China’s Ministry of Finance and National Tax Bureau has announced changes to the consumption tax on passenger vehicles. Effective September 1, the consumption tax on cars with engine displacements below 1.0 liter will be cut from 3.0 percent to 1.0 percent, and the tax on cars with 3.0 liter to 4.0 liter engines will be increased by 10 percentage points from 15 percent to 25 percent.

The consumption tax doubles from 20 percent to 40 percent for cars with engines above 4.0 liters. For passenger cars with engines having displacements from 1.0 liter to 3.0 liters, the consumption tax currently ranges from 3 percent to 12 percent and remains unchanged.

This latest government initiative is obviously an effort to discourage purchases of gas-guzzling 3.0 liter plus engines and spur demand for cars below 1.0 liter. As such, it is a step in the right direction. However, passenger car models which fall within the size ranges most heavily impacted by the new tax changes account for a relatively small part of car sales currently.

During the first half of 2008, approximately 3.0 million passenger cars were sold. Of this amount, only 139,000 cars (4.6 percent of the total market) with engines having engine displacements below 1.0 liter, and just under 21,000 passenger cars (0.7 percent of the total market) with engine displacements above 3.0 liters, were sold. In other words, cars with engine displacements between 1.0 and 3.0 liters account for 96 percent of sales, but are unaffected by the new tax changes.

As restructured, consumption taxes on autos now range from 1 percent to 40 percent in China, depending upon size of engine. Which companies can expect to benefit from this tax change? The most likely beneficiaries would seem to be the car makers that currently have products in the small car segment. As the China market for passenger cars broadens, and consumers with lower incomes join the population of car owners, this segment can theoretically be expected to grow. Of the 139,000 cars sold in the first half with engine displacements below 1.0 liter, the Xiali, QQ, Spark and the Alto account for over 95 percent. The Spark is made by SGM Wuling, a General Motors joint venture, and the Alto is made by ChangAn Suzuki. The Xiali and QQ are made by Tianjin Auto and Chery, respectively, both local car companies.

In actual practice, though, the market for small cars has not grown in China, despite the theoretical arguments as to why it should, and the new tax changes are unlikely to change this consumption pattern. It seems that Chinese consumers, once they reach an income level where they can afford a car, would prefer to pay more for a bigger car with more features that also provides more “face.” This is the same conclusion we came to when we analyzed the $2,000 Nano that Tata Motors of India has developed. The reason that Chinese car companies have not developed models at such a low price level is that Chinese consumers simply don’t want small cars with bare bones features.

The conclusion, unfortunately, is that the new consumption tax changes sound great on the surface, but are unlikely to have much impact. If the choice is between a small car with an engine below 1.0 liter and the consumption tax is 1.0 percent, and a bigger car with a 1.5 to 2.0 liter engine that has more features, but where the consumption tax is 5 percent, the difference in tax of four percentage points is unlikely to be large enough to change purchasing habits. For the consumer who has enough money to buy a large gas guzzler, an increase in tax of 15 to 20 percentage points is unlikely to make much of a difference. Moreover, even if the tax increases cause some of these consumers to switch to slightly smaller cars, there aren’t enough purchases in this category to make much of a difference.

As anyone who lives and works in China knows, obtaining visas is becoming a bigger and bigger problem here. So much so that some, like the Australian foreign minister, are warning that this could harm future trade and business. In a recent interview, Stephen Smith told reporters in Hong Kong: “It is important that the Chinese authorities understand the potential practical, on-the-ground difficulties that this is causing.” Whether this is part of the overall pre-Olympic tightening that may begin to dissipate when the last athlete leaves Beijing, we won’t know until later. In the meantime, individuals and businesses alike need to understand the new restrictions and how to best deal with them.

To this end, Jason Inch, a Shanghai-based consultant and co-author of the soon to be released “Supertrends of Future China,” did us all a favor by putting together in one place some of the most current thoughts on the visa issue. Last week, Jason commented on his blog, China Supertrends, about a recent panel discussion and networking event in Shanghai which was sponsored by Beijing-based China Entrepreneurs and whose theme was “The State of Entrepreneurship in China.” I had the pleasure of serving on the panel along with Taiwan entrepreneur Raymond Chang, who is bringing a new take to home television shopping in Shandong; and Rocky Lee, an American lawyer with DLA Piper who heads its Asia Venture Capital and Private Equity practice.

We did not have time or the occasion that evening to discuss the visa issue and how it impacts entrepreneurs in China, so Jason provided a nice summary in his post. He referenced the changes you should know about and how this might affect your personal and business travel plans; a timely post on the subject from Dan Harris of China Law Blog; as well as several posts from China Herald.

I won’t repeat all of the advice, wisdom and observations contained in these sources, but merely refer you to them.

The Wall Street Journal recently ran an article regarding arbitration in China that described the pros and cons of Western companies submitting to arbitration in China or insisting on arbitration in more neutral venues such as Sweden. 

It’s an excellent article as far as it goes, but what it doesn’t emphasize is that arbitration is only the first step towards resolving legal conflicts in China. Whether a complaint is arbitrated in China or outside the country, the enforcement of any arbitral award that involves China will require a trip to a Chinese court, and that leads to the issue of enforcement.

For better or for worse, I have had a fair amount of experience dealing with the legal system here. Because it such an important issue, I devoted a section to it in my book, Managing the Dragon. Here is what I wrote:

Contrary to what most people think, China does in fact have a body of law and a legal system, including courts and arbitration panels where grievances can be brought.  On December 29, 1993, the National People’s Congress adopted a Company Law, which has been refined over the years and was last modified in 2006. The point is that China already has laws on its books. The difficulty lies in enforcement. 

There’s an International Arbitration Tribunal in Beijing, made up of both Chinese and Western judges, where a contractual dispute with a Chinese partner (or something of that nature) can be taken.  When I was researching the idea of setting up a business in China, I was told that a foreign investor or company could get a fair hearing in arbitration, and that foreign companies had actually prevailed in a majority of the cases.  I have found this to be true.

During the course of our history in China, we’ve had three cases that have gone to arbitration, two that we brought and one that was brought by one of our Chinese partners.  What we didn’t realize at first, but soon learned, is that prevailing in arbitration and getting an arbitral award is actually only the first–and the easier–step in the process.  Having the arbitral award enforced is the second and harder part. Because the job of enforcement reverts to the Chinese court system, the party with better relationships in the area in which the grievance occurred has a substantial advantage.

In the first case, we were new at the game and thought winning in arbitration was everything.  With the Tribunal’s ruling in our hand, we marched off to court in Harbin, the site of the complaint–only to find that our Chinese partner already had the system wired.  Despite several years’ worth of efforts, we got nowhere.

The second case was the one you read about in Chapter 8, where the general manager and our Chinese partner in Anhui had set up a competing factory in violation of a non-compete agreement that he’d signed only months earlier. Right was clearly on our side, and we won in arbitration.  But this time, we lined up support from the local government ahead of time. Armed with a favorable ruling, we asked them to help and got what we wanted in one meeting, presided over by the Party Secretary.  We never even had to go to court.

In the final case, a Chinese partner that we had bought out–with the blessing and encouragement of the local government–made claims against us and took us to arbitration.  (The local government was as frustrated as we were with the actions of the Chinese partner over the years, and believed we could better develop the business if it were wholly-owned.)  The case wasn’t credible and we won rather easily.  At all times, the local government was on our side, so enforcement wasn’t an issue.

My best advice on legal actions is to avoid them at all costs and use them only as a last resort.  The outcome is uncertain, and it’s going to take time–no matter what.  In all three arbitration cases, even though they were open and shut according to any objective legal advisor, it took a year to go through the arbitration process.  If you then have to go to court to enforce the award, you can easily add on a couple of years.  And that whole time, the business that’s the subject of the dispute will be in turmoil, with a cloud of uncertainty hanging over it.  Under these circumstances, given the competitiveness of the Chinese market, final victory will probably be pyrrhic, if it ever comes at all.

Maybe the best reason to avoid legal action in China is that once you go down that path, all other avenues for resolving a dispute are foreclosed.  We had this experience in each case.  Once we had filed arbitration, the local and provincial governments took the position that the matter was being resolved through the legal system, and they didn’t want to interfere.  Once the legal gauntlet is thrown down, you have no choice but to see it through to the end.  In my experience, negotiation is a better way to go.

All that said, the legal system is evolving and improving every day.  With government support and help from international legal experts, the body of law governing commercial transactions and contracts in China is becoming increasingly sophisticated.  It’s no longer so different from the legal frameworks that exist in the most developed countries.  But the key link remains enforcement through the judiciary system, and in this area personal relationships will continue to play an important role for some time to come. 

The article cites a case involving PepsiCo and a Chinese bottler. As part of their joint venture agreement, the parties agreed to resolve any disputes through arbitration in Stockholm. Subsequently, Pepsi took its partner to arbitration in two separate arbitration complaints, alleging several breaches of various contracts and seeking an order terminating the joint venture. The lead judge in the arbitration proceedings was Swedish, and along with the judge selected by Pepsi, sided with Pepsi. Both arbitrations were decided in Pepsi’s favor and were wrapped up in 2005.

Here is where the article makes my point. The last paragraph begins with: “Meanwhile, PepsiCo has yet to recover on the judgment…” Those final words say it all. Arbitration is only the first, and the easiest, of the two steps. Enforcement is where the rubber meets the road in China.

From all outward appearances, the Danone/Wahaha affair, one of the most spectacular and visible disputes between a prominent foreign company and its Chinese partner, is speeding to a resolution as quickly as it seemed to spiral out of control in the middle of 2007.

In the latest announcement, Emmanuel Faber, one of the key persons in the dispute, has resigned his positions in the China joint ventures due to his recent appointment as Chief Operating Officer of Paris-based Danone.

This move saves face all around, and promises to pave the way for constructive discussions between the two parties. Mr. Faber has obviously been given a huge promotion by the parent company, so no negative aspersions can be cast on his move back to Paris. Yet, his departure creates more negotiating room for both sides. His successor as point person in the negotiations on behalf of Danone is now free to reconsider the company’s various positions and modify or adjust without fear of losing face, something that is as important to non-Chinese as it is to their Chinese counterparts. Likewise, the representatives from Wahaha, with a new person sitting across from them at the negotiating table, will have more freedom to step back from lines that they may have drawn in the sand previously. Difficult and tedious negotiations remain ahead, but the conditions for further discussion have never been better.

Why the sudden progress after months of stalemate? In my opinion, the key lies in Danone’s abandonment of the typically Western, legalistic approach which it first took to try and resolve its dispute with Wahaha, in favor of one that is more Chinese. In the West, filing a lawsuit often sets the stage for settlement discussions. In China, it works just the opposite. Legal action signals an end to discussion and negotiation. Rather than being an integral part of the dispute resolution strategy, the best legal strategy in China is, more often than not, not to have one.

Winning a lawsuit in China is difficult and time consuming for a foreign company, as Danone and others have found. While the prospects for obtaining a favorable judgment in arbitration are much better, any damages awarded have to be enforced through the Chinese courts—a classic Catch-22 which I had the dubious pleasure of discovering for myself. Filing lawsuits outside China, as Danone did, may hold out the promise of asset recovery, but it cannot by definition address the core issues in China.

As painful, as frustrating and as tiresome as it may be, negotiation and maintaining communication with your partner in China is always the preferred way to go. That, I believe, is the advice that President Hu Jintao of China gave President Sarkozy of France when the latter brought up the Danone issue at their November dinner. It was no surprise that Danone began abandoning its legal strategy immediately afterwards. With all legal action stopped or suspended, and both parties agreeing to refrain from further hostile comments, the stage for constructive dialogue was set. By stepping out of the picture, Mr. Faber and Danone have now expanded the area for compromise.

And, “compromise” will be the operative word from here on in. Neither party can expect to get all that they want from the negotiations. Given the deep differences which have arisen and which the dispute has highlighted, it is unlikely that the relationship can go back to the way it was. At best, Danone and Wahaha will be able to come to some agreement that enables each to pursue its own destiny in China and abroad in some mutually beneficial manner.

Barely one week after Danone’s decision to change its approach and drop certain legal proceedings against its Chinese partner, both parties said that they have agreed to a legal ceasefire and will return to “peace talks” for the resolution of one of the most high-profile disputes between a foreign company and a Chinese partner. “Both parties agree to temporarily suspend all lawsuits and arbitrations, stop all aggressive and hostile statements and create a friendly environment for peace talks,” the companies said in a joint statement.

Last week, The Wall Street Journal ran a story which described the dispute and the background behind Danone’s decision to drop its legal proceedings against Wahaha in China. (For those who haven’t been following this case, the article provides a good summary of the key issues.)

Groupe Danone SA said it has suspended certain lawsuits against Zong Qinghou, its estranged business partner in China, and is willing to drop other legal action in an effort to encourage him to work toward reconciliation.

The response to Danone’s peace offering was cool. The Sino-French presidential summit last month prompted a call from the two governments for a speedy and amicable resolution to Danone’s dispute with its partner in joint ventures that produce Wahaha-brand drinks, Emmanuel Faber, Asia president for Paris-based Danone, said Friday.

Danone, as a result of the signals from the two governments, has suspended six lawsuits it filed in Chinese courts that allege Mr. Zong was in breach of his fiduciary duties as a director of their joint-venture business. Under the right conditions, Mr. Faber said, Danone would suspend all of its pending legal action against Mr. Zong in order to begin talks. “There is a need to create some space for dialogue,” Mr. Faber said.

Danone is locked in a battle for one of its most important global businesses, Wahaha-branded water and drinks in China, with Mr. Zong, who founded the company. The French company charges that Mr. Zong built and owns a parallel network of manufacturers and distributors for Wahaha drinks in China outside the decade-old joint venture Danone controls with a 51% share. Mr. Zong doesn’t deny he owns the businesses but says Danone has been an unfaithful partner, as well, for instance by investing in dairies that compete with Wahaha.

What caused Danone’s change in attitude? One of two events, or a combination of the two, was most likely behind Danone’s decision.

First, when President Sarkozy of France brought up the Danone/Wahaha dispute with President Hu of China in their recent presidential dinner in Beijing, President Hu undoubtedly told him that there was little he or any Chinese official could do as long as the two parties are embroiled in legal proceedings. This would be consistent with my experience in China. I have found that Chinese officials can be helpful in resolving disputes, but not if the matter is already in the courts. Once legal proceedings are brought, government officials will decline to be involved, preferring instead to let the courts decide.

Secondly, Danone may have been somewhat unsettled by the recent court decisions that went against the company in China. While Danone has claimed that it was winning in lawsuits outside China, that is not where the real issues lie. Danone’s legal actions in the U.S. were designed to gain leverage on the Chinese partner by going after assets that Wahaha or Mr. Zong may have outside China, but they would have done nothing to settle the central causes of the dispute which are in China.

In order for a purely legal strategy to work, Danone would have to win, and have its judgments enforced, in China–a very tall order indeed. It is interesting that the six lawsuits which Danone decided to drop were its lawsuits in China. Given the recent decisions, Danone probably concluded that it was unlikely to win these anyway.

Despite the coolness of Wahaha’s initial response, it appears that pressures have been brought to bear in convincing Mr. Zong to return to the negotiating table. The Chinese government undoubtedly played a major role in causing this to happen. Resolving the complex issues will not be an easy matter, but everyone has now seen that lawsuits are not the answer and will hopefully work twice as hard to resolve the disputes. After all, a peaceful resolution of this issue is in everyone’s best interests.

When Danone enlisted President Sarkozy’s support to help resolve its legal disputes with its Chinese partner, it must have known that it was having some trouble in the courts, particularly those in China. Sure enough, as reported in the International Herald Tribune on December 10:

Hangzhou Wahaha, embroiled in a trademark dispute with Groupe Danone, said Monday that it won a lawsuit on claims of unfair competition filed in China against a Danone executive.

François Caquelin, appointed by Danone to sit on the board of a joint venture with Wahaha, participated in unfair competition because he also sat on the boards of rivals, Wahaha said Monday in a statement, citing a court judgment.

The Guilin Intermediate People’s Court will consider similar claims against Danone Asia’s president, Emmanuel Faber, and the firm’s China president, Qin Peng, Wahaha said.

Danone, which formed ventures with Wahaha in 1996, has accused companies linked to the chairman of its Chinese partner of unauthorized use of the Wahaha trademark.

Wahaha’s chairman, Zong Qinghou, claims the agreement giving Danone control of the brand violated Chinese law and that rights to the trademark remain with Wahaha.

An arbitration court in Hangzhou also found in favor of Wahaha, ruling that the trademark used to sell bottled water, tea and other beverages remains with the Chinese company, Caijing Magazine reported Sunday, citing Zong. Danone still has the right to appeal the decision, it said.

As evidenced by the above excerpts, the legal aspects of the Danone/Wahaha dispute are very complicated. It is impossible for me, or, I would argue, anyone who isn’t intimately familiar with all of the details of the case, to judge whether the above judicial decisions by the Chinese courts are fair or unfair. The point is, that once negotiations stop in China, and a dispute enters the legal arena, avenues to resolving the dispute in any other way, other than through the legal system, are closed.

Prior to legal action being taken, the local, provincial or central governments in China may be persuaded to play a role in bringing two parties together. That is when an appeal by President Nicolas Sarkozy to President Hu Jintao would have had maximum impact. Once the dispute gets into the court system, however, government officials, no matter how senior, will be very reluctant to interfere. Now that one or two decisions have gone against Danone, I don’t see Divine Intervention having any chance of success.

The obvious lesson in all of this is that all means should be used to resolve disputes in China outside the court system, and that legal action should be taken only as a last resort. In developed countries, court proceedings can be an excellent way to gain leverage and bring an opposing party to the negotiating table. In my experience, that approach seldom works in China.

Previous posts on the Danone/Wahaha dispute:

Danone/Wahaha: Just the Facts, We Think (Part 1)

Danone/Wahaha: A Breakdown in Mutual Trust (Part 2)

Danone/Wahaha: Failure to Create a Common Vision (Part 3)

Danone/Wahaha: Dispute Resolution in China (Part 4)

Danone/Wahaha: Everybody Loses (Part 5)

Danone/Wahaha: Divine Intervention (Part 6) 

For some time now, I have been searching the news for an update on the dispute between Groupe Danone, the large French food and beverage group, and Wahaha. The latter is one of China’s most famous privately-owned companies, and Danone’s partner in 39 beverage joint ventures across the country.

After dominating the headlines for weeks earlier this year, all parties seem to have gone underground, and news of the well-publicized dispute has been scarce ever since.

However, suddenly the report that recently elected French President Nicolas Sarkozy, on his first official visit to China, brought up the dispute in his state dinner with President Hu Jintao told volumes.

What it told me is that the dispute must be at a stalemate, hopelessly mired in the legal system, with divine intervention by the nations’ highest leaders seen as one of the only remaining ways out.

Enlisting the help of senior government officials from your home country to intervene and help resolve a dispute in China, or to push a deal approval over the finish line, is a tactic that has been used ever since the country opened up to the outside world. I can admit to resorting to this tactic myself, and companies like Airbus and Boeing use it all the time to clinch deals for new aircraft orders. My contacts tell me that General Motors used a visit to Beijing by then Vice President Al Gore to maximum effect as a way to obtain approval for Shanghai GM’s highly successful assembly joint venture in China.

How effective is this tactic? It’s probably works better to solidify new deals than it is as a dispute resolution mechanism. Visits by top governmental officials from another country are big news anywhere, but they are especially big in China. Every visit by the head of a large foreign power underscores China’s arrival as a major global force, and a country to be reckoned with. President Sarkozy’s visit last week was particularly notable because it occurred so early in his administration. Past practice by French presidents has been not to visit China until after at least two years after taking office.

With all of the fanfare surrounding these high-level state visits, it’s in everyone’s best interest for all to go smoothly and this means giving everyone “face.” China wants to show its graciousness as a host and its good will to the country of the visiting dignitary, so it accelerates the approval of every deal in the pipeline.

The visiting dignitary wants to show his constituents back home that he is effectively working on their behalf, so his or her staff have added incentive in the weeks ahead of the visit to lobby the Chinese officials hard for approvals. The result: At the conclusion of the visit, the smiling leaders of both countries jointly announce to the television cameras billions of dollars (or Euros) of new deals, and a spirit of enhanced cooperation between the two countries.

Resolving disputes is another matter, however. Disputes in China tend to be complicated, with each side convinced of its own righteousness. While billions for new Airbus jets and Alcatel-Lucent telecom contracts were announced, there was no obvious progress on Danone. The fact that these disputes even exist and need to be discussed at the senior-most levels of government represents a loss of face for both leaders. No doubt, both President Hu and President Sarkozy had been briefed ahead of time by their respective staffs and received somewhat different versions of events that were biased one way or another.

Given these circumstances, the best one can hope for is that the visibility the dispute received at the top level of China’s leadership is enough to incentivize a lower level official to help resolve the matter. In some cases, this may be just enough to clear up outstanding issues. But in most, I am afraid, a great deal of tough negotiations remain ahead.

Previous posts on the Danone Wahaha dispute:

Danone/Wahaha: Just the Facts, We Think (Part 1)

Danone/Wahaha: A Breakdown in Mutual Trust (Part 2)

Danone/Wahaha: Failure to Create a Common Vision (Part 3)

Danone/Wahaha: Dispute Resolution in China (Part 4)

Danone/Wahaha: Everybody Loses (Part 5)

As reported by the International Finance News, a Chinese language newspaper under the supervision of People’s Daily, Chinese toymakers in the Yangtze River Delta Region are already suffering from the aftershock of “questionable” toys. There are over 8,000 companies which make toys in China, many of which are located in Jiangsu and Zhejiang provinces and in and around Shanghai. In 2006, these companies had total turnover of 150 billion yuan ($19.5 billion) and employed 3 million workers.

According to the newspaper, China’s toymakers exported $7 billion of toys to global markets in 2006, of which $3.2 billion, or almost one-half, was to the United States. Other major markets include the European Union Community (EUC), Hong Kong and Japan. From January to July, 2007, exports of toys totaled $4.1 billion, a 24 percent increase over last year, of which $1.7 billion were to US customers.

The recent recalls by US toymakers and the “Made In China” crisis is already having an impact on China’s toymakers, however. Many small scale producers have closed, and orders at the larger companies have been sharply reduced. Li Meng, a manager in a Nanjing, Jiangsu Province based import/ export company, commented. “Previously, it was easy to deal with American and EUC companies and we could get orders quickly. Now, it’s very, very difficult.” Mr. Li said that he now has to work much harder with much less success in getting orders. In his opinion, recalled toys have been made according to customer designs and comply with 85 percent of their specifications. The problem is in design, he said, and it is unfair for the European and American media to only aim at China manufacturers.

This view has gotten some support outside China. According to the China Daily, a research paper, soon to be released by two Canadian business professors, shows that about 80 percent of the 550 toy recalls in the US in recent years were because of design faults instead of manufacturing defects.

Mrs. Wang, a representative from a toy company based in Yi Wu in Zhejiang Province, gave her own reasons for defective toys.“ Prices are so low that it would be unusual if there are no quality problems,” she said. “Currently, there are too many toy companies in the Yi Wu area and competition is too fierce. In order to obtain more market share, many companies provide lower prices. The result is that some processes are eliminated and lower quality raw materials are substituted for good,” Mrs. Wang explained. The net impact of this fierce competition is not beneficial,” she reasoned. “First, the company sacrifices its profits. And once this issue occurs, the whole country’s reputation is damaged, leading to even bigger economic losses.”

Another manager from a Shanghai based export company commented on the rising standards expected by overseas customers. ”Recently, the EUC has raised safety and cleanliness standards for toys and also increased testing procedures. The technical criteria is tougher and tougher, and production costs have increased several times.” His advice to China’s toymakers: “Improve quality and diversify markets. If we have problems with the United States and the EUC, focus more on Hong Kong, Japan and Africa,” he counseled.

In an effort to boost near term sales, Li Changjiang, head of the Administration of Quality Supervision, Inspection and Quarantine (AQSIQ), assured American parents that China-made toys are safe and can be given as Christmas gifts. “Before Christmas, we will certainly provide children safer, better and more attractive toys. They will certainly like them,” Li said.

I’ll admit it. I am a HUGE Harry Potter fan. I preorder books, read them within the first 48 hours, and then again two months later when the magical withdrawal becomes unbearable. I frequent the various Harry Potter blog sites, and am even guilty of watching the ‘behind the scenes’ features on the DVDs. Yes, it might be pathetic, but at least I am not alone. There were millions of us who waited with bated breath on July 21st for the official English-language release of the seventh and final book in the series, “Harry Potter and the Deathly Hallows”. Within the first 24 hours, the book sold 8.3 million copies in the U.S. alone.

Having resurfaced from my 48 hours of Harry Potter isolation, I, like many, continue to search for J.K. Rowling interviews and other related commentaries in a sorry attempt to keep the magic alive. What I found was quite astonishing. The most fruitful attempts to maintain this magical momentum were not, in fact, attributable to the 8.3 million American fans, nor to the scores of English-language readers worldwide. Instead, the Chinese, who still await the official translated version of the final book, constitute the driving force behind the unofficial Harry Potter phenomenon.

Preempting the Harry Potter craze, Chinese publishing houses have printed unauthorized translations of real Harry Potter books as well as fake copies of the most recent English-language edition. Such book piracy is not surprising, as 30 to 40 percent of all books for sale in China might be illegal. What is surprising, however, is that the Chinese have evolved past counterfeiting as a means to capitalize on the success of the Harry Potter phenomenon. Myriads of budding Chinese writers have taken it upon themselves to recreate the magical epic, publishing unauthorized Harry Potter titles that may or may not parallel the original. Such titles include “Harry Potter and the Half-Blooded Relative Prince,” “Harry Potter and the Hiking Dragon,” “Harry Potter and the Chinese Empire,” “Harry Potter and the Young Heroes,” “Harry Potter and Leopard-Walk-Up-to-Dragon,” and “Harry Potter and the Big Funnel.” Dozens of these titles are hawked on street corners and even cataloged in school libraries. Some imitate the original text, while others weave in plots from other established authors like J.R.R. Tolkien. Still others swap protagonists with those from well-known kung-fu epics and Chinese literary classics.

The most notable such invention is entitled “Harry Potter and the Showdown,” a 250,000-word novel that replaces Book Seven. The novel was written by Li Jingsheng, a manager at a Shanghai textile factory, in order to allay his son’s fierce anticipation for the release of the final book. The finished manuscript was placed online and has received rave reviews from its 150,000 readers. One such comment of praise from Gu Guaiguai, an enthusiastic fan, reads, “I wonder if Rowling would bother to continue to write if she had read [‘Showdown’].” Despite receiving no interest from publishers, “Showdown” is nevertheless being sold in a bound version on the streets of China’s major cities. The source: the People’s Literature Publishing House (the official publisher of the Harry Potter series in China), which denies any association with the fraudulent novel. Seemingly innocent, the publishing house’s director of business development, Sun Shunlin, recently reminded the public that, “You are not supposed to use the name of Harry Potter anywhere else other than J.K. Rowling’s own books.” Thank you, Sun, for clearing that up.

Other publishers are not so quiet about their attempts to piggyback on the success of Harry Potter. “We published the book out of a very common incentive. Harry Potter was so popular that we wanted to enjoy the fruits of its widely accepted publicity in China,” explained Wang Lili, the editor of the China Braille Publishing House. Wang is referring to the knockoff book “Harry Potter and the Chinese Porcelain Doll,” published in 2002.

Wang’s attitude towards piracy is shared by many in China, despite recent government attempts to reverse the rampant violation of intellectual property rights. Such efforts have been slow to take effect, as one can still purchase knockoff prescriptions, DVDs, artwork, and even automobiles. With regards to book piracy, Wei Bin, editor of the Writers’ Publishing House, concludes that, “The focus of the government is not to fight against piracy. It seems they fight harder for banned publications, like pornography, political books, such as things written about the leadership, the government, and historical matters like the Cultural Revolution, and the Anti-Rightist Campaign.”

Perhaps Mr. Wei has a point. In the struggle to uphold IPR, the Chinese government might respond more fervently to products which seemingly threaten political and social stability than to any economic retaliation or sanction from the international community. While ‘Counterrevolutionary Viagra’ is an unlikely innovation, “Harry Potter and the Deathly Coal Mines” is not, especially given the rise of citizen journalism and public opinion in China. Until the release of “Deathly Coal Mines” and the subsequent crackdown on literary fraud, however, I will be enjoying my copy of “Showdown.”

Source: Only in China: Harry Potter and the Big Funnel By Howard W. French New York Times

When a joint venture goes sour in China, and the partners begin battling, everybody loses. This is certainly the case with Danone/Wahaha. Given the size and breadth of the cooperation between the two companies, the damage to all parties is that much greater.

The Victims: The JVs and Their Employees

If there are victims in all of this, it’s the 39 Danone/Wahaha joint ventures and their employees. Management has left, or is threatening to leave; the employees and remaining managers are refusing to accept the Danone appointees; distributors are choosing sides; and the distribution staff are refusing to sell the products of the French company. With so much management turmoil and instability, no one is focusing on the job at hand, and this is already taking its toll on sales. The longer the dispute goes on, the more likely it is that the very viability of the joint ventures themselves will be at risk.

Danone and its China Strategy

Groupe Danone is a Fortune 500 company and one of the most famous food and beverage groups in the world. It operates in 120 countries and has built strong brands such as Danone for fresh dairy products and Evian for mineral water. Danone has 70 factories in China and a major presence in the country. Whatever the outcome of the dispute, Danone’s China strategy is sure to suffer.

The Chinese Partner and Zong Qinghou

Mr. Zong established a very successful and profitable company in China, and in combination with Danone, built the joint cooperation into one of China’s most successful. Even though he and the Chinese partner have established parallel companies, the damage to the joint ventures with Danone is a heavy price to pay. Beyond the financial damage caused by the dispute, Mr. Zong’s reputation as one of China’s leading businessmen has surely been damaged. Read more »