Month: April 2009

To See China Transforming: Go to a Chinese Bookstore

Ming Dynasty Portrait of Emperor

“Go to a Chinese bookstore”. This is my advice to anyone who wants to get a quick, accurate and comprehensible sense of what’s happening, and what’s most remarkable about this almost unfathomably large and complex country. 

Why a bookstore? Well, first, all of us have been to these in our own cities and countries. So, we have a good enough idea of what to expect in a boostore. It’s usually a quiet, not overly well-trafficked location, with people milling around in silence. Even in the larger US chains like Borders and Barnes & Noble, there’s always a somnolent feeling about the place, like the paying customers are too few to support the cost of the lease. Sadly, that’s often been the case and Borders, for one, has run into huge financial problems. 

Now, let me take you – at least in words – to the bookstore closest to my home when I’m in Shenzhen. It’s called Shenzhen Book City, and even from the outside doesn’t look like any bookstore I’ve ever seen elsewhere. It’s a seven-story blue-glass tower the size of an office building. A typical big-box two-story Borders looks like some kind of cutesy toy compared to Shenzhen Book City. 

It’s on the city’s main thoroughfare, Shennan Road, and just above ground from a subway station. It’s open from 10am to 10pm daily. Just approaching it, you have the happy feeling of being pulled into a giant vortex of human activity, as big crowds of people quickly move into the store, or head out of it. 

Inside, it’s more crowded and generating a more palpable sense of buzz than the crowd at a baseball game. There are readers everywhere, moving from section to section, floor to floor, or stopped in an aisle deeply concentrating on some book they’ve taken from the shelves. This is a picture of China in the process of continued self-improvement. It’s very inspiring, and bears only the faintest resemblance to any other bookstore I’ve been to, in the 70 of more countries I’ve visited. 

The checkout lines are long, at any hour of the day. There’s a huge staff spread around the place, answering questions, guiding people to the section they’re looking for. Of course, this being China, there are also places to eat – quite a few of them – in the bookstore itself. It’s also more than just a retailer. There are classrooms on the upper floors where people come to take paid classes on all kinds of subjects aimed at self-improvement, like foreign languages, or accounting. 

The Shenzhen Book City, single-handedly, restores my faith that a love of books and the pursuit of intellectual inquiry has not been completely deadened by YouTube, video games and chat rooms. 

Shenzhen has other Book Cities, spread around the city. The others I’ve been to are no less crowded – and my guess, no less successfully financially than the one in my neighborhood, which must be making a small fortune every day. Books aren’t all that cheap in China. They used to be. But, the quality and choice have both improved enormously over the years. Some of the cover art is as good as anything I’ve ever seen. 

Anyone from outside China would have some immediate familiarity on entering the place. It looks like other bookstores, with lots of aisles and bookshelves, grouped in sections by topic,  stacked with books. But, what isn’t going to be familiar is the sheer exuberance of the place. It’s more like a jam-packed department store on Xmas eve than a staid bookstore.  It’s got that same air of  “I’m here to spend money, now”. 

It’s somehow raucous and purposeful at the same time. 

Standing by the entrance one day, a woman approached, seemingly intent on discovering why I was so obviously awestruck by the whole scene.  I couldn’t convince her there was anything worthy of note – as what seemed like thousands of people surged in and out of a book store. As it turned out, she also provided a nice small lesson on the state of Shenzhen’s economy at the moment. Until recently, she’d been working in 外贸, “waimao”, or foreign trade in English. It’s a catch-all term for a lot of the economic activity in Shenzhen until recently, embracing trading, sourcing, import-export. 

With the sudden downturn in the world economy last year, many of the easiest opportunities to make money from foreign trade more or less evaporated, as did many of the small companies that carried out this kind of work. The woman lost her job, and just a short time later, found a new one as a clerk in the bookstore. In other words, she made the transition, quite smoothly by all appearances, from earning a living off exports to earning a living from the domestic economy. 

I wandered some more and found my way to the section selling business, management and career-guidance books. It was particularly jammed with people, heads down, buried in their books, as if cramming for a big exam. In their urgency, their evident hunger to learn, to improve, you could catch a glimpse of just what lies deepest within the remarkable economic transformation of China over the last 30 years. 

It’s all there for the viewing, in an ordinary Shenzhen bookstore. 




Intellectual Property Law in China — rule of law is replacing law of the jungle

Ming Dynasty lacquer box

Within a two-minute walk from my apartment in Shenzhen, there is ample evidence that intellectual property, particularly American, is not very well-protected in China. Nighttimes, three different vendors set up their folding tables on the main street with pirate DVDs by the carton-full, including many of the latest Hollywood releases. Cost: RMB5 each, or 73 cents each.

A little further west at the main intersection, a huge new superstore is under construction. The four-story-high signs proclaim it’s Shenzhen’s new “Official NBA Store”. But, when I emailed a friend who is one of the top executives at the NBA headquarters in New York, intending to congratulate them on their expansion in China, he emailed back to say that the NBA has no such project underway in Shenzhen. In other words, some other group is going to try to hijack the NBA logo (and most likely, when the store opens, NBA merchandise as well) and pass itself off as the genuine article, presumably making a killing along the way in basketball-crazy China. 

So far so ordinary, right? Everyone knows that China is a paradise for counterfeiters and IP thieves, right? 

Well, as is often the case in China, things are not quite as malign as they appear from the outside, in the minds of Western critics. Slowly but surely, China is taking the right steps to build a legal framework through which intellectual property – including foreign IP — can be protected in court. * 

This is very good news for all of us in the private equity and investment banking industries in China. Improved enforcement will help bring China into closer accord with the rest of the developed world in terms of IP protection. In many successful companies, intangible assets, including IP, are the most valuable item on the balance sheet. So, protecting IP is commensurate with protecting the value of a business, and so the financial interest of investors. 

There’s another key reason: some of the best private Chinese companies are developing their own successful brands in the Chinese domestic market. These Chinese brand-leaders are among the best opportunities for private equity investment, not just in China, but anywhere in the world. They face the same threats in China as foreign companies whose IP is being stolen. As the IP legal system develops, China’s own emerging brands will find it easier to defend their position in the domestic market, and shut down competitors who are ripping them off. 

One telling data point: perhaps the fastest-growing area of Chinese law – measured by billable hours among well-qualified lawyers – is in intellectual property. That’s because it’s getting much easier for companies to prevail in court against those who appropriate their logos, trademarks, designs, patents and other intellectual property. 

The court system is more and more responsive to such claims of IP theft. So, with increasing regularity, Western companies are taking action in Chinese courts. This is, without question, a positive development, and one that points the way toward a future where IP protection is more strenuously and uniformly enforced across China. 

The legal system is still evolving. At the moment, damage awards for the victor in an IP infringement case are not very high, often no more than RMB500,000 ($73,000), which is not going to be enough to discourage many of the larger-sized businesses in China that are producing and selling products that obviously rip off other companies’ IP. But, there’s often more at stake here than just the damage award. Litigation in China, as elsewhere, is costly. The victor in an IP case, in addition to the damages, will often also be awarded legal costs, meaning they can reclaim their entire legal fees from the company they’ve just defeated in cost. 

This is the real sting in the tail. Legal fees can easily reach amounts 10-20 times higher than the maximum damages. So, the victor can ultimately collect tens of millions of renminbi from the loser. In addition, of course, the losers have to swallow their own legal fees, which can be no less sizable. That sort of cumulative penalty (damages+own costs+victor’s costs) is enough to inflict a lot of pain on a company that is prospering by stealing someone else’s IP. Now, sure, collecting on a large monetary judgment in China can be a challenge. But, if the losing Chinese company is large enough, it’s hard for them to escape paying. They can’t just close up shop, and start again under another name. 

As China’s economy continues to grow robustly, more companies (including those whose success is predicated on stealing others’ IP) reach a size where they are too large and too well-established to escape the effects of such a punitive judgment. Result: some of the worst and largest IP offenders will be the first to suffer, made to bear heavy costs, or forced out of business. 

Now, of course, it’s likely going to be a very long time before the pirate DVD street vendors are put out of business. It’s not often discussed, but other countries, including the US, have similar sorts of opportunistic businessmen. I’ve been to areas of Los Angeles – usually not the nicest ones – and found guys on the street selling pirate DVDs of the latest Hollywood movies owned by studios that are headquartered less than 10 miles away. If the US can’t shut these operators down, it’s unrealistic to ask China to. 

But, the legal remedies now available – and I expect them to get even more extensive and water-tight over time –allow companies in China to act against the biggest IP thieves who do the most financial damage. This will benefit both foreign and the domestic Chinese companies now investing heavily to build their own brands and unique IP. A category of private equity investors in China will be winners also – those that back the companies now developing the brands that will one day dominate China.   


* I am once again indebted to Luo Ke, of Fangda Partners, and Elliott Chen of Junzejun, for sharing insights, perspective, legal knowledge. Every discussion I have with them is a joy. They always seem to provide the impetus for a blog post. 




A very flattering article in the Shenzhen Daily newspaper


Shenzhen Daily Article on Peter Fuhrman April 14, 2009

To my delight — and also somewhat to my embarrassment, given what a flattering article it is — the Shenzhen Daily this week published an article on me and my company, China First Capital.

The Shenzhen Daily is the local English-language paper in Shenzhen. The reporter, Cao Zhen, is originally from Hubei Province and studied in the UK. She has an expert grasp on the language, and asked some thoughtful questions.

As a once-upon-a-long-time-ago journalist, I particularly appreciated her preparation, fact-checking and patience with my rambling answers. 

Here’s the link:






The Best Transaction Lawyers in China

Tang Dynasty Terracotta Horse

Lawyers get less of the credit and take more of the abuse than most other professions. They’re mainly the butt of jokes. A favorite of mine comes from Mark Twain: “It is interesting to note that criminals have multiplied of late, and lawyers have also; but I repeat myself.” 

Of course much of the most biting criticism is aimed at American lawyers, who just about outnumber the rest of the developed world’s lawyers combined. 

In China, the practice of law is still a relatively new profession. Despite having a population over four times larger than the USA, China has only one-tenth the number of lawyers. In my particular area of private equity, IPO and institutional investment, talented and experienced Chinese lawyers are exceedingly rare. 

But, as is often the case, quantity doesn’t determine quality.  I’m fortunate to work alongside some of the very best legal minds in China. Shenzhen has a particularly strong group of private equity and IPO lawyers. There are two reasons for this: first, Shenzhen is home to the first stock market opened in China. And second, this part of China has more great private entrepreneurs, per square inch of real estate, than probably anywhere else in the world. 

The following is my personal list of the best securities and private equity lawyers. I know, have worked with or have met all of them. I can give them all the fullest recommendation. They are all first-class lawyers, and first-class people. 

Along with being a credit to their profession, these lawyers are a key part of ecosystem for financing the growth of great companies in China. The lawyers are a big part of the reason why the private equity industry in China has quickly grown so large and achieved such a high rate of success, both for PE firms working here and entrepreneurs receiving the financing.

 Private Equity, IPO, Securities Lawyers, Shenzhen  (all are bilingual Chinese-English) 

  • Cao Yuhui, King & Wood, Partner. Tel: 0755 2216 3310 – The dean of PE lawyers in Shenzhen and “first among equals” on this list
  • Elliott Chen, Junzejun Law Offices,  Partner. Tel: 0755 3398 8655
  • Luo Ke, Fangda Partners. Partner. Tel: 0755 8256 0188
  • Tong Ke, Jun He Law Offices,  Partner. Tel: 0755 2587 0775
  • Zhang Jianwei, Jun He Law Offices, Partner. Tel: 0755 2584 1025
  • Jack Lai, Zhong Lun Law Firm, Partner. Tel: 0755 3320 6898

Private Equity, IPO, Securities Lawyers, Beijing (all are bilingual Chinese-English) 

  • David Yu, Horwath Capital China, CEO & Managing Director. Tel: 010 85171616 ext.386 – Lawyer and CPA, with vast knowledge, experience, deal-making prowess and integrity
  • Richard Guo, Fangda Partners. Partner, Tel: 010 6505 2775

For General Corporate Law, I can also recommend two experienced, highly-competent professionals:

  • Yang Song, Guang Dong Ruan Guan Law Firm. Partner. Tel: 0755 2901 300
  • Brian Su, Greenleaf Law Firm. Tel: 1351 058 5835





China’s government — an example for the world on competent economic management

Yuan Dynasty blue-and-white porcelain vase

China’s government is managing very ably the global financial crisis, and continuing to deliver to its people a better standard of living. Yes, the economy in China is growing more slowly than it has over much of recent history, at around 7%-8%. But, overall, the country continues to bustle as nowhere else does. People still have spring in their step, and the same sense of boundless potential.

This is a measure of just how many things the Chinese government has done right economically. It’s a fact that’s too rarely remarked upon outside China, where the major talking points about China’s economy tend to be pollution, corruption and what’s seen to be the artificially-low level of the renminbi. This does a huge disservice to what’s been highly successful and competent management by China’s economic policy-makers. 

How good a job has the Chinese government done? Consider this: the country has managed, with relatively limited economic dislocation, the huge contractions in China’s export markets over the last year. Yes, factories have closed and workers have lost their jobs. This is a familiar enough boom-and-bust story in every country where manufacturing plays a big part in the overall economy. But, not long ago, most of China’s economic well-being was tied to its manufacturing exports. There was little other fuel for economic growth. 

China today is a very different place, economically, than it was even three years ago. The domestic market, not exports, is now the locomotive that’s pulling 1.4 billion people down the track. This shift was managed so deftly by the Chinese government that it’s hardly even been noticed outside China – and often inside as well. I run into a lot of Chinese who still believe that the fate of the nation is determined by the output of its assembly lines. Exports and manufacturing are still important, hugely so. But, they matter less than they did just a while back, and in the future, they will matter less. 

This shift away from manufacturing has caused huge ructions in other countries – just think of the endless labor strife in France, or Britain on the 1970s, and the persistent high unemployment in most other European countries. They have stumbled along, economically, as their competitive advantage in manufacturing was lost. 

In China, it’s a very different – and better – picture. There is so much economic opportunity here that people can, with far less disruption to their lives than in Europe, find new places to work and build a future. The Chinese government creates the circumstances that allow all this economic opportunity to occur. Again, the contrast with Europe is particularly marked. In Europe, economic activity is stifled by excessive regulations that set out who can do what, where, for how much. In China, the government, wisely, takes a much lighter approach to regulation, always with an eye focused on creating circumstance that will lead to new jobs, more activity, and more competition in most sectors of the economy. 

China’s government, rightly, does get credit internationally for the economic changes over the last 30 years that have lifted some 500 million people out of poverty. This is, unquestionably, the most important economic achievement of the last century, if not the last millennium. 

But, the policies that are generating China’s continued prosperity — the uplift that is carries as many Chinese into the middle class as were taken out of poverty — is much less well-followed and less-praised. That’s wrong. Arguably, it’s no less significant an achievement.



Private Equity Firms in China in the Firing Line – Ratcheting Up the Criticism of Performance Ratchets

Ming Dynasty Cloisonne

In an interesting discussion this week in Shenzhen with a very smart and capable lawyer (Ke Luo of Fangda Partners), I learned about a small, but growing backlash against the Top Tier private equity firms working China. Evidently there have been some articles in the Chinese press voicing criticisms of their approach and methods, and comparing them unfavorably with Chinese domestic investment companies. 

Upfront disclosure: we choose to work only with the 70 or so Top Tier private equity firms active in China, as we believe they are the best investors for companies with the greatest potential, adding more value, beyond just capital, than any other source of investment. 

A main point of contention: the ratchet and performance provisions of most of the top private equity investment deals in China (and everywhere else in the world). These are the provisions, incorporated into the final closing share purchase agreement, through which the PE firm gains greater ownership in a company they’ve invested in if the company fails to meet previously agreed revenue, profit or margin targets.   

It’s a penalty for underperformance. And a very effective and focusing one. It’s not uncommon for these ratchets provisions to specify that the PE firm can gain an additional 10-15% ownership, at no additional cost,  in a company that fails to meet the annual targets. 

In good economic times and in solidly-run companies, ratchet provisions are very rarely put into effect. So, they are a generally just a ghoulish contingent presence in every PE investment contract, the stick that compliments the carrot of a PE firm investing in your business. I know from personal experience that the concept can seem very off-putting – even frightening – to some Chinese bosses: that the PE firm will, for example, go from owning 25% of his company to 40% of his company if the owner has one year that falls below the projected levels of profit and revenue. 

We’re not in good economic times at the moment, so it’s a certainty that more ratchet provisions will be triggered this year. This is what is behind some of the complaining in the Chinese press about international PE firms. Chinese investment firms apparently don’t often include ratchet provisions. The implication of the articles is that a Chinese company is better off taking money from a Chinese investment company, and so free itself from the possibility of a sort of “takeover by stealth”, as the PE firm’s ownership ratchets upward with each year of under-target performance. 

On the surface, ratchet provisions are a very fat, very easy target. So, no surprise some in the Chinese press are attacking them. But, it’s a very incomplete, unfair – and even financially illiterate – criticism to say that because of performance ratchet provisions, a Chinese company is better off taking money from a Chinese investment company. 

Chinese investment firms may not use performance ratchets, but they have a variety of other serious weaknesses. Believe me, I’m no fan of ratchets of any kind, and work hard in negotiations with PE firms to eliminate their potential for causing harm to our clients’ businesses.  But, I still think, in almost all cases, a good Chinese private company is far better off taking money from a reputable PE firm than from a more loosely-run Chinese investment business. 

The reasons are many. But, the most deep-seated are based on an appreciation of what an outside investor can and should provide a strong Chinese SME company besides just capital. Money, famously, all spends the same. So, taking $10mn from a rich uncle or from a leading private equity firm is no different, in terms of what the money can buy – a new factory perhaps, or expanded marketing and sales, or an acquisition. 

The key difference is that the best PE firms are going to do a lot more than just write a check and then wait for the riches to flow three years later at IPO. They are going to get deeply involved assisting the company to improve all areas of its operations, implementing best practices in areas like financial accounting and corporate governance, as well as providing real expertise on hard core sales and operational issues. They also know, from past successful experience, how best to guide a private company towards a successful IPO, whether on China’s domestic stock market, or abroad.

A Chinese investment company, from what I can gather, does not have the experience, the management talent – or even the inclination – to be involved in such a detailed fashion with the companies it invests in. 

I believe, based on my own practical experience,  that the good PE firms often really do make a significant difference inside a company, enabling it to get further faster than it otherwise would. Of course, PE firms can be a pain to work with. This goes way beyond the potential for a ratchet provision to be triggered. The good PE firms act as fiduciaries for their Limited Partners, and so require a massive amount of due diligence before investing, and no less enormous information flows (generally on financial performance) after an investment is made. They want quarterly board meetings, and often hold veto rights on any spending above $500,000 or so. 

But, in return, the PE firm will go to the furthest limits of its collective abilities to make sure the Chinese company succeeds above and beyond even what the boss of that company could expect. A domestic Chinese investment company? Most likely, they have had little experience with leading good companies toward successful IPOs, little operational knowledge, little desire to commit so thoroughly to adding value inside a company. 

So, yes, performance ratchet provisions are nasty. However, they should never come into effect – if the company and the PE firm are doing everything in their power to keep the business growing. The PE firms, contrary to the way it may appear, do not  want performance ratchets triggered any more than the company’s owner does. It’s also going to reflect badly on the PE firm’s judgment and abilities, and so make it harder for them to continue to raise money for future investment.

In other words, every time a performance ratchet is triggered, it gets harder for that PE firm to continue to thrive. They would rather own a smaller share of a solid company that’s meeting its targets, than a bigger share of one that isn’t.