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Payment Fraud In China. This Season’s Edition.

By Dan Harris on Posted in China Business

It’s become somewhat of a December tradition to write about China payment scams in December because history shows this is the biggest month for those.  Last December, it was Ancient China Business Scam. Back With A Vengeance This Season.  This year, I asked my co-blogger, Steve Dickinson, to report on what he is seeing and hearing on that front these days. The following is his report:

We are frequently contacted to deal with the following issue. A foreign company has been making purchases from a Chinese company for an extended period. Payments are made pursuant to purchase orders that specify the company bank account to which payment should be made. Suddenly, the Chinese company sends an email requesting funds for outstanding POs be made to a new bank account. Often, the name on the bank account is not the same as the name of the Chinese company. Often, the bank account is in a different city or even in a different country. Often it is for Hong Kong.

The question we are asked is whether the request to make payment to a different account should be honored. Our answer always is no. Ignore the request. Make payment as provided in the original PO or don’t make payment at all. In the past, I have made this statement because it is not uncommon for rogue employees in Chinese companies to set up alternative bank accounts using forged company documents. These employees are noted for having stolen substantial sums using these techniques.

It now turns out that foreign criminal gangs have entered the field, making the situation even more dangerous. China Daily reported today on such a foreign operated fraud.  The foreign gang worked with a network of 9 foreign nationals living in China. The scheme worked as follows:

  •  The China team investigated Chinese trading companies making sales to foreign companies operating in 27 foreign jurisdictions.
  • After locating the target Chinese companies, the gang installed Trojan horse software on the computer systems of the Chinese companies. They used the Trojan horse to intercept email communications between the Chinese and foreign companies.
  • The gang then sent out false emails to the foreign buyers, requesting that they send funds to bank accounts different than those provided in the applicable purchase orders. These accounts were opened in China by the China resident members of the gang. The accounts were emptied immediately, leaving only small sums behind to reward the local gang members.
  • Nine local gang members were arrested. However, since the majority of the funds were sent overseas to unknown parties, the stolen funds were not recovered.

How can you avoid getting caught up in this type of fraud:

  • As you can see from this story, the computer networks of many Chinese companies are not secure. The networks are subject to abuse by employees of the Chinese company and by outsiders. This means that you can NEVER trust an email communication from a Chinese company. Email is inherently insecure in China and you never know with whom you are really dealing when engaging in electronic communication with Chinese companies.
  • Chinese companies are very loyal to their bank and so you should view with extreme suspicion any request to make a change in the payment bank. You shoudl not even consider such a request unless the request is made in writing on a revised purchase order stamped with the company seal. Even in that case, it is important to contact someone you know in the company with supervisory authority to ensure that the request is valid. Email requests to make a change should be ignored, but the request should be forwarded to your trusted Chinese company contact for an explanation.
  • Carefully review all bank account information. Monitor both the name of the payee and the location of the bank. Where the payee is even slightly incorrect, do not pay. Where the location of the bank is in the wrong city or country, do not pay. I have seen cases where foreign buyers paid to bank accounts outside of China to payees with no connection to the seller. These cases were all obvious frauds and the buyers lost their entire payment. I have seen millions of dollars vanish into thin air with this sort of scam.  The Chinese parties committing the fraud will explain the need for this irregular payment as part of a plan to hold foreign currency outside of China. This kind of arrangement is no longer required in China. Explanations of this kind are indicia of fraud and should be ignored.

As China opens to world, this kind of international fraud will become even more common. Constant diligence is required to avoid being taken in.

You have been warned.

What are you seeing out there this season?

Doing Business With The New China Seminar. December 13, 2012. Seattle.

By Dan Harris on Posted in Events, Good People

On December 13, I will, along with Fraser Mendel, be co-chairing a seminar on “The China Market: Selling Products and Services in the New China.”  I promise you it will be an excellent seminar.  I can make this promise because I have known nearly all of the speakers for many years and I can vouch for them.

Fraser Mendel and Robert Carrol will start the day speaking on forming an entity in China. They will be discussing when to form a WFOE, when to form a Rep Office, when to form a Joint Venture, and yes, even when not to form an entity in China at all.  Fraser is a lawyer at Davis Wright (Gary Locke’s old firm) and he knows his stuff.  Robert Carrol’s practice focuses on representing food and beverage companies and I understand his focus will be on the  the best ways for food and wine companies to do business in China.

Michael T. McCune (who I also have known for years) will speak next on “Marketing in China; Internet Sales; Creating Distribution Chains; Reviewing Consumer Values That Drive Consumption in China; Understanding Why Enabling Internet Sales is Your First Step Into the Chinese Market; Understanding Merchant Dynamics to Appropriately Prepare for Retail Distribution.” To give you an idea of Michael’s retail expertise, leading Chinese retailers hire him so that they can better compete in China against foreign companies doing business in China.  Yes, you read that right. Michael is Director of Global Retail and China Trends at Iconoculture.

Tony Liebo of will speak next on Money/Banking/Letters of Credit and getting paid in China.  And that is the bottom line, right?  Tony is a senior Vice President at Wells Fargo.

Yours truly will then speak on Protecting Your Intellectual Property in (and from China):  Trademarks; Copyrights; Patents; Non-Competes; Trade Secrets.

Fraser Mendel will then speak, this time on “Anti Corruption Compliance: Chinese legal issues and the Foreign Corrupt Practices Act (FCPA)”.  He will be focusing on “Red Flags When Operating in China; Considerations when Dealing with Government Officials; Risks of Bribery; Compliance Requirements

We will then break out into panel discussions.  The first will be on Food and beverages and will consist of the following:

  • Xiaohui “Lou” Luo heads up operations for Chang International, Inc., a Seattle based seafood company with sales and operations in China as well.
  • Julie Felss Masino, Vice President of Starbucks’ Global Beverage Group and former Vice President of Marketing and Category for Starbucks in China.  I saw Ms. Masino give a great speech at this year’s Wharton China Forum and then I was on a panel with her at an Economist Magazine “Business without Borders.” Julie knows China retail.
  • Michael McCune (see above) will round out this panel.

The next panel will be on consumer products and will consist of the following:

  • Michael A. Zakkour heads up China strategy and implementation for Tompkins International.  Michael has been involved with China for decades and he truly knows its consumer side. I have had the pleasure of working with Michael on a number of China matters and serving with him as a speaker at various China events and I can verify his expertise.
  • Sage Brennan co-founded China Luxury Advisors and he too has been working with China for decades.  China Luxury Advisors assists luxury goods companies in selling to Chinese consumers both inside and outside China.
  • Renee Hartman also co-founded China Luxury Advisors and she too has a wealth of China consumer experience.  Renee wrote The Basics On China Retail — Creating Your Own Customers Is The Key, one of the most popular posts ever on this blog.  I have worked extensively with both Sage and Renee and shared a podium with them at many a China event and I know that they will bring a wealth of expertise and ideas to this one.

The last panel will be on services and will consist of the following:

  • Benjamin A. Shobert heads up the Rubicon Consulting Group, which focuses on assisting healthcare and senior care companies with Asia.  Ben has been involved with China’s health care and senior care industry for many years and he is a frequent writer on the topic as well, oftentimes for the Asia Health Care Blog.  Ben is amazingly knowledgeable on China big picture issues.
  • Darryl Custer.  Darryl Custer is a Vice President of Operations at Callison Inc., an architecture firm which has had tremendous success in China. Callison has been doing business in China for as long as I can remember. Daryl’s focus is on China.

China Law Blog readers will be given a “substantial” discount to this seminar and if you contact us by leaving your email in the comments or by emailing us at firm@harrismoure.com, we will give you the code to make that discount possible.

I look forward to seeing you at the seminar.

China Law Blog On Huffington Post Live. Friday, November 30, 2012. (TODAY at 1pm EST/10 am PST)

By Dan Harris on Posted in Events

I will be participating in a Huffington Post Live show on China TODAY.  The show starts at 1 pm EST/10 am PST and it is going to be on the following:

  • Why do American businesspeople “love” Chinese officials. Is this because the key to financial success is finding that government in?
  • Why do expat leaders leave China?
  • How will China’s slowdown impact American businesses?
  • What about China as a currency manipulator?
  • What about the tense relationship between the United States and China?

I make no promises regarding brilliance or erudition, but I assure you that I will be contrarian enough to generate at least some controversy.  So please be sure to listen, either live or at some later time.

And, of course, don’t hesitate to let us know what you think/thought.

Is China Emotionally Just Average?

By Dan Harris on Posted in Recommended Reading

Clicked on a Washington Post article entitled, “A color-coded map of the world’s most and least emotional countries,” because it was showing as the most read WaPo article today.  The article contains the following map of “emotions”:

Emotions Map

The World’s Emotions Mapped — China Too

The map reflects the results of Gallup surveys taken since 2009:

Since 2009, the Gallup polling firm has surveyed people in 150 countries and territories on, among other things, their daily emotional experience. Their survey asks five questions, meant to gauge whether the respondent felt significant positive or negative emotions the day prior to the survey. The more times that people answer “yes” to questions such as “Did you smile or laugh a lot yesterday?”, the more emotional they’re deemed to be.

Gallup has tallied up the average “yes” responses from respondents in almost every country on Earth. The results, which I’ve mapped out above, are as fascinating as they are indecipherable. The color-coded key in the map indicates the average percentage of people who answered “yes.” Dark purple countries are the most emotional, yellow the least.

China scores right in the middle, which probably seems about right to me, assuming the survey accurately measures emotions and assuming that the emotions it measures are the same ones I am thinking about.  People in China do sometimes smile — certainly more than in Russia but less than in the United States.  People in China sometimes scream and yell and fight — certainly more than in Singapore, but less than in Korea.  But of course people smile and scream and yell and fight everywhere, so I don’t know….

Is this map accurate?  Do these surveys accurately portray China?

What do you think?

China Non Disclosure Agreements (NDA). Done ALL The Time.

By Dan Harris on Posted in Basics of China Business Law, Legal News

Just responded to an email from a client that went something like this:

A couple of the potential manufacturers to whom we are showing the NDA you did for us are saying that “we don’t respect” them and that these sorts of agreements are “not done in China” in the _____ industry.  Is this true?

My response was as follows:

China Non Disclosure Agreements are quite common and they tend to work very at protecting confidential information.

Chinese companies often say that something isn’t Chinese as a way to avoid it.  What I always say about NNN Agreements (what we call our NDAs) is that we have done about 300 of them.  Maybe 148 times, the Chinese company just signs it.  Around 147 times, the Chinese company suggests reasonable changes and then signs it.  About five times, they say “this is never done in China.”  I then tell our client that can’t be true and we have our own proof of it — the 295 out of 300 times that we got one signed — and that the Chinese manufacturer saying that is a very bad sign.

 Nothing unusual about the ____ industry either.

China Joint Ventures. Watching The Sausage Get Made.

By Dan Harris on Posted in Legal News

Not sure why (the still bad economy?) but my law firm has been getting a rash of China joint venture deals and possible deals over the last six months or so.  Many of these have involved a United States company that wants to enter into a Joint Venture with its China manufacturer so as to work jointly on manufacturing and marketing and selling some combined product or products around the world.

An email from one of our lawyers to a client doing such a China joint venture recently crossed my desk and I am setting it out below because it provides a good introduction to what is involved in “doing” a China joint venture.

There are two steps in forming an equity joint venture in China. The first is to enter into a written joint venture agreement between the Chinese and foreign participants in the joint venture. The second is to formally register the joint venture as a corporation under Chinese law.

With respect to these two steps, please note the following:

a. Since the JV agreement is required, we will move forward with drafting that document first. Issues related to the JV and its structure can be worked out in the process of drafting this document.

b. Please indicate at this time who you will want to use to actually register the joint venture company. There are several options:

  • The Chinese JV partner can be responsible for the registration process.
  • You can engage the services of the local investment development bureau to handle the registration.
  • You can engage our law firm to manage the registration process. If you want to use this option, I can begin working with you to obtain the required    documents and information required for JV company registration.

For the JV Agreement, I have the following questions:

  1. You have provided your desired company name. Please provide that name in Chinese. English versions of company names have no legal effect in China.
  2. Please provide a one or two paragraph statement of exactly what the joint venture company will do in China. In particular, please describe:
  • The proposed facility.
  • If you will manufacture, what will be manufactured and what will be the source of the materials.
  • If you will import, what exactly will be imported.
  • Where will product be sold? In China, for export or both? What entity will handle sales of product.
  • Will any foreign intellectual property be transferred to the JV?

Please note that, in general, Chinese JV companies are free to sell their own manufactured product. A JV company is also permitted to import product manufactured by its shareholder parent. However, in general, it is not possible for a JV company to operate both as a manufacturer and as an importer of product manufactured by companies other than the shareholder. In your emails, you indicate that you desire to obtain approval for what is normally prohibited. If this is the case, we will need to review this issue with the local governmental authorities. If they will provide you with a special approval, you should understand what that is and then make sure that you hold them to their agreement.

Please also note that a primary requirement for company formation in China is that you have a lease on a premises that is approved for the business approved for the company. For a manufacturer, this means a factory, for a trader, this means a warehouse. However, it is also possible to have an initial address that is simply an office in a case where the business plan contemplates later selection of an appropriate factory/warehouse site. Some jurisdictions will permit this, some will not.

Your proposed registered capital is $2,000,000. This means that the Chinese company will need to contribute the RMB equivalent of $400,000 in cash. Are they  aware of this requirement? Do they have the cash? I assume that your group is also planning to contribute cash. As you mention in a related email, it is best from the start to develop a basic plan for contribution of the capital. There should be a basic business plan that provides how much will be contributed, when it will be contributed and for what it will be used.

China’s legal rules for contribution of capital are as follows:

  • 15% of the total amount of the registered capital must be contributed within 90 days after registration approval.
  • The remaining amount must be contributed within two years.

It is common for local governments to impose even stricter requirements and we will need to check with the local government officials on this point. Note that they do not have the power to make the requirement LESS restrictive; they only have the power to make the requirement MORE restrictive.

You asked us how we plan to draft documents that provide for the contingency of your key Chinese counterpart dying.  Since the shareholders in the JV are corporations, the death of any one person is irrelevant to the future life of the joint venture. We will write the JV Agreement to say that your Chinese joint venture partner company has the right to select a single director for the joint venture and that the director will be Mr. ______ at the outset.  However if you believe that the participation of Mr. ______ in management of the JV is critical, you can provide the following:

  1. Mr. _______ agrees to act as a director.
  2. If Mr. ______ is not able to be a director for any reason (refuses to serve, disability, death, etc.), then the foreign shareholder [you] has the right but not the obligation to purchase the stock of the Chinese shareholder. The purchase price will be $400,000, which is the initial amount paid by the Chinese shareholder. It is your choice whether or not you want to add this provision to the agreement. You could also provide the following: in the event that Mr. _______ is not able to be a director for any reason, then 1) all three directors will be chosen by the foreign shareholder but 2) the Chinese shareholder will have a continuing right to 20% of the profits of the joint venture company. I personally prefer the second alternative since it does not require restructuring the stock ownership.

There are a number of alternative ways to deal with this issue. Please consider the options that I have proposed and let me know whether you need additional information in to make your decision on how to proceed.

You are right to ask about dispute resolution.  Dispute resolution should be in China. You can use the Zhanjiang Courts or arbitration at CIETAC in Shenzhen. Arbitration in Hong Kong will be of little to no benefit to you in resolving any disputes because Chinese courts do not recognize their decisions regarding the corporate governance of Chinese companies.  We will need to discuss the pros and cons of Chinese courts and Chinese arbitral bodies.

We also will need to discuss who you will want to be the Representative Director. The day to day business of a Chinese companies is conducted by the general manager, not the representative director. The representative director role is limited to executing important contracts. This can be done by that person without any need to be physically located in China. In any Chinese company with a foreign representative director, there is always a challenge in allocating responsibility between the two individuals. The key issue is usually control of the company seal (“chop”). However, it is always best to appoint officers who are willing and able to travel to China freely. This is not a requirement, but it does make it easier to operate the company.

In answer to your question about scheduling contribution of capital, yes you are correct that it is an important issue for China joint ventures and one that should be resolved before executing the joint venture agreement.

I trust that the above answers your initial questions and lays out a bit of what we will need to be working on over the next few weeks.  If you have any additional questions based on the above, please don’t hesitate.

China Sales Contract Law From The Inside.

By Dan Harris on Posted in Legal News

Our most frequent job as China lawyers is to write sales contracts between Chinese companies and foreign companies.  And our most frequent email questions from blog readers also relate to China sales contracts.  Sales contracts are relevant for just about any company doing business in China.

So we figured we would start a series of blog posts explaining in depth China’s contract law relating to sales and this is the first in what we plan as a long running, quasi-weekly series.

By:  Steve Dickinson 

One of the things the Chinese authorities are doing to improve the application of law in China is to provide more authoritative guidance on the interpretation of statutory law. China is a civil law country. The sources for interpretation of the statute law follow the German civil law pattern.

Under this approach, sources for the interpretation of the law are as follows:

  1. The text of the statute.
  2. Supreme Court and other binding interpretations of the statute.
  3. Authoritative commentary.
  4. Government approved illustrative cases.

This familiar civil law pattern is followed in China in the area of disputes concerning contracts for the sale of goods. The applicable PRC sources are as follows:

1. Statute: One of the first civil law statutes promulgated by the Chinese government was the Contract Law of 1999: 合同法:  Chinese version, English version. Articles 130 – 175 of the Contract Law specifically address the sale of goods.

2. Interpretive regulations. The PRC Supreme Court has issued a number of interpretations of the Contract Law. Under the Chinese system, these interpretations have the force of law. The most important for sales of goods contracts are as follows.  Notice that the most recent was issued in May of this year, showing the continuing development of the law in this area.

 a. 关于审理买卖合同纠纷案件适用法律问题的解释 ［Interpretation of issues relating to the interpretation of law arising from the adjudication of sales contracts disputes], promulgated by the PRC Supreme Court on May 10, 2012.

 b. 关于使用《合同法》若干问题的解释I，II.［Interpretation of some questions relating to the Contract Law], promulgated by the PRC Supreme Court, volume I on December 19, 1999, volume II on April 24, 2009.

 c. 关于当前形势下审理民商事合同纠纷案件若干问题的指导意见 ［Opinion on guidance on some questions relating to adjudication of civil commercial contracts under current conditions], promulgated by the PRC Supreme Court on July 7, 2009.

 3. Commentary.

 a. A full commentary on the sales provisions of the PRC Contract Law can be found at: 买卖合同纠纷 ［Sales Contract Disputes], 田郎亮 ［Tian Langliang], editor, pages 1 – 47. Published by China Legal Publishing House, August, 2012. Pages 48 – 105 of the same text contain a full commentary on the Sales Contract Interpretation discussed at 2.a above.

b. The PRC Contract Law is ultimately based on the work of a group of scholars under the chairmanship of Professor Wang Liming of People’s University. This group has issued a fully annotated version of their draft that provides the source and reasoning behind every provision of their proposed version of the Contract Law. Though this scholar’s version was not adopted as proposed, the commentary in this volume nevertheless serves as a sort of “legislative history” of the Contract Law. The commentary is published as: 中国民法典学者建议稿及立法理由：合同编 ［A Propositional Version with Legislative Reasons for Civil Code Draft of China: Contract Section], Wang Limin chief editor, Legal Press, June 2005.

c. There are numerous commentaries on contract law. The best is by Wang Limin who was influential in the promulgation of the current PRC Contract Law: 合同法研究 [Studies on Contract Law], Two Volumes, People’s University Press, 2003. There are numerous more recent commentaries, but none surpass Wang in depth of analysis and clarity.

d. The Chinese ultimately base their version of contract law on the German system. Very few Chinese scholars are comfortable with original German commentary. Most therefore rely on the excellent Chinese translation of the 12th Edition of the standard German commentary on Schuldrecht [Obligations/Contract] by Dieter Medicus published in 2003 as 德国债法：总论，分论。Though this translation is quite influential in China, a quick review will show primarily how far the Chinese approach departs from the German approach.

4. Case law. The PRC Supreme Court now treats sales contracts as a separate area of concern. In order to provide guidance in adjudication, the Supreme Court annually issues a volume of annotated authoritative cases. The Supreme Court also periodic issues in depth annotations of cases relating to sales contract issues. The most recent examples of these are:

a. 中国法院2012 年度案例：买卖合同纠纷 ［Chinese courts decisions for 2012: sales contract disputes], edited by by the National Judges College, February, 2012.

b. 买卖合同纠纷 ［Sales Contract Disputes], 田郎亮 ［Tian Langliang], editor, pages 106 – 503.

Foreign commentators (mostly from common law countries like the United States, England and Australia) frequently complain that Chinese law is too vague and general to provide concrete guidance. However, such commentators would almost certainly say the same thing if they simply read the provisions of German or Japanese statute law. In all civil law jurisdictions, no one is in a position to comment on the state of the law until after they have mastered the four levels of explanatory material discussed above. It is simply false to state that this explanatory material does not exist with respect to Chinese law. The material does exist and the Chinese courts, scholars and lawyers have worked very hard over the past decade to generate this material.

Most such statements about the state of Chinese sales contract law are thus usually based on a lack of familiarity with civil law systems. Note that this extensive material discussed above is almost exclusively in Chinese and, to my knowledge, only the Contract Law has been translated into English. Therefore, only those who can read large amounts of legal materials in Chinese are equipped to provide in depth perspectives on Chinese civil law.

Over the next year I will be discussing some of the key issues of Chinese sales contract law. I will make use of the explanatory materials introduced in this post as the basis for discussion. The result will be a small glimpse at China sales contract law from the inside.

China Trademarks. Doing Them With Class.

By Dan Harris on Posted in Basics of China Business Law, Legal News

As we have written many times over the years, if you are selling goods into China, sourcing goods from China, or even just doing business in China or with China, you probably should be registering a trademark in China for your logos and brand names. China is a first-to-file country and it requires no evidence of prior use, which means that whomever files for “your” trademark first, almost certainly gets it. For more on the need to register your trademarks in China, check out the following:

But for what exactly should you register your trademark n China?

China breaks out its trademark registrations into 45 different classes, not to mention sub-classes.  And unlike many other countries, China is a “single class application” country, which means that you must file (and pay for) a separate trademark application for each class for which you are seeking trademark protection.  Very roughly speaking, what this means is that if you register your “ABC Trademark” in the class for clothing, you will be protected from trademark infringement just from those who use your ABC Trademark on clothing items.  If someone wants to use your ABC trademark on clocks, cars, kitchen appliances, or any other product or service within any of the other 44 classes, they will be free to do so.

So then what can you do?  Well obviously you can register your “ABC Trademark” in all 45 classes, but that is really no solution at all. It is no solution both because doing that would be prohibitively expensive for all but the largest and wealthiest companies.  It is also no solution because if you fail to use your registered trademark for three years, you risk losing it.

So then what should you do when filing for China trademarks?  We suggest that you register your mark in classes of products you may make or sell in the future, or where there is room for consumer confusion.  Let’s take your ABC Trademark on clothing.  It probably does not make sense for you to register that for kitchen appliances but it might make sense for you to register it for beauty products because so many clothing companies also make beauty products.

Unfortunately, there are no general rules here, beyond that you fully familiarize yourself with China’s various trademark classes and that you figure out as early as possible what classes your products/services best fit into now or may fit into in the future and also what registrations by others are most likely to be confused for yours.

UPDATE:  I just received an email from a Hong Kong lawyer friend that raises a very good point.  This lawyer, who has a very substantial China IP practice, thinks every company should think long and hard about registering their trademark in the clothing class:

It was interesting to read the last portion about registering CN TMs.  I’ve been advising people for years that irregardless of what their product category is, they should also register their TM for clothing on the basis that almost any TM in China will eventually appear on someone’s (unauthorized) T-shirt, socks, or something in one way or another.

Furthermore, most companies will at some point or another want to put their trademark on a piece of clothing, whether it be a T-shirt for a promotional item, or for a marketing blitz somewhere, or whatever.  Or, the company will eventually want to expand their brand by moving into clothing…Look at what happened to Ferrari when they started selling clothing in China – or Harley Davidson.
Very good point.

China Still The Place For Manufacturing

By Dan Harris on Posted in China Business

There have been countless articles written on how the end of cheap China will mean the end of foreign companies going to China, but that has barely happened at all.  This article, “Analysis: Investors make $100 billion bet on China’s drive up value chain,” by Kevin Yao of Reuters, nicely encapsulates what is going on out there by way of foreign direct investment (FDI) into China.

Essentially, FDI has slowed a bit, but is still massive and all of the talk of companies going into places like Indonesia or Vietnam has been to a large extent just talk.  This is what I have been seeing as well and I have to admit that it is NOT what I have been predicting:

I am particularly surprised at how so few of my law firm’s clients have moved over to Vietnam, especially those in industries, like clothing, shoes, and pet toys where to me it makes complete sense for them to do so.  I am even more surprised at how few of our new clients going into Asia for the first time are looking to countries other than China for their manufacturing.

And I have a new theory as to why this is the case.  My theory, which may be less a theory than a fact-based observation, is simply that these companies do not know how to go into any country other than China. I will call this the “I would love to, but…” theory.

Let me explain.

My law firm represents a large number of clothing and shoe companies, most of which are fairly well known brands and have fairly high margins, but most of which are not massive.  In the last year or so, these companies have seen an increase in bad product from China. The typical scenario goes something like this:

  1. Chinese company provides US company with bad product.
  2. US company refuses to pay whatever is still owed for the bad product.
  3. Chinese company goes ballistic and threatens US company that it will do horrible things to it if US company does not pay.
  4. US company complains to me and I suggest that now might be a great time for US company to just walk away from China and set up manufacturing in a place like Vietnam.
  5. US company says that it has heard great things about Vietnam and it would love to go there but it has no clue how to do so.
  6. US company then strikes a deal with Chinese company and keeps producing in China, slowly diversifying to other Chinese manufacturers.

So why does the US company not go to Vietnam?  Simply because it lacks the people in its organization with any Vietnam expertise and because there is no clear and easy path for SMEs to get into Vietnam. The path is less than clear because Vietnam lacks a “soft infrastructure” of well known and highly regarded experienced consultants with offices in the United States. Vietnam also lacks a network of people (and even seminars) in the United States who can talk of their Vietnam experience.  There is at least a couple of how to do business in China seminars in every good sized American city every year, but one on Vietnam anywhere is a rarity.   Vietnam is simply too much of an unknown.

So for SMEs, there is this massive knowledge and fear gap regarding places like Vietnam and that gap is creating an “I would love to” Catch-22.

That’s my new theory.

What do you think?