On-demand seminar: Going International - China

Scott Jolliffe: First of all let me welcome you to Gowling WLG. We're not only here in Ottawa today but we have partners in the UK, France, Germany, the UAE and China. We had also hoped to have Cuba on the line but with recent events communications have been a little more difficult and a video link just wasn't possible. This is the new Gowling WLG with offices in 18 cities around the world and 9 different countries. We'd like to introduce at least a handful of these countries. We don't have somebody here from places like Singapore or Moscow or Monaco but we did want to give you a sampling of some of the major countries in which we have substantial operations. And do all this in the context of the series that we currently have underway. In fact this is the last of the series of seminars called "Risk and Reward" and this one focuses, in particular, in going international. I can tell you if you're experience is anything like the Gowling experience the reward has been very significant. For us it's been a tremendous change in how we operate, where we operate, it's become a very important aspect of the daily lives of our professionals and business support staff, and I have to say, for our clients as well to be able to provide a seamless service that extends pretty well right around the world. I should also say, and maybe I'll touch on this later but, I don't think there's ever been a better opportunity for Canadian companies to expand around the world. The Canadian brand has never been stronger with many of the events taking place around the world, changes in governments and structures. The Canadian brand has come out as a very strong brand that many companies and people in foreign countries are more than happy to deal with.

Let me just give you an idea of what we're going to do today. You're going to hear from our partners in China, the UK, France, Germany, the Middle East and not from Cuba. But I will give you our insight into investing in Cuba. What we're going to cover, in the context of these particular countries and regions, what are some of the emerging in-country opportunities and, of course, what are the legal considerations that you need to keep in mind. We'll do that on the basis of looking at different forms of expansion and investment, whether it's sourcing goods and services, or selling goods and services into these countries, establishing a business or even going so far as to acquiring a business.

Let's first go to China, and why China? I think it's about almost 10:00 in the evening there. Our partner Jamie Rowlands, the chief representative in our office in Guangzhou. We also have an office in Beijing but Guangzhou, as Jamie will tell you, is sort of the heart of the manufacturing sector in China. Jamie himself is a true international lawyer in the sense that he spent most of his career resolving disputes involving parties in the UK, Europe, China, Japan, Africa, and of course, North America. Jamie is based in Guangzhou. Has been for several years now. But he also maintains a practice in the UK. In Guangzhou he manages our team throughout China on both transactional and litigation matters. With that Jamie, let me turn it over to you.

Jamie Rowlands: Thanks Scott. I hope everyone can hear me. If the technology's working as it should be you should be able to see me. I'm the person with the beard, waving, and also hear me. Good morning Ottawa. It's great to be here and thanks very much for giving me an opportunity to give you a very high level view of what's going on in China, in Guangzhou at the moment, but in particular why it's particularly a good time for Canadian businesses to be looking to do business over here.

First of all I'm just going to give you a little bit of context as to why is the Canadian business you might think about, either increasing trade or business with China, or indeed jumping into the ring. I think one of the key developments of this year is the fact that the relationship between Canada and China has grown from strength to strength. Your Prime Minister, of course, paid a visit to China in August and Premier Lee of China returned the favour in September to Canada. The overwhelming feeling, certainly sitting here in Guangzhou, as Scott alluded to is that the Canadian brand has real value and presence out here in China and there really is a sort of strength of relationship that can be built on. Some of the things were discussed during these visits I've just put up on the slide. For example Canada is intending to join the Asian infrastructure investment bank, and indeed, in terms of trade there is now a goal between China and Canada to double bilateral trade by 2025. That is building on an existing trade platform that is significant in any event. And leading into there are preliminary discussions about setting up a possible Canada/China free trade agreement. All these contextual issues are really helpful for Canadian business wanting to come to China.

Aside from the, what I would call the diplomatical/political reasons, you just need to look at China itself to understand that if you get right, and I've got to say it is about trying to get it right in China, this is a land of opportunity. It is the second biggest global economy in the world and although there's been negativity around the growth plan in China it is still in growth. This year was around 6.5%25. There's lot to go at. It's a high quality manufacturing hub. I've said it's really low cost labour. I think there is a shifting sands here. The very low cost labour is leaving China. It's going to other Asian regions such as Vietnam, Thailand, Cambodia. What you get is a good low cost base with quality manufacturing today. And of course if you're wanting to sell in China the market is absolutely huge. You have 1.3 billion people in China of burgeoning middle class. Some of the statistics about growth in cities is frankly mind boggling. I mean today you have over 20 cities with over 5 million people. By around 2030 they estimate that there'll be over 200 cities with 1 million plus people. So an awful lot of goods to potentially sell.

As Scott mentioned I'm going to have a very quick canter through a number of issues that I put on the slide here, sourcing goods from China, supplying good and services to China, setting up a business, and indeed, investment into China. I'm literally going to touch on those. I have about 10 minutes left. It's just to give you some pinpoints that if you were thinking about this region there are some issues that you may want to consider.

Starting off with sourcing goods from China. I'm taking the premise that you base yourself in Canada but you are using agents or manufacturers in China to source goods back into the Canadian market. I think the most critical point is carrying out adequate due diligence for any Chinese local partner. That requires time and it requires patience. The due diligence exercise just cannot be underestimated. It is so fundamental to make sure that your local partner has the correct credentials. We see far too many companies come into China, rush the process, particularly around quality. I think there's two things to mention about quality issues with goods coming out of China. In the early days of any relationship with a local partner, contractually you must try as best you can to ensure that payment is conditional upon the quality of goods arriving and being in line with expectations. And leading onto that the importance of the contractual specification is absolutely fundamental. It's really important your local partner understands the product specification and understands that it can meet that criteria. On the contractual side of life, this again is really a topic in itself, but again we see a lot of companies come into China believing that's it just not possible to enforce a contract in China, and as a result of that, not spending any real time in ensuring that the contractual position is as good as it can be. It is a myth that you can't enforce contracts under Chinese law. You can and a result of that you really must spend time and energy to getting the contractual position right. Two points on that. Firstly, in relation to enforcement, there is a tendency to want governing law and jurisdiction to be your home turf (ie: to be Canada). That's understandable but I think you need to think in a context where the likely party to be enforced against will be Chinese. Obtaining a Canadian judgment and trying to enforce that in China is very difficult and therefore China law, China courts, is an option very much to consider. If China causes a stat too far arbitration is a possible way to go with Hong Kong or Singapore being very suitable hubs for this region. One final point on the contractual side it's very point for contracts with Chinese parties to be both in English and Chinese. The importance of getting the translation right is very, very critical. And over and above that it's really important to state in the contract whether it's the English or Chinese version that prevails in case there is an inconsistency. That's just a couple of points on sourcing goods.

Shifting over quickly to supplying goods and services from Canada into China. As is old news China remains a fairly regulated jurisdiction and that is true for supplying goods. There is regime called the China Compulsory Certification system. It's all about safety and quality of goods that are being sold on the Chinese market. It's really important that any importer into China understands those rules and regulations, are compliant. The risk of not being compliant can lead to fines, and indeed, goods either being held up in customs for very long periods of time, or worse still, returned to the originating nation, so say Canada in this case. And always remember, if you're selling goods on the Chinese market, labeling in Chinese is very, very important as well.

I wanted to touch on IP. Again, there are plenty of myths around IP in China and enforceability of intellectual property. My key message today is if any business wants to do any form of business in China it is fundamental to register IP. It is enforceable in China but given it is a first to file system if you don't register the likelihood is someone will register on behalf of you and trying to claw that intellectual property back is extremely difficult. It's very time consuming and you see time and time again large global companies, having fallen into this trap, being unable to recover their IP and it's a real problem. So do register intellectual property in China. It is possible to enforce. We do it all the time and we have a very, very good success rate on that.

Very quickly, on tax for supplying goods and services, just a heads up that there are a number of tariffs and taxes to consider if goods are coming into China and that can add a lot of value to the goods themselves. That does need to be assessed so that you can get an accurate value of what you will need to sell those goods and services for on the market, on the domestic market, in China.

Shifting on now to establishing a business in China, so bringing a business into China, it's very possible to do. You can set up what's known as "woofies" here, wholly owned foreign entities, effectively subsidiary companies. You can set up representative offices, and indeed, joint ventures with local partners and there are a number of joint ventures options that you can go for. As mentioned in the previous slide China remains regulated and in many ways how you can set up in China is dictated by this catalogue for the Guidance of Foreign Investment Industries. That sets out encouraged or restricted or prohibited activities in China. So again, if you wish to set up a business in China, it is really important to get early advice on whether your sector, your business focus, falls into one of these criteria because that will dictate whether in fact you're allowed to set up a wholly owned subsidiary or whether in fact you have to go in with a local partner.

On the employment side of life, I think the most important point to realize is that if you do set up in China, the labour law here is very pro employee. Trying to get rid of the low performing employees is a struggle in China. There are ways to do it but the reality is that usually you are going to end up having to pay some form of severance. The other important thing to note is that written contracts of employment are important and are watched out for here in China. If in fact as an employer you forget or you don't enter into, for whatever reason, a written employment contract with an employee, that employee can raise that issue in a tribunal and the employer can end up paying double the salary that was agreed to the employee for the period of time that there wasn't a written contract. So a written contract, very important in China.

And again, moving to tax, just a quick point that if you are, for example a wholly owned subsidiary in China wishing to repatriate funds, whether is dividends or whatever, back to a parent company in China watch out for withholding tax. That is a tax that will be paid on the monies leaving China to be repatriated back in Canada.

Finally, just very quickly looking at acquiring a business in China. The most important thing, as I mentioned earlier on in relation to local partners, is due diligence. Just touching on that a little bit the basic way to find out about basic information of companies in China is through the AIC. That's the Administration of Industry and Commerce, a little bit like Companies House. As I say that carriers basic factual information about finances of a company, etc. You don't get much out of it and finding out detailed information about companies in China is a challenge and that is why use of private investigators is common place over here. All I would say about using private investigators, given recent case law particularly for Glaxo case that happened about 2 years ago, it's very important how private investigators are used and instructed. And again, local advice is required if indeed private investigators are going to be used.

Finally, I just wanted to raise the concept of Guanxi, not a legal point at all, but an important point for the culture in China. Guanxi is the relationship building and trust building between companies and individuals, is very much alive and well in China. I just cannot emphasize enough the importance that Chinese place on the building of trust and the getting to know one another. It takes time and patience to do that in China but if you're willing to give that investment the likelihood is that you'll garner success if you wish to have a long stay out here in China. It is something to bear in mind. It's just a cultural phenomenon.

That's really my whistle stop tour of some high level points to bear in mind in China. In summary I'd say there is a fantastically large opportunity to be had for Canadian businesses here in China. Planning is important. It is a difficult jurisdiction given the size, the language, the culture which are alien to most. I think that breeds the need to be very hands on out here. You need to come out. You need to invest in China and, of course, Gowling WLG, our office here in Beijing, here in Guangzhou, happy to help in any way we can. Thank you very much.

Scott Jolliffe: That was terrific Jamie. Let me just see if there are any questions in our audience. We have a microphone here and we're happy to pass it around if you have any questions.

While Luke is doing that let me ask you Jamie, one thing you didn't touch on and I know it's a touchy subject, but over here we do read about corruption. Mainly these days about the government's approach to ridding the country of corruption. Is that a significant aspect of doing business in China today.

Jamie Rowlands: Yeah. You are absolutely right. There is a significant crack down going on over here. You read different reports as to whether it's in reality superficial PR versus really getting to the crux of the problem. But I must say there does seem to be a difference of approach. Or at least start of a different cultural way of doing business over here. I think it is improving. Does it remain a problem and is it something that any foreign businesses should watch out for in coming to China, I think the answer has to be yes. I think it really goes back to what I mentioned about doing one's due diligence. It's really, really important in a place like China to try to get to the nub of what companies doing, whether it's a private company or a state owned enterprise, what they are doing and how they approach business, and again, the use of private investigators is hopeful in that regard and it's something that is done on a regular basis out here.

Scott Jolliffe: Okay, thank you Jamie. We have a question here in Ottawa.

Audience: Hello. Thank you. I was hoping that you could comment on the use of Hong Kong being a special administrative region of China and how that can play into dealing with business in China. And then, maybe follow that, the umbrella movement and the recent change in Hong Kong's democratic process and whether you see any impact from that.

Jamie Rowlands: Sir, I missed a line. I got the first bit about Hong Kong and influence in relation to Mainland China. I missed the second part of the question, I'm afraid.

Audience: Just to reiterate the first part use of Hong Kong as a special administrative region and how that can help in doing business with China. And the second part, Hong Kong's change in their democratic process recently and how you see that impacting relationships and how that benefit of using Hong Kong it's impact moving forward.

Jamie Rowlands: Sure. Hong Kong as a hub, as a special region, it's interesting. When you're out in Mainland China, Hong Kong really is perceived as an entirely different jurisdiction. The laws and regulations are different. We have no jurisdiction over Hong Kong. Where I think Hong Kong can be very useful for a foreign business coming into Mainland China is actually as a stepping stone, as the entrance point into PRC, so a lot of companies choose to set up in Hong Kong because it's an easier regulatory landscape. It is easier to set up business but it's close enough to Mainland China to be able to do the necessary things to ensure the businesses run smoothly in PRC, in Mainland China. If I had to list the most beneficial reason for using Hong Kong as a hub, it would be proximity to China but an easier regulatory landscape. In terms of the political situation, that is interesting and it is a changing dynamic at the moment. Sitting on the PRC, the Mainland China side, when you talk to businesses here a lot of them losing faith in what's going on in Hong Kong. Equally, if you talk to foreign businesses in Hong Kong, they are beginning to panic about what's likely to happen in the next 20-30 years and whether in fact the cleaner regulatory landscape is going to become more regulated, more like Mainland China. That is a real worry for some of the financial institutions, etc. It's difficult to look into a crystal ball now and give a clear answer with what is going to happen, but I think it's fair to say that there is quite a lot of antagonism between the two, if I can call them two separate jurisdictions and we're going to have to wait and see how things play out in the next few years to really get a better understanding of how things will develop.

Scott Jolliffe: Thank you very much. I think we have another question for you here in Ottawa, Jamie.

Audience: Thank you. What the products export or doing business in the product side is quite obvious. Could you have a comment on the services side that Canadian businesses can engage in in China?

Jamie Rowlands: Sorry. Just to make sure I've understood the question right because the sound isn't perfect. I've touched on goods going into China from Canada but you'd like a comment on services being transferred from Canada to China.

Audience: Yes. Transferred or Canadian businesses setting up there to do business on the service side.

Jamie Rowlands: Yeah. I mean in many ways what I've said about goods transfers pretty smoothly into services as well. One of the key things you're going to have to look at is whether in fact the service line that you want to bring to China is either an encouraged, a restricted or prohibited activity. That's going to be the most important aspect. Some services are outright prohibited or very carefully regulated so that needs careful thought. But on the whole, subject to that, you can bring services into China. There will be some tax issues and if you're setting up as a service line actually the same rules apply whether you're supplying goods or service. In short, whether its goods or services, the point really remains the same.

Scott Jolliffe: Jamie, thank you very much and we'll be talking soon.