DOING BUSINESS IN CHINA: POLITICAL ENVIRONMENT                                     David B. B. Helfrey                    ...
opera and other entertainers, and businessmen, primarily Chinese, U.S., Taiwanand Hong Kong business people operating in C...
consequence of political struggles between powerful men which resulted in thedeaths of 100,000’s of people and ruination o...
Migrant workers.           Freedom of the Press.      And many other such issues.      But other issues are addressed and ...
Europe and the United States are dependent on Chinese consumers for much oftheir high profits.      Few societies are able...
Deng Xiao Ping. Bo Yi Bo traveled with the legends of Communist leadership onthe “Long March” of 5,000 miles with the retr...
President, Secretary of the Communist Party and head of the military. Bo becamethe Governor of Liaoning, the province in w...
projects for Gu and Bo. Bo’s Communist Party salary was very modest as theparty chief.       Heywood was responsible for B...
authority of Bo in Chongqing. Remember he was not even a member of theGovernment.      The U.S. negotiated the turnover of...
This sets the stage for his trial. The Politburo of the Communist Party, not theGovernment, has alleged various criminal a...
corruption. Here many of the muckrakers use the Western media as a shield andrely on them to prevent their arrests due to ...
First it demonstrates without question the corruption of a leader at thehighest level of the Communist Party and the Gover...
In today’s environment how does all of this translate into U.S. and Westernbusinesses prospering in China? China is clearl...
in demand and if the Chinese imitators see a profit in it. Not the             origins of the idea or product.       To co...
I, being a former prosecutor, use to say very few of us could stand up torigorous investigation without being exposed for ...
often real tensions between the National Government in Beijing and the citiesoutside of Beijing. It is not uncommon for th...
The value of his business has declined from around $25 million to maybe $4million today. This does not even account for th...
Dinners – as much as $3,000/meal are all too common.      Let me end on a negative note. The U.S. has a statute called The...
Despite everything I have said, I am very positive on China and believe itrepresents a very favorable climate for U.S. bus...
China needs more constructive emotional appeals to its population.       The recent change in leadership was peaceful – wh...
The political stresses and strains actually could be good for Westernbusinesses since the focus will be on economic expans...
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  1. 1. DOING BUSINESS IN CHINA: POLITICAL ENVIRONMENT David B. B. Helfrey March 23, 2013 I appreciate the opportunity to share with you one of my few remainingpassions – China and just about everything about it. Today I would like to engage you in a conversation about China and itsleadership post-Mao Tse Dong – feel free to engage in the conversation withquestions and comments as the mood leads you. An event occurred in 2011 which I believe has the potential for dramaticconsequences on China’s leadership and society. We will get to that event shortly.But first – a little background on me. I am a litigation attorney – I was a defense attorney, prosecutor and judge inthe U.S. Army. Thereafter, I joined the U.S. Dept. of Justice’s Organized Crimeand Racketeering section more commonly known as the Strike Forces againstorganized crime, i.e. developed Mafia prosecutions through the Midwest. I wasbased in Kansas City. If you saw the movie Casino, that was my last prosecution – a 4-month trialthat linked the Kansas City, Chicago and Milwaukee Mafia families – theTeamsters Union leaders – and their Las Vegas representatives to a skimmingscheme from many prominent casinos of about $2 million per month. Since then I have been in private practice litigating intellectual propertycases, white collar criminal defense cases, celebrity divorces – almost anythingelse that gets me into court. Clearly – I am well qualified to make this presentation today – notconvinced – you are a skeptical group. Perhaps this will help. In 1996 I married a former diving champion from Shanghai who hadexcellent relations with many prominent leaders while with the diving team, in the1980’s and 1990’s. One, of whom, went on to become the President of China.Therefore, through those connections I get exposed to a rather broad cross sectionof Chinese society including Government and political leaders, cultural leaders inDoing Business in China (3-23-13)
  2. 2. opera and other entertainers, and businessmen, primarily Chinese, U.S., Taiwanand Hong Kong business people operating in China. I have worked with the People’s Bank of China in assisting in the puttingtogether of the Chinese Anti-Money Laundering regime. We spend a great deal oftime in China and will spend even more in the future, since I would like to retirethere. I have represented Chinese companies in the U.S. court system and Ruby,my wife, has represented many of my client’s in establishing businesses in China. With those impressive qualifications, let’s look back to the Mao Tse Dongarea at that time – China’s leaders were highly political – strong personalities, verycharismatic. The three most prominent were Mao; Deng Xiao Ping; and Zhou EnLai. There were many others – including our mystery person’s father who wewill discuss momentarily. Mao’s great leap forward and the Cultural Revolution – while having thetrappings of social and economic underpinnings – were largely designed tomaintain Mao as the undisputed political leader of China. Obviously, Mao had akeen political sense and ruthlessly kept his rivals or potential rivals at bay. He,through his personality, was able to mobilize the Chinese citizens in huge Nationalpolitical movements. We do not see many with that ability in leadership positionstoday. The man I will speak about, in a bit, may have had that potential. Those mass movements largely served their purposes and Mao was thesupreme leader of China until his death in 1976. Deng – a revolutionary and a charismatic leader in his own right – wasimprisoned periodically during the cultural revolution, which existed for about tenyears from 1966-1976. Not only was Deng, but also his family, were subjected tohumiliation and persecution. Mao died in 1976. Deng, after the death of Mao,became China’s paramount leader – he advocated a more capitalist economicsystem under the control of the Government. His famous statement captured hisconcept. “It doesn’t matter if the cat is white or black, as long as it catches mice.” He was also keenly aware of the adverse consequence of political egos – theback-biting, the intrigues those egos caused and the wasted energy and 2
  3. 3. consequence of political struggles between powerful men which resulted in thedeaths of 100,000’s of people and ruination of many otherwise worthy anddedicated citizens of Revolutionary China. What you begin to see with the ascension of Deng are leaders who are notpolitical leaders, but individuals with engineering, economic and technicalbackgrounds – the technocrats with much less political skills than the earlyrevolutionaries of the Chinese revolution. Deng carefully picked the leaders of China. They were problem-solvers notdriven by ego or visions, but by identifying a problem and solving it. Many werecolorless – with routine or even dull personalities. Few were bigger than life. Like Mao, Deng, Zhou En Li, etc. and someone we will discuss shortly. Deng, who died in 1997, is credited with anointing Zhang Ze Min to becomethe President of China, Zhang is an electrical engineer by training, and also Hu JinTao, who was president until this year, who was a graduate of Tsinghua Universitywith an engineering degree in hub-hydro power stations – I can’t imagine a dullerfield. Hu Jin Tao became president long after the death of Deng. It is a testamentto the power and respect the Communist Party had for Deng that he controlledsignificant aspects of China, even for many years after his death. Deng was the second undisputed leader of China, post-revolution. He didn’thold the position of president of China. Neither did Mao. Neither Zhang Ze Minor Hu Jin Tao achieved that status. I do not believe the current president willachieve that status either. The current leader, Xi, Jin Ping, who succeeded Hu Jin Tao this month, wasalso educated at Tsinghua University where he studied chemical engineering.Deng advocated consensus decision making and discouraged long-windedspeeches that didn’t address a “problem” or offered clear, technically soundsolutions. He is quoted as saying just churning the air with long speeches was awaste of time. Therefore, it is not surprising that the larger political issues of theday went unaddressed by Deng Xiao Ping. Rule of law – which he favored. Corruption. One-child policy. Land ownership. 3
  4. 4. Migrant workers. Freedom of the Press. And many other such issues. But other issues are addressed and addressed very well – Economic expansion. Creation of jobs. Creating great schools. Creating niche market. Most recently, solar energy manufacturing. Creating new and modern transportation systems. New airports, inter- province highways, high-speed trains, some of world’s best harbors. Building great hydro-electric dams. Etc. These technocrats guided China to the #2 economic power position in theworld in a very short period of time (20-30 years) and have successfully laid theeconomic base that will, one day, overtake the U.S. economy. The only question iswhen is the conclusion of most economists. I also suspected between 2025 and2030. OECD (Organization for Economic Cooperation and Development) ispredicting this will occur in 2016. The Communist Party has become a group of technocrats not necessarilyendowed with great political skills to incite the people to support them, tomotivating the population or to gain the intellectual and emotional support of thepeople. That is, the current leadership does not inspire the people they would bewilling to die for. The Communist Party’s founding principle of workers’ rights,egalitarianism, etc. has become less of a focus – and economic development hastaken center stage. So, the intellectual basis for the Communists’ remaining power – shifts fromthe great principles of Marx to creating a new, pro-market society, but one tightlycontrolled by the Communist Party. So, the Party’s fortunes are tied by theiractions and their ability to successfully bring about economic expansion. Theyhave created a middle class of around 350 million people a number larger than thepopulation of the United States. They have or are close to having as manymillionaires and billionaires as the United States. The premier luxury brands of 4
  5. 5. Europe and the United States are dependent on Chinese consumers for much oftheir high profits. Few societies are able to keep talented individuals out of Government whohave the ability to motivate and gain the unconditional support of the people. Wehave seen recently the rise of political leaders – to compete with the technocrats inChina. [As on aside, the U.S., however, seems to have been able to keep talentedpeople out of the Government by making seeking high office such an ordeal thatmany qualified people simply avoid seeking high office. And, by the high costs ofachieving high positions and the inherent corruption that goes with it. There areexceptions like Mayor Blumberg of New York City.] Leaders with a political bent who are charismatic leaders are reassertingthemselves in China: The most recent example is Wen, Jia Bao, the Premier for the past 10 yearsunder Hu, Jin Tao. He was known as “Grandpa Wen” and frequently was in themedia becoming the “face:” of the Hu Jin Tao leadership. He would appear atnatural disasters and express heart-felt sympathies and other public events and thepeople seemed to respond quite favorably to him. Bo, Xilai – are any of you familiar with him? Few Americans are – but Ifind it a fascinating insight into current China leadership – it dramatizes the plusesand minuses of China’s current leadership and represents real challenges to theCommunist Party. The journey to change comes with one step just as the LongMarch began when the Red Forces were retreating from the Nationalist Forces ofChiang Kai Chek. Bo, Xilai He was born on July 3, 1949 in Beijing. His father, Bo Yibo, was one of the“Eight Immortals” of Revolutionary China. These Immortals were CommunistParty and Government leaders who steered China through the volatile shift fromMaoism to a market-oriented economy. Bo, Yi Bo was supportive of Deng XiaoPing’s plan to have a more market-directed economy and a society morecharacterized by the rule of law. Yi Bo was also prominent in the purging of HuYaobang in the late 1980’s, a competitor of Deng Xiao Ping. Bo, Yi Bo defendedthe crack down on the Tiananmen Square student protesters in 1989 ordered by 5
  6. 6. Deng Xiao Ping. Bo Yi Bo traveled with the legends of Communist leadership onthe “Long March” of 5,000 miles with the retreating Communist forces in the earlydays of the revolution. His son, Bo Xilai, and others with a strong background, are popularlyreferenced as “Princelings”, i.e. a son of a prominent party leader – whose“connections” help account for his/her present high position in the Party or theGovernment. Those connections gives the offspring of well known leaders a “legup” on the ladder of success as a high public official. Bo Xilai was educated at the Chinese Academy of Social Sciences (1979-1982) and Peking University (1978-1979) – and earned a non-technical degree inPolitical Science. He was not a technocrat. His second wife is Gu Kailai who played a prominent role in Bo Xilai’spolitical life and fortunes. Bo has one son – Bo, Gua Gua – educated at the Harrow elite boardingschool in England. The first Chinese student ever accepted there. Gua Gua hasdegrees from Oxford and Harvard. He is believed to be hiding in the U.S. As ithappens in China and elsewhere, the sons/daughters often get caught up in thescandals of the parents. Gua Gua was “exposed” as a profligate with a hardcharging social life by the enemies of Bo Xilai, as part of the struggle between thePro Bo and anti- Bo leaders of the Communist Party. I guess it is not always fun to be the son of a prominent politician in Chinaor even in the United States. Early on, Bo was the mayor of Dalian on China’s northeast coast – this iswhere the Beijing high officials spend part of the summer when Beijing gets veryhot. As Mayor Bo Xilai quickly flaunted the Communist norms by flagrant self-promotion and personal extravagances in a highly public manner. A true populist,very much contrary to Deng Xiao Ping’s philosophy and the technocrats runningthe Communist Party and the Government. For example, in Dalian he enjoyedshowing visitors his ability to control the color of the water in a fountain on theplaza from his office window. He openly campaigned for a seat on the Politburo Standing Committee,which acts as the highest policy-making body. It currently has 7 members only,having recently been downgraded from 9 members as Xi jin Ping became 6
  7. 7. President, Secretary of the Communist Party and head of the military. Bo becamethe Governor of Liaoning, the province in which Dalian lies. He then became theNational Minister of Commerce in Beijing. Bo’s last position was as the Secretaryof the Communist Party of the Chongqing branch. Chongqing touts itself as the largest city in China – of around 25 millionpeople – it is located in southwestern China, not very far from Tibet and issurrounded by mountains. It is on the banks of the Yangtse River that runs fromTibet to the ocean at Shanghai on the East Coast of China. Bo revived the cultural revolution-era – which was a very bad time in Chinafor Government and Party leaders – he promoted the “red” culture of egalitarianvalues. Cultural revolution-era songs were broadcast over a public address systemthroughout Chongqing. He aggressively sought to have foreign businesses relocateto Chongqing. He e-mailed thousands of citizens of Chongqing some of Maosayings. He was the champion of the New Left – The “New Left” are the Maoistsand Social Democrats disillusioned with the excesses of market-based economicreform. I think we in the West would view him as a conservative. Bo put substantial assets into social programs and prosecuted over a 1,000members of organized crime. Many were executed and the rest imprisoned. Hewas largely unchallenged in Chongqing. Even the mayor of Chongqing was nomatch for Bo’s strong charismatic personality. So Bo’s rise to power wascharacterized by aggressive social programs and crime fighting in a highly publicmanner not seen since Deng assumed power in the late 1970’s. As an aside politicians seem to naturally recognize crime fighting, economicdevelopment, social programs and nostalgia as pathways to political success. Bo would have been a member of the Standing Committee of the Politburoexcept for an event which was exposed by a close confident – serious misconductwhich he came very close to avoiding responsibility and consequences. Here is an abbreviated overview of the events which here fascinated theChinese people and China watchers as well. Bo’s wife, Gu Kailai, a prominentpracticing attorney also handled much of the side businesses of the Bo family. Guand Bo were closely allied with a prominent British businessman, Neil Heywood.They had been allied for many years and participated in many projects together.All became very wealthy due to these economic ventures. Heywood was allegedlyinvolved in the laundering of substantial monies generated by these various 7
  8. 8. projects for Gu and Bo. Bo’s Communist Party salary was very modest as theparty chief. Heywood was responsible for Bo’s son Gua Gua getting into Harrows andUniversity of Oxford. There was a Chinese realty project that went bad, a rareevent. A dispute developed over the failed project leading to tensions in this long-term and corrupt relationship. In China many multi-millionaires and evenbillionaires have come out of real estate development projects. Allegedly,Heywood held Bo’s son against the family’s will and threatened his safety duringthe course of this dispute. I say “allegedly” because – the best that I can tell – GuKailai is the only support for this view of reality. Anyway – Bo’s wife, Gu, invited Heywood to Chongqing where they met, had dinnerand engaged in a drinking party on November 14, 2011. He was found dead onNovember 15, 2011 in a hotel room in Chongqing – the police chalked his death upto excessive intoxication. The body is cremated – an autopsy was not performed. The story would end there except on February 6, 2012, Wang Lijun showsup at the U.S. Consulate in Chengdu. He seeks asylum. Although some deny hesought asylum. Wang Lijun had followed Bo from Dalian and through various positions toChongqing, where he became the Chief of Police of Chongqing. He led theinvestigations into the organized crime groups in Chongqing giving Bo a nationalreputation for busting organized criminal groups. And, making himself a nationalfigure as well. As indicated, over 1,000 people were imprisoned or executed. Theproblem was Wang was not comfortable with the way Heywood died and his rolein it. Or, he simply wanted to ensure Bo was aware of his wife’s actions.Originally, Heywood apparently was to be shot, but instead Gu got Heywoodintoxicated to the extent of incapacitation and gave him medicine to alleviate hisailing stomach. The medicine was arsenic. Clearly, Wang Lijun was complicit inthe death of Heywood and helped cover up his murder. Wang Lijun tells theconsulate everything – it is recorded – the consulate denies him asylum for hiswell-known excesses as police chief and for his well-known corruption. Bo sentarmed soldiers/police to the neighboring Sichuan province’s capital Chengdu –which strikes me as unusual for one province to send armed men to anotherprovince – they surround the U.S. Consulate. It also demonstrates the power and 8
  9. 9. authority of Bo in Chongqing. Remember he was not even a member of theGovernment. The U.S. negotiated the turnover of Wang to the Beijing authorities. Wedon’t know the details. My guess is the Chinese Government agreed not to executeWang. Last fall, he received a sentence of 15 years in his 2-day trial. He wascharged and convicted of: Defection (going to the U.S. consulate in an effort to defect). Power abuse. Bribe-taking. Bending the law for selfish ends. This is believed to be the unauthorized electronic surveillance of National Party and Government leaders in Beijing. Can you imagine the arrogance of the wire-tapping of senior officials inBeijing? This is one of the rumors regarding Bo. Many rumors spread acrossChina via the internet. One was the alleged mobilization of some army units in theBeijing area to contest the power of the National Government. Many Beijingersswear they saw military roadblocks and troop movements in Beijing during thisperiod of time. I have noticed that many, if not most, Chinese politicians seem toally themselves with one or more military leaders. And, the more powerful theyare, the higher the rank of the military ally. In my mind, this is somewhatdisturbing. Apparently, Wang Lijun’s gambit of going to the U.S. embassy paid off forhim. He put the United States in a very difficult position, which was handled verywell by the U.S. and the Chinese Governments. Gu Kailai’s trial this last fall for the murder of Heywood lasted 2 days. InChina, the Communist Party controls the prosecutors and the judges. All areanswerable to the Communist Party under traditional Communist ideology. And, ifyou expect leniency, you must plead guilty or not contest the charges. Gu wassentenced to death, which sentence was suspended for 2 years. It is expected dueto her “cooperation” and her alleged motivation to murder was to protect her son’slife that the sentence will be reduced to life imprisonment. Bo is in a prison near Beijing, a prison which is primarily reserved for highofficials and sensitive cases. He has been expelled from the Communist Party andfrom the People’s National Congress thereby stripping him of his legal immunity. 9
  10. 10. This sets the stage for his trial. The Politburo of the Communist Party, not theGovernment, has alleged various criminal acts by Bo: Bribe-taking. Abuse of power during the murder investigation – attempting to cover the murder up and sending armed officers to surround the U.S. Consulate in Chengdu. Inappropriate sexual relations with multiple women. The Communists in this area of sexual relations remind me of the old Puritans in the U.S. While Bo has not been formally charged, this scandal – the worst since theGang of Four at the end of Mao Ze Tung’s rule which gang were imprisoned at theend of the cultural revolution – including Mao Tse Dong’s wife – is set against thestruggle for power between various factions within the Communist Party. TheParty may be morphing from the party controlled by the technocrats to a morepolitical and populist leaning one which appeals to the masses – from problemsolving to slogans – sort of what we have in the U.S. currently. Wen Jaibao and his family, the premier until this year, were recently“exposed” by the New York Times as billionaires. This exposure, despite intensecensorship, has convinced many that Communist Party leaders are corrupt, venal,not subject to the rule of law and in fact acting above the law, which are allcontrary to the ideology of the party and its expressed principles. It should benoted Wen denies the allegations published by the New York Times. President Xi Jin Ping has made corruption a high priority by saying hisGovernment will attack the dragons and the flies, i.e. big and small corrupt actors. The role of the internet has proven most interesting – you have heard of thegreat firewall, i.e. the efforts of the Government to control content on the internet.Google left mainland China over these issues and relocated to Hong Kong whichhas a degree of autonomy from Beijing. Hong Kong elects its own Government.Despite this very real firewall, it is very common for individuals who have beenallegedly abused by a high official to complain on the internet which isimmediately picked up by other activists and spread quickly all over the internetand the country. Numerous officials have lost their jobs, been sent to prison orotherwise punished as a result of such exposures. The internet is proving difficultto control. Muckrakers become instant celebrities and are difficult to suppress,particularly since they are saying what the party espouses – such as no corruptionby the small or the important and by factually supporting their allegations of 10
  11. 11. corruption. Here many of the muckrakers use the Western media as a shield andrely on them to prevent their arrests due to the threat of exposure in the Westernmedia and over the internet in China. Corruption is engrained in the currentsystem of Government – bribes are understood as a way of getting things done. Many political dinners will include a businessman who will bring gifts andpay for the dinners. This appears to be the main purpose for the invitation to thebusiness person to attend. Bo – while a true leader and clearly talented and who was genuinelyrespected by the populous – was also clearly corrupt in the broadest sense of thatword. Money – yes, but also acting above the law, he would have gotten awaywith at least the cover up, if not his involvement, in the murder of Neil Heywood,if Wang Lijun hadn’t gone to the U.S. authorities. When Wang told Bo of his“suspicions” of his wife Gu’s involvement in the murder, Bo physically slappedWang across the face and threatened him. Bo, for his part, continues to refuse to cooperate with his former colleaguesand the police claiming to his interrogators that they have no right to question him.He may be counting on his many supporters in the Party Government to “save”him. Remember Bo was at the pinnacle of power and knows as much as anyoneabout the corruption of the high party and Government officials. I think that isunlikely that Bo avoids severe punishment given the President and Party ChairmanXi Jin Ping’s public commitment to eradicating corruption at all levels of theGovernment and the Party. President Xi has made this a main policy of his newGovernment. And, most Chinese are clearly watching to see what happens in theBo case. While there is no question that Bo has supporters high and low in China andin the Party – but, I believe – there is little choice but to severely punish Bo.However, in prior cases, when a high official receives a harsh sentence it wouldlater be commuted to house arrest. This may be difficult in Bo’s and Gu’s casesunless they suffer severe “health issues”. Bo, in determining a course of action, needs to think about his son and evenhis wife whose execution has only been suspended for 2 years. The practice andcustom is not to have a real trial, but to accept the Government’s charges as truewith some tacit understanding of the sentence. This case represents very significant cross-currents in modern China. 11
  12. 12. First it demonstrates without question the corruption of a leader at thehighest level of the Communist Party and the Government. It impacts the public in that it validates the suspicions/beliefs of thecorruption of high Government and Party officials. It is perceived by the Party elders as threatening the very success andsurvival of the party itself. Xi Jin Ping has made corruption and its elimination at all levels ofGovernment and the Party a central policy of his new Government. Failure to takedramatic actions in this area will adversely impact the Party and its legitimacy. So far Xi has done symbolic things to demonstrate his seriousness to addresscorruption. He has banned extravagant dinners and functions for Governmentofficials. The immediate result has been the substantial decline in the sale of freshflowers and a real decline in patronage of fancy and expensive restaurants. Afancy dinner for eight in Shanghai can easily cost $3,000. If the Communist Party is not able to gain some sense of trust by the people,it could be increasingly difficult for the Party to maintain exclusive power. Whileeconomic growth has become everything in China – these kinds of abuses are notreadily acceptable to a significant section of the population. And, now that it is anopen and public discussion, it will not be easy to put this genie back into the bottlewithout significant progress. One thing you notice in recent years is the rise of appeals to Nationalism.You see mass demonstrations against the Japanese, many organized by the Party orthe Government as, for example, the dispute over uninhabited islands in theEastern Chinese Sea or over other political disputes between these two Asiangiants. Similar appeals have been aimed at the U.S. and our alleged interference inChina’s claims to the islands located in the South China Sea. Disputes are ongoingwith Korea, Vietnam, the Philippines, Brunei as well as Japan. These disputes arebecoming increasingly characterized by military provocation. The rise of the military is another area of concern. Xi Jin Ping has openlycourted the military. You will see increased military budgets, more aircraftcarriers, drones, aircraft, rockets, etc. One Chinese Lt. Colonel wrote a verypopular book about war with the United States – Interesting Times. 12
  13. 13. In today’s environment how does all of this translate into U.S. and Westernbusinesses prospering in China? China is clearly recognized as an economicopportunity for many Western businesses. My wife Ruby has been involved insetting up U.S. businesses in China. The short answer – in my opinion is thatChina remains a place where Western companies can do business successfully inthat they perform a very positive role for the Chinese economy in the transfer oftechnologies and business practices to the Chinese and creating millions of jobs;and, in giving Chinese products access to markets to which they otherwise wouldhave limited access. The trade off is substantial profits to the Western and Japanese companiesGE has done very well in China from light bulbs to medical equipment and jetengines. GM’s Chevrolet brand automobile is a major seller in China. The short history of modern China has set out some broad outlines of somethings for business people to avoid – for example, partnerships with local Chinacompanies have proven difficult. Dannon, the yogurt company from France, went into partnership with a local company to ultimately find itself on the outside looking in – having largely lost its business to its Chinese partner. GM found its blueprints for a new line of cars stolen and being used by a competitor. Intellectual property – an interesting area. Historically, Chinese view intellectual property as products of the mind that belong to everyone. This view is changing. As China invents more and seeks protection of its inventions, it will naturally want to protect those ideas and inventions as economically valuable. The Government’s position is officially pro-protection of IP. But, the practice has not caught up with the Government’s position yet. Handbags, Hollywood movies, etc. are still readily available, but not as much as 5 years ago. Ming vases were originally made in Southern China during the Ming dynasty. The fake Ming vases are made from the same mud and kilns as the originals with the same designs and appropriately aged at various Chinese factories. The Ming chop or seal is applied by a different shop. Imitation is an old and cherished art in China – often the imitations are better than the original. The Western companies are not targeted for copying any more than the Chinese companies. The test is whether the product is popular and 13
  14. 14. in demand and if the Chinese imitators see a profit in it. Not the origins of the idea or product. To combat this phenomenon, some Chinese companies have employed atechnique of multiple locations for their factories with each factory manufacturinga portion of the end product which are assembled then elsewhere – thereby limitingto a few the complete knowledge concerning the technical aspects of the product orits techniques of production. Security of IP is a necessity, both of techniques ofproduction and the product itself. China has similar fraud schemes as we experience here such as: falseinvoices; supplies or parts inferior to what you ordered; theft by employees; and,extortion efforts. It is somewhat magnified in China for the foreign businessmanbecause they are not sure how to combat it, whether the police will investigate youor the alleged crooks – the unfamiliarity with local customs, law enforcementattitudes, etc. makes dealing with such issues more difficult for a foreign businessthan for a local Chinese business since they intuitively know how to handle it. You have heard, undoubtedly, of the various sayings or stories describingvarious situations in China, such as Confucius says. Well, I defy you to offer a factpattern that won’t remind a Chinese educated listener of an event that happened100, 1,000 or even 5,000 years earlier which would guide a perceptive listener tothe correct response to the current situation under discussion. Let me give you one example: a Chinese businessman – leading a substantialtrading company in China – related to us how his warehouse was looted by severalemployees over one weekend, taking millions of dollars of inventory. Theseworkers had come to be employed by the company eight years earlier for theexpressed purpose of looting the company. The businessman admired theirpatience, their planning and the execution of the scheme. He lamented his loss. Favorable relationships with the Government are of paramount importance.It is important in the U.S., but much more important in China. With frequentpolicy changes, and changing enforcement practices, it is hard to stay out of issueswith the Government unless you have solid relationships with, particularly, thelocal government where you do business. In the U.S., larger corporations spend millions to influence and to get alongwith the Government, with congress, with the regulators, with the military, etc. 14
  15. 15. I, being a former prosecutor, use to say very few of us could stand up torigorous investigation without being exposed for some wrongdoing. Many times,you may not know what you did was illegal. I defended a client recently whotransported in his truck paint and solvents, etc. from one location, to his newfactory about 40 miles away. He failed to get an EPA permit to transport thesechemicals. He was prosecuted even though he had no criminal record. He wasfound guilty and sentenced. We are familiar with many common practices but which are technicallyillegal in China such as: In mine safety. Many miners die each year in unsafe mines operated contrary to the established laws. Misuse of intellectual property, such as the sale of fake handbags, blueprints for a competitor’s line of cars, movies, etc. Safety standards in various industries. Work hours, conditions and pay. Foxconn, a Taiwanese company who manufactures the Apple IPhone, was recently investigated and cited for unfair labor practices brought on by a high suicide rate among its 100’s of thousand employees. Food safety. I will address this one shortly. Etc. The Chinese economy benefits substantially from the Western businesses,but you should keep in mind that Chinese companies always want to fill yourniche. A primary obstacle to Chinese excluding you from the market place is thatWestern businesses have connections they can’t or haven’t yet obtained. For example: Hua Wei – a giant Chinese telecommunications business – can’t sell to the U.S. Government due to a lack of trust deriving largely from its military background. This means, effectively, they can’t sell telecommunication equipment to U.S. Government or to companies that do business with the U.S. government. Chinese businesses often lack the contacts with you or your customers. The IP laws protect your product from being imported into the U.S., etc. One trend I have noticed is the Government – and remember, while there is atendency to think of the Chinese Government as a monolith – actually, there is 15
  16. 16. often real tensions between the National Government in Beijing and the citiesoutside of Beijing. It is not uncommon for the province to ignore edicts fromBeijing. And, remember these leaders, local and national, have strong power basesof their own. Any level of Government, and more likely the local Government, will atsome point in your business cycle, whether caused by some act of your company ora complaint from a competitor, your workers, etc., can become a problem for yourbusiness. You need to curry favor with the regulators (just like we do in the U.S.).Look what happened to Google – they left mainland China for Hong Kong becausethey couldn’t get along. It has cost them financially a great deal. The result hasbeen that the Chinese competitors have virtually excluded Google from the searchengine business in China. Another recent trend is for the Government to be focused on holding thelarge Western firms to the legal standard whether those standards have beenenforced by the Government previously or not. While it may be good for Chinesesociety as a whole, it still is disrupting to your business. KFC – for example was punished for selling “bad” chicken purchased from its Chinese suppliers. It caused a 6% drop in sales due to this bad publicity. And, resulted in the parent company’s stock to drop on the U.S. Stock Markets. Apple and Volkswagen have been taken to task recently for its Customer Services policies which allegedly are less favorable in China then elsewhere in the world. There was a 2-hour program on China Central Television focusing on these two companies and their service policies as practiced in China and how they were less favorable than in the U.S. The focus on Volkswagen was for selling substandard gear boxes in China. McDonalds and the French Grocer Carrefour have been through this in the past as well. It is also important to establish good working relationships with the workers– human resource programs if progressive work well. I have a client who treats hisChinese workers in a very disrespectful manner. That has led to problems with theGovernment; to numerous work stoppages; theft of supplies and parts; and evenproblems with suppliers, who don’t get good service from his employees whenthey deliver supplies, and materials, etc. 16
  17. 17. The value of his business has declined from around $25 million to maybe $4million today. This does not even account for the fact that he has to spend a greatdeal of management time to problem-solving and not business expansion. Bo Xilai was very good at bringing favored Western businesses toChongqing. Ford is located there. In this respect, it was good for China bycreating jobs far from the more rich coastal cities to where many are under-employed; it was good for the Western companies that located in Chongqing and itwas good for Bo Xilai and his family who grew rich from the associations. U.S. businesses complain about China and how difficult it is to do businessthere. [By the way, so do the Taiwanese who claim they make no money in China– however, I don’t see them leaving China despite their claims of poverty. Manyhave been there since the 1990’s.] It is important to have a carefully thought-out plan. You need advisors orexperienced Chinese executives you can trust, and to have redundant checks andbalances to keep them honest. You need to establish good working relations withthe local Government and with the customs officials. Most U.S. manufacturersexport some or all of the goods they manufacture in China. The Chinese preference is to do business with “friends”. That means aninvestment of time in cultivating relationships is required. This requires gifts,entertainment and time socializing. It doesn’t have to be corrupt. Law firms in the U.S. spend substantial sumsentertaining clients and potential clients all the time in the United States. The lure of the riches to be made in China is so strong that someWestern/Japanese businesses will exchange money or favors making leaders likeBo wealthy via corruption. It aided Bo in acting as if he was above the law. In thiscase, he would have remained so if he had made his police chief feel secure asopposed to fearing for his life. Bo is estimated to be worth hundreds of millions of dollars. Guanxi – I understand your professor has spoken about this, so I won’trepeat it here. Presents are expected. 17
  18. 18. Dinners – as much as $3,000/meal are all too common. Let me end on a negative note. The U.S. has a statute called The ForeignCorrupt Practices Act that prohibits bribes to gain a competitive advantage in aforeign market by a U.S. company. The question is where is the line drawnbetween corrupt practices and relationship development. Of course, the line is initially drawn where the U.S. prosecutor says it is –obviously after spending a few hundreds of thousands of dollars you will learn ifthe Government properly drew the line. A very risky proposition at best for yourbusiness. The U.S. Department of Justice has a stellar record in this area and isbringing in billions of dollars to the U.S. Treasury in fines and settlements. Despite all – doing business is not really all that different here than in China. Corruption may not be as pervasive here, but in one of the prioradministrations in St. Louis, the real estate/zoning attorneys all knew the cost ofhaving a zoning ordinance changed. And they were not talking about a publish feebut money to cause the elected officials to act. In my estimation, just old fashionbribery/extortion. By the way, in the U.S. extortion is not a defense to bribery. The U.S. prosecutors often overcharge defendants, and their families, to getpleas of guilty. Is that corruption? The U.S. court system has become much more ideological and political. Isthat the rule of law? China suffers similar problems, but nimble businessman can and are doingquite well in China. As long as you understand your environment and the rules ofthe game, you can be successful. You may need to be able to think a little Eastern;have good advisors, and, have contingency plans should things go wrong. ManyChinese have contingency plans should things go wrong. Many obtain green cardsfor that primary purpose, with no real intent to leave China unless necessary. You need to be well financed because your diverse Chinese competitorsoften have Government backing and can receive bank financing even when losingmonies several years in a row. 18
  19. 19. Despite everything I have said, I am very positive on China and believe itrepresents a very favorable climate for U.S. businesses. However, like I do in thecases I litigate, I prepare not for the best circumstances, but for the worstcircumstances. I’m never, therefore, really surprised by my opponents. Professor Meyer asked me to comment on the recent changes in the Chineseleadership. I can share my perspective – which could be totally wrong. First, I think the lack of an intellectual basis for the Communist Party beingin power has caused the Communist Party to fall back on economic development tohold onto power. Not all bad and they have accomplished impressive things in thisarea. And, clearly, China is better off today in almost every imaginable way. Butpeople like to have guiding principle to make sense of their world. Guess I amsaying materialism is not enough. People need something else. The party has notcome up with that grounding yet – just holding onto power won’t work forever. Itis an issue that needs to be dealt with and continued economic expansion will notbe enough forever. China experiences major demonstrations, violent strikes and demonstrationsby the thousands each year. You read about what appears to be random andatrocious violence in China. A man stabs a number of kindergarten children, amiddle class man, after an altercation with a police officer, leaves and returns topolice station with a butcher knife and kills several officers. The stresses of modern life in China and the emphasis on materialism andthe great economic expansion is disruptive – taking land for factories from villagesfor example – tensions can become violent easily. I mentioned Foxconn whereworkers felt so much pressure that they began committing suicide at the factories. How has the party and government responded? To some extent they appealto nationalism. This can be an ugly emotion. Sometimes the focus becomes ourproblem. When it focuses on the Japanese or the Americans, etc. – NationalismWorks to unite the population. Particularly, in China if the focus is the Japanese. Ithink it is probably impossible to watch TV on any day in China where the crueltyof the Japanese in World War II is not dramatized. In the short run, a government pushing that agenda can find it can channelthe emotions of the populous and great violence can occur but it can’t always becontrolled. 19
  20. 20. China needs more constructive emotional appeals to its population. The recent change in leadership was peaceful – which has not always beenthe case in China. Xi Jinping is not well known in the West. He clearly is intelligent and hasthe reins of power in his hands heading the government, the military and theCommunist Party. There seemed to be little serious opposition to him assuming these positionsof power. The Central Committee of the Politburo – of the Communist Party hasbeen reduced to 7 members. Not sure why but I am convinced it was the result ofserious rivalries within the party. It appears that 4 or perhaps 5 of these positions are filled by men associatedwith a former president Zhang Zemin. I believe he is 86 now. He apparentlywants to be a power broker. It appears the prior President Hu Jin Tao’s people have largely beenexcluded from the politburo central committee. Where does this leave Xi Jinping? China is very much a consensus society.Its former president is influencing policy and another former president is not beingheard very well. Is Xi Jinping really in control? In this situation, he can be apowerful leader or is he constantly being forced to form coalitions to run thegovernment. Does he reach out to the military for a much closer alliance toinfluence the other political leaders? No one in China’s political circles hasforgotten Mao’s famous statement that “power comes out of the barrel of a gun.” The rise of the Chinese military is a concern. President Xi has clearlyindicated a desire to increase the strength of China’s military forces. It is interesting to speculate but the Chinese are a very clever people – so Iexpect things will work out. But it does not appear that Xi Jinping will be able to take drastic steps ordramatic overtones – so things most likely will rock on as they have been since the1990’s, which is not bad. 20
  21. 21. The political stresses and strains actually could be good for Westernbusinesses since the focus will be on economic expansion or something they canall agree on – while they sort things out. Much more can be said here but let’s deal with issues you may have in yourmind regarding China. Questions 21