In the second part of the series "Setting up a business in China," Serge Fafalen, managing partner of SG Fafalen & Co., talks about challenges that businesses face in China. SG Fafalen & Co. is the first and only Swiss law firm in Hong Kong.

Bureaucracy in China

One of the first complications that companies entering the Chinese market have to contend with is getting permission from the authorities. Is bureaucracy a big problem in China? Fafalen thinks that it could actually be of help in some situations although he admits it can be a problematic issue to deal with. "Bureaucracy is a system, so I won't say it's a problem. It can be a problem because you're dealing with human beings and when you have powers in the hands of certain individuals, they might be tempted to abuse the situation."

What complicates the process, in Fafalen's opinion, is that a permit or authorization is needed for almost everything that needs to be done in China. "First, you need to find the right person or the right bureau that you can get this authorization from, which is not obvious. And secondly, you have to get the authorization, and this might take more time than what you really want to have factored into your business plan."

Fafalen describes a scenario which foreign manufacturers might find themselves in when they deal with authorities. "Some provinces, especially in the remote parts of the country, want to attract foreign investors, by offering certain advantages, such as tax holidays, tax advantages and so on."

"Imagine a foreign investor who deals with the administration and gets authorization to build a manufacturing business in China after being offered all these. Then he discovers that the province or municipality or whatever administration he has been dealing with had no power to authorize anything. So everything is void from the beginning."

"The investor loses all the advantages that have been promised to him, but he has already invested all the capital in order to have his manufacturing operations approved. It's catastrophic."

Fafalen said that these "misunderstandings" do happen and are a big problem in China. "This is something that has to be discussed with advisers that are skilled and knowledgeable about China, because there is no other way of finding out if what is being proposed to you is illegal and can be voided, cancelled at any moment."

Intellectual property rights (IPR)

Copyright infringement is one of the problems that foreign companies going into China must face. "Infringement of IPR is a fact of life in China. It's very difficult not to accept it. It's enormously widespread. It's something that may happen at any stage of production by any kind of means, including your own management setting up a factory a hundred meters away from your own to copy your designs and capture the market," Fafalen describes the problem.

Serge Fafalen heads the first and only Swiss law firm in Hong Kong. (Image: Radio86)

"Basically, in China, you have a good set of rules. The problem is the enforcement of rules and the willingness to enforce the rules. For certain industries which are very big and important in terms of the turnover that the industry generates for China, it might even seem to be a form of protection. So you might question the willingness of some of the authorities, especially on the local level, to prosecute."

"The problem is so widespread and the country so big that there are a lot of issues to address before getting to a certain type of standard that foreign investors would be happy about." However, Fafalen emphasizes that the government has made a lot of effort to improve enforcement of copyright laws. "The government in Beijing wants to do something about the problem," he said.

"Since 2004, there have been certain very high profile litigation, including criminal litigation, against the infringers. The government in Beijing wants to do something about the problem. I guess they are improving and they will certainly keep on improving in order to abide by what they agreed to when they adhered to the World Trade Organization (WTO) in 2001. I have no doubt about this, but this is of little relief to someone who is being copied right now."

"I think the law is one thing, how you protect your rights by using the law or a strategy of protection is something different," he continues. "And sometimes, especially in designs, you might be willing not to think about protection by the law because this is useless. It takes too much time, for example, to get the patent on your design in China. It takes about two years, and in two years, your product is out of the market. So it is completely inefficient."

Fafalen thinks that the IPR situation in China might improve even more as Chinese companies enter the world market. "At one stage, these Chinese companies will go out and face the same problem of intellectual property copying and infringement of their rights in their overseas market. That might teach them that somehow, the situation in their country must be put in order so that they can be protected outside as well."