Over the past couple of years, a shortage of everything from iPhones to paracetamol due to pandemic lockdowns in China has highlighted the reliance of global supply chains on the country.
It has also drawn attention to the danger of future disruption for multinational companies as cross-border trade and dealmaking becomes more complex — and the value of possible legal remedies.
Once known as mere assemblers of high-end products and producers of their components, Chinese companies have been moving up the manufacturing value chain.
For example, Apple, already well known for sourcing many of its US-designed products in China, this year hired Chinese contract manufacturer Luxshare Precision to help lead the design of its augmented reality headsets — one of Apple’s latest premium products.
This increasingly complex east-west interdependency is growing as China becomes a more significant consumer of goods and an acquirer of foreign companies.
China’s imports of consumer goods reached a record RMB1.9tn ($280bn) last year, doubling over the past decade. Demand for beauty and luxury products from Europe has been particularly robust, while the price tags for cross-border acquisitions have ballooned in recent years. But these businesses’ growing size and significance also mean takeovers are much more complicated.
One example is last year’s purchase of LF Logistics, the logistics unit of the world’s largest supply chain manager Li & Fung, by Danish transport group Maersk for an enterprise value of $3.6bn.
“The global freight management business had been very much an integral part of the target group,” says Sarah Su, partner at Freshfields Bruckhaus Deringer. “So an incredibly complex reorganisation had to happen before the logistics business and freight management business could be properly separated.”
As global trade expands and supply chain operations lengthen, the legal and geopolitical challenges for the logistics sector are growing, too.
“Some regulations in India, for example, restrict the ability of buyers or investors that are affiliated with China from being able to acquire or invest in certain Indian businesses,” says Su. The key is “finding workarounds for those restrictions and structuring businesses to fit regulatory requirements for each jurisdiction”, she notes.
Escalating geopolitical tensions between China and the US, alongside a growing concentration of the world’s supply chains in China, has also drawn attention to disruption risk. Yet foreign companies and investors remain committed to maintaining the ties and flow of trade between mainland China and the rest of the world as the country reopens fully from its Covid pandemic lockdowns. The country’s Qianhai Cooperation Zone is one of the ways it is opening up further. Alvin Ho, partner at Pinsent Masons, describes the economic development area as an “extra gateway from mainland China opening not only to Hong Kong but to the rest of the world”.
Attracting foreign companies and investment is crucial to the venture, which is designed to foster economic development and closer co-operation between mainland China and Hong Kong.
Requirements crucial for the zone’s success are a straightforward legal and procurement model for infrastructure projects, easier cross-border settlements and a dispute resolution framework for construction contracts covering both Hong Kong and Chinese law.
“We have a sense of what changes regulators will accept and what changes they will find difficult to understand and accept,” says Ho. “We have to come up with a system that is attractive enough for foreigners but still looks quite familiar to the mainland officials, and also acceptable to them.”
Giving foreign companies the option to use Hong Kong law and arbitration if they choose to has been a key differentiating factor for the Qianhai Cooperation Zone. It is a “unique set-up that is different from the rest of China”, says Ho.
The expansion of these special economic zones has helped many local companies become leaders in the global supply of many consumer and industrial goods.
But with this growth has come a surge in legal disputes over patents and other forms of intellectual property. Last year, Chinese smartphone maker Oppo lost a patent dispute in a regional German court with Nokia, which may prevent the company selling certain handsets in the European country. This is just one example of how leading global suppliers in the Asia-Pacific region are having to handle legal battles, cross-border deals and patent disputes that are ever more complicated across many jurisdictions.
Conventional dispute resolution strategies are not always effective in such cases. For example, in cross-jurisdiction disputes, a court in one country may pass a decision that contradicts one made in another.
In these circumstances, lawyers aim to develop global strategies to help their clients. In the case of Nokia, Anand and Anand has used Indian courts as one starting point for global action on disputes alongside action in other jurisdictions in Europe and Asia, including the Finnish telecom group’s case against Oppo over 4G and 5G technologies. This could serve as a template for similar instances of international IP disputes.