By Dan Harris
Many years ago, an American credit reporting company called me seeking help with forming a subsidiary in China (a WFOE). This company told me of their extensive and expensive market research demonstrating that China had a tremendous pent-up demand for their credit reporting services. As I listened, I kept thinking that unless the law had very recently changed, foreign companies were prohibited from engaging in such business without a Chinese joint venture partner.
So I asked politely if anyone had researched whether their planned business would be legal in China. They paused and said they had not. I then suggested that we do so straightaway. After about ten minutes of research, I reported back that credit reporting was barred to foreign entities seeking to go it alone in China. This company immediately abandoned its China plans, putting to waste its hundreds of thousands of dollars on market research.
Flash forward to the present. Organic, cruelty-free cosmetics have become big business, including in China, where many who can afford such things would not be caught dead putting made-in-China products on their skin. American cruelty-free cosmetic companies are being contacted in droves by Chinese companies wanting to import and distribute the American products.
Thrilled at the prospect of a massive new market, American cruelty-free cosmetic companies fly to China to meet with their prospective partners and negotiate “memoranda of understandings” for getting their cosmetics to the Chinese consumer.
There is only one problem with all this: foreign-made cruelty-free products are not legal in China.
Though China recently removed its animal-testing requirement for most domestically produced cosmetics, all imported cosmetics must still be tested on animals (with one minor exception). This means that cruelty-free American cosmetics companies must choose either to (1) not sell their products in China, (2) conduct animal testing to secure Chinese government approval to be able to sell in China, or (3) re-brand their products for China and conduct animal testing. The first choice means no money from China. The second choice likely would damage the company’s reputation and sales outside China. The third choice may allow the company to avoid damage to its reputation, but only if consumers differentiate between the brand and the company. So far, the companies who have contacted my firm’s China lawyers have all chosen not to sell their products in China, rather than go through any sort of animal testing. The companies simply are not willing to risk putting their reputation at risk, though some cosmetics companies are diluting their cruelty-free claims to sell in China.
The point here is simple. Before conducting market research or flying to China or drafting memoranda of understanding or engaging lawyers to form a foreign subsidiary, you should first determine whether your business plan is even legal in China.
Dan Harris is a lawyer at Harris & Moure and the co-author of China Law Blog, which discusses how Chinese laws impact businesses.
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