Study Up to Do Business in China

Allen Smith, J.D. By Allen Smith, J.D. November 7, 2019
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​PHOENIX—Familiarity with three things—fluctuations in economic growth, a U.S. law affecting foreign investments and a Chinese law that may make operations more difficult—are necessary to grow a business in China.

Economic growth has cooled in China to 6.2 percent this year, its weakest performance in 27 years, according to Reuters. The trade war between the U.S. and China may be part of the reason for the economic slowdown, according to speakers at the Association of Corporate Counsel (ACC) Annual Meeting on Oct. 29.

Alibaba, a leading Chinese e-commerce site, had revenue growth of 40 percent last quarter—and that was a bad quarter for the rapidly growing company, according to Christopher Chan, general counsel and head of government affairs in Singapore for Lazada and RedMart, which are owned by Alibaba.

In China, he said, technology workers are accustomed to the "9-9-6 work-hour system," working from 9 a.m. to 9 p.m. six days a week. Chan, who is American, said that Chinese business leaders think that Chinese employees "work so much harder" than U.S. workers that their companies will surpass companies in Silicon Valley, even if the area remains "the gold standard for innovation" for now.

But innovation is happening at a rapid pace in China, said Deborah Vaughn, vice president and chief counsel, Asia Pacific for Kimberly-Clark Corp. in Singapore. Consequently, Chinese companies—long accused of violating intellectual property laws—are demanding greater intellectual property protection, she said.

Competition in China is intensifying, so much so that some U.S. companies are finding it increasingly difficult to maintain market share. "They [Chinese companies] are able to sell for less and have captured some market from us," said Max Laun, vice president and general counsel for Arconic Inc. in Pittsburgh. He noted that his company has had to change its focus as a result.

U.S. Law Could Affect Chinese Investment

Businesses operating in China should stay aware of developments in the U.S. that may make investing in U.S. companies more difficult, cautioned Dennis Unkovic, an attorney with Meyer Unkovic & Scott in Pittsburgh.

The Trump administration has raised concerns over the national security risks posed by foreign direct investment, primarily by Chinese firms, in U.S. high-tech companies. On Aug. 13, 2018, President Donald Trump signed into law the Foreign Investment Risk Review Modernization Act (FIRRMA). The law amended the process by which the Committee on Foreign Investment in the United States (CFIUS) reviews, on behalf of the president, the national security implications of foreign investment in the United States.

If national security is a concern, the president can reverse or unwind a transaction and impose civil penalties on the non-U.S. company up to the total value of the investment, Unkovic said.

Even before FIRRMA was enacted, U.S. presidents blocked the following transactions, according to the Congressional Research Service:

  • 1990: Acquisition of Mamco Manufacturing by China National Aero-Technology Import and Export Corp.
  • 2012: Acquisition of an Oregon wind farm project by Ralls Corp., backed by Chinese company Sany Group.
  • 2017: Acquisition of Lattice Semiconductor Corp. by Canyon Bridge Capital Partners, a Chinese investment fund.

FIRRMA also recommended that CFIUS establish a process for exchanging information with U.S. allies to facilitate coordinated action over trends in foreign investment and technology that pose national security risks. Recent action by other countries include, according to the Congressional Research Service:

  • May 2018: Canada blocked the Chinese acquisition of a Canadian construction company.
  • July 2018: Germany blocked the Chinese takeover of a German machine tool manufacturer and expanded its authority to block acquisitions of firms involved in "critical infrastructure."

Unkovic, the author of Asia Ascending: Insider Strategies for Competing with the Global Colossus (American Bar Association, 2019), said he would not complete an investment from China in the U.S. without CFIUS approval. Final regulations implementing FIRRMA are due in February 2020.

[SHRM members-only toolkit: Introduction to the Global Human Resources Discipline]

Social Credit Law

In China, a social credit law that has applied to citizens will be expanded to apply to companies in 2020, Vaughn said. CNBC has described the law as rewarding behaviors China likes and punishing behaviors of which it doesn't approve. In June, China established a credit recording system for "market players" and "institutions" that would reward and punish "acts of good or bad faith" and link them to companies. Once the corporate social credit system operates, the Chinese government will be able to see if a company has complied with its regulations or engaged in "good behavior." Higher scores in the system may result in lower taxes and better credit, while lower scores could result in blacklisting, CNBC reports.

Chan noted that many individual-consumer payments in China these days are made digitally, and China monitors every electronic transaction.

Vaughn said that when the social credit law applies to businesses, companies will be rated on 300 metrics—currently there are only 30 metrics under the system. She said observers question whether the social credit law will be used only for compliance or "to toe the political line."

Be Open to Learn

Chan said that Americans need to spend more time in China to understand its culture. There are nearly 330 million people in the U.S. By contrast, there are more than 1.3 billion in China, according to the U.S. Census Bureau.

Vaughn said, "I lived in China [for four years] and loved it." She said that sometimes learning some Mandarin will go far toward winning a warm reception.

Unkovic, who was the moderator for the ACC session, emphasized that the speakers' views were their own and not their companies'.

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