Western Companies and China: No Longer a Slow Boat

“Wealth and rank are what every man desires, but if they can only be retained to the detriment of the Way he professes, he must relinquish them.” - Confucius

The People’s Republic of China (PRC) and its people welcome American business ventures, but without the knowledge and expertise of an experienced legal team, companies seeking to do business in China can place themselves at risk. China enacted laws and guidelines in an effort to promote foreign ventures while protecting the interests of its people. The laws in effect are being refined continually as more and more companies enter the Chinese market and as China responds to the demands of Western business and cultural attitudes.

Foreign ventures operating in China require a Chinese partner who must, in many instances, be a majority owner. However, certain flexibility regarding voting rights, allocation of risk and income, and enforcement by foreign arbitration exist under the law and are essential to ensure proper and effective control. There is little precedence with these laws, but the practice is gradually becoming accepted into Chinese culture. We have found that the business structure must remain agile and respond to changes in the law and cultural practices in order to ensure a long, prosperous relationship.

Recently, J&F Consulting Co., Ltd., of Shenyang, PRC invited CoGo’s Co. to begin doing business in China. The proposition was attractive, but CoGo’s had a number of concerns. At that time, it had no international experience, but it did have a unique technical system for operations and an outstanding reputation for customer service and branded products. CoGo’s system, reputation and its highly visible logo attract more customers than larger, national competitors. CoGo’s invited the White and Williams business development team of Nick Pasciullo, Gary Biehn, and Estella Gold to create the following strategies to protect its assets, yet provide the necessary flexibility to pursue the business opportunities in China.

Register Intellectual Property First: Estella Gold researched the trademark laws in China and found that China is a “First-to-File” country (as opposed to “First-to-Use”), so when a company is thinking of doing business in China, immediate registration of intellectual property is critical. For CoGo’s, contacting a certified agent in Beijing was an early step. With that assistance, CoGo’s is in the process of registering its intellectual property in both English and Chinese.

Translate the Business Name and Tag Line: A business should not overlook the importance of the message its name, tag lines and even its advertising approach has on Chinese cultural attitudes. Fortunately, the pronunciation of CoGo’s in Chinese translates roughly into “a good place to shop.” Most companies are not so lucky, but they should strive to create a favorable name translation by exploring a wide range of character combinations that are phonetically close. There are also superstitions surrounding numbers, similar to the Western treatment of the numbers 7 and 13. In China, for example, sequences of multiple 8’s or 9’s are highly sought after, while the sequences “1-4” and “5-3” should be avoided. With the assistance of Chinese partners, CoGo’s selected a sequence of characters that described its business and branded it as prosperous.

Select the Right Business Structure: A Chinese-Foreign cooperative Joint Venture is a common and flexible arrangement for foreign companies doing business in China. The type of joint venture is largely dependent upon the type of business, whether manufacturing, technology, retail or other. At White and Williams, Gary Biehn structures foreign and domestic joint ventures. Gary and Nick Pasciullo combined their experience with business structures and Chinese culture to craft a joint venture structure designed to satisfy the parties’ needs in light of the PRC’s emerging Chinese-Foreign business laws. They also sought China based advisors in Chinese tax and accounting to verify the joint venture structure and confirm strategies for the tax efficient flow of earnings from China to the United States. Their approach viewed the arrangement from many skill-sets and identified the advantages and risks of the business.

Continue to Innovate Beyond Structure: Because CoGo’s also encourages individual responsibility and growth, the joint venture structure it chose allows sufficient flexibility and local autonomy. While many cultures are represented in China, they all place a premium on individual success. As a result of this cooperative venture, CoGo’s Chinese partner surpassed all expectations, achieving profitability within the first few months of operations and creating capital for further expansion.

Be Flexible in a New Culture: Many Chinese businesses still thrive in a culture of handshakes wherein a person loses face if he or she fails to keep a promise. Americans, on the other hand, are uncomfortable with the handshake deal - witness the reams of paper filled with intricacies of rights and obligations that flesh out a typical joint venture. Balancing the need for formality and specificity with the cultural aversion to tedious agreements is the key to a successful relationship.

International markets, especially those which have long been closed due to cultural or political barriers, can be profitable for American businesses. Cultural understanding, diligence, and flexibility in both business and legal structures are the key.