Attorneys discuss pitfalls, solutions to building a business in China

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Throughout the last decade, the amount of business Wisconsin does with China has increased by more than three-quarters of a billion dollars, according to the U.S. Census Bureau’s Foreign Trade Division.

A 2006 report by the bureau revealed that China ranked third in total exports from Wisconsin, behind only Canada and Mexico. The state did more than $870 million in business with China, compared to around $108 million in 1996 when the country ranked 18th as a trading partner.

“Thirty years ago, talk about doing business in China was almost nonexistent,” said Nancy J. Sennett, managing partner of Foley & Lardner LLP’s Milwaukee office.

But while Wisconsin business has been booming in the Far East, establishing a successful venture in China is far more complex than crossing the borders of Canada or Mexico.

Several attorneys from Foley and Deloitte & Touche USA, LLP, spoke recently on the challenges and channels needed to launch and protect a profitable business in China.

Not Business as Usual

One of the typical miscalculations made by entrepreneurs who expand their business to China, according to attorney Zhu “Julie” Lee, is the expectation that practices are essentially the same worldwide.

“For Americans, we cannot move our business methodology or our business model wholesale to China,” said Lee, a member of Foley’s International Business Industry Team. “We really need to modify what we are doing here from a business perspective. as well as a legal perspective. to accustom our culture to the Chinese market.”

China has stringent guidelines for foreign business, which includes a lengthy approval process. Lee noted that numerous reports are filed with government boards that review the legitimacy, viability and long-term effects of prospective business.

Although the complexity of the process is something Lee helps navigate with clients, the clients themselves should have an active role in negotiations.

“Here in the United States it can only take a day or two to set up an on-line business and a contract generally signifies the end of negotiation,” said Lee. “In China, that paper really just signals the start of the negotiation. You really have to nurture that process because it does not stop with a piece of paper.”

Foley is finding that to be the case as the firm plans to establish its first branch office in China. The firm filed an application in April, but has yet to receive approval from the Ministry of Justice.

Clay Perschall, senior public relations manager for Foley, said he hoped the firm would be approved by the end of this year.

Proper Protection

Once a business is expanded or transplanted to China, a key to success is keeping it secure, according to attorney Catherine Sun.

Sun is a partner in Foley’s Intellectual Property Litigation Practice and was appointed to oversee the firm’s new office in Shanghai.

“Some U.S. businesses think that they will be safe if they don’t bring their technology with them to China,” said Sun. “That’s not necessarily true.”

By not filing patent or trademark papers in advance, a company can fall victim to counterfeiters, who are prevalent in China.

In addition to adhering to intellectual property laws, forging a mutually beneficial relationship with vendors and distributors is a way to avoid potential problems.

“A provision prohibiting distributors from fighting patents can be a good idea, but more importantly, a company cannot manage its business long distance,” said Sun. “Face-to-face interaction is a big part of successful business in China.”

For Wisconsin, which primarily exports agricultural and industrial products to China, that may mean an initial sacrifice to ensure long-term success, according to Lee.

“One thing we’re trying to do with our clients is to think proactively in terms of what are the things you need to do to protect your intellectual property, protect your products, protect your relationship so that people will avoid those mistakes which can ruin a business,” said Lee. “On paper you might be sacrificing a little profit up front, but long term you are generating a common goal.”