Silk Road International Blog

I would recommend Frank Gallo’s book, Business Leadership in China, to any new-to China manger working for an MNC—that’s who it’s written for and that’s who will probably get the most out of it.

I liked the fact that there were a lot of personal examples that show that Gallo has indeed lived the advice he’s sharing.  This to me is the most valuable portion of the book.  Frank has been here for 8 years and writes from experience—both good and bad.  That’s important.  He’s not just sharing success stories, but his mistakes and misunderstandings too.  It’s easy to point out everything that was successful.  It’s much more difficult and more valuable to others to identify where mistakes where made and the follow up remedies.

I liked the fact that that there was an attempt to compare the two cultures—this, I think is sorely missing in the literature on international business.    There are more than enough books describing Chinese culture to foreigners but very few making side-by-side comparisons.   This should be the highlight of this book—any time you can have someone point out to you  “we do it like this and they do this” and then identify some personally experienced middle ground you know you have some tools you can use.  There is some of this, but it’s limited in it’s application because of how it’s presented and at whom it’s directed.

I like that for whom it’s targeted, it’s a quick read.  I understand that this was written to be digested in (very very very) small parts and would therefore be valuable to someone that is (very very very) busy and has absolutely no time whatsoever to commit to learning anything about a new culture that will impact business results.  Making culture accessible in 5-minute chunks was obviously a goal.

And kudos too because the book is just what he claims it is: a starting point for further research into constructing a business model that blends both foreign and Chinese leadership techniques.  To this end, the bibliography is a great resource.  When you read this you know there is more to learn and that Gallo would be a great expat to sit down and have a discussion with.  Personally, I love getting into a book and finding new ideas or ideas that I don’t agree with and having a source citation so I can look it up!  So, thanks for the new additions to my factory-travel reading list!

Now, for the things I didn’t like as much.  And please understand, the structure of the book is what I have issues with far more than the content.

(I guess) It’s a very MBA style look at how culture affects the corporate environment.  Meaning it’s a very very simplified version of Chinese culture that is explained in the context of how it does or does not fit into various foreign business models and theories.  You both had to know the theories and be in a place (large MNC) where you can use them for much of the analysis to be useful.

And while it does compare cultures, it’s actually very PC look at only one and a half cultures, not really two.  What I mean is that Gallo is very deferential to China and Chinese culture and not nearly as nice to foreign cultures.  For example, even in the chapter on honesty, he won’t say that any practices in China are dishonest.  Not one, not once.  He’s not alone in this unwillingness to be (ironically) honest.  I’m not sure why people are afraid to call warts warts after they get to China.  In this case I assume that he didn’t want to offend any of the Chinese reviewers/interviewees, which was probably a good idea considering how valuable the interviews are to the book.  But throughout the book he is more than willing to use terms like “rash,” “haphazard,” “over confident,” “cocky,” “aggressive” (as a pejorative term) and “impatient” to describe foreign business leaders.  Maybe self-deprecation is a Chinese virtue he’s trying to indirectly teach foreigners who read the book.

What’s surprising is that this book came out of a class that was teaching foreign business practices to Chinese MBA students but the final product is much more about how foreigners need to adapt to Chinese culture than it was about a 50/50 blending of two ideas.  This is a VERY common approach in many books, usually justified by “China has a 5000 year history” or “China is a huge market” and “you’re just not going to change it.”  And with each of these points I agree.  But these answers don’t justify a lack of analysis of Chinese processes or an unwillingness to look at the need for Chinese to adopt international standards in many businesses.  For example, when it comes to accounting, no one says, “Hey!  Let’s do it the Chinese way!”  So why can’t we discuss both sides of the cultural coin on other issues as well?  If we are to honestly blend the two why is there not equal give and take on both cultural sides?  Is it because we’re in China and we’ve been cowed into thinking that we’re privileged just to be here?  Why is it so popular to bash foreign cultures and worship China?   Has social relativism infected MBA schools too?

Now I’m all for cultural adaptation—I’ve spent years reading hundreds of books about China and SEA, studying Chinese and Thai—but even though I was educated as an anthropologist I do not believe that just because “it’s how things are done here” that that automatically makes it right and so the outsider must change.  If that’s the case why not just condense the book down to one page of “When in Rome,” sell togas (chopsticks in this case) and save the executives the time they would otherwise take reading the executive summaries?!  I’m just asking for some balance, that’s all.

Side note on comparing two cultures. I hate the term “westerner.”  Who the hell is that?  Can you honestly say that an Italian manager will have the same style as one from California?  A German the same as a Mexican?  A retired Israeli soldier the same as a Canadian trader?  A 50-year-old MBA in a MNC and a 30-year-old small business owner?  Clumping “westerners” all together is just as bad as grouping Asians all together.  How can you compare cultures when one of the two cultures your comparing isn’t even an identifiable culture!?  Just because there was a class in Junior High School called “Western Civilization” doesn’t mean that “Western” is a culture.

Now that I’ve said all that I have to be honest myself.  This book is good—not nearly as bad as the organizational issues I have with it make it sound.  The content is better than the structure.  I just found the structure and vocabulary of the book getting in the way of me appreciating the context.  (Apologies to those who read my blog regularly and know how many typo’s per posting I usually have!  No, a degree in Anthro didn’t teach me how to write well.)

Actually I found quite a few useful examples and ideas, mostly from Gallo relating his personal experiences.  And I really like the fact that he will get some Chinese culture into the hands of people that he thinks may not have otherwise looked at it at all.  That’s a huge plus for this book regardless of anything else it does or doesn’t do.

I also loved that he has Chinese managers with foreign degrees talking about Chinese culture specifically to a foreign audience.  That, I think is more of what is really needed.  I would really like to see an appendix with extended transcripts of the interviews.  Those interviews by themselves would be another book that I’d buy (and read).

I would recommend this book to a foreigner that is new to China and will be working in a large multicultural and MBA environment.  I think that for whom it is written and how it is presented it would connect and be a great introduction (hopefully not a conclusion) to a further study of Chinese business culture.

Finally, for me, this book is also a somewhat humorous look at business executives too.  Open Question to those of you with MBA’s: Do MBA’s really need to have a 1-page executive summary after a 1-page introduction and only 3-6 pages of text?  Is this what MBA school is like?  Is everything broken down into bite-sized pieces for quick digestion with little analysis or context?  Are all MBA’s really so much busier than the rest of us that they can’t read a real book?!  In this book, for example, there only 35 pages of full text (out of 225)!  There are huge headers, big quote boxes, bullet point lists and large font on almost every page!  I’m left with the impression that going to business school must give you ADD as well as an MBA.

Tags: Book Reviews, Business, China, Culture by David Dayton
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1. Factories out the Wazoo!

I’ve been in 7 different factories in the last 10 days.  Factories making everything from furniture to molded metal office suppliers, from clothing to candle holders, and from offset printing to silk screening.  Despite their different industries/products they all had a few things in common.

One, they all had over 100 and under 300 employees—about ½ of what they all claim to have had this time last year.  Two, they were all working at way under capacity—two of them doing nothing but our orders this week.  Three, they all had some version of the same story: western client XYZ didn’t pay/canceled order/can’t take delivery—do we want to buy their product?

I was really amazed that there really wasn’t more anger.  They were all very matter of fact about it, though many were hurting.  I suspect that more than one of them will not be in business this time next year.  They were all still fishing for export orders and didn’t plan on looking for more domestic clients.  I asked if the domestic orders had increase at all and to a man they all said they had gone down as well.  They didn’t see the local market being able to step in and offer any significant replacement orders.  Just read this on CLB about Chinese stereotyping too.

By far the weirdest comment I heard last week was from one manager who claims that the US will soon start a war with China so that it doesn’t have to pay back any of the debt that China has purchased over the last two decades.  He told me wars were generally good for the economy and a war with China would be doubly good (for the US) since the US could stimulate the economy and write of billions of dollars in debt at the same time.  He was serious about it too.

I responded as politely as possible and shared a couple of jokes to try to lighten him up a bit—I told him that (thanks to the Vizzini the Sicilian) Americans know to “never get involved in a land war in Asia” and that two countries with McDonald’s had never fought a war.  More seriously, I tried to explain that our economies are too interdependent and that the physical, human and economic costs of these two huge economies going to war was a far greater loss than not paying back the whatever hundreds of billions in treasury debt that the US owes China.  He responded by saying that of course I would that, I’m doing business here.  But then left me with the oft-heard chilling factoid “China would win because we have more people and we don’t care about going back for the dead bodies” I was left with little room to respond.

2. Reading about China

While I travel back and forth from factories I have a lot of time to read.  I finished a couple of books about managing organizations/people in China this month and have a few thoughts that I think are important apart from the forthcoming reviews of the books themselves.

First, “entrepreneurial” and “innovative” are not the same thing.  I agree with Jack Perkowski that “the Chinese are among the most entrepreneurial people in the world,” but I add that they have not yet shown the same successes in innovation.  Can they?  Yes, certainly.  Will they?  I don’t know, but I surely wouldn’t bet against them.  The larger point really is that in many books (especially by Chinese themselves) the two concepts are used as synonyms.  Which they are not.  If they were, I wouldn’t have a job and Chinese brand names and/or new products would be seen much more in world markets.  Indeed, at least 50% of my time in China is spent putting out fires and solving problems (another 40% is spent setting and enforcing standards).  Creative and effective solutions to problems are by far the most valuable and rare commodity to me in China today.

One of the reasons, and the second important idea here, is that there isn’t a single locally-educated manager (MBA) with more than 15 years of experience in China today.  The first MBA program was only just started in 1991.  Think about what that means for any company in China—either your management team are all under 40, or they are foreigners or they were western educated, or they simply don’t have the education that most international business expect.  (I do not mean that without an MBA there are no great managers in China over or under 40.)  How many millions (?) of Chinese companies are just doing things “their own way,” or “like they’ve always been done,” or by will of the owner’s personality?!  This is a big part of the reason why it’s so hard to get international standard product on a regular basis from domestic level factories.  Perkowski says that “China has a shortage of more than seventy-five thousand “globally competent” managers.” And “the need for local managers is only going to increase.”

Great take on the current Chinese comments on world economics on Jack Perkowski’s blog today too.

And a couple of good articles on Taiwan and the continuation of corruption in China.

3. Chinese traffic and Hospitals, part 3,476.

I have a friend (overseas Chinese) who, over the weekend, fell while getting off the bus.  (It’s tough for most people, especially ladies in skirts and high heels, to get off a lurching vehicle that’s supposed to be stopped.)  She fell and was hurt pretty badly and had to be taken to a local hospital.  The bus company admitted responsibility.

She had some people help her check in and see an MD at the nearest hospital.  First MD says that she has a broken pelvis and a broken femur and will have to stay in the hospital in intensive care for at least a week (with expensive meds) and then have bed rest with hospital care and physical therapy for another 3-4 weeks.  She decides that although she is in pain she wants a second opinion.  The bus company wants her to get a second opinion too, they don’t want to pay for all the time in the hospital.  By the way, any guesses what the bus company’s compensation for a hospital stay is?  50RMB a day.  Since my friend was a “housewife” that is her official economic value–$7.32 per day.

So she goes to a second hospital and gets a second opinion, this time with x-rays.  Final prognoses?  Bruises.  She’s sore, at home and walking now.  No broken bones, nothing but standard pain meds.  No physical therapy necessary.  Just sit on a pillow and move slowly for a few weeks.

Like you’re doing with your factories here— bring your own translators and double check everything.

Next (believe it or not), I saw another dead body on the way to a factory in Panyu.  The accident was on the Guang-Shen Expressway at the Chang An off-ramp about 8AM Saturday.  There were not yet any police or emergency vehicles on the scene yet.  The bus I was on drove by just minutes after it happened, before traffic was even backed up much.  Don’t know exactly how it happened, but the car had been smashed by a bus.  It looked like the driver’s side had been hit by the front right corner of the bus.  Which probably means the lady driving the car didn’t check her blind spot (what blind spot?!) when changing lanes.  As we drove past we could see her neck at a bad angle, no airbag and lots of blood on her face.  Really sad.

So, like last time, just be careful.  That’s the point here.  (If you comment on this part of the post, your comments will not be posted—so there!  ttthhhbbbbtt)

And so we don’t end this section on a bad note, here is a much nicer bit about cars and faces.  Ferrari F4 for sale here at a show in Coco Park.  Asking price?  About $500,000 USD.  Not sure where you could safely drive an F4 here.  It seems to me that owning one in China would be like being the Far Side deer with the bad birthmark.  (“Bummer of a birthmark, Hal.)  But I’d much rather have these faces stuck in my head than the other one!!

4. Thailand–bad and getting worse.

Not only is it bad in Thailand but it was twice as bad in February ‘09 as it was in November ‘08.  Ouch!  At least the government is taking measures that will help both now (investment monies) and later (re-education/training), unlike the US which is spending money that won’t help now or later!  And an interesting look at how factory closings are affecting individuals.  And another bit on increasingly bad bank loans this year too.

I guess it’s time for me to suck it up and go to Phuket and see what I can personally do to help stimulate the local economy.  Anyone else up for sacrificing a weekend in the name of global altruism?  I really think that it’s the least we can do.

Tags: Business, China, Culture, Thailand by David Dayton
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At each of the Global Sources New Buyers’ Seminars (Buying from China: what new buyers need to know) and in my inbox probably once each week, I get a question something like this one I received last week:

“Hi, David, I found a few suppliers online that can do what I want but they all want me to wire cash directly.  I’m sure that this isn’t the way to do this.  What other options do I have?  Also, what happens if I send them money and I don’t get my [product] or it shows up broken?  How would you do it?”

To me, wiring cash (which really is the way that it’s done) is not the part that you should be most worried about.  What you really need to do is figure out how to tie the payments that you will be wiring to the quality of the goods.  And also how to confirm that quality before you allow any product to be shipped.

If I was working by myself from over seas this is what I would do.

LEGAL NOTE: If you are going to be doing any type of OEM/ODM work and not just buying stock items then you need to take all the legal precautions you can in BOTH your home country and in China.  If you do not protect your name/brand (both in English and Chinese) and your product designs here, you probably will not have the protection in China that you’ll want/need later on.  We’ve used Harris Moure (China Law Blog) with great results.

First, I’d get prices from 3-4 factories on as many pieces as each one will bid out for you.  I’d tell them up-front that you’re talking with other factories and comparing prices but that you’re looking for a single long-term supplier.  I’d be very honest about the qtty’s and the quality expectations.   If you exaggerate the qtty’s they will cut your quality to compensate for the lower bulk prices they’ve quoted you.

Second, I’d be very up front about price questions and get as many details as possible.  You have to be sure to not only get a list of what is included in the price but also what is NOT included in the prices.  Negotiate the prices like there is no tomorrow—the prices you’ve been give are purposefully high, they expect you to negotiate.  Don’t ever except the first price you’re given.  Don’t offer or even think to give them their higher price in return for “better quality” unless you specify exactly what better quality includes.

SIDE NOTE: Terms. Price terms and shipping terms are not the same.  FOB and COD on the bid and Pro-forma Invoice are not talking about the same items.  Finance terms are simply when you pay for your goods.  Shipping terms designate a specific logistical service that is (or is not included) in your final payment prices.  Having FOB or CIF shipping terms listed on the contract does not tell you when you must pay.  Similarly, COD does not tell you what portion of the international shipping costs you are personally responsible for.

Third, before I ordered, I’d pay $50 (per supplier) and have a 3rd party verify the company info.  Look up import records (public in the US), talk to any of the suppliers’ clients if you can and talk with others in the industry and see if your potential supplier has any type of reputation.  Companies we’ve used are Globis and Verify.  If you’re doing a) custom work with lots of tooling, b) a single order that is a significant dollar amount, or c) will be doing regular orders that are hundreds of thousands of dollars over the course of months/a year, then I would suggest that you pay to have a standard capacity audit done.  This will cost you somewhere in the neighborhood of $650 plus expenses.

Fourth, you need to confirm with your home county what both the import requirements and product requirements are.  If you need to meet specific product safety or health standards then you MUST PAY FOR A THIRD PARTY TO TEST BOTH THE MATIERALS AND THE PRODUCT BEFORE YOU SHIP IT.  This isn’t an optional step.  This can’t be left to the factory.  If you are the importer of record then it’s YOUR responsibility to confirm that the materials and the product meet your country’s standards.  The factory really has very little incentive to do this for you if you’re already committed to an order.

The import requirements are different from the product requirements.  To know what is allowed and how much it will cost you’ll need to contact a freight forwarder with offices in both your home country and China so they give you a full list of all the duties and requirements.  There are often not just import requirements into your home country but export requirements that must be met to get goods out of China too.  Make sure you know BOTH before you order.

SIDE NOTE: Testing. You need to have an independent third party test your raw materials, your molds, and certainly both inline and finished production.  I’ve used Intertec, BV and Pro QC.  They all have labs in China (and other countries).  They will send someone out to pick up the samples, if you request—and I strongly suggest that you do this.  If you are not here yourself to pull the samples and you don’t have a 3rd party do it for you, what incentive does the factory have to send samples that may not pass the test?  None.  Do it right or your just wasting time and money.

Fifth, negotiate the prices again, and order initial samples from some (2-3) of your potential suppliers to check the quality and the security and service of each one.  Getting your order and finding out that 33% is bad (everything from one supplier) is much better than getting the order and finding out that you picked the wrong guy and 100% is bad.

Sixth, I’d wire (T/T) the money to them directly if the cost was less then $1000.  If you split up the sample order into 3-4 parts, you’re less likely to lose the entire amount and you’ll learn how responsive/responsible each of them are too.   For small orders there is really no other way to do it either.  No one in China has heard about Paypal or escrow accounts so don’t waste your time.  And no one wants to do LC’s for less than hundreds of thousands of dollars, and even then it’s tough to get one.  If you’ve done your DD and paid for research then you should be relatively safe.  But, of course, at some point you need to trust people.  You should verify as much as possible before you trust, but you will still have to trust at some point—which brings me to the next point.

Seventh, I’d tell each of the suppliers that product cannot leave the factory until it’s been QC’d  by a third party (orders for sure, samples too, if they are expensive).  And then copy your 3PQC on the TT and the invoice and the contract (that is, of course, signed/stamped by you and the factory).  This will help to make sure that the factory knows that someone who is already in China will be coming out to check the product and can/will provide a paper trail of all important documents and correspondence.

Eighth, have your 3PQC do at least two/three visits.  They should check production (inline) and final product and loading of the container—this is the bare minimum.  You should do much more QC and testing especially if you are in a sensitive industry that requires specific health and/or safety standards.  The quality rule for product from China is very simple—the more time you spend monitoring the quality of production, the better the finished product will be.  Spending $2,000 for QC and testing for a order even as small as $10,000 is better than spending $10,000 and 6 months on product that shows up below standard or wrong or broken.

SIDE NOTE: Returns. Getting bad product back into China is expensive, time consuming and almost impossible to do.  China has strict laws about sub-standard product coming back in to China (why would they want it?!) and getting your supplier to pay for it will never happen.  If you aren’t planning on coming to China and you aren’t planning on have 3PQ check on it, you’re really telling your supplier that shipping garbage is OK—and that’s most likely what you’ll get.  Factories know that if they can get it on the boat, they’ll never see it again.  And if you’re paying before it ships then you have no recourse—what incentive do they have to give you the best, most expensive quality?  None.

Ninth, I would NOT continue to buy from all 4 suppliers after the initial sample, try to consolidate orders with one or two.  But keep in touch with the other two and place small partial orders with them as the opportunity arises, just to keep them aware of you and your business and to keep you aware of their new products/options. It never hurts to have a back up ready to go just in case.

Tenth, I’d then plan a trip out here sometime in the next year or so—especially if you are going to order regularly.  Visit each of the 4 factories.  Time the visits so you can place an order or two while you’re here and see some of the production of your product.  Maybe time it so you can attend some tradeshows while you’re here too.

Finally, I’d contact a number of freight forwarders that have their own offices in your home state and the region your suppliers are in (for example: Guangzhou or Shenzhen for southern China; Hong Kong is sometimes not “local” enough) and get them to quote you complete shipping costs for both sea and air with all duties and fees included for each order.  People are often surprised to realize that there are specific requirements and oftentimes duties and licenses necessary to get product out of China as well as to get product into another country.  Sometimes these expenses can double the final cost of your goods.  Negotiate rates with them based on your projected volume over the next 3-6 months.  Like the factories, choose one forwarder all your orders (unless you also have to have UPS overnight something to you) and stick with them.  As you push more and more volume through them, they will get better and better at anticipating your needs and more and more willing to help you with details and requirements.  Schenker, Phoenix, Expeditors and Maersk are all forwarders that we’ve used.

Tags: Business, China by David Dayton
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This is a fantastic book.  Honestly, I only have two minor issues with Jasper’s Becker’s book, The Chinese.  First, it’s ten years old and I really want an update.  If you think that ten years couldn’t be nearly long enough to date a book on populations within a country than you haven’t been to China recently.  I’d really like to see an update that included some specifics on the various population groups within the major cities of Shezhen, Shanghai and Beijing.

For example of how fast China changes, consider this: I first came to China in ’95.  I taught English at a university on the outskirts of Chongqing for a year.  That year was physically the most difficult of my life.  I lost 45lbs—there was nothing to eat.  Even the parents of my Chinese students told their children not to eat out on the streets because it was so dirty.  The teachers told me not to go to the campus health clinic because the university was saving money and buying fake medicines.  My parents cried when I came home saying that I looked like I was just released from a concentration camp.   But life here is completely different now—and it’s only been 14 years.  Shezhen, where I’ve been since ’03, has made me fat.  I’ve gained back the 45 and another 10 just for good measure.  We have the choice of imported or fake med’s now.  Really, I have almost every convenience that I could want from back home.  So I’d love to see Becker do an update specifically on the first and second tier cities.

Second, other than comments about their visiting presence, there is no mention of the Taiwanese, Hong Kongese or any other Chinese from any overseas community.  These populations, which are arguable part of “one China” in anyone’s book, are a major factor in the development of Mainland China over the last couple of decades.  But more than that, I wanted a look at them from Becker’s eyes and in the context of the book about other Chinese peoples.  I know that Becker is a mainland guy by experience, but these groups aren’t just minor characters in the story of the Chinese people.  A discussion of their difference and similarities is very necessary to understand both their participation in China and their resistance to being controlled by China.  More than the update, this was the piece of the book that I kept waiting to get to, but it never came.

Becker’s book is fantastic though, in what it does do.   Becker is able to describe in very personal detail the many different facets of China.  Regardless of how long one has been here value of this level of analysis is immeasurable in trying to understand China for doing business or one’s personal life.  From the book it’s clear that despite the political rhetoric there is not just “one China;” not even within the continent.  In fact, as I sit in a factory outside of Shenzhen and talk about the economy with a manager today, he reminds me that even “inside the fence” and “outside the fence” of Shenzhen are very different places and the countryside is a “whole other world.”

While the personal details are great and I was sucked into the individual stories, the ability to then expand those stories into generalities without being to simplistic is what makes this book a useful tool.  He takes the exceptional and integrates it into a larger context and historical pattern.  Indeed, Becker not only takes individual stories and puts them into a larger modern social context but also fits the lives of real people into the detailed political and cultural histories of each region.

Becker knows the Chinese situation—and he knows that there is not just “one China” even on the mainland.  Life in Shezhen is completely different than life in the countryside.  Life in China when you agree with the political, social and economic systems is also much different than if you disagree; for whatever reason.  Education, money, political connections, even ancestors make a difference in the “China” that is described—sure this is true everywhere, but there are few places on earth the inequalities affect so many people.  Becker exposes this variety in great detail through his extensive research and captivating writing style.

The Chinese is not a beginner’s guide to China.  It’s more of a dissertation.  At more than 450 pages it’s long too.  But like I said above, my only issues with it are that I wanted more.

Tags: Book Reviews, Business, China, Culture, Politics by David Dayton
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This is another post about Chinese Contracts from Matt Kowalak.

There are, unfortunately, times when contracts, for whatever reason, need to be voided.  The problem is, when can contacts legally be voided?  There are specific circumstances when this indeed can be done.  But to make it work, you have to meet specific legal criteria.
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The key to understanding these types of contracts in to note when they are actually voidable. There are three situations in which you have the option of voiding a contract in China.

1.    A contract made by a “significant misconception” – This one is tough, because there are not really enough cases on the books in China to even attempt to take a guess at what “significant” implies.  Tentatively, if you are able to prove that in some aspect of the contract, one of the parties made significantly misleading promises that are not in sync with industry standards, you may meet this standard.

2.    Contracts that are “significantly unfair” – This has more to do with contracts in which some aspect of the agreement has changed significantly from the time the contract began to be effective to the time of performance by one of the parties.

3.    A contract signed “under duress” – While this seems like a straight forward idea, no one can somehow force you to sign a contract and force you to perform it, in reality duress can be difficult to prove.

Basically, proving legal voidability will come down to three things, how well you know your industry, what the specific standards are and how influential your lawyer can be in arguing that you were mislead, tricked or coerced into signing a contract.

The tricky part about these types of contracts is that while they are indeed voidable, they are still valid until or unless the party that is getting the short end of the stick exercises their right to have the contract voided. These contracts are not inherently unenforceable. Chinese courts have treated many cases in which a contract has been created by fraud as a voidable contract. This means that unless you catch the other party to your contract cheating and blow the whistle on them, the contract is still perfectly legal.

While this may seem to tilt the field of play in favor of those who will steal cookies all day long and just take their losses when the one time they get caught with their hand in the jar, the Chinese courts have actually rationalized this position by pointing out that it may be in the interest of the party being misled to continue to enforce the contract.

While there may be some hypothetical situations in which the party being wronged would benefit if the contract were to be enforced, it seems to me that more often than not, these “significant misconceptions” will not be understood by the party being wronged. The other point of view from the courts is the recognition of the intent of the parties when they signed the original contract, they decided, by free will, to do business with each other in the first place and it should be up to them whether or not they continue to uphold the contract.

The most important point to take from this discussion is that, if you find yourself being deceived in a contract, it is up to you to go to the court and have the contract declared void.

A similar issue is the right to the rescission of a contract. This right deals with rescission as well as the modification of a contract. In Chinese courts, modification is almost universally preferred to rescission.  While modification of the contract is preferred, it is usually too difficult to try to decide what the true intent of both parties was had they been honest when putting together the original contract.

The statue of limitations for rescinding a contract is one year from the point one of the parties ought to have known they had cause to rescind the contract. Also, your right to rescind a contract may be waived through an explicit declaration or through your actions, if you continue to perform a contract after the evidence that you had cause to rescind was uncovered.

There are also many possible legal consequences to voiding contract. If a contract is declared void, (meaning it does not meet the minimum requirements of a contract) the contract will not have the intended outcome. If part of a contract is void (this is known as severance) you can basically cut that part out of the contract without damaging other parts of the contract that are still valid. Also, the dispute resolution clauses of a contract may still be valid as well, determining arbitration, mediation or conciliation and even the choice of applicable law. Just because the terms of the contract are void, does not mean that the contract disappears, there may still be very real responsibilities that can be costly.
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Matt Kawalak has worked in manufacturing related positions in Shenzhen for the last 5 years.  He studied Chinese at Shenzhen University and is currently an LLM student at The Chinese University of Hong Kong. For further business questions or consulting you can reach Matt at sasinopaths@gmail.com.

Tags: Business, China by David Dayton
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