TEE TIME IN CHINA!

By John Frederick Karch

China has long been known for its world class athletic prowess in various state sponsored programs like gymnastics, basketball, ping pong, soccer and equestrian. Now, enter the latest national focus, this time on individual excellence in golf.

Clearly this was brought to the forefront in the recent 2012 U.S. Open at Olympic Club in San Francisco by 14 year old Andy Zhang ("Jung"), the youngest amateur to qualify for this prestigious PGA tournament, let alone ANY PGA tournament. How did this happen?

An informative video report by Chip Reid of CBS News on June 23, 2012 gives an excellent background, and insight into what might be expected for some time to come from this new class of elite athletes from PRC. There are more than a million millionaires comprising China's elite, seeking to emphasize academics and athletic achievement for their children. Girls and boys begin golf lessons as young as kindergarten in the exclusive schools in which enrolled by their parents. By age 8 the more proficient are playing in full course 18 hole tournaments, at an entry fee of more than US$1,500 per tournament, about one-half of the annual income of the average Chinese factory worker. Critics have dubbed this phenomenon as "green opium" because it is so expensive and addictive, to which most golfers may readily attest.

For comparative purposes, look at Andy Zhang at age 14 in the U.S. Open. He legitimately qualified with competitive golf scores, was cut from the field after the second day having shot respectively 79 and 78 at 17 over par. The eventual winner, Webb Simpson, shot 72 and 73, and won at 1 over par with 68s on the final two days. Tiger Woods entered his first professional tournament at the LA Open played at the Riviera Country Club in Los Angeles in 1992. He was entered with a sponsor's exemption, shooting 72 and 75 in the first two days, also missing the cut. Woods was 16 years old.

U.S golf professional Jack Lear, interviewed in Chip Reid's piece, now working in China to develop its future generations of World Class golfers noted the addictive work ethic of the Chinese youth will no doubt create future superstars. Many of these young athletes seek higher education and golf team participation at major U.S. colleges, a path similarly taken by Woods at Stanford University. Obviously, Andy Zhang, while certainly a young phenomenon, is only representative of the beginning of a new Chinese sports tradition being well crafted to impact long into the future.

Such preeminent interest in golf by Chinese elite as a stepping-stone to global opportunity for themselves, their families and China appears indicative of emerging receptivity of the wealthy business owners, ranking government officials and other influential decision makers to embrace such global opportunities as they arise. Accordingly, conditions could not seem better for you to consider a tee off time for your business in China, whether as a source of materials or products, or as an expanding market for your company's goods or services. Forms of doing business range from an in-country wholly foreign owned entity ("WFOE"), through various joint venture structures, to off shore hybrids with licensing of proprietary technology and international sales companies. All focus on bringing value added to your business.

However, business protocol in China contrasts sharply with customary US business procedures and expectations. Relationships and business rapport dominate; and the business concept, entity structure and even profitability are relegated to secondary importance. Within the relationships, several critical nuances which are generally not present in customary US business practices must be understood, acknowledged and respected for a Chinese related business to succeed.

China business is controlled by central government and its agencies by ownership of natural and administrative resources which must be allocated to any business for its operations. This "state capitalism/command economy" requires that relationship be carefully chosen and honed. Due diligence of background, motivation and character of prospective partners ("Guan Xi") is fundamental to knowing who controls a partner (government, its agencies, other relationships), so the true control of the business may be ascertained (roles and resources).

In general a traditional 51% ownership is meaningless in Chinese entities. The key operatives are the representative director and the general manager who are vested with authority under Chinese law; and the custodian of the company seal (the "chop") which is critical for authenticating operating documents and contracts, and which is almost impossible to replace or to duplicate. The rule of law based on Western common or civil law principles simply does not exist in Chinese law; consequently, enforcement of supposedly binding contractual rights and liabilities, equitable remedies and concepts of predatory and unfair business practices is superfluous and generally unobtainable in a Chinese court or government agency. What does matter is a documented consensual "blueprint" of mutual cooperation compiled among those in the business relationship.

The relationship itself involves an overriding consideration and sensitivity to source of investment resources, face ("Mianzi") and a "zero sum mentality". Wealthy Chinese businesspersons have generally accumulated their net worth from bargain purchases and resale of government assets, speculation in booming real estate, or complementary building supply or furnishings businesses. In most cases, they are highly protective of their new found wealth and understandable skeptical of opportunities, unless or until the relationship has developed and solidified. Consequently, much lip service will be paid to aspects of the business and decisions deferred until confidence in the relationship is established. Along the way it is critical that zero sum be tallied; that is what someone gains another must lose; but that at all times there is no loss of Mianzi. Consequently, there should be no expectation of positive synergy (1+1=3) in striking a deal, because by zero sum, there is no result greater than the sum of its parts.

Nevertheless, in formulating the mutual consensual blueprint for a venture there are various methods to protect commodities, intellectual property and trade secrets which might be brought to the table in structuring the business. These techniques vary from defining products and markets or geographical regions to avoid prospective later competition between partners; registering rights and obligations of intellectual property or trade secrets with specified agencies and/or countries; designate who is responsible for required compliance and tax matters; all in the contexts of who bring what to the table for the venture, and who receives what from the venture as it evolves.

Obviously, to successfully conduct business in China or with Chinese Nationals, it is paramount that the US businessperson understands the rules, know their Guan Xi and competition, and adapt customary business practices to accommodate Chinese business nuances. Unless and until there is significant diplomatic movement in establishing formal Sino-US business comity and protocols in the near future, to take advantage of enormous current business opportunities evolving in China, the US businessperson must yet exercise caution and an abundance of understanding.

To this end, WHGC, a trans-Pacific law firm, specializing in intellectual property and international law, with offices in Northern and Southern California as well as in Beijing, extends an open invitation to contact us to avail yourself of our services. WHGC represents Chinese companies doing business in the U.S., American companies seeking to operate in China, and joint ventures which such companies might seek to structure together. Services include facilitating introductions, recommending capital structuring of such entities for investment, counseling on the fundamental considerations to ideally structure your entity to protect proprietary intellectual property and trade secrets, documenting and closing your transactions; and then providing continuity with on-going expertise directed toward maximizing the success and profitability of your business venture.