Doing Business in China

Kneppelhout & Korthals AdvocatenAsia Practice

Erik van der Molen08 April 2013

Introduction

Kneppelhout & Korthals:

• Independent Law Firm focusing on Trade, Investment & Intellectual Property

• Asia Desk with a focus on China, Vietnam & Japan• Serving Small & Medium Sized Companies

Why Asia is Important 1

Share of world population:

Share of world output growth:

Visualising China’s growth 1

1990

2012

2030?

Balance shift? Or Return to normal?

Visualising China’s Growth 2

One in five people in the world is Chinese

China's economy grew 7 times as fast as America's over the past decade (316% growth vs. 43%)

China’s economy will surpass the US in 2025

3 new powerplants every week

5000 new hospitals in the next 30 years

one-fifth of the global construction industry

240 million cars

A Growing Urban Middle Class

240 million cars

564 million internet users

220 million internet shoppers

25% of world luxury product market240 million cellphones sold in 2013

Developments

• Ongoing Economic Transformation• Fast growing urban middle class giving rise to

new demands. (creative & luxury markets)• From made in China to designed in China• Chinese companies going global• Rest of Asia will grow in China’s wake:

Vietnam, Laos, Cambodia, Mongolia, Myanmar, Mongolia

Why go to China?

To summarize:

• A focus on China / Asia is no longer an option, it is a necessity.

• No China/Asia strategy means:- Losing from the competition that does

have an Asia focus- Losing from the competition that will

emerge from Asia itself.

• Don’t underestimate the speed and scale of developments

• If you wait until China is ready for your product, you are too late.

The End of Cheap China?

- Production in China can still be interesting.

- China is getting more expensive, but it is not only about price. (scale/flexibility)

- Upcoming alternatives in the region: Vietnam,

Thailand, Myanmar, Mongolia.

Manufacturing

Market

Case: Apple

Apple’s executives had estimated that about 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers eventually involved in manufacturing iPhones. The company’s analysts had forecast it would take as long as nine months to find that many qualified engineers in the United States. In China, it took 15 days.

The Other Side of the Medal

Many Opportunities in China but Challenges abound:

Legal

•Fraud•Corruption•Intellectual Property•Contracts

Culture

• Negotiation• Relationships• Business

Culture

•Finding the right partner•Quality Control•Knowing the market

The 4 P’s of Doing business in China

Preparation Patience

Perseverance Prudence

Causes of Failure:

• Choosing the wrong partner• Short-term orientation• Underestimating the cultural factor• Insufficient legal protection

The 4 P’s of Doing business in China

Invest in Relationships

-Personal Contact.-Regular Contact-Network

Know the Culture

- Negotiation Tactics- ‘Face’ and “Hierarchy”- Indirect Commucation

-Language

Know the Market

- Where is your market?- Who are the players?- How fast the market developing.- Where is the market developing.

Protect Yourself

- Know who you are doing business with- Protect your intellectual property

- Have good contract.

CHINA SUCCESS:

Know the Market: China is a continent not a country.

Business Culture

• Relationships & Loyaltymake business personal, reciprocity, long term relations

• Hierarchy & Faceshow respect, formality, not everybody is equal, give face

• Harmonyavoid conflict.

In Asia, all business is personal

Business Culture: Relationship

• Long term View• Building a relationship takes time• Reciprocity: Give and Take• Investing in Relationship will lead to

better results

Finding a Business Partner

Find a Business partner:• Internet• Tradeshows• Dutch Government Network• Third Parties• Join a Trademission

• Important to do your Due Diligence!

• Make sure your partner is a strategic match.

• Personal Contact is paramount!• Beware of known frauds & scams

Know who you are dealing with

1. Understand how the Chinese organization works: management, corruption risks, worker education level.

2. Provide detailed guidance and documentation

3. Factory Presence and Inspection.

4. Take a long-term view:

5. Anticipate what will go wrong and prepare.

6. Always carry a safety stock.

The Key to Quality Control

Sourcing / Manufacturing – The absolute basics

A Common Misconception:Contracts in China are meaningless and not enforceable

A good contract:

• Provide clarity about mutual expectations.

• Will help prevent problems.

• Will be enforced by a court if.

Things to remember:

• Include Non-Disclosure/Non-Use/Non-Circumvention Clauses

• In Chinese

• Choose the right Governing Law

• Consider Arbitration Clauses

• Find a balance between a good contract and a good relationship

• Negotiations will continue after contract has been signed

Contracts in China

Intellectual Property Rights

• Always Register Trademarks in China.• Contractually Protect Your IPR.• It is possible to go after copycats, but is it worth it?• Protect your production processes

Conclusion

• The time to go to Asia is now.• Don’t rush into a relationship; know who you do business with.• Choose a partner with a long term view in mind.• Put time and effort in personalizing relationship.• Know the culture or work with people who do.• Don’t underestimate the speed and scale of developments• Take basic steps to protect yourself legally

Questions?

How to structure my

China operations financially?

What to put in a sourcing contract with a Chinese

supplier?

You can contact

Which legal entity /structure is

best for my business?

How to set up a legal entity in

China?

How to secure my interests in a contract

with my Chinese distributor?

How to protect my intellectual

property in China?

Contact information

Erik van der Molen

Tel.: +31 010 400 5100

E-mail: evdm@kneppelhout.nl

Questions?