By Dan Harris

I was interviewed a couple weeks ago by a reporter who wanted to know what impact the declining economy in China was having on my law firm’s clients. I told her none. I said that so far, anyway, not a single client had even mentioned China’s declining economy as a factor in its decision-making. But I then said that I had also not really been asking and that about half our clients are not in manufacturing, and that virtually none of our manufacturing clients make low end products like $2 toys, socks, or costume jewelry. I also mentioned that less than ten percent of our manufacturing clients are in Guangdong Province, which seems to have been hardest hit.

Since that interview, I have conducted an extremely unscientific client survey regarding our clients’ China plans. This survey was of about fifteen clients (to tell you how unscientific it was, I took no notes), eleven of which are American, one Korean, one Spanish, one Mexican, and one German. About half are in manufacturing and none make what anyone would describe as a low end good like a cheap toy or jewelry. I asked them how their China business was going, “in light of the economic downturn.” I also asked them if the downturn was going to cause them to reduce or eliminate their China presence. Lastly, I asked them what they would be doing differently in China in 2009 due to the economic downturn. Their answers were all pretty much the same.

They said that China’s downturn had made them look more carefully at their China expansion and hiring plans. They said they were going to be very “cautious” and “careful” in 2009 with respect to expansion and hiring. Many of them (5 or 6?) said they had an “official” hiring freeze in place for the first six months of 2009 or the entire year. Two said they were going to expand their business in China faster than anticipated because they saw now as the best time to get a jump on their less well-funded rivals. All of them said they had no concrete plans to get out of China, but one worried that the company’s overall problems might force an ill-advised China exit. Many of them responded to my question about their leaving China by asking me “and go where?” I got the following comments (these are from the last few months, not just from these 15 or so companies):

1. This downturn is good. It is going to bring us stability. We had been losing 2-3 good employees every month and that has stopped completely.

2. I hated China’s new labor law and I hated how employees were able to hold this over our heads. The power has shifted.

3. I have enjoyed my last six months in China more than any six month period in my 20 years here. We are a small fish in a big pond (they are in Shanghai) and I feel like the Chinese government actually appreciates that we are sticking it out and have not laid off anyone.

4. China is the only country in which our company is still doing well.

5. We had made some terrible deals because we had no choice. We have been able to renegotiate nearly all of them. Our costs are down, and our sales are down, but our profits have remained the same.

6. We looked at Vietnam and really liked what we saw, and we definitely plan to add that to our China operations eventually, but nobody wants to spend the money to get set up there right now. Maybe in a year or two.

7. I’m just glad we are no longer in Thailand.

8. Our R&D in China has been fantastic. We want to expand and we should be expanding, but the company has a complete freeze on anything new right now. I see this as a huge mistake and one that is going to cost us millions down the road.

9. Our sales are down 20% worldwide. Nobody wants to leave China because we all know we will make good money here soon, but the question is whether the home office will be able to subsidize us until we do.

Would love your comments. How is China’s downturn affecting your business?

UPDATE: Make that sixteen. Had a long conversation with a client that focuses on auto parts sourcing in China, Vietnam and Mexico. Told me 2008 was best year ever and 2009 is going to be much better. Seems many of the automobile and auto parts companies have laid off so many people they are going even more outside their own doors for outsourcing. They are hiring outsourcing companies more and doing the outsourcing themselves even less.

Dan Harris is a founding member of Harris & Moure, an international boutique law firm.  He is also co-editor of China Law Blog.