On October 3, 2014, I was at the University of Toledo College of Law for an all day program titled Doing Business in China. The program was excellent, but it had to come across as scary for a truly small business. During one of the breaks someone asked me what I was learning and my rather flip, off-the-cuff response was: “No one should do business in China.”
My snarky response was, of course, an exaggeration. Having said that, I don’t think it is much of an exaggeration to say that there are significant hurdles to doing business in China. If your business does not quality as a “small entity” at the United States Patent and Trademark Office you absolutely should be doing business in China. But if you own a truly small business or start-up company you probably don’t have the resources necessary to be doing business in China. Where the threshold is between too small for China and too big not to be doing business in China is hard to say, but it is fair to say that all businesses of all sizes should at least investigate the realities of doing business and China and have a China strategy in place.
One of the real challenges for the truly small businesses is with the virtual unanimity of presenters and panelists on one point — in order to do business in China you really have to have an employee in place in China on a permanent basis. Another option discusses was having one of the principles or partners of the business always on the ground in China, perhaps rotating in and out so that someone is always there to make sure everything goes according to plan. This might seem like overkill, but one of the big problems with counterfeiting is when the Chinese manufacturer runs an extra shift off the books using your equipment and raw materials to create unauthorized products. Having a person on the ground in China seems absolutely essential.
Unfortunately, most small business just cannot afford to send a person to China. But that doesn’t mean that you shouldn’t have a China strategy. The first step is understanding the realities of doing business in China so that an appropriate plan can be developed, even if the plan only includes China in the intermediate or long term horizon. But let’s take a step back and fill in some blanks.
The first presentation of the day was by Elizabeth Lai Featherman, who is IP Counsel at Mandelbaum Salsburg, PC. Featherman focuses her practice on trademark, anti-counterfeiting, domain disputes, licensing and other IP matters. Her topic: Creative Solutions for Combatting Online Counterfeiting. Featherman’s presentation was detailed and informative. After she laid the foundation for the problems that face U.S. business working in China she provided a checklist for businesses to combat counterfeiting, which started with always registering your intellectual property.
Once you have your intellectual property properly protected the next step is to record that IPR with Customs. If the rights holder knows an infringing shipment is passing through a Chineses port the General Administration of Customs in China (GACC) can be notified and they will seize the goods. GACC can still seize a shipment if they are suspicious or recognize counterfeit goods, but smaller companies really cannot afford to hope that GACC will recognize their trademarks on counterfeits, so education efforts can and should be undertaken. She recommended preparing a one-page informational sheet for Custom’s records, which will bring awareness of the commonly spotted features in the counterfeit products.
Featherman would go on to explain that it is necessary for companies to monitor the Internet for counterfeits and take actions to enforce rights when counterfeits are located, which can include cease and desist letters, take-down notices, letters to payment processors explaining they are being used to sell counterfeits and perhaps actions under the uniform domain name resolution policy to recover domain names. She would also explain that there is no substitute for screening the Chinese companies you work with to make sure they themselves are not facilitating the counterfeiting. She also recommended that product design be changed regularly to stay ahead of counterfeiters.
At the end of Featherman’s presentation a question from the audience asked: “This all sounds very expensive.” Indeed, the vigilance requirement to successfully do business in China is not cheap. A further reason that small businesses and start-ups need to have their eyes wide open when they are going to consider doing business in China. Of course, doing business anywhere will require vigilance, and some costs, and larger companies have the resources to manage intellectual property and deal with counterfeiting, which can be an enormous problem. For the large business the reward of doing business in China is too great to be deterred by this or any other concern, but for the small business the benefit of doing business in China may be too little given the risks involved.
One of the next speakers, Professor Ann Bartow, of Pace Law School, spoke about consumer privacy in China. Bartow was a Fulbright Scholar who spent time teaching at a law school in China. She explained that one of the first things you notice upon arriving in Chinas is just how slow the Internet operates. It isn’t slow due to lack of sophisticated technology, but rather as the result of filtering software. All Internet traffic in China must go through censoring filters unless you happen to be lucky enough to be granted special “International Internet” privileges. Bartow requested such access but was denied “International Internet” access. She explained that you know you do not have access to isn’t everything, but in most cases there is no way to know exactly what is being hidden.
On top of filtered Internet and snooping to see what people are accessing on the Internet, Bartow and many others commented on the reality that when you travel to China you absolutely cannot use your own cell phone. “Phone use is audited,” Bartow explained. “Everyone knows this, but that does present business problems.” On top of that, hackers have been known to access smartphones, placing viruses on those phones, which scrape all kinds of personal information and data, including back account numbers and passwords. Over and over again speakers explained that you “must have a China only phone,” which you only use to talk on the phone in China and doesn’t contain any personal information. You cannot use your China only phone to access anything online. It would seem that China is much like the wild west in many ways, which obviously presents real challenges for businesses of any size.
On June 4, 2014, Bartow would tell the audience that she was in Shanghai. It was the anniversary of the Tiananmen Square massacre, which occurred on June 6, 1989 (or 6/4/89). Interestingly, on June 4, 2012, the Shanghai Composite Index opened the day at 2346.98. The last four digits backwards 89 6 4 seemed coincidental. But then at the close of business for the markets the last four digits of the closing figure were 64.89. Coincidence? Perhaps, but given how so much of life is so severely controlled by the Chinese government this has to make one wonder how open the markets in China really are. If this was a subtle message sent by the government to remind Chinese citizens who is in control it means that the Chinese government has extraordinary control of stock prices or index prices, and the authority and ability to manipulate stock prices. Not a warm and comforting thought for anyone involved in the Chinese market.
Many who are unfamiliar with just how controlling the Chinese government is will undoubtedly think that the aforementioned anecdote about the Shanghai Composite is merely a conspiracy theory. But the more you look at what China does the more you have to wonder. For example, back in October 2012, China blocked access to the NY Times website. This was particularly interesting because China did not seem to care about publications that discussed the Tiananmen Square massacre, but they objected to the NY Times publishing an article discussing the real wealth of the family of Wen Jiabao, who was then Premier of the State Council of the People’s Republic of China. Apparently China is alright with its citizens knowing about China cracks down on dissidents, but vehemently objects to its citizens knowing just how wealthy the country’s leaders are. The NY Times report was likely particularly embarrassing because the Jiabao family wealth only began once he became a member of what the NY Times referred to as the “ruling elite.”
Near the end of her presentation Bartow asked a particularly enlightening question. If China can crackdown so thoroughly on its citizens why couldn’t they crackdown on intellectual property infringement and IP crimes? She explained: “Because it isn’t in their interest.” Bartow explained that in the Chinese view it doesn’t make sense to change their view of intellectual property rights because so many within the country are becoming wealthy as a direct result of widespread intellectual property infringement. Bartow ended by saying that as long as this is the view of intellectual property it will be difficult to attract the companies that they really want to attract.
I will personally observe that until China really cracks down on intellectual property infringement, and until they crack down on hackers more generally, it will be virtually impossible for truly small businesses to ever do business in China; the risks (and costs) just outweigh the reward. Still, this doesn’t mean that companies should ignore China altogether. Rather, it means your eyes must be wide open when engaging in China. You cannot simply focus on the 1.3 billion people in the world’s largest marketplace. Instead, you must carefully assess the real cost of doing business in China and come up with an appropriate strategy, which may be that it is too risky to engage in China until you have the financial resources necessary to engage in the precautions necessary to do business in China in a safe and responsible manner.