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Starting A China Business: What JM Keynes Would Say
Too many American companies still go to China for other than economic reasons. Too many American companies still go to China with little to no chance of succeeding there. Too many American companies go to China for vanity reasons.
Let me explain…..
Why is that company starting a business in China? Read JM Keynes.
During college I took all of the required economics courses but fell one (1) elective course short of a major. For at least ten years after graduating, I did not care one bit about not having secured a third major, but as my view of the world has increasingly become from an economic/economist’s perspective it irks me that I cannot claim to have majored in it. In my heart I did, in that all I needed for the major was to take any single economics course. But I digress.
But just a bit.
I read a lot of Keynes back then (what economics or even ersatz-economics major doesn’t?) and one of the things I have never forgotten was how Keynes talked of how big companies are often run by people with goals that go well beyond — and even sometimes conflict with — earning profits. He talked about how those who run big companies often (or was it sometimes?) act to bolster their own standing or prestige, rather than for the good of the company.
I have countless examples from my own experiences representing big companies, but one of my favorites is the following (with enough of the facts changed so that nobody will ever know the company of which I am speaking):
My firm was representing a massive multinational company in an international matter our China lawyers were able to resolve quickly and favorably for this company. In the course of this representation I became convinced that our client had a strong insurance coverage claim against its insurance company, with a value of around $15 million. I told this to the lawyer with whom I was working and he was far less interested than I expected. I suggested that I contact a lawyer friend of mine (one of the best international insurance coverage lawyers in the world) to gage his views on the case. The insurance coverage lawyer loved it.
So I convinced my client to move forward with the case. It is important to note that my firm was not billing any time on this matter and it never did. I just wanted to see the client get the insurance money as opposed to a nameless and faceless insurance company.
The international insurance coverage lawyer filed suit against the insurance company and within about a week of that, the insurance company offered $5 million to settle. The insurance coverage lawyer passed this on to our mutual client who immediately wanted to accept it. The coverage lawyer and I were shocked. When a defendant immediately offers $5 million upon the filing of a complaint, there is little doubt that is just an opening offer and the odds are overwhelming that it is willing to go higher. We two lawyers prevailed upon our client to allow to allow for a us to counter-offer and we got authority to do so at $7.5 million, with clear and strong instructions to be sure to “wrap up the case as quickly as possible.” We countered with our $7.5 million and the insurance company immediately accepted.
Had we been given more leeway and more time, there is little doubt that “we” could have negotiated considerably more out of the insurance company. There is almost no way that insurance company would not have paid at least $10 million, probably more.
Why were we not given more leeway and time? Why was our counteroffer so low? In-house lawyers at massive multinationals do not get promoting by bringing in a few more million dollars for the company, but they do lose out on promotions when they bog their company down in litigation in which the company need not be involved. The in-house lawyers with whom we worked lived in fear of being called into a meeting with the General Counsel and the CEO and to explain why they had given the go-ahead to a long drawn out lawsuit that was now consuming valuable executive time. I am convinced that the settlement negotiations were driven more by the in house lawyers career concerns than by company finances.
This sort of thing is not at all uncommon. But what does this have to do with China?
I saw an article on a big company I know well that is going into China in a big way in an industry where I and just about everybody else knows it will lose its shirt. And this is not an isolated case. Our China lawyers still see American companies bring their companies to China when everything points to that being a money losing proposition. Sometimes even their explanations for the move hint that they know this. They will say things like “it just seemed like it’s time” or “there are a lot of people telling us that we should go in.”
Why do companies go into China when the odds overwhelmingly point to their failing? It is always difficult to parse one’s motives, but I am convinced it is sometimes simply because the CEO wants to be able to tell the company’s shareholders or investors that the company “is moving into China” or that the company has a “China plan.” We have also have seen instances where it appears a company is moving into China because someone a level or two below the CEO thinks doing so will expand their standing with the company and lead to promotions and raises.
A lot of this is speculation on my part, but I also know that I am not the first one to raise this issue since Keynes or regarding China expansions.
What are you seeing out there?
The post Starting A China Business: What JM Keynes Would Say appeared first on China Law Blog.
We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.
Source: http://www.chinalawblog.com/2015/06/starting-a-china-business-what-jm-keynes-would-say.html
