Foreign
businesspeople tend to arrive in China animated by long multiplication.
They envisage their sales in units multiplied by millions of customers
and the burgeoning spending power of an ascendant middle class. But
often they leave humbled by long division, their dreamt-of profits
sliced and diced by unforeseen regulations, fees and murky “transaction costs”.
The journey from mathematical euphoria to despair is usually
punctuated by the discovery that China is a very different place to do
business. This realisation in some cases comes dropping slow; for others
there are revelatory shocks.
The bribery scandal that this week enveloped GlaxoSmithKline,
the UK pharmaceutical company, has jolted boardrooms around the world
and prompted western businesses in China to re-examine their internal
controls. On Friday, authorities were widening their probe into drug
companies, with investigators visiting Belgium’s UCB.
The renewed focus on internal controls at multinationals in
China may turn up some awkward truths. “The way things are done here is
so totally different to back home. Head office either does not want to
know, or, when I start trying to explain things, the eyes just start to
glaze over,” says one western businessman in Beijing. “The rule here is
that everybody must give in one way or another. The skill is in
ensuring, if you can, that you give legally.”
Another recounted a trip in a lift with a senior official in
the regulator that oversees his industry. As they ascended, he
complimented the official on the new, high-tech headquarters he had just
entered. “It cost Rmb200m [$32m] and we didn’t need to borrow a fen
[cent] to build it. Everything came from our own profits,” the regulator
said. When the businessman asked how a regulatory agency could make a
profit, the reply came with a mirthless chuckle. “Ah! You are new.”
Several regulators in China are directly involved in
business. Xinhua news agency, the official government mouthpiece, is a
business that also wields considerable powers of oversight. The National
Education Examinations Authority regulates the vast testing market and
receives from many of the companies it authorises fees per test served.
The Ministry of Railways has long been one of the country’s biggest
businesses as well as arbiter of business approvals, prices and
contracts. The list goes on.
With the dividing line between regulatory authority and
commerce blurred, it is unclear whether an “administrative fee” paid for
a business approval is funding the regulator’s pool of clerks or the
sleek rank of Audis parked outside. Government agencies do not make
public accounts of how revenues are earned and spent. Also ambiguous are
demands from some regulators for multinationals to “make contributions
to China’s development”. After discussion, such requests often end with
the company paying for a training course, study tour or fact-finding
mission for a delegation to some alluring overseas location, expenses
paid.
Because they are legal, such tours are a favoured vehicle to
win friends in the bureaucracy and guide the rubber stamp of project
approval to their advantage. Such trips have become a staple for the
officials and the foreign executives who organise them. Some ministry
staff have been on so many tours that they complain of “training
fatigue”.
Such examples of legal giving may help to illuminate an
aspect of China’s peculiar business culture, but do not explain the huge
personal wealth amassed by members of the ruling elite. In an
indication of the symbiosis between wealth and power, a Bloomberg study
showed that the 70 richest members of the National People’s Congress,
the national legislature, have a combined wealth of about $90bn,
compared with a combined wealth of about $7.5bn for the 535 members of
the US Congress, the president, his cabinet and the Supreme Court.
Corruption scandals involving NPC officials erupt with regularity.
“Members of China’s National People’s Congress have become
so wealthy that their meetings may best take place in a bank vault,”
veteran China executive James McGregor writes in his book, No Ancient Wisdom, No Followers.
In provincial cities, the notion that a foreign company can
gain essential bureaucratic approvals with displays of “legal giving”
such as study trips sounds quaint. Mr McGregor notes that: “Once you get
below the level of big multinationals doing large deals (at the central
government level), China becomes a swamp.”
GSK
stands accused of transferring up to Rmb3bn to 700 travel agencies and
consultancies across the country to facilitate bribes, often in the form
of overseas trips for hospital staff, to boost sales of its drugs. The
group said it was deeply concerned about the charges, and described the
alleged practices as “shameful”. Four GSK executives in China have been
detained, while the British chief financial officer has been banned from leaving the country.
This action is part of a widening probe
by Beijing into perceived corporate abuses. Nestlé and Danone, the
European food groups, said they would cut infant milk formula prices in
China after Beijing launched an inquiry into the industry. On Friday the
official People’s Daily newspaper reported that Chow Tai Fook, a large jewellery retailer, was among a number of gold shops being probed for alleged price-fixing.
Such moves are feeding a neuralgia that multinationals are
the intended victims of the corruption crackdown that has become a
defining campaign of President Xi Jinping’s administration, which took
power in November. Though it looks likely that hard times are ahead for
many multinationals in China, a wider view reveals that government
agencies – central to the bribes-for-approvals interface – have also
been targeted. This year Beijing stripped government departments of the
right to grant 133 approvals, and pledged that such red-tape busting
activities would continue.