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Monday, Jun 5, 2023

oped-Leung

To do business in an unfamiliar environment is by definition a risky endeavor.

However, there is a gradation of risk. Launching a venture cannot be based on complete control of all factors. Business risks can take the form of political risks, currency risks, operational risks and hidden risks. It is important to identify these risks so that a calculated appraisal will be in place.

Let’s start with political risks. As far as China is concerned, at the top of the list of risk factors is the state of the Sino-American relationship. To implement a joint venture lasting over 30 years in a country like China, one has to weather many storms.

To a large extent, there is not much an American corporation can do to avoid political risks. China may change its policy toward American corporations at any time, depending on how those in power in China perceive the relationship between the two countries.

Likewise for Hong Kong, which will become a part of China after July 1 although it will remain a special administrative region where the capitalist system will continue for another 50 years.

For American companies that only engage in direct sales to China, the political risks may not be as far-reaching as for those companies that are forming joint ventures based in the country for a protracted period of time.

In choosing a suitable form of business in or with China, one must consider a number of factors, one of which must be the company’s ability to stomach those unpredictable political changes. A major Fortune 500 corporation naturally adopts a very different strategy from a small- to medium-sized business with an annual revenue of $5 million.

The kind of business a corporation conducts is very much affected by political factors. For example, China keeps a tight control over its media. If you intend to invest in China as a publisher, you have to be very cognizant of China’s ideological twists. A sudden change in policy may wipe out your investment. Even a fairly ideologically neutral business, such as selling American-style fast food, may get you into a political mess.

American business people who were brought up in a market economy should realize up front that China has long been a planned economy. Many of the decisions made there do not seem in accord with what we would consider business common sense.

For example, in many Chinese legislative bodies, there is a provision that the power to execute the law rests with various governmental agencies yet which agencies have authority are not identified in the legislation. So a foreign business entity may suddenly be confronted with myriad governmental agencies whose permission it must seek before commencing business. Such loopholes often lead to corrupt practices, administrative manipulation and favoritism.

By contrast, Hong Kong legislation has hitherto enjoyed a much higher degree of clarity. Its legal system is fairly comprehensible to lawyers who are trained in the Common Law. That’s why Hong Kong serves as a rather effective agent for foreign corporations that are embarking upon new China ventures.

It is futile and dangerous to believe that business problems in Asia can be resolved by remote control. The Asian style of doing business places great emphasis on personal relationships. But a warning must be given regarding relationships, because they can be a two-edged sword.

The inordinate amount of time and effort spent on forming a relationship is often wasted whenever there is a change of decision makers. More importantly, personal relationships should not be used to override or bypass legal procedure, particularly in the formation of contracts and resolution of commercial disputes.

A keen sense of political awareness about a foreign country can only be developed through a prolonged period of living and doing business there. The only substitute for living there may be reliance on trusted employees or professionals. Again, a note has to be registered here about the hiring of professionals and local employees.

Different ethical standards and practices exist in different countries. A local employee may not be able to provide an accurate political risk assessment in certain situations; he may have his own axe to grind. One should be concerned about conflicts of interest, especially in China, where governmental agencies can often engage in business under a different cloak.

Operational risks, meanwhile, can take many forms, depending on the complexity of the operation.

As a lawyer or a prudent business person, you have to anticipate a number of worst-case scenarios and make contingency plans for them. The principle that whatever may go wrong will applies to business as well as to any other human activity.

A familiarity with the foreign culture helps you to anticipate better. When seemingly trivial matters go wrong, it can make the difference between whether a project makes money or loses it. Business people must be able to deal with problems either by flying in themselves as troubleshooters or by remote control.

It is absolutely essential to prioritize risks and act to handle crises accordingly. A client of mine who is running a chain of franchised fast-food restaurants in China has to monitor his activities by phone on an hourly basis. After another obtained a cargo-freight license from an airline, almost 50 percent of his working hours were spent flying around the globe. It was not until his business stabilized and was put on a steady curve of profitability that he relinquished these arduous and taxing tasks.

As for the hidden risks, if you have ever fought in a war, you know what they are. If you have ever examined a witness in a courtroom or traveled abroad on your own, you also know what they are. To do business, you must be prepared for certain hidden risks.

A person I know bought a business in China after relying upon certain business information supplied to him by sources in the country. As you may know, doing due diligence in a country like China is like shooting in the dark. After he acquired the business, he realized that a lot of the figures supplied to him were total fabrications.

It was not done to mislead him. Rather, because of ignorance, the Chinese parties didn’t know anything about simple things like comparables, good will, accounts receivables or capital reserve. Because the Chinese parties were requested to supply such information which they did not know, in order to hide their ignorance they decided to make it all up.

This poor buyer had to put extra effort into rehabilitating the name of the corporation, retraining staff and bringing in managers from Hong Kong and the United States to take over certain key functions. Little did he know that about 40 percent of the staff of the business was unproductive. Even the pension the new owner had to pay to the retired staff members turned out to be very burdensome.

These are hidden risks.

Frankie Fook-lun Leung is a partner with the law firm of Lewis, D’Amato, Brisbois & Bisgaard and an adjunct professor at Loyola Law School.

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