Sitting in Starbucks on the first floor of the World Trade Tower Beijing on a June afternoon, to my right there was a U.S. businessman working on his laptop computer. To my left, three Americans were negotiating with a Chinese gentleman sales terms to import products to China. China is definitely an exciting place for U.S. companies. The market is big. The business opportunities are numerous. The chance of success is promising. But there are also many pitfalls.
Choosing a Business Structure
Under Chinese law, there are four types of business structures from which U.S. companies may choose: the representative office (the “Office”), wholly foreign owned enterprise (WFOE), Chinese-U.S. joint venture (JV), and branch. The common problem in choosing a business structure is being not very well informed on what is permitted or prohibited under Chinese law for each structure. For instance, the Office is permitted to engage in marketing and consulting activities for its U.S. headquarters and affiliates, but it is prohibited from engaging in the manufacture or direct distribution of products. The WFOE, JV and branch have more freedom than the Office. However, their business activities are also limited by Chinese law (1) requiring the U.S. company to define its business scope in the application for governmental approval and (2) prohibiting U.S. companies from engaging in unrelated business. If U.S. companies want to change or expand business activities, they must submit to the government an amendment for further approval.
Conducting Market Research
Many U.S. companies believe that China is a big market for their products, and some hire marketing firms to conduct research to confirm their beliefs. Relying on beliefs or marketing research results, some make the mistake of rushing into China without knowing how to break into the market or how the distribution system works. Some companies spend a great deal of time and resources in China but get very few sales. To avoid such a loss, before making a formal decision, make trips to China to talk to prospective customers and watch how the market operates.
Preparing Documents and Getting Approval
Companies normally rely on their Chinese counterparts to prepare application documents for approval. Since Chinese business people do not customarily have lawyers participate in the preparation, one common problem is that the documents are sometimes delayed or denied because they do not exactly comply with a particular Chinese rule. Another common mistake is not having someone proficient in Chinese and English legal terminology check the application. As a result, sometimes the approval issued by Chinese authorities does not reflect the terms that the company had agreed upon in the contract.
Protecting Trademarks, Patents and Copyrights
A common misunderstanding about intellectual property rights is that U.S.-registered trademarks and patents are protected in China. However, under Chinese law, U.S. trademarks, patents and copyrights for computer software, for example, must also be registered in China in order to be protected. The Chinese registration process is relatively simple. If companies do not register in China, they may lose substantial protection opportunities if there is a infringement in China.
Managing and Controlling China Operations
After setting up many companies experience difficulties in controlling their China operations. For instance, some China employees may not maintain adequate bookkeeping systems, borrow excessive amount of loans, register the trademarks or patents under their own personal names, or get into relationships exposing the U.S. headquarters to unnecessary liabilities. To mitigate the potential damage, the company may limit the Chinese managers’ powers by stipulating terms in employment agreements and entering into confidentiality agreements, noncompetition agreements and the like. In addition, the company may hire an auditing firm which has offices in China to conduct periodic reviews of its China operations.
For more information, please contact hzhang@cohenlaw.com.
