Let’s first consider a massive global heavy hitter that failed in China – Amazon. What went wrong in China given that they seem to have just about everything right elsewhere?

One of the main reasons that Amazon failed in China is that its flywheel failed to function there. The key components of Amazon’s flywheel include its vast selection of products, low prices and strong logistics network. Yet Amazon’s selection in China was much narrower than its local competitors’ offerings. That’s because Amazon used the “Buy Box” [the company’s algorithm-driven Add to Cart function], which unfortunately was not well accepted by third party sellers, and who ended up choosing to sell through Amazon’s rivals.

Amazon’s low prices were also threatened when Chinese rivals launched aggressive price wars and created shopping festivals including the famous Singles’ Day. Amazon’s logistic network was outperformed by its Chinese rival JD.com when JD.com built its own logistic network that effectively combined the strength of both Amazon and UPS. That being said, Amazon didn’t possess any resources that gave it competitive advantages.

Amazon also made many mistakes in terms of managerial decisions: It didn’t commit to the Chinese market; its governance structure didn’t grant autonomy to its China unit; its local management team lacked a skillset to compete with Chinese entrepreneurs, and stuck with the same operational model that didn’t fit China.

On the other hand, LinkedIn has done well in China. What did it get right that all the other international internet giants have got wrong?

LinkedIn definitely did certain things right. Learning from other internet companies’ failure in China, LinkedIn created a new operational model: it formed a joint venture with Chinese venture capital firms to gain connections and regulatory benefits; it had its own board, separate from that of the parent company; its China team was offered stock options – a similar reward system as other start-ups – and its China president reported directly to the global CEO.

These were good moves and contributed to its smooth sailing initially. Yet LinkedIn’s strategy quickly shifted to building a new product – Chitu just for the Chinese market. In this way, it voluntarily gave up its only edge, namely the global network, putting it in the same position of its competitors.

Even today, LinkedIn has only partially realised “product-market fit” in China. It has been primarily perceived as a high-end job hunting site, but not a professional networking platform. As a result, user retention rate remains low. Whether LinkedIn has done well is still debatable, but we’d like to quote the LinkedIn executive who appeared in the story, saying: “We managed to beat everyone by still being there (China).”

Amazon’s logistic network was outperformed by its Chinese rival JD.com when JD.com built its own logistic network that effectively combined the strength of both Amazon and UPS

Another failure that is instructive for other companies is Norwegian Cruise Line. They were in a seeming boom market, with no well-known local players for competitors, a great reputation … yet they are no longer operating in China. What happened there? 

The conventional wisdom is that when you go to a foreign market, you need to tailor your offering to local customers. That’s exactly what Norwegian Cruise Line did. It made tremendous efforts to make its ship Chinese: the topsides had a 333-meter-long artwork depicting a phoenix, representing good fortune in Chinese culture. Inside the cruise ship there were Chinese restaurants, Chinese tea houses, karaoke rooms, gaming rooms with mahjong sets, a ‘tranquillity park’ offering tai chi classes. But despite this, ironically what they did didn’t give them an edge, so instead it backfired.

It turns out that “Westerness” is an attribute that Chinese consumers valued. The cruise industry didn’t exist in China until Italy’s Costa Cruises sent in its first cruise ship in 2006. Cruising remains to many a foreign concept. When Chinese consumers get on a cruise ship, they expect an exotic western-style experience. The China-specific design looked too familiar to attract Chinese consumers.

You also offer some useful general guidelines for companies to consider when thinking about China – your so-called ‘Three Necessary Conditions’. Could you give us an idea of these and why they are so important?

The “Three Necessary Conditions” include demand, access to the market, and competitive advantages. A foreign company must provide a product or service that meets a demand. And though nearly any need that exists in one’s home market exists in China, consumer preferences can still vary. For example, given the culture difference, the demand for online professional networking is not yet evident, that’s part of the reason that LinkedIn hasn’t reached its goal in China.

The foreign company also needs to make sure that it is allowed to operate in China. Some categories of businesses are closed to foreign companies. Some categories require a Chinese partner, and sometimes a foreign company can sidestep the restrictions, as some internet companies did in our book.

The last condition is a potential source of competitive advantage. Ultimately all competitive advantage arises from controlling some resource or asset that helps deliver a solution to customers and that cannot readily be acquired by rivals. We call these resources the firm’s alpha assets. Alpha assets may include efficient production systems, brands valuable to consumers, or proprietary products.

If companies pass the hurdle of the ‘Three Necessary Conditions’ then come the ‘Five Managerial Decisions’ essential to success that you outline in the book. What are these?

The “Five Managerial Decisions” are actual decisions that managers make in entering China. They are commitment, governance structure, leadership, strategy, and the product.

The commitment required to succeed in China is usually larger than for any other foreign market. But we often see firms fail to realistically forecast the costs required and lose enthusiasm once reality proves more expensive than their projections. Governance refers to the structure and administration of the relationship between the China unit and the parent organisation. This often decides the autonomy the China unit has and whether the China unit can be agile – important factors for success in China.

Successful leadership at a foreign company’s China unit often requires entrepreneurship. Corporate-savvy managers must be entrepreneurial and also know how to marshal resources and win support at headquarters for their plans. Strategy refers to the top-level plan for entering the market and achieving sustainable success. If a firm has a clumsy strategy, it will likely stumble, even when it enters a booming market with a strong commitment and capable leadership. Last but not least, product-market fit is also essential. This fit can be influenced by consumers’ price sensitivity, their cultural norms and preferences and their alternatives.

There are no UK companies in your list of case studies, but are there any UK firms, products or brands that have caught your attention in China either as solid successes or terrible failures? 

Dyson has achieved tremendous success in China. The company generates around half of its revenue from Asia, and China is one of its top three markets. It entered China in 2013 and now operates more than 800 stores there. Its vacuum cleaners, hair dryers and stylers are quite popular among Chinese consumers. On Singles Day 2019, Dyson sold 20,000 units of hair dryers in 10 minutes on JD.com and generated more than £10 million sales on Tmall (Alibaba’s e-commerce platform). The company even moved its headquarters to Singapore to be close to its customers. If you use our framework to analyse Dyson’s success, it’s clear that it has checked many boxes.

Tesco would be the opposite. The retail giant came to China in 2004 and struggled to crack the market from that moment on. In 2014, it formed a joint venture with a Chinese partner, combining its 131 stores in China with its partner’s around 3,000 stores. In 2020, Tesco sold its joint venture stake to its Chinese partner and completed its exit from China.

About the authors: Lele Sang is a Global Fellow at the Wharton School at the University of Pennsylvania and a former journalist and editor who has previously worked for Beijing News and Caijing Magazine, covering business and politics. Karl T. Ulrich is Vice Dean of Entrepreneurship and Innovation and the CIBC Professor of Entrepreneurship and e-Commerce at the Wharton School.

Many common mistakes can be avoided when entering the China market. For access to market intelligence, connections to businesses and government leaders and the chance to network with sector experts, consider joining CBBC. You can find out more by clicking here.

Call +44 (0)20 7802 2000 or email enquiries@cbbc.org now to find out how CBBC’s market research and analysis services can provide you with the information you need to succeed in China.

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1. Misunderstanding Chinese consumers

Chinese consumers are not the same as consumers in the UK or the West. Their tastes, styles, budgets and requirements are all different and therefore products and services that sell in the UK might not necessarily sell in China. It is therefore absolutely vital to conduct thorough research about Chinese consumer habits and preferences to find out whether your product will work in the China market.

Nevertheless, many brands have had success when localising their products to the local market. From different clothing sizes to targeted milk products to crab flavoured Pringles – those that understand their consumers will certainly fair better. Also, China’s appreciation of soft skills, consultancy and services is not yet as financially valued as in the UK, therefore market research, competitor analysis, testing and focus groups are all strongly advised before a full-on launch.

2. Underestimating the time involved

Unlike other territories, expanding an existing business into China is not a quick and easy task. The legal, financial and regulatory processes can be complex depending on which sector your company is in. And leaving it all to local staff and partners to manage can be costly in the long term. Allocating appropriate funds, hiring and training local staff and dedicating time for senior staff to get to know the market, the local office and the local staff is essential.

3. Ignoring KOLs and KOCs

Top KOLs can drive brand awareness and sales conversations, but they can also be costly

Key opinion leaders (KOLs) and key opinion consumers (KOCs) are the Chinese equivalent of social media influencers and are instrumental in a brand’s success or failure. While KOLs can be celebrities or other types of influencers paid to promote brands on their social media posts, KOCs are regular consumers, albeit with a large social media following, who are trusted for their reviews and brand preferences. Choosing the right KOLs or KOCs to advertise a brand can be key for foreign businesses when reaching out to consumers.

“It’s essential for brands to be very clear about their objectives for their marketing campaign,” says CBBC’s Demi Ping, Director for retail and e-commerce. “Top KOLs can drive brand awareness and sales conversations, but they can be costly; micro-KOLs and KOCs, on the other hand, can be more affordable for SME brands and can generate decent sales.”

4. Choosing the wrong partners

When spearheading a first foray into the China market, domestic business partners can mean boom or bust. A number of businesses have had bad experiences with business partners who did not share the same vision; or worse, partners who own an illegitimate business. It is thus best not to rush into any partnerships with people or businesses that you do not know and to conduct a proper background check.

5. Misunderstanding the business culture 

D&G’s cultural mistakes cost have them dearly in China

Although business in China is conducted much in the same way as it is in the West, there are a few important subtleties that can make a difference. Preparing appropriate gifts, knowing the holidays and the bonus structure is important, as is understanding the concept of ‘giving face’. Giving face is all about preserving a good image for your team, your counterparts, your partners or your host, and learning about ways to ‘give face’ – as well as avoiding things that can make you or others ‘lose face’ – is vital when conducting business in China.

Likewise, many businesses have also missed the mark in some of their advertising and branding and fallen foul of their consumers, sometimes even causing their China operations to close.

6. Ignoring lower-tier cities

The third-tier city of Yiwu holds one of China’s largest trade fairs

China is the size of a continent and just as companies wouldn’t treat Europe as one territory, nor should China be treated as such. First-tier cities such as Beijing and Shanghai might be household names but they are just one part of a much larger market. Many of China’s smaller cities have huge populations in the tens of millions, and many domestic brands have done very well by specifically targeting third- and fourth-tier cities.

7. Not securing your IP

It may seem self-evident, but having IP protection from your home country does not extend that protection to other countries; IP rights are limited in scope, duration and geographical extent, and foreign businesses often make the mistake of misunderstanding their IP rights in China. Since China uses a ‘first-to-file’ system for patents and trademark protection applications, it is thus highly advised to obtain IP protection for your business in China as soon as possible.

“Before expanding any business in China, it is essential to obtain the necessary rights to ensure that you maintain a competitive advantage in this market,” says Yuan Yuan, director of business environment at the CBBC. “Legislation for IP protection in China has made leaps and bounds in recent years, and the current system now rivals other IP protection systems anywhere else globally. Registration of your IP rights is the first line of defence.”

8. Not getting to grips with China’s local digital landscape

China’s online platforms are completely different from those elsewhere

Navigating the complex digital landscape in China, and capitalising on its innovative sites and platforms, can be a real challenge for businesses as many do not get properly acquainted with its unique characteristics. Facebook, Paypal, Uber and other foreign websites are restricted; instead, China has WeChat, Alipay, Didi and other domestic platforms that cater to Chinese consumers. Foreign businesses would do well to establish themselves on these platforms and ensure they comply with domestic internet regulations, as failure to do so could lead to losing a platform, or worse — getting locked out of the market.

9. Missing frequently changing regulations 

While there are negative lists for market entry and foreign investments – meaning that listed areas and sectors are not open for access and investment – cross-border e-commerce (CBEC) in China uses a positive list, meaning that only items included on the list can be eligible to sell through CBEC. These lists are updated frequently, and so foreign businesses are strongly advised to stay abreast of the newest changes.

10. Getting the legal jurisdiction wrong

Many businesses may want to handle contracts and legal agreements under their home country’s laws or under the laws of the Hong Kong SAR, but in most cases, this cannot be done when doing business in China. Businesses often do not adequately prepare the legal side of business, and it is important for them to use the proper legal jurisdiction and abide by the jurisdictions’ laws and regulations.

In order to mitigate risks, consider using China Gateway, the CBBC’s market advisory service, to help demystify the process of doing business in China, as well as CBBC’s Launchpad service, which provides simple, low-risk, legal means to enter the China market.

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The Export Control Law (ECL) not only draws attention to the widely-defined control list of exported items and the temporary control regime – which used to be stipulated by scattered regulations and policies – but also brings in remarkable regulative measures such as a licensing system and reporting obligations to enhance the state’s systematic control on export activities.

Other than shedding some light on a few key provisions in ECL, this article aims to go a step further by using cases and examples to illustrate who should be most concerned about these new regimes, what new rules to be wary of, and more importantly, how companies and the responsible persons in those companies should prepare for the impacts of this law from corporate governance and risk management perspectives.

Who should be concerned about ECL?

Businesses may come across controlled items or unwittingly behave in a way now regulated by ECL, and thus are required to comply with the relevant rules. So here we will summarise three types of market participants that are most likely to be impacted by ECL: (i) exporter (including re-exporter, deemed exporter and other exporters); (ii) importer and end-user; and (iii) third-party service provider. The following paragraphs explain why and when a business needs to be concerned about ECL rules.

Exporters:

Any person (including individual, company and other organisation, etc.) who intends to export or engages in export transactions that are associated with controlled items on the control list or fall under temporary control (or are considered to be relevant to public security and public interests of China) may be regulated by ECL, and shall obtain an export licence from the relevant competent State Export Control Authorities (SECA) in China for exporting such controlled items.

The scope of ‘export’ as interpreted under ECL encompasses more than what you might normally think of as restrictions imposed on a Chinese vendor who sells a domestic product to an overseas purchaser. ECL puts in place certain control and monitoring measures to oversee any person who carries out re-exporting or exporting activities.

Re-exporters:

There is no clear and precise description in respect of ‘re-exporter’ or person who carries out ‘re-export’ transactions under ECL. It is widely believed that re-export takes place when an imported product is then exported by the original importer to a subsequent importer. As such, any person who re-exports controlled items is equally required to obtain a licence for exporting such controlled items.

However, ECL remains silent on the ‘de minimis rule’, which was proposed in previous review drafts – namely, whether an export of uncontrolled products with a certain proportion of controlled items will be regarded as re-export. In the previous review draft of ECL, the definitions of re-export and re-exporters set out a detailed percentage threshold for controlled items, but such threshold was eventually removed. By disapplying the ‘de minimis rule’ in ECL, it may imply that the re-export of foreign-made products containing China-made controlled contents is not subject to ECL regime. However, it could also mean that there is room left for future administrative regulations to set a threshold. Future administrative regulations may further clarify the scope of re-export and, in particular, the ‘de minimis standard’. It is therefore important to be wary of the uncertainties and risks based on the above mentioned rule.

Example A: Re-exporter

Chinese company A exports controlled items (e.g. dual-use products) to American company B, after which British company C imports the controlled items from the United States. In this case, (i) Chinese company A (acting as the original exporter of the controlled items), (ii) American company B (acting as the re-exporter of the controlled items) will need to comply with ECL rules in particular in obtaining the licence for exporting (and re-exporting) controlled items.

Deemed exporters

ECL widely catches and regulates any person whose behaviour may be categorised as a ‘deemed export’, which refers to the provision of controlled items by a citizen, legal person or unincorporated organisation of the PRC to a foreign organisation or individual, catching any non-cross-border exporting activity, no matter what form it takes. Exporting controlled items to any foreign person may be deemed as an export under ECL, regardless of whether such foreign importers are located or based within or outside China. In other words, an ECL-regulated export does not necessarily have to be a typical cross-border export transaction.

Exporting controlled items to any foreign person may be deemed as an export under ECL, regardless of whether such foreign importers are located or based within or outside China. In other words, an ECL-regulated export does not necessarily have to be a typical cross-border export transaction.

Example B: Deemed exporter

Employee A (Chinese nationality) and employee B (British nationality) both work in companies located in China. Employee A may be deemed as an exporter under ECL if he or she transfers a controlled item (e.g. restricted technology) to employee B in the course of business (e.g. via electronic form), regardless of the actual place where the importer (employee B) is located and the form of such transfer. In this case, employee A will be required to obtain a licence for exporting such technology to employee B.

Other exporters

The broad definition of ‘export’ may also catch mergers and acquisitions. If the sale of a company involves controlled items or is subject to SECA’s temporary control, the transaction is likely to be governed by ECL. Since ECL has just come into effect, we will use the recent case of TikTok to illustrate how the term ‘exporter’ might be interpreted under ECL in practice.

Example C: Other exporters

In 2020, TikTok’s China-based parent company, ByteDance, was forced to sell its US operations to a US-based company under pressure from the US government. At that point, an adjusted catalogue of prohibited and restricted technologies for export was issued in China, including text analysis and content suggestions-related AI technologies – which are the core algorithm of TikTok’s US business. If ByteDance insists on selling its US operations with its core algorithm, it should make an application to SECA for export licence before such sale can proceed.

With the promulgation of ECL, the sale of a company or business associated with controlled items to a foreign purchaser, regardless of whether the sale takes place domestically or in a foreign country, could be caught by ‘export’ under ECL, and therefore triggers the seller/exporter’s obligation to obtain an export licence before proceeding with the sale.

Taking the example of the TikTok case (see chart below), we can deduce that if  Chinese parent company A wishes to sell its overseas UK subsidiary B to a UK company C and the subsidiary B owns materials, equipment and technologies on the control list or subject to SECA’s temporary control, the sale will constitute an ‘export’. As such, it will be subject to the licensing regime under ECL. The parent company A will be required to obtain a licence for selling its subsidiary B to the UK company C.

Importer and end-user

As one of the conditions to trade, ECL requires exporters to provide certificates or evidence issued or provided by importers and end-users’ relevant competent authorities to declare the purpose and use of the controlled items. Moreover, ECL extends its power to regulate and supervise importers and end-users who are important counterparties in export transactions. One of the main obligations of importers and end-users is to use the controlled items only for the declared purpose and not to transfer controlled items to any third party without notifying or obtaining prior approval from SECA. Failing the above, the company may face a sanction by SECA.

It is equally important for exporters to check on day one and ensure that the importers and end-users with whom they propose to conduct business are clear of the Blacklist stigma

Blacklist/Controlled person list

Pursuant to Article 18 of ECL, an importer or end-user will be put on the blacklist or controlled person list if it:

• breaches regulatory requirements regarding end-users or end-uses; or
• endangers national security and national interests; or
• uses any controlled item for terrorism purpose.
  (hereinafter referred to as the ‘Blacklist’)

For any importer or end-user that is put on the Blacklist, SECA may take necessary measures such as prohibiting or restricting its importation of controlled items. Any person on the Blacklist can apply to SECA to have it removed from the Blacklist if it can demonstrate that it is no longer in breach of the relevant rules and appropriate remedies have been taken effectively.

It is equally important for exporters to check on day one and ensure that the importers and end-users with whom they propose to conduct business are clear of the Blacklist stigma. SECA may prevent any exporter from exporting any controlled items to any person on the Blacklist in the first place. However, in exceptional cases, an exporter may be allowed to apply for permission from SECA for proceeding with the export to any person on the Blacklist, provided certain conditions and requirements are satisfied.

The consequences of an importer or end-user being listed on the Blacklist could be serious, considering the strict ban applied on import transactions. Whilst we are as yet unable to evaluate the complexity of obtaining permission from SECA without examples of practical application of ECL, the US Export Administration Regulations (‘EAR’) may enable us to infer how ECL Blacklist is to function. In this respect, the case of ZTE may help to demonstrate how wide the impact of ECL might be on importers.

The ZTE case

On 1 July 2010, US President Barack Obama authorised new sanctions against Iran. Embargoes were placed on dual-use items produced by US companies. In 2012, ZTE provided Iran’s largest telecommunications operator (TIC) with equipment which had US software installed. In 2016, the US Department of Commerce published an investigation report and stated that ZTE illegally exported US-origin items to Iran. ZTE was found to be in violation of EAR. As a result, ZTE Corporation was put on the ‘Entity List’, and export restrictions were enforced against ZTE.

In March 2017, in hopes of being removed from the ‘Entity List’, ZTE agreed to pay approximately US$890 million in fines to reach a settlement with the US Department of Commerce.

ZTE, as a Chinese telecommunication company, has no branch or office in the US. However, as demonstrated by the case, it does not mean that American laws will have no influence over it. Importing controlled items and then exporting them to a country or an entity being sanctioned would be a clear breach under American laws. It is envisaged that ECL will have control over importers and end-users in ways similar to EAR. As such, overseas importers and end-users should be cautious about whether or not the transaction involves any controlled item imported from China or the contracting party is sanctioned by ECL.

Third-party service provider

Similar to the EAR system, ECL prohibits any person from providing agency, freight, delivery, customs clearance, third-party e-commerce trading platforms, financial services or other services to any exporter who engages in transactions that violate ECL. It is important to note that Article 20 of ECL does not provide an exhaustive list. That is to say, even if the service carried out by a third-party service provider does not fall within the listed categories as set out in Article 20, the person should still be mindful that any means of assistance to the exporter acting against ECL may in itself constitute a violation of ECL.

What items will be restricted? – The control list and temporary control

Control list/Controlled items list

ECL imposes export control measures over ‘controlled items.’ The definition of ‘controlled items’ includes dual-use items, military items, nuclear items, as well as other products, technologies, services and items that are related to the maintenance of national security and national interests, performance of anti-proliferation and other international obligations. The unified export control system is to be administered through making lists, directories, or catalogues of controlled items and implementing export licensing system. The lists, directories, or catalogues may be adjusted from time to time pursuant to ECL and other relevant administrative regulations. In that case, SECA will work with the related departments to establish and adjust the control lists, and promptly publish such lists in accordance with export control policies.

Temporary control

For items not listed on the control list, there remains the possibility for SECA to amend the list and supplement those items to the extent it considers necessary in maintaining national security in China. This is referred to as the ‘temporary control regime.’

SECA is authorised to impose temporary control over items for a period of no more than two years if those items are not on the control list. Before the expiration of any temporary control period, an evaluation will be carried out and SECA will decide whether to cease, extend or change the temporary control based on the result of the evaluation. Meanwhile, ECL provides that if any foreign country or region ‘abuses’ its export control measures to endanger China’s national security and interests, the Chinese government can take reciprocal countermeasures against such foreign country or region.

If any foreign country or region ‘abuses’ its export control measures to endanger China’s national security and interests, the Chinese government can take reciprocal countermeasures against such foreign country or region

The temporary control regime may bring uncertainties to overseas companies that have or will develop trade relations with entities or people in China regardless of any relevant jurisdiction or nationality of that entity or person. At the same time, it could be challenging for overseas companies to predict the impact of ECL on any existing or future trade relations considering the difficulties in anticipating the risks of being caught by the temporary control regime.

So, how do you comply?

Despite the fact that ECL has already been in effect since 1 December 2020, people are expecting more bylaws to be put into place and to guide market participants on how to adapt to China’s export control regime. Meanwhile, here are some specific measures that SECA encourages companies to adopt in order to comply with ECL.

Licensing regime

It is mandatory for exporters to obtain an export licence from SECA if they intend to export any items that are listed on the control list or may be caught by the temporary control regime.

When assessing exporters’ applications for the export licence, SECA will take into account the following factors:

• national security and interests;
• international obligations and commitments;
• the type of export;
• the degree of sensitivity of the controlled item concerned;
• the export destination country or region;
• the end-user and the end use;
• the exporter’s credit records; and
• other factors as prescribed by law or regulations.

Reporting changes of end-users or end-use

As one of the requirements for granting export licences, SECA will have to be satisfied that the documents provided by the exporters have established the proposed usage of the controlled items and the target end-users. Proof of identity and detailed information are also required from the target end-users. Should there be any change of the originally-registered usage of controlled items or the target end-users, both the exporter and the importer have an obligation to report to SECA. As a key regulatory measure, SECA will constantly monitor the compliance of the end-users and end-uses through a risk management system, details of which are to be further clarified by SECA.

Internal compliance system

If an exporter establishes an internal compliance system for its exporting behaviours and such a system proves to function effectively, SECA may consider granting general licence or applying other facilitation measures to such an entity for carrying out export business. Only exporters can benefit from such measures. In this respect, for exporters that wish to take advantage, we would suggest they plan and establish such internal compliance systems as soon as possible to allow more time for adjustments.

Establishing and improving the risk assessment mechanism for export control

The risk assessment mechanism is different from the aforementioned internal compliance system. We recommend that any relevant party, including exporters and importers, should develop and maintain a risk assessment mechanism as an additional assurance for any export and import activities. For example, within an importer’s company, before its directors and/or shareholders approve any import transaction, it is in line with the company’s interests to fully investigate the exporters and end-users and to evaluate the underlying risks with regard to all key aspects of such import transactions under ECL.

In general, the objective of the risk assessment mechanism is to uncover whether or not the target company, i.e, the counterparty in any export and import transaction, has engaged in any export or import violations or may in any way be restricted under ECL. The information to investigate into may include at least two major aspects: information about the exported or imported items, and information about the counterparties.

Firstly, the company should draw up a list of documents that it may require from the target company on a case-by-case basis. For example, depending on the scale of transaction and the particular counterparty, the company may collate and review the relevant information of product and core technology used in the exported items, the financial data, sales data, and the shareholding structure of the target company. In situations where the target company is reluctant to provide all required information, the company should consider trimming their list of required information down to a reasonable extent which is acceptable to the company from risk assessment perspective.

Secondly, the company may also look into other indirect information during the investigation process in order to figure out whether or not the type of transaction is or is likely to be subject to the scrutiny under ECL regime (for example being re-export or deemed export) and to what extent it may be restricted. Ways to acquire such information can include inquiring into relevant foreign employees in the target company and examining the proportion of China-made components of the exported items.

Following proper risk assessment procedures, the company may either find that the exported or imported items are not involved in the control list and neither do they fall into temporary control, and also that the target company is not on the Blacklist, or may conclude that the target company or the traded items are restricted by ECL and therefore requires export licence or permission from SECA.

If the exporter insists on trading with an importer or end-user on the Blacklist for some reason, permission must be obtained from SECA before carrying out the transaction or entering into any transactional documents

What should you do if the traded item is found on the control list or is subject to temporary control?

Where the import or export of items is explicitly prohibited by ECL, the companies should avoid entering into a contract for such a transaction. Nevertheless, for those not strictly prohibited, the following chart provides general guidance on how to conduct the transaction cautiously.

As shown in the chart, the exporter shall firstly check if the importer or end-user is on the Blacklist.

If the answer is yes, then the exporters should be alarmed and try to avoid trading with those entities. If, however, the exporter insists on trading with an importer or end-user on the Blacklist for some reason, permission must be obtained from SECA before carrying out the transaction or entering into any transactional documents.

If the answer is no, the exporter shall request for a licence from SECA, which we understand could be much simpler than applying to obtain the permission where the importer or end-user is on the Blacklist. In this respect, we would suggest parties document and make a record of any effort which the exporter makes to obtain such licence, including, without limitation, to any statements or certifications the importers and end-users are requested to provide and have actually provided throughout the trading process.

Nevertheless, if the application of the export licence is rejected by SECA, the parties to any already-executed transactional documents should then check the termination clauses, force majeure clauses and loss sharing provisions to deal with the risk allocation between parties to ensure that the transaction and the relevant documents comply with ECL and any other applicable laws of China and the relevant jurisdictions concerned.

In other words, for any to-be-executed transactional documents, parties should be mindful of carefully drafting and negotiating the relevant provisions to eradicate, or at least mitigate, the risks. We will explain this in more detail in the following section.

What are the potential risks and how can you mitigate them?

Apart from carrying out necessary due diligence processes, companies should also watch out for latent risks that might be brought about following the implementation of ECL. It is worth flagging up the potential conflicts between ECL and the export control laws or anti-boycott regulations of the relevant jurisdictions that may be applicable to the transaction and the parties concerned.

Some countries and regions’ export control laws have long-arm jurisdiction and can apply extraterritorially to persons abroad. Complying with ECL could lead to a potential breach of laws from other jurisdictions and vice versa. For instance, complying with ECL may result in the breach of US Anti-Boycott Regulations for certain companies. For those US-funded companies in China and Chinese companies with a substantial commercial presence in the US, they are likely to face a dilemma: complying with ECL may cause them to be sanctioned by the US authorities; while complying with US Anti-Boycott Regulations may lead them to be sanctioned by Chinese authorities. If that is the case, it will be essential to find a way out to prevent those entities from being sanctioned by other jurisdictions for complying with the requirements under ECL.

Complying with ECL could lead to a potential breach of laws from other jurisdictions and vice versa.

Moreover, companies or financial institutions that provide funds to those entities being regulated by ECL should also be wary of the potential risks. If the debtors are sanctioned by ECL, the creditors will face the risk that the creditworthiness and repayment ability of the debtors may be adversely affected by such sanction. To mitigate the risks, our general suggestions are outlined below:

Compliance clause

For those companies whose business could be significantly influenced by ECL, it is necessary to revisit and make necessary amendments to the compliance clauses in their existing transactional documents. For certain overseas companies, their compliance clauses are usually tailored to fit for specific compliance requirements of the jurisdiction where they or their parent companies are located.

Since the compliance requirements may differ from jurisdiction to jurisdiction, the compliance clauses designed for one jurisdiction may not be sufficient to fulfil the requirements set out by ECL. As such, companies should consider drafting tailor-made compliance clauses to fulfil the requirements under all applicable laws for a specific transaction and follow its internal risk assessment policies.

Representations and warranties clauses

To mitigate any deal-killing risks, one party should consider at an early stage requiring the counterparty to insert certain clauses to mitigate the risk – such as representations and warranties clauses, undertakings and covenants that are made by the restricted entity –stating that by carrying out the export or import transaction and entering into the transactional documents, it has not and will not violate any applicable export control regulations or sanction rules in all the relevant jurisdictions. Besides, the termination clause and force majeure clause should be carefully drafted to include situations where ECL is not complied with.

Sanction clause

For creditors of any restricted entities, such as banks, it is necessary to review the facility agreement to which those restricted entities are parties. The aim of the review is to ensure that sanction provisions incorporate requirements set out by ECL, and warranties clauses are put in place to guarantee compliance with ECL.

Exemptions for non-compliance with laws of certain jurisdictions

As mentioned above, companies could be prevented from implementing policies of other nations which run counter to the policy of their home country under any export control laws or anti-boycott laws with long-arm jurisdictions. Nevertheless, there are certain exemptions which may allow for non-compliance or conditional compliance with relevant jurisdictions’ boycott requirements.

We suggest companies seek legal advice from professional lawyers to review, amend and supplement relevant provisions in transactional documents and request their lawyers to issue legal opinion opining on regulatory compliance of the underlying transaction where necessary.

For more information about the ECL contact ZhongLun Law Offices  

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Alibaba recently surveyed 1,000 small businesses across the UK, finding that only one in five plan to export in the next 12 months. With technology making it easier to sell overseas and strong international demand for British goods, small businesses have a real opportunity to look beyond the UK – and Europe – to fuel their recovery and growth.

Britain’s 5.9 million small businesses have long been considered the foundation of its economy. As of October this year, they employ 48% of the total British workforce and account for more than a third (36.3%) of its private sector turnover.

The Covid-19 pandemic has played the nation’s small businesses a particularly tough hand this year. We’ve seen 80% of them experience a drop in revenue, with two out of three small firms saying they expect trading to get worse still during the months ahead.

We must encourage and empower small businesses to look beyond the borders of the UK – and Europe – for growth

If we’re going to reverse this trend, we must encourage and empower small businesses to look beyond the borders of the UK – and Europe – for growth. China’s retail market has already bounced back to pre-pandemic levels: consumers are spending confidently and shopping even more than they were prior to the pandemic, and China is the only major economy expected to grow this year. Chinese consumption is going to be a serious driver of the global recovery – and UK SMEs can benefit.

Our latest research, conducted in October 2020 amongst 1,000 SMEs across the UK, reveals that many small businesses are unsure about how they can tap into the overseas trading opportunity. More than a quarter are telling themselves they’re ‘too small to export,’ while a fifth think there’s ‘no demand for their products outside Europe.’ In fact, just 21% of the British small businesses we sampled said they are planning to sell their products or services overseas during the next 12 months.

When we look at China in particular, the world’s largest e-commerce market, we find that just 7% of small British businesses with export plans say they will look to China as their next international market, compared to 23% who would consider Africa, 37% North America and 52% who have their sights set on Europe.

Large companies have always been good at getting their products around the world. Now, technology is making it just as easy for small businesses – who may not be recognised brand names in their home market – to tap into this opportunity and to shine on a global stage. The scale, cultural difference, and the simple fact that it’s far away mean that exporting to China can feel like a daunting prospect for a smaller company. But the opportunity is easier than many realise – and too big to ignore.

Demand for products from international brands – particularly from the UK, which was again one of the top ten markets for brands selling into China during this year’s 11.11 Global Shopping Festival – has remained resilient and in fact, grown over the course of this year. From luxury goods to health, beauty and nutrition, Chinese consumers hold ‘Brand Britain’ in extremely high regard for its quality and heritage.

China’s retail market has already bounced back to pre-pandemic levels and Chinese consumption is going to be a serious driver of global recovery

As we move into 2021, I would urge all small businesses to review and consider the role that export can play in their growth plans, looking beyond the UK and beyond familiar markets, to explore the opportunities that lie further afield.

This report will provide an overview of some of our key research findings. It includes opinion from expert partners, first-hand experience and insight from British businesses who have found success in China, and some data and tips to help dispel myths around exporting.

Read the full report here

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The new British Ambassador to China and patron of the British Business Awards 2020, Caroline Wilson CMG, was the guest of honor at the ceremony announcing the winners of this years Awards.

The ten awards aim to showcase the companies and individuals who have been building strong business relationships betwen the two countries. The biannual awards were first launched in 2009 and this year the British Exporter of the Year Award was created and sponsored by CBBC, to celebrate British success and innovation in exporting to China.

CBBC has developed this opportunity to recognise companies that have demonstrated sustained success in exporting to the China market for at least three years, and who have highlighted the positive impact trade with China can have on the UK economy.

After receiving many competitive applications and following several rounds of judging, John Edwards, HM Trade Commissioner for China; and Tom Simpson, Managing Director China of CBBC presented the award to this year’s winner: Peak Scientific.

Peak Scientific was established in 1997, specialising in the design and manufacture of laboratory gas generators. Peak’s gas generators are used in analytical testing, academic research laboratories, hospitals, food and beverage, QA/QC laboratories and many more. Peak Scientific’s products are smaller, safer, quieter and more efficient than similar products in the market and are real world alternatives to high pressure compressed gas cylinders –  a true example of British Innovation. The company’s products reduce the carbon footprint by bringing gas production in house on an ‘on tap’ basis. Transport of gas cylinders to sites is eliminated, where these cylinders are often transported long distances in inefficient vehicles.

Learn how to sell to China from your own site

The British Business Awards 2020 winners in full

About the British Business Awards

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CIIE is the UK government’s flagship trade show in China during 2020, and a fantastic opportunity for businesses to participate, promote their brand and grow their exports to China.

DIT has created a unique opportunity to bring together businesses, trade associations and regional partners for collaboration and promotion. The GREAT campaign will further raise participating businesses’ exposure and profile to professional audiences in China by listing in the digital brochure.

A series of online activities will be held to share information and enhance understanding of the China market.

Direct and facilitated virtual business matchmaking activities aim to drive focused pre-CIIE trade discussions.

Who is this relevant to?

Companies with the following objectives can participate:

• Direct Trade – Products and service exporters with an interest to grow in China. The platform welcomes companies from: Agriculture, Food and Drink; Automotive and Advanced Manufacturing; Consumer and Retail; Creative and Sports; Education; Energy and Infrastructure; Financial and Professional Services; Life Science and Healthcare as well as Technology to participate and list. A series of promotional and marketing activities will be conducted to deliver private virtual meetings.

• Services and Management – Ranging from innovative technology, logistics services, financial and consultancy services to tourism, digital solutions and related areas of expertise targeting both the UK and China market.

• Investment – Companies aiming to invest in the China market. The digital brochure is ideal for promoting and highlighting capabilities, finding new opportunities and increasing market knowledge.

Why participate?

• Sales and marketing – Listing in the Department for International Trade’s CIIE 2020 digital brochure is free of charge and open to all qualifying businesses. This is an opportunity for businesses to enhance their brand, build B2B partnerships, boost B2B sales and drive marketing initiatives within the China market. Companies will have administrative access to their digital profile to update information, view analytics and track profile visits.
• Access and participate in online activities – A series of activities will be held throughout November to promote trade and investment. Use this opportunity to connect with partners and discuss opportunities for cooperation.
• One-to-one business matchmaking opportunities – Through a smart navigator function provided in the digital brochure, your company will be accessible through search criteria including product type, keywords and sub-sector. Interested Chinese partners will then access a calendar within the digital brochure and schedule individual meetings to be held online.
• Receive news and updates – Businesses can access their accounts to receive updated news related to CIIE and review their diary.

How does it work?

The first step is to register.  Email the China-Britain Business Council at CIIE2020@cbbc.org.cn to register your interest in signing up. The Company Information Collection Form will be shared upon successful sign up.

Prepare the requested information in the template, and return it by Friday 21st August.

DIT will arrange for the company profile to be uploaded.

Once the digital brochure (mini-site) is launched on 31st August, it will be accessible via PC or mobile (WeChat). Companies can log-in to review and adjust their profile with the account details provided.

The smart navigation function will enable a Chinese partner to search and identify a business by keywords and/or sector.

Provide availability for one-to-one business matchmaking, so companies can conduct virtual meetings.

A confirmation email will be generated to secure a meeting. Analytics on viewer traffic and a number of meetings arranged/confirmed will be provided. Note: A Voov meeting ID is required for meetings.

The digital brochure will be live throughout the autumn and after CIIE to maximise visibility and provide a virtual bridge to connect with Chinese partners.

The China International Import Expo (CIIE)

CIIE provides a unique opportunity to further strengthen and deepen the UK’s long-term trade cooperation with China. It creates a unique platform for Chinese businesses, investors and consumers to connect with UK companies.

CIIE reflects China’s intention to further open up its markets and increase trade.  It encourages Chinese consumers and businesses to buy more products and services from across the globe.

UK at CIIE 2018

Former UK International Trade Secretary Dr Liam Fox attended the inaugural CIIE alongside a 50-strong UK business delegation in 2018. The UK was given ‘Country of Honour’ status, helping the delegation secure more than £2 billion of commercial deals across a range of sectors, including creative industries, healthcare, education, energy, mining and aviation.

Notable deals included:

• A £30 million partnership between Clipper Media Capital and Arca Pictures on film co-production
• A deal between TPP and Shanghai Kunfu Bio Technology to roll-out an AI-led health management app in Shanghai
• A deal signed by Rolls Royce worth more than £850 million

The theme of the Pavilion was ‘Innovation is GREAT’.  It showcased cutting-edge Virtual Reality and Augmented Reality technologies from ground-breaking British companies such as Mi Hiepa Sports, who promote Global Elite Football VR. The Pavilion also featured companies such as WorldFirst, ACCA, Lloyds Bank, Alibaba Cloud, the University of Buckingham, Rio Tinto, Baosteel and Anstee, GSK and Boots.

UK – China bilateral trade facts

UK trade with China (including Hong Kong) reached £104.5bn in 2019, the first time it has surpassed £100bn. China was the UK’s third-largest export market after the EU and USA.

In the four quarters to the end of Q1 2020, China was the UK’s:

• 4^th largest import market
• 5^th largest trading partner
• 6^th largest export country: UK exports to China grew by 28.0% to £31.2bn

In the four quarters to the end of Q1 2020:

• Total UK exports to China and Hong Kong amounted to £44.6bn. This is an increase of 23.3% (£8.4bn) compared to the four quarters to the end of Q1 2019.
• Total exports between the UK, China and Hong Kong accounted for 6.5% of total exports between the UK and all trading.
• Of all UK exports to China and Hong Kong, £34.9bn (78.1%) were goods and £9.8bn (21.9%) were services.
• UK exports of goods to China and Hong Kong increased by 26.9% or £7.4bn compared to the four quarters to the end of Q1 2019, while UK exports of services to China and Hong Kong increased by 12.0% or £1.0bn compared to the four quarters to the end of Q1 2019.
• Total UK imports from China and Hong Kong were £56.7bn (a decrease of 2.0% or £1.1bn compared to the four quarters to the end of Q1 2019).
• Total imports between the UK, China and Hong Kong accounted for 8.2% of total imports between the UK and all trading partners.

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Businesses in the UK are nimble, entrepreneurial and well-informed and, while there remains uncertainty around Brexit at home, many are finding growth by taking opportunities to export their products and expertise overseas.

Last year, British business exported £629.4 billion worth of goods and services, proving that the power of ‘Brand Britain’ remains strong on the world stage. However, there’s still more to do to make sure small businesses are maximizing their returns from growth markets – and nowhere is this more true than in China.

HSBC’s “Made for China” report found only 27 percent of UK businesses currently selling to China view it as a top three future market, versus 46 percent globally. Additionally, only a minority (10 percent) of those that are considering selling to China see it as among their top three export markets in the next three to five years, compared to 15 percent globally.

Consumer tastes change quickly in China. As an example, eight years ago the country imported only about 30 tons of avocados, with the Central American fruit an exotic ingredient rarely appearing on Chinese dining tables. In 2017 China bought 32,200 tons of the fruit from Chile, Mexico and Peru – enough to make 200 million servings of avocado on toast.

Much has been said in recent years about the opulence of China’s new rich. China is becoming more sophisticated and inclusive as wealth spreads from urban centres to rural heartlands, bolstered by a better-educated new generation who is both web-savvy and worldly-wise.

HSBC’s Made for China report found only 27 percent of UK businesses currently selling to China view it as a top three future market, versus 46 percent globally.

There’s little doubt about the importance of China as a target market for UK businesses. According to official estimates, the country is set to import US$8 trillion worth of goods in the five years from 2018 to 2022. That’s an average of US$1.6 trillion a year – more than half the GDP of the UK in 2017.

HSBC’s annual Navigator report predicts that the value of China’s goods imports will grow at about 8 percent a year on average between 2017 and 2030, reflecting both a demand for intermediate goods for processing, and for final goods that satisfy the demands of China’s increasingly wealthy population.

All this is happening as China bids farewell to growth based on exports and state-led investments and increasingly encourages its 1.4 billion people to consume. Slowly but surely, the old model of “Made in China” goods heading to markets around the world is shifting to one where China is itself becoming a destination for products made elsewhere.

China International Import Expo exhibits products marketing to the vast Chinese market

A perfect example of this rebalancing was the China International Import Expo in Shanghai. In the past, China-based trade fairs were all about what Chinese companies could sell to the world. This event, by contrast, was about foreign companies selling into China. For six days in November, several hundred thousand square metres of floor space was dedicated to international sellers, showcasing everything from food and medicines to consumer electronics and cars.

Last year British businesses exported £629.4 billion worth of goods and services but there’s still more to do to

To be sure, selling into a vast, complex and rapidly-evolving market like China is not without challenges. As the economy matures, incomes aren’t rising as fast as they once did. And today’s trade tensions naturally affect business and consumer confidence.

What’s more, foreign companies need to be able to react to constantly-shifting tastes and head-spinningly rapid developments in e-commerce and digital payment tools. And they need to brace for intensifying competition from nimble and increasingly high-tech local companies. UK businesses need support, connections and the right financing to help them either make the first step into trading overseas, or expand their already existing cross border presence

But none of this should obscure the enormous long-term potential that the Chinese population of 1.4 billion represents for UK businesses. From the millennial brunching in a Shanghai cafe to the parent purchasing diapers in a Hunan village, China’s consumers are becoming ever more affluent and discerning. Now, more than ever, they represent an essential market for businesses everywhere.

Jane Galvin is Head of Corporate Banking, HSBC UK, and Chairman of CBI East of England.

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