like the Memorandum will be the only shot fired in the revolution — foreign law firms have remained resolutely silent about the matter, apparently as part of a unified strategy. Foreign law firms are relying on the Shanghai BOJ’s realpolitik to balance the interests of local lawyers with those of the members of the foreign investment community, most of whom will not rest easy if they cannot choose their own advisors. But even the Shanghai BOJ seems to be bowing to the forces that the SBA has unleashed and the criticism made against it. The SBA says that the matter has reached such a critical state due to the lack of supervision from the Shanghai BOJ and MOJ.

Speaking anonymously, foreign lawyers in Shanghai expressed their view on this matter. “The foreign firms want to understand the purpose behind this Memorandum,” said one partner of a foreign law firm. “Any comments made should be in a constructive manner,” said the partner. “To cause further problems in this community and start a confrontation does not solve anything. Reaction to the Memorandum will reflect on the foreign law community and on how we solve problems. It is always more efficient to first try to understand what is at hand.”

To date, there has been no official response from the Shanghai BOJ. It is widely understood that an investigation is proceeding and universally said that at least one or two foreign law firms will be disciplined. The rumour mongers claim that the BOJ will “kill a monkey to make an example”. The severity of the punishment will serve as an example to other would-be transgressors.

In response to a CLW inquiry, an officer of the MOJ in Beijing stated that he had not heard about the Memorandum, but invited CLW to make a formal written query. The Shanghai BOJ was aware of the Memorandum but had no comment for the press, indicating that they would only respond to inquiries from governmental entities. The BOJ in fact referred CLW to the SBA itself and then asked what the SBA had said in the interviews.

The natural allies for foreign law firms are the foreign investors that they represent in China. But so far there has been no reaction from investors or either the American, European or other chamber of commerce. The silence is odd given the high stakes involved and the shared interests of multinational corporations (“MNCs”) and foreign firms. It is easy to imagine the outcry that would result if MNCs were told that they could not consult advisors of their own choosing.

As one foreign lawyer points out, the US Ambassador to China was himself a foreign lawyer who headed a foreign firm’s China practice before his appointment. Ambassador Randt would no doubt have a unique insight and interest in the issue. But so far, the silence from the foreign firms has kept the matter from becoming political. Given the long and hard negotiations on legal services that China experienced as part of its discussions on the WTO accession, the silence could give the Shanghai BOJ some flexibility to handle the matter on its own.

Flip Side of the Coin

In the interviews, Wang and Hu spoke with genuine passion about a lack of enforcement by the authorities. They pointed to a newspaper report citing an employee of a US law firm at the Shanghai Kerry Center who asserted that 70% to 80% of the firm’s practice was illegal and to the administrative warning given to Coudert Brothers for a blatant violation by its Beijing Chief Representative to show that the situation is out of control. Nevertheless, the SBA may only be seeing one side of the coin. The employee cited in the newspaper report had only worked at the firm for three weeks and might not have a good understanding of what the firm really does. In Beijing, Coudert Brothers removed the Chief Representative within days of the warning from the authorities and he was obliged to leave for an English firm that recently opened its Beijing office. Clearly, foreign firms do observe some limits and do cooperate constructively with Chinese law firms. One partner at a foreign law firm said that his firm used 10 different local law firms for China legal matters in the past year. A local lawyer confirmed that “he worked closely with a foreign law firm on Chinese matters.”

Role Play

According to Hu, the purpose of the Memorandum is to have a dialogue with the foreign law firms to address the issues and roles played by foreign and domestic law firms. However, foreign firms actually see themselves as unequal partners in any dialogue. They face a complete termination of their business and the loss of many years and dollars invested in Shanghai — and they already know that the SBA will be decidedly unsympathetic. The Memorandum is clearly very hostile in its tone. According to an SBA member and partner of a mid-sized local law firm, “the Memorandum would not help relationships with the foreign law firms, let alone strengthen it.” In fact, he fears that it could have the opposite effect.

He is certainly correct. The coverage of this matter in both domestic and foreign press is expanding; and the tone of reporting, especially in the local press, is becoming increasingly strident. Instead of dying in the summer heat, the issue threatens to flare up in a very ugly way. So far, the foreign law firms and foreign investment community have been silent and played a waiting game. In the current environment, they cannot afford to remain silent for much longer. For better or for worse, the SBA has already taken a highly confrontational approach. If the relations between the law firms are to be salvaged, the response of the foreign side will have to be both considered and mature. As one local lawyer said, “The important aspect of this is that Shanghai wants to stay on track to be an international financial centre to the world at large and will do everything to protect that from being destroyed.” Ironically, the SBA has now left it to the foreign firms to exercise moderation, preserve relations among law firms, prevent politicization of the issue and safeguard this local interest.

The above is an excerpt of an article from China Legal Watch, a monthly journal on China law published by CCH. The full article is available at the China Legal Watch website.

[Editor's Note: Now and again, this writer hears from young men and women who wish to build a career in China, echoing aspirations I heard and similarly uttered whiles ago, when most of that vast nation was off-limits to foreigners. For me, who had been given extraordinary linguistic talents, China was the locus of a range of fascinating sounds and expressive concepts, which nation, by extension, must also have been as exotic, mystical and enjoyable in every other aspect.

We are grateful to Mark Agrasut for today's post. Mark discusses legal careers specifically, but his post will likely prove helpful as well to those considering what might be called a China career. Mark is a solicitor with Linklaters, specialising on energy and infrastructure transactions, as well as project finance. He has also been a research associate and programme director at the Centre for East Asian Law at the School of Oriental and African Studies, London University (SOAS), The opinions expressed in this post are his own and do not represent the views of his firm.]

Possibly more so than ever, international law firms are targeting Asia, and especially Greater China. More and more newly-qualified lawyers are starting their careers with aspirations and intentions to work in Asia, and many are approaching the path as "Asia specialists" first, lawyers second. Having spoken to a number of aspiring China law specialists, trained in the UK/US, about career options, one notices more and more looking to spend a greater and greater proportion of their professional lives in the PRC. This note is a (slightly) amended posting which was made in relation to one such query (from a US-trained law student), detailing my point of view on the subject of starting a legal career at a China office of an international law firm. Let me qualify this by emphasising that this is all just based on unofficial information/personal views, and from informal discussions I have had with colleagues and lawyers in similar positions. Further, my intent is not to ignore the importance and accomplishments of the developing China-business environment, but to focus mainly on the potential breadth of experience at the cutting edge of commerce-side legal developments offered in more established legal/regulatory environments to lawyers trained within them, exposure to which may allow an aspirant China-specialist, for example, to bring more to the table when the time comes.

I think one needs to have in mind a long-term view when considering this sort of move. Starting your career and being hired to be in China may have a slightly limiting effect on your long-term options to practice anywhere else. My personal view on this is that in most areas of practice, starting out as a China-based foreign attorney may not serve you well if you intend to move back to a more mature jurisdiction later, especially if you're thinking of competing to secure your place working on complex, ground-breaking international deals in markets like London or New York. My experience has been that the ability to move laterally from a position in China (or any developing market) to an equivalent position in London is limited if you have no real grounding/transactional experience in the more mature legal markets.

I'd also say that the work you get in fast-developing markets has also often been more subject to macro movements in the market; you start as an energy/infrastructure sector lawyer, and then find yourself working on general IPOs the next year. In that context, you might find yourself being a China lawyer first and foremost, and a specialist in any particular field of law through necessity rather than choice. Of course, I also accept that there may be much to be said for "regional" specialisms, much as there are "industry/sector" specialisms: but it has always seemed to be the case that the process of globalisation diminishes the need for the former, whilst increasingly-sophisticated business practices demand the latter. On current trends, my inclination is to believe that sector specialism to be marginally more important.

That being said, an excellent lawyer anywhere should be an excellent lawyer no matter what, and there is a lot of valuable experience you can gain in China. Of course, you may only wish to practice in China, and not to practice in your "home" jurisdiction, in which case the position is different: bear in mind, however, the fact that foreign lawyers/law firms in China currently occupy a unique, but essentially medium-term position, that will erode as PRC law firms gain experience and expertise operating in and dealing with international standard environments/documentation. As the dynamic between foreign and domestic law firms changes, so will the profile of the lawyers involved. It may take a while, but I think it must happen, and at that stage you will be competing with PRC nationals who (forgive me for making quite an assumption) will in most cases have a greater grasp, linguistically and legally, of the nuances of the domestic market; as well as foreign lawyers entering a maturing market which is demanding cutting-edge legal products which you may not have expertise in.

In all honesty, I often question many of the UK/US lawyers-in-training who intend to start their professional practice in China and for whom that goal is paramount, because I haven't yet heard a really good professional reason why they've chosen to set out their stand and declare for China so early in their career; I do, however, hear an awful lot of personal reasons (and many reasons which are ostensibly professional but which often do not bear up to close scrutiny in the context of anything other than academia or certain types of development/NGO work). Essentially, my view is that the very best training and experience (with the greatest degree of transferability) is probably more easily found in the more mature legal jurisdictions, amongst those firms who consistently practice at the forefront of their fields of expertise. Unless the US firms are very different in their approach, I'd think long-term on this point, and bear in mind that (until China becomes an exporter of legal services on the scale of New York and London) the widest range of options are reserved for the lawyers with the greatest exposure to the widest spectrum of deals, who can practice almost anywhere they choose.

“Doing Business in China”

Speaker: Jonathan M. Heimer, Deputy Principal Commercial Officer, U.S. Commercial Service, Consulate General of the U.S., Shanghai

Time: Friday, September 8, 2006, 8:30 am – 10:30 am
Location: Weissman Center for International Business, Baruch College, Room 14-285, 55 Lexington (corner of Lexington and 24th Street), New York City

Topics addressed include

* The state of China's Intellectual Property Rights
* What measures are you exercising to protect your IPR in China?
* Payment scams by Chinese companies.
* Why is China’s legal environment currently under attack?
* Why the recent upswing in Chinese economic nationalism?
* Export services to China -- financial, legal, and marketing -- provided by the U.S. Commercial Service to U.S. exporters.

Presented by the Commercial Service of the U.S. Department of Commerce and The Weissman Center for International Business.
For further information, contact:

Alice Chan, International Trade Specialist
Tel: 212-809-2678
U.S. Department of Commerce, U.S. Commercial Service
New York U.S. Export Assistance Center
www.buyusa.gov/nyc

The Wall Street Journal reports on new Chinese banking regulations that will further delay Citigroup's China strategy.

The rules will "strengthen and improve the supervision and management of foreign banks and promote the stable operation of the banking sector," the State Council said in a statement Wednesday.

One would think, given the state of the Chinese banking system, that foreign banks require less supervision. But China can be -- how can I put it nicely? -- counter-intuitive.

FOLLOW-UP: Readers of Chinese will find of interest this 金融界 special edition on foreign banks. As of November 28, 2006, 金融界's online reader survey reported the following results:

外资银行管理条例发布调查
共有790人参与

您认为外资银行是否会对我国银行业造成冲击

会，内资银行将倒闭几家 53.04%
不会，内资银行可以经得住竞争 33.04%
不清楚，现在不好判断 13.92%

作为个人，您更倾向于选择内资银行还是外资银行

外资银行 54.81%
内资银行 45.19%

So who's making money in China? You'd be surprised to hear who isn't...

That's a lotta patacas...

[Editor's Note: We are grateful to Paul Jones for today's post on China's new franchise regulation, in which he delineates the differences between it and previous franchise regulations. Mr. Jones is a franchise and intellectual property lawyer in Toronto, Canada, and a Chinese speaker. The international law program at John Hopkins University currently uses his paper on the interpretation of the previous Commercial Franchise Measures to illustrate the differences between common law and civil law. He may be contacted at this address.]

China has just released a new franchise Regulation (商业特许经营管理条例) to come into effect on May 1, 2007. It replaces the existing Commercial Franchise Measures (商业特许经营管理办法) that came into effect on February 1, 2005. [In Chinese.] The new regulation (hereinafter, "Regulation") is significantly different from previous Measures that had caused considerable concern amongst international franchisors and led to intervention by the U.S. Trade Representative.

The Regulation tries to balance a variety of international and domestic concerns and there is some question as to whether it manages to satisfy the needs within China for intervention to prevent fraud and abuse, and the international desire for easier access to the China market. The new Regulation has clarified that it will apply to all franchises operations in China equally. The Measures had a separate chapter (第七章外商投资企业的特别规定) that had requirements for Foreign Invested Enterprises (FIE), but it was not clear from the text what triggered the requirement to set up an FIE, and some questioned whether these separate requirements were in line with China’s WTO commitments. The Regulation has eliminated this issue by eliminating separate requirements for FIEs.

Another international concern was the requirement for a franchisor to have owned and operated two locations in China for at least one year. The requirement to have owned and operated two locations has been retained in the Regulation, but the requirement that they be in China has been removed. Foreign franchisors that have met this requirement in their home market will now be eligible to franchise in China.

But there are also restrictions to try to curb the rampant fraud in the domestic market for franchises. The State Council’s Legislative Affairs Office and the Ministry of Commerce (国务院法制办、商务部) also released a set of questions and answers on the new Regulation. [In Chinese.] They describe the Regulation as having five aspects that are designed to deal with problems in the franchise market.

Firstly, only corporations and other legal entities can be a franchisor. Individuals may not be franchisors. Franchisors must have a mature business model and have the resources to provide support.

Secondly, franchisors must disclose sufficient information for the franchisee to make a suitable investment decision. This information must be accurate, complete and not omit related information. Previously, U.S. franchise lawyers had complained strongly about the vagueness of the unfamiliar civil law drafting in this section. The wording has been changed, but the obligation to disclose all material facts may still arise out of Article 42 of the Contract Law (合同法). Article 42 requires that parties negotiate a contract in good faith and not conceal “key” or “material” facts (重要事实). It is based on similar provisions now codified in Germany’s Bürgerliches Gesetzbuch. German courts have relied on the equivalent law to impose an obligation of pre-contractual disclosure on franchisors in several cases. The questions and answers clearly indicate that the General Principles of the Civil Law (中华人民共和国民法通则) and the Contract Law continue to govern franchising.

Thirdly, franchisors must now register within 15 days of signing their first franchise agreement in China. The Regulation specifies certain documents that must be submitted for registration, such as a marketing plan, but does not specify the fees, if any.

Fourthly, the Regulation stipulates a number of items that must be in a standard form franchise agreement, including an unspecified cooling-off period.

And finally, the Regulation sets certain standards for the relationship, such as requiring the franchisor’s approval for the transfer of locations and requiring the franchisee to protect the franchisor’s commercial secrets.

The Regulation will make it easier for foreign firms to enter the China market, but the greater concern will continue to be not the laws and the courts, but the lack of more developed “rule of law” culture, or as the State Council calls it, the “chaotic market conditions” (市场秩序较为混乱).

Today's post contains a few questions I'm hoping some of my readers might be able to answer.

This WSJ article on American labor union officials and labor activism in China is an interesting read.

The All-China Federation of Trade Unions (ACFTU) is a government department. Its management does not take its cue to any degree from laborer members, who, by the way, must, without exception, join. There are no benefits to speak of - except perhaps for the annual ticket to see a movie (forget a first run) and perhaps a box lunch.

[Here is a video interview with Andy Stern, President of the Service Employees International Union, speaking on his union's involvement with Chinese unions. Thanks to Bob Kapp for the onpass.]

It strikes me as incredible that American union officials have any sway without explicit approval and active participation of the Chinese Communist Party (CCP) at the highest levels – and certainly the encouragement of labor activism in general is not at the top of the Party's “to do” list.

So here are a few questions to my readers:

1) Can anyone point me to research on CCP control and oversight of the ACFTU? Is anyone working on AFL-CIO involvement in the Walmart “unionization?” The WSJ story does not refer to sources other than foreign union spokesmen, and I wonder if scholarship has been done on the subject.

2) This may be well out in left field, but it strikes me that there exists some American legal stricture upon union mobilization in connection with Communist controlled labor unions. Am I mixing something up? Call this a junior moment, if you will, but some legal thread somehow perhaps related to COCOM of years ago is telling me some federal prohibition exists.

[Editor's Note: Price fixing and industry collusion aren't generally considered hot topics among investors and lawyers, except when the discussion turns to China. Does Chinese business culture, whatever that may be, favor monopolistic behavior, eschewing competition? Or is price fixing, where it occassionally pops up, merely a symptom of inadequate regulation, incompetent administration or general chaos, regardless of the region?

Alas, these questions have been subject to endless disputation, often argued anecdotally, for lack of hard evidence, as mere unsubstantiated claim. We are thus grateful to Lou Schwartz for today's post, which provides us with the benefit of his lengthy experience analyzing and reporting on the Chinese aluminum industry. His bio may be found at the end of his post.]

Contrary to Lou Dobbs’s characterization of China as “Communist” or “Red,” China’s economy today is actually raw, unbridled capitalism. The Chinese aluminum industry, which I have followed closely for more than eight years, is very representative of the road that China’s economy has taken since the death of Mao and the beginning of the Reform Period. From an outdated and lethargic industrial base managed by an enormous government-run mega-corporation to a plethora of new companies whose world-class plants are financed with much more private capital than state-owned bank loans (in 2006 77.2% of the capital which the Chinese non-ferrous metals industry used for fixed asset investment came from non-bank sources), the aluminum industry represents how Chinese industry has become more like what is described in The Wealth of Nations than the Communist Manifesto. And if there still is a doubt that the Chinese economy has become the greatest example of pure capitalism -- with all its warts -- since Adam Smith described it, one need look no further than the aluminum industry again, which has been spotted organizing cartels in an effort to save themselves from their own excesses.

The Chinese aluminum industry largely has followed the same meteoric trajectory as a wide variety of Chinese industries. In the first forty years (1953-1992) of its existence, the industry’s capacity to produce primary aluminum grew to 1 million tonnes per year (tpy). It took just an additional 5 years for primary aluminum capacity in China to reach 2 million tpy. Assisted by the restructuring of the Chinese non-ferrous industry beginning in 1997, a plethora of new companies in this space has grown China’s aluminum smelting capacity to a projected 14.6 million tpy this year from 3 million tpy as of the end of 2001. By late 2005, a group of 23 primary aluminum smelting companies, smarting from growing losses caused by their unrestrained development of smelting capacity which had exceeded even the torrid ramp up of demand for aluminum in China, banded together and agreed to idle 10% of their capacity to stabilize the price of aluminum. This consortium was sufficiently disciplined in idling capacity that it was able to mostly stave off a series of projected insolvencies among Chinese aluminum smelters.

Perhaps the most significant reason why primary aluminum smelters felt compelled in 2005 to form a seller’s cartel and idle capacity was that the price of alumina, their most significant input, had more than doubled in price -- due to the rapid increase in capacity in the Chinese primary aluminum smelting industry. The world’s producers of alumina, including the remaining Chinese state-owned aluminum industry behemoth--the Aluminum Corporation of China Limited (Chalco) ((中国铝业股份有限公司 (中国铝业)) benefited royally from surging alumina prices: Chalco leveraged the squeeze that primary aluminum smelters found themselves in to acquire companies that were at the brink of insolvency.

As the world price of alumina rose, Chinese entrepreneurs ((including Xinfa Aluminum Industry (信发铝业) and Weiqiao Aluminum Industry (魏桥铝业)), now inhabiting a free-wheeling economy, leapt at the apparent opportunities in alumina refining and in early 2006 began a rapid multi-billion Yuan build-up of alumina refining capacity in China. As of the end of 2007, total alumina refining capacity in China is expected to reach 27.7 million tpy, an increase of 4.4 million-tpy over year-end 2006 and a 17 million tpy increase over year end 2005! Not surprisingly the price of alumina has dropped by two-thirds since late 2005 and the price of the alumina refining industry’s most significant input -- bauxite -- has increased precipitously. This turn of events caused a group of seven private alumina producers, to meet in early 2007 and agree to adjust output to support alumina prices.

Meanwhile, lured by outsized prospects in supplying aluminum sheet, coil and foil for the construction, automotive and packaging industries in China and easy access to capital, Chinese industrialists flocked to the aluminum rolling industry beginning in 2004, pushing capacity up from 1.5 million tpy in 2004 to 2.5 million tpy in 2005; when all the rolling mills under construction or in planning are completed as of 2010, China’s rolling industry will have more than 5 million tpy of rolling capacity. In the so-called “Double 0” segment of the rolling industry (named for the thickness in millimeters of the aluminum foil produced) which supplies aluminum foil to that part of the packaging industry serving the tobacco, food, beverage, pharmaceutical and cosmetics industries, the growth in capacity is expected to grow to a significant proportion of the 940,000 tpy in total aluminum foil capacity which will be in place by 2010. Once again the response of the thinner gauge segment of the aluminum foil industry was to form a cartel to attempt to control output and prices. According to a report in 中国铝业网, in February 2006 five of the principal producers of “Double 0” aluminum foil met at a “summit” meeting to agree, among other things, to hold their respective shares of the domestic market to a fixed amount, to export all output in excess of their agreed share of the domestic market, to adhere to a specified lowest domestic and export processing price and to refrain from selling their products for a price in excess of the imported price.

In the free-wheeling economic environment that is today’s China it is far from certain that the attempts to monopolize markets is likely to have more than short term benefits to the Chinese monopolists. Rather, the central dynamics which Adam Smith discussed with such acuity in 1776 are at work in China today and will ensure that the attempts at monopoly power by some of the actors in this panoramic economy will not permit the level of control that was a fixture of the pre-Reform period.

[Lou Schwartz is president of China Strategies, LLC and publisher of the China Renewable Energy and Sustainable Development Report, as well as the China Aluminum Industry Report. Mr. Schwartz earned degrees in East Asian Studies from the University of Michigan and Harvard University, as well as his J.D. from George Washington University Law School.

Fluent in Mandarin Chinese, Lou work includes matters dealing with China's legal system, economic development, trade and investment. After serving at a large U.S. law firm, Lou has for a decade taught at the University of Pittsburgh School of Law and College of Arts and Sciences.]

A shameful kow-tow.

"Our reputation has been damaged lately by these recalls," Thomas Debrowski, Mattel's executive vice president of worldwide operations, told China's quality watchdog chief, Li Changjiang, in the Chinese capital.

Mattel takes full responsibility for these recalls and apologizes personally to you, the Chinese people and all of our customers who received the toys."

"But it's important for everyone to understand that the vast majority of those products that we recalled were the result of a design flaw in Mattel's design, not through a manufacturing flaw in Chinese manufacturers."

As of 1300 UTC on the date of this posting, the Mattel website does not display any such statement.

Beware, all ye who dare to accuse.

UPDATE (2100 UTC):

Even the Wall Street Journal, that supposed bastion of the free market ideal, and its interviewees miss the point entirely:

it also would also seem logical for Mattel officials to take a respectful stance toward Chinese officials, as 65% of its products are built there. Drew Thompson, the director of China Studies at the Washington-based think thank, the Nixon Center, says maintaining good government relations is crucial for companies that want to build a lasting corporate presence in the country. "It's incredibly important," Mr. Thompson said. "It's everything." Bates Gill, who has worked as a China specialist at the Center for Strategic & International Studies, agrees, noting that while it's important to maintain good governmental relations in most countries, it might be more so in a country like China. "The government has a lot of control over the full range of factors of production in China," Mr. Gill said. "From land usage, regulatory questions, licensing, labor, all of these inputs for profitable production in China are, you know, controlled and can be manipulated by state authorities. So you have to be cautious and make sure that those relationships are positive."

Why is it that, when discussing China, shameful bootlicking subservience under threat, a requisite of behavior before the ancient Imperial court, is tolerated by the most modern of businessmen and academics? Why is it blithely explained away, simply as an act of necessity, even of survival? Lord Macartney refused to bow to Qian Long:

In Peking Macartney refused to kow-tow, or make the nine prostrations, unless a magistrate of equal rank would kneel, and bow nine times before a portrait of George III. Both sides declined to yield. Finally, not in the palace, but in a garden, informally, the British minister obtained audience of the emperor, but in reality he was received and treated as tribute-bearer from a vassal state. Trade was opened at Canton, but the British foreigners agreed to obey the local magistrates. In a word, there was no "extra-territoriality" as yet. The foreigners' place of business was called a "factory."

[Note: If enough readers ask for it, I will find the incident in Macartney's journal of the trip, published ca. 1793.]

Bravo for that Brit! Who has the spine now?

Mattel's apology should be publicly and vociferously deplored, not simply for the craven act itself, then for its assuredly lasting after-effects upon other foreign firms, who will now find themselves pressured to act similarly, at pain of who knows what sanction.

I regret to say I can not commiserate with Mattel executives on their decision to cave. Instead, this is a lesson to all those who would foolishly place most of their eggs in one basket. I've been saying it for years, boys, China is a tough town. They play for keeps. Diversify or suffer. Or they're going to have you by the short and curlies. If they don't already.

The American Consumer Product Safety Commission has issued another set of product recalls involving leaded toys and jewelry from China. (Golly gee willickers, but don't they look so cute!)

In Bejing, Commerce Ministry spokesman Wang Xinpei on Thursday said: "Our attitude toward the toy problem has always been the same, that the problem is one in a thousand."

With several million products already recalled and many more likely to follow, that ratio may be somewhat erroneous.

The $64,000 Asia Business Intelligence question: which of the American companies involved in the recalls will be the next to suddenly appear with Chinese officials, apologizing deeply, humbly and profusely to the government, exporters, manufacturers, factory workers, transport carriers, freight forwarders, longshoremen and God knows who else in China?

From the New York Times: China Agrees to Post U.S. Safety Officials in Its Food Factories.

Embedded, like Judith Miller in Iraq?

Michael O. Leavitt, secretary of health and human services, said he expected that Food and Drug Administration officials would eventually be embedded in China’s food safety bureaucracy to help train Chinese officials and keep records on their inspections.

Did Mr. Leavitt make use of the word "embedded" in conversation with the interviewing journalist, Steven Weisman? Or did Mr. Weisman himself choose that word, pregnant with negative connotation, while lacking a direct quotation from Mr. Leavitt?

China and the United States, seeking to ease the furor over the safety of food exports, signed an agreement Tuesday calling for a greater American role in certifying and inspecting Chinese food products, including an increased presence of American officials at Chinese production plants.

This should help, shouldn't it? English speaking inspectors in an entirely Chinese environment. Many thousands of factories to be monitored -- extraordinary cost of bringing American inspectors to China, housing and feeding them, etc...

This agreement will provide an opportunity to have our people here on a continuous basis with expertise so that we can work with our Chinese colleagues in helping to develop good practices,” Dr. von Eschenbach said.

People is plural, meaning at least two. But the precise number of inspectors was not actually specified.

American officials said that the agreement did not cover all the food products sought for tighter inspections, but that it could be expanded. It is to cover some preserved foods, pet food ingredients and farm-raised fish, all products that the United States has said were tainted.

But, wait! Only a few food groups would undergo any inspection at all.

One may conclude that this initiative has been a major failure, from conception to implementation, on the part of American food and safety officials. Can one, however, consider this a public relations success?

Many small and mid-sized manufacturers in the United States are unaware that their exports may be subject to Export Administration Regulations (EAR). The implementation of those regulations is overseen by the Commerce Department’s Bureau of Industry and Security (BIS), and enforced through that bureau's Office of Export Enforcement (OEE). BIS is joined by several other federal departments with various responsibilities in the area of export control.

Not only are dual-use products -- items with military and commercial uses -- subject to the EAR, but many solely commercial products as well. Does your export require a license? The answer to that question is not necessarily straightforward, given the complexity of the regulations, which have been strengthened since 9/11. However, the importance of reviewing your export in light of the EAR cannot be understated.

To that end, I've devoted today's post to several China-related enforcement actions from the BIS website, which make for pretty interesting reading. More on export control law -- especially the topic of “deemed export” about which I've written here -- in future posts. I have dealt with China export issues and welcome inquiries from companies dealing with that and related issues.

WMD and Missile Proliferation

Industrial Furnace to China – On October 4, 2006, William Kovacs, president of Elatec Technology Corporation, was sentenced to 12 months and one day imprisonment, three years’ supervised release, and 300 hours community service in connection with the export of an industrial furnace to a proliferation entity of concern in China. On May 28, 2004, Kovacs and Elatec pled guilty to charges that they conspired to violate U.S. export licensing requirements in connection with this export. Elatec’s export license application for this transaction had previously been denied by BIS due to missile technology concerns. An associate, Stephen Midgley, separately pled guilty on January 10, 2005, to falsely stating in export documents that the furnace did not require an export license when the goods were shipped to China. Midgley was sentenced to one year probation, 120 hours community service and a $1,500 criminal fine. BIS assessed Midgley a $5,000 ($4,000 suspended) administrative penalty as part of an agreement with Midgley to settle charges related to this unlicensed export. OEE and ICE jointly conducted this investigation.

Nickel Powder to Taiwan – On October 11, 2007, Theresa Chang was sentenced to three years’ probation and to pay a $5,000 criminal fine. On June 21, 2007, Chang pled guilty to one count of making false statements related to the export of nickel powder controlled for nuclear proliferation reasons to Taiwan without an export license.

Thermal Insulation Blankets to China – On May 17, 2005, Vladimir Alexanyan, owner of Valtex International, was ordered to pay a $12,000 criminal fine, was sentenced to three years’ probation, and was ordered to refrain from any international activities or trade for the term of his probation. Valtex International was ordered to pay a $250,000 criminal fine. In February 2005, Vladimir Alexanyan and Valtex pled guilty to export violations and false statements in connection with the attempted export of satellite/missile insulation blankets to the Chinese Academy of Space Technology in Beijing. BIS had previously rejected Valtex’s application for an export license for these items. The goods were seized in San Francisco before their shipment from the U.S. BIS assessed Alexanyan an $88,000 administrative penalty and Valtex a $77,000 administrative penalty to settle charges related to this attempted unlicensed export. Both Valtex and Alexanyan are also subject to five year denials of export privileges to China. Further, Valtex agreed to implement an export management system. OEE and ICE jointly conducted this investigation.

Computer Chips with Guidance System Applications to China – On October 6, 2004, Ting-Ih Hsu, a naturalized U.S. citizen and president of Azure Systems, Inc., and Hai Lin Nee, a Chinese citizen and an employee of Azure, were sentenced to three years’ probation for false statements in connection with the illegal export of low-noise amplifier chips to China. The defendants falsely described the goods as “transistors” in export documents. These goods have application in the U.S. Hellfire missile. OEE and ICE jointly conducted this investigation.

Unauthorized Military Use

National Security Controlled Items to China – On May 1, 2006, criminal sentences were handed down against four former employees of Manten Electronics in connection with their illegal exports of millions of dollars worth of sensitive national security controlled items, with applications in radar, electronic warfare and communications systems, to state-sponsored institutes in China. Weibu Xu, aka Xu Weibu, aka Kevin Xu, was sentenced to 44 months’ imprisonment and two years’ probation. Hao Li Chen, aka Ali Chan, was sentenced to 30 months’ imprisonment and two years’ probation. Xiu Ling Chen, aka Linda Chen, was sentenced to 18 months’ imprisonment and two years’ probation. Kwan Chun Chan, aka Jenny Chan, was sentenced to six months’ home confinement and two years’ probation. OEE, the FBI, and ICE jointly conducted this investigation.

Attempted Export of Encryption Modules to Taiwan – On March 7, 2006, Ching Kan Wang, President/owner China May, Inc. of Hollywood, Florida was sentenced to prison for one year and one day. Wang pled guilty to conspiracy to violate the IEEPA for his role in attempting to acquire sensitive communication encryption modules for export to Taiwan without the required BIS export licenses. OEE and ICE jointly conducted this investigation.

National Security Controlled Electronic Equipment to China – On January 18, 2006, Ning Wen, operating Wen Enterprises, was sentenced following his conviction at trial on September 21, 2005 to 60 months’ imprisonment, two years’ supervised release and a $50,000 criminal fine for conspiracy to illegally export more than $500,000 worth of controlled electronic components to Beijing Rich Linscience Electronics in China. On December 21, 2005, Hailin Lin was sentenced to 42 months’ imprisonment and a $50,000 criminal fine; and on July 25, 2005, Jian Guo Qu was sentenced to 46 months’ imprisonment (later reduced to 22 months), and two years’ supervised release for their roles in these exports. OEE, the FBI, the Internal Revenue Service, and ICE jointly conducted this investigation.

Satellite and Radar Technology to China – On September 28, 2005, Zhaoxin Zhu of Shenzhen, China was sentenced to 24 months’ imprisonment and three years’ supervised release for conspiring to purchase controlled satellite and radar technology for illegal export to China. Zhu negotiated with undercover federal agents to purchase a variety of sensitive goods, including traveling wave tubes with satellite and radar applications, for export to China. OEE and ICE jointly conducted this investigation.

Low Noise Amplifiers to China – On August 17, 2005, Univision, operated by Zheng Zheng, was sentenced to a $1,000 criminal fine for false statements in connection with the export of low noise amplifiers, controlled for national security reasons, to China without obtaining the required license from the Department of Commerce. On June 28, 2005, Zheng was also sentenced to a $1,000 criminal fine for this violation. OEE and ICE jointly conducted this investigation.

False Statements on Export Documents; Microwave Amplifiers to China – On August 22, 2007, Norsal Export and its President Norman Spector agreed to pay administrative fines to settled charges that between November 9, 2000 and January 9, 2003, Norsal and Spector each committed forty-four violations of the Export Administration Regulations by exporting microwave amplifiers to the China with knowledge that violations of the EAR would occur in connection with the items. BIS also charged that the parties filed false Shipper’s Export Declarations in support of the unlicensed exports. To settle the charges, Norsal agreed to a $462,000 administrative fine, all of which will be suspended for a period of one year, and then waived, provided that no future violations of the EAR occur. Spector also agreed to an administrative fine of $462,000, of which $442,000 will be suspended on the same terms, and $22,000 is due in payment. In addition, both Norsal and Spector have been subjected to a twenty-five year denial of export privileges. In February 2005, Spector International, dba Norsal Export, was sentenced to a $57,000 criminal fine in connection with providing false information on Shipper’s Export Declarations regarding unlicensed exports of microwave amplifiers with potential radar applications and controlled for national security reasons, to China.

Deemed Exports

Video Amplifiers to China/National Security Controlled Technology to Chinese Nationals – On July 25, 2005, Charlie Kuan, former president of Suntek Microwave, Newark, California, was sentenced to 12 months and one day imprisonment and two years’ supervised release for failure to obtain required export licenses for shipments of detector log video amplifiers (DLVA), items controlled for national security reasons, to Chengdu Jeway Microwave Telecommunications, a company controlled by the Chinese government. Suntek, which was also charged with failing to obtain export licenses under the deemed export provisions of the EAR, was sentenced to a $339,000 criminal fine. BIS additionally assessed administrative penalties of $275,000 against Suntek, $187,000 against Kuan, and 20 year denials of export privileges against both parties in connection with these violations.

National Security Controlled Technology to Chinese and Ukrainian Nationals – In November 2004, BIS assessed Fujitsu Network Communications, Inc. an administrative penalty of $125,000 as part of an agreement with Fujitsu to settle charges related to unlicensed deemed exports to foreign nationals. In particular, BIS alleged that Fujitsu failed to obtain the export licenses required for transferring commercial digital fiber-optic transmission and broadband switching technology to Chinese and Ukrainian nationals. The applicable technology is subject to national security controls.

National Security Controlled Items and Technology to China – In September 2004, BIS assessed a $560,000 administrative penalty against Lattice Semiconductor Corporation as part of an agreement to settle charges of unlicensed exports of extended range programmable logic devices and technical data to China and the deemed export of controlled technology to Chinese nationals. The items and technology are controlled for national security reasons.

National Security Controlled Technology to Chinese and Iranian Nationals – In April 2004, BIS assessed New Focus, Inc., an administrative penalty of $200,000 as part of an agreement with New Focus to settle charges related to unlicensed deemed exports to foreign nationals and other exports. In particular, BIS alleged that New Focus failed to obtain the export licenses required for transferring technology to two Iranian nationals and one Chinese national who, in the course of their employment in the U.S., were exposed to national security controlled manufacturing technology. BIS also alleged that New Focus failed to obtain the required export licenses for shipments of national security controlled amplifiers to the Czech Republic, Singapore, and Chile.

One has heard of the promise of private equity investment in China at various times since the early 90s. What is really going on?

BusinessWeek, which curiously seems to mistitle its articles often, implies a boom. Shaun Rein's article implies great potential, but no boom yet. Adduced in favor of that proposition are the following:

...the continued optimism and growth of China's middle class in spite of inflation and the global downturn, the increasing global competitiveness of domestic Chinese firms that need expertise and capital to expand internationally, the tightening of credit from Chinese banks, and the decline of China's stock market.

Echoes of the past. Why is now any different?

Other observers are rather less positive, but seem to see a somewhat rosy future indicated by the defections of high-level Temasek and Goldman people, who have decided to set up their own shop, often in "cooperative" competition with their former employers.

One Beijing-based attorney put it to me this way (I'm paraphrasing here):

"Of 10 investments, nine will fail miserably, but one will make everything back and then some. Quite a lot more than then some. Everyone is chasing the 10th deal."

The investments to which he referred were, to most corporate investors, minor, each well under $10 million. But what about the big investments, which preoccupy the minds of private equity investors? Rick Carew writes:

Although smaller than the multibillion-dollar deals struck in North America and Europe, stakes in Chinese companies can be lucrative. A consortium led by Carlyle Group invested $740 million in China's third-largest life insurer, China Pacific Insurance (Group) Co., ahead of the insurer's IPO.

Post-IPO, the 17.3% stake is valued at around $4 billion, though the stock has declined this year alongside other China shares. Still, deals have been slow to come because of Beijing's worries about foreign capital and criticism that Western buyers got overly favorable terms for state assets.

China has withheld approval of a Carlyle deal to invest $375 million in a Chinese construction machinery company for three years. Carlyle has cut the size of its proposed stake repeatedly to get a deal done, to no avail.

Der Spiegel reports that one out of five German companies has ceased or is planning to cease production in China due to rising costs.

"The big story here is that globalization is for real -- and China is no longer what it was," says Ronald Haddock, a vice-president at consultant Booz Allen Hamilton...

Corporate fright at seemingly unstoppable upwardly moving human resources cost, the rapid turnover of highly trained workers, the insufficiency of energy supplies coupled with fast rising demand, the slight appreciation of the RMB and a revulsion by many consumers in the West at the prospect of seeing their local shops stocked entirely by Chinese -- all contribute to the "China no longer is what it was" phenomenon. Elsewhere on this blog, I have suggested as much, viz., a decrease in the increase of the rate of at which Chinese goods find their shores in the US. Even so, read this:

Chinese companies, too, are increasingly outsourcing production abroad, Eddy Henning, the head of corporate banking at Deutsche Bank in Beijing, told the newspaper. "Someone who just wants to produce T-shirts is more likely to go to Vietnam or Africa," he said.

As energy prices make container transport unprofitably expensive for heavy products, some furniture manufacturers in North and South Carolina in the United States have brought back production from China. But has the tide turned back to the countries that have lost their manufacturing? Not likely:

In only four years, from 2002 to 2006, the value of furniture production in China has nearly tripled in value, from just under $20 billion to just under $60 billion. As production has increased, China's furniture exports have experienced a similar boom. From 1997 to 2006, the value of furniture imported to the US from China has increased more than nine-fold, to hit $14.4 billion in 2006. The percentage of US furniture imports from China rose from 32% in 2001 to 50% in 2005. Due to a weaker currency and state regulations, Chinese manufacturers can produce finished products at much lower costs. In fact, the average wage of a Chinese furniture production worker is only four percent of the average wage of a worker in the U.S. This fact combined with China's modern, high-tech plants make them a huge threat to the stability of the industry in North Carolina.

One wonders whether the German companies profiled by Der Spiegel are smaller companies which should never have been in China in the first place. The Chinese export engine continues to hum. Visit the ruins of the American manufacturing industries throughout the US and one will see what it really means to pull production.

Hmmm... Now everyone is jumping on the China downturn bandwagon.

Textile exports fell 4.2 percent in June from the same month last year, a serious blow to an industry that employs millions of people. Overall export growth in June was 18.2 percent, down from May's 28 percent rate.

Note the change in overall export growth means that there has been a decrease in the rate of increase, but that exports continue to grow.

Chinese banks, despite State prodding to the contrary, refuse to lend to struggling factories. At least, that is what Bloomberg writes.

``It's wishful thinking for the government to try to talk banks into lending to stimulate the economy,'' says Li Qing, a Shanghai-based analyst at CSC Securities HK Ltd. ``Banks are holding onto their purse not because they are bound by the quota, but because they are expecting mounting defaults and failures.''

Hold on to your 帽子 （hats）!

The American Foreign Corrupt Practices Act seeks to criminalize bribery of foreign officials -- not of American officials -- by regulating and punishing the conduct of Americans doing business globally. In its "Report of the Committee on Banking, Housing and Urban Affairs to Accompany S. 305...May 2 (legislative day, March 28), 1977," the U.S. Senate noted:

The statute covers payments made to foreign officials for the purposes of obtaining business or influencing legislation or regulations. The statue does not, therefore, cover so-called "grease payments" such as payments for expediting shipments through customs or placing a transatlantic telephone call, securing required permits, or obtaining adequate police protection, transactions which may involve even the proper performance of duties.

The word "corruptly" is used in order to make clear that the offer, payment, promise, or gift, must be intended to induce the recipient to misuse his official position in order to wrongfully direct business to the payor or his client, or to obtain preferential legislation or a favorable regulation. The word "corruptly" connotes an evil motive or purpose, an intent to wrongfully influence the recipient. It does not require that the act be fully consummated, or succeed in producing the desired outcome.

Did you too see the word? I had to read it twice to make sure "evil" was not a typo. Hmmm.... This is, without doubt, activist legislation that seeks to influence global behavior indirectly by holding Americans to account. Does that sound right to you, when many of the nations it seeks to indirectly regulate employ bribery as a common and ordinary way of life? Isn't it their responsibility to clean up their own mess? Why am I to be punished for behaving as they would in their own land?

The EU and its member countries have enacted similar legislation. For those doing business globally, especially in the third world, where "gifts" are expected, anti-corruption leglislation in one's home country is a serious obstacle. In China, one of the most corrupt nations, those who require the assistance of government walk the wire of violating US and EU anti-corruption leglislation.

Once thought to be safe from the same level of scrutiny, payments to charities are not immune. Schering Plough's $76,000 contribution to a legitimate charity -- the favorite of a senior Polish official -- resulted in a $500,000 fine in June 2004 when the company failed to account for the payment as the bribe that it was deemed to be.

Government enforcement, at least in the U.S., will apparently be redoubled.

The U.S. Securities and Exchange Commission expects in the next two to six months to slap larger penalties than in the past on a number of companies that have allegedly violated the Foreign Corrupt Practices Act, reminding lawyers in the field that the regulator is taking a tougher stance today on international bribery.

"The dollar amounts in the cases that will be coming within the next short while will dwarf the disgorgement and penalty amounts that have been obtained in prior cases," said Scott Friestad, the SEC's deputy director for the Enforcement Division.

I have never understood why the American government has made -- over three decades -- the extraordinaty effort to reach into its taxpayer funds to prosecute the bribery by Americans of foreign officials. Where will the money come from to increase enforcement efforts of global activities? Ah, timing, timing, never to be forgotten -- this must be part of the Obama stimulus? Clean up the world, in our image, and have the American government pay for the enforcement of it. A missionary purpose, one with which I find it hard to agree.

But that is the law as it stands and we must follow it. Businesses dealing with China must thoroughly understand the effect FCPA has on even something as seemingly unrelated as its client development efforts. Thinking of showing the Import/Export Development Official of City X and his colleagues around your factories in the US and then taking them for a weekend jaunt in some city where you have no business interests? What are you going to pay for? Do you plan on giving them "spending money?" Do you risk going afoul of the FCPA? To answer those questions, the extent of your exposure needs to be determined up front. Your business activity needs to be vetted by your company counsel.

Here's fish for thought: are the activities of Chinese national employees of American subsidiaries, who may never have left China in their lives, also regulated by the FCPA? We will deal with that question in a forthcoming post.

Growth in electric power generation "has collapsed under the weight of the global economic implosion — at least for now," claims Andrew Revkin, author of the New York Times Dot Earth blog,. Environmental activists appear to consider this progress in the climate control wars -- the necessity for which I question. Global warning is a theorem whose proof I find circumstantial and unpersuasive. [But then, I'm generally skeptical and don't usually rush to judgment. Let's give it another generation or two...]

Certainly, the graph the weblog displays, based upon China's notoriously unreliable National Bureau of Statistics, claims a decrease in growth. Here, here and here (from 2002), just for starters. To what extent have these energy stats been studied, picked apart, cross-tested?

In 2001, Tom Rawski, economist at the University of Pittsburgh, in "What's Happening to China's GDP Statistics," argued persuasively that the unreliability of Chinese energy statistics has caused serious flaws in official GDP calculations. Has something happened between 2001 and 2008 in China that have made these statistics more trustworthy? [That was a rhetorical question.]

Yes, yes, I know. It seems believable: a widespread decrease in manufacturing will most likely cause a drop in energy generation. But where are the hard numbers? Why are Stanford academics parroting official Chinese numbers? Where is the analysis?

For a brief summation on Electricity Regulation in China, read this short paper, authored by Lehman, Lee and Xu, which Aldo de Nobili and Ed Lehman were kind enough to send me. Download file

[Editor's Note: Much has been made of China's potential for a consumer, rather than export, driven economy. The potential has caused marketers to salivate in expectancy for centuries. However, estimates of 40 to 50 million Chinese consumers with sufficient disposable income equate China to roughly the size of the Italian market. But has the equation finally begun to change with the latest generation of Chinese to enter the workforce?

Today's post has been graciously contributed by Lin Bai, who, as a professional analyst of trends, writes from the perspective of that new generation of Chinese. Ms. Bai, born and raised in China, is a New Ventures Analyst for Metan Development Group. Prior to that, she was with Trimtabs Investment Research and International Data Corporation. Ms. Bai was educated at the University of San Francisco and the University of London.]

The Gold Mine: China’s “Post-80s” Generation of Consumers

As one of China’s post-80s generation (aka Generation Y), I still remember my glory days in high school. A pair of Nike Michael Jordan sneakers, a Motorola pager, or a Giant-brand mountain bike – and you were the most popular kid in your class. In Mainland China, the post-80s generation refers to those born after 1980 and before 1990. According to China’s census yearbooks, 200 million children were born during this time period. This generation is gradually becoming one of the most lucrative segments ever coveted by marketers, the so-called China “gold mine”.

Our “post-80s” generation has more disposable income and a greater appetite for consumption, partly driven by international ties. We are addicted to the Internet and video games and constitute the majority of online shoppers. We are more receptive to new things, follow latest fashion and trends, and are quickly becoming the face of China.

As a result of China’s one–child policy, this generation is cursed with the “me” factor. With no siblings to compete with, we are considered the “little emperors and the little princesses” of the family. And unlike children in the US or in the other countries, this generation is fully financially supported by their parents well into their twenties or, at the very least, until they graduate from college (many of them still rely on their parents even after they get a job). In fact, according to the China Research Center on Aging, a surprising 30% of working age employees in China are supported by their parents.

The post-80s generation has a markedly different behavior in consuming than their parents. This generation believes that money is something to be made and not saved. We are confident that we can (and will) make big “bucks” in the future - especially after an intensive education starting at primary school. We also believe if we cannot afford a high-rise apartment or a Mercedes Benz with our current salary, why not spend and pretend that we can. Thus, an introduction to the so-called “Moonlight Group” (people who live paycheck to paycheck, spending it all by month’s end). We also focus less on a product’s usefulness than on its appeal. Purchases are heavily based on appearance, popularity, and what I like to refer to as the “flash” factor—how much attention they would get from the others if they own it.

In the next few years, the post-80s generation will constitute (as some of them already do) most of China’s entire middle-class. Not only are we better educated and start earlier at making substantial money than previous generations, we are doing this across all industries including sports, entertainment, IT and business. Piano prodigy Lang Lang, world champion hurdler Liu Xiang, NBA basketball players Yao Ming and Yi Jianlian are some of this generation’s celebrities – who are also representatives of this new generation of China’s “gold mine”. In fact, in Forbes’ 2009 annual “Top 10 Chinese Celebrities List”, 50% of those listed belong to the post-80s generation.

This generation’s product consumption was a key factor in China's retail growth in 2008 - representing 20% of all spending (China Market Research Group).

As a part of this lucrative member of this post-80s generation, I’m actually quite excited to see what the future holds in China. I can proudly boast that I’m making history and changing China as an economic force. Whether it’s for the better (or for the worse), I’m a proud part of that change. So, the next time you decide you want to tap into the largest group of consumers in the world – think of this “spoiled, egotistical, self-centered, and rebellious” crowd. Think China and join the gold rush!

NY Times:

A World Trade Organization panel ruled on Wednesday that China had violated its international free trade rules by limiting imports of books and movies,

WTO Findings and Conclusions here. (Beware: although written in what appears to be English, it is generally impervious to understanding by those with graduate school education. You may need to hire a specialist.)

UPDATE: China to appeal.

Not surprisingly, the Chinese Ministry of Commerce announced today that

Investment declined 35.7 percent from a year earlier to $5.36 billion, the Commerce Ministry said at a briefing in Beijing today. That compared with a 6.76 percent drop in June.

Creatively spinning this data -- which, as with most Chinese statistics, likely represent an optimistic representation -- Commerce Ministry spokesman and advance man for the investment roadshow, Yao Jian, said:

“China’s FDI is still healthy compared to the global slump in investments...We can say that China is one of the most attractive places for investments.”

[Editor's Note: Steel is a big deal in China. The World Steel Association has noted:

The case has generated a great deal of discussion among attorneys involved with China. The following post I found especially interesting and worthwhile reading. Today's post has been graciously provided by Vivienne Bath, Senior Lecturer and Director of the Centre for Asian and Pacific Law, University of Sydney. Ms. Bath writes that the opinions expressed are entirely her own and do not represent the views of Sydney University.]

Comments on the Stern Hu/Rio Tinto Case

The case of Stern Hu and his colleagues continues to present a number of difficult issues. The first is that when Stern Hu and his colleagues were arrested, the allegation seemed to be that they were being investigated for theft of state secrets – an offence which is not clearly defined and is potentially very far-reaching – even though the information in question appeared to be commercial information of state-owned enterprises. Given that the Chinese Ambassador to Australia spent considerable time making speeches when the Chinalco-Rio Tinto deal was under consideration saying that state-owned does not mean state run and the primary aim of enterprises like Chinalco is to make money, the state secrets allegation appeared to confirm much of what the Australian Opposition and the Australian press had been saying about the proposed investment. If the original allegation had been commercial bribery and infringement on business secrets, there would undoubtedly have been a discussion on why Rio’s employees were targeted, but nothing like the fuss that the state secrets allegation created.

It should be noted that most prosecutions for bribery in China concentrate on the officials or executives who are bribed rather than the companies or people who did the bribing. Most cases involving the “bribers” have been brought by the US authorities (although Australia has its own version of FCPA, no prosecutions have ever been brought under the legislation).

It is also not clear why it is only the employees have been targeted if the allegation is commercial bribery. Why not Rio itself? If bribes were paid, where did the money come from and for whose benefit were they paid?

Another question is whether the fact that the employees are all either Chinese or, in Stern Hu’s case, formerly Chinese makes a difference to their position. James Peng, the Australian who was tried and put in goal for 6 years in China over what appeared to be primarily a commercial dispute, was also formerly a Chinese national. Chinese nationals (and former nationals) do tend to have much better access to sources in China and to be able to work with their Chinese contacts in a way that non-Chinese Australians are generally not able to do, but that does not necessarily mean that they are more inclined to act dishonestly. It does seem, however, that they are more exposed.

The last point is the motivation for the charges and the question of what message, if any, is being sent – and to whom. It appears that the Stern Hu case is probably related to the iron ore negotiations, particularly since, according to reports, various executives in Chinese steel companies have also been detained. It comes at the same time as other significant developments in the generally friendly Australia-China relationship, however.

On the one hand, stresses in the Australia-China relationship include the failure of the Chinalco-Rio deal, which was due to the Rio shareholders rather than the Australian government. The Australian government (perhaps fortunately for it) was never required to make a ruling, although this may not be believed in China, where the role of foreign governments in business is often over-estimated. In addition, from the Australian point of view, the relationship has not been at all assisted by the efforts of the Chinese Embassy and the Consulate to try to induce the government to refuse a visa to Radiya Kadeer (who actually has close relatives in Australia and has made several visits in the past) and on the Melbourne Film Festival and the National Press Club not to show a documentary about her. On the other hand, an announcement has just been made of a 20 year LNG gas purchase contract between PetroChina (which is, of course, also state-owned) and Exxon for the purchase of gas from the Gorgon field off Western Australia – reportedly the largest trade deal ever signed involving Australia. If the message in the case of Stern Hu and his colleagues is to the Australian government, therefore, it is completely unclear what it is. If it is directed at Rio Tinto and the Chinese steel companies, the ramifications have been considerably broader than intended.

As his employer plans to roll out 15 stores in China,

George Hrdina, president of Ralph Lauren’s Asian business, said in an interview in Hong Kong. “We do more Ralph Lauren business on the island of Manhattan, New York than we do in Hong Kong and China.”

What an extraordinary public statement! Generally, execs are loathe to give any indication of sales volume in specific locations. One wonders if the company breaks out numbers by geography in its financial statements? As luxury sales slow in the West, the paradise of China passes through the minds of sales execs who must raise their numbers or, at least, stanch the bleeding.

Luxury brand Gucci plans to open two to four more stores this year in China, after opening its 28th outlet yesterday. Gucci chief executive Patrizio Di Marco is undeterred by uncertainty in the global economy as China is set to lead future luxury consumption.

Counterfeit Lauren has been a favorite of consumers (both Chinese and foreign) in Greater China for 25 years. How, other than by purchase in a Lauren store, can a luxury buyer ensure that what he's purchased is the real thing? And what, frankly, is the difference between what passes, often, as superb fake and the genuine?

In 1988, a garment maker in Taiwan showed me both and I could not tell the difference. Granted, I was not in the business and did not have the eye or the touch that experience brings. The maker told me that the genuine shirt was priced at $14 ex factory; the fake at $7. Some of the counterfeits brought into the U.S. today are of high quality and priced to sell fast. The problem is bigger than ever before. The potential counterfeit market is now China, not merely Taiwan, Hong Kong, Korea and the foreign tourists who visited those tiny states.

Perhaps there is, other than price, little difference in the well-made counterfeit product. Some name brand contract factories in China -- I will not specify what brand or product -- produce extra for their own account for sale to the domestic market, even in the department stores. China does not present, if I may suggest, a marketing challenge for Lauren -- everyone knows Polo by now -- but a management challenge, specifically of its intellectual property. Daunting, in the face of weak IP enforcement and the ubiquity of excellent forgeries. The company must be well aware of this. Their strategy is worth watching as it plays out over the next few years.

On September 29, 2009, the U.S.-China High Technology Working Group, sponsored by NAM, MOFCOM and the Dept of Commerce, will hold a "Public-Private Sector Dialogue," described as follows:

The U.S.-China High Technology Working Group (HTWG) was established to facilitate high-technology exports to civilian end-users in China, in accordance with U.S. export control requirements. In furtherance of this effort, the Department of Commerceʼs Bureau of Industry and Security (BIS) and the Peopleʼs Republic of Chinaʼs Ministry of Commerce (MOFCOM) are pleased to announce that the 2009 HTWG meetings will include a public-private dialogue on Tuesday, September 29, 2009.

In this public-private HTWG event, participants will focus on identifying barriers to U.S.-China high technology trade, particularly in two of the largest categories of bilateral advanced technology trade: civil aviation-aerospace and information technology. This all-day event will provide ample opportunity for two-way dialogue. The principal goals of this dialogue are to offer an opportunity for U.S. and Chinese companies to interact with each other and with government officials directly on these issues, and to learn from individual U.S. and Chinese companies about the ways in which the two governments can further support high technology trade for civilian end-uses in China.

A number of interesting speakers. In light of the tire tariff decision, this meeting might prove worthwhile if only to witness the sparks that might be generated.

I attended something similar to this in the mid-1980s when China was first eagerly developing its approach to technology transfer. And the US was eagerly divesting itself of its design and manufacturing capabilities in a vast swath of technology products. How the world has changed...

Note the last sentence of the indented paragraphs: "...for civilian end-uses in China." Ah, yes, creating the consumer economy of China. When will they wake up? Better asked, will they? What of American technology manufacturing?

Register here.

China State Construction Engineering Corp, the largest contractor in China, has bagged a subway ventilation project worth about $100 million in New York's Manhattan area, marking the construction giant's third order in the United States' infrastructure space this year.

SUBWAY VENTILATION... Given extraordinary precautions regarding biological agents, etc., and the exposure of 5 million riders daily, isn't this an extraordinary decision?

Click this link for the QueensCrap blog plus comments.

WSJ confirms, quoting DOW Jones in Shanghai:

SHANGHAI (Dow Jones)--China State Construction Engineering Corp. (601668.SH) recently signed contracts totaling $94.35 million to build subway ventilation facilities in Manhattan, a person familiar with the deal told Dow Jones Newswires on Monday. The contract was given to China Construction American Co., a unit of the firm, said the person, who declined to be named.

Anyone with specific information on the project is more than welcome to write a post on it for Asiabizblog.

[H/T to Miss Johnson from London.]

While it is well-known that advertising revenue has made CCTV, the provincial and regional stations superb examples of the proverbial cash cow, we find out from "Li Lisi of the Creative Power Entertaining Co., Ltd. (“Creative Power”) in Guangzhou" how little they are willing to pay for their programming.

Animation demands a large amount of upfront capital, particularly from the beginning; the cost may amount to 10,000 Yuan per minute. Later, the cost might be reduced to a few thousand Yuan per minute. However, China’s TV stations can pay very little and differ greatly. Some small TV stations may only pay 10 Yuan per minute, and the fee may increase to 80-100 Yuan per minute for larger stations. The largest China Central TV may pay a few hundred Yuan per minute.

Obscure TV stations have even asked you to pay the cost. Therefore, it can be said that you “lose a penny as you put a penny” in developing original animation. Then you may do sums, on average, we would be able to recover the investment, in theory, only when the animation was broadcasted on dozens of TV stations. In general, we are able to recover 40% of our investment through TV media.

More on cyberattacks originating in China of private companies with interests contrary to the Party. Article here.

Lawyers suing China for 2.2 billion dollars in an Internet-censoring software piracy case said they came under cyberattack this week.

Attorneys at the California law firm of Gipson Hoffman & Pancione said that on Monday they began receiving "Trojan emails" crafted to trick them into opening files booby-trapped with malicious software code.

Download the original complaints filed in federal court in California.

Cybersitter v. People's Republic of China, et al.

Cybersitter v. CBS Interactive

I write this to satisfy the curiousity of those who may not see a quotation referenced in an Asiabizblog post.

The New York Times has removed or revised two quotations from an article it published on January 13, originally titled, "China's Exit Threatens China's Internet," by David Barboza, et al. The revised article, running at the same URL as the original, is entitled, "Baidu’s Gain from Departure Could Be China’s Loss." Among the quotations removed is that of Anne Stevenson Yang, whom I quoted in yesterday's post. (See post below.) Yes, that quote was there and is now gone. Along with this one: "It's the epitaph for US online involvement here."

In addition, the following quote from the original story was partially revised.

“Baidu keeps a great relationship with the government,” says Hong Bo, a consultant at 5G, a Beijing-based consulting firm. “If the government wants something removed it will do it immediately. On the other hand, everything with Google has to go through its headquarters.”

The revised article curiously allows the writer to ventriloquize the first sentence:

Baidu’s strong relationship with the government contributed to its rise. “If the government wants something removed, it will do it immediately,” said Hong Bo, a consultant with 5G, a Beijing consultancy. “On the other hand, everything with Google has to go through its headquarters.”

Other than these changes, the articles appear similar. So, why were any changes made? Why were quotes dropped?

[H/T to a friend.]

Sources not named by Reuters allege employee collusion:

Google (GOOG.O) is investigating whether one or more employees may have helped facilitate a cyber-attack from China that the U.S search giant said it was a victim of in mid-December, two sources told Reuters on Monday.

Extraordinary -- unnamed sources. Unnamed and yet virtually identified?

The sources, who are familiar with the situation, told Reuters that the attack, which targeted people who have access to specific parts of Google networks, may have been facilitated by people working in Google China's office.

In other words, other Google employees with an ax to grind? American executives who are sick and tired of surveillance? The PR department?

Furthermore, despite Google's claim to cease filtering, it is not evident that the company has made any change in Web search filtering.

This is a strange game of cat and mouse. We know what the cat wishes to do. What exactly is the mouse doing?

Breaking news at WSJ:

Google CEO Schmidt at Davos: 'We like what China is doing in terms of growth ... we just don't like censorship. We hope that will change and we can apply some pressure to make things better for the Chinese people.

Uh oh.

This is worse than merely shooting oneself in the foot, is it not? Direct foreign criticism of Chinese "internal affairs" declaimed to the world's elite political leadership.

Commercial espionage among nations should not come as a surprise to anyone involved competitive businesses. I am a proponent of the idea that American intelligence should practice it far more than we already do, which is either so brilliantly executed as to stay below the radar of public view or relatively inconsequential.

Not so Chinese commercial espionage, which is far from a new story. I distinctly remember in the early 1990s the Taiwanese visitor to a certain bearing manufacturing in the United States, discovered wearing shoes with magnetized metal soles to catch iron filings during a factory tour.

But Chinese commercial espionage is "evidently" well-funded and coordinated. An MI5 report, leaked to the Sunday Times, contains details of interest, including this:

A leaked MI5 document says that undercover intelligence officers from the People’s Liberation Army and the Ministry of Public Security have also approached UK businessmen at trade fairs and exhibitions with the offer of “gifts” and “lavish hospitality”.

The gifts — cameras and memory sticks — have been found to contain electronic Trojan bugs which provide the Chinese with remote access to users’ computers.

Granted, given the prevalence of virus activity and the near absence of antivirus applications in use in China, it is always possible that rogue applications find their way onto "gifts." It has also been rumored -- and I believe unproven, correct me if I'm wrong -- that applications to ease ingress by hackers have been installed unto computer hardware at certain Chinese factories.

Need I say it? if you are senior executive or assistant to such an officer in a sensitive industry or multinational, beware of strangers -- especially PLA or PSB people -- bringing gifts.

More hollering about the value of the Yuan. This is simply Washington window dressing on the more profound problem to which none of the "best and brightest" supposed to be leading this country seems to care deeply enough about to create a solution for. Are there any newly instituted and significant incentives aimed at encouraging American business to bring manufacturing back onshore? (That was a rhetorical question.)

Richard McCormack, editor of Manufacturing & Technology News, writes:

The United States is not a desirable place to build a new semiconductor wafer fabrication (fab) plant. Such plants are massive, costing upwards of $8 billion and generating thousands of direct and indirect high-paying jobs, spinoff revenue for local communities and massive investments in research, equipment and materials. Semiconductors sit at the top of the electronics industry pyramid. The United States invented the technology, but it's become a small player as measured by global production.

In 2009, 16 fabs began construction throughout the world. One of them was in the United States, according to Daniel Tracy, senior director of industry research and statistics at Semiconductor Equipment Materials International.

...

China led the world last year in new semiconductor factory construction, with six fabs, followed by Taiwan with five, and Korea, Japan, the European Union and Southeast Asia, all with one apiece.

...

The United States does lead the world in one category, however: closures. In 2009, 27 fabs closed worldwide, with 15 of them in the United States (followed by four in Europe, four in Japan, two in China, one in Korea and one in Southeast Asia). The number of closures last year almost doubled from the previous year, when 15 fabs were shut down worldwide, again, with the largest number in the United States (at four).

Why is the United States losing out on the next phase of the semiconductor boom? "It's not direct labor," says George Scalise, president of the Semiconductor Industry Association. "It's not materials -- they cost the same everywhere. If you go down the list of expenses, every-thing is the same, except for tax policies and subsidies." [Emphasis added.]

Read the rest here.

[The alternate title for this post could very well be "Baidu Executives Celebrate Gift-Horse with New Strategy to Capture Existing Google Customer Base."]

WSJ reports Google throwing in the towel -- or at least leaking the rumor that they will, by publicly threatening immiment closure of its Chinese language search engine. A few posts ago, I strongly suggested this was likely, given the company's extraordinary intransigence before those select few who have no need to back off.

Google's closure of Google.cn would leave the Internet in China—which has about 400 million users, more than any other country, and is adding 250,000 each day—almost entirely dominated by local companies.

[Our old friend Jeremy from Danwei.org is quoted in the story.]

See also this report:

Google Inc. advertisers in China are being advised to switch to rivals such as Baidu Inc. and business partners are exploring alternatives as speculation grows the U.S. company will shut its Web site in the country.

Why is it Americans fail to effectively respond in kind with Chinese firms? Because, in short, standards differ.

Google's departure could hardly be better news for the Standing Committee of the Politburo. One can imagine the round-table where a hypothetical thorn in the side is discussed...

A: On to that damn company....

B: Who is the boss? Can we shoot him?

C: No. It would be too messy. The whole world is watching.

B: It is your job to persuade the world that the execution is justified!

D: My son-in-law has internet interests. I think the stock would go down. You own stock in that company, too, don't you?

C: I do, and many others in that commercial sphere.

A: Yes, yes, the stock will fall. No execution. Agreed?

All: Agreed.

A: Force them to leave the Motherland.

B: Yes, be as hard as nails. Attack from all sides.

E: Sirs, the company has just decided to withdraw from China.

All (in a flurry, picking up cellphones): Buy Baidu! Buy Sohu! Buy Sina!

Humor aside (if, in fact, you considered the above dialog to be humorous), Chinese media is forbidden territory for foreign firms -- its control is of such value to the Party's propaganda as to overwhelm whatever social benefit Westerners, such as Google and its executives, believe to have perceived. And frankly, if Chinese value such ideals, and wish to adopt them -- which I do not believe to be the case for the majority of mainland Chinese -- it is for them to overturn the ideas which Westerners (and some Chinese) believe oppress them.

However, apart from higher notions of God-given rights, and turning strictly to commerce, the US is a far more open environment for the activities of Chinese nationals than is China for American nationals. As an example, thousands of Chinese nationals, even those without immigrant status in this country, are licensed to practice law in many of these United States. No American, who is not a Chinese national and thus subject to heightened discipline by the Chinese state, is permitted to be similarly licensed.

Whither parity?

All of this occurs while a substantial portion of China's foreign exchange reserves are in the hands of the US government -- all of it eminently confiscatable.