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How To Sell To The Chinese Government. And Not Lose Everything.

By Dan Harris and Steve Dickinson

One of the strengths of the China blogosphere is that we so often enhance each other. This morning I did a quick post, entitled, "How To Sell To The Chinese Government: Have What It Really Really Wants." That post was based on an article by a couple of Reed Smith attorneys in the China Business Review, setting out some tips for securing deals with the Chinese government. Stan Abrams over at China Hearsay followed up on my post by doing his own post, entitled, "Government Procurement Tips: Don't Forget About IP," pointing out a couple critical legal aspects of such deals. Stan pointed out how important it is for companies doing business with the Chinese government to be mindful of the anti-corruption laws of China and of their home country. Stan rightly states companies that do business with the Chinese government without having instituted anti-bribery practices and procedures are "crazy in this legal environment." It completely agree and I will say that I have had a client or two walk away from an otherwise good deal rather than pay off a governmental employee to keep it. I will also say that in my experience, these things usually do not come up until right near the end. They come up right when you are salivating about the high profit deal you are about to sign, at which point someone steps in and lets you know exactly why it is that you were able to strike such a great deal and exactly who it is you have to thank for that. Or, as Stan puts it:

Regardless, however, if you really want to get into the procurement business, you will face corruption early and often. You may face the terrible choice of either engaging in such activities or giving up the business. As a lawyer, I can only advise on the latter option of course; as a human being, I understand that not every company is in a position to just cut and run from a jurisdiction. From my point of view, in many instances, the reality of corruption in the area of government procurement means that some foreign companies just can't compete without risking serious jail time (in their home country or China). It's just not worth it in many cases. These legal tips will only take you so far.

Stan also pointed out the need for companies to protect their intellectual property in any government deal:

Therefore, you not only need something the government really wants, you need a way to ensure that you will not be pushed out after a couple of years. How to do this? Many options, including tying up your domestic competitor with a JV; this doesn't work in the long run, but it is a short/medium term option. A better method is to have some solid IP that is registered in China, and by that I mean patents -- created in China is the best. Even that's not a 100% safe game, though. Recently we've seen some patents that looked fairly solid fall to invalidation actions. In one case that involved a client of mine, the technology was in an area that the government was very interested in. Not that I'm inferring anything untoward occurred . . . Even better than a patent is trade secret information that remains safe and secure in the home country and the application of which cannot be reverse engineered. I know, most companies only wish they had that going for them. Understood. That's why it's the best option, not the most common.

All true.

Full post as published by China Law Blog on May 13, 2010 (boomark / email).