MCC: What are the top things corporate counsel should be worrying about regarding doing business in China?
Yu: Number one on my list is the cost of doing business. It’s increasing dramatically. It’s not just the labor costs or the materials costs, but the regulatory and compliance costs, which are going up as the Chinese government tends to get tough on multinational corporations.
Bahl: There is a very high level of geopolitical risk that does not show signs of subsiding. Corporate executives are reassessing their strategies given these risks, as well as significant changes in foreign currency exchange rates. They are looking at different parts of their operations and thinking about how to better integrate to mitigate the risks.
Faraci: China is complex. Given mainland China’s data privacy rules, and the government’s desire to be able to get in the back door of corporations' servers, a lot of thought has to go into it. Additionally, regulators in the rest of the world continue to be very interested in mulitnational corporations operating in the region, so you open yourself up to extra scrutiny when you're operating there.
MCC: Even within China itself there is a varied regulatory climate because there are different cultures from region to region. What’s the impact of these intra-Chinese differences on litigation, e-discovery and other aspects of your work?
Yu: I’m based in Shanghai, but we have clients from Beijing in the north to Guangzhou in the south. The cultures of doing business – even the way local governments do things – are different. For example, contracts are honored in Shanghai more than in some other parts of China. The law is catching up, but it’s just the way it is.
Bahl: You can’t manage China as one country. Different provinces have different cultural norms, different religious populations. It’s critical to understand the nuances of their business practices when executing strategic alliance deals, conducting investigations, or managing operations.
Faraci: Look at the Shanghai Free Trade Zone. They’re trying to make Shanghai a little more like Hong Kong. Other cities, especially the big manufacturing cities, are asking for waivers so they can operate more freely. It’s a rapidly changing environment.
China is also quite progressive in the pace with which they're making changes. They’re trying to understand how they can interact positively with companies around the world. The amount of change they’ve pushed through is impressive. It’s commonly overlooked.
Yu: It's not just overlooked, but a huge misperception. Most people think it's going in the other direction.
MCC: You’ve got this emerging second layer of compliance. There’s national compliance, and now you have a new tier of internal compliance. What does it mean for companies and their counsel?
Faraci: If you’re a multinational with operations in China, you really have to be concerned about inquiries that may be opened by the Chinese authorities now. They have begun to enforce their own anticompetition investigations, and it’s difficult to understand how their laws will be applied. You don’t know. It’s not like a common law country with case law, where you can understand what you’re up against. It’s a new set of rules, and everyone is a bit scared not knowing how they will be enforced.
Yu: At the same time, regulatory pressure from the U.S. hasn’t subsided. Corporations can be stuck between two regulators pursuing similar matters with different agendas.
Bahl: It makes refreshing a company’s global risk assessments even more important and requires that the interrelationships among global risks are sufficiently identified and mitigated.
MCC: Let’s talk about e-discovery. What are the critical trends generally and particular to Asia? Where are e-discovery and information governance going?
Yu: Traditionally we’ve seen a lot of electronic data in the West, where e-discovery law originated. Now we're seeing the very same in China and in Asia generally. China has gone through the same evolution in the last 10 years that the West has experienced in the past 30. With this, China has seen an explosion of data from so many different sources, making the capture of data more difficult than ever.
Faraci: Much of what AlixPartners does, a lot of our value-add, is to understand the technologies and figure out ways to extract data and get it to a common platform so you can read across it. I can't go into a company and say, “I'm going to integrate your two systems in time to respond to the subpoena.” What I can say is, “I have experts who understand different platforms such as SAP, Oracle or other large ERP systems. If I get data extracts from all the relevant systems, I can put the potentially responsive data into one consolidated system for this analysis.” Data volume is exploding. Even the regulators can’t always fully comprehend the amount of data that will get dumped on them by certain broad requests. We don’t want our clients to have to turn over large amounts of unnecessary data. We want to help negotiate with the requesting parties to decrease the scope and turn over what's necessary, ultimately saving our clients’ time and money.
Multinational corporations deal with impossible legal situations every day in the APAC region. If you're a bank operating all over the world and you get a regulatory request from the U. S., how do you comply if it means breaking another privacy law in China or Vietnam? It’s a risk assessment game. Whose laws are you going to comply with?
MCC: Thinking about information governance generally, is there a path for those doing business in China that will keep them out of all this? Or is this just how it is?
Faraci: Some of it is "how it is." You've got to operate day to day. The easiest thing for a CIO to do when people scream for more email storage is to buy another drive. By the nature of things, data just starts to accumulate. The business side doesn't want to get rid of anything. The legal side wants to get rid of everything. The compliance side wants to keep it really tight as to what you’re storing.
MCC: Are there country-specific challenges? What are the differences between China, Japan, Hong Kong, Singapore and Vietnam in terms of data privacy and security?
Faraci: China seems to be the farthest out on the privacy issue. There are incredibly strict rules around giving unauthorized access to state secrets, which can extend all the way to the death penalty. While companies have experience dealing with the personal data privacy laws in the EU, the unclear definition of what constitutes a State secret along with the potentially harsh penalties makes this a complex issue. Japan is a little easier. They worry more about overproducing information to the regulatory bodies in the U. S. out of concern those agencies are going to come back on a completely unrelated issue. Hong Kong is interesting. While they are a part of China now and therefore have to be aware of and cautious about the issues surrounding state secrets, they still have a common law system with discovery rules. Singapore also has a common law system, and its data privacy is more open because they have been dealing in the world economy for a lot longer.
MCC: In China, the pipes leading in and out of the country are state owned. People don't want to transmit data that way.
Faraci: The privacy laws are so strict that companies often don’t even want the data leaving the company. We have a data center in Shanghai, but all the Internet connections and communications are state owned. It makes for an interesting dynamic, especially in internal investigations. Companies don’t want information surrounding what they are looking at internally to go outside their firewall.. That’s why AlixPartners has invested so heavily in our Asian infrastructure.
MCC: What value proposition does AlixPartners offer to its clients? What’s your competitive advantage in Asia and elsewhere?
Bahl: Almost everyone is a senior professional, and no matter how high up they are in the pecking order at AlixPartners, they’re getting their hands into the details to make sure our clients get the highest quality solutions; everyone on our teams, which are small, is rolling up their sleeves. Here’s a recent example. A client called on a Thursday with an internal allegation of financial fraud. This is a global company with billions in market cap at stake that could not issue its quarterly financials unless they vetted this issue. Within 24 hours, we had nearly 30 people at six company locations helping with the accounting and operational issues. They were able to issue their financial statements with only minor delays, and their market cap fully recouped the billion dollar loss experienced at the outset. The SWAT team approach we use sets us apart. We’re not there to take over your operations. We’ll fix the issue, train your people, and assure you that if the issue arises again, you can handle it on your own.
Yu: Having people on the ground is fundamental. We are experienced professionals who have seen the changes in China and the region generally. We are helping clients with real issues while some of our competitors are sending junior staff to learn from the clients' experiences. And while we are a small group in Asia, we have the backing of our global team. We tap into their expertise on a daily basis.
Faraci: I do mostly litigation technology and high-profile discovery cases, but our ability to bring in forensic accounting or other experienced experts when our client has a problem is important. We have a great group of people who do transfer pricing in Japan. Companies that are operating all over the world need to decide where they get the highest tax benefits. We're not only reacting because you're in trouble. We have a lot of people in the firm who can help healthy companies – and possibly keep them out of trouble in the first place.
MCC: Tell us about your global capabilities. What’s your footprint, and why is it important to your clients?
Bahl: We have more than 25 offices, and we’re growing rapidly and intelligently. We’ve been doing a lot of work in Asia, as discussed, and recently we’ve been doing a lot in Latin America. We’re growing our capabilities in Argentina. We have Brazilian nationals on staff. We recently expanded our office in Zurich and are monitoring banking regulations for global financial institutions.
Yu: All of our Asia-based staff are fluent in local languages, however, most of us have also had a lot of experience with cross-border matters in our professional lives. It is critical that we are able to help our clients solve their Asia-based problems with the local know-how, and at the same time report all of the findings in a way our clients in another part of the world can understand and understand clearly.
Faraci: We also do a lot of post-merger integration work. We have people who are ex-CIOs figuring out how we are going to perform "quick strikes" to demonstrate value propositions for companies in as little as six to eight weeks. Let’s say, for example, an FDA regulation requires you to modify your manufacturing at a facility in China. That requires the input of our manufacturing specialist, who knows shop floors, but, as we’ve seen, manufacturing issues may be linked to corruption issues. Our manufacturing specialists may find that someone took a bribe and looked the other way while manufacturing slipped. On top of that, because the product is moving across channels, we need transfer-pricing experts focused on the tax ramifications. You need a service provider with people who understand the different aspects of a merger so you don’t have five firms handling an issue. With AlixPartners, you have one team that can help you craft a solution quickly and effectively.
MCC: How would you advise a company about to begin operations in China?
Yu: China is still a land of opportunity; companies that don’t have a presence should consider it. But going into China is always a partnership. You cannot be the sole representative; you have to partner with a local company. Government agencies will welcome you and make things easier, but be aware that you will still see protectionism of local versus foreign businesses. Also, regulations change so fast that a company can get caught off guard. That’s the kind of risk you face if you do business here.
Bahl: Some companies use a case or Socratic method to vet prospective partners and providers. “If you were faced with this scenario, how would you handle it?” Say you’re hiring someone for discovery services. A key question, beyond asking how they are going to manage collection and production, would be: “With all the data on your servers, how would you handle a breach?” Scenario-type questions are key if you want to get comfortable that your business partners are actually capable of handling issues before they happen.
Published September 3, 2015.