By Stephanie Henry
Companies investing in any market must deal with administrative licensing — or getting official government approval for everything from selling products to building new manufacturing facilities. But in China, the extensive, complex, and at times onerous licensing system at all levels of government can result in significant delays, added costs, and lost revenue for companies.
Administrative licensing has been a top concern of US companies operating in China for some time. According to the US-China Business Council’s (USCBC) annual member company survey, administrative licensing has ranked among the top three concerns each year since 2006.
USCBC interviewed 19 member companies in August 2013 about their experiences with China’s licensing process when expanding manufacturing operations, and released the findings in a report, Licensing Challenges and Best Practices in China. The report shows that companies frequently encounter problems in five broad areas: transparency, expert panel reviews, disclosure requirements, third-party consultant recommendations, and licensing associated with joint ventures. These problems occur during reviews at the central, provincial, and municipal levels.
Transparency
Transparency—or applicants’ abilities to easily apply, monitor, and determine the status of their applications—frequently causes delays and creates uncertainty in the licensing process. Transparency problems emerge in the licensing process in three key ways.
First, public information on licensing processes is often vague or insufficient. Companies are required by central and local governments to submit various legal and planning documents in the licensing process, which may vary by region. Though these requirements are often made available through public sources such as government websites, companies noted that the information provided is often inaccurate, vague, or incomplete. This makes it difficult for companies to know how much information is required to avoid lengthy delays. It also forces companies to contact government officials—at times on multiple occasions—to clarify what should be a straightforward process, adding time and labor costs to the project.
Second, inconsistencies in policy interpretation and implementation at the local level create challenges in the licensing process. Companies must often negotiate between competing local government agencies, which can extend an already-frustrating licensing process, fostering uncertainty and ambiguity. Generally, companies interviewed said they were unaware of the reasons for differing local policy interpretations, and that they often struggle to quickly work with officials to mitigate differences between government interpretation and company strategy.
A third issue relates to government timelines for review and approval of licensing applications. While central and local government regulations provide official timeframes for various steps in the licensing process, the majority of companies found that those timelines differ greatly from what occurs in practice. To mitigate these delays, some companies have resorted to developing their own methods for monitoring the status of their applications. For example, one company dispatched an employee to wait outside local government offices to find the officials in charge of reviewing the company’s application to ask about a delay in the application process.
This type of strategy can help companies manage transparency issues in the licensing process. However, this is not a panacea; these transparency issues can constrain companies’ abilities to develop accurate timelines and budgets for new investments, and make it difficult for them to prevent such delays for future investments.
To manage this lack of transparency, companies interviewed emphasized the importance of building relationships with local government officials who oversee licensing processes and investment promotion. Fostering these relationships before investments are made can help clarify ambiguities in the licensing processes. Companies should also consider sharing with local officials the expected economic, tax, and employment benefits the project will bring to the community. This could also lead to a speedier and more transparent review process. Finally, companies should actively provide input on rules made available for comment to reduce conflicts between regulations. Companies can offer expert insights into how various regulations interact and how they might need to be clarified.
Expert panel reviews
Depending on the size, scope, and type of project, expert panel reviews may occur at several steps in the licensing process, including reviews of a project’s energy conservation assessment, safety assessments, and environmental impact assessment (EIA) reports. These reports may contain detailed information on companies’ proposed projects, including project economics, major unit operations, equipment lists, equipment specifics, capacity, and raw material and energy use.Panels are typically comprised randomly of five or more experts, who must meet academic and professional qualifications set out by the government. Expert panels examine submitted reports and issue written opinions based upon the reviews.
These types of reviews create significant challenges for companies operating in China. One challenge is the government’s authority to nominate experts, including employees of Chinese competitors. Technical information included in the reports is often sensitive, and providing such information to anyone outside the company—including government officials—can be problematic for companies. Further, competitors named to the expert panel may use their positions to gain access to proprietary information, as was the case with one company interviewed. Further compounding this problem is the lack of input that foreign companies have over the expert panel nominating process. Consequently, foreign companies frequently face difficult decisions on addressing experts’ requests for information.
Liabilities introduced by expert panel reviews create serious risks for US companies. To manage these risks, companies should develop strong relationships with the government bodies that oversee panel nominees. Using local connections, some companies interviewed found they were able to recommend certain experts to the panel. Companies should also try to identify experts that are well-versed with the technology and projects under review. Expert panelists can help facilitate the review process by clarifying misunderstandings, maintaining the panel’s focus, and offsetting any negative views held by other experts toward the company.
In some cases, a company may also be able to seek support from local government agencies to clarify misunderstandings that may arise on the panel. For example, one company worked with a local energy authority to draft a letter to the panel that was reviewing its energy-consumption assessment. The local agency clarified that the company was in compliance with government energy quotas, a fact that had previously been disputed by the panel.
IP and disclosure issues in the licensing process
One of the many requirements for licensing approval is providing detailed product and process information to government agencies at the local and central levels. Such disclosure can put sensitive intellectual property (IP) at risk during the approval process. Further, as China generally does not maintain requirements to destroy company information submitted in the licensing process, companies risk exposing sensitive IP even after approval is secured. Overall, companies indicated that approval processes in China are significantly less clear and objective than they are in other markets, such as the United States, leading to the disclosure of sensitive information that is typically not required in other locations where a company operates.
While companies may be required to provide additional information compared to other markets, companies interviewed shared a number of practices for minimizing disclosure while remaining respectful of government authorities. One tactic involves selectively limiting the decision-making authority of local China offices, which often come under pressure from local officials. This tactic can help manage local officials’ expectations of what information to expect from the local office. It also reinforces companies’ policies on information sharing, which may help ease pressure on the relationship and licensing process.
Another tactic companies cited is negotiating what information is made publicly available and what information remains undisclosed. As several companies suggested, local officials may be willing to redact sensitive information from public disclosures. Finally, companies may be able to sign non-disclosure agreements with local administrative committees when investing in a region. This not only lessens the risk of exposure, but it impresses upon local committees the importance of IP protection.
Third-party consultant recommendations
Companies in virtually all industries work with tax, environmental, legal, and many other third-party consultants and agents throughout the licensing process. Depending on the approval being sought, companies interviewed for this project said that local government regulators often recommend or mandate the use of specific third-party consultants. These recommendations can arise at any stage in the licensing process, including the submission of EIA reports and certain product approval applications. Third-party consultants may also be called in to ensure that paperwork complies with local government requirements.
Though most companies agreed that they prefer to utilize trusted third parties over government-recommended parties, many companies felt a great deal of pressure to use government-recommended service providers. Several companies noted that if they choose not to use a government-approved entity recommended to them, they felt they ran the risk of extended lead times and strained government relations.
Even when they were willing to consider using government-recommended vendors, companies said that government regulators did not provide enough third parties from which to choose. In some cases, when companies opted to use a government-recommended vendor, they found that third parties did not possess the necessary knowledge the project required.
Overall, these types of government recommendations put companies in a difficult position in China. Many foreign companies require strict due diligence reviews before working with new third party providers, resulting in extensive review processes if they choose a government-recommended provider. This adds both time and cost to their investment projects. Though these types of due diligence reviews are fairly standard, some companies thought they might offend local government officials. Companies said that this risk can be minimized by stressing early and often their obligations to adhere to global best practices in due diligence.
For companies that found it acceptable to use third-party service providers, several were able to negotiate with government officials to share additional local third party providers so that they could have a broader selection from which to choose. These types of solutions helped companies appropriately respond to requests to use recommended third-party service providers while maintaining their relationships with local authorities.
Licensing challenges in joint ventures
Joint ventures (JVs)—either majority- or minority-owned—add a layer of complexity to company licensing and approvals in China. While one of the benefits of having a JV is the close government connections a Chinese partner may enjoy, some companies noted that this relationship can also give Chinese partners significant leeway to ask their US partners for more information than is necessary in the licensing process. For example, one company noted that its Chinese partner is unwilling to include the foreign partner in licensing discussions with government regulators, asserting that it’s easier to work directly with government officials with whom it already has relationships. The Chinese partner has asked for sensitive information from its foreign partner, stating that such disclosure is necessary to move forward in the licensing process. When asked to show the documentation requiring this disclosure, the Chinese partner hasn’t been able to provide written evidence or refer the foreign partner to publically-available regulations.
Though there is no guarantee a JV partner will protect the information supplied to it in the licensing process, companies have created practices that limit IP risk after information has been disclosed. For example, one company interviewed said they clearly define that technology used in the production of any final product can only be sold in certain markets. The company noted that if its agreements had not laid out these restrictions in the early stages of the JV relationship, its partner would likely now be a direct competitor in the developed markets that are key to the foreign company’s business.
Conclusion
Foreign and domestic companies doing business in China must negotiate a complex and opaque licensing system that often requires the disclosure of sensitive information or trade secrets, potentially to competitors. Many of the problems addressed here cannot be solved without changes to the licensing processes at central and local government levels, but companies can take steps to reduce risk. US companies seeking to invest or expand their operations in China can mitigate risks and facilitate the licensing process by establishing strong relationships with local government officials to improve transparency and minimize disclosure requests. Companies should seek to clarify what information they are—and are not—willing to disclose during the licensing process. They should also create internal decision-making structures to help local China offices manage officials’ expectations. These strategies, along with those described previously, may help companies manage challenges in China’s administrative licensing system.
About The Author
Stephanie Henry (shenry@uschina.org) is a government affairs manager at the US-China Business Council’s Washington, DC office. USCBC is the publisher of the China Business Review.
(Photo by Cory M. Grenier via Flickr)