Free exchange of the Yuan: next on the agenda?

24 June 2010 – 10:53 pm

There has been a lot of hoop-la about the People’s Bank of China’s recent announcement to unpeg the Yuan from the US dollar and their determined follow-through (note to those who may be confused, including it seems Forbes, this is not an appreciation but a release from the fixity of the RMB to the USD and a replacement with an unidentified basket of currencies).

However, there has been another interesting development regarding the Yuan which has escaped coverage (relatively speaking). This is the announcement that the People’s Bank of China is looking to expand its pilot program for the settlement of export trades, which allowed certain approved Chinese enterprises to invoice customers in Hong Kong, Macau and the ASEAN nations in Renminbi and be paid in foreign currency, so long as the payment was made and settled through an approved Chinese bank.

The program has now been expanded to all other countries not just ASEAN nations, Hong Kong and Macau.

The expansion also added enterprises from 18 provinces and municipalities to the program (previously limited to Shanghai and four Guangdong cities) to include Beijing, Tianjin, Inner Mongolia, Liaoning, Jiangsu, Zhejiang, Fujian, Shandong, Hubei, Guangxi Zhuang Autonomous Region, Hainan, Chongqing, Yunnan, Sichuan, Jilin, Heilongjiang, Tibet and Xinjiang Uygur Autonomous Region.

If you have ever considered dealing in any trade with China from offshore, there is some significance; as the Renminbi is seen as a stable currency, many customers prefer to be quoted and to trade in the currency.

This is a small, seemingly innocuous measure, but is emblematic of  the way in which Beijing executes its long-term reforms. The final goal, no doubt, is free exchange of the Yuan. Prior to that, it seems, there will be a (slow) step-by-(slow) step implementation of reform.

Who knows, I recall it having been run up the flagpole before, but Shanghai may in one of these steps become a free currency-exchange zone to challenge Hong Kong (where the Renminbi is informally and very broadly exchangeable).  I continue to be in awe of how Beijing marches to its own drum of reform in such matters.

By Geraldine Johns-Putra | Posted in Yuan | Comments (0)

Yuan flexibility announcement: the surprise is that it’s a surprise

20 June 2010 – 2:20 am

Today, the People’s Bank of China announced that it would further reform the Renminbi exchange rate regime and suggested that, rather than a revaluation, it would be looking at loosening the Yuan’s peg to the US dollar. 

The official economic policy reasons were spelled out in a piece in the China Daily. They included the disadvantages of a sharp revaluation of the Yuan to China’s continuing dependence on exports, particularly by foreign enterprises who might withdraw their powerhousing contribution to the Chinese economy and by Chinese manufacturing companies who have slim profit margins. This article also explains the confusion I have previously expressed over whether China is seeking to increase its exports or to rebalance towards imports and therefore reduce its trade surplus. The simple explanation is that while China may have contemplated a revaluation of the Yuan to rebalance towards imports as part of a short-term strategy to reduce its trade surplus, its long-term goal is to change the profile of its exports so that it exports “products with independent intellectual property rights by its domestic enterprises”, as the writer of the China Daily article puts it in comparing China to Japan.  

Now the grand plan seems to be that, by reducing China’s reliance on foreign enterprises and the manufacturing sector, China could safely allow the Yuan to float (eventually) as currency fluctuations would be better absorbed by more robust non-manufacturing businesses.

Anyway,in terms of timing, this is an exemplary way of announcing the inevitable that we had forgotten was inevitable; on a Saturday, after a spell during which President Obama has been coping with a mega-environmental crisis in the Mexican Gulf , the UK went through a historical election and the EU has been fighting off localised government debt traumas, not to mention that we are in the middle of a World Cup.

Even so, the Chinese have been even more artful this time by springing an announcement when “nobody expected it” that is not really an announcement about anything that is going to happen immediately. It is simply an announcement that they have agreed with the rest of the world that the Yuan needs to be  ”reformed” and made more “flexible”.

As a statement of intention however, it is still a biggie.

By Geraldine Johns-Putra | Posted in Yuan | Tagged | Comments (0)

Chinese VAT rebates: micro and macro issues

2 June 2010 – 10:11 pm

Do not forget the impact of Chinese VAT on exports and the economy, someone once said to me.  And I’ve tried to stay true to that. 

I was involved recently in a desktop due diligence of a publicly listed Chinese manufacturing company. 

Nothing untoward was revealed in its public filings and disclosures, but a little more was revealed from an accounting viewpoint.

This company’s recent financial performance showed a strong increase in revenue of about 150% compared to the corresponding period last year.  Its operating cashflow was unimpressive due in part to an increase in receivables (a sign of the market, perhaps) and, interestingly, a trebling of the operating taxes that it paid.

In trying to determine the reason for the sharp increase in taxes, I queried whether the company might have suffered from a change in the Value Added Tax (VAT) rebate policy.* 

I am not an accountant, so I have no clue as to how a change in tax rebate is reported on a company’s income statement and how that would have showed up in its financial reporting.  What I was thinking of was the way in which many Chinese manufacturers are dependent on VAT rebates when it comes to the relative success of their export business. 

The simplified way in which VAT rebates works is this:

  • a Chinese manufacturer pays VAT of 17% when it purchases raw materials and inputs for its products
  • when it exports those products, the Chinese manufacturer invoices its foreign customer 17% VAT on the price of the exported product 
  • the  Chinese government rebates part of the price to the manufacturer, say 10%
  • the rebate results in a 10% return of the price to the manufacturer in respect of the exported product
  • the effect is that the net tax paid is 7%.

On a micro-level: unless a foreign buyer knows how much the applicable rebate is, he or she may be assuming an operating expense for the seller that is higher than what is actually justified.  Here’s a neat explanation of how the VAT rebate might affect you if you’re buying from China, from which I borrowed my example above.

And, as a corollary, you can expect the Chinese manufacturer to raise its prices (or suffer temporary losses in the case of a contracted sale price) if the VAT rebate changes.  The VAT rebate did in fact change in 2007 when the Chinese government reacted to a World Trade Organisation (WTO) dispute and settled it by reducing VAT on approximately 3000 categories of export, all of which was beautifully and gamely reported at the All Roads Lead to China blog.  It led to advantageous price gains overnight for many who were importing Chinese products.

Which brings me to the macro-level.  The VAT tax rebate acts as a protectionist incentive in these chosen sectors, as much as any tariff or subsidy might, by introducing an artificial reduction in costs relative to non-domestic competitors or competitors in substitute sectors.  

Currently, there is pressure building up within the WTO system for China to address the VAT rebate system.   ”Partial VAT rebates” are on the list of culprits of alleged free-trade violations by the Chinese government. 

So, we may be in for another adjustment.

Either way, on a micro or macro level, it pays to be cognisant of what a VAT rebate is in the sector you’re dealing with, and what it means.

* Unlikely in this case, but I still think a valid question to pose.

By Geraldine Johns-Putra | Posted in Foreign Investment, Legal | Tagged , | Comments (1)

China vs. Hong Kong: personal income tax

19 May 2010 – 9:05 pm

Every now and again, someone asks me about how he or she might reduce their individual income tax (IIT) in China.  Usually, this comes about because the person has been offered a lucrative position in mainland China and then realised that the top personal income tax rate in China is 45%, which kicks in at a monthly salary of RMB100,000 (or USD14,600).

This is really not that much in top executive terms, whether you are talking pre- or post- financial crisis.  Many countries have very high top marginal tax rates, including the UK and Australia, but many people still view mainland China as something of a hardship posting.  And then, they look at Hong Kong, with its 15% tax rate on salaries, and they start to wonder…could they structure something a bit more advantageous if they are going to be moving to the region…

Maybe they could.  But first let’s consider what is at stake.

When I first applied for a job in China, I was asked by my prospective employer what my preferred location was, Hong Kong, Shanghai or Beijing.  Without hesitation, I replied “Shanghai”.  Hong Kong was in the back of my mind, Beijing a third.  What mattered to me was that I wanted to be on the mainland, found Shanghai as a city utterly fascinating and wanted to live there.  I got the job, and didn’t look back.

Others are not so emotionally driven.  And I can understand that.  Moreover, as someone who has lived in different tax jurisdictions and in every case had low confidence in what was being done with my tax dollar, I can see the wisdom of trying to keep the maximum in your own pocket and out of the taxperson’s clutches.

I am no tax  expert.  For China tax issues, I defer to Matthew McKee at China Tax Insights.  I have also found this China expatriate tax guide from the accountancy firm Grant Thornton (available from the firm’s website here) to be very useful for its clarity in a confusing area.

As a corporate lawyer with clients who have more than a passing interest in the issue, what I would like to share with you from what I have learned is this:

  1. Individual Income Tax (IIT) is becoming more and more of an issue for expatriates who live in China, because the Chinese authorities have become stricter in enforcing regulations. For example, the tax authorities used to accept the scheme of splitting payments between China and Hong Kong and employees only declaring the China portion, but a few years ago they really clamped down on the practice. It is now very risky and I doubt any employer would permit it since they can also be liable for fines and non-compliance. 
  2. The main option to reduce tax for an expat in China is to make optimum use of the expatriate relief under expat employment contracts.  This relief provides for part of an expat’s monthly salary to be tax-free and allocated to living expenses and therefore reduces the taxable amount.  The total monthly allowance is capped at about 20% of the monthly salary with separate caps for items like food and laundry.  It also translates into the need to start collecting fapiao or receipts…
  3. For tax optimisation, the expat employee could have some of the salary guaranteed to be paid as the annual bonus, since this is taxed separately from one’s monthly salary.
  4. In addition to employing the expatriate relief and bonus structure it may be possible to have a separate arrangement and be paid a separate amount for services that are performed for an entity outside of mainland China .  The work must be done outside of mainland China and must not be charged to or borne by a Chinese enterprise or establishment.   The good news is that the payment received for any such services will not be taxable in China.  The possibility of using this structure depends on the employer and what legitimate arrangements can be put in place.  

The main thing is not to view Chinese tax laws as being  so pro-expat anymore that you could get away with clearly illegal arrangements.  Most employers anyway will not come to the party for such ill-advised arrangements, since they may be liable for non-compliance at very high penalty rates. 

I urge you to read China Tax Insight’s Tax Compliance Nightmares series for a bit more flavour.

And, as a final word, as much as I love Hong Kong, I have a view on what you could gain from living on the mainland: if you don’t sweat the small stuff, what you learn in China will be worth its weight in gold and more. 

That is certainly what I found.

By Geraldine Johns-Putra | Posted in Legal | Comments (6)

Is it just me? Or is everyone going China crazy?

14 May 2010 – 9:59 pm

I liked this story about Copenhagen’s Little Mermaid being moved to Shanghai’s World Expo for a bit of an out-an about.

Let’s just say: I am not enamoured by the whole Shanghai World Expo thing. 

I lived in Shanghai for over 2 years and I don’t need the “Beijing Olympics” type overhaul to appreciate this wonderful city.  Shanghai is a city I remember in a peculiar way.  It is extravagant, pulsating, hazy, chaotic, crowded, yet oddly personable and, oh, a bit addictive.  I do not need a World Expo makeover, replete with new tunnels under the Huangpu and ten extra metro lines, to remind me that I have a spot for Shanghai in my heart.

But then I read this piece about the Little Mermaid.   When I was just a little girl growing up in Malaysia on Hans Christian Andersen fairytales, I always wanted to travel to Copenhagen to see her.  Now to know that it has been seen fit to dig her out of Copenhagen’s harbour and transport her to Shanghai is kind of heartwarming, even for someone like me who is not naturally a softy.  

She has never been moved before.  I think this is evidence that we are all going China crazy.  We are all recognising that China is where it is at.  The world is turning, and it is turning to China.  Let’s do unprecedented things, for China…

And to think I will likely get to see the Little Mermaid from my childhood fairy tales, in all places, in Shanghai, a place I thought I would less likely visit than Copenhagen.

By Geraldine Johns-Putra | Posted in Uncategorized | Comments (4)

Commercial secrets: suggestions on how to play it safe

9 May 2010 – 8:54 pm

The Circular issued by the State Owned Assets Supervision and Administration Commission (SASAC) and released on 26 April 2010 concerning “commercial secrets” of Central State-owned enterprises (CSOEs) has generated signficant commentary about what it really means for businesspeople and advisers in China.

According to the Circular, its intention is to strengthen the protection of CSOE commercial secrets and safeguard the interests of CSOEs from violation. 

The Circular contains a number of measures towards this end including

  • establishment of a separate confidentiality committee within the CSOE which will be responsible for complying with laws, including the State Secret Law;
  • establishment of an office within the CSOE to carry out the day-to-day work relating to protection of commercial secrets; 
  • a procedure to be carried out by the CSOE to identify what is a commercial secret, what term applies to the required confidentiality and what disclosures will be permitted.

The Circular is squarely addressed at CSOEs.  In the main, it sets out steps that these enterprises have to take to protect their commercial secrets.  This is interesting to me, because it means that the Circular is not a document that is explicit about penalties for breaches.  The “rewards and penalties” section of the Circular is brief and provides that, in the event of a leak, the CSOE must undertake the necessary legal processes, investigate leaks and refer them to the judicial authorities.  The Circular does not specify any express penalties for anyone found to be in unauthorised possession of a commercial secret.

Yet, in the wake of the judgments against Stern Hu and his colleagues at Rio Tinto, this short shrift on penalties does not lessen concerns that the Circular could be used as a rather blunt tool for judicial investigation and prosecution, should someone find herself or himself in unauthorised possession of a “commercial secret”.

Concerns

One major concern is the breadth of the definition of a “commercial secret” .  Art. 2 of the Circular states: 

…a “commercial secret” refers to management information and technical information that is not in the public domain, may lead to economic profits for the Central State-owned enterprise, has practical application and in relation to which the Central State-owned enterprise has adopted confidential measures.

That is a very broad scope and could include almost any information that the enterprise has taken steps to keep confidential. 

Positives?

One small positive within the drafting is that, if the Circular is complied with properly, then what is a commercial secret should be very much identifiable.  According to Art. 15, all documents carrying commercial secrets must be clearly marked as “confidential”, with the level of confidentiality and the term of confidentiality expressly stated.  Still, it is not so hard to imagine a situation where a piece of information turns out to be a commercial secret, yet the document carrying the information was not officially obtained directly from the CSOE and did not have the necessary markers.  In this sort of situation, would it be a sufficient defence for anyone found to be in unauthorised possession of the information that the document they obtained was not marked confidential? 

For those involved in a transaction or potential transaction with an CSOE , Art. 21 of the Circular states that a confidentiality agreement must be signed: 

where the Central State-owned enterprise is involved in consultation, negotiations, technical assessment, appraisal of results, cooperation development, technical transfer, joint share acquisition, external audit, due diligence, settlement of properties and funds and other activities regarding commercial secrets.

Steps you can take to protect yourself

The articles I have described above give some idea of the steps you can take to protect yourself in when dealing with SOEs.  I am not sure myself what a Central SOE is, as distinguished from any other SOE, but if you are dealing with an SOE, it is best to consider that it is a Central SOE for the purposes of the Circular. 

The  defense mechanisms I have come up with, based on my reading of the Circular are:

  • When dealing with any information from a CSOE, seek to obtain information only through official channels.  Especially, try to obtain the blessing of the “confidentiality committee” and “confidentiality office” that need to be established under the Circular.
  • If you are in a position to obtain information from a CSOE, sign a confidentiality agreement that sets out a process for disclosure – don’t assume you are better off without one, since a confidentiality agreement that is signed by the legal representative provides some assurance that the CSOE has complied with proper procedures and provided information through proper channels.
  • Every commercial secret is supposed to have a term of confidentiality and this should be marked on documents carrying the secrets.  Make note of the term since this could be important in any proceedings, should you be so unlucky as to be prosecuted. 
  • Anything in the public domain is not a commercial secret, under the provisions of the Circular.  If you have evidence that information pertinent to your dealings with the CSOE is in the public domain and could otherwise fall within the broad definition of a “commercial secret”, make note of it.  Again, this could be very important in judicial proceedings.

To sum up, play it safe.  This is not one to take chances in. State secrets have always been an area that savvy foreign investors knew they should not mess with, and the association that SASAC has made between commercial secrets of CSOEs and State secrets (they are not one and the same, but could be, yet no-one can say when and why) should be fair warning that dealings with SOEs must be conducted on a very proper footing.

By Geraldine Johns-Putra | Posted in Foreign Investment, Legal | Tagged , | Comments (0)

Exporting to China – the next wave?

27 April 2010 – 12:38 am

We’re still just talking and talking about the revaluation of the Yuan.  It must be imminent.  Any day now it will happen.  Surely, surely.

Provided it does finally happen, what will be the fallout?  One very basic and direct consequence of a revaluation would be that Chinese exports would be less competitive and imports to China would be more affordable for Chinese consumers.  And therein lies an interesting opportunity.

An article in the financial analysis pages of WSJ Asia on 23 April (full content available on subscription only) suggested that  Japan, as China’s largest source of imports, would gain.  This is one of those obvious but easy-to-miss points, and one which has a potentially wider impact. 

The article observes that Chinese consumer demand is growing…and of course middle class consumption is a big part of that.

This must sound some bells for the dealmaker or entrepreneur.  So what are the opportunities here?

If a foreign investor has already made a tie-up in China that involves a manufacturing base in China (as Japanese clothes manufacturer Uniqlo has), then a Yuan revaluation could in fact hurt, as this would shrink margins.  But if your base is outside China, could one possibility for cooperation be with a China-based wholesaler or retailer for the import of your products into China?  This may be a particularly attractive option if you manufacture in another low cost country already and are hesitant to up sticks and move your production base to China.

This sort of approach goes hand-in-hand with the encouragement that the Chinese government is giving to “outbound investment” from China, since Chinese investors may consider investing strategically in non-Chinese companies who might make ideal partners for imports to China.

We are now coming full circle here: i.e. that Chinese companies may invest in companies outside of China, for reasons of cost-effectiveness in production.  And no-one really should be surprised about this anymore.

Obviously, China is still wary about revaluing its currency.  A deterioration in its trade position is par for the course, but what it must fear is that this will be a pebble with even wider ripples – for example, might a revaluation cause the collapse of an asset bubble, a precarious situation that the government is trying to avoid?  To the extent that any such bubble is dependent on offshore money, this is a real concern.  And indeed some have speculated that the pressure on the Yuan could have a similar impact that the appreciation of the yen had in Japan i.e. the collapse of Japan’s 1980s asset bubble, falling export demand and years of deflation and wage depression.  Japan’s finance minister even weighed in recently with some advice to Premier Wen Jiabao on this very topic. 

But the fact that the Yuan is fixed and the Yen has long been floated and that the Chinese seem paranoid about making hasty currency related moves makes it unlikely that the scenario will unfold in the same way.  China anyway seems quite determined to reign in its loose monetary policy and curb excessive bank lending, to prevent any asset bubbles from bursting.

So let’s continue to watch this space…and plan accordingly.

By Geraldine Johns-Putra | Posted in Foreign Investment, Yuan | Tagged , | Comments (1)

China’s indigenous innovation policies: no easy solutions

9 April 2010 – 7:07 pm

I have previously posted my views on China’s “indigenous innovation” policies.  Reading a recent WSJ blog post by China law specialist Stanley Lubman on the issue, I thought a further post would be timely. 

Mr Lubman’s post (including the links) is well worth reading for its observations on the step-up by the Chinese government to give priority to indigenous innovation products in government procurement.  Foreign companies are reporting detrimental effects on their business due to the policies, according to a very recent Amcham survey of American companies, which Mr Lubman links to in his post.

My previous post on the topic was, I admit, a bit of a rant against the whole stance.  Given that ”indigenous innovation” is getting to be a decidedly serious problem for foreign businesses in China, a more considered post about the practical ramifications is in order.  

A good amount of the factual background is available via commentary on the web and elsewhere and I have recapped some of it here as a refresher/easy reference:

  1. In China, government agencies have been legally required to give preference to local products and services since the introduction of the Government Procurement Law in 2002. 
  2. In 2006, the Trial Measures for the Administration of the Accreditation of National Indigenous Innovation Products set out more explicit criteria as to what qualifies as an “indigenous innovation” product, including: 
      •   the IP in the product must be owned by a Chinese enterprise through its own R&D or acquired from another Chinese entity;
      •   the product must be branded under a trade mark registered in China;
      •   it must incorporate a high degree of innovation and be technologically advanced;
      •   it must be accredited by the Chinese Certification and Accreditation Administration. 
  3. The 2006 Trial Measures provided for a national catalogue of accredited indigenous innovation products to be compiled, but no such catalogue was produced and various provinces and municipalities issued their own.
  4. More recently, in November 2009, came a notice issued by the Ministry of Science and Technology, National Development and Reform Commission and Ministry of Finance finally implementing the Trial Measures.  The notice gave an indication of how seriously the government was taking the indigenous innovation issue, by confirming that these three major government agencies would jointly implement the accreditation programme for indigenous innovation products and produce the national catalogue.  The notice called for applications for products to be included in the catalogue and for recommendations on the final scope of the catalogue. 
  5. The products emphasised by the notice are “computer and application devices, communication products, modernised office equipment, software, ‘new energy and equipment’ and energy-efficient products” although the final scope could of course be broader.
  6. The notice refers to a set of guidelines for those applying to have products included in the catalogue.  These guidelines change some of the original criteria for indigenous innovation products.  Most interestingly are the added requirements that the product must be distributed under a trade mark which has been first registered in China and which is not restricted by foreign brands, and that there must not be any foreign restrictions on the use, transfer or improvement of the IP in the product. 

The combination of new and more stringent requirements, the imminent centralised product catalogue and the signs these present about the determination of the Chinese government to promote home-grown know-how is not good news for foreign businesses in China, particularly of course those in technology-related industries.

Foreign-invested enterprises in China stand to lose out heavily to domestic competitors in government procurement contracts as it is likely that much of their IP has been created outside of China or distributed under a trade mark registered outside of China.  What are the alternatives?  To move or establish R&D centres to China and distribute products under an entirely new brand in China?  And what are the guarantees that any product applied for by a foreign-invested enterprise would be granted accreditation?  In any case, the deadline for submission for the first catalogue has passed, so these solutions, even if feasible, would apply to subsequent versions of the catalogue (if any). 

In Sino-foreign joint ventures, Chinese parties now have ammunition to argue for the JV to have access to base foreign technology as a platform so that it can create its own IP, as well as for marketing to be carried out under a Chinese brand.  This could be deal-critical to a foreign investor.

There really are no easy solutions here. 

As Mr Lubman observes, these policies are inconsistent with obligations under the WTO Agreement on Government Procurement.  China has yet to accede to this agreement although it has been negotiating its accession for over two years. 

Mr Lubman drily comments that the negotiations “will be lengthy”.

By Geraldine Johns-Putra | Posted in Foreign Investment, Innovation, Legal | Tagged , , | Comments (1)

The universal effectiveness of tact, discretion and a little humility

7 April 2010 – 8:04 pm

Things seem a little jollier in US-China relations.  China has agreed to discuss Iran sanctions with the US and other Western powers.  President Obama recently had a friendly telephone chat with President Hu Jintao about nuclear and economic issues.

And now…lo…comes the report that US Treasury Secretary Tim Geithner will visit Beijing for talks on the Yuan.

So, (with apologies to the inimitable President George W. Bush) it looks like the freeze in relations that didn’t take very long to thaw, is not taking all that long to unthaw.

This may not be confirmation that the US has made some progress on the value of the Yuan by stopping its more vocal lobbying.  It’s tempting to say it is, since it’s been my take that the Obama administration should have adopted this approach earlier.  However, it’s premature to say that anything is going to happen, even if the signs are pointing that way. 

If indeed the Yuan does move and if indeed more discreet and behind-the-scenes efforts from the Americans have been more effective, then a lazy lesson to absorb would be that the Chinese government is sensitive to public lecturing and more receptive to face-saving diplomacy. 

In the business world, the equivalent would be that, in business dealings with Chinese, foreigners in China should always  be careful not to raise their voices or lose their tempers so as to avoid the Chinese counterpart losing face.

Actually, we’ve heard this about a million times.  Maybe it’s getting kind of tired.

So, in light of my views on the US-China ding-dong on the Yuan, I thought I should look at the whole thing afresh. 

In truth, not many people take very well to being yelled at, talked over or publicly hectored whether in a diplomatic discourse or a business meeting (or in any other interaction, for that matter). 

Granted there would be some aspects of the way this has played out that are peculiar to both the Americans and the Chinese (the history of previous run-ins, for example)  but the sensitivity to loud criticism is not necessarily something confined to one culture or nationality.  I can’t think of an instance where one sovereign government that has been publicly ticked off by another has simply agreed to fall in line.

This brought to mind a story from my first year in China. 

I learned something from a client of mine who was a foreigner in China and leading what had become very drawn-out negotiations on a transaction.  On the last day of one of his visits to China, he was eager to resolve a prickly outstanding issue so asked for a meeting with the Chinese party.  Because of the short notice, only a “lower level” counterpart was available to meet him.  After consulting with a Chinese colleague, I told my client that I thought the meeting would not make any headway since we had discussed the point for 2 days straight already with more senior persons on the other side.  It would only result in a perceived loss of face for my client as he would be seen to be pretty desperate to resolve the issue.   

My client set the meeting anyway and the counterpart surprised us with an acceptable proposal which was later confirmed by his seniors.  The assumption we had made (and which I had made) was wrong.  Perhaps his seniors had discussed the proposal with him ahead of time. Perhaps they had delegated him the authority.  Perhaps he was not the “lower level” officer we had presumed him to be based on his job title and rank. 

My client told me that he had asked for the meeting courteously, showed openly he was keen to progress matters, and all in all felt he behaved with forthrightness and humility.  He expected it would be taken the right way.  And, in this instance, it was.

On reflection, it was not a risk-free manouevre by my client, nor would have it been in any cultural setting.  But the error I made was judging it purely in a perceived “China setting”, instead of assessing it on both a universal, non-culture specific level and then assessing any differences that I thought would apply in China.

I admit, it’s a lesson that’s been easy to forget, but it’s helped me every time I remember to apply it.

By Geraldine Johns-Putra | Posted in Cultural, Yuan | Tagged , | Comments (0)

Geely and Volvo: let’s get personal with SEC filings

29 March 2010 – 1:25 pm

Geely has finally signed a binding contract to acquire Volvo Cars for US$1.8 billion on Sunday March 28, 2010.   Having been in the M&A game myself, I know that these types of deals are very rarely reported the way they happen.  So I dug up Ford’s US Securities and Exchange Commission filings and compared them to the press reports, to see if I could find some angles of more interest to those of us who want to look beyond the media story.

This is the result:

  1. Who is buying what? For a start, the reporting is heavily focussed on the “China buys Sweden”  aspect of the deal, notwithstanding that Volvo Cars has been an American-owned concern since 1999, when the Swedes sold it to Ford Motor Company.   Actually, Geely used two subsidiaries – a Swedish and a US company.  The Swedish company will buy Volvo Cars Corporation and the  US company will buy Volvo Cars North America LLC.  Makes sense, so far.
  2. Intellectual property: when Ford bought Volvo Cars in 1999, it gained control of the Volvo intellectual property (but not the Volvo brand – see item 3 below).   According to the SEC filing for the Geely acquisition, any IP owned by Volvo Cars continues to be owned by Volvo Cars, and so control of it shall transfer to the Chinese Geely.  But whatever Ford owns shall only be either sold or licensed to Volvo Cars (and only some portion of it may be sub-licensed to Geely).  Even that only includes what relates to Volvo’s “current and planned business” (What does that mean?  What’s “unplanned” business, for example?).  My interpretation of this tortuous part of the SEC filing is that a lot of negotiation went into it.  At the time that Ford bought Volvo Cars, it must have anticipated mixing some of its IP with Volvo Cars, and probably did.  But I imagine it was very careful about what IP actually transferred to Volvo and what did not.  In sum, Geely has picked up some important technology, including Volvo’s pre-1999 technology, but what post-1999 technology has it actually managed to buy??
  3. Brand: This was not part of the SEC filing but let’s best get this out of the way.  The “Volvo” brand is co-owned between Ford Motor Company and Volvo Group, the Swedish truck and bus manufacturer which remains a separate entity.  To the extent that Geely has “obtained” the “Volvo” brand from Ford, it has obtained Ford’s co-ownership rights, presumably largely contractual.
  4. Vendor financing:  Ford disclosed Geely as the preferred buyer of Volvo Cars in October 2009.  Ford then seems to have been negotiated into providing “vendor financing” to the tune of a US$200 million seller loan note to Geely.  This amount is to be repaid within 5 years and 3 months.  It effectively reduces the “headline” amount of US$1.8 billion to US$1.6 billion, so long as the business of Volvo Cars is kept running in a steady way for the life of the note.  
  5. Adjustments to purchase price: It appears that there are to be adjustments to the final purchase price for “pension liabilities, debt, cash and working capital” of Volvo, which suggests that Geely got the better of that debate, since pension liabilities have been quite significant in Europe for the last 10 years and, if that actual liablities comes off the purchase price, all the better for Geely.
  6. Conditions to closing: Reuters reports that Geely has “promised to preserve Volvo’s manufacturing facilities in Gothenburg and Belgium”.  I wonder how watertight the drafting is in this respect and how much of this was a result of pressure to find a way to convince relevant works councils (trade unions) to approve the deal?  Works council approvals may be only some of the conditions to closing for the deal, not to mention anti-trust filings and other regulatory approvals (Chinese NDRC approval, for example, comes to mind).

In summary, the deal is not yet done. 

And even if it is done, Volvo Cars may have been sold for a headline price that was much cheaper than what Ford may have wanted to attain on the seller’s side of the bargain.  And, on the buyer’s side, what IP and branding rights did Geely really win to prove it did a better deal than a direct buy-out of a brand a la Roewe (which, with the complications of the Volvo co-branding, it could not really have done here anyway..?)

By Geraldine Johns-Putra | Posted in Brand, Legal | Tagged , | Comments (1)