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Sixth Annual In-House Counsel Conference

Sixth Annual In-House Counsel Conference. Panel 2 Interactive Strategies for Doing Business in China. Presenters. Frances Chou, President and General Counsel, Schechter + Chou Robert Hart, Senior Corporate Counsel, Harman International Industries, Inc.

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Sixth Annual In-House Counsel Conference

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  1. Sixth AnnualIn-House Counsel Conference • Panel 2 • Interactive Strategies for Doing Business in China

  2. Presenters • Frances Chou, President and General Counsel, Schechter + Chou • Robert Hart, Senior Corporate Counsel, Harman International Industries, Inc. • Kimberley Chen Nobles, Partner, Crowell & Moring LLP • Andrew Pan, Chief Representative & Managing Director, North American Representative Office of Shenzhen, P.R. China (NAROS) 2

  3. China’s Market Under Global Slowdown Update and Opportunities • Andrew Pan 3

  4. Overview • China’s Economy Under Global Economic Slowdown • China’s Economic Stimulus Package • Opportunities by Industry Sectors • Recent Development 4

  5. China’s Economy Under Global Economic Slowdown • GDP growth statistics • 9% in 2008 • 2008 in Quarters • 10.6% (Q1) • 10.1% (Q2) • 9.0% (Q3) • 6.8% (Q4) • 2009 in Quarters • 6.1% (Q1) • 7.9% (Q2) • 8.9% (Q3) • 2009 target: 8% 5 Source: National Bureau of Statistics of China

  6. China’s Economy Under Global Economic Slowdown (cont.) • Export decline • Export declined 19.7% in Q1, 2009 • Export volume decreased from $111.4 billion (Jul 2008) to $51.3 billion (Jan 2009) • FDI decline • FDI flows declined 20.6% in Q1, 2009 • Unemployment rate increase • Raised 2009 target to 4.6%, the highest since 1980 6

  7. China’s Economy Under Global Economic Slowdown • Stock market, housing market, auto market and other key economic figures were all down sharply 7

  8. China’s Stimulus Package • Announced Nov. 9, 2008, projects and spending already started in 2008 • 4 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 8

  9. Opportunities by Industry Sectors • Finance • Removing lending quota on commercial banks • Increasing the lending scale • Credit support to M&A • Credit support to rural areas • Credit support to small and medium enterprises • Tax (VAT) reform • 120 billion RMB tax reduction from January 1st, 2009 • Export VAT refund rate increases to help exporters, applicable to 3,770 products 9

  10. Opportunities by Industry Sectors • Housing • Tax reduction to boost real estate market • Affordable and low-rent housing • Expanding the pilot program to rebuild rural housing • Increasing senior housing • Rural infrastructure/modernization • Improving countryside roads and power grids • Ensuring drinking water safety • Expediting the North-South Water Diversion Project and country-wide reservoirs • Rural Home Appliance Subsidies Program 10

  11. Opportunities by Industry Sectors • Transportation • Budget: 1.8 trillion RMB • Building more dedicated passenger railways and coal routes • Expanding highway system • Building more airports in the western areas • Automobile • Tax reduction for purchasing economic cars less than 1.6L • Subsidies to farmers for purchasing light trucks and minivans • 10 billion RMB to subsidize auto industry technological innovation and new energy vehicles • Expanding auto financing 11

  12. Opportunities by Industry Sectors • Telecom • Long 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 12

  13. Opportunities by Industry Sectors • Healthcare and education • Improving health and medical systems in rural areas • Restructuring the healthcare system • Building more joint-venture hospitals • Expanding health insurance, especially to rural areas • Developing cultural and educational sectors in rural areas • Building more schools in rural western and central areas 13

  14. Opportunities by Industry Sectors • Energy and environment • Budget: 350 billion RMB • Technology upgrade of coal-burning power plants to reduce pollution • Encouraging 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 management • Eco-city plan 14

  15. Opportunities by Industry Sectors • Other industry sectors • Sichuan earthquake rebuilding: 1 trillion RMB • Technology innovation • E-commerce • Entertainment, animation, media and advertising • Logistics 15

  16. 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 spending • Over liquidity/inflation concern • Banking trouble again: non-performing loans may rise • Currency and trade disputes between the U.S. and China 16

  17. Recent Development • Q4/2009 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 pattern • Before: 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 17

  18. Key Business Issues • Frances Chou 18

  19. Key Business Issues • Initial research • Unexpected costs and expenses • Labor related issues • Relationship, Relationship, Relationship! • Due diligence • Lost in translation • Opportunities 19

  20. Initial Research • Permits, licenses, approvals, . . . . • What kinds • From which agencies • Fees, costs, expenses, . . . . • Market research • The Chinese market is extremely regional • Understand where you will fit in • Adjustment of Products • Government policies • Relevant US and Chinese laws 20

  21. Unexpected Costs and Expenses • Permits, licenses, approvals, . . . . • IPR issues • Government incentives and expiration of such incentives • Other start up costs • Currency conversion issues 21

  22. Labor Related Issues • Hiring and retaining skilled employees in china • Employment agreements • Insurance • Training • Firing employees 22

  23. Relationship, Relationship, Relationship! • Understand how “Relationship” works in China • Government relationship • Relationship with the “Right People” 23

  24. Due Diligence • The most important thing • Government filings and documents • Corporate documentation • Financial information • References • Site visit • Background check of executives 24

  25. Lost in Translation • Different business cultures • 100 ways to say “NO,” but 90 of them sound like a “YES” to a foreigner • Read between the lines • What does a “contract” mean to Chinese? 25

  26. Opportunities • Selling into the China market • Sourcing and outsourcing • Selling/licensing technologies to Chinese companies 26

  27. Conclusion • Initial research • Understand the differences • Find competent assistance • Due diligence 27

  28. Key Legal Issues and Business Approaches • Robert Hart • Kimberley Chen Nobles 28

  29. Overview • Economic and trade trends • Growing importance of IP assets in information-based economy • Key law changes and legal issues • Outsourcing – Export Control regulations and issues • New opportunities with associated risks • Red flags and what to do about them 29

  30. Introduction • Economic and trade trends • Globalization of markets and manufacturing bases • China’s role and position • Growing importance of IP assets in information-based economy • Market value of business increasingly based on IP assets • Outsourcing • Trends • Models • Issues 30

  31. Current Business Climate • Skyrocketing Production Costs*: • Management compensation + 9.1 % • Support staff wages +10.3 % • Blue collar wages + 7.6 % • Raw materials + 7.1 % • Continued increase in production costs in 2009/2010 * 2008 Booz Allen Hamilton & American Chamber of Commerce data. 31

  32. 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. 32

  33. New Market Opportunities • Key technology sectors: • Biotech and pharmaceutical • Agricultural chemicals • Software • Satellite broadcasting encryption technology • Computer, video games • Raw materials 33

  34. Business & Governmental Policies • How 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 patents • WTO-sanctioned retaliation • Other policy tools 34

  35. Recent Legislation 35

  36. Key Legal Issues • IP and ownership issues • Export controls • U.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 36

  37. Intellectual Property Rights • Proactive exploitation and protection is essential in today’s global marketplace • Key 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 37

  38. Intellectual Property Rights • Exploit 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 countries • Patent Cooperation Treaty • E.g., Parties include Japan, China, Taiwan, Korea, Malaysia, United States • Madrid Protocol (Trademarks) • E.g., Japan, China, Korea, Singapore, United States 38

  39. Intellectual Property Rights • Exploit IP Asset in Strategic Manner - cont’d • Contractual approach – IP Licenses • Obtain necessary licenses before sharing data • Know and comply with local laws • Business approaches • Form joint ventures instead of licensing • Split production processes • Control Through vertical distribution chain 39

  40. Contracts • American contract attributes: • Long • Detailed and tight • Legalese does not often translate • Use 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 40

  41. Signing Ceremonies • Informalities in the U.S. • Mail contracts and sign at leisure • Ceremonies are a waste of time and money • Major agreements with Chinese partner: • Expect top executives to meet and sign • Often followed by dinner, drinking and karaoke 41

  42. Dispute Resolution • Dispute resolution options: • Ad hoc rules • Administered mediation – not enforceable • Litigation • Adjudication of cases in rural areas is primitive with protectionist influences • May be impossible to enforce outside of China • Arbitration • Preferred in business disputes, has confidentiality unlike courts and IS enforceable under the New York Convention signatories 42

  43. Arbitration • Choosing 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 China • Day # 3 – 14: Repeat Day #2 • Day # 14: Suggest Stockholm, Sweden • Insist on Hong Kong and Singapore • These cities have better Chinese restaurants than Stockholm • Stockholm winters are dark and cold 43

  44. Arbitration Administration • CIETAC – established in the 1950s, monopoly over international matters • Local arbitration commissions (over 180 in number) – domestic disputes • When regional commissions were allowed to hear international disputes, CIETAC lobbied for local disputes, thus CIETAC is now the busiest arbitration group 44

  45. 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: • where all the parties are from New York Convention States; and • local laws do not prohibit ad hoc arbitration • Are ICC arbitrations permitted in China? 45

  46. Drafting Effective Arbitration Clauses • Requirements for valid arbitration agreements: • Must be in writing • Designate an arbitration commission • “If a dispute arises, submit to arbitration by CIETAC or by the People’s Court” • Unenforceable • Can’t have an alternative in the provision, drafter must choose forum • “ARBITRATION INSTITUTION” are MAGIC WORDS 46

  47. Combating Global Infringement • Requires multi-faceted strategy • Establish IP management and anti-infringement measures for business operations • Utilize all available domestic legal remedies • U.S. enforcement laws • U.S. Government and international trade policy initiative tools 47

  48. Combating Global Infringement • IP management and anti-infringement measures for business operation • Management structure • Contracts/agreements • Education • Operational procedures • Monitoring of operations 48

  49. Conclusion • Exploiting and protecting rights and assets in doing business with China • Global 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 49

  50. QUESTIONS? 50

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