sixth annual in-house counsel conference
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Sixth Annual In-House Counsel Conference. Panel 2 Interactive Strategies for Doing Business in China. Presenters. Frances Chou, President and General Counsel, Schechter + Chou Robert Hart, Senior Corporate Counsel, Harman International Industries, Inc. - PowerPoint PPT PresentationTRANSCRIPT
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Sixth AnnualIn-House Counsel
Conference
Panel 2Interactive Strategies for Doing Business in China
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PresentersFrances Chou, President and General
Counsel, Schechter + ChouRobert Hart, Senior Corporate Counsel,
Harman International Industries, Inc.Kimberley Chen Nobles, Partner,
Crowell & Moring LLPAndrew Pan, Chief Representative &
Managing Director, North American Representative Office of Shenzhen, P.R. China (NAROS)
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China’s Market Under Global Slowdown
Update and Opportunities
Andrew Pan
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Overview
China’s Economy Under Global Economic Slowdown
China’s Economic Stimulus Package Opportunities by Industry SectorsRecent Development
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China’s Economy Under Global Economic Slowdown
GDP growth statistics
9% in 20082008 in Quarters
10.6% (Q1)10.1% (Q2)9.0% (Q3)6.8% (Q4)
2009 in Quarters6.1% (Q1)7.9% (Q2)8.9% (Q3)
2009 target: 8%
Source: National Bureau of Statistics of China
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China’s Economy Under Global Economic Slowdown (cont.)
Export declineExport declined 19.7% in Q1, 2009Export volume decreased from
$111.4 billion (Jul 2008) to $51.3 billion (Jan 2009)
FDI declineFDI flows declined 20.6% in Q1, 2009
Unemployment rate increaseRaised 2009 target to 4.6%, the
highest since 1980
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China’s Economy Under Global Economic Slowdown
Stock market, housing market, auto market and other key economic figures were all down sharply
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China’s Stimulus PackageAnnounced Nov. 9, 2008, projects and
spending already started in 20084 trillion RMB ($586 billion USD)
stimulus package for government investment in infrastructure, tax deductions and subsidies, to stimulate domestic spending
2 years, 10 major areas: Finance, housing, rural infrastructure,
transportation, industry, health and education, disaster rebuilding, environmental protection, technology innovation, and tax reform
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Opportunities by Industry SectorsFinance
Removing lending quota on commercial banksIncreasing the lending scaleCredit support to M&ACredit support to rural areasCredit support to small and medium
enterprises
Tax (VAT) reform120 billion RMB tax reduction from January 1st,
2009Export VAT refund rate increases to help
exporters, applicable to 3,770 products
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Opportunities by Industry SectorsHousing
Tax reduction to boost real estate marketAffordable and low-rent housingExpanding the pilot program to rebuild rural
housingIncreasing senior housing
Rural infrastructure/modernizationImproving countryside roads and power grids Ensuring drinking water safetyExpediting the North-South Water Diversion
Project and country-wide reservoirsRural Home Appliance Subsidies Program
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Opportunities by Industry SectorsTransportation
Budget: 1.8 trillion RMBBuilding more dedicated passenger railways
and coal routesExpanding highway system Building more airports in the western areas
AutomobileTax reduction for purchasing economic cars less
than 1.6LSubsidies to farmers for purchasing light trucks
and minivans10 billion RMB to subsidize auto industry
technological innovation and new energy vehicles
Expanding auto financing
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Opportunities by Industry Sectors
TelecomLong awaited 3G licenses issued to China
Mobile (TD-SCDMA), China Telecom (CDMA2000) and China Unicom (WCDMA)
Will spend 170 billion RMB in 2009, and 400 billion RMB by 2011 on 3G network
Could lead to US $290 billion in private-sector investment by 2011
Target: 50 million subscribers by 2011, covering all cities and bigger townships
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Opportunities by Industry Sectors
Healthcare and educationImproving health and medical systems in rural
areasRestructuring the healthcare systemBuilding more joint-venture hospitalsExpanding health insurance, especially to rural
areasDeveloping cultural and educational sectors in
rural areasBuilding more schools in rural western and
central areas
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Opportunities by Industry SectorsEnergy and environment
Budget: 350 billion RMBTechnology upgrade of coal-burning power
plants to reduce pollutionEncouraging investment in renewable
energy such as nuclear, wind, solar, and biomass
Encouraging energy conservation, and improving energy efficiency
Clean Development Mechanism (CDM) projects – greenhouse gases reduction projects
Waste managementEco-city plan
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Opportunities by Industry Sectors
Other industry sectorsSichuan earthquake rebuilding: 1
trillion RMBTechnology innovationE-commerceEntertainment, animation, media and
advertisingLogistics
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Recent Development
Challenges:Global/U.S. economic slowdown lasting can
cause China’s economic growth sluggish and market (most sectors) downsize continuously
Is 4 trillion RMB enough?Saving vs. spending Government spending vs. consumer spendingOver liquidity/inflation concernBanking trouble again: non-performing loans
may riseCurrency and trade disputes between the U.S.
and China
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Recent DevelopmentQ4/2009 GDP growth: >9% (estimated),
2009 GDP growth: 8% (almost confirmed), 2010 GDP growth: >8% (estimated)
China’s economy V-shaped recovery confirmed
Transformation of growth patternBefore: excess consumption of natural
resources; environmental pollution; too much dependable on investment and export; insufficient domestic consumption
Aim: more balanced, sustainable and steady growth with a better skilled work force and technological innovation; boost domestic consumption
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Key Business Issues
Frances Chou
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Key Business Issues
Initial researchUnexpected costs and expenses Labor related issuesRelationship, Relationship,
Relationship!Due diligenceLost in translationOpportunities
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Initial ResearchPermits, licenses, approvals, . . . .
What kindsFrom which agenciesFees, costs, expenses, . . . .
Market researchThe Chinese market is extremely
regionalUnderstand where you will fit inAdjustment of Products
Government policiesRelevant US and Chinese laws
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Unexpected Costs and ExpensesPermits, licenses, approvals, . . . .IPR issuesGovernment incentives and expiration
of such incentivesOther start up costsCurrency conversion issues
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Labor Related IssuesHiring and retaining skilled employees
in china Employment agreementsInsuranceTrainingFiring employees
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Relationship, Relationship, Relationship!Understand how “Relationship” works
in ChinaGovernment relationshipRelationship with the “Right People”
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Due DiligenceThe most important thingGovernment filings and documentsCorporate documentationFinancial informationReferencesSite visitBackground check of executives
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Lost in TranslationDifferent business cultures100 ways to say “NO,” but 90 of them
sound like a “YES” to a foreignerRead between the lines What does a “contract” mean to
Chinese?
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OpportunitiesSelling into the China marketSourcing and outsourcingSelling/licensing technologies to
Chinese companies
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ConclusionInitial researchUnderstand the differencesFind competent assistanceDue diligence
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Key Legal Issues and Business Approaches
Robert HartKimberley Chen Nobles
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OverviewEconomic and trade trends Growing importance of IP assets in
information-based economyKey law changes and legal issuesOutsourcing – Export Control
regulations and issuesNew opportunities with associated
risksRed flags and what to do about them
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IntroductionEconomic and trade trends
Globalization of markets and manufacturing bases
China’s role and positionGrowing importance of IP assets in
information-based economyMarket value of business increasingly
based on IP assetsOutsourcing
TrendsModelsIssues
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Current Business ClimateSkyrocketing Production
Costs*:Management compensation
+ 9.1 %Support staff wages
+10.3 %Blue collar wages
+ 7.6 %Raw materials
+ 7.1 %* 2008 Booz Allen Hamilton & American Chamber of
Commerce data.
Continued increase in production costs in 2009/2010
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2010-2020?Foreign currency reserves:
$1.4 Trillion (2007)$2.3 Trillion (2009)
Purchasing raw materials on a worldwide scale
Time compression due to Growth:1 year in China =
~ 2.8 years in U.S.~ 5.6 years in Ireland~ 5.8 years in U.K.
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New Market OpportunitiesKey technology sectors:
Biotech and pharmaceutical Agricultural chemicalsSoftwareSatellite broadcasting encryption
technologyComputer, video gamesRaw materials
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Business & Governmental PoliciesHow understanding and utilizing key
business, government policy and legal issues can work for you
Create new market and exploitation opportunities
International trade agreements are raising the standards for protection and enforcement of IPR
International rules and policies create risks as well Compulsory licensing of patentsWTO-sanctioned retaliation
Other policy tools
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Recent LegislationLegislation Issuance Date Effective Date Significance
Property Rights Law
3/16/2007 10/1/2007 First time recognition of legal protection of PRIVATE and public property
Enterprise Tax Law 3/16/2007 1/1/2008 Phasing out of favorable tax treatment for foreign investors, tax holidays, etc.
Labor Contract Law
Implementing Regulations
6/29/2007
- -
1/1/2008
9/18/2008
Provides greater protection for employees making it harder to terminate employees, lots of compliance issues
Anti-Monopoly Law 8/30/2007 8/1/2008 Expands scope of prohibited activities that affect business and commercial trade
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Key Legal IssuesIP and ownership issuesExport controlsU.S. Foreign Corrupt Practices Act
(FCPA) & China’s Anti-commercial Bribery Rule of 1996 –“1996 Rule”
Mandatory hiring/contracting and in-country labor laws
Local content laws
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Intellectual Property RightsProactive exploitation and protection is
essential in today’s global marketplaceKey premises:
Intellectual property rights are a private right
Intellectual property rights are generally territorial
In order to protect and enforce in any country, must obtain IPR in that country
Best way to ensure protection of IP asset: know and comply with the local rules
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Intellectual Property RightsExploit IP asset in strategic manner
Be proactive even if currently a potential market
Utilize international treaties which make it possible to file/register in several countriesPatent Cooperation Treaty
E.g., Parties include Japan, China, Taiwan, Korea, Malaysia, United States
Madrid Protocol (Trademarks)E.g., Japan, China, Korea, Singapore, United
States
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Intellectual Property RightsExploit IP Asset in Strategic Manner -
cont’dContractual approach – IP Licenses
Obtain necessary licenses before sharing dataKnow and comply with local laws
Business approachesForm joint ventures instead of licensingSplit production processesControl Through vertical distribution chain
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ContractsAmerican contract attributes:
LongDetailed and tightLegalese does not often translateUse Modern Format - no whereas clauses, delete
the words “said” and “hereto” as used in “said parties hereto,” etc.“AS WITNESS, the parties hereto have caused this
Agreement to be signed on the date first written above.”
Large Chinese companies are experienced with U.S. style contracts versus midsized Chinese companies with little, but increasing experience
Boilerplate language often a stumbling point
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Signing CeremoniesInformalities in the U.S.
Mail contracts and sign at leisureCeremonies are a waste of time and
moneyMajor agreements with Chinese
partner:Expect top executives to meet and signOften followed by dinner, drinking and
karaoke
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Dispute ResolutionDispute resolution options:
Ad hoc rulesAdministered mediation – not
enforceableLitigation
Adjudication of cases in rural areas is primitive with protectionist influences
May be impossible to enforce outside of ChinaArbitration
Preferred in business disputes, has confidentiality unlike courts and IS enforceable under the New York Convention signatories
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ArbitrationChoosing an arbitration venue
Chapter 14 of the MOFCOM Chinese Handbook used to say:Day # 1: Insist on arbitrating in China
Day # 2: If the foreigner still wants to arbitrate outside China, continue to argue the benefits of arbitrating inside ChinaDay # 3 – 14: Repeat Day #2Day # 14: Suggest Stockholm, Sweden
Insist on Hong Kong and Singapore These cities have better Chinese restaurants
than StockholmStockholm winters are dark and cold
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Arbitration AdministrationCIETAC – established in the 1950s,
monopoly over international mattersLocal arbitration commissions (over
180 in number) – domestic disputesWhen regional commissions were
allowed to hear international disputes, CIETAC lobbied for local disputes, thus CIETAC is now the busiest arbitration group
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Arbitrating in China– ad hoc arbitration?Supreme People’s Court has struck down
domestic ad hoc arbitration clauses - People’s Insurance Company of China, Guangdong Branch v. Guanghope Power et al [Min Si Zhang Zi No 29]
Supreme People’s Court (2004) - Prohibit ad hoc arbitration agreements, EXCEPT:1. where all the parties are from New York
Convention States; and2. local laws do not prohibit ad hoc
arbitrationAre ICC arbitrations permitted in China?
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Drafting Effective Arbitration ClausesRequirements for valid arbitration
agreements:Must be in writingDesignate an arbitration commission
“If a dispute arises, submit to arbitration by CIETAC or by the People’s Court”UnenforceableCan’t have an alternative in the
provision, drafter must choose forum“ARBITRATION INSTITUTION” are
MAGIC WORDS
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Combating Global InfringementRequires multi-faceted strategy
Establish IP management and anti-infringement measures for business operations
Utilize all available domestic legal remedies
U.S. enforcement lawsU.S. Government and international trade
policy initiative tools
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Combating Global InfringementIP management and anti-infringement
measures for business operationManagement structureContracts/agreementsEducationOperational proceduresMonitoring of operations
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ConclusionExploiting and protecting rights and
assets in doing business with ChinaGlobal marketplace and international
trade Developments create opportunities AND risks
Need knowledge of international trade obligations, policy tools, business and legal rights to effectively navigate
Proactive exploitation and protection is essential
Develop multi-faceted strategy utilizing legal, business and government-assisted approaches
THINK GLOBAL / ACT LOCAL
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QUESTIONS?
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Contact InformationFrances Chou, Schechter + Chou, Inc.
310-479-8600Robert Hart, Harman International
Industries, Inc.(949) 337-0568, [email protected]
Kimberley Chen Nobles, Crowell & Moring LLP949-798-1330, [email protected]
Andrew Pan, North American Representative Office of Shenzhen, P.R. China (NAROS)213-628-9888,