The End Of Cheap China, Part VI. Vietnam, Burma/Myanmar, Globalization, The Next Big Thing, And Falling Wages.

Posted by Dan on March 01, 2012

One of the things that I love about my job is hearing about the next big thing. Most next big things never actually become a big thing, but the fun is in the sorting. It seems that any time I get together with a client, the discussion invariably turns to the "next" country, with "next" country very roughly meaning the country where manufacturers will move to reduce their costs. Implicit in all of these discussions is that the "next" country has an almost unlimited capacity to supply sufficient low cost labor to step in as a China replacement.

But of course this assumption is silly, as was brought clearly to light by a recent FT Beyond Brics post, entitled, "Fewer, more demanding workers for Vietnamese factories." The post focused on recent labor strikes in Vietnam and on how it is getting increasingly difficult to staff factories there:

Prices of food and accommodation are rising faster than wages, making countryside dwellers reluctant to take factory jobs in far-away cities and industrial zones. That has led to a significant labour shortage in the electronics and garment making industries, according to the Vietnamese government.

“Some people tell us they would rather engage in petty trade than work in factories,” says Jonathan Pincus, an economist who runs Harvard University’s Vietnam programme in Ho Chi Minh City and has been researching labour issues. “It’s hard work, with unpleasant conditions, a lot of forced overtime and little freedom.”

Some Japanese manufacturers, who dominate the industrial parks of northern Vietnam, have found it difficult to hire enough workers of late, especially for bigger factories with more than 300 employees, says Hirokazu Yamaoka, head of Japan’s trade promotion body in Hanoi.apanese employers have noticed that Vietnamese workers have been getting more selective about factory jobs, he says, weighing up working conditions as well as pay. Factories without air conditioning and those that use potentially hazardous chemical processes are particularly unpopular.

The article goes on to quote an employer on wages potentially hitting "unsustainable" levels and then discusses how employers "have started offering more generous inducements to lure workers, such as free monthly sacks of rice, free accommodation and annual staff holidays."

The article then discusses how Vietnam, "unlike China" does not have large pools of migrant workers desperate for factory jobs. I hear this again and again from our clients with facilitiies in both China and in Vietnam. They tell me  hometowns/farming areas of Vietnam are typically nicer and more productive than in China and so it is much easier to hit a "tipping point" in Vietnam where the workers will simply choose to stay in or return to their hometowns, rather than keep working in the factory. They also tell me that as China's wages and other costs continue to increase and as more manufacturing moves to Vietnam from China, Vietnam necessarily experiences the same effects.

I guess this is where Myanmar comes in. I had lunch the other day with a friend who is (I think) the only person I know who is completely fluent in Burmese. He told me of how he is getting a shockingly high onslaught of calls from companies (mostly in the pharmaceuticals business) wanting to go to Burma. My friend's view is that it is too early/too risky. 

After that lunch, I started talking about Burma, expecting people to mostly just laugh. Wrong. Nearly everyone is intrigued and many of them have conducted "preliminary analysis." Then just this week, no fewer than two people I know who had been talking about going to Vietnam for vacation told me that they are now considering Myanmar. One of them said it's for vacation, but it's also to see what is going on there "business-wise." 

At the same time, I would be remiss if I did not mention that the new consensus is that globalization leads to declining wages and increasing inequality in the United States. For more on this, check out this New York Times article, "As Jobs Go Global, U.S. Workers Pay."

Myanmar, the next big thing? What do you think?

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The Proview v. Apple China Trademark Dispute. Wanna Buy The Brooklyn Bridge?

Posted by Dan on February 29, 2012

Just read a Bloomberg News article, "Proview Using ‘IPad’ Name is Harmful: Apple," that quotes me on the Apple-Proview dispute, as follows:

“It’s not really trademark law, it’s about whether the trademark was legally transferred or not,” Dan Harris, a Seattle-based lawyer with Harris & Moure who handles cases on intellectual property in China, said before the hearing. “Proview Taiwan agreed to sign over the trademark, but Proview Taiwan didn’t own the trademark.”

I see the case as being about authority. Authority to sell the iPad trademark. Who had the authority to sell the iPad trademark to Apple back when Apple (acting through a third party intermediary) thought it purchased the trademark for iPad in China back in 2009?  Let me explain.

If you bought the Brooklyn Bridge from me, you would not own it. Why not? Because I cannot transfer title in the Brooklyn Bridge to anyone because I do not own it in the first place. This analysis should be the starting point for analyzing the Apple-Proview case. I say this because it appears that Apple bought the iPad China trademark from a company that did not own it. Apple (again, acting through a third party intermediary) bought the iPad China trademark from a Taiwanese company called Proview Electronics Company, Ltd. ("Proview-Taiwan") at a time when a Shenzhen company called Proview Technology Shenzhen Co, Ltd. ("Proview-Shenzhen") actually owned it.

So the big legal issue in China is not really a trademark issue, it is an ownership and authority issue. The ownership of the trademark when it was allegedly sold is not really in doubt; it was owned by Proview-Shenzhen. The real question is whether Proview-Shenzhen authorized Proview-Taiwan to sell the iPad trademark to Apple and that is mostly what is being argued in the Chinese courts.

To modify the Brooklyn Bridge analogy, let's say that you bought a house from Mr. Jones and it turned out that Mr. Jones did not own the house, but rather, his wife, Mrs. Jones, owned the house. If Mr. Jones and Mrs. Jones were in the midst of a divorce and she had told him not to sell the house and had told you that she owned the house and so Mr. Jones could not sell it to you, your claim to own the house through the purchase would probably be pretty weak. But let us suppose that Mr. and Mrs. Jones were happily married and Mrs. Jones was right there during the negotiations for the sale of the house and never said a word about how she was the one who actually owned it. Well your claim to own the house would be a lot stronger.

The Apple-Proview case is dealing with similar factual issues, as can be seen in the Bloomberg article. In other words, it looks like a factual mess.

And that is not the only factual mess. Remember how I keep saying Apple used a third party intermediary to try to buy the China iPad trademark. Well, Proview-Taiwan is suing Apple in the United States about that, claiming that the way Apple sought to buy the iPad name constituted fraud and unfair competition. My initial reaction upon hearing of this lawsuit was to assume it had little validity. I assumed this because it is quite common for big companies (small ones too) to try to buy something through a third party intermediary so as to avoid revealing to the seller how much the desired item may really be worth and I had never heard of a lawsuit being brought over that.  But in reading, "How Apple snookered Proview to get the iPad trademark," I am not prepared to just laugh off that lawsuit.  

So what should your takeaway be from the Apple-Proview case? Nothing more than that you need to be sure that the company with whom you sign a contract is the right company. I know this sounds basic, but this sort of thing happens more than you can imagine in international deals.  I personally have worked on at least two joint venture deals gone bad where the American company had signed an agreement involving the wrong party. In both cases, the American company thought it had a deal to be the distributer of the Joint Venture's products outside China, but in fact, the agreement actually said that the American company would be the distributer for its Chinese joint venture partners' products. And since the Chinese partner did make products that the American wanted to distribute....

For more on the Apple-Proview case, check out "Apple v. Proview. China Trademarks And So Much To Learn" and if you want still more, go over to China Hearsay, where Stan Abrams has written nearly a dozen posts on this case. And for you law-geeks out there, click here for a copy of the just-filed Amended Complaint (along with some interesting exhibits) in Proview's U.S. litigation against Apple. 

How To Survive A China Joint Venture

Posted by Dan on February 27, 2012

Earlier this week, I was talking with a potential client regarding a potential China Joint Venture (JV).  In our initial conversation, I told him of how difficult and yet important it is to do joint ventures correctly from a legal perspective and of how negotiating joint venture deals can be so time consuming. I then had to run off to a meeting and a few days later, we resumed our call.

In our second call, the potential client told me that he had since spoken with a high school friend of his, who is the General Counsel for a large international auto parts manufacturer. The potential client told me that his friend had told him that for a Joint Venture to work in China, the American company would need to be able to have someone in China pretty much all the time to monitor the day to day goings on at the Joint Venture. Without this, said the General Counsel, the Joint Venture would be doomed to fail. The potential client asked me if I agreed with that and I immediately said "yes" and then relayed how co-blogger Steve Dickinson and I had once tried to figure out what it was that successful joint ventures had in common and we had determined it was close monitoring of the joint venture by someone who both knows China and can be 100% trusted by the American joint venture partner. Without that, the chances of a joint venture working out for the American company are very slim.

The Foreign Entrepreneurs in China blog recently did a post, entitled, "A Joint Venture Survival Guide. 22 Facts and 22 Practical Tips." This post includes the need to monitor and a whole lot more. If you are in a Chinese Joint Venture or contemplating entering into one, you absolutely should check out that post, and to whet your appetite for it, I list my five favorites from it below:

  • "The foundations for your success will be laid before you sign the deal.
  • Put in writing what will happen to the JV and to your participation in it if and when things start going wrong.
  • Your potential Joint Venture partner's "connections" can be a double-edged sword.
  • "Let me guess: your Chinese partner wants to contribute the land to the joint venture."  I love this one because it is virtually always true and it is virtually always true that your potential partner will value it at more than double its true market value.
  • Your employees will be used to "suck your money away" from you.

For more on China Joint Ventures, I again urge you to check out the Foreign Entrepreneurs' Post and also the following:

For more on what it takes to succeed with a China joint venture, check out the following:

What do you think?

Dumplings For Sale. Chinese Migrant Life.

Posted by Dan on February 26, 2012

Just read a fascinating article by Tricia Wang, entitled, Dumplings for Sale.

Ms. Wang is in the process of getting her Ph.d in Sociology at USCD and writing a book on technology and China. I have been a big fan of Ms. Wang going way back to the days when she was writing the YouMeiT Blog on China youth culture. On its face, the article is about a migrant family in China, but it is really about Chinese society writ large.  I loved the piece and I recommend it. I also recommend that you read Ms. Wang's bytesofchina blog because learning about a culture with whom you are doing business can only be a good thing.

Do you agree?

Four Tips For Learning Mandarin (Chinese).

Posted by Dan on February 25, 2012

The following is a guest post from Corinne Dillon, founder of Discover Mandarin, an online Chinese language school.  

Many regular readers of this blog are either Chinese speakers or aspiring Chinese language students. For those of you in the latter category, if this is the year you've decided to fully commit yourself to learning Mandarin, I want to offer some tips on the best and most efficient ways to do so, based on many years of my own experiences trying, failing, and eventually succeeding in learning Mandarin fluently.

1. Shut the book, turn on the tape: Let's assume that you're a busy business or legal professional. Just as you wouldn't waste time at work on projects that don't get you any closer to accomplishing your goals - and only mean more time at the office - why would you waste time learning Mandarin the "wrong" way when you could be learning it the "right" way, i.e. faster, better, more efficiently?

I am comfortable using the word "right" because I started out learning Mandarin the not "right" way and had little to show for it in spite of a major investment of time and effort. If you're anything like I was then - trying to learn from a textbook and spending hours writing and memorizing characters - the best advice I can give you is to shut the book and put the pen down. Your primary objective as a beginner or intermediate learner should be to improve your speaking ability and listening comprehension, two things that are only accomplished by speaking and listening more, not spending time reading and writing. Pick up some Chinese language CDs or subscribe to an on-line service like Chinesepod.com which offers thousands of great dialogues for all levels of learners. Download lessons to your iPod and listen as much as possible - at home, in the car, at lunch - and you'll see that you will quickly not only get used to how Chinese sounds, but you'll have memorized whole chunks of dialogue and phrases simply because you've heard them so many times.

2. Forget about meaning: This suggestion, while hard to do, makes a huge difference when it comes to learning Chinese. Once you've passively listened to a Chinese dialogue a dozen times or so, start to pause the recording and repeat after the speaker. Do this enough times until you get comfortable saying the dialogue yourself, even if you have little or no idea what you're actually saying - simply focus on distinguishing sounds and rhythms of speech rather than actual meaning. As soon as you look at the English translation and pinyin equivalent of the dialogue, your ear will shut off and you won't actually be learning anything because you think you already know it (of course you know what they're saying - you read the translation!) Instead, struggle with the dialogue - repeat tricky phrases over and over until they start rolling off your tongue. Only then should you look at the translation: when you're able to repeat the dialogue correctly and with confidence.

3. Be a kid again: No Chinese child ever, ever memorizes tone marks (those symbols on top of the letters). In fact, if you were to ask your average Chinese person "what tone is this word?" they would have no idea what you're talking about - they know it instinctively!

Chinese kids learn by simply listening to words spoken over and over again (like we learned English as babies) which is the process you're trying to mimic by listening to dialogues on repeat. If you can listen to those recordings and pause and then imitate the sound and the way in which it is said, you will develop a great ability to reproduce Chinese and then form those words on your own without the prompting of the tape. In my opinion, foreign students fail to learn to speak Chinese properly because they concentrate solely on trying to memorize tones marks written on paper instead of simply listening to the way Chinese should sound from a native speaker and imitating it.

4. Invest in 1-on-1 lessons: Once you've spent a few weeks learning Mandarin on your own, it's time to commit to regular, 1-on-1 classes with a professional Chinese instructor. Let me say up front that I founded and run an online Chinese language school that does just that - offers personalized Mandarin classes online. Let me also say, however, that it wasn't until I started meeting regularly with the teachers who are now my employees that my Mandarin really started to take off. In a 1-on-1 setting, all the focus is on you - improving your grammar, pronunciation, and tones - and you are not distracted by the poor all-of-the-above of your fellow students. Ideally, you are able to shape the curriculum so that it reflects only the vocabulary that is relevant (and immediately applicable) to your profession and interests. Most importantly, it's the most efficient use of the time you have to study Chinese - your teacher can answer your questions, correct your mistakes, and let you know right away if what you're saying is what an actual Chinese person would say in any given situation. You can't that kind of feedback from a textbook!

Many people who have struggled to learn Mandarin will tell you that it's too difficult to learn. My answer to that is that Mandarin is actually very learnable if you use the correct methodology to do so and can bring you great happiness - the intellectual challenge of learning something new, a sense of accomplishment, and the joy that comes from forming new relationships and friendships with people of a different culture.

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An Overview On Doing Business In China.

Posted by Dan on February 25, 2012

The Legal Insight Blog has a long and comprehensive post, entitled, "Overview of Doing Business in China." And that is exactly what it is. Written by King & Wood, one of China's leading law firms, the post sets out the basics of China's systems as they relate to business and it does so very clearly and succinctly.

The post is broken out into the following sections:

  1. Governmental Structure
  2. Legal System
  3. Establishing a Business Vehicle in China
  4. Operating in China

It really does provide only the most cursury information, but it does a great job of doing so and it can serve as a great first source for you. Just by way of example, I pull the following from it on dispute resolution in China:

4.9 Dispute Resolution

As an increasing number of foreign investors penetrate the Chinese market, commercial disputes are expanding quickly both in number and in scale.  China has made significant progress in increasing the integrity and reliability of its courts.  The formal processes available for resolving such disputes in China have, in recent years, become increasingly similar to those elsewhere in the world.

If a dispute cannot be settled through negotiation between the parties, the case must be submitted for litigation or arbitration.  Under PRC law, it is permitted for the parties to choose for binding arbitration to resolve their disputes and the courts will generally enforce arbitration judgment without inquiry into the merits.  It is worthy noting that arbitration is only possible if the parties expressly agree to arbitrate. In practice, the arbitration is favored by many foreign investors in China.

(a) Litigation

The PRC courts consist of four (4) layers: the People's Court (at the district or county level), the Intermediate People's Courts (at the municipal level), the High People's Courts (at provincial level), and the Supreme People's Court (at the national level).  The level of the competent court should be generally subject to the nature and size of the disputes.  In most cases, disputes with a foreign connection may be initially in the Intermediate People's Courts.

Court judgments may be appealed once, but the judgment of the second instance is final and binding upon the parties immediately.  Under the PRC Contract Law, it is permitted to select a foreign law to govern the contract with a foreign connection and to provide for exclusive jurisdiction in foreign courts.  In fact, it may be difficult for Chinese courts to enforce a judgment made by a foreign court, but Hong Kong's judgments are exceptions.

(b) Arbitration

In comparison to litigation, the arbitration seems much quicker, more efficient and more reliable, thus major foreign investors would like to include an exclusive arbitration clause in their contracts.

 Under PRC law, an express clause clearly indicating the parties' selection of binding arbitration is enforceable, which should be in writing and contain a clear statement of the parties' intention to submit the dispute to arbitration, the scope of disputes subject to arbitration, and the specific arbitral commission to resolve the dispute.  In addition, it is possible for the parties to reach an arbitration agreement after a dispute arises, but in most cases an arbitration clause is included from the outset in the operative contracts.

The China International Economic and Trade Arbitration Commission (the "CIETAC") is one of the most frequently selected arbitration forums when the arbitration will be held within the PRC.  Foreign investors sometimes do not agree to arbitration in PRC, including arbitration at CIETAC, because they believe that Chinese parties will have a home advantage, meanwhile, Chinese parties concomitantly often object to arbitration aboard.  Therefore, Hong Kong seems as acceptable compromise to both parties.  Of course, to select a third country's jurisdiction for arbitration is also common in practice.  Since China is a party to the United Nations Convention of Recognition and Enforcement of Foreign Arbitral Awards, it is generally possible to obtain the enforcement of an arbitration award issued by a panel in any member country.

I encourage anyone new to doing business in or with China to check it out.

 

Will China Escape The Middle Income Trap?

Posted by Dan on February 23, 2012

Orville Schell   and Peter Schiff contend that China's brand of state-directed capitalism has the resilience to come out on top of the global market.  Ian Bremmer and Minxin Pei put their money on the American model despite its faltering in recent years.

Where do you stand?  

Intelligence Squared U.S., in partnership with Slate, promises provocative, insightful discussion of this timely question as Schell and Schiff square off against Bremmer and Pei to debate whether "China Does Capitalism Better than America."  ABC News's John Donovan will be moderating the March 13th event at NYU's Skirball Center, and a live audience will vote to determine the winning team. 

A word of warning for anyone staunchly embedded on one side of the Chinese vs. American capitalism debate: according to its mission statement, Intelligence Squared aims to "to transcend the toxically emotional and the reflexively ideological; and to encourage recognition that the opposing side has intellectually respectable views." It was also voted one of Forbes's "Top Five Podcasts to Change Your Mind."  

Attend in-person or tune in via live stream - then let us know what you thought.

Though this upcoming discussion sounds fascinating, I actually think framing the issue as a face-off between China's state supported capitalism versus the US's more freewheeling version is the wrong question. To me, the most important question is whether China will have what it takes to surmount the middle income trap.

I was on a panel this past weekend at the Wharton China Forum 2012 and while there I had the opportunity to listen to a great lecture by world-renowned economist, Augusto Lopez-Claros. I asked Professor Lopez-Claros whether he thought China would be one of the rare countries that breaks through the middle income trap and his answer was a resounding "it's possible." He then went on to note how only five countries have really done that and become developed: South Korea, Japan, Singapore, Hong Kong and Chile. I'm not even sure Singapore and Hong Kong are even large enough to count. I am not prepared to say that China will not be able to burst through the middle income trap, but I will say that I think those who just assume that it will are ignoring all sorts of things.

Will China ever become a developed country? If you think it will, what do you think China has that that will enable it to do so? Conversely, if you think it will not, please explain why you think that. 

Breaking News. (THE) Michael Jordon Sues In Chinese Court To Protect His Name. Jeremy Lin, Are You Watching?

Posted by Dan on February 22, 2012

Just learned that Michael Jordan filed a lawsuit today against Qiaodan Sports Company Limited -- a Chinese sportswear and footwear manufacturer --  for unauthorized use of his name and identity.

According to the complaint, filed by the Jun He and Fangda Partners law firms, Qiaodan Sports has misused Michael Jordan's name and identity on Qiaodan products and marketing materials and by so doing, Qiaodan Sports has intentionally misled consumers so as to profit from Michael Jordan's name. According to Jordan, the Chinese company has improperly registered and "used the name “Qiaodan” (乔丹), which is the moniker Michael Jordan has been known by in China since he gained widespread popularity in the mid-1980s. Jordan's website/press release on this case notes that 90% of young people outside China's major cities think Jordan owns Qiaodan Sports. 

Fangda Partners has experience with this sort of case, having prevailed on a similar case before the Beijing People's Intermediate Court on behalf of Yi Jianlian in 2010. In that case, Yi Jianlian vs. Fujian Yi Jianlian Sport Goods Co., the court held that a celebrity's name can become a “highly renowned trademark" warranting protection even that celebrity did not register the name. That court issues its decision on April 26, 2011 (World Intellectual Property Day). The judgment was affirmed on appeal to the Beijing High People's Court, which stated that an “Individual’s name right should be recognized as a prior right as
defined under Article 31 of PRC Trademark law." To prevail in such a case, the party seeking protection must have a "certain fame in the relevant area.”

In his press release, Jordan makes clear that he is bringing this case strictly to protect his name and identity and not for the damages he might win. Jordan is saying that he will donate every Yuan he wins to "growing the sport of basketball in China.”

It is not clear exactly under what laws this case is being brought but we note that Article 31 of the PRC Trademark Law provides that an application for trademark registration must not prejudice any preexisting right of anyone who has achieved a certain reputation.

According to Jordan's website, the plaintiff in a naming rights lawsuit is entitled to injunctive relief and damages where: 1) the individual is a famous public figure; 2) the defendant acts in bad faith by intentionally using the plaintiff’s name or other personal attributes without authorization; and 3) the use of the plaintiff’s name or other personal attributes damages the plaintiff by causing confusion among consumers who mistakenly associate the infringer, its products or services with the plaintiff.

By all indications (I mean, how many people set up a website on their own lawsuit?) Jordan is very serious about this case. I have read (here) that someone way back in 2010 registered variants of Jeremy Lin's name in China, but I think Lin's case will be different simply because when Lin's name was registered, he almost certainly did not have a "certain reputation."

This case is obviously at its inception and I will write more once I know more.

2-23-2012 UPDATE:  For more on this case, I suggest you check out China Hearsay's post here and this Wall Street Journal Article by Laurie Burkitt.

China Eases Foreign Film Quota. Maybe.

Posted by Dan on February 22, 2012

By: Mathew Alderson

It’s hard not to get carried away by Hollywood’s breathless reaction to the US-China film deal announced during Xi Jinping’s recent visit to LA and apparently struck in "down to the wire" talks with Vice President Joe Biden. The deal is variously described as a ‘trade accord’ or a ‘trade agreement’. Whatever it may be, MPAA is "celebrating" and the White House is heralding it as a "breakthrough."

But just where is the public acknowledgement of the deal by Chinese officials?

 Depending on whose account we read, we are told that the deal:

  • adds 14 3-D and large format films to China's existing quota of 20 on which box office revenue may be shared;
  • increases the share of box office available on quota films from around 13% to around 25%;
  • increases by an unspecified amount the licence fees available to ‘independent’ films, presumably those films which are neither quota films nor official co-productions; and
  • allows "other distributors, apart from China Film Group, to distribute films in China.

Call me a cynical lawyer, but I must ask whether anyone outside the Office of the US Trade Representative has actually seen the document recording the deal? (If anyone has seen that document, would they please send it to me because i am very interested in its details.) In the meantime, we are adrift in a whirlpool of contradictory and ambiguous commentary on this.

There is also a big question mark over the legal effect of the deal. Just when does all of this come into effect in China?

So my take on all this right now is that it appears to be good news, but I am reserving full judgment and analysis until there is at least some more detail. 

For more on this "breakthrough," check out the following:

For more of Mathew's views on China' film/media industry, check out the following:

What are you hearing?

Anatomy Of A China Scam. Part II. Conclusion And Advice.

Posted by Dan on February 21, 2012

Earlier this week, we ran part I of this two part series. Part I consisted of Jennie Shi, Felix Zhang, Wendy Zheng and Robert Walsh, all of Samsara Biopharma Consulting, writing of an incident they investigated in which their client had been scammed by an alleged chemical seller based in China. The client had purchased a high end chemical and had ended up with an unidentified white powder. Samsara sought to help this company recover for its not insubstantial loss. Part I detailed the investigation of the companies that perpetrated the scam. This Part II talks of the efforts to secure compensation and it also sets out how this scam could have been avoided and how you can best act to avoid being scammed. 

The Insurance Claim

Just as we were preparing documents to file according to police instructions, the inks company decided to have us hold off while it files a claim for “theft in transport” with a Chinese insurer (a very major and well-known one) that insured the shipment. 

We advised that additional delay might cool the PSB’s (police) ardor to pursue the case, and also that the insurance company would itself in due course arrive at the same conclusion that our outfit and the PSB had formed: that this was a commercial fraud, plain and simple, and not in any provable way theft in transport. 

Nevertheless, the inks company went ahead and filed the claim.  Nearly 6 months went by, and the Chinese insurer delivered its expected verdict right before the Spring Festival holidays, declining to settle the claim.

How it All Ended Up

In the end, the inks company decided to let the matter drop, based on decreased interest in a now cold case from Hebei’s PSB, and the attendant lack of prospects for recovery.  The inks company has made clear it will never again order anything from China, let alone Hebei, regardless of the quality of bona fides established. 

To quote Mark Twain:  “The cat, having sat upon a hot stove lid, will not sit upon a hot stove lid again. But he won't sit upon a cold stove lid, either.”

-------------------------------------------------

Recommendations on this specific case:

Americans might have different ideas in terms of culture discrepancy, but all the Chinese who hear this story think Company #1 and Company #2 are scammer companies and they don’t think these two companies will issue refunds without the involvement of police or court. Based on this, should you ever find yourself in a similar sitaution, we suggest the following:

  • Prepare full and convincing evidence as quickly as possible. For a criminal case, the police need serious and formal evidence to freeze the scammer’s bank account. Any discrepancy in provided evidence may delay police action and may decrease the chances of getting your money back. The same holds true should you decide to pursue a court remedy.
  • Don’t disclose to the scammers your intent to report the case to Chinese police. If the scammer becomes aware of the involvement of Chinese police, they will transfer the money to a secret bank account and you will likely not recover anything even if the scammer is successfully caught.
  • Send a “foreign face” to the appropriate police division and report your case personally. If possible, someone fairly high up in your company should go meet with the police with business cards in hand. The police officers told us this speeds up the process.
  • Consider alerting the trade section of the Chinese Embassy in Washington, DC, the American Chamber of Commerce in Beijing and the Chinese Commodities Inspection Bureau of your situation and request that they contact the appropriate Chinese police departments. This may speed up the process. 
  • Do not allow yourself to be scammed a second time. Scammers often promise to give you a full refund but claim that to do so, you first need to pay the insurance, testing fee, freight, tax etc. Or the scammer promises to send you the right material if you pay the price difference between what they first provided you and what you actually wanted. Do not give the scammer more money, no matter what they say.

Suggestions for future trade with China

We consulted with several people who have decades of foreign trade business experience and they suggested the following when trading with foreign companies (not just Chinese companies):

  • Be very careful when establishing business relationships with a new company. Do as much due diligence as you can. For example, ask for the company's license and ID card and the passport of the company's registered legal representative. Send people you trust to do a site investigation of the manufacturing site.  Do a site inspection on goods before payment. If ordered material needs  legal testing/statutory survey, ask for the scanned report before the shipment.
  • Use formal and strict contract terms to protect your interest. A formal contract should be signed and stamped by all parties and include, but not be limited to, the following items:
    • Product name
    • Product specifications
    • Price
    • Packaging
    • Quantity
    • Payment
    • Delivery terms
    • Quality standards with specified testing methods ( ISO 591-1 or similar)
    • Testing terms (before shipment or on receiving)
    • Arbitration organization or court if any dispute occurs
    • Choice of law
    • Penalty on quality discrepancy
    • Penalty on quantity discrepancy (more or less clause)
  • Letters of credit (L/C) can be difficult when dealing with China. The L/C in this case did not include any terms that would have helped the inks company. It did not provide for any quality control testing before delivery.  Be wary of using any template provided by your supplier.
  • Consider a small trial order to reduce your risk. The problem with this though is that some scammers will provide you with a good trial and then scam you when you order the full amount. 

Preventive measures cost much less than corrective measures.

What do you think?

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