This week, to commemorate the 15th Anniversary of Dezan Shira & Associates in China, we are serializing excerpts from the brand new book “The Story Of A China Practice” which details the development of the firm since 1992.
China IP troubles for foreign investors – Setting up mirror companies in competition
(excerpt chapter five, circa 2003)
I recall a due diligence case we handled that involved a Canadian invested WFOE in Dalian who had hired two long term associates to run the business in the city. Both associates were Chinese, but now carried Canadian passports, and had been with the Canadian business for seven years. Indeed, they were considered “family friends” by the business owner.
The business in Dalian however had not been performing well, and another US$1 million was to be injected to assist with the now longer than expected market penetration issues. “Strong local competition” and “pricing issues” were given as reasons by the two Chinese associates as to why the business was not performing to expectations.
We were to conduct a small due diligence project on the business in Dalian to ensure everything was indeed, OK. I sent down two of our audit staff to check, and the books seemed alright. However, one sharp-sited member of my staff uncovered documents relating to another website. In looking at the site, it sold exactly the same products but at cheaper prices, to the local market. The site was completely in Chinese. Looking up the site owners – they were the two Chinese associates employed by the Canadian invested business. They had set up a complete mirror company, and all leads coming in from the Canadian side were being passed to their own business. The fall out from the Chinese associates upon our advising the Canadian investor was immediate. A total denial (just like Green) and more wickedly, accusations that my own audit staff had asked for bribes in order to write a good audit report. They had “refused” such bribes, which is why our auditors had written such bad things about them. It was utter nonsense, although rather distressing to deal with, and the Canadian owner was shocked, for awhile not knowing which way to turn. These people had been his friends.
But the evidence was compelling, and more and more the Chinese associates tale unraveled, although not without further accusations calling into question both the sexual and ethical morality of my staff – which was all rather upsetting for two 26 and 28 year old single female Chinese auditors just trying to do their job. Such however is the life sometimes of due diligence in China – when caught, the perpetrators can be extremely vicious in their attempts to extricate themselves from their own web of deceit, and will issue lie after lie and counter accusation after counter accusation to muddle and confuse the real issue of their own corruption.
Eventually, after some time, the Chinese – carrying as I mentioned Canadian passports – were jailed for fraud and now languish in prison in Toronto. But it cost the Canadian investor his China business, and he is unlikely to come back again. Auditors have tough jobs sometimes dealing with fraudulent investments, as do the firms such as ours that have to ‘go into the lions den’ in addition to the unfortunate investor. It’s a real hazard of China business and often kicks in when the romance of it all has dried up. It can get very nasty out there.
Beijing wins the Olympics
(excerpt chapter four, circa 2001)
That was a fun evening. Curiously, I had just flown into Beijing that afternoon from a fact-finding mission from Pyongyang. The decision was due from the IOC, and they’d only recently been in Beijing, looking at infrastructure, what needed to be done, and assessing the Chinese bid. They’d all stayed at the Beijing Grand Hotel, which our office, The Pagoda, looks out onto along one side.
In fact, the Public Security Bureau had come into the offices one afternoon, and sealed all the windows and doors overlooking the hotel, worried of snipers, or protests that could be draped in front of IOC delegates. So they stayed in their suites, unaware that any lack of protests was already down to police enforced security measures having been already enacted.
I met my girlfriend at Frank’s Place. That in itself deserves a mention, Frank had been the first foreigner in Beijing to open a bar that was not sited in a hotel, and the small place, ever since opening, had been a veteran stalwart of Beijing’s expatriate scene, and most definitely the last hole for its golfing community. Frank had recently sold up, but still it was heaving most nights with expatriates.
The large screen TV was switched on in the bar, and all over the city the drama was unfolding with people glued to their screens. “And the winner is….Beijing” and suddenly the entire bar – along with the rest of the city just exploded. “Yeessss!”
Almost immediately, fireworks broke out from the direction of Tiananmen Square, and after drinking a few more pints to celebrate, many headed off to the square to celebrate. Even Jiang Zemin was there, dressed casually in a light beige windcheater as he came down to sample the good natured spirit of Beijing, finally, getting some global recognition, mixing with the masses, shaking hands, beaming. The impromptu street party lasted to dawn, and I suspect, in its naive, raucous, unplanned status may well be a better and more memorable event that the real thing, monitored, packaged, commercialized and securitized, might manage. For one night, Beijing was totally free, and it felt great.
A Look at North Korea
(excerpt chapter four, circa 2000)
By this time, with the practice stable and doing well, we were also looking at potentially other markets. Pyongyang, the capital of North Korea, is only an hour or so flight from Beijing, and we had already assisted a couple of North Korean ginseng traders set up Representative Offices in the city. Yet it was such an enigmatic country, and no-one knew very much about it. Hardly anyone I knew had ever been there.
Yet the Hong Kong General Chamber of Commerce (an excellent organization by the way) scheduled a Trade Mission – essentially fact finding – to the DPRK, and for sure I signed up. Pyongyang, as we flew in, was surprisingly green. Britain didn’t have diplomatic relations at the time with the country, so we’d been issued a special inward travel permit on a separate piece of paper by the North Korean de facto consulate in Hong Kong. Passports and mobile phones were left with the North Korean immigration as we arrived and luggage was searched. Later, we boarded our Mercedes bus to the Hotel Koryo, the biggest in Pyongyang. Standing tall over the city however is a building that would probably qualify for one of the tallest buildings in the world, but you never get to hear about it. A massive, slender pyramid shaped giant, over 100 stories high, spikes into the Pyongyang skies. Derelict, it was to be a hotel until the Soviet Union collapsed and construction halted. It’s a remarkable sight.
So too was the Koryo Hotel. A massive, Stalinistic structure, especially for receiving foreign guests, it had a huge marble lobby, and a beer garden on the ground floor. Check in was lengthy, so I sat down to have a swift pint of North Korean ale. Sitting down across the bar was a burly Russian in a leather coat, and I struck up conversation with him. The guy’s name was Vlad, and he’d come from Moscow on a train to sell tractors to the North Koreans. He had all these guys around him. It turned out they were his team of bodyguards. The North Koreans had paid him in cash — 1 million in U.S. dollars — and that’s why he needed the bodyguards. He was comfortable doing business with the North Koreans. He said they always paid. But I must say, the guards with machine guns may be a bit much for the average Western businessman.
We visited several factories on that trip, and enjoyed a slap up meal with the Minister of Commerce one evening. Despite their demonization by the U.S., I found them rather charming, if somewhat embittered by their treatment at the hands of the Americans. The Minister of Commerce even hired Dezan Shira, for about US$500 a month to advise on matters of the legal development and structuring of free trade zones, including sending to them copies of legal drafts of such zones from China and Vietnam so they could study them. This we did, and shortly afterwards, the North Koreans opened a free trade zone at Raijin Sonborg. We even produced an issue of China Briefing all about investment in North Korea.
Regrettably, it wasn’t to last. The then American President Bill Clinton has wanted to try and reach out to the North Koreans, and a state visit was on the cards. But George W. Bush was elected the next President, and immediately branded the country as one of the “Axis of Evil.” All doors slammed shut, and remained so with dangerous consequences as they built an atomic bomb and exploded it. Nowadays, there are signs that the U.S. position has softened, and again the door to the country has opened just a little. It’s unlikely now that Dezan Shira & Associates will establish offices there, but back in 2000 it seemed possible. It was however, one of the most interesting visits overseas I have ever had.
More excerpts tomorrow including a look at Mongolia, developments in India, combining Chinese culture and art in business, and good management practices when dealing with Chinese staff.
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Great reading. The IP story is an endemic problem in China and I am sure it would be easy to compile a whole 800 page volume just on IP scams. Congratulations also on your anniversary I have been reading your magazine for many years. Keep up the excellent work.
North Korea must have been quite an eye opener, and starting to come back to favor again now.
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