Capture of Commercial Secret by Foreign Enterprise through JV Negotiation

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In September 2008, Guangdong Zhongshan Guangding gas equipment company brought a suit to Wuxi local court, accusing the defendant, a French manufacturer Lacrise of obtaining its commercial secret through vicious jv negotiation. Guangding argued that over the past five years, Lacrise deliberately devised a JV project and through the consecutive visits and negotiations Lacrise has obtained huge Chinese market information and plaintiff’s commercial secrets. Once being a partner, potential joint venture cooperator, why Guangding is decided to take action against Lacrise in court?

Frustrated in European market

The French manufacturer Lacrise is a middle sized company in Europe with its annual sales revenue of around 3 billion euros. It has plants in France, Italy, Britain, Poland, Czech. Products mainly are lifting equipment, building heating system, brass and fittings, gas regulator. Since 21st century, due to the situation in European market its sales was stalled, furthermore European human resource costs continue to rise; performance of the company has been down falling. The company sequentially closed its plants in France, Britain and Italy. The traditional manufacturing industry in European market may not have tremendous potential development. The board of directors therefore was looking for long term strategic adjustment, and turning its eyes on the other attractive market for example China.

Dec. 2002, the company held a meeting of Board of Direcytors in Hong Kong, it had only one topic: China. The board consisted of nine directors, the meeting invited other companies like SEB, Merlin Gerain, which operate their business in China for many years; the meeting also invited management consulting expert to deliver speech and success practice for the Board. Finally the Board passed a resolution that China market was the center of company’s activities in the future, Lacrise should gradually swift its aim and objectives from Europe to China, and the implementation of China’s market development should be carried out immediately.

Strategic shift to China

Lacrise surely underestimated the difficulty to develop the Chinese market. In March 2003 it established representative office in Shanghai, the office hired two Chinese employees. Headed by a French guy Eric, Lacrise set up a China team. Lacrise immediately launched a carpet-marketing campaigne. They were looking for the potential customers through massive telephone cold call; and visited the customers, and participated in various professional exhibitions. After a period of customer contact, Eric and his Chinese team organized some roadshow in five-star hotels, inviting potential clients to participate. However, by the end of 2003, no increase happened to the sales records.

Such a bad result pushed Lacrise to re-examine themselves its products. Its core product is lifting crane. Given the market survey Lacrise found that China’s high-end market was occupied by American Carterpillar, Japanese Komatsu, and Korean Hundai; China’s low end market was filled with hundreds of local Chinese products. Productof French product price is high, with good enough quality, but with no any technical support and after-sales services. Another kind of product is floor heating system which is rarely used in Chinese household, even in the cold Northern China industrial and civil buildings are equipped with air conditioning or heating machines rather than floor heating system. Other product like copper pipe and fittings, the market was full of local Chinese products that are extremely cheap, this product is heavy cargo and transportation cost is high, importation from Europe to China has economic advantage. There is only product within Lacrise which has the potential of competitive advantage is gas regulator. Most Chinese big cities are using of piped coal gas and natural gas, suburban living community has to use the pipe line with special design of liquefied petroleum gas and natural gas, because the city gas network cannot reach them. The small-medium sized pipeline networks are equipped with different internal storage tanks.

How can this product of Lacrise quickly occupies some shares of Chinese market? How does Lacrise successfully get Chinese market information and competitors’ details? Lacrise decided to achieve these goals for the company by elaborating a layout of false Joint Venture project.

Joint Venture negotiation- exchange capital and techology for market

Lacrise assigned this project to a French guy-Eric, who was responsible for Asia-Pacific market. Eric joined the company since he was 22 years old, he was taking care of the developing markets, for example South America, Middle East, Eastern Europe etc, and was a very experienced sales and marketing people. Eric found a breakthrough point after talking with many Chinese companies- The Chinese market has an obvious characteristics, it is a huge market, one manufacturer cannot form leading advantage in its specific industry nationwide, but can occupy controlling market share in some provincial areas and play a greater role in the segmented market. For example, in the Pearl River delta, the Yangtze River delta, Wuhan area or Beijing area respectively, the same industry was controlled by different brand. The Chinese market is separated by different regions. One manufacturer cannot become the nation wide player. Thousands of small and medium-sized firms compete intensively in order to survive, business owners eagerly need capital and technology, hoping to expand production scale, increase sales revenue and reduce production costs.

Eric found this breakthrough point, and based on the understanding, he carried out his business negotiation. First, Eric and his Chinese colleagues contacted dozens of gas regulator company in China, explaining that Lacrise planned a joint venture project and searched potential partners; Lacrise would offer capital and knowhow; for the reason of high cost, Lacrise would never directly import products from France and sell to the China market; Lacrise hoped to develop China market and need a Chinese counterpart so that they could make production in China and sell the products in China as well. Because Chinese domestic enterprises are lack of funds and technology, after hearing this news, they were anxious to discuss with Lacrise for the project.Eric chose three companies from three different regions. One is Shanghai XX gas equipment company, one is Beijing Hongye gas regulator factory, another is Guangdong Zhongshan Guangding gas equipment company.

Since January 2004, Eric led his team to visit their Chinese competitors one by one. The purpose is to obtain sufficient market information. Eric had prepared a detailed list of questions.

The whole year of 2004, Eric took business trip almost every month. He and his colleagues repeatedly visited the aforementioned companies. They visited Shanghai, Beijing and Zhongzhan consecutively. During the visits, Eric talked and discussed with company owners, senior managers, middle level supervisors, factory operators and even gate guards. He asked a lot of question and took notes, he repeated the same question several times and tried to fully understand a situation. His counterpart thought that detailed understanding of situation was essential for JV project. Eric had a Chinese colleague named Chen Fang, who was responsible for French translation. Eric always asked the same question with different counterparts in different time. Chen Fang was very confused, sometimes interrupted translation, and told Eric in French that he asked the question already three times and noted the answers also. Eric patiently waved to Chen Fang and let him continue to translate. Afterwards, when Eric and Chen Fang were back to the hotel, Eric explained to Chen Fang, he used a tactics, the same question was asked to the different individuals, and the same question was asked to the same people at different time, in order to compare and analyze, and draw a conclusion that can be very close to the truth, this is the main technique for market study. Eric explained this was a basic skill for marketing guys to constantly visit these Chinese companies, constantly ask many questions, to obtain real market information. Chen Fang was suddenly enlightened.

In 2004, Lacrise had obtained a large number of market information, actively formulated a market entry strategy, and set up distribution channel; at the end of the year, sales of Shanghai office reached 300 thousand Euros.

Abandon potential JV partner

At the beginning of 2005, Shanghai XX gas equipment company appeared bored, and was very reluctant to receive visit of Eric’s team. However the other two companies kept high emotion to discuss with Eric. In March 2005, Eric and his team visited Zhongshan Guangding and Beijing Hongye once again. The purpose of the visit is to carefully study production situation and get commercial data from the competitors.

Lacrise had designed a set of investigation list, and some contents is abstracted now as follows:

The company product categories, each product output?

Company sales revenue, yearly sales increase rate?

The company is state-owned, collective and private? Equity structure?

Number of staff and workers, including how many sales personnel, R&D personnel, technical engineers, production operators?

Production workshop area, number of shifts, each production operator output on an average day?

Who are the suppliers, raw material purchase price, quantity, quality standard?

Transportation is self handled or outsourced, monthly volume? How to calculate transportation cost?

In which regions the company is operating its sales activities, each region accounts for the percentage of total company sales turnover? Sales growth rate for each region over the past 3 years?

What is the sales channel, distribution system, how the company operates its sales channel, direct sales or indirect sales, percentage in total sales revenue, how could be the potential?

How many subsidiaries and branches in the whole country, sales revenue for each subsidiary and branch, how many employees for each subsidiary and branch?

How big the stock is, inventory turn over rate?

The selling price, including price to distributors and retail price, any rebate, with percentage?

Customer payment, how much account receivable?

Who are the main competitors and how much is their sales revenue, what are their advantage?

Where comes from the technology and know how, how to develop new product, whether the company has independent IP?

Negotiations went smoothly, so was sales of Lacris in China. In 2005, the company had realized a sales revenue of 3.5 million euros; 10 times of sales of 2004. So Lacrise conducted false negotiations with Chinese partners, and on the other hand, it was selling its products simultaneously. In 2006 Lacrise reached a sales revenue of 15 million Euros.

Because Lacrise obtained detailed information of specific market and its competitors, after careful analysis and research, Lacrise draw a conclusion that it was capable to independent operate the business by itself and without any Chinese JV partner, and it could maintain the cost advantage against most of the Chinese players. Lacris decided to open its own factory in China, produce and sell independently.

October 2007 Lacrise founded the wholly foreign owned enterprise in an industrial development zone in Wuxi city. May 2008 Lacrise formally notified Guangdong Zhongshan Guangding and Beijing Hongye that it was decided to terminate all discussion and talk and negotiation for JV purpose with the company. The action resulted in what is described in the beginning of this report.

How to deal with foreign investor’s malicious JV negotiation

1. Professional lawyers shall participate in negotiations as soon as possible, and implement legal due diligence

Lawyers participate in negotiations, not for commercial objective, but for full control of the negotiation process and of legal risk. Lawyers participate in negotiations, and give the foreign counterpart deterrent effect. Chinese party must immediately conducts due diligence, fully understand the intention of foreign investor. For instance given UK Company Act, these decisions of general meeting and meeting of board of directors shall be sent to Company House (equivalent to China’s industry and commerce administration), where people can investigate and inspect. Lawyer can survey various stakeholders, such as shareholders, senior managers, employees, company community, local government, suppliers to well understand foreign investor’s intention to enter into Chinese market, clarify whether they really want to establish joint venture, or just want to occupy the Chinese market.

2. The Chinese company shall establish a comprehensive intellectual property protection mechanism

Chinese companies should actively protect copyright, trademark, patent, and the company’s business secrets. JV negotiation may involve commercial secrets, those who take part in the negotiation (including the lower-level employees, all levels of manager, general manager, CEO), shall not disclose any of such mentioned. Companies can entrust a lawyer to discuss the issue with foreign counterpart. The company also shall regularly train staff, what is commercial secrets of the company and let them be alert and improve risk awareness. If foreign counterpart requests providing relevant data or documents or other materials, the general manager, CEO, even the board of directors shall know and decide how to handle it.

3. The Chinese company can bring suit based on “Contract Law”

According to the Article 42 of the Contract law of the People’s Republic of China, if one party carries out malicious discussion in the process of contract formation, thereby causing loss to the other party, it shall bear the liability for damages. Therefore the Chinese party may take action against foreign investor claiming his pre-contractual obligations for breach of contract and requisitioning damages.省略)

图片关键词：商业机密