Sixth AnnualIn-House Counsel

Conference

Panel 2Interactive Strategies for Doing Business in China

22

PresentersFrances Chou, President and General

Counsel, Schechter + ChouRobert Hart, Senior Corporate Counsel,

Harman International Industries, Inc.Kimberley Chen Nobles, Partner,

Crowell & Moring LLPAndrew Pan, Chief Representative &

Managing Director, North American Representative Office of Shenzhen, P.R. China (NAROS)

33

China’s Market Under Global Slowdown

Update and Opportunities

Andrew Pan

44

Overview

China’s Economy Under Global Economic Slowdown

China’s Economic Stimulus Package Opportunities by Industry SectorsRecent Development

55

China’s Economy Under Global Economic Slowdown

GDP growth statistics

9% in 20082008 in Quarters

10.6% (Q1)10.1% (Q2)9.0% (Q3)6.8% (Q4)

2009 in Quarters6.1% (Q1)7.9% (Q2)8.9% (Q3)

2009 target: 8%

Source: National Bureau of Statistics of China

66

China’s Economy Under Global Economic Slowdown (cont.)

Export declineExport declined 19.7% in Q1, 2009Export volume decreased from

$111.4 billion (Jul 2008) to $51.3 billion (Jan 2009)

FDI declineFDI flows declined 20.6% in Q1, 2009

Unemployment rate increaseRaised 2009 target to 4.6%, the

highest since 1980

77

China’s Economy Under Global Economic Slowdown

Stock market, housing market, auto market and other key economic figures were all down sharply

88

China’s Stimulus PackageAnnounced Nov. 9, 2008, projects and

spending already started in 20084 trillion RMB ($586 billion USD)

stimulus package for government investment in infrastructure, tax deductions and subsidies, to stimulate domestic spending

2 years, 10 major areas: Finance, housing, rural infrastructure,

transportation, industry, health and education, disaster rebuilding, environmental protection, technology innovation, and tax reform

99

Opportunities by Industry SectorsFinance

Removing lending quota on commercial banksIncreasing the lending scaleCredit support to M&ACredit support to rural areasCredit support to small and medium

enterprises

Tax (VAT) reform120 billion RMB tax reduction from January 1st,

2009Export VAT refund rate increases to help

exporters, applicable to 3,770 products

1010

Opportunities by Industry SectorsHousing

Tax reduction to boost real estate marketAffordable and low-rent housingExpanding the pilot program to rebuild rural

housingIncreasing senior housing

Rural infrastructure/modernizationImproving countryside roads and power grids Ensuring drinking water safetyExpediting the North-South Water Diversion

Project and country-wide reservoirsRural Home Appliance Subsidies Program

1111

Opportunities by Industry SectorsTransportation

Budget: 1.8 trillion RMBBuilding more dedicated passenger railways

and coal routesExpanding highway system Building more airports in the western areas

AutomobileTax reduction for purchasing economic cars less

than 1.6LSubsidies to farmers for purchasing light trucks

and minivans10 billion RMB to subsidize auto industry

technological innovation and new energy vehicles

Expanding auto financing

1212

Opportunities by Industry Sectors

TelecomLong awaited 3G licenses issued to China

Mobile (TD-SCDMA), China Telecom (CDMA2000) and China Unicom (WCDMA)

Will spend 170 billion RMB in 2009, and 400 billion RMB by 2011 on 3G network

Could lead to US $290 billion in private-sector investment by 2011

Target: 50 million subscribers by 2011, covering all cities and bigger townships

1313

Opportunities by Industry Sectors

Healthcare and educationImproving health and medical systems in rural

areasRestructuring the healthcare systemBuilding more joint-venture hospitalsExpanding health insurance, especially to rural

areasDeveloping cultural and educational sectors in

rural areasBuilding more schools in rural western and

central areas

1414

Opportunities by Industry SectorsEnergy and environment

Budget: 350 billion RMBTechnology upgrade of coal-burning power

plants to reduce pollutionEncouraging investment in renewable

energy such as nuclear, wind, solar, and biomass

Encouraging energy conservation, and improving energy efficiency

Clean Development Mechanism (CDM) projects – greenhouse gases reduction projects

Waste managementEco-city plan

1515

Opportunities by Industry Sectors

Other industry sectorsSichuan earthquake rebuilding: 1

trillion RMBTechnology innovationE-commerceEntertainment, animation, media and

advertisingLogistics

1616

Recent Development

Challenges:Global/U.S. economic slowdown lasting can

cause China’s economic growth sluggish and market (most sectors) downsize continuously

Is 4 trillion RMB enough?Saving vs. spending Government spending vs. consumer spendingOver liquidity/inflation concernBanking trouble again: non-performing loans

may riseCurrency and trade disputes between the U.S.

and China

1717

Recent DevelopmentQ4/2009 GDP growth: >9% (estimated),

2009 GDP growth: 8% (almost confirmed), 2010 GDP growth: >8% (estimated)

China’s economy V-shaped recovery confirmed

Transformation of growth patternBefore: excess consumption of natural

resources; environmental pollution; too much dependable on investment and export; insufficient domestic consumption

Aim: more balanced, sustainable and steady growth with a better skilled work force and technological innovation; boost domestic consumption

1818

Key Business Issues

Frances Chou

1919

Key Business Issues

Initial researchUnexpected costs and expenses Labor related issuesRelationship, Relationship,

Relationship!Due diligenceLost in translationOpportunities

2020

Initial ResearchPermits, licenses, approvals, . . . .

What kindsFrom which agenciesFees, costs, expenses, . . . .

Market researchThe Chinese market is extremely

regionalUnderstand where you will fit inAdjustment of Products

Government policiesRelevant US and Chinese laws

2121

Unexpected Costs and ExpensesPermits, licenses, approvals, . . . .IPR issuesGovernment incentives and expiration

of such incentivesOther start up costsCurrency conversion issues

2222

Labor Related IssuesHiring and retaining skilled employees

in china Employment agreementsInsuranceTrainingFiring employees

2323

Relationship, Relationship, Relationship!Understand how “Relationship” works

in ChinaGovernment relationshipRelationship with the “Right People”

2424

Due DiligenceThe most important thingGovernment filings and documentsCorporate documentationFinancial informationReferencesSite visitBackground check of executives

2525

Lost in TranslationDifferent business cultures100 ways to say “NO,” but 90 of them

sound like a “YES” to a foreignerRead between the lines What does a “contract” mean to

Chinese?

2626

OpportunitiesSelling into the China marketSourcing and outsourcingSelling/licensing technologies to

Chinese companies

2727

ConclusionInitial researchUnderstand the differencesFind competent assistanceDue diligence

2828

Key Legal Issues and Business Approaches

Robert HartKimberley Chen Nobles

2929

OverviewEconomic and trade trends Growing importance of IP assets in

information-based economyKey law changes and legal issuesOutsourcing – Export Control

regulations and issuesNew opportunities with associated

risksRed flags and what to do about them

3030

IntroductionEconomic and trade trends

Globalization of markets and manufacturing bases

China’s role and positionGrowing importance of IP assets in

information-based economyMarket value of business increasingly

based on IP assetsOutsourcing

TrendsModelsIssues

3131

Current Business ClimateSkyrocketing Production

Costs*:Management compensation

+ 9.1 %Support staff wages

+10.3 %Blue collar wages

+ 7.6 %Raw materials

+ 7.1 %* 2008 Booz Allen Hamilton & American Chamber of

Commerce data.

Continued increase in production costs in 2009/2010

3232

2010-2020?Foreign currency reserves:

$1.4 Trillion (2007)$2.3 Trillion (2009)

Purchasing raw materials on a worldwide scale

Time compression due to Growth:1 year in China =

~ 2.8 years in U.S.~ 5.6 years in Ireland~ 5.8 years in U.K.

3333

New Market OpportunitiesKey technology sectors:

Biotech and pharmaceutical Agricultural chemicalsSoftwareSatellite broadcasting encryption

technologyComputer, video gamesRaw materials

3434

Business & Governmental PoliciesHow understanding and utilizing key

business, government policy and legal issues can work for you

Create new market and exploitation opportunities

International trade agreements are raising the standards for protection and enforcement of IPR

International rules and policies create risks as well Compulsory licensing of patentsWTO-sanctioned retaliation

Other policy tools

3535

Recent LegislationLegislation Issuance Date Effective Date Significance

Property Rights Law

3/16/2007 10/1/2007 First time recognition of legal protection of PRIVATE and public property

Enterprise Tax Law 3/16/2007 1/1/2008 Phasing out of favorable tax treatment for foreign investors, tax holidays, etc.

Labor Contract Law

Implementing Regulations

6/29/2007

- -

1/1/2008

9/18/2008

Provides greater protection for employees making it harder to terminate employees, lots of compliance issues

Anti-Monopoly Law 8/30/2007 8/1/2008 Expands scope of prohibited activities that affect business and commercial trade

3636

Key Legal IssuesIP and ownership issuesExport controlsU.S. Foreign Corrupt Practices Act

(FCPA) & China’s Anti-commercial Bribery Rule of 1996 –“1996 Rule”

Mandatory hiring/contracting and in-country labor laws

Local content laws

3737

Intellectual Property RightsProactive exploitation and protection is

essential in today’s global marketplaceKey premises:

Intellectual property rights are a private right

Intellectual property rights are generally territorial

In order to protect and enforce in any country, must obtain IPR in that country

Best way to ensure protection of IP asset: know and comply with the local rules

3838

Intellectual Property RightsExploit IP asset in strategic manner

Be proactive even if currently a potential market

Utilize international treaties which make it possible to file/register in several countriesPatent Cooperation Treaty

E.g., Parties include Japan, China, Taiwan, Korea, Malaysia, United States

Madrid Protocol (Trademarks)E.g., Japan, China, Korea, Singapore, United

States

3939

Intellectual Property RightsExploit IP Asset in Strategic Manner -

cont’dContractual approach – IP Licenses

Obtain necessary licenses before sharing dataKnow and comply with local laws

Business approachesForm joint ventures instead of licensingSplit production processesControl Through vertical distribution chain

4040

ContractsAmerican contract attributes:

LongDetailed and tightLegalese does not often translateUse Modern Format - no whereas clauses, delete

the words “said” and “hereto” as used in “said parties hereto,” etc.“AS WITNESS, the parties hereto have caused this

Agreement to be signed on the date first written above.”

Large Chinese companies are experienced with U.S. style contracts versus midsized Chinese companies with little, but increasing experience

Boilerplate language often a stumbling point

4141

Signing CeremoniesInformalities in the U.S.

Mail contracts and sign at leisureCeremonies are a waste of time and

moneyMajor agreements with Chinese

partner:Expect top executives to meet and signOften followed by dinner, drinking and

karaoke

4242

Dispute ResolutionDispute resolution options:

Ad hoc rulesAdministered mediation – not

enforceableLitigation

Adjudication of cases in rural areas is primitive with protectionist influences

May be impossible to enforce outside of ChinaArbitration

Preferred in business disputes, has confidentiality unlike courts and IS enforceable under the New York Convention signatories

4343

ArbitrationChoosing an arbitration venue

Chapter 14 of the MOFCOM Chinese Handbook used to say:Day # 1: Insist on arbitrating in China

Day # 2: If the foreigner still wants to arbitrate outside China, continue to argue the benefits of arbitrating inside ChinaDay # 3 – 14: Repeat Day #2Day # 14: Suggest Stockholm, Sweden

Insist on Hong Kong and Singapore These cities have better Chinese restaurants

than StockholmStockholm winters are dark and cold

4444

Arbitration AdministrationCIETAC – established in the 1950s,

monopoly over international mattersLocal arbitration commissions (over

180 in number) – domestic disputesWhen regional commissions were

allowed to hear international disputes, CIETAC lobbied for local disputes, thus CIETAC is now the busiest arbitration group

4545

Arbitrating in China– ad hoc arbitration?Supreme People’s Court has struck down

domestic ad hoc arbitration clauses - People’s Insurance Company of China, Guangdong Branch v. Guanghope Power et al [Min Si Zhang Zi No 29]

Supreme People’s Court (2004) - Prohibit ad hoc arbitration agreements, EXCEPT:1. where all the parties are from New York

Convention States; and2. local laws do not prohibit ad hoc

arbitrationAre ICC arbitrations permitted in China?

4646

Drafting Effective Arbitration ClausesRequirements for valid arbitration

agreements:Must be in writingDesignate an arbitration commission

“If a dispute arises, submit to arbitration by CIETAC or by the People’s Court”UnenforceableCan’t have an alternative in the

provision, drafter must choose forum“ARBITRATION INSTITUTION” are

MAGIC WORDS

4747

Combating Global InfringementRequires multi-faceted strategy

Establish IP management and anti-infringement measures for business operations

Utilize all available domestic legal remedies

U.S. enforcement lawsU.S. Government and international trade

policy initiative tools

4848

Combating Global InfringementIP management and anti-infringement

measures for business operationManagement structureContracts/agreementsEducationOperational proceduresMonitoring of operations

4949

ConclusionExploiting and protecting rights and

assets in doing business with ChinaGlobal marketplace and international

trade Developments create opportunities AND risks

Need knowledge of international trade obligations, policy tools, business and legal rights to effectively navigate

Proactive exploitation and protection is essential

Develop multi-faceted strategy utilizing legal, business and government-assisted approaches

THINK GLOBAL / ACT LOCAL

5050

QUESTIONS?

5151

Contact InformationFrances Chou, Schechter + Chou, Inc. 

310-479-8600Robert Hart, Harman International

Industries, Inc.(949) 337-0568, rhart@harman.com

Kimberley Chen Nobles, Crowell & Moring LLP949-798-1330, knobles@crowell.com

Andrew Pan, North American Representative Office of Shenzhen, P.R. China (NAROS)213-628-9888,

andrewpan@shenzhenoffice.org