China Law Blog is a good source of legal information about Chinese business and investment regulations and one of his comments in my previous post got me thinking about why Chinese entrepreneurs don’t like to work not just with American lawyers, but lawyers of any nationality.
Here is his comment in full:
Right idea. Wrong country. What you predict will happen, I am certain of it. I am certain of it because our German and Russian clients have over the last few weeks been calling us (here in the US) like crazy to help with this or that deal they are doing or want to do. The deals range from high tech to old line manufacturing (that’s right) to real estate. When we tell them our legal fees I can almost hear them gasp (particularly the Germans) at how low they seem for those used to paying in Euros. That’s right, step right up, the US is on sale to foreigners ….. Like it or not. BTW, no calls from Chinese and I don’t expect many either, both because they tend not to use lawyers so much and they also tend not to be big buyers of existing US companies. At least not yet.
So why is it that Chinese entrepreneurs don’t like to use lawyers and legal services, even when using them the right way, and intelligently, will help them to greatly expand their businesses?
I have a theory.
For many Chinese, “the law” is whatever the Chinese government says it is. Just because some new kind of business is done in China, does not mean it is legal, it is just tolerated. It usually means that it is so new to the slow-moving bureaucracy that it hasn’t figured out whether it should be legal or illegal, so it’s “tolerated”.
Your business may be tolerated, then the government says it is “illegal”, or it may be tolerated, then the government says it is “legal”. Then it might switch from “legal” to “illegal” and told to shutdown almost overnight. This happens, and continues to happen all the time. This is part of the price of doing business in China.
Here’s another example.
The Chinese government says that new businesses in China have to list their “business categories” and the business they are in. Think about it; does this make sense? From a business point of view, it makes little if any sense. Let’s say a consulting business needs to do a marketing survey. They may run afoul of the law because this is not allowed; they registered as a consulting business but need to do a marketing survey for a client who wants to enter the Chinese market. So while it makes perfect business sense to do this, the bureaucrats and regulators prevent it from doing so, because from their POV (the government regulators), categorizing businesses makes more sense.
Among Chinese business people, there is a large degree of frustration at these sudden changes which come out in the morning, and may change before the sun goes down. For Chinese entrepreneurs, this is the face of the law.
So, in order to succeed, they spend a huge amount of their time avoiding the regulators and getting warned, or even shut down. If the regulation comes from Beijing and they are in Hangzhou, they will go talk with Hangzhou city government officials to avoid getting crushed because local Chinese officials have the power to “interpret” the law. Sometimes this means ignoring what Beijing says, without openly confronting Beijing.
And this is why many Chinese entrepreneurs avoid lawyers, because so much of the time, the government officials are the face of the law, and are not there to represent their rights, but are there to warn them, or even shut them down. So, from their perspective, the law is bad news.
When Chinese companies go overseas, they continue to act this way. They avoid relatively small up-front legal fees, thinking that they can outmaneuver them and the regulators, never thinking that the law can in fact work both ways, and can help them to gain benefits. They are guilty of thinking that they are still in China and behave as if they were still in China.
Moreover, they know that the advantage of Chinese businesses lie in their cost structure, and fear losing it if they go overseas. This means that they act very cheap when they go overseas, and acquire reputations for being cheap and micro-managing their foreign employees, trying to extract every little bit of time and value out of them.
In the long-term, this hurts the reputation of Chinese companies as a whole.
In fact, company cost structures evolve and adapt to the market and society they are a part of. No country can have the same cost structure as China, just as no country can have the same values as America does.
And there is no reason that they should.