OCTOBER 2004
CORPORATE LEGAL TIMES
51
CORPORATE LEGAL TIMES
the Roundtable
Sponsored By Preston Gates & Ellis
THE CHINA GAME
The Obstacles, Challenges And Rewards Of Doing Business
In The People’s Republic Of China
I
IF YOUR COMPANY has yet to devise a game plan to tap into China’s markets, then it’s doomed to fail. At least that’s what some experts would have
you believe.
There’s little doubt China is the market of the future. It’s a country teeming
with investment opportunities for those with a little bit of money and a lot of
moxie. It’s brimming with cheap labor and a sophisticated and technologically
savvy white-collar workforce. It offers a potential market of 1.2 billion people
and a rapidly growing middle class that is eager to spend its money on
Western wares.
It also is a country dedicated to tearing down the barriers that have made
foreign investment in China’s most lucrative markets impossible until now.
For instance, Europe’s HSBC Holdings recently sealed a deal in which it
acquired a 19.9 percent stake in China’s Bank of Communications. This deal
follows on the heels of U.S.-based Newbridge Captial’s May acquisition of a
stake in Shenzen Development Bank. The Chinese government never would
have approved either deal a few years ago.
Although most of the remaining barriers to foreign investment are crumbling, and China’s economy seems poised for explosive growth, companies
still should proceed cautiously.
“Whether or not you should invest in China depends on what industry you
are in,” says David Tang, a partner in Preston Gates & Ellis’ Seattle office.
“You need to do a careful analysis of what it is you hope to gain. I don’t think
it’s possible to say across the board that it’s a good time or not to invest.”
For instance, telecom, retail, information technology and distribution still
are restricted markets. In addition, China has a host of regulatory, legal and
cultural barriers that can quickly sour a potentially lucrative deal. Another
problem is that Western companies often go into China with the belief that
they will make a killing overnight.
“I call it the billion sock phenomenon,” Tang says. “American companies
think that if they can just sell one sock to half of China’s population, they will
have it made. It doesn’t work like that.”
Tang recently moderated a roundtable for Corporate Legal Times and asked
a group of experts on the frontlines of foreign investment in China to explain
how it does work. What follows is a captivating discussion of both the dangers
and opportunities awaiting foreign investors in the People’s Republic of China.
—Robert Vosper
THE ROUNDTABLE
Pictured from left:
Jack Hennessy, Fengming Liu,
Tim Punke, Edith Shih,
David Tang, Richard Waysdorf,
Jim Wu
Moderated by David Tang,
Preston Gates & Ellis
Tang, Preston Gates: What has been your
experience with investing in restricted
industries?
David Tang, Preston Gates: Give me your
thoughts on foreign investment trends in
China, and where you see investments
going.
Jim Wu, Yahoo! Inc.: Internet media is
highly regulated and extremely restricted.
We are coming into China as a strategic
investor, rather than a pure investor. If we
can’t go into a market through the front
door, we will try investing in ancillary businesses. China is opening up quickly in
some industries and slowly in others. The
one thing you have to be aware of is that as
you enter these restricted areas, they aren’t
as restricted for local competitors.
Jack Hennessy, Baring Private Equity
Partners Asia: We’ve seen China shift
from a low-cost manufacturing base for
exporting to an economy in which people
actually are investing in order to sell products in China. Taking a 10-year view, we
see China as one of the top five world
economies. That means all the foreign
investment going into China is mostly for
domestic market access as opposed to
export access.
Edith Shih, Hutchison Whampoa Ltd.:
The big trend I see is that restricted areas
such as banking are opening up. The telecom sector is still restricted but everybody
is waiting for the opportunity to get
involved in it. The other general areas of
investment include property development,
retail and infrastructure.
Hennessy, Baring: As a general rule, we
don’t invest in regulated or even newly
deregulated industries. Unlike Yahoo!,
we don’t have to invest in a specific sector. So we prefer to focus on high-growth
sectors rather than taking the risk that an
industry may not deregulate in the way
we originally thought.
Shih, Hutchison Whampoa: That’s
interesting, because I would have
thought you would want to be the first in
the market.
Hennessy, Baring: We are very risk
averse. Capital preservation is very
important to us. And even though the
reward may be higher by going into
deregulated markets, there’s also the risk
of capital loss. And capital loss is something that we avoid at all costs.
Wu, Yahoo!: When people think of China
they think of it as one market. That’s not
true. It’s Beijing; it’s the southern province;
it’s Shanghai. Every region is very different
and each has its own competitive landscape
and regulations. Some are a little more
restrictive and some are a little more lax.
Richard Waysdorf, Starz Encore Group:
We are in a very restricted area, but we
believe it offers tremendous growth. We
are delivering Western television programming, and the demand is huge. The
rewards can be huge because the market is
just so great.
Waysdorf, Starz Encore: And then it
comes down to the relationships you have.
You have to prove yourself over the years
as someone the government can rely on to
do what they want you to do. We’ve been
doing this for eight years, so they know we
aren’t trying to implant evil thoughts into
the populace. Our goal is never to run
along the edge of what they would like to
keep out. We strive to provide programming that people want to watch, and that
we can sell advertising against, while staying in compliance.
Timothy Punke, U.S. Senate Finance
Committee: We are hearing a lot more
success stories, particularly from larger
companies. And that’s because people are
managing their expectations better. When
you look back at the 1980s and 1990s, there
were such high expectations for what was
going to happen in China. Companies now
understand reform will be gradual. They
also realize that they are not dealing with a
country of 1.2 billion consumers. They are
really dealing with a middle class of maybe
200 million consumers.
Fengming Liu, Microsoft Corp.: Just a
comment on the investment trade. You
have a huge talent pool in China, which
supplies more talent in the technology area
than any other country. As a result, a lot of
high-tech companies are investing in China
and building R&D centers there. We have
CORPORATE LEGAL TIMES
the Roundtable
CORPORATE LEGAL TIMES
52
OCTOBER 2004
Sponsored By
Preston
Gates
& Ellis
some of the best computer-science
researchers in China today, and our
research facility there is recognized as one
of the best facilities anywhere. Anytime Bill
Gates talks about the China research facility, he is just glowing.
The Talent Hunt
Tang, Preston Gates: Is it easy to find
management expertise in China?
From day one, you need
to get your executives
to understand what
doing business in China
is all about—and what
your people are doing
out there.
bridge back to the mothership, especially
now with the corporate governance situation that exists in the United States.
Liu, Microsoft: China has a lot of cheap
labor, especially in the technical area. It can
be even more economical to shift work to
China than India. But the new and higher
level of managers—the product managers,
and program-design managers—tend to
be more expensive. This is something
China needs to address, otherwise it will
become less competitive.
Hennessy, Baring: We’ve had far better performance with local people just because they
tend to be very cost conscious. First and
foremost, they manage for profitability.
Having said that, we do generally like
managers who have had the benefit of training at an international company. It’s a benefit to know they understand the importance
of internal audits, control systems and quality control. It also gives us more confidence
if the company is exporting offshore to a
company, such as Ford, which is the most
disciplined purchaser in the world. If a
Chinese company is able to fit within their
supply constraints, it’s clearly at an international level of management.
Tang, Preston Gates: Are you seeing dif-
ference between the business-school graduates coming out of China these days versus
those who have been around for, say, 20
years?
reforms in order to implement WTO obligations. It had to liberalize for 7,000 goods
and eliminate non-tariff barriers on more
than 600 products. And the government
deserves credit for the progress the country
has made. But there are huge obstacles still
in trading rights and distribution that create huge problems for a company that’s
trying to do business in China.
Standard Barriers
Tang, Preston Gates: Is it a problem that
China often sets very different standards in
various industries?
Liu, Microsoft: China’s standards have
increasingly become an issue for a lot of
companies—in part because the standards
are new and the people who draft them are
new. But China’s regulators are learning
from the international community.
I am very happy to see China becoming
more flexible. The Wi-Fi standards are a
perfect example. We had huge issues and
then all of the sudden, China and the U.S.
sat down together and decided it was best
to settle the issue. That’s very encouraging.
Also, China has begun to ask for feedback
and input from foreign companies.
Shih, Hutchison Whampoa: We should
look at China from its point of view. We
can say that they’re not up to par, but
China is the largest country in the world,
so why can’t it set its own standards?
We should give China a bit more consideration in light of what it has gone through
in the past. There has been a lot of
improvement in how they deal with us.
When we first went to China to borrow,
they had a standard two-page loan document that you couldn’t change. So we wiggled our way in by adding supplements. It’s
an uphill battle, but they are receptive to
CHINA BY THE NUMBERS
• As of July, China’s population was about 1.3 billion.
• 744 million people were employed in China at the end of 2003, about 7 million more
than the previous year.
• China’s Ministry of Commerce approved 41,081 foreign direct invested enterprises in
2003, an increase of 20 percent from 2002.
• Between January and June, the Ministry approved 21,688 new foreign funded
enterprises, an increase of 15 percent from the same period in 2003.
• In 2003, trade between U.S. and China totaled about $126 billion, an increase of
30 percent from the previous year.
Sources: Ministry of Commerce, China; CIA World Factbook; US-China Business Council; and news reports
—Jim Wu
Associate GC, International
Yahoo! Inc.
Liu, Microsoft: In my experience, the
Chinese managers are at a much higher
level compared to 10 or 15 years ago.
Tang, Preston Gates: Any other hurdles
Wu, Yahoo!: It is a bit easier if you are
looking for R&D talent. In terms of management, local talent may not be accustomed to the Western way of doing things.
But you need local managers to run your
business because they know the market.
On the other hand, you need enough of a
GROWTH IN FOREIGN DIRECT INVESTMENT
2002
34,171
82.8
Number Of Projects Approved
Contracted Investment ($ billion)
2003
41,081
115.1
that may be particular to setting up operations in China?
Punke, U.S. Senate: It’s interesting to note
the progress that has been made in China.
For example, the country had to make
something like 700 individual legal
Percent Change
20
39
Source: Ministry of Commerce, China
TOP 10 COUNTRIES/TERRITORIES INVESTING IN CHINA (2003)
Number Of
Total Of Contracts
Contracts
($ million)
Hong Kong
13,633
40,708
Virgin Islands
2,218
12,664
Japan
3,254
7,955
South Korea
4,920
9,177
United States
4,060
10,161
Taiwan
4,495
8,558
Singapore
1,144
3,419
Western Samoa
678
2,584
Cayman Islands
217
1,695
Germany
451
1,391
Total Utilized
($ million)
17,700
5,777
5,054
4,489
4,199
3,377
2,058
986
866
857
Source: Ministry of Commerce, China
The piracy rate for
software in China is
92 percent—the
highest in the world.
ANNUAL PERCENTAGE GROWTH OF CHINA’S GDP
13.4
12.6
10.5
9.6
8.6
—Tim Punke
Chief International Trade Counsel
Senate Finance Committee
9.1
7.8
8.0
7.1
7.5
8.8
8.0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004*
* Estimate
Source: Asia Pacific Consensus Forecasts
OCTOBER 2004
CORPORATE LEGAL TIMES
53
Punke, U.S. Senate: You’re absolutely
right that we have to give China credit
where credit is due. And I think it’s fine if
China wants to set its own standards, as
long as those standards aren’t overly protectionist or unnecessarily inflict damage
on common trades.
The local firms are
as well-versed and
sophisticated as any
law firms in the
United States.
Tang, Preston Gates: Edith [Shih] and
Jack [Hennessy], since both of your companies are based outside the United States,
do you have a different perspective on this?
Hennessy, Baring: For us it is an opportunity. We are investing in Chinese companies that are number one or number two in
whatever niche market they operate. And if
there is some uniqueness about the domestic market, such as standards, that’s an
opportunity because we’re able to be the
market leaders in the industry.
Though, I would add that’s all fine for
companies that are focusing on the domestic Chinese market, but it will be very hard
for them to become dominant global
brands if they don’t have the same standards as the rest of the world.
Executive Lessons
Tang, Preston Gates: How do you get
the executives back home to understand
these issues?
Liu, Microsoft: It happens on a daily basis.
For example, I have a daily conversation
—Richard Waysdorf
VP, Business Affairs
Starz Encore Group
Preston
Gates
& Ellis
CORPORATE LEGAL TIMES
understanding what the client’s requirements are, and what the outside world is
doing. They are trying very hard, and we
should all give them a little bit more leeway.
the Roundtable
Sponsored By
The other thing is that you need to look at
China as long-term investment. You are not
going to get returns in the next three, five,
or even 10 years. And in the short-term we
have to grapple with a lot of difficulties.
Friends In High Places
Tang, Preston Gates: How do personal
with my business managers regarding IP
rights (IPR) in China because many of our
executives are extremely concerned about
IP. They’re worried that Chinese testers
will leak source code, or will go to work for
a competitor, for instance. They want to
know what laws can help prevent those
types of things. And they want to know
how China will enforce them.
One of the things I tell them is that
nothing is 100 percent sure. If you are
looking for 100 percent assurance that
your IP will be protected, you will never be
able to do business in China. So you have
to determine whether the reward is bigger
than the risk. And then you make a decision. But the courts in China are thinking
about the international ramifications of its
decisions on these types of matters. China
would like to be seen as a player in the
international arena.
Tang, Preston Gates: How do you make
Shih, Hutchison Whampoa: You know,
we are still viewed as foreigners even
though Hong Kong is now part of China.
But the fact that we’re yellow-faced, the
fact that we’re just next door, hopefully
helps a little bit.
those translations, Jim [Wu]?
Wu, Yahoo!: A big part of that process is
educating the mothership on how to view
these things. The United States has to
understand that China has very vague regulations. That’s the reality of the market.
ROUNDTABLE BIOS
JACK HENNESSY is a partner in the San
Francisco office of Baring Private Equity
Partners Asia. Previously, Hennessy was a
general partner with Allen & Buckeridge in
Australia.
DAVID K. Y. TANG is a partner in the Seattle
office of Preston Gates & Ellis. He concentrates
his practice in the areas of foreign investment
matters, international commercial transactions,
venture financing, and real estate and security
financing.
FENGMING LIU is general manager of
Microsoft Corp.’s China Office, located in
Redmond, Wash. Previously, he was Microsoft’s chief legal counsel in China. Prior to
joining Microsoft, Liu was a partner in Davis
Wright Tremaine’s China practice.
RICHARD WAYSDORF is vice president of business affairs and affiliate relations for
Englewood, Colo.-based Starz Encore Group. In
addition, he serves as chief legal counsel for
Encore International Inc., the company’s East
Asian arm.
TIM PUNKE is chief international trade counsel to the democratic staff of the Senate
Finance Committee. Previously, he served as
international economic policy adviser to the
White House National Economic Council.
JIM WU is vice president and associate general counsel, international M&A at Yahoo!
Inc. Previously, Wu was director of corporate
development for the company’s operations in
North Asia. Prior to joining Yahoo!, Wu was a
partner at Preston Gates & Ellis.
EDITH SHIH is head group general counsel and
company secretary of Hong Kong-based
Hutchison Whampoa Ltd. She is also executive
director of Hutchison Harbour Ring Ltd. and
Hutchison International Ltd.
relationships impact the way you do business, and how does that impact the way
certain regulations are enforced?
For information about participating in or hosting
a Roundtable, please contact:
Robert Vosper
Executive Editor
Corporate Legal Times
All Photos by
312.651.0366
William Stickney
rvosper@cltmag.com
Liu, Microsoft: Relationships do play a
bigger role than perhaps they do in the
West. It can help you work through some
of the ambiguities. For instance, I will go
to the person who drafted the laws and
say, “What was the reason you put in that
language?” In that sense, it does play a
role. But I always advise people that relationships in China are critical, but not
sufficient to be successful.
Tang,
Preston
Gates:
Richard
[Waysdorf], it’s surprising that you can do
business in an area that is so restricted. I
suspect the fact that you were able to work
with people to accomplish business goals,
regardless of the rules, played some role in
your decision to do business in China.
I don’t see much of a
difference between local
law firms and the ones
we use outside of China.
—Edith Shih
General Counsel
Hutchison Whampoa Ltd.
Waysdorf, Starz Encore: Well, I want to be
clear. We operate within the rules. When
we first got involved in bringing Western
programming into China, a lot of it was
based on relationships. It certainly helped
that the founder of our company was born
in Shanghai and spent 12 years there.
Relationships are especially important in
this area where there are a lot of rules. It’s
really all about trust.
CORPORATE LEGAL TIMES
the Roundtable
CORPORATE LEGAL TIMES
54
OCTOBER 2004
Sponsored By
Preston
Gates
& Ellis
That means showing officials that you
are going to do the right thing. We’re good
people, and we’re going to treat this venture in the way that the Chinese want it to
be treated. We’re not just out there to get
every nickel out of this thing that we can,
but really to help accomplish their goals
and respect those goals.
Liu, Microsoft: It is essentially the value
proposition. Personal relationships really
help on the communication side. But if
you don’t have value proposition, you can
have the greatest relationship with the person in charge, but they’re not going to
bend the rules for you.
Shih, Hutchison Whampoa: If they did,
you wouldn’t want to get involved.
Liu, Microsoft: Right.
Shih, Hutchison Whampoa: When we
first started, all the government asked was,
“What are you giving me?” Investors gave
and gave believing they would eventually
get a return. When we first went into
China the terms of the agreements we
were subject to were outrageous. That is
changing. They are learning very fast and
trying very hard.
Punke, U.S. Senate: We always hear that
relationships are important, but few
companies will approach the government directly when they have a problem.
When a company comes to the government with a problem, it’s always through
their associations. Individual companies
never want to write a letter complaining
about a specific problem because they
fear retaliation.
Anytime Bill Gates
talks about the
China research
facility, he is just
glowing.
Liu, Microsoft: One thing I wanted to add
is that headquarters often doesn’t understand that building relationships in China
doesn’t always guarantee success. You need
to convince them that you have a proposition that is good for them.
One of the things we have done is organize trips for our executives so they can
meet officials and see the marketplace.
Advice from a government official or a
Chinese professor will resonate with them
more than my advice.
Wu, Yahoo!: And these meetings have to
be done on a regular basis to avoid the
lost-in-translation situation. From day
one, you need to get your executives to
understand what doing business in China
is all about—and what your people are
doing out there.
Finding Legal Help
Tang, Preston Gates: Let’s switch gears a
little. Does China have the same types of
services that we have in the United States
in terms of accountants, investigators and
advisers? How hard is it, for instance, to do
due diligence in China?
Hennessy, Baring: I would say the duediligence process that we use in China is
more detailed than in the United States.
There is a relatively small supply of capital
in China, and a high demand for it. As a
result, we can get three to six month exclusivity periods on deals. That is unheard of
in the United States. So, we take a lot more
time to do due diligence—not only on the
target company, but also on the company’s
suppliers and customers.
The one thing you
have to be aware of
is that as you enter
these restricted
areas, they aren’t as
restricted for local
competitors.
—Jim Wu
VP and Associate GC
Yahoo! Inc.
—Fengming Liu
General Manager
Microsoft Corp.
Tang, Preston Gates: And how do you
do that?
Hennessy, Baring: Services in China have
evolved dramatically over the past seven
years. The biggest problem is the cost of
doing due diligence. Service providers charge
a premium for their work, which makes the
cost of doing a transaction much higher.
Wu, Yahoo!: I would add that the duediligence process probably starts a lot earlier—at the beginning of the exploration of
various targets. And this is where your
relationships come in. You go through
your other relationships and third parties
to find the information you need on the
target company. You have to start early
and prepare for a long process.
Also, the court system is unpredictable
and contracts don’t mean as much as they
do in the U.S. So you need to know whom
you are dealing with, and that needs to
start early on.
Shih, Hutchison Whampoa: The professional service providers are there. And I
must say the quality of those services is
tremendous. For instance, I don’t see
much of a difference between local law
firms and the ones we use outside of
China. The service level is comparable to
what we get anywhere else.
Waysdorf, Starz Encore: We employ
Chinese firms and foreign law firms operating in China. We rely on both for overlapping advice.
Shih, Hutchison Whampoa: The local firms
can give a very different perspective. We
used to hire outside lawyers to manage the
local lawyers. We don’t do that anymore.
Waysdorf, Starz Encore: I don’t see any
need for that. The local firms are as wellversed and sophisticated as any law firms
in the United States.
Tang, Preston Gates: What are some of
the things for which you would use a local
firm and not a U.S.-based firm?
Waysdorf, Starz Encore: Well, anything
from office leases to programming issues.
Liu, Microsoft: There’s a legal requirement
that some things must be done by a local
firm. For instance, foreigners aren’t authorized to appear in court. Also, when a legal
opinion on Chinese law is required, a
Chinese law firm must issue it.
Waysdorf, Starz Encore: Certainly for
restricted industries where you need operating licenses and you have to deal with the
local bureaus, you need local counsel to
help. They know the officials they have to
deal with, and what they’re thinking.
Capital Gains
Tang, Preston Gates: Let’s turn to the
issue of capital markets. One of the traditional exit strategies for investors is an IPO.
Does that apply to Chinese companies?
Can you look to the capital market as a
good means to exit an investment?
Hennessy, Baring: The short answer is yes.
Capital markets in China have developed
dramatically over the past five years. In
fact, we’ve had better liquidity on our
investments in China than we’ve had anywhere else in Asia.
In China, exit strategies take three forms.
One is selling the company to a foreign
multinational. And there is growing interest in that because the domestic market has
become quite large. The second method is
through an IPO. And the third, which is
relatively new, is exiting through ADRs
(American Depositary Receipts) here in
the U.S. And there has been, particularly
over the past few years, a larger appetite by
U.S. investors to invest in high-growth
domestic Chinese companies.
One strategy I didn’t mention is listing
on the domestic market. There still are significant restrictions that impact our liquidity as a foreign investor in taking
OCTOBER 2004
CORPORATE LEGAL TIMES
55
Waysdorf, Starz: The more liquid the
environment is, the more valuable the target becomes. That makes it more expensive
for us to buy. As Jack [Hennessy] just said,
I think there have been some positive
developments, but there still is a lot of
room for improvement.
We take a lot more
time to do due
diligence—not only
on the target
company, but also
on the company’s
suppliers and
customers.
Liu, Microsoft: There certainly are Chinese
companies that are beginning to get into the
M&A space with share exchange. For
instance, one company recently outsourced
all of its IT support to a Chinese company in
exchange for an equity share. I think it was
something like 12 percent of their company.
So that was an interesting exchange.
—Jack Hennessy
Partner
Baring Private Equity Partners
Preston
Gates
& Ellis
CORPORATE LEGAL TIMES
companies public on a Chinese exchange.
As a result, we don’t view the domestic
Chinese markets as a viable exit strategy.
the Roundtable
Sponsored By
whole market. It’s not just a guy on the
street corner selling a DVD. It’s a whole
market. And some of these vendors rent
those stalls from the government.
Tang, Preston Gates: What’s the solution?
Waysdorf, Starz Encore: One observation I
have is that there is a lot of entrepreneurial
activity and spirit in the Chinese market, and
as a result, target company prefer cash. That
way they can turn around and start another
company, rather than being tied down and
being incentivized by the acquirer’s equity,
regardless of how much upside there is.
Shih, Hutchison Whampoa: You’re quite
right. Money in your pocket is more
important than the upside.
Liu, Microsoft: The Chinese marketplace is
looking for long-term commitment with foreign companies. In the early days, the minimum term of a joint venture was
10 years. Investment bankers want out in two.
There’s mismatch there. You should take a
long-term approach to investment in China.
thinking of listing on the U.S. exchanges have
no choice but to comply. Often they have
great names, but their internal books aren’t
good enough. And they pick and choose
some aspects of their business and repackage
them in a way that qualifies under the law.
the time. And, yes, you can walk through
the streets of Shanghai or Beijing and find
an array of pirated DVDs. It can be mindboggling. But at the same time that’s part
of the business. It’s something that you just
have to do your best to control.
Hennessy, Baring: We actually get
approached by a lot of companies that
don’t even need our money, but like our
ability to help them through the process.
We go through that whole process of setting the company up such that we could
list it or prepare it to be sold.
Liu, Microsoft: Piracy is the single biggest
obstacle for us in terms of doing business
in China. And I believe Chinese piracy is
substantially higher in the software business than many other countries. There is
an 80 percent to 90 percent piracy rate of
our operating system. The piracy rate for
Office is even higher.
So just think about the sheer numbers. If
they could drop the piracy rate by 5 percent,
our business would benefit tremendously.
Despite all the piracy, we have faith the
system will change. In addition, China is
the second largest computer market. So we
cannot afford to ignore it. And we need to
do our part to educate the public and educate government officials about the importance of intellectual property protection.
Unless the society recognizes the importance of IP, then it will be hard to change.
IP Nightmares
Tang, Preston Gates: Let me quickly turn
Tang, Preston Gates: What are your
observations in terms of how companies in
China are dealing with the whole corporate
governance issue? How do you see this
developing?
Liu, Microsoft: Chinese companies that are
to the IP issues. We have heard that there
are abuses in the market. Given the piracy
risks, why are you still in the market?
Waysdorf, Starz Encore: When all is said
and done, there is piracy everywhere.
DVDs are copied in the United States all
Tang, Preston Gates: How have the laws
changed?
We are still viewed
as foreigners even
though Hong Kong
is now part of
China.
—Edith Shih
General Counsel
Hutchison Whampoa Ltd.
Liu, Microsoft: In the past 20 years, China
has come a long way. But we need to educate
the judges, the lawyers and the public. My
view has always been that unless the Chinese
copyright holders themselves begin to pressure the government, foreign copyright
holders will not get 100 percent protection.
That’s a process, and we, as a company, just
determined that’s a risk that we need to take.
Punke, U.S. Senate: Anywhere you do
business there’s going to be piracy. But it’s
so widespread and so bad in China. The
piracy rate for software in China is 92 percent—the highest in the world.
The frustrating part for many politicians
is that you can walk down the street in
China two blocks from your hotel and it’s
right there in from of you, and there’s a
Punke, U.S. Senate: The government needs
to increase fines, strengthen criminal prosecution and lower the threshold for punishment. But that’s only going to happen
with pressure from Chinese companies.
Sound Advice
Tang, Preston Gates: Let me bring the dis-
cussion to a close. What one piece of advice
would you give companies that are thinking
of investing or doing business in China?
Liu, Microsoft: The single most important
thing is to do nothing drastically different
than what you’ve been doing in the U.S.
Waysdorf, Starz Encore: Have patience and
take a long view. Don’t go into the market
thinking you can take advantage of 1.2 billion consumers in less than a year. It’s a very
exciting market but there will be times when
it’s going to seem very frustrating and you
have to keep in mind that long-term view.
Wu, Yahoo!: I was going to say patience,
too. The other thing is that you really need
to find people you can trust. That’s the single most important thing.
Punke, U.S. Senate: You need to stay
involved with Washington. The U.S. can put
a lot of pressure on China and they can get
results. That is a direct result of companies
coming to Washington, talking about their
problems, and the government then putting
pressure on those issues. It can be very useful.
Shih, Hutchison Whampoa: That is different from what I would say. We are not
Americans. You need to adapt to the
Chinese culture and accept what it is.
China is changing every day and is trying
very hard to live up to the expectations of
the outside world. You are very wrong if
you think you can go there and change
China so that you can make your money.
Hennessy, Baring: My advice is to do a lot
of due diligence. Investing in China is not
a new phenomenon; it’s a popular one
now, but not new. A lot of people have lost
a lot of money in China and you can learn
from their mistakes.