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Oct 31, 2011

Due Diligence Key to Saving your Skin in China: Don't do it the John Paulson Way

Private Equity firms, Hedge Funds and overzealous investors in Chinese companies beware.  Needless to say I wasn’t surprised or disappointed when learning that “Hedge Fund Guru” John Paulson of Paulson & Co. lost a cool half a billion dollars on a Chinese company called Sino-Forest, listed on the Toronto exchange, after a report from the research firm Muddy Waters exposed significant reporting fraud at Sin0-Forest. 

Now for those of us who are in the Jungle (China) on a daily basis, we could have saved Paulson a lot of money and Muddy Waters a lot of time and told everyone from the beginning to expect fraud and overstatement of resources, assets, and earnings and to do due diligence. 

Then after you’ve done it, do it again and again.  Yes there are good companies in the Jungle, with solid earnings, accurate financial statements and transparency and I am sure the opportunities for investment and stock trading can be promising.  But, it is never what it really seems here in the Jungle and best to remember and dream about due diligence.  The following from the editorial page of the South China Morning Post as always for your reading pleasure.

Investors need to have faith restored in companies being brought to market
Jun 28, 2011

The cloud of doubt over Chinese companies listed on the world’s stock markets is getting ever darker. Values took another dive last week after it emerged that American hedge fund guru John Paulson had suffered massive losses by ditching his entire stake in the Toronto-listed mainland firm Sino-Forest, accused by a short-seller of faking timber holdings.

His move has added to the damage caused by a series of scandals that have wiped billions of dollars off the market value of companies and damaged their credibility, regardless of whether they have been implicated.
But it is wrong to point the finger at suspect companies alone. Those who bring questionable firms to market should also be under the spotlight. Those are the investment banks, accounting firms, institutional investors and lawyers who vouch for the firms that are trying to list on stock exchanges. Just as during the global financial meltdown three years ago and the dotcom bubble of 2000, it is obvious that they have not done their homework. A number of firms that have doctored their books have been able to list.

A point is fast approaching where investors are unsure who they can trust. Large state firms and small private ones alike are being shunned. The values of many have plunged at least 20 per cent, and some by as much as 60 per cent, in the past few weeks alone. Quick action is needed by companies and the government to shore up credibility.

But a public relations blitz, in which firms make themselves as transparent as possible, and a concerted effort by authorities to improve domestic accounting practices are only part of the solution. Investors also have to have faith in the foreign entities that sign off on audits, underwrite initial public offerings and promote companies as sound deals. Conflicts of interest that abound have to be taken out of the process. Foreign stock exchanges seeking to attract mainland companies must also meet their responsibility to investors.

Workplace Safety in China: Yah the Chinese Government Cares

Y’all might have read about the town in Hunan province where it was recently discovered that at least one factory had been polluting the ground, water and air so badly that people were actually dying as a direct result of the pollution. 

As China continues to develop and evolve there will undoubtedly be more of these stories – similar to our Love Canal in New York state in the 1970′s where 21,000 tons of toxic chemical waste was buried.

Anyway, it seems that this recent event in Hunan province has given the government good reason to look at and implement some new measures on occupational hazards and safety.  While this is probably good, nobody knows what the law means or how far the government or local governments will go to enforce the law.  Please notice that in the the article below it doesn’t just mention “polluting factories” but also “businesses.” 

Remember with the labor law how we told you that the ambiguity in the law was one of the ways that the burgeoning legal trade here in China was going to find sources of revenue.  Looks like this new regulation will be a bonanza for disgruntled employees, competitors and hungry lawyers. 

Companies now required to monitor workplace hazards
(China Daily)
Updated: 2009-08-14 09:33
Beginning next month, Chinese businesses and factories that violate occupational hazard regulations will be shut down and face a maximum penalty of 300,000 yuan ($44,000).

“If an employee’s health has been affected by dust, toxic substances and other harmful factors during occupational activities, those harms can be defined as occupational hazards,” according to a temporary provision released recently by China’s work safety watchdog.

The provisions were formulated by the State Administration of Work Safety (SAWS). SAWS is in charge of monitoring and inspecting work safety practices, halting work hazards, issuing licenses, investigating accidents and stopping illegal work practices.

Businesses and factories should faithfully inform employees about possible occupational hazards and their consequences, and provide occupational hazards prevention knowledge training. Also, employers are required to give their workers necessary health checkups. They also should buy protective gear for employees working around hazards and ensure that equipment remains safe and in good repair.

Businesses that violate the provision will receive a warning from SAWS, ordering them to correct the practice within a time limit. Enterprises that do not correct the problem within the time limit will be fined 20,000 yuan.

Businesses that seriously violate a relevant law, regulation, or industry standard, causing grave damage to employees’ life and health, will be closed and required to pay a fine of between 100,000 and 300,000 yuan.
Moreover, companies are obliged to report any occupational hazards in construction projects to their local work safety department. They also must periodically monitor work safety procedures and make reports to the department. Occupational hazards should be monitored at least once a year, and be evaluated at least once every three years.

Misconceptions about China: IP Protection Strategies Work in China

My mother thinks that people in China still ride around on bicycles wearing those green army suits and green hats with the red star in the middle.  While there are still a lot of bicycles, especially in Beijing and Shanghai – where they are proud to wear their silk pajamas while riding their bicycles and smoking at the same time – there are not many people wearing those green outfits. 

In fact, to most people in the U.S., China would be unrecognizable from what they remember in the news clips from the last few decades.  There are many misconceptions about China and we are here to clear up a big one.

I have had several clients recently tell me that their lawyer from _______ (insert the country here cause they are all the same) told them that there “wasn’t any need to file a trademark or patent application in China because China doesn’t recognize intellectual property rights anyway and people still ride around on bicycles wearing those green army suits and hats” (I added that part).  This is a big misconception that could potentially cost someone a lot of money.

First of all, China has something called the State Intellectual Property  Office of the Peoples Republic of China “SIPO”.  They even have a website if you want to pay them a visit:  SIPO and if you can read Chinese you would understand what they are writing.  If you can’t read Chinese, they have an English version at: SIPO English Site.  From the website you can see they are legitimate, SIPO is similar to the US Patent and Trademark Office (USPTO), and takes Intellectual Property filing and enforcement very seriously.

Secondly, as more Chinese companies file for IP protection in China and in the West, and they have an expectation of enforcement and a rule of law, those same principles will extend to foreign companies and individuals who apply for IP protection in China.  I have personally watched IP filing and protection improve dramatically in the past decade and most of the problems in enforcing intellectual property rights arise when foreign companies have not filed in China.

Thirdly,  China does not recognize US and other patents in the same way as other countries.  China recognizes Chinese patents filed with the SIPO and China is a first to file jurisdiction.  This means the first person to file usually gets the IP rights.  I say usually because there are circumstances where internationally recognized brands have spent a lot of money to enforce their trademark rights from people who have filed first in China or similarly they have spent a lot of money to buy the rights from those same clever individuals who filed first.

Finally, filing Trademark and Patent applications in China is relatively straight forward and not prohibitively expensive.  In fact, the costs compare with those in the U.S. and are lower than in the E.U.  When filed and approved by the SIPO you then have Intellectual Property rights and an asset in the IP that you didn’t have in China prior to filing.  The certificate then allows you to use expanding legal channels to enforce your IP.

So, why wouldn’t you file!!!!  Because your lawyer, who has never been to China, told you it wouldn’t make a difference? While we don’t make a bunch of money on helping clients file Trademarks and Patents in China, it is a service we offer because we simply wouldn’t be doing everything we can to help our clients navigate the business jungle in China – if we didn’t.


Protecting your Products in China: Customs is your Friend

Fake products in China are nothing new and I have been advising clients on protecting Intellectual Property matters for many years here. As I wrote in my previous blawg entitled “Misconceptions about China” as more Chinese companies file for IP protection in China and in the West, and they have an expectation of enforcement and a rule of law, those same principles will extend to foreign companies and individuals who apply for IP protection in China.

I thought this below article was interesting and while you can never be quite sure if the numbers are accurate, I can assure you from personal experience that Chinese Customs will enforce the IP rights of those who have IP – this means Patents and Trademarks that have been filed in China.

So, the best thing you can do is file often and file early as the first to file has the IP in China and then file your IP rights with Customs and establish a good relationship with Customs (you would be surprised how far a nice sincere lunch will go). So, I hope you learn something from the below article and as always.

Drastic increase due to rapid development of e-business: Customs
BEIJING — The country’s customs officials seized as many as 37,000 pieces of mails and express mails containing counterfeit items from June to December of last year, seven times the figure in the same period of 2008, the General Administration of Customs (GAC) said on Monday.

On July 20, 2009, Beijing Customs stopped a batch of outbound express mail for random inspection.
Each of the 75 boxes, with “digital accessories and parts, digital cassettes and electronic accessories” written on them, weighed 30 kg. The parcels were headed to 10 countries.

On opening the boxes, officers found more than 50,000 mobile phones, SD cards, flash drives and memory banks involving 12 brand names.

The smuggling bid opened the customs department’s eyes to the seriousness of the infringement of intellectual property rights in the country.

The case is now been transferred to the public security department for further investigation.
The drastic increase in the practice is due to the development of e-business, said Meng Yang, director of the policy and regulations department of GAC, at a press conference in Beijing.

“Intellectual property protection in export trade faces new threats as e-business develops. With online trading gaining popularity, we’re seeing more and more cases where tort goods are shipped through mail, express mail, or carried by individual passengers across the border,” Meng said.
But she said the department would not regard it as an infringement of property rights if tort goods carried by passengers were within “range of reasonable self-use”.

Zhao Fudi, spokesperson for the GAC, said mails and express mails had become a major channel in the cross-border circulation of tort goods. Zhao said the GAC launched a special campaign from July to December last year, where inspection was focused on mail and express mail.

“The number of batches of goods seized through mails and express mail in 2009 has jumped by 738 percent compared with 2008. “The number of items has increased by 28 percent, and the total value by 402 percent,” he said. China’s e-business transactions reached 530 million yuan ($77.6 million) in 2009, an annual increase of 248.7 percent, iResearch said in its report on Thursday.

It said China’s e-business market is stepping into an explosively increasing stage. “In the next two to three years, the country’s e-business customers will maintain an annual growth rate of 70 percent. Scales of real goods will reach an annual increase of up to 400 percent,” the report said.

According to the GAC data, a total of 280 million items were seized last year because of intellectual property infringement, where 99.9 percent were exporting goods and 99 percent were trademark infringement. Tobacco products, light industrial products, cosmetic and care products, hardware and mechanical products, and clothes topped the list of goods categories in terms of the number of items seized in 2009. Among the five, only tobacco products saw a decrease in number compared with last year, from 560 million in 2008 to 180 million in 2009.


Legal Fees in China: Fear the Cheap

We have a phrase in Texas, something about the difference between a steer and a cow, I don’t remember how it goes, but it’s kind of like the British one – Pennywise and Pound Foolish. 

This can be used to describe those who try to save a few dollars (used to be a penny back in the 1600′s) and it ends up costing them a lot more in the long term.  Old Chinatex gets a lot of enquiries from people and companies that want to do business in Asia-Pacific.  They think that just because factories makes stuff real cheap here in China, that things like quality legal counsel should also be cheap. 

As many of you may know, Hong Kong and it’s neighbor city in China (Shenzhen) are two of the most expensive cities, as ranked by Mercer, in the world and that while making stuff is still cheap, helping those who make stuff keep their money is not. 

Now, I know what you are thinking “those *#!% lawyers” – well that’s what you will be saying if you trust somebody who is not a lawyer or even worse, a local lawyer to handle your matter.  Reminds me of one of the first legal matters I witnessed here in China.  Foreign (U.S.) company comes to China to build a entertainment facility in a shopping mall.  Against the advice of those who know better, they hire a local lawyer for numerous reasons  - one of them being he is cheaper.  Unbeknownst to them, the lawyer was good friends with the lawyer for the shopping mall and they had struck a deal where the savings to the shopping mall owner from the negotiations would be shared equally between the two lawyers and the mall owner.  True story and I fear not a rare one.

Now, Old Frank has been helping people in Hong Kong and China who are in trouble and who don’t want to be in trouble and who want to make good money and keep it – for many years.  I don’t want to see y’all be Pennywise and Pound Foolish when having somebody advise you on your business, which to many of you is your life.  Better just be careful, make sure you get references if you have any doubt who you are hiring and expect to spend what you would spend in your country for similar quality services. 


Due Diligence or Get Robbed by the Bar Sisters in China.

I can remember about 5 years ago here in the Jungle (Shenzhen, China).  There was a new bar street that had just opened, and while there were about 7 bars, only one was relatively modern and western, and ultimately, the only one with customers.  As the shopping mall to which the bar street was attached became more popular, so did the other bars, only because there was nowhere else to go.  It’s the law of numbers in China, especially in cities like Shenzhen where there is so much money and relatively little culture.

But, this isn’t about lamenting the few choices or lack of culture in Shenzhen, China, it is about the discussion I had with one of the small bar owners, who almost never had any customers.  The bar had a bad name and a picture of a dodgy kangaroo (it didn’t even look like a kangaroo) and was supposedly an Australian wine bar.  In turns out one of the owners who put in most of the money lived in Australia and the bar was run by the other two owners who happened to be very clever sisters. 

I asked one of the sisters one evening why they didn’t have any customers, and if she would like me to bring in some friends to make the place more popular.  She emphatically said it wasn’t necessary because they were trying to make the bar lose money so that the absentee partner would accept a fraction of his initial investment in a sale to the sisters.  She said that they knew the bar street was going to be really popular – and eventually it was standing room only every night – and that she and her sister would share all the profits.  He eventually acquiesced, as he didn’t spend much time in China and had no idea what was really going on, and the rest is history.

I haven’t seen the sisters in quite awhile, but, I imagine them driving one of those new Mercedes SL Class Roadsters that are a dime a dozen here in the Jungle, smiling all the way to the VIP counter at the Bank of China.

One of the people I most respect in the world once told me, “nothin’ is ever what it seems.”  That lesson is driven home to me every day that I spend here in the Jungle.  I always tell my clients in China and anyone that will listen, do as much due diligence as you possibly can, peel back the layers of the onion until you reach the core, take your time, never be in a hurry and then once you make the investment or hire the factory or the distributor or the general manager, never stop doing due diligence. Never, never, never.  That is if you really want to make money.

The post is by Frank Caruso.  Frank Caruso is the head of the China Law Group at IPG Legal and has lived and worked in Shenzhen of over 12 years.


Registering your Business in Hong Kong and Enter the China Market: The Hong Kong Phooey Way

I remember watching a cartoon on Saturday mornings called Hong Kong Phooey.  It was about this kung foo fighting dog that battled crime in Hong Kong.  Now, I didn’t know where Hong Kong was or how to get there or if I would ever go there, but, I dug that kung foo dog and the way that good prevailed over evil. 

Now that was the early 70’s and I was probably a burgeoning teenager with two karate lessons under my belt, which I quit because I couldn’t touch my toes and would rather have been playing basketball.  35+ years later and here I am in Hong Kong drinking coffee on a Wednesday morning before the organized chaos begins and I’m reading an article in the Asian Wall Street Journal about the influx of foreign (outside of Hong Kong) companies desiring to list on the Hong Kong stock exchange.

I thought, of course they want to list in Hong Kong because of the lower cost of listing, fair but not burdensome compliance – unlike the U.S. Sarbanes Oxley laws which make it cost prohibitive to list on the NASDAQ or NYSE for many firms. Also, the transparent and safe banking system and the access to capital.  Why wouldn’t they want to relocate their company or alternatively set up a new company to handle their international or Asian business?

Freest country in the world.  Easiest to do business.  16.5% flat corporate tax. 15% flat personal tax rate – even lower if it means you can pay less tax. No death tax, no capital gains tax, no tax on dividends, no sales tax, no consumption tax. No graffiti. World class medical care, world class schools, clean, safe, a bit crowded for those accustomed to living in a rural or suburban environment, but, a very livable city. In fact, Hong Kong was ranked number 1 in the Heritage Foundations 2011 Index of Economic Freedom.

I have to think that Hong Kong Phooey had something to do with this. Now, unlike Hong Kong Phooey, I don’t have a Phooeymobile to travel around Hong Kong, but I don’t really need it because the public transportation is the best I’ve ever experienced anywhere in the world – and it’s cheap.  Anyway, if I had a Phooeymobile I would certainly get confused driving on the wrong side of the road, and those roundabouts would have my head spinning. I do have something similar to Hong Kong Phooey’s Hong Kong Book of Kung Foo which he consulted to fight bad guys, only to be saved each time by his trusty sidekick Spot – go figure a cat saving a kung foo fighting dog.  What I have is a book of knowledge gained from being on the ground here in Hong Kong, advising my clients on Asian (specifically China) market entry via Hong Kong and on numerous transactions, mergers and joint ventures.

What I know is I am big fan of Hong Kong Phooey and a bigger fan of Hong Kong. I was with one of my clients yesterday and we were talking about Hong Kong – she’s been spending more time here as her global business grows. She said, “Hong Kong has everything, it is safe and easy and a world class city, I love it here.”  What you should know about her is that she is a very experienced, talented and successful entrepreneur and has chosen to base her new ventures in Hong Kong specifically because of the economic freedom.  She didn’t mention that her country, which is supposedly the “freest” in the world comes in at a distant number 9 on the list, which is generous and just one slot ahead of the economic megalopolis of Bahrain.

So, next time you and your business are feeling overburdened by regulations and taxes and lack of capital, look to the kung foo fighting dog and his trusty sidekick Spot. Look to Hong Kong Phooey!!

The post was written by Frank Caruso, the chair of the China Practice Group at IPG Legal.

Oct 30, 2011

Shenzhen is a Great Place to Do Business: Just Ask my Law Firm Partner Frank Caruso

It’s been a busy Fall here in the Jungle (Shenzhen).  With the rest of the world economies crumbling as a result of too much debt and their populations getting bigger because of too many carbohydrates, business and baking is booming here in China.  The government continues to support an economy that is growing at somewhere between 8 and 12% and the people can’t get enough Ferrari’s, Mercedes, BMW’s, LV and Gucci bags, not to mention apartments and commercial office space.  You really have to be here on a daily basis to see it, understand it and then appreciate it as the consumption is unlike anything most of us have ever seen in our lives, or will ever see again.

That being said, while we have been busy helping our clients enter and exit the manufacturing business in China, we seem to be advising an increasing number of clients on entering this market to sell their products to distribution or even at retail.  As I have been telling anyone who would listen for the last 10 years, we are in the midst of the greatest (largest) economic boom that the world might ever see, purely because of the number of people here and their desire for the things that the rest of the world has.  China will soon surpass the United States as the largest economy in the world.

One of my friends and clients, although he rarely requires my counsel, is one that is taking advantage of the Chinese quest for things that the rest of the world has, like Pizza.  Thomson Ly is the founder of NYPD Pizza in Shenzhen, China and Hong Kong.  We met many years ago when he opened his first delivery pizza place in a back alley here in the Jungle.  I was shocked to see a picture of his pizza in the English language newspaper, Shenzhen Daily, and a story about his new venture.  So, I called the pizza shop and he answered the phone and I asked him if his pizza was really as good as the picture made it look.  He suggested I come over and try one and find out for myself.  So, after an hour trying to find the back alley where he was located next to the tire repair shop I walked in on a diminutive Chinese American in jeans and a baseball cap.  I checked again and thought, “this can’t be the place” “a Chinese can’t make a pizza as good as the one in the picture”.

Lo and behold not only can this ABC (American Born Chinese) who speaks fluent Mandarin, Cantonese, English and several other languages make a fantastic pizza, but after several years, multiple awards and a growing customer base of carbohydrated Chinese and foreigners he recently won an award in Hong Kong for the best pizza.  He even beat out a place called Paisano’s which makes a pretty darn good pie.

Best Pizza in Hong Kong 2011 – NYPD
As the four of you who read my blog know, I like to write about my entrepreneurial friends and clients who are willing to take big risks and go all in here in the Jungle.  Lot’s of people said that the Chinese wouldn’t like pizza or even order delivery pizza.  Tell that to Thompson at NYPD and the next time you are in the Jungle, try ordering The Caruso it’s my favorite.

The following post was written by Frank Caruso.  Frank is the head of the China Practice Group at my Firm.  Yes, the pizza is good.  Not as good, of course, a Pepe's in New Haven, Connecticut, but still great pie and the best I have had in Asia.  The owner is also one of the nicest guys you will meet in the world.  

Developing Trust in China by Building Processes

A blog referred to me by the China Law Blog has a wonderful post on Developing Trust in China by Building Trustworthy Systems/Processes.

The value of building systems in China should not to be underestimated.  The Chinese, in most respects, are wonderful at performing tasks that are well dictated and explained. While in the West we often more autonomy oriented, in the East partners often want ordered guidance.

My Firm often works with business consultants to assist client in implementing systems that reward following these systems/processes. These “systems” are, often, incorporated by reference into our joint venture, OEM and other agreements.

Don’t jump into a relationship before considering the development of verification, quality assurance, logistic and like systems.

The article from the All Roads Lead to China Blog notes emphatically that:

Systems that can, regardless of human ignorance, greed, inaction, confusion or incompetence, remove the downside risks that comes with the human element of any process. Systems that at the heart of it, are established to minimize human impact, alert system operators (buyers/ clients) of a failure, and provide the data necessary to make changes to the system (human or mechanical). For me this is a system, as basic as it is, that allows for the most protection for a firm who is engaging with any external party, and in a way where “trust” isn’t an issue.

Oct 27, 2011

Weekly Legal and Business News from Asia (Week of 10/27/2011)

-As we know, China is far from being the most liberal country when it comes to freedom of speech. However, last year witnessed a large development of internet and blogs. The most famous blogger, Han Han, is  freely questioning the communist government.  The Chinese government decided to impose a tougher censorship on blogs' contents. “China Cracks Down on Bloggers and “Excessive” Entertainment,” The New York Times.
      -China may definitively lose its reputation as a cheap manufacturing country as its wages are rising. The minimum wage rose by 21.7%, in accordance with China's policy of boosting spending power and domestic consumption. “China minimum wage up by 21.7% despite economic cooling,” BBC News Business.
        -On last Wednesday 26, Seoul elected Park Won-Soon as its new mayor. Independent candidate, but supported by the liberal opposition, this election is seen for many as a forecast of the next Presidential election of 2012. “Critic of South Korean Leader Elected as Seoul Mayor,” The New York Times.
          -South Korea is also facing an  economic slowdown. Due to decreasing corporate investments, its economic growth has slowed. Slowing demand from EU and US may also affect the next quarter. “South Korea economic growth slows as investments falls,” BBC News Business.
            -Next year, in Singapore, skilled foreign workers holding an Employment Pass (E-Pass) will see their wage increase. The tough E-Pass rules aim to not disadvantage local workers, however, Singaporean's companies say they will retain and still hire well-trained foreign workers as they are valuable assets. “Firms likely to retain foreign workers despite new salary criteria,” Channel News Asia.

              Oct 24, 2011

              Daily Legal and Business News from Asia (10/25/11)

              • Trademark Law of the People's Republic of China was, recently, amended. The major change concerns “bad faith filling.”  If a trademark applicant applies to register a trademark that he knows is already legally used by another person, the application may be rejected or canceled. You can also read about other changes at: “The Revised Trademark Law of China: Open for public comment,” Mondaq.
              •  China is focusing on increasing its imports in advanced technical equipment, key parts, commodities, raw materials and consumer goods. “Made for China...,” China Daily.
                • We all know that The US is trying to pass a bill aiming to encourage China to revalue its currency.  We all love reading Friedman's work and this piece will not disappoint. “Imagined in America,” The New York Times.

                Oct 23, 2011

                Don't Waste Your Money in Asia: Commission a Feasibility Study before Hitting the Bricks in China, Korea, Vietnam and Cambodia

                I see too many investors engage in projects in Korea, China and Southeast Asia without conducting an adequate feasibility study.  The feasibility study should be performed by an attorney with the active participation of a business consultant and potentially an accountant. 

                A business consultant, alone, is not enough.  Attorneys deal in numerous projects simultaneous and normally have a better grasp of the market and pitfalls than business consultants and accountants, because of this experience.  Beware, however, some attorneys that only deal with transactional work are also, too often, not adequately prepared to give the advice necessary to assist clients.

                I always work with business consultants, since they often do a great job of complementing my experience.  I find that any law firm not utilizing business consultants are, too often, the wrong law firms to utilize.  These law firms, often, look down on the role of consultants – the reasons I am not quite sure of.  Often, attorneys, are blinded by the risk and consultants are blinded by the opportunity – the two make a very useful team.  Get them on your team.   

                Only decide to engage in investment in Asia after a complete feasibility study that includes:
                1. Legal Feasibility:  The study should include, at a minimum, the basic regulatory, environmental, tax, incentive, and license framework with a legal opinion addressing the feasibility of the project under the relevant law.  The study should also detail the estimated timeframe for approvals and the major risks of JVs, OEM, and like relationships;
                2. Technical & Operational Feasibility:  The study should include, at a minimum, the ability and timeframe of the host nation’s companies to be able to satisfy the technical and operational requirements of the foreign investor.  This should include issues of sourcing, land procurement, labor sourcing and risk and, if relevant, political risks;
                3. Economic Feasibility & Market Study:  The study should include, at a minimum, a detailed market study, cultural relations study, efficiency study and the competitive advantage of the nation versus other nations.  Increasingly, Asia is becoming more costly to manufacture in and, thus, a mere labor cost evaluation is not enough, since labor efficiency rates are lower and material costs and utilities are often higher than in the West, thus, negating some of the benefits of manufacturing abroad.  

                Weekly Legal and Business News from Asia (10/24/2011)

                This is the start of a new weekly posting of Asian legal and business news.
                • China "Yuan FDI" program took effect last October 12th.  Foreign investors will, now, be able to use overseas acquired RMB to make direct investments into China. This should lead, according to The Asahi Shimbun, to an increase in FDI and an internationalization of the RMB. "New rule promote direct investment in China in yuan," The Asahi Shimbun.
                • "Restructuring," the new key word in Vietnam. Suffering from a severe economic slow down since 2008, the Vietnamese government plans to restructure investments, state-owned businesses and the financial markets.  The growth model is also expected to be revised.  However, some fear that this would lead to a decrease in Vietnam's competitiveness. "Viet-Nam to trim five year outlook," Viet Nam News.
                • The Limited Liability Partnership model should be available for attorneys in Hong Kong, both local and foreign, in mid 2012.  The aim is to encourage multinational law firms to partner with local law firms.  In addition, Hong Kong wants to expand its arbitration services to Shenzen's Qianhai, which China hopes will be the "Manhattan of the Pearl River Delta."  "Hong Kong to pass new law allowing local solicitors to adopt LLP model," ALB Legal News. 
                • China's FDI from EU and US are decreasing due to the financial crisis and to China's "frustrating business environment" according to the US Ambassador to China, Gary Locke.  However, FDI from Asian countries is growing. "Investment from EU drops in Sept," China Daily.
                • Yunnan province, in China, is aiming to become the next asian Hub, mainly attracting Southeast Asian countries. Of course, the province is going green, with a "green economy, green industries, green energy..." The Yunnan province being part of the Chinese "Gateway Project" will be financially supported by the Central Government, according to the China Daily.  "Yunnan aims to be regional business hub," China Daily.
                • Cambodian exports to EU and US markets are growing despite the European financial crisis. However, Cambodia is looking to other potential markets to diversify its exports (essentially garment industry).  "Exports up despite EU crisis," Phnom Penh Post.

                Oct 21, 2011

                Daily Legal and Business News from Asia (10/21/2011 Weekly News)

                • Singapore Joint Law Venture program was launched about a decade ago.  It is, overall, recognized as a failure. In 2008, when foreign law firms were allowed to practice law in Singapore under the Qualifying Foreign Law Practices program, it was the predictable end of the Joint Law Venture program. But it seems that this prediction was false, as we are now seeing new joint law ventures.  Will these last? “Singapore Joint Ventures Make a Comeback,”
                • As the Decree on Advertisement of 2011 was proven ineffective, the Vietnamese government is now working on a Bill on Advertisement. However, according to most local politicians believe  the Bill needs to be revised to be effective. The advertisement industry is quickly developing in Vietnam, but many politicians want tougher regulations and punishment for violators of privacy rights. “Lawmakers question draft advertising law,” Look at Vietnam.
                • After the censorship of internet and blogs' content, China is now extending its policy to TV programs. “Match-making” game shows and even dance broadcasts are, now, banned from Chinese TV and will be replaced by more "moral" programs. “China orders cutback on entertainment from TV,” The China Post.
                • India's cabinet has approved a policy aiming to develop the national manufacturing industry. The policy is planning to create 100 millions jobs in the next ten years, to train the rural population in order for them to apply for these jobs, to create special economic zones and to improve the government bureaucracy. “India cabinet approves manufacturing push,” BBC News South Asia.
                  • Europe agreed on last Thursday 27the to recapitalize its banks. However, as it can not provide all the cash needed for this operation, Europe is looking to China.  “Why China Should Bail Out Europe,” The New York Times.


                    Oct 19, 2011

                    God Bless the Philippines: Foreign Negative List to be Abandoned?

                    The Philippine Government has been slow to liberalize its foreign investment laws because of the power of large Philippine companies and their wish to keep the competition from foreign investors off their shores.

                    The situation has contributed to the Philippines being one the most corrupt and impoverished nations in world with an income disparity that makes many African nations feel good about their income disparity.

                    Times may be changing. Cayetano Paderang, the very capable Economic Planning Secretary, has announced that most areas of investment will not be restricted by nationality, with the exceptions of constitutionally restricted areas (real estate).

                    I have done work in the Philippines for companies and as we say in the states:  "I will believe it when I see it."

                    Presently, the Philippines maintains two “Foreign Negative Lists.” According, to Cayetano Paderang, the lists  will be amended.  Hopefully, the Constitution will also be amended. 

                    List A: Restriction Based on Nationality. Reserved Equity to Philippine Nationals.
                    1.  No Foreign-Capital Investment (Total Prohibition)
                    • Mass Media
                    • Professions
                    • Retail Trade Enterprises with paid-in capital less than USD 2.5mill
                    • Private Security Agencies
                    • Small-scale Mining Operations
                    2.  20% Foreign-Capital/Equity Allowed
                    • Radio Stations/Networks
                    3.  25% Foreign-Capital/Equity Allowed
                    • Recruitment Agencies
                    • Construction Companies engaged in Public Works Programs
                    • Defense-Related Construction Companies
                    4.   30% Foreign-Capital/Equity Allowed
                    • Advertising
                    5.  40% Foreign-Capital/Equity Allowed
                    • Natural Resource Exploration
                    • Ownership of Private Lands
                    • Operation of Public Utilities
                    • Educational Institutes
                    • Deep See Commercial Fishing
                    6.  60% Foreign-Capital/Equity Allowed
                    • Banking and Financial Institutions

                      List B:  Foreign-Capital Investment Restrictions Based on Nationality

                      1.   National Security and Defense;
                      2.   Public Health, Safety and Morals.

                      I assume from the comments of the secretary that an increase in the equity allowed by foreign investors will occur and List B will be eliminated. 

                      Oct 18, 2011

                      Tom Coyner on Korea Being Closed to Foreign Businesses?

                      For many years, the Korean market has been synonymous with protectionism in many foreign marketers' minds.

                      However, with the advent of a strong middle class and its successful struggle to gain a genuine democracy during the past two decades, many of the trade barriers have fallen. As more foreign products and services have become integrated into the Korean economy, a wider acceptance of foreign corporations has taken place.

                      However, it would be a mistake to say this is a trend.

                      A number of counter factors remain -- some of which are even strengthening.

                      Foreign companies, especially from the major countries, are regarded with mixed feelings.

                      While high technology and advanced products are admired and coveted, they are at the same time somewhat feared by Korean businessmen who perceive the possibility of having to depend on them.

                      When using foreign IT products and services, Koreans sometimes feel they themselves are not up to snuff in some way.

                      When work-arounds are devised using Korean solutions, many Koreans take pride in "getting smarter" -- no matter what may be the real costs, and often despite a lack of design for long-term flexibility.

                      In recent years, however, Korea has generally become more accommodating to foreign business, perhaps not by choice, but by necessity as its trade and investment overseas are expanding rapidly.

                      Even though most Koreans acknowledge that Korea's economy is highly trade-dependent, in 2004 it took seven months of deliberations and three failed attempts for the National Assembly to ratify its first ever free trade pact with another nation, Chile, because of the overzealous and nationalistic agrarian interest groups.

                      Nonetheless, the trend is evident in relaxing regulations on imports and foreign investments -- though most foreign chambers of commerce would say the pace of deregulation is still too slow.

                      In relations with major trading partners, Korea tends to have a "poor country mentality."

                      Just four decades ago, it was regarded as one of the poorest in the world, requiring much relief aid from advanced countries. Even after attaining their present prosperity, Koreans still regard themselves as poor, needing preferential treatment from trading partners.

                      Until fairly recently, the United States had been looked upon as a generous big brother with unlimited affluence and resources, while Japan continues to be regarded as a country that should eternally compensate Korea for its colonial exploitation.

                      Today, younger Koreans look upon the U.S. in less favorable terms -- partially out of concern that America seems at times an economic bully, and partially because a large number of younger Koreans blame the US for being an obstacle to unification of the country. In dealing with the ever-growing trade frictions with these two major trading partners, Koreans have maintained these attitudes.

                      The readjustment of past relationships, along with the recognition of a new relationship with China, increasingly recognized as an economic giant at Korea's doorstep, seems to take a long time, often to the detriment of cooperation.

                      Even after becoming an OECD member in December 1996, South Korea feels a bit disadvantaged. Korea's 2002 gross domestic product, at $898.7 billion, was 10th among the 30 member countries.

                      The average GDP of the OECD members was $962.4 billion. Perhaps by other developing countries' standards, Korea with its high tech strengths may be viewed as a "poor little rich country." Yet Koreans measure themselves by the standards of Japan, the US and Western Europe.

                      And from that perspective, they feel relatively impoverished.

                      Another factor in relation to foreign business is the growing sense of nationalism, especially among the younger generation.

                      As the nation's economy becomes healthier and stronger, there is a growing sense of nationalism, which may also be a latent legacy of past President Park Chung Hee's infusion of positive thinking and somewhat chauvinistic sentiments. More recently, under the Kim Dae Jung, and even more so the Roh Moo Hyun governments, populism has become a key element in the population's thinking.

                      This includes a strong element of "minjok-jui" which literally means "racism," but actually means something more akin to the Spanish "la raza," or prideful recognition of a common ethnicity. A natural, if unfortunate, side effect is a kind of generally benign racism that resents foreign influences on the fate of the nation.

                      These sensitive and idealistic young students who did not experience the hardships of war or poverty are inclined to more independent and nationalistic ideals.

                      The collective, younger generation's voice in the last presidential election was temporarily loud enough to win the acceptance of the majority of student voters and of the general public. With a nationalist, populist government in power, however, many of the weaknesses of this philosophy have become self-evident.

                      As a result, today there is an emerging moderate and practical _-- and at times even conservative -- body of young people. In any event, nationalism remains a very strong, emotional factor in the daily lives of Koreans, and foreigners have no choice but to handle the matter sensitively.

                      Koreans generally associate foreign-origin brands with quality and durability.

                      That's why many manufacturers and marketers like to give even truly local products western brand names or western graphics, even if the products are exclusively for local buyers.

                      Though nationalistic sentiment may indicate otherwise, nowhere is prejudice for foreign goods more evident than in buyer behavior or buying habits.

                      Buyer preference for quality seems to transcend ideology everywhere. In reaction to this trend, some consumer activists have attempted to discourage the purchase of foreign-brand products, alleging that high royalties have to be paid to foreign licensers for using their brands on local products with the same quality as foreign brands.

                      This kind of propaganda can seep into corporate buyers' thinking, sometimes convincing them that purchasing foreign goods represents a "loss" to Korea as money is remitted overseas as earned profits.

                      Still, the general perception of foreign companies among most Korean buyers is rather favorable, again relating to their quality goods and services as well as the impression that foreign corporations provide better working conditions for national employees.

                      This is counterbalanced by an overall anxiety as to whether foreign companies can provide the same level of apparently unconditional after sales support offered by local companies. While production quality assurance (QA) is greatly improving, too often in the past, the quality seemed to go in after the product was installed rather than during manufacture.

                      Consequently, 24x7x365 technical support has become standard in many information technology (IT) sectors.

                      Tom Coyner runs Softlanding Korea and is the senior commercial advisor to the IPG.

                      Oct 14, 2011

                      Meeting the Good Ole Boys at the China Law Blog in Beijing

                      I will be in Beijing tomorrow and Sunday to visit with my good friends at the China Law Blog.

                      Old China hat Steve will be giving a talk on China and the WTO at an event that should be interesting and hopefully doesn't land Steve in the clink.

                      Here is a remark from the China Law Blog on the event.

                      CLB's own Steve Dickinson will be one half of a two person discussion this Sunday, October 16, at 3:00 p.m., on China and the WTO. The event is part of the Hopkins China Forum, which describes itself as "a quarterly speakers series that brings together counterparts from the United States and China in China's capital city to discuss current events."

                      More specifically, the topic is "China and the WTO: A 10 Year Review With a Look to the Future." it will be a "conversation" between our own Steve Dickinson and Professor Tu Xinquan, the Deputy Director of the China Institute for WTO Studies (中国WTO研究院). Wei Lai, editor of the Global Times will be the moderator.

                      It will take place at the Western Returned Scholars Association (WRSA) Building, 111 Nanheyan St., 欧美同学会会址,南河沿大街111号, Beijing. There is a RMB 30 entrance fee, but that includes a drink and a reception to follow.

                      Both speakers will have 10 minutes to make opening remarks, followed by a 20-minute moderated dialogue. After that, the speakers will take questions from the audience. Without revealing what Steve is going to say, I can assure you that it will cause some sparks to fly.

                      I (Dan) am going to be attending and I can hardly wait. Who's in?


                      Oct 12, 2011

                      U.S-Korea FTA Passed and Soon to Be Signed by U.S President

                      Our sister blog has posted the following article on the passage of the U.S-Korea FTA:

                      The KOR-U.S. FTA passed the Senate by a vote of 83-15.  Democrats supported the bill largely because of the passage of the Trade Adjustment Assistance Program (TAAP) last week.

                      The TAAP Program, according to the CBO, will cost the taxpayers USD 90 million over three years.

                      Korean President Lee Myung-bak during a speech in D.C. noted that:

                      This economic alliance will promote free trade and send a powerful message all around the world that Korea and the United States stand united in our commitment to rejecting all forms of protectionism and that we are committed to free, open and fair trade," he said.
                      "History teaches us that protectionism is not the answer when you are faced with a challenge of this magnitude.
                      Korea will likely pass the FTA within the month. Analysis of the FTA will be posted over the next couple of weeks. A bone of contention, for years to come, will be undervaluation of the Korean currency.

                      Oct 2, 2011

                      Korea is Falling Behind China in Innovation

                      Sang-Hun CHOE posted a great article in the New York Times quoting IPG’s Senior Commercial Advisor Tom Coyner in an article entitled - Korea: Connected Yes, Competitive Maybe.

                      Mr. CHOE emphatically notes that:
                      But being hyper-connected is not the same as being hyper competitive. Connectivity on its own does not bring productivity or happiness. It does not necessarily even bring foreign investment. And for all its positives, Seoul’s connectivity comes with some downsides.
                      For starters, the city is home to the headquarters of global hardware giants like Samsung and LG, but the companies have built their success largely by copying and improving existing products rather than by innovating or moving into new technology frontiers.
                      Korea is still a blue-collar manufacturing country that has failed, to date, as noted by Mr. CHOE to create truly innovative products and move into new technologies.  China, in many cases, is years ahead of Korea in innovation, because of its willingness to actively promote FDI and liberalize its investment environment.  We also find China to be much more welcoming to foreign products than Korea.

                      Mr. CHOE goes on to note:
                      Today, Seoul is a place where a digital rush collides with industrial-age regulation and mind-set.
                      Until Apple’s iPhone made a splash here, advertisements for foreign electronics were all but nonexistent; the market was almost completely dominated by local brands like Samsung and LG. Electronic home appliances are almost entirely South Korean-made. The phenomenon said as much about an implicit buy-Korea mentality as the products’ growing competitiveness.
                      Korea is one if the not the most nationalistic nation in Asia.  The Chinese are proud to be Chinese, but they also know the benefit of foreign investment and foreign technology.

                      This Korean mindset, coupled with the burdensome regulatory environment, is leading Korea to only live off its past manufacturing glory, a glory that is increasingly being eaten away at by the more competitive China.   The majority of the major Korean companies, today, produce more of their wares outside Korea than in Korea.  Most of the major Korean companies have large manufacturing plants in China, Vietnam, the Philippines, India and in North America.  Many of the R & D centers have also moved off-shore.

                      Mr. CHOE has worked for the New York Times for the majority of his career as a journalist.  He is a recipient of the Pulitzer Prize.  His work appears in the International Herald Tribune and the New York Times.  Mr. CHOE's article maybe found at:  Connected Yes, Competitive Maybe.

                      Korean Ranks Low in Global Reputation - Just Behind China.

                      The following post was posted on our sister blog.

                      The Reputation Institute has, again, listed Korea as the second lowest rated country in Asia and one of the lowest in its world rankings for global reputation.  China has ranked slightly lower than Korea.

                      The ranking heavily relies on impressions of individuals polled in Korea and throughout the world.

                      The three main components of the survey include:
                      • “Appealing Environment" (enjoyable country, appealing lifestyle, friendly people and natural environment); 
                      •  “Advanced Economy” (global culture, global brands, workforce, and quality of products); and, 
                      •  “Effective Government” (effective government, openness to investment, and efficient workforce)

                      If you live in Korea, the reasons for the low rankings become immediately obvious.

                      Korea can be a great place to live and do business, but overall neighboring countries are much more concerned with having an “appealing environment,” “advanced economy” and an “effective government.”  This leads to Korea as being perceived low in the eyes of Koreans and foreigners when compared to other nations.

                      Improved rankings have been shown to contribute to increase tourism, business opportunities, and the improvement in citizen satisfaction with government and society.

                      The Korean government, facially, has made efforts to improve the national image of the country, but all efforts, according to the survey, have failed.

                      Appealing Environment
                      • Seoul is, overall, a great place to live, however, outside the major cities few cultural, employment and social opportunities are available.  This is why most Koreans and foreigners live in the Seoul region.
                      •  Recently, Koreans, during sporting events have held up signs congratulating Japan for the earthquake.  Koreans are often incredibly nationalistic, insensitive to outsiders and xenophobic. 
                      • Koreans have a reputation for being incredibly impolite to those in the service industry.
                      • Koreans, often, react to occurrences in a very irrational manner (U.S. beef issue, crimes by U.S. military personnel and foreign relations).
                      • Koreans, often, treat “poorer” Asians as subhuman.
                      • Korea has the highest suicide rates in the OECD.  Yes, the rate is now higher than Japan.  The former Korean president, even, committed suicide. This occurrence may have contributed to the recent increase in the suicide rate over the past half decade.
                      Advanced Economy
                      • Korea has a few noted brands, however, these brands are often not recognized as Korean brands.
                      • Most of the major brands are involved in peculiar and illegal activities through their executive management. 
                      • Korean unions, often, engage in violent strikes over issues that would be resolved peacefully in most neighboring nations.
                      • The major Korean products are generally well made, but mid-size companies often produce poor quality products and engage in unique business tactics with customers. 
                      • Korea is still a manufacturing country with only a handful of true innovative products.

                      Effective Government
                      •  Fist fights in the halls and the floor of the National Assembly in Korea are commonplace.
                      •  Most Korean politicians are without any ideology other than the ideology of self-preservation.
                      • The government still has anti-foreign capital sentiment (Lone Star).
                      • The Korean government is, often, more reactive than proactive (flooding, subway fires and building/bridge collapses). 
                      • The Korean bureaucracy is bloated, bold and inefficient.
                      The good news is that we, in Seoul, see improvements each year.   The bad news is drastic improvements will take a drastic change in education, government and in the powers that be.

                      What do you think?