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Business

Even on U.S. Turf, Culture Clashes Make China Firms Tough Foes

The United States is seeking an investment treaty with China

A woman walks past a mural with the words "China Dream," "Strong military, Prosperous people" outside an Aviation Industry Corp. souvenir shop in Beijing, photo: AP/Ng Han Guan
2 years ago

U.S. companies have found it can be tough to do business in China. Now, as more Chinese firms invest in the United States, U.S. companies are finding it can be hard to contend with the Chinese on American turf, too.

Chinese companies can hide behind complex corporate structures. They can keep assets back home. And they can use connections to Beijing to assert immunity from America’s legal system.

Consider one Texas company that thought it had scored a victory.

Five months ago, an arbitration panel awarded Tang Energy Group at least $69 million after a contract to build wind farms collapsed and left Tang fighting for survival.

The celebration didn’t last long.

The company the panel ruled against — Aviation Industry Corp., a conglomerate owned by China’s government — challenged the award. AVIC argued that the arbitration panel was stacked against it and that it wasn’t directly involved in the wind project, though its subsidiaries were.

AVIC had another argument, too: As an arm of China’s government, it said, it isn’t subject to the authority of American arbitration panels — or courts.

Such disputes are destined to grow as Chinese companies invest more in the United States and sign more contracts on U.S. shores. China’s investment in the United States reached a record $15.7 billion in 2015, the Rhodium Group consultancy reports.

“Chinese companies are flush with cash,” says AVIC’s lawyer, Cedric Chao of DLA Piper in San Francisco.

Disputes with Chinese companies are complicated by China’s blurry lines between public and private. Many Chinese companies with the clout to export and invest overseas are owned by the state or enjoy powerful ties.

The Chinese government backed two companies that were accused of rigging the price of Vitamin C in the U.S. market. The Chinese Commerce Ministry said the companies were following Chinese law when they set prices. The companies lost in 2013, but the case is on appeal.

There’s some hope that the task of fighting Chinese companies in U.S. courts will ease as they deepen their investment in the United States and their assets become easier to seize.

And as they increasingly expand internationally, they will need to manage their reputation and won’t want to be known for eluding courts and skipping out on legal bills, says Dan Harris with the law firm Harris Moure in Seattle.

But for now at least, Harris says the Chinese can’t always fathom how U.S. courts operate, aren’t used to judges who are mostly immune to bribes and don’t understand the consequences of defying court orders.

Several state-owned companies have invoked the 1976 Foreign Sovereign Immunities Act. The act says foreign government agencies can claim immunity unless they’re directly involved in commerce — a status that’s subject to dispute.

“Being sovereign,” says Anthony Balloon, a lawyer who specializes in international business, “means you don’t have to say you’re sorry.”

Consider the toxic drywall case.

Chinese-made drywall, installed after hurricanes struck the Southern United States in the mid-2000s, caused damage ranging from foul smells to corroded pipes. Thousands of homeowners sued a Chinese commission that oversees state-owned companies that made the drywall.

Chinese officials countered that the commission is a government agency with immunity from U.S. courts.

In March, another defendant in the drywall case, China National Building Materials Group, convinced U.S. District Judge Eldon Fallon it was immune because it, too, belongs to China’s government.

In this Friday, May 6, 2016, photo, Tang Energy CEO Patrick Jenevein poses for a photo in his office in Dallas. Several months earlier, Tang Energy won an arbitration case arising from a contract with Aviation Industry Corp., a conglomerate owned by the Chinese government. AVIC has challenged the ruling in federal court, arguing that as an arm of the Chinese government, it isn't subject to American arbitrators. (AP Photo/LM Otero)

Tang Energy CEO Patrick Jenevein poses for a photo in his office in Dallas. Photo: AP/LM Otero

AVIC, tangled in the dispute with Tang, has also claimed sovereign immunity in a case brought by Global Technology, a Michigan company that’s U.S. sales rep for an AVIC subsidiary. Global Technology says it was wrongly left out of a deal in which AVIC acquired an American auto supplier.

In the meantime, the United States is seeking an investment treaty with China. Researchers at the Peterson Institute for International Economics has suggested that negotiators require China’s state-owned companies to accept the jurisdiction of foreign countries.

In some ways, the very fact that Chinese companies are fighting in U.S. courts represents progress. In the past, many didn’t even recognize the American legal process.

The U.S.-China Economic and Security Commission, a watchdog, complained last year that Chinese companies in the United States hid behind a “legal firewall” by claiming that Chinese secrecy and banking laws exempted them from U.S. complaints.

And when American plaintiffs took their cases to China, they got nowhere.

“We call it retreating to Fortress China,” says Balloon, a partner in Atlanta with the firm Alston & Bird.

Some plaintiffs and judges are deploying other tactics against the Chinese companies. Judge Fallon, presiding over the drywall case, found the Chinese company Taishan Gypsum in contempt of court in 2014 for refusing to appear and defend itself. Faced with being barred from business in the United States, Taishan Gypsum returned to court.

In Dallas, Tang is still awaiting its award from AVIC.

A corporate colossus, AVIC has 500,000 employees and 140 subsidiaries in businesses from aircraft manufacturing to financial services.

“We follow the rule of law,” says Tang CEO Patrick Jenevein. “They follow playground rules when the teacher is not around.”

The Tang-AVIC relationship had begun promisingly. In 1997, the two agreed to build a gas-fired power plant near China’s Great Wall. Later, Tang and two AVIC subsidiaries started producing wind turbine blades in China. In 2008, they agreed to form a company to develop wind projects.

Then the partnership soured.

Tang suggested that AVIC consider a partnership with Cirrus Aircraft, a Minnesota aircraft maker that wanted to enter the wind-turbine business. AVIC considered it — and then acquired Cirrus on its own, leaving Tang out of the deal.

AVIC also bypassed Tang when it invested in wind projects in the United States. And it developed its own projects from Australia to South Africa.

Tang argued that the AVIC projects violated their agreement to develop wind projects exclusively together. The arbitration panel agreed in December. It found that AVIC and its subsidiaries operate as a single entity and that AVIC used its subsidiaries to commit “fraud or injustice.”

AVIC has appealed to a federal court. Among other things, it argues that it “was beyond the jurisdiction of the panel and now this court as an undisputed 100% state-owned enterprise.”

“We’ve seen in the last three to five years Chinese companies becoming more sophisticated in the way they deal with the West,” Balloon says.

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