IPG's China Law & Business Blog

Basics for Partnering with a Chinese Company: More than Just Due Diligence

noreply@blogger.com (Sean Hayes) — Mon, 15 Jul 2013 01:51:00 PDT

The following post was written by, Tom Coyner, MBA, one of IPG's senior business advisers. Tom has has worked in Asia for over twenty years. Please read the following post in conjunction with the articles listed at the end of this articles for needed due diligence prior to engaging in any arrangement with Chinese company.

Many foreign companies in China, for practical reasons, choose to partner with a local company to market, sell and support their products and services. While once upon a time there were legal requirements to do so, now China, in most industries, has a relatively free market in this regard.

Frankly speaking, finding a China partner company can be ridiculously easy. Finding a successful partnership, however, can be ridiculously difficult. That is, many China companies are willing to partner for all of the wrong reasons. And this may be said for a like number of foreign firms attempting to do business in China.

Many China firms look at partnering with overseas companies as a cheap and easy way to become "international," or at least more international, via this foreign partnerships. Partnering can add to their market prestige and provide new products and services the domestic competition lacks, or that they cannot easily develop on their own. Thus, in their reasoning, sales may often be secondary to domestic market positioning.

Foreign firms often regard the China market as the most important international market for the next decade and that if they are not in China at this time, they better be in China quickly. As a result, they may be tempted to do a "quick and dirty" market entry, finding a China company selling into the right market niche and boasting a glib speaker of English or some other appropriate foreign language. After the China joint venture agreement is inked, its back on the plane without much expectation to return to China for another six or even twelve months.

These two descriptions are stereotypes, but unfortunately they are closer to the reality mark than many Chinese and foreign firms may like to admit. So what may be a better way to find and develop a successful partnership?

First, look carefully at the company and the key people on whom you will depend. Many China firms look absolutely great on paper, but it will be a couple of key people who will largely determine whether your joint venture will succeed. Certainly the Chinese company needs to be financially stable and credible in your market niche. At the same time, that company must have individuals with sufficient authority to ensure commitments with the foreign company remain at a mutually appropriate priority level.

Key people include the CEO, marketing or planning director, sales director and product support director. If you do not perceive a personal stake in the venture for each of these people, your partnership with the Chinese company may be in danger from the beginning. You should be able to accurately articulate from the Chinese perspectives why this venture is personally important to each key person. Then you should honestly compare their motivations with your own. Even if you like the company and the people, if there is a not a good match, its time to move on.

Second, consider how and with whom your company will be able to communicate. Assuming you do not have Chinese speakers in the home or regional offices, it can be critical to ensure there are capable English speakers at least in the marketing/planning and product support groups. Ideally there should also be a strong English speaker representing the China sales team, but that may be harder to find. Naturally, the larger the company, the more likely the China partner will have employees with foreign language skills.

That brings us to our third point: It is important to partner with the appropriate-sized Chinese company. It is surprisingly easy to go too big or too small. The big companies are usually part of the giant business conglomerates. Their prestige often brings instant credibility to the market for your products, but their ability to sell to other companies within their group is usually exaggerated.

Furthermore, big companies typically have annual or even more frequent organizational reshuffles. The net result can be that the Chinese in whom you have invested a great deal bringing them up to speed on your company and products may one day, perhaps without notice, be reassigned to other departments. Major corporations anywhere in the world tend to be systemically arrogant, holding the unstated assumption that you need them more than they need you. Chinese companies are no different.

Partnering with too small a company, meanwhile, may entail another set of traps. The good news is that they may need you as much as you need them - or even more so. Consequently, insure that they will be putting enough skin into the game to consider you more than simply another arrow in the quiver. The personnel you train are probably more likely to stay dedicated to your products than those of the larger firms.

However, if you are selling large capital assets, these smaller firms may themselves having to partner with other local China firms to be credible producers, marketers and supporters of your products for future customers. Additional, de facto partners mean smaller pieces of the shared pie of profits and/or higher pricing that may make your products less competitive.

Finally, even if you are able to get the right mix and balance, you have just begun the partnership. Chinese, generally, look at all written agreements as just the launching of a new relationship that will need to adapt to unforeseen circumstances. So the foreign firm should not be shocked if, almost from the very beginning, the Korean partner asks for variances from the written partnership agreement as the first real sales opportunity approaches.

Such requests for variances might be justifiable in some cases, but there are also times when the Chinese partner has not done adequate due diligence in selling or preparing support for the foreign products. At these times, one needs a reasonable adjudicator who can advise from ground zero on how to handle variance requests.

Established foreign firms usually have local representative offices with enough employees to act as the local eyes and ears and advise home office management. Those firms not yet ready to set up representative offices can outsource to consultants. IPG works with some of the leading consultants in Asia.

Some articles that may be of interest:

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To contact IPG send an email to: SeanHayes@ipglegal.com

Hiring Employees for Positions in Asia by Senior Advisor to IPG

noreply@blogger.com (Sean Hayes) — Thu, 11 Jul 2013 21:28:00 PDT

“Hiring is your most important task,” said the late Steve Jobs. Considering a wrong hiring decision can be extremely expensive to repair, let’s look at some recruiting options.

Ideally, a succession plan will have an internal candidate ready for promotion: advancing a rising star’s career and providing continuity with minimum controversy and a positive message to the workforce that capable people who do well will be recognized and rewarded.

Often, however, hiring from outside is required. If the company has a competent HR recruiting function, direct ads and in-house screening may be effective for lower and some midlevel positions.

For more important midlevel management or specialist positions, outside assistance may be needed. There are many recruiting companies. By going to any networking event, it is hard not to collect business cards from such firms.

Most recruitment firms offer contingency searches. Usually the process begins with interviewing the hiring managers and agreeing on a job description and compensation range. The recruiter ideally provides a long list of candidates and works with the client in coming up with a short list. In reality, the contingency recruiter usually relies on names from their database, or active job seekers. The recruiter may do some fundamental reference and credential checking before the final offer is made. The success fee is normally in the range of 20 to 30 percent of the first year compensation, including regular bonuses.

For lower-level positions the contingency approach is preferred, since a wrong hire is not likely to be a strategic setback. However, a hire of the wrong senior manager can be costly in terms of negative impact on the organization and lost time.

Some recruiting companies claim they do both retained and contingency searches. In reality, these are contingency recruiters that are thrilled to be paid up front - but still deliver a contingency-class service.

There is also a small number of retainer-only search consultancies that focus on identifying, evaluating and attracting “C-suite” executives (CEO, head of region or country and positions reporting directly to the region/country head) - and sometimes accept engagements one level lower. These senior professionals partner with the client in a consultative process aimed at selecting organizational leaders. Success in these partnerships depends upon a shared focus built on trust, candor and responsiveness throughout the process.

The search is conducted through an exclusive engagement with fees billed at the start and throughout the process. Consultant and client collaborate in determining leadership needs and defining executive positions. The consultant leads in identifying well-qualified individuals, selecting those best suited through a comprehensive evaluation process, and convincing them that the company/opportunity is a proper step in their career progression. Meanwhile, retained search consultants provide employers regular, detailed progress briefings.

This methodology proves to be the wisest option for senior leadership and other strategically critical hires. Some employers avoid retainer search due to the perceived costs, although in reality the total amount is not significantly higher than a contingency fee, and the risk of lost opportunity cost or reputation damage is greatly reduced. Most retained search firms are paid the equivalent to 33 to 35 percent of the total annual compensation, or in some cases a fixed fee not linked to compensation.

According to the Association of Executive Search Consultants, “Retained executive search consulting is a specialized form of management consulting. In addition to locating high-quality candidates, the retained search firm should provide information and feedback that not only helps direct the client’s search for executive talent but can also be used to run the client’s business more effectively. This feedback may include general market research regarding how the client’s organization is perceived in the market, competitive intelligence, and what kind of recruiting strategies may or may not be working at any given point in time.”

Retained searches most commonly take place when one or more of the following conditions apply:

Replacement of incumbent: There are times when a very high level of confidentiality must be maintained. As with other professional services firms - attorneys, accountants and strategic consultants - disciplined senior executive search professionals fully understand how to work with total discretion.

Difficult to find individual: Access to high-level executives who are not on the job market is fundamental, as is capability to invest time and resources thoroughly researching the target universe to identify key players.

Difficult internal promotion: Shareholder compliance (or internal debate) may necessitate a thorough look at external candidates in conjunction with independent evaluation of internal candidates.

The retained consultant will invest much more time than a contingency firm in understanding the client’s corporate culture, key executive personalities, vision, strategy and business objectives, and will be able to communicate this effectively to qualified individuals. Out of this process may emerge the “compelling story” critical to attracting a star executive.

A retained search firm will rigorously conduct reference checks with a broader range of people than those suggested by the candidate. It is in the best interest of the consultant as well as the client to flag concerns before an offer is finalized.

Most companies say “people are our most important asset,” yet often default to hiring friends of friends, applicants from newspaper or Internet ads, or resumes thrown at them from many sources. This may work for lower/midlevel positions, but tossing the dice when filling any key leadership role isn’t acceptable in today’s corporate environment.

In summary, there are a broad range of situations requiring different hiring strategies. The hiring executive has several options, and one recruiting strategy rarely fits all needs.
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SeanHayes@ipglegal.com

IPG is not engaged in the executive recruiting business. We have advised clients on the use of headhunting firms in Korea and China and have found, only, two companies we have worked with satisfactory. Please choose carefully.

Importance of Contracts in China

noreply@blogger.com (Sean Hayes) — Tue, 11 Jun 2013 00:01:00 PDT

The following is from a blog post I put up a few years ago and although it is brief and not as verbose as my other posts, it is certainly in my top ten favorites.

It is not surprising how many companies and entrepreneurs are in such a hurry to get started in manufacturing, partnering or marketing that they totally disregard the need for a contract, a simple memorandum of understanding or something written on a cocktail napkin. It’s also not surprising anymore (after 10 years in the Jungle) that people come to me looking to recover losses incurred with Chinese suppliers, factories, or partners and they don’t even have a basic agreement. Usually I have to tell them that without an agreement, you really have no chance to recover and that there are very few lawyers or legitimate collection agencies in China that are willing to work on a contingency fee basis, including yours truly.

So, as we enter the second quarter of 2013 and try to reach our manufacturing goals and sales targets for the year, it might be time to conduct a thorough review of your contracts. Do you have them? Are they written in English and Chinese? Are they written by your U.S.-based lawyer who knows nothing about China? Are they written by your Chinese lawyer who has little or no obligation to advocate on your behalf and has never even traveled outside of China?

I thought I would share this blog posting from The International Technology Law Blog as a reminder that you shouldn’t start without a contract, and if you have started you must conduct a thorough contract review or you risk not having any recourse for recovery when you get shafted by your Chinese factory, supplier or partner. There are many factors that must be considered when presenting and negotiating a contract with the Chinese and you better have someone skilled and experienced in China looking out for your best interests.

by Frank Caruso
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info@ipglegal.com

IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar, the Philippines, Vietnam and the U.S.

www.ipglegal.com

If it is Good for Apple why isn't it Good for your Company

noreply@blogger.com (Sean Hayes) — Mon, 10 Jun 2013 23:50:00 PDT

If it is good for China, then, why isn’t it good for your company as well. You might even argue that Apple has billions of dollars and lots of cash and can spend money on high priced lawyers and accountants and you can’t. Well, that is true and they do spend a lot of money on lawyers and accountants, but what is untrue is that you can.

Some of you might remember 2008, just before the economic crisis and shortly after George W. Bush pushed through sweeping changes in the U.S. Bankruptcy laws, Haliburton moved their corporate headquarters out of the U.S. to Dubai.

This didn’t just mean they moved their physical address, which they did, they also changed the jurisdiction of their incorporation. Why did they do this? Simple, Dubai has very low, if any Corporate taxes and Haliburton can be shielded from paying those taxes, from the onerous restrictions of the Foreign Corrupt Practices Act, and from liabilities that they would otherwise be subject to under U.S. law. “Well, that doesn’t sound fair,” you might say. Fair or unfair it is completely legal and companies do it all the time.

I have been promoting Hong Kong as one of the best jurisdictions in the world for protecting your assets and for legally paying less taxes and in fact in the annual Report on Economic Freedom Hong Kong is regularly ranked number 1, well ahead of the U.S.

I often wonder why U.S. individuals and companies that do business in Asia and Europe would not want to incorporate in Hong Kong and invoice out of Hong Kong and instead prefer to generate revenue in a tax system that is wasteful and takes more half of their income. It doesn’t make sense.

So, I thought I would share the below article from Zero Hedge and share it with you and hope it is enlightening. Apple and Taxes Confused why AAPL is opting for the dividend recap route (as we predicted it would in January )?

Simple: as the first chart below reminds us, as of December 31, nearly 70% of the company’s total cash, which has grown to a record $145 billion in the current quarter, was held offshore. This means that if AAPL wanted to repatriate this $100 billion or so in cash, it would have to pay Federal tax on it, amounting to dozens of billions in remittances to Uncle Sam as this is cash which AAPL does not have full access to for US based operations.

Hence: it has opted to raise cash by issuing debt instead of repatriating its cash. Which brings up an interesting point. As we have shown in the past, perhaps the one thing Tim Cook’s company has loathed more than anything in the past, is to pay taxes, which is why it has some of the most convoluted legal tax shelters imaginable. Indeed, in the current quarter, according to the company’s cash flow statement, a tiny $2.4 billion was paid in cash taxes. Putting this number in perspective, the company had an operating profit of $12.4 billion. Or, cumulatively, since December 2008, AAPL has generated a grand total of $149 billion in operating profit, while paying just $21 billion in total taxes. Is it apparent now why some $100 billion in Apple cash is not fully recourse to the company? Unless, of course, AAPL decides to follow Gerard Depardieu’s example, and run away into the tax-amnesty friendly steppes of Russia, where it will be free to do as it wishes with all of its cash…

Read the Article with all the cool graphs.

by Frank Caruso
info@ipglegal.com

Buying a Customized Cake is Too Complicated in China

noreply@blogger.com (Sean Hayes) — Thu, 07 Feb 2013 18:20:00 PST

Most of the time I prefer to write about the cultural differences in the Jungle and how they impact foreigners doing business here. Sure, I can write about the law and it’s changes and provide a list of things that you must do if attempting to do business here. As I have said before, there are many other websites that do this and at the end of the day you probably don’t want to know or don’t care and in fact should leave this to your lawyer and concentrate on your business.

With that in mind, I had an interesting experience recently when I went to buy a birthday cake for the 237th birthday of the United States Marine Corps. As a former Marine, it is a tradition to celebrate the birthday each year and I thought I would have a cake made and share it and some drinks with some friends here in the Jungle.

So I marched into the cake shop with my assistant, who is a very competent translator (I can speak and understand Chinese, but not cake Chinese as it’s not something I usually need to talk about) and a detailed diagram of the cake that I wanted. You would have thought that I wanted them to make a nuclear reactor or enrich uranium.

They immediately said no. So I asked why and they said “we don’t have a box that big.” I was asking for a plain white sheet cake with some writing on top. "So, you don’t want my money because you can’t figure out what to put the freakin cake on? I’ll bring my own box" and that led to “okay go get your own box and come back and then we will make the cake.” "How about you make the cake and then I’ll bring the box when I pick it up?" “No, we need the box now.” "How about if you take two of your boxes and put them together and then you will have one box?" The look they gave me was the same look I get from my clients when trying to explain the intricacies of cross border mergers and acquisitions and the impact of the Internal Revenue Code.

Okay forget about the 30 second chore of putting two boxes together, I’ll bring a box tomorrow when I come. “Okay.”Whew, crossed that hurdle. “Now what kind of cake do you want?” It says right there on the intricate diagram that I drew. HAPPY 237th BIRTHDAY and then the Marine Corps Logo below it. “Okay?” So, I stood there for a few minutes because when they say “Okay” in the Jungle, you should be nervous. Then they did nothing but just stand there staring at me like I had three heads. Okay, so do you want to write this stuff down? “Okay” Nervous. So, I started telling them how to do their job. I will pick up the cake at 4 pm tomorrow, is that okay? “Okay” Nervous. How much will it cost? “68 RMB per pound.”

And, would you like to tell me how many pounds it’s going to be? “Oh, about seven pounds”. So, I’m paying the equivalent of $70 dollars to get a 14×14 sheet cake? “Yes, that is the price”. Okay, nervously. So, they proceeded to write everything down and then we moved over to speak with the actual baker, who was within three feet of us during the entire 1 hour conversation to make sure he understood. I provided him with the diagram and a color copy of the logo. Here we go again. “We can’t do this.” Why? “We don’t have a box big enough” I’ll bring my own box. “Yes, but I don’t have anything to put the cake on after I bake it.”

How about you put two of those flat pieces of cardboard together and then you can put it on that. “Grunt, okay” “Now where do you want the writing?” Exactly how it is shown on the diagram. “Okay, I can write it in black” Okay. What about the logo? “I’m going to cut out the piece of paper you gave me and put it on top of the cake, where do you want it?” You gotta be kidding me, you need to make the logo out of that edible writing stuff that cake makers use. Haven’t you seen the Cake Boss? “I can’t make the logo.” Why not? “Too difficult.” Well just make it close. “Okay” Nervous. “I can make it in black only.” Why? “It’s the only color we have.” You gotta be kidding? “No.” Okay just don’t put a logo on there and I’ll figure out something later. Well, this went on for another hour, and fortunately I was joined by a Chinese-American friend who has infinitely more patience than me and figured out a way to make the logo out of chocolate from a local friend of his.

If it wasn’t for his help I would have never got the cake and in the end it turned out awesome. So, this story isn’t about the law or how to structure a cross border acquisition or even how to comply with the confusing tax regulations in the Jungle.

It’s about the difficulty of doing business here and how something as simple as ordering a birthday cake can be a huge ordeal. Imagine purchasing custom products from a manufacturer or entering into a Joint Venture with a Chinese company or bringing your products into this market.

A great deal of patience along with competent advisors to help you will save you time and money, but most of all sanity.

By Frank Caruso. Chair, China Practice Team

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To contact IPG send an email to: SeanHayes@ipglegal.com

Happy Lunar New Year: From IPG Legal

noreply@blogger.com (Sean Hayes) — Thu, 07 Feb 2013 18:10:00 PST

IPG Legal is an international Asia-focused law firm and business advisory focused on assisting clients in entering and succeeding in Asian markets, including China, Korea, Hong Kong and the majority of nations in Southeast Asia.

This past year, among other projects, we are proud to have:

advocated for a Fortune 500 company on an ongoing trade dispute with Korean conglomerates.
advised international franchise companies in expansion in Asia.
advised a high-tech agricultural business in a joint venture with a Korean manufacturing company.
prevailed in nearly all of our shareholder, international sales, IP, employment and other commercial and contentions disputes.
advised a major Korean entertainment company on the majority of its overseas projects.
completed a merger between a major Korean technology company and a Chinese government-controlled corporation.
successfully raised funds for growing major corporations through traditional lenders and private lenders.
been recognized by international rating companies as one of the leading law firms in Asia.

Please feel free to subscribe to our Korean Law Blog and/or Asian Law Blog.
Click Here to Subscribe to The Korean Law Blog
Click Here to Subscribe to The Asian Law Blog

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To contact IPG send an email to: SeanHayes@ipglegal.com

Increasing Protests in Shenzhen, China: What is Their Exit Strategy?

noreply@blogger.com (Sean Hayes) — Tue, 05 Feb 2013 21:34:00 PST

I have been writing for many years on the changes that have occurred here in the Jungle. I have seen China and specifically the Pearl River Delta undergo dramatic changes since I first arrived ten years ago and counted 80 construction cranes outside of my hotel room window.

Many of the changes have been positive and I often congratulate the government here for the work they have done in improving education, infrastructure and of course the rule of law. I leave the criticizing for the pundits and observers who don’t have to operate here and travel freely in support of their clients.

However, the Jungle continues to develop and at the governments’ behest it is moving from a manufacturing economy to a consumer economy, much like its Western predecessors, and with that change comes growing pains and tidal waves. This week has seen some big waves that have affected some of our clients whose government is at odds with the government here (we’ll let you figure that one out) over island and territorial disputes.

It seems that while the governments do their thing to resolve the matter, the inhabitants of the Jungle have taken matters into their own hands and destroyed their businesses, attempted to destroy their brands and forced them to close just because their government is at odds with the Chinese government.

At least eight cities here in the Jungle have seen not so friendly behavior which includes the destruction of private property and looting. We have been called on to help their management and employees deal with the threats and the stress involved and will undoubtedly be asked to help clean up the aftermath and deal with the various governments and the police as we are often asked to do when foreign companies in the Jungle run into angry inhabitants.

While your company or operation is chugging along and your business is operating without any problems, this is a good time to start thinking about what you will do when there are problems – and there will be problems. I don’t know how many times I have come across prospective clients who are shocked that the people they are doing business with in the Jungle don’t share the same morals as they do.

Now is the time to review your risk management plan, your exit strategy (if you have one) and to review your overall business and short and long term objectives here in China. We understand business first and we know how to help your business survive and profit here in the Jungle and we also know how to help you exit. Better to be safe than sorry.
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To contact IPG send an email to: SeanHayes@ipglegal.com

Which Visa Must Your Employees Have?

noreply@blogger.com (Sean Hayes) — Wed, 15 Aug 2012 23:36:00 PDT

China has passed a new law to take effect July 1, 2013. According to government officials, these rules are not new but simply codify current law enforcement practices. In summary, non-Chinese citizens who are found to be working in China without a work visa or residence permit will be fined and possibly deported. The employer will also face fines for having a foreigner working for them.

One large change is that the requirement for remuneration has been removed from the law, now focusing on whether the foreigner is “working.” The new law does not repeal theForeigners in China Provisions, which does retain the definition that working is social work for the benefit of labor remuneration. Calls to law enforcement and immigration ministries have provided no detail on what is considered “social work.” All departments have replied that they will determine each case on an individual basis. From our experience, working has meant receiving payment for goods or services from a Chinese company or individual. The new wording implies that simply being seen in an office on a computer will be enough for the police to question you although we won’t know until next year.
Worse, the new law now expressly authorizes deportation for foreigners for illegal work. In comparison, those who simply stay in China longer than their visa allows will be given a warning and on subsequent violations a fine of up to 10,000RMB. Severe cases, which are at the government official’s discretion to determine, can incur a 100,000RMB fine and detention for 15 days. Those who are “unsuitable” to remain will be given a deadline to leave, and will not be allowed to return for 1-5 years. In severe situations (again, at the discretion of the government office), the foreigner will be deported. After deportation, the foreigner will not be allowed to enter China again for 10 years. This is in addition to a fine on any company the foreigner worked with of 10,000RMB plus the confiscation of any income earned by the company from such work.

This new law will also likely make receiving a visa more difficult as well. The regulation states that a visa should not be issued to a person who is likely to engage in activities prohibited by their visa (link in Chinese). Thus, anyone entering China on an L visa (also known as a tourist visa) that has been renewed several times without leaving China for a significant amount of time will be suspect. The new law also forbids officials from stating the reason for denying a visa, leaving foreigners with little ability to appeal denials.

So what can a foreigner do to avoid the penalties and possible deportation? The best thing a foreigner can do is get an employment visa instead of the common tourist or business visa, especially if they are planning on staying long term in China. For those people who stay in China for business reasons, the best option is often to set up a company in China and work as the manager. While the initial investment to set up a company will vary depending on the industry, people who plan on staying in China for more than a year find the investment will pay for itself in peace of mind. This strategy has the added bonus of making sure Chinese partners can’t report you as working illegally in order to take over your business.

With experienced legal counsel, a foreigner can live and work in China without fear for many years.

Posted by Frank Caruso at IPG.
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SeanHayes@ipglegal.com

Another Reason for Establishing a Company in Hong Kong for Entering the Chinese Market

noreply@blogger.com (Sean Hayes) — Mon, 13 Aug 2012 20:55:00 PDT

As those of you who have read my blog over the past 6 or 7 years (I can’t even remember how long I have been writing it) you know that I have always been a big fan of Hong Kong. Ever since 1989 when I sailed into Hong Kong on U.S. Navy ship as a young U.S. Marine Officer I have been enthralled with the city.

While the dramatic beauty of Central and the sky scrapers overlooking Victoria Harbor against a backdrop of lush green mountains, the iconic Star Ferry and other attractions make it my favorite city in the world, it is the business climate and rule of law that make it the best place in the world to do business.

I have written about this in Hong Kong and the Rule of Law and Hong Kong Phooey and numerous other articles on the topic. I also advise my clients from all over the world on using Hong Kong as the only legal corporate structural platform for their entry into China and South East Asia. Well, we now have another reason to support Hong Kong as a market entry, financial and administrative center for China operations – regardless of the scope of business.

China’s State Administration of Taxation just announced a change in the rules governing the withholding tax that foreign investors pay on dividends repatriated from their share of investments in Chinese companies. Companies and shareholders based in countries outside Mainland China (such as the United Kingdom, Hong Kong and Singapore) that have double taxation agreements (DTAs) with China will only have to pay 5% in withholding tax on the dividends they receive from Chinese companies, instead of the usual 10% payable by companies and shareholders resident in countries without DTAs (U.S. and many EU companies).

Although the reduced rate has been available for several years Hong Kong holding companies did not meet the ‘substantial business activity’ requirement which has in effect been removed. So, now there is even more reason to use Hong Kong as the structural platform for you operations in China and beyond.

Posted by Frank Caruso, Chair China Practice Team at IPG.
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SeanHayes@ipglegal.com

Taxes on U.S. Citizens Residing Abroad

noreply@blogger.com (Sean Hayes) — Mon, 13 Aug 2012 20:48:00 PDT

Everyone wants to avoid taxes and only a few people really know how. This goes double for US citizens who earn income in China. This is because the US taxes foreign income as well as income earned within the States. Even worse, the IRS requires any US person with a financial account overseas to register it with the treasury department, as long as such account has held over $10,000USD at some point during the year. This provision was meant to discourage the use of overseas tax shelters, but they equally apply to US people teaching English in China that have managed to save $10,000USD in their Bank of China account. And speaking from personal experience, the process is complicated because it involves both the IRS and the Treasury department. Luckily, the filing can be done online, even if it is not particularly simple.

For those earning a salary in a foreign country, the most important exclusions to know about are foreign earned income and foreign housing exclusions. For 2012, the foreign earned income exclusion is up to $95,100 and the foreign housing exclusion/deduction is 30% of the foreign earned income exclusion (but varies by location). The housing exclusion applies to income received from an employer, and the deduction applies to self-employment income. The details for calculating the foreign housing exclusion/deduction are maddeningly complicated and beyond the scope of this article. The foreign earned income exclusion is more straightforward as it directly excludes the income from taxes. Most important to these exclusions is how to qualify for them.

First, you must be a resident alien or citizen of the United States. Resident aliens are those who have Green Cards or who have been in the United States for a total of 183 days over the past 3 years, only counting 1/3 of days in the 2^nd year and 1/6 of the days in the least recent year. (That is the easy math. Imagine what the housing exclusion entails.)

Second, you must have a foreign country as your tax home. This means you have employment in that country and it is where you permanently or temporarily work. Business trips don’t count, but moving there to fulfill employment or contract work likely would. As a general rule, if you expect to be working in the country for over a year, it is your tax home.

Third, you must be in a foreign country for a significant time, determined by the bona fide resident test or the physical presence test. Bona fide residence means you are living in a foreign country as a resident would for a full tax year. Each case is evaluated individually, but those who rent an apartment in a foreign country, live there 7 days a week, and only leave the foreign country for business and vacation with a clear intention to return to the foreign country, are almost certainly residents. The physical presence test is for those who live a long time in a foreign country but not the January-December tax year. If you spend 330 days in a foreign country over a consecutive 12 month period, you meet the physical presence test. Unlike the bona fide resident test, you could live out of your suitcase, travel through Europe to multiple countries for any reason, and as long as you spent 330 days outside the US you can meet the test.

Finally, you must have foreign earned income. Usually, foreign earned income is any income earned when you have met the tax home and bona fide residence/physical presence test. Foreign income also includes housing and meals provided by the employer, allowances such as cost of living or education reimbursement, and commissions earned. Money from the US government or a pension does not count as foreign earned income.
If all four factors are met, then you can use the exclusions and can avoid some or all US taxes on your foreign income. Of course, if you have set up a company in a foreign country, the process is very different.

Posted by Frank Caruso. Chair, China Practice Team for IPG. _________
SeanHayes@ipglegal.com

Minimizing your Tax Liabilities in China

noreply@blogger.com (Sean Hayes) — Wed, 20 Jun 2012 23:40:00 PDT

China is and will continue to be one of the most attractive markets for consumer goods. With a population of more than one and a half billion people and a middle class of more than 300 million, that is projected to grow to at least 700 million in the next 20 years. Based upon our experience in China and having been a part of the tremendous growth, we have seen that this emerging middle class, which is already larger than the U.S. population, is spending money like crazy and is not saving like previous generations.

Given that China is one of the only places in the world that has had double digit growth in GDP (except for this year which is still 8%), it has a burgeoning and spend crazy middle class, a developing legal system and excellent infrastructure, everyone should want to bring their products and services into this market. It’s not that easy. For many products, and services there are taxes. China does not have a national sales tax on retail items like other countries and so it imposes import duties, value added taxes and consumption taxes which the importer, wholesaler or retailer must add to the price the consumer pays. It’s all hidden, but, believe me they can be quite steep. For example, the total duty on imported wine, which is the only wine worth drinking in China, is between 41 and 50% which can make many products cost prohibitive when compared to quality – the value is just not there.
And people think China is cheap!

I would offer that in the major cities in China, cost of living is higher than most cities in the U.S. and Europe and inflation has not stopped in the 10 years that we have been advising clients in China. China aint cheap anymore, but, the domestic market where they don’t mind paying higher prices on quality items (that aren’t fake) is enormous and growing.

So, until the central government decides to either scrap it’s antiquated and cumbersome Value Added Tax “V.A.T.” system, which we don’t see that happening for a long time as too many people would lose a lot of money, or they lower the import duties and consumption taxes on imported products – there might be other ways to import products that are in high demand in China.

China and Hong Kong operate under a one country two systems arrangement that has been in place since the turnover in 1999. Despite obvious cultural differences and the fact that there is a border crossing, most of us who do business in South China consider the two as one. In fact, there is a treaty between Hong Kong and China which many people don’t know about that allows for Hong Kong companies and professionals to operate in China and also a few other things such as the duty free import of Hong Kong made products. Below is a summary of the CEPA rules pertaining to importation of Hong Kong products which could provide a solution to the high import duties in China.
In order to enjoy zero tariffs under the Closer Economic Partnership Agreement (CEPA), goods exported from Hong Kong to Mainland China must fulfill the rules of origin and show evidence of being “made in Hong Kong.”

The execution of the rules of origin is detailed in the “Customs Provisions of the People’s Republic of China on Executing the Rules of Origin for Trade in Goods under the Mainland/Hong Kong Closer Economic Partnership Arrangement (haiguanshuling No.106, hereinafter refers as ‘Provisions’),” which was promulgated in December 2003 and came in effect from January 1, 2004. Under the Provisions, “Hong Kong” as the origin of goods shall be determined according to the following principles:

Goods entirely obtained in Hong Kong; and
Goods “substantially manufactured” in Hong Kong if not entirely obtained in Hong Kong Goods entirely obtained in Hong Kong According to the Provisions, goods entirely obtained in Hong Kong include:

Minerals exploited or extracted in Hong Kong
Plants or related products collected in Hong Kong
Animals born and raised up in Hong Kong and their related products
Animals hunted in Hong Kong
Fish and other sea products caught by ships with Hong Kong licenses and regional flags and their related products
Waste disposal for recycling from and collected in Hong Kong
Waste and scrap for recycling resulting from manufacturing in Hong Kong
Products made out of waste disposal or waste and scrap mentioned above Substantial processing, transformation, or manufacturing The criteria of determining whether the products are “substantially manufactured, transformed, or processed” in Hong Kong should include the following:

Manufacturing or processing operations. The goods should be endowed with essential characteristics after principal manufacturing or processing operations in Hong Kong.
Change of tariff number. Change of tariff number refers to a change of the four-digit tariff numbers and taxation categories after the manufacturing or processing operation of non-Hong Kong materials in Hong Kong. Moreover, no further manufacturing or processing should happen outside Hong Kong.
Ad valorem percentage. Ad valorem percentage is the ratio between the total value of raw materials, components, labor and product development that are fully acquired in Hong Kong, and the FOB value of the finished product for export.

Ad valorem percentage = (Value of raw materials + value of components + labor costs + product development costs) ÷ (FOB value of finished product for export) Products with an ad valorem percentage equal to or greater than 30 percent, and with the last manufacturing or processing procedures completed in Hong Kong, shall be regarded as “substantial processing.” The following stipulations apply:

Calculation of the above “ad valorem percentage” should be consistent with generally accepted accounting standards and with the “Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994.”
“Product development” refers to product development conducted in Hong Kong for the purposes of producing or processing the exporting goods. Incurred expenses for development shall be related to the exporting goods, including the costs for self-developing of the producers and processors, as well as the costs for the developing of consigned natural or legal person. The expenses also includes fees for purchasing designs, patents, patented technologies, trademarks or copyrights processed by a natural or legal person in Hong Kong. The concerned value should be clearly identifiable under generally accepted accounting standards and the provisions of “Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994.”
If raw materials or components originating from Mainland China are used and they constitute part of the export products in Hong Kong, when calculating the ad valorem percentage of the export product, the raw materials or components from Mainland China should be deemed to be originating from Hong Kong. The ad valorem percentage of the export product should be greater than or equal to 30 percent, and greater than or equal to 15 percent excluding the price of the raw materials or components from mainland. Other criteria The “other criteria” refer to other criteria agreed by authorities of both Mainland China and Hong Kong in determining the origin of the products, besides the three above-mentioned criteria.

Mixed criteria. The “mixed criteria” means that two or more of the above-mentioned criteria are used in determining the origin of the products. Manufacturing or processing for the purpose of transporting or storing the goods, facilitating the packaging of the goods, or better packaging and displaying the goods is not considered as “substantial processing, transformation, or manufacturing.”
Simple diluting, blending, packaging, bottling, desiccation, assembling, sorting or decorating will not be regarded as “substantial processing, transformation, or manufacturing.”

Package, packaging materials, containers and accessories, spare parts, tools and explanatory materials accompanying the goods should be ignored in determining the origin of the goods.

by Frank Caruso
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SeanHayes@ipglegal.com
IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar, Vietnam and the U.S. www.ipglegal.com _________ SeanHayes@ipglegal.com

Protecting your Reputation in China: Copied Products

noreply@blogger.com (Sean Hayes) — Sun, 17 Jun 2012 22:43:00 PDT

You know that I like to write about the various copied products that are made here in the Jungle. I usually find things like copy salt and eggs to be humorous, but, in this case it is not funny as the lives of civilians and military personnel are on the line when counterfeit parts are sold to the U.S. and other armed forces.

After a year long investigation, where we advised the Senate Armed Services Committee on the real problem with counterfeit parts and the harsh reality of counterfeiting in China, the SASC released its report which you can find a synopsis here with the full report being available on the SASC website soon.

While one of the objectives is to place the blame squarely on the counterfeiters in China, there is little legal recourse available and given that most companies that purchase electronic components from China know that many of the parts are counterfeit, they look the other way and pass the parts up the Defense Department supply chain. Up until now, that hasn’t been much of an issue and the reward far outweighed the risk.

Of course cost is an issue when there are four or five companies involved in the supply chain and each one has to make some margin on the product. However, an easy solution, to this problem, would be to ensure that the parts are inspected by a reputable third party electronic component inspector, such as the non-Chinese owned Whitehorse Laboratories who has been warning everyone of this problem for years and was also involved in advising the SASC on this matter.

As the Justice Department and various enforcement divisions of the Defense Department and Department of Homeland Security begin investigating defense contractors and component suppliers and this has already begun and will be ramped up considerably in the near future, the simple solution is to test the components and have agreements in English and Chinese with the Chinese suppliers that provides for recourse.

The penalties for supplying counterfeit parts are set forth in the recent National Defense Authorization Act which you can find a summary here and investigation and enforcement has begun.
While the SASC and the State Department will continue to pressure China to wipe out counterfeiters, it will not happen. Counterfeiting and copying is woven into their DNA, especially in certain parts of Guangdong Province where even the late Chairman Mao had a difficult time trying to control the leaders who ruled this region.

So, what can you do so that your company will not be investigated and fined.

1. Have a sample of the parts tested by an independent and professional laboratory.
2. Purchase from reputable vendors in China and have written agreements with them which could be as simple as purchase order terms or terms of purchase on your website in English and Chinese.
3. Keep records of the efforts you make to ensure that you are not passing on counterfeit parts.
4. Don’t trust your Chinese employees to handle any of the above and if you do, supervise, supervise, supervise.

More on this as it develops. Be vigilant.
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SeanHayes@ipglegal.com
IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar, the Philippines, Vietnam and the U.S.
www.ipglegal.com

Yachting Industry in China

noreply@blogger.com (Sean Hayes) — Sun, 17 Jun 2012 22:33:00 PDT

I like to write about my clients who try. Now, they don’t always succeed and when they don’t it is usually because they were too early or the market factors weren’t what they expected and a few other reasons, as believe me, they were prepared legally to enter the fray here in the Jungle. It turns out that the clients of mine that are entrepreneurial, using their own money and taking their own risk are my favorites and they turn out to be some of my best friends. I wrote about Jame Guo and Ben Hart on my blog a few years ago when they launched the first sailboat that they built in their factory north of Shenzhen. I was honored to be invited to the launching and when they put the beautiful 48′ foot cruising sailboat in the water I was also very proud of them because it is difficult – extremely difficult.

Now, more than two years has passed and 8 sailboats have been delivered and are comfortably sailing the seas. I had the opportunity to go on an afternoon sail on their brand new 52′ Farnova Catamaran this past weekend and once again I was honored to be included and equally proud of my friends and clients. Now, I prefer mono-hull sailboats because it just feels more like sailing, this new Catamaran was just about the most comfortable sailing yacht I have ever been on.

While it’s not easy to build a shipyard from scratch and begin making insurable and sea worthy vessels that people want to pay lots of money for – Ben and Jame at Farnova have pulled it off. Not only are they making beautiful sailboats, but they recognize that the domestic market in China will continue to grow and the Chinese consumers will purchase more sailing yachts. Congratulations to Farnova and we are happy to have you as a client.

By Frank Caruso, Chair of the China Practice Team at IPG.
_________
SeanHayes@ipglegal.com
IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar, the Philippines, Vietnam and the U.S. www.ipglegal.com

Import Duties & Taxes in China: The Wine Example

noreply@blogger.com (Sean Hayes) — Wed, 16 May 2012 00:14:00 PDT

Given that China is one of the only places in the world that has had double digit growth in GDP (except for this year which is still 8%), it has a burgeoning and spend crazy middle class, a developing legal system and excellent infrastructure, everyone should want to bring their products and services into this market. It’s not that easy. For many products, and services there are taxes. China does not have a national sales tax on retail items like other countries and so it imposes import duties, value added taxes and consumption taxes which the importer, wholesaler or retailer must add to the price the consumer pays. It’s all hidden, but, believe me they can be quite steep. For example, the total duty on imported wine, which is the only wine worth drinking in China, is between 41 and 50% which can make many products cost prohibitive when compared to quality – the value is just not there.

And people think China is cheap! I would offer that in the major cities in China, cost of living is higher than most cities in the U.S. and Europe and inflation has not stopped in the 10 years that we have been advising clients in China. China aint cheap anymore, but, the domestic market where they don’t mind paying higher prices on quality items (that aren’t fake) is enormous and growing.

So, until the central government decides to either scrap it’s antiquated and cumbersome Value Added Tax “V.A.T.” system, which we don’t see that happening for a long time as too many people would lose a lot of money ,or they lower the import duties and consumption taxes on imported products - there might be other way to bring in imported products that are in high demand in China.

China and Hong Kong operate under a one country two systems arrangement that has been in place since the turnover in 1999. Despite obvious cultural differences and the fact that there is a border crossing, most of us who do business in South China consider the two as one. In fact, there is a treaty between Hong Kong and China which many people don’t know about that allows for Hong Kong companies and professionals to operate in China and also a few other things such as the duty free import of Hong Kong made products. Below is a summary of the CEPA rules pertaining to importation of Hong Kong products which could provide a solution to the high import duties in China.

In order to enjoy zero tariffs under the Closer Economic Partnership Agreement (CEPA), goods exported from Hong Kong to Mainland China must fulfill the rules of origin and show evidence of being “made in Hong Kong.”

The execution of the rules of origin is detailed in the “Customs Provisions of the People’s Republic of China on Executing the Rules of Origin for Trade in Goods under the Mainland/Hong Kong Closer Economic Partnership Arrangement (haiguanshuling No.106, hereinafter refers as ‘Provisions’),” which was promulgated in December 2003 and came in effect from January 1, 2004. Under the Provisions, “Hong Kong” as the origin of goods shall be determined according to the following principles:

1. Goods entirely obtained in Hong Kong 2.Goods “substantially manufactured” in Hong Kong if not entirely obtained in Hong Kong Goods entirely obtained in Hong Kong According to the Provisions, goods entirely obtained in Hong Kong include:

Minerals exploited or extracted in Hong Kong
Plants or related products collected in Hong Kong
Animals born and raised up in Hong Kong and their related products
Animals hunted in Hong Kong
Fish and other sea products caught by ships with Hong Kong licenses and regional flags and their related products
Waste disposal for recycling from and collected in Hong Kong
Waste and scrap for recycling resulting from manufacturing in Hong Kong
Products made out of waste disposal or waste and scrap mentioned above Substantial processing, transformation, or manufacturing The criteria of determining whether the products are “substantially manufactured, transformed, or processed” in Hong Kong should include the following:

Manufacturing or processing operations. The goods should be endowed with essential characteristics after principal manufacturing or processing operations in Hong Kong.

Change of tariff number. Change of tariff number refers to a change of the four-digit tariff numbers and taxation categories after the manufacturing or processing operation of non-Hong Kong materials in Hong Kong. Moreover, no further manufacturing or processing should happen outside Hong Kong.

Ad valorem percentage. Ad valorem percentage is the ratio between the total value of raw materials, components, labor and product development that are fully acquired in Hong Kong, and the FOB value of the finished product for export.

Ad valorem percentage = (Value of raw materials + value of components + labor costs + product development costs) ÷ (FOB value of finished product for export) Products with an ad valorem percentage equal to or greater than 30 percent, and with the last manufacturing or processing procedures completed in Hong Kong, shall be regarded as “substantial processing.” The following stipulations apply:

Calculation of the above “ad valorem percentage” should be consistent with generally accepted accounting standards and with the “Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994.”
“Product development” refers to product development conducted in Hong Kong for the purposes of producing or processing the exporting goods. Incurred expenses for development shall be related to the exporting goods, including the costs for self-developing of the producers and processors, as well as the costs for the developing of consigned natural or legal person. The expenses also includes fees for purchasing designs, patents, patented technologies, trademarks or copyrights processed by a natural or legal person in Hong Kong. The concerned value should be clearly identifiable under generally accepted accounting standards and the provisions of “Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994.”
If raw materials or components originating from Mainland China are used and they constitute part of the export products in Hong Kong, when calculating the ad valorem percentage of the export product, the raw materials or components from Mainland China should be deemed to be originating from Hong Kong. The ad valorem percentage of the export product should be greater than or equal to 30 percent, and greater than or equal to 15 percent excluding the price of the raw materials or components from mainland. Other criteria The “other criteria” refer to other criteria agreed by authorities of both Mainland China and Hong Kong in determining the origin of the products, besides the three above-mentioned criteria.

Mixed criteria. The “mixed criteria” means that two or more of the above-mentioned criteria are used in determining the origin of the products.

Manufacturing or processing for the purpose of transporting or storing the goods, facilitating the packaging of the goods, or better packaging and displaying the goods is not considered as “substantial processing, transformation, or manufacturing.”

Simple diluting, blending, packaging, bottling, desiccation, assembling, sorting or decorating will not be regarded as “substantial processing, transformation, or manufacturing.”

Package, packaging materials, containers and accessories, spare parts, tools and explanatory materials accompanying the goods should be ignored in determining the origin of the goods.

______________
by Frank Caruso. Chair, China Practice Team

China to Discuss Three Way FTA with Korea and Japan

noreply@blogger.com (Sean Hayes) — Sun, 13 May 2012 01:37:00 PDT

It has been reported in local news outlets that China, Japan and Korea have vowed to commence free trade negotiations and cooperate in alleviating the issues with North Korea.

Korea's Yonhap News has reported, in part, that:

During annual summit talks in Beijing, South Korean President Lee Myung-bak, Chinese Premier Wen Jiabao and Japanese Prime Minister Yoshihiko Noda also agreed to start preparations to launch official negotiations on a three-way free trade agreement by the end of the year.

The summit came a month after North Korea unsuccessfully launched a long-range rocket on April 13. Though the rocket fizzled soon after takeoff, the liftoff drew international condemnation as it broke a U.N. ban adopted over concerns such a launch could be used to develop missiles capable of carrying nuclear warheads.

Concerns have since grown that Pyongyang could stage additional provocations, such as a nuclear test, which would be its third, as well as more missile tests and border clashes. Officials in Seoul have said the North appears to have completed preparations for a nuclear test.

"The leaders of the three countries appreciated the U.N. Security Council's strong and swift presidential statement regarding North Korea's long-range rocket launch and agreed that they cannot accept a nuclear test and other additional provocations by North Korea," the presidential office said.

The agreement on North Korea was seen as rare because the three countries have usually differed over how to deal with North Korea, with South Korea and Japan calling for a tougher stance, and China, the North's last-remaining major ally, being reluctant to criticize Pyongyang.

On the sidelines of the summit, the three countries also signed an investment guarantee treaty that calls for providing most-favored-nation status and other protective measures for investment from each other. The pact is the first economic treaty between the three countries.

The three countries also agreed to begin preparations to launch free trade negotiations before year's end. The envisioned pact, if realized, would create one of the world's largest markets as South Korea, China and Japan account for 20 percent of the global gross domestic product (GDP) and 17.5 percent of all global trade.

The sides have carried out non-governmental academic research on the trilateral FTA since 2003.

The three countries also signed two other cooperation agreements, one of them on agricultural cooperation and the other on preventing desertification of forests and protecting wildlife.

After the trilateral session, the leaders attended a lunch meeting of business leaders.

Later in the day, Lee planned to hold a one-on-one summit with Wen, which is expected to include discussions on North Korea and free trade

The full article may be found at Korea, Japan and China Agree to Work Together on N. Korea, FTA
We suspect that an FTA will not be forthcoming until, at least, until a couple of more years.
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SeanHayes@ipglegal.com IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar, the Philippines, Vietnam and the U.S. www.ipglegal.com

Korea & Australia a Challenge to China's Rare Earth Mineral Market

noreply@blogger.com (Sean Hayes) — Mon, 07 May 2012 03:42:00 PDT

Arafura, an Australian resources company, has reported that it has executed a non-binding agreement with a major Korean construction company to supply to the company rare earth minerals. The company will provide, according to the company, a viable option to the Chinese rare earth minerals and the Chinese governments increasing grip over these resources.

Most involved in the energy and natural resources industry know who the Korean conglomerate is, but I will refrain from mentioning the name until it is officially reported.

The company and other Korean companies have been aggressively attempting to secure resources throughout Asia, the Middle East and in the Pacific with many of these projects leading to substantial loses. The loses occurred, mainly, because of the lack of qualified advisers and the lack of understanding of the nature of business in many of the parts of the world that they attempted to do business in.

However, the proactive and aggressive approach has lead to Korea maintaining, for the foreseeable future, a supply of the resources needed to maintain the Korean manufacturing economy.

Rare earth minerals are utilized in batteries, mobile phones and computers.

Other, recent, articles on Korea Energy & Natural Resources:

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Sean Hayes, IPG's Co-Chair of the Korea Practice Team, may be contacted at: SeanHayes@ipglegal.com

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SeanHayes@ipglegal.com

What can we Learn From Ireland: North Korea, South Korea and China.

noreply@blogger.com (Sean Hayes) — Thu, 22 Mar 2012 08:56:00 PDT

My recent essay, “Denuclearization – Korea’s Red Herring,” stirred much discussion. Most reaction was favorable, but there was also some heated controversy. I had a chance to engage at depth with two ambassadors to Korea. Both diplomats were quite familiar, of course, with North and South Korea.

I will try to fairly represent both ambassadors’ perspectives since one man was skeptical and the other was encouraging of my ideas. Readers may draw their own conclusions.

The first ambassador is from Eastern Europe. He began his career under a socialist government and is therefore in a privileged position of viewing North Korea both from the perspective of a once sympathetic ally and from what may now be assumed to be a more balanced vantage point. This ambassador’s argument was that my recommended shift in diplomacy attacks the political ideology of North Korea. In any country, he maintained, “that is the last to go.” In other words, my approach would have to be a nonstarter.

And, in general terms, I’m sure he is right. But negotiators have been tiptoeing around Pyongyang’s refusal to accept the legitimacy of South Korea for some 60 years – roughly the time covered by two complete generations. The obvious question is: given the glacial pace of change in the North, shall we allow for three or four generations to pass before the matter is properly addressed? Meanwhile, be it a red herring or not, the North Korean nuclear program will continue to develop “defensive” weapons capable of wrecking global mayhem should matters get desperately out of hand.

Today’s enlightened perspective, held by many, is to recognize that North Korea is changing. The theory goes that constant exposures to the outside reality are needed to eventually cause internal reform. That approach comes across as entirely sensible. But, this same strategy has been tried for multiple decades, and the results have been and continue to be remarkably uninspiring. It is like different nations and organizations have been building bonfires in front, around and on top of a glacier. These fire builders are quick to point out the minor indentations that have melted away. Yet, when these efforts are viewed in their totality, one is likely to ask, “So what?”

Back in the 1960s, ’70s and ’80s, there was merit to the current approach. But, the current strategy, to put it kindly, is getting rather long in the tooth. At the same time, there has been little creativity other than to do the same strategy over and over again.

And, I would guess by now, the North Koreans may have caught on to what the West is really up to. The Germans recently closed their Pyongyang branch of the Goethe-Institut upon realizing that the North Korean authorities were intimidating its citizens from entering those facilities.

Some diplomats may declare: “Small sparks of light are better than none in the darkness!” Perhaps so, but I can’t help wondering who is actually fooling who when one party is controlling the entire game.

Before I move on to the second ambassador, I need to relate that other readers noted that the South has never made any public move to formally recognize the North. But, since the end of the military governments, particularly from the time of Kim Dae-jung, there has been open discussion in South Korea about a federation of two governments on the peninsula, which I assume would require mutual recognition. In earlier times, such discussion would have landed advocates in jail. Today, such ideas are openly aired. All of this suggests much greater flexibility on the part of the South Korea’s government.

I had a long discussion over lunch with another EU ambassador. It turns out he spent several years contributing to the successful Northern Ireland peace accord. While I was aware that the accord took several years of negotiations, I was surprised at how long it took to be fully implemented – almost a decade in fact. In other words, peace building is obviously a very difficult and tedious process, but only when an agreement is signed does the real work begin.

The diplomat cautioned about applying lessons from one conflict to another, but said that there were clear lessons learned from the Northern Ireland peace process. In essence, the Northern Ireland peace process was based on multiple, related negotiation tracks done in full concert with each other. All issues were put on the table and addressed. There were negotiations between Catholics and Protestants; Northern Ireland and the Republic of Ireland; and the U.K. and the Republic of Ireland. The U.S. played a critical broker role as a friend to all parties. In any event, no one negotiation tracks could have ever been truly successful without the successful conclusions of the other two.

In all three tracks, the cornerstones were mutual respect and prolonged meetings leading to personal friendships and empathy, all of which led to mutual acceptance and understanding. But, without achieving these qualities, ancillary issues could not be effectively addressed.

If we may learn from the Irish example, what could be possible?

First, there needs to be an open discussion, such as in forums jointly sponsored by South Korea, the EU and the U.S. to discuss whether a similar approach may work with the North. Rather than focus on resulting issues such as human rights and nuclear proliferation at six-party talks, perhaps multitrack negotiations could be more effective. Confidence building measures would be needed, not least a verifiable freeze on the North Korean nuclear weapons program.

Specifically, there may be the following negotiations: South-North cooperation, which would include humanitarian and commercial matters, bilateral relations, which would address diplomatic and military matters, and Korean foreign relations, which would result in a comprehensive peace treaty involving all parties, including the U.S., the UN, the South and the North. But, it would need to be clear that all three negotiations would have to show substantial progress.

Upon the development and agreement among South Korea and its allies to something similar to the above, this approach would be brought to the UN for further discussion and introduction to North Korea.

To conclude with the obvious, we know what has not been working. Perhaps the powers that be could do better by emulating something that has proven to be successful.

The article appeared in the Korean Joonang Daily and can be found at: What Can Korea Learn From Ireland?
_________
SeanHayes@ipglegal.com

North Korea, China and South Korea by IPG's Senior Advisor Tom Coyner

noreply@blogger.com (Sean Hayes) — Sun, 04 Mar 2012 09:09:00 PST

During the past couple of weeks the North Koreans have once again pulled the red herring across the trail in an attempt to distract the rest of the world from the fundamental Korean issue. Dutifully, commentators and government officials have editorialized and issued statements about terms and conditions for yet another possible round of negotiations.

Please, would someone give us a break? Could someone in any concerned government service come out and state what’s really going on?

Allow me to call out the emperors are not wearing any clothes. The problem that is at the core of the six party talks is not North Korea’s atomic weapons. The real issue is that the North cannot bring itself to recognize the legitimacy of another government on the Korean Peninsula.

Everything else has been cascading down from this sticking point since the end of World War II, up to and including the North Korea-related issues of this week. Meanwhile, remarkable time and effort have been devoted to secondary issues with totally unrealistic expectations that by solving these lesser issues, the overall tensions on the Korean Peninsula may somehow be resolved.

Beyond any controversy, the smartest thing Pyongyang has done has been to develop an atomic weapons program as a way to repeatedly get the world’s (read: America’s) attention and to distract diplomatic focus from the core issue, which is the North’s refusal to recognize the Republic of Korea as a legitimate government.

Within the North’s ideology, there is but one government, which in turn necessitated the Korean War. Given the absence of victory, the North has had no choice but to continue to find schemes to bring the U.S. back to the negotiating table on one pretext or another. The masterpiece alibi has been the nuclear weapons issue. With the ongoing turnover of “Korea hands” in Washington, it has been relatively easy for Pyongyang to force American-Korea desk officers to focus on the pending and immediate nuclear threat from North Korea.

In the process of one North Korean-manufactured mini crisis after another, Pyongyang has been able to achieve three objectives. First, the North Koreans have made sure that North Korea matters in spite of its political, diplomatic and economic bankruptcy. Second, by playing Washington and its allies like a yo-yo of promises and provocations, the North has been able to extract foreign aid from its sworn enemies. Third, by achieving the first two goals, the key issue of Pyongyang’s refusal to recognize Seoul is never adequately addressed.

When one looks at Seoul’s repeated demands for Pyongyang to apologize for last year’s military episodes that resulted in the needless deaths of islanders and sailors, it is readily apparent why North Korea refuses to do so - when viewed from the North’s perspective. To apologize would in effect recognize the legitimacy of the Seoul government having intrinsic rights and responsibilities as a sovereign state - as opposed to being a puppet government that can be cajoled into coughing up cash and aid whenever it suits Pyongyang’s purposes.

At the risk of making too fine a point, just what in blazes does the U.S. have to offer in negotiating a “denuclearization of Korea?” Decades ago, the U.S. withdrew tactical atomic weapons from Korea. What’s more to be demanded from Pyongyang? Is the North suggesting the removal of the U.S. Navy from Yokosuka with its potential nuclear capacity? A no-go zone for American submarines in the east Pacific? America’s removal of ICBMs from North Dakota? Or, does anyone genuinely expect the U.S. to build nuclear reactors in North Korea?

It’s all nonsense. The North knows it, and many American government officials know it. And yet there is a good deal of resources being expended towards a possible next round of denuclearization talks. It may be cynically said that all another round of talks may produce are opportunities for American government officials to upgrade their CVs as having represented or supported American diplomacy “to reduce nuclear tensions in NE Asia.”

So, given all of this, what may be the alternative?

As an American business professional, here is my suggestion from my years of negotiating business deals with Koreans and others. First, change the game. Inform North Korea that the U.S. is no longer interested in a continued discussion on a dead topic. We will not recognize North Korea as a nuclear power for two reasons: One, to do so would be a bad precedence for other dictatorships; and two, to do so would to recognize the overriding legitimacy of the issue. In other words, denuclearization is a non-negotiable issue as it is not a matter of possible discussion with the United States.

At the same time, what is the first and foremost concern to the United States and its allies is the formal recognition of South Korea by the North. If this cannot be achieved, after all these decades, there is essentially nothing more to be expected from the United States and the rest of the world. All other matters are off the negotiating table until Pyongyang formally recognizes the legitimacy of Seoul as the government. Only after that has been achieved to the mutual satisfaction of Seoul and Pyongyang will Washington enter into serious peace talks with Pyongyang.

After a half a century and more, with South Korea achieving its political, economic and diplomatic overwhelming dominance, the North must be forced to come to grips with reality. Otherwise, it is total nonsense for Washington to play along with Pyongyang’s fantasies, which includes providing humanitarian and other assistance, as unintended tribute to a delusional regime.

Tom Coyner is a Senior Advisor to IPG and the President of Softlanding Korea.
The article appeared in the Korea Joonang Daily in August of 2011.
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SeanHayes@ipglegal.com

Selling Traditional Products to the World: The Korean Rice Wine Story

noreply@blogger.com (Sean Hayes) — Thu, 23 Feb 2012 17:55:00 PST

Even foreigners living in Korea cannot help but notice how makgeolli has taken on a new air of respectability. As a long-time imbiber of the brew - we are dubbed “makgeoholics” - this is good news!

I once was a Peace Corps volunteer who lived on a monthly stipend of 43,000 won for lodging, food and entertainment. That meant beer and other Western beverages were beyond my budget. So, during most after-hours events, my choices were pretty much limited to soju and makgeolli. But after some forgettable evenings and unforgettable mornings after, I soon realized that the soju of the 1970s was not healthy for living things.

Fortunately, I learned that makgeolli was not only cheap but even good for you. As an Irish-American, I have reverently believed that Guinness stout beer is good for you. In fact, the Irish say that Guinness is a meal in a glass. So, I was overjoyed when I heard from Eumseong townspeople that it is possible to survive a full two weeks on nothing but makgeolli. Having imbibed the stuff for over three decades, there is no doubt the creamy, tangy stuff is full of nutrients - and who knows what else.

And as a rural Peace Corps volunteer, I came to respect Korean farmers and small townspeople. These were real people, doing real work and drinking a real beverage. To me, soju was something akin to poison for a quick drunk, but makgeolli was a real man’s drink with which one can enjoy like a real man while not getting so drunk that the rest of the evening is only a hazy memory.

And, I might add, any woman who tells me she, too, loves makgeolli is immediately regarded by me as a superior sort of female. And that leads to my old friend from our shared Peace Corps days, the former U.S. Ambassador to Korea, Kathleen Stephens.

She has appreciated makgeolli for decades, and often served it at her official residence. While I cannot say her high regard for makgeolli is responsible for her success, I will say a woman who drinks it is likely to be up for any job.

All of which leads us back to the current fad, rediscovery and new ideas for exporting makgeolli. Frankly, I’m pretty excited about all of this. First, it opens the doors for further improvement of makgeolli. Back in the 1970s, under the Park Chung Hee regime, the amount of rice used in makgeolli production was curtailed as part of the nation’s efforts for grain self-sufficiency: a wise move since everyone knew how many Koreans would allocate their limited rice reserves towards the production of makgeolli.

Later on, as Korean agricultural production improved, the controls were removed and pure rice makgeolli became common. That was a major step forward and now makgeolli may be about to take the next important step in upgrading its quality.

When we order makgeolli at a restaurant, usually we really don’t know which type we are drinking. The stuff is served in a generic ceramic pot. In other words, unlike every other beverage on the menu, makgeolli is devoid of branding. As a result, one goes to those restaurants that serve “good makgeolli,” which means a beverage that is made by one of the better brewers and is fresh. Even good makgeolli sours relatively quickly, even when kept at optimum temperatures.

As a marketing professional, I see these negatives as allowing for future positives to be developed. First, by exporting abroad by brand, more competitive pressures will be placed on makgeolli brewers for consistent quality. Tetra Pak Korea, for example, is providing cartons to be used for the export of makgeolli, but so far, there has been no demand for these containers for domestic distribution. Rather, makgeolli is normally distributed only near the brewer’s facility.

But, when exporters fully master the means to deliver makgeolli abroad and as foreign consumers develop a thirst for the beverage, more Koreans will try to make money by exporting. And in so doing, branding will become more important. Furthermore, as brands become stronger, we may see the best brewers doing wider distribution domestically, taking advantage of new packaging - and possibly applying new refinements in brewing.

And that leads me to the second, likely development of makgeolli - new investments in improving the production of makgeolli so that it sours more slowly. In the past, there was regular soju and superior “tourism soju,” and I believe the Korean economy has outgrown that kind of product differentiation.

But I should add a word of warning. Given this upsurge in the creamy stuff’s popularity, I have been sometimes horrified as the unacquainted (usually female) imbibers shake the bottles to stir up the contents prior to uncapping. Frankly speaking, watching that kind of experience is only one level lower in anxiety than watching a sweet young thing pull out the pin from a hand grenade and ask what’s the purpose of the pin.

Should you see a well-meaning dining mate start shaking the bottle, immediately grab away the makgeolli bottle for everyone’s safety. Rather, hold the bottle by the top and slowly swing the bottle in downward arcs, almost as if you were ringing a chime or bell. The beverage deserves respect and your guests deserve to drink it, not wear it.

So next time you are out with your friends, lift your cup of makgeolli and toast what it once was and what it has become. Then dream of what makgeolli may soon be: a real beverage for real people around the world.

by Tom Coyner. This article appeared in the Korea Joonang Daily.

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SeanHayes@ipglegal.com

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SeanHayes@ipglegal.com

Hiring Employees for Positions in Asia by Senior Advisor to IPG

noreply@blogger.com (Sean Hayes) — Tue, 21 Feb 2012 13:31:00 PST

Salaries in China on the Rise According to Recent Chinese Salary Survey

noreply@blogger.com (Sean Hayes) — Sun, 19 Feb 2012 05:55:00 PST

A Chinese salary survey conducted by J.M. Gemini which I noticed on Danwei, lists Chinese salaries in the Beijing, Shanghai and Guangzhou areas. All sums are in RMB and refer to monthly salaries. The monthly salaries are based on a 13-month per year gross payment basis. Thus, the monthly payment includes severance in the monthly calculation.

The following list was compiled by Danwei and includes a selection of listed jobs in the survey. The complete survey lists hundreds of jobs from junior positions to senior positions.

Junior secretary: 2,500 – 3,500
Executive Secretary / PA: 13,000 – 21,000
Accountant: 10,000 – 15,000+
Finance Director: 65,000+
Quality control manager: 14,000 – 24,000
HR Manager: 20,000 – 35,000+
Translator: 8,000 – 18,000+
News editor: 5,000 – 8,500
Web Editor: 6,000 – 19,000+
IT Programmer: 5,000 – 9,000
CEO Advertising Agency: 70,000 – 100,000
Regional Sales Manager: 26,000 – 36,000+
Mechanical Engineer: 10,000 – 16,000
Senior Architect: 25,000 – 45,000

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SeanHayes@ipglegal.com
www.ipglegal.com

China's Proview Takes a Bite out of Apple: The Proview v. Apple Saga

noreply@blogger.com (Sean Hayes) — Thu, 16 Feb 2012 01:41:00 PST

Most of our readers have probably already heard about Apple’s latest hurdle here in China, a costly mix up over the trademark ownership of the “iPad” name.

While one can easily see how Apple’s lawyers were confused as to which trademarks they were purchasing in 2006, it is ultimately inexcusable that America’s largest company, with arguably the world’s most valuable collection of patents, trademarks, and intellectual property, could have made such a costly legal oversight. This doesn’t appear to be a case of a sneaky Chinese company front running a predicted future Apple product name in hopes of a payout. The company is a legitimate manufacturer of LCD screens and registered the name in 2000, six years before the first iPhone. It was possibly their intention to suggest a nonexistent affiliation between their products and the reputed apple iMac, but there are plenty of other companies around the world, including the largely successful iHome, which successfully exist inside the Apple economy, without popular criticism.

Apple’s arguments have been weak in this case, especially knowing that they should be extra prepared when addressing Chinese courts against a local company. They contend of course that they were under the impression that they had purchased these patents in 2006, and that their lack of Chinese language skills has left them without the proper trademarks.

There is evidence that Apple’s attorneys uncovered the separate Chinese trademarks in 2006 after closing the $55,000 deal for the rest of the global trademarks, but rejected the then $10 million asking price. Now, after having launched iPad sales at their 4 China Apple Stores and 1,000 Chinese resellers, Apple’s strategy was to sue Proview for the iPad rights. Unfortunately, China operates under a first to file, not first to use, trademark basis.

This protects Proview’s ownership of the iPad name even if they haven’t brought a product called the iPad to market in the 10 years since they registered the trademark. Chinese courts found in favor of Proview and Apple is currently appealing. Poorly handled is an understatement.

Some are wondering why Proview would have sold the international trademarks to Apple for a measly $55,000, but at the time, Proview thought they were dealing with a small British company called IP Applications Development (IPAD), not knowing that IPAD was a wholly owned subsidiary of Apple Inc. The sneaky tactics seemed to be played on both sides, and in this case Apple has been outplayed.

The latest developments show just what Apple is up against. After winning the case in December and verifying their ownership, Proview filed a $1.3bil countersuit for trademark infringement that has since increased to $1.6bil. That number may have been set excessively high to attract press, but Proview does mean business. It is rumored that Proview is struggling financially, making a prolonged legal battle in Apple’s interest. Rather than wait for the outcome of the appeal, Proview has taken to the offense.

This week Proview convinced the local Administration for Industry and Commerce in Shijiazhuang to seize iPads from the shelves of resellers across the city. The resulting press led Apple resellers across the country to take down iPad advertisements and hide remaining stock for fear of having their own confiscated.

While the Apple stores in Shanghai and Beijing, as well as Apple’s online store continue to operate as usual, the uncertain future for resellers will likely hurt orders, as they fear future inventory seizures. Proview has announced that they intend to pull iPads from shelves in 30 more cities across China, and on Wednesday succeeded in having iPads in Zhengzhou at least sealed if not seized. Proview can legally resell the seized iPads domestically for now to fund their legal battle.

Proview admits that it is unlikely they will be able to convince customs officials to seize exports or halt production at Foxconn, but the latest jab should encourage Apple to reach a settlement. It is rumored that an iPad 3 will soon be released, China is an important market to maintain sales figures for iPad 2s in order to avoid steep discounts on excess inventory when the iPad 3s come out.

As we frequently remind the readers of these blogs, it is crucial to register your patents and trademarks separately in China, as international patents will not hold up. Let this be a reminder that failure to do so could end up costing you in bad press, halted sales and shipments, and in the worst case up to $1.5 billion.

by Frank Caruso. Chair, China Practice Team at IPG
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info@ipglegal.com

Wages Increasing in China: Minimum Wage in Shenzhen, China

noreply@blogger.com (Sean Hayes) — Wed, 08 Feb 2012 05:31:00 PST

Beginning February 1, 2012 the minimum wage increased in the City of Shenzhen to ¥1,500 per month. This is the highest minimum wage in mainland China.

Overtime wages have also increased with the new law stating that overtime pay must be 1.5 times the hourly rate based upon the monthly wage and number of hours. Weekend overtime has also changed to 2 times the hourly rate and holiday overtime to 3 times hourly rate.

In addition, all employees must now contribute 18% of their minimum wage to the Pension Fund (Social Insurance) for a total of ¥270 with the employer responsible for paying ¥150 of the ¥270 and the employing paying ¥120.

Employers caught paying below the minimum wage may be fined ¥30,000 to ¥50,000 and may have their corporate charter suspended. Shenzhen usually increases its minimum wage in April of every year, however, this year Shenzhen, which is one of the most developed and expensive in China, decided to publish the increase early to allow companies to budget after the Chinese New Year.
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SeanHayes@ipglegal.com

North Korea Amends Foreign Investment Law: Is China Involved?

noreply@blogger.com (Sean Hayes) — Tue, 31 Jan 2012 23:29:00 PST

n a move to attract more investment from abroad, North Korea has amended the foreign investment law. The amendment has been reported by the North Korean main news agency.

The details of the revisions have not, yet, been publicly announced by the North Korean government, but previous changes have been less substantive and more political in nature.

The amendments seem nothing more than a reaction to the Chinese dismissal of North Korea's efforts to entice China to invest in a free trade zone near the border between North Korea and China.

North Korea can learn a great deal from the Chinese manner of developing the economy, however, in the past - North Korea has quickly retreated after brief periods of hopeful developments that the nation will open up to the South, China and the West. Maybe China has finally found a rationale ear.

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SeanHayes@ipglegal.com

Basics for Partnering with a Chinese Company: More than Just Due Diligence

noreply@blogger.com (Sean Hayes) — Tue, 24 Jan 2012 20:55:00 PST

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SeanHayes@ipglegal.com