Many Chinese manufacturers are behaving as though they have no future

The China Law Blog (previously) reports on the kinds of questions that western businesses operating in China are raising; China's serious economic downturn and rising authoritarianism have turned the site's normally businesslike posts into a glimpse of a kind of cyberpunk stranger-than-fiction dystopia (for example).

A new post on the site describes the consequences of a sharp downturn in the Chinese economy: a new mood among many Chinese businesspeople that they are at the end of the long Chinese boom and that there's no reason not to burn their bridges with non-Chinese firms, because they're not going to be doing business with them for much longer no matter what.

The site's author, Dan Harris, compares the mood in China today with the situation in Russia in the 1990s, when outside businesses would get repeatedly ripped off by their Russian partners, and would go away mystified that these partners would take the short term payouts of burning a foreign partner, at the expense of the much larger upside they could realize from an ongoing arrangement. For these Russian entrepreneur/bandits, Harris says, "They do not believe they will be able to operate freely five years or even one year from now. So though you see them as having irrationally sacrificed massive long term gains for much smaller short term rewards, they see themselves as having quite rationally grabbed what they could while it was still there."

Western firms hiring Chinese manufacturers find themselves taking delivery of junk that is totally unlike the samples they received before placing their main orders; discovering that their trademarks have been registered in China by their manufacturers (which means they can't change suppliers, since the crooked manufacturer now owns the exclusive right to produce their products); finding that their manufacturers have disappeared (or that they never existed in the first place); and claims by Sinosure, the Chinese state-owned insurer that is supposed to protect Chinese manufacturers who've been stiffed by foreign partners, have exploded, as the insurer's foreign offices file legal claims against Western businesses that are having disputes with manufacturers.

Sinosure is China's state-owned export insurance company that pays Chinese manufacturers that were stiffed by their foreign buyers and then seeks to collect from the foreign buyers that allegedly failed to pay. Before this year the Sinosure cases we handled always involved situations where if the Chinese manufacture did not get Sinosure involved it would almost certainly never get paid. We are now seeing Sinosure cases where the Chinese manufacturer has made what we think are fraudulent policy claims to Sinosure because they are desperate for cash and they don't care about maintaining their relationship with their foreign buyer.

Lastly, our China lawyers are dealing with an increasing number of situations where the Chinese side of a China joint venture has essentially taken over the joint venture and stops communicating with its foreign joint venture partner. Maybe these joint ventures are no longer even profitable, but our clients are entitled to determine this and if the joint venture should be shut down, our clients are also entitled to a share of the joint venture company's existing assets. For how to prevent/mitigate such problems, check out this article on China joint ventures. It's as though the Chinese side in these joint venture partnerships views it as their patriotic duty to kick their foreign partner to the curb.

For some companies, China's increasing risks now exceed its rewards, but for others this is not at all true. Do you really need a legal entity in China with Chinese employees or might your company be better off with no operations in China beyond a third party distributer or reseller? Our China lawyers have been doing a lot of work in the last six months helping our clients reduce their China footprint and thereby reduce their China risks. No matter what you are doing in or with China, now is a good time to look at how you too can reduce your risks.

How to Conduct Business with Chinese Companies That See a Dark Future [Dan Harris/China Law Blog]

(via Naked Capitalism)