Chapter 6
Ethics and Corruption
“In China, there is an absence of religion. The moral concept is much weaker. In my mind, when a Chinese comes to a crossroad, the decision-making is about ‘What is the benefit for me?’ On average, the Chinese tend to think about their benefits first.”
Prakash Menon (India), President of NIIT (China)
“I have seen so many foreign companies in which the foreigners had no idea what was going on in their own company, underneath the Chinese surface. Many of these expats get cheated on several levels and have no idea what’s happened to them.”
Simon Lichtenberg (Denmark), Founder and CEO, Trayton Group
Introduction
For foreign entrepreneurs in China, the “c” word—corruption—is often one of their most serious concerns when preparing to invest in a business. On one hand, rumors abound about China’s guanxi (or relationships) system, in which backdoor connections to both government and private sources are necessary in order to operate a successful business. There is the widespread feeling that if you don’t use backdoor shortcuts to getting business done, your competitors will. On the other hand, foreign-invested businesses are subject to the tough anticorruption laws of their home countries, such as the Sarbanes-Oxley Act regulating accounting for U.S. companies worldwide. This situation can make for an uncomfortable double-edged squeeze for foreign-invested startups in China.
While the importance of China’s well-known guanxi system is often exaggerated in the foreign media, our interviewees did confirm that working in hazy legal “gray zones” is a fact of life in this country (see Chapter 2). In addition, as foreign-invested startup companies, they describe a clear disadvantage in comparison with large multinationals; at least to some degree, Fortune 500 firms in China are protected against the threat of corruption by their big name, high profile, and global standards and corporate processes.
This chapter covers seven main topics:
Putting Corruption into Context
One aspect of running a business in China that all our interviewees agreed upon was that managing ethics—and guarding against corrupt business practices—is a continuous struggle. The organization Transparency International, in its 2007 annual Corruption Perceptions Index, placed China in the 73rd position among the 180 countries included in the index. (In 2006, China ranked 71st among 163 countries.)
“In Kazakhstan, corruption is even worse. In China, most of the things are under the table at least. In Kazakhstan, they are upfront, on the table.”
Phillip Branham (USA), Founder and President, B & L Group
Although some of the 40 entrepreneurs we interviewed had experienced difficulties regarding corruption, none of them had given up on their dream of operating in China. In the end, each was able to launch a successful, legally operating business in China—an achievement that several said would have been more complicated in other countries in which they had previous experience. Construction entrepreneur Phillip Branham compares China to other areas in which he operates: “In Kazakhstan, corruption is even worse. In China, most of the things are under the table at least. In Kazakhstan, they are upfront, on the table.” He adds that he has had to turn down business opportunities in Kazakhstan in order to avoid engaging in corruption—a situation he, and his company, encounters far less commonly in China.
Others among our entrepreneurs commented that China is significantly less corrupt than other emerging economies’ markets. Says furniture entrepreneur Simon Lichtenberg, “Other countries are much worse than China. In the timber industry in Thailand and Malaysia, for example, they have a list of under-the-table rates for different services. The rates are official,” he says. Lichtenberg adds that, while corruption is sometimes highly sophisticated in China—including operations via offshore accounts—and even occasionally lead to violence, “the overall system in China is improving.” Italian consultant Ruggero Jenna agrees that China isn’t at the “high” end of the corruption spectrum in the Asian region. “I don’t think China is very different from other countries. There are some countries in Southeast Asia and Africa that are much worse in this respect.”
American consultant Gene Slusiewicz agrees that corruption elsewhere in Southeast Asia is worse than in China. “A friend of mine in Indonesia got pulled over [by bribe-seeking traffic police] for ‘traffic violations’ many times, usually just before lunch or dinner and certain holidays. Ten thousand Indonesian rupiahs [US$1] was a common amount paid for ‘traffic violations,’ real or contrived,” he says.
Spanish consultant Josep Giro believes that China compares favorably with, say, India in terms of corruption. “In China, corruption is useful—you use corruption to get what you want to get. Here, you pay the customs officer and you clear the goods—I like this kind of corruption. In India, you pay bribes and do favors, but you never get your tasks done. That’s the problem.”
Cultural, Historical, and Economic “Triggers”
The first step in managing corruption in China is to understand it. Our interviewees commented that the country’s tendencies toward corruption are rooted in cultural, historical, and economic factors.
The first trigger for corruption in China is the nation’s social norms built upon guanxi. Our interviewees explained that Chinese businesspeople today continue to follow the tradition of using social contacts, or guanxi, in both private and business contexts. Also, they report a general blurring of business life and professional life in China. At best, these social norms create a warmer, more “human” business environment than is the norm in developed nations; while at worst, the system leads to corruption. Another point is that corrupt guanxi is generally being phased out of the larger, more internationalized cities that now have a tradition of attracting foreign direct investment. As exporter Oto Petroski says, operating in Shanghai or Beijing is becoming more straightforward. “[However,] once you go into the other areas [of China], you still find in power the traditional guanxi system. That means: if you know people in the village, you can do everything. If you don’t know people in the village, you cannot do anything.”
Our interviewees also commented that the lack of religious beliefs among most of the Chinese population (especially among the younger generations who have grown up since the Cultural Revolution) creates another key social—and business—difference. Indian education consultant Prakash
Menon explains how this contrasts with his home country: “The average Indian is very religious. So, when he makes a decision, the moral aspect will influence that decision. If it’s not the right thing to do morally, he will not do it.” Menon believes that religion thus contains and curbs corruption in India, while China lacks such moral guardrails.
“People everywhere want success, but in China, the thinking is: ‘It doesn’t matter how you get there—just make sure you don’t get caught.’”
Olaf Litjens (Netherlands), Founder and CEO, Unisono Fieldmarketing (Shanghai)
Consultant Josep Giro identifies a similar religious-based contrast between Chinese and Spanish social and business norms. “In Spain, because we have a Christian civilization, we believe in punishment for wrongdoing. If you do unlawful acts, you are going against God and will face the consequences. But in China, if you want to do it, you do it—so what?” In Chinese culture, Giro says, there is no tradition of spiritual punishment for moral transgressions. “The concept of committing a sin isn’t integrated into their mindset,” he says.
Dutch entrepreneur Olaf Litjens says that while businesspeople around the globe need to be aggressive in order to be successful, Chinese society tends to emphasize results over methods to a higher degree than elsewhere. “People everywhere want success, but in China, the thinking is: ‘It doesn’t matter how you get there—just make sure you don’t get caught,’” he says. “Western society looks at how you reached success, and not just at what you have achieved.”
Third, the socialist history of the country has also promoted the growth of corruption, says Giro: “To get things done under the communist regime, you had to use relationships and pay for favors.” Today, Giro says, China is “at the third stage” in its development, in which corruption is “linked to business activities, like in the West.” He says that most corruption today takes place “when somebody takes advantage of his position.”
Finally, a new trigger for corruption in China has emerged in recent years: the explosion of wealth among some sectors of the population (especially urban residents) has created a serious income gap between rich and poor. This has resulted in new frustration and temptation among the “have nots,” fostering crime and corruption. “When I first came to China in 1986, there were few thieves, but they are now growing in number,” says Josep Giro. “When the wealth of the country grows, corruption also grows—that’s human.”
Evolving Legal System
Another reason for corruption—or at least a lack of transparency—is China’s still evolving legal system. Because many of China’s business-related laws are new and vaguely worded (see Chapter 1), they are being tested and finalized, creating legal chaos.
“Part of the corruption problem can be attributed to unclear rules and regulations,” says business development entrepreneur Shah Firoozi. “It is a country where decisions are made based on interpretations, as opposed to clarity of the law. Sometimes, the way a law is interpreted by government officials is in the interest of the public, and sometimes it’s for self-serving reasons. There is a lot of room here for corruption.” For example, Firoozi finds China to be more corrupt than Brazil, where he also operates.
“Part of the corruption problem can be attributed to unclear rules and regulations. [China] is a country where decisions are made based on interpretations, as opposed to clarity of the law.... There is a lot of room here for corruption.”
Shah Firoozi (USA), Founder and President, The PAC Group
The Good Side of Guanxi
Despite the hassles—and even dangers—caused by corruption in China, our interviewees also stressed areas in which Chinese business partners, clients, or employees tend to be more loyal than their counterparts elsewhere. Once a working relationship has been established, they said, Chinese tend to show more loyalty and commitment than is standard in developed nations. In other words, if a Chinese partner, client, or customer has formed a trusting long-term relationship with a foreign invested company, the Chinese side will support the relationship through thick and thin—showing more loyalty than is standard in the West. Spanish consultant Josep Giro explains: “I have experience with both Spanish and Chinese clients. The Spanish clients will get information from us and then hire [a cheaper consulting firm]. Chinese people never do this. I have had relationships with Chinese people for over 20 years and they are still honest. Even if we don’t do business together, we still have a good relationship. In Europe, if you have ongoing business transactions, you have a relationship. If no business, no relationship.”
“The corruption in China is not nice, but the strong relationships are nice.”
Olaf Litjens (Netherlands), Founder and CEO, Unisono Fieldmarketing (Shanghai)
China veteran Olaf Litjens also emphasized the positive aspects of guanxi, both in business and social life. First, he stressed that in China, the boundaries between business and personal life are much more blurred than in the West. A certain degree of blurring—as long as it doesn’t go too far—can be practical and useful, he says. “What is corruption? If you go to the tax office and you become friends with the officials and they advise you how to do things, is that corruption? If you pay them money, that is corruption. What if you have dinner with them? Is it corruption?” In many cases, foreign companies in China end up blurring the distinctions between business and personal life, often operating just within the limits of their home country laws in terms of gift-giving, favor-swapping, or other “gray” business practices. This creates challenges for specific companies, as home country regulations vary widely from country to country. For example, U.S. law (especially under the Sarbanes-Oxley Act) is restrictive against giving or receiving gifts, which puts American-invested businesses at a competitive disadvantage in China.
Litjens adds that, after spending 24 years working and living in China, he finds the relationship-based culture—in both personal and professional life—to be more human. “I think one of the nice aspects of life in China is that relationships are important and you should take care of each other. I think it is actually quite a nice thing to take care of each other.” As an example, he points to the differences in how Western and Chinese families tend to care for their aging parents: “In the West, we have insurance and can put our parents in a nursing home when they are retired. [In comparison,] the way Chinese take care of their parents by living with them is good.” He sums up the East–west cultural difference in this way: “The corruption in China is not nice, but the strong relationships are nice.”
Government Guanxi
Learning to work effectively with the Chinese government is a significant challenge for any foreign startup—and that generally means building up positive relations (guanxi) with a host of officials at various agencies relevant to your business. The frequency and seriousness of government-related corruption experienced by our entrepreneurs varied widely, based on their industry, location, and connections in China.
At the “mild” end of the spectrum were cases such as those described by logistics entrepreneur Jeffrey Bernstein, who told of a bribe request from a government official who inspected a shipment of designer sunglasses being transported by Emerge Logistics: “There was one inspector who wanted to try on a pair of expensive sunglasses and let his friend do the same. He was bragging to us that they both have pairs of Fendi glasses at home, too. These are people who earn only about RMB800 (US$114) per month in salary, local rural inspectors. They were hinting that they should be allowed to walk out wearing our glasses,” he says. “These things happen, but less often in Shanghai than in other areas. I guess the answer is to know when to stay firm.” Did Emerge let the officials keep the sunglasses? “No,” says Bernstein.
“Once you get outside of Shanghai, the court system is really, really rotten. Some of the party figureheads at the village level and the district level are very bad. It is something that even the farmers are complaining about. I have seen terrible things.”
Simon Lichtenberg (Denmark), Founder and CEO, Trayton Group
Bernstein says that location is one reason Emerge has avoided serious issues with corruption: “The sunglasses incident is about as bad as it has gotten. Part of the reason is that I’ve been [based] in Shanghai, which is in general a cleaner place.”
Other entrepreneurs also agreed that the problem of corruption tends to be far worse in China’s second- and third-tier cities, where the legal system is less mature and businesses tend to be less familiar with international standards. “Shanghai is a little better. In other cities, corruption is still a barrier to doing business,” says Korean financial advisor Chun In Kyu.
Simon Lichtenberg agrees that corruption varies between the urban centers and rural areas. “Shanghai isn’t bad, but certainly not clean, sometimes at higher levels,” he says. He points to the 2007 arrest and 2008 sentencing of Chen Liangyu, former general secretary of the Communist Party in Shanghai, as an example of the scale of corruption in Shanghai. Lichtenberg says that corruption is more widespread in China’s small towns and rural areas, but tends to operate on a low level. “Once you get outside of Shanghai, the court system is sometimes really rotten. Some of the party figureheads at the village level or the district level are very bad. It is something that even the farmers are complaining about. I have seen terrible things.” He adds that, at the national level, China is making a serious effort to crack down on corruption as a matter of necessity and national pride, and as a way to integrate with the global community.
Consultant Gene Slusiewicz describes the urban-versus-rural variation in transparency in this way: “Shanghai is more advanced now, and business practices and lifestyle there are more like in Western countries. When you move inland, the cities are the way Shanghai was 10 or 15 years ago. Shanghai is more efficient now, while the central provinces are still a little bit slow. Today, cities like Wuhan and Chongqing are moving faster, while the smaller cities are still not following international practices—there, the mayor or the mayor’s son cuts the deal.” Slusiewicz adds that there is a “thin line” in China between being practical and expedient, and being corrupt. He gives a typically “gray” example: “What if you hire a consultant who has good connections with the government officials, who can push your case forward? You pay a little bit of money, but it’s not under the table. Probably, it is not fair, but it is not cheating—and it is not illegal.”
Sector by Sector
Corruption also varies by business sector, our interviewees said. In the stone business, for example, corruption is quite rare, says Turkish startup Onder Oztunali, founder of Globe Stone Studio. “We deal strictly with the bosses of companies,” he says. When he launched the business, he says, “We didn’t have to pay anything under the table; everything was very clear.” Compared to business norms back home in Turkey and in Thailand, Oztunali says he faces minimal corruption in China. “For some licenses, we gave some money to a third party who helped speed up the application process, but it was a very small amount. I wouldn’t actually call it corruption or bribery—just something to make them happy. For Turks, it is not a problem at all. In Turkey, it used to be pretty bad. After all, ‘bakhshish’ is another international Turkish word, like ‘Turkish coffee.”’ By comparison, Oztunali describes the level of corruption in Thailand, where he also worked for several years, as “unbelievable.”
Korean financial services entrepreneur Chun In Kyu agrees that corruption levels vary by industry, and according to the potential pay-offs to be had. “The real estate business has a lot of room for profit, so there is some corruption. As for other industries like manufacturing, corruption is much less serious.”
Corruption Levels: From Annoyance to Danger
Our interviewees experienced vastly different levels of governmentlinked corruption. At the low end of the spectrum, they described facing complicated regulations, delays, and extra expenses in China. A case in point: Oto Petroski describes a typical scenario: “There are no corruption issues for me, but I have to pay lots of ‘penalties’ in this country,” he jokes. “For example, I paid a penalty for not requesting a tax refund. I have paid maybe RMB200,000 [US$28,600] in penalties.” When he operated his initial business—a coffee bar—inspectors visited twice to measure the air quality. Both times, he was fined for poor air quality—a measure that he claims was untrue. Each time, Petroski paid an RMB1,000 (US$145) fine. A traditional Chinese-style wok-frying restaurant located directly next-door, from which clouds of greasy smoke poured throughout the cooking process, was never tested for its air quality, he says. “The inspectors never visited my neighbor; they only went to foreign restaurants. This is another kind of discrimination. The only solution is just to pay the fine.”
Others among our interviewees have experienced far more severe instances of corruption in China. In fact, Eric Rongley says he met with such serious corruption from both Chinese police and his domestic competitors that he changed his business model to sell only to offshore clients. “We stopped selling to local Chinese clients partly because domestic customers don’t pay well, but also because, in competing with local companies for local business, local companies have better government networks than we do. We found ourselves getting into difficult situations a couple of times.” (See the case study entitled “The Price of Weak Guanxi.”)
Generally, our interviewees found different types of corruption depend on the size and scope of the company. At the young, startup stage, companies can be vulnerable based on their lack of resources, clout, or guanxi. Business founder Juan Martinez explains the dilemma he faces in operating a young import/ export company in China: “Corruption is an issue. For example, we are now trying to get a new kind of import license, and the officials are hinting that they need hongbao (Chinese expression to indicate money inside a red envelope). The official keeps saying he will need to have a ‘big talk’ with his boss, and that our case is ‘complicated.’ We feel it is about the red envelopes. We are facing it right now; it exists. Maybe it is worse for us because they see us as being not very powerful.”
As the owner of a small company, Martinez describes feeling “damned if you do, damned if you don’t.” “You need to move forward and get the license to do business, and it seems that red envelopes are the only way possible,” he says. But, he warns, once a company begins paying off officials, it can slide down a slippery slope of having to pay extra “fees” constantly. “It’s very tricky. You don’t want to fall into a trap.”
Such dilemmas don’t end when companies grow in size and reputation. Software entrepreneur Eric Rongley says that when his company became more successful, new corruption issues arose. For example, when the company moved into upscale new offices in downtown Shanghai, Rongley faced extortion from the fire department in order to issue permits. “It happened because they saw us as a rich company. They thought, ‘If we cheat them out of a little money, who cares, right?”’ In the end, Rongley says, “We paid a few thousand dollars here and there and the problems went away. It kind of infuriated me at the time, but when I put it into perspective, it wasn’t a big deal.”
“[Fighting a corruption case is] like when you have a room full of cockroaches and you turn the light on and they run away. That became my strategy: turning on the light.”
Eric Rongley (USA), Founder and CEO, Bleum
At another time, however, Rongley’s company, Bleum, faced a very serious issue with local government, caused mainly (he says) by competing with a local company that had excellent government guanxi (see the preceding case study).
B2B Corruption
Another notoriously corrupt sector in China is the food-and-beverage business. “The alcohol and F&B business is a very dirty business. There is a lot of money under the table,” says trading company founder Winston Ling. He explains that many bars and most night-clubs charge “entrance fees” and “menu fees” —fees that suppliers must pay in cash without getting receipts, before selling or promoting their products in their facilities. Says Ling: “Outside Shanghai, you cannot do business if you don’t pay the entrance fee.” These fees, he says, may also be charged to suppliers of products for supermarkets or other types of retail business.
Olaf Litjens stresses that corruption in China not only harms the companies that are forced to pay kickbacks and bribes, but also destroys the normal benefits of an open market economy, where the best products and best services win the highest market share. When relations are built upon corruption, rather than market-based reasons, the result is poorer products and services from suppliers. “The problem with corruption is that it stagnates innovation” Litjens says. “If I give kickbacks—which I know some of my competitors are doing—in the short term, it is good because it protects you from that client. But it creates no drive to excel or improve in order to beat competitors. For that reason, we simply stay away from it. I want my clients to stay with me because I offer them much better quality than anyone else. It still sometimes happens, although I’m finding that, very rapidly, China is becoming much more professional.”
“Sales staff in China know thousands of ways to cheat. They are very, very innovative in finding ways of cheating,” he says. “There is a Chinese idiom that says, ‘Whatever the emperor says, the guys on the ground have 10 ways to get around it.’”
Simon Lichtenberg (Denmark), Founder and CEO, Trayton Group
Unfortunately, corruption between business partners, such as buyers and suppliers, is widespread, with many of our interviewees having had first-hand experience of it. “I could write a dictionary of cheating methods,” says 15-year China veteran Simon Lichtenberg. One example occurs when a buyer purchases, say, RMB10,000 worth of furniture and the seller issues a fapiao (invoice). “The seller has the authority to give the buyer a 3% discount, but he doesn’t tell that to the customer. The customer pays RMB10,000 [US$1,430], and the seller writes out two invoices: one for RMB10,000 for the customer and one for RMB9,700 [US$1,385] for the store records. Then he pockets the difference.” Lichtenberg says this is just one of many common forms of cheating. “Sales staff in China know thousands of ways to cheat. They are very, very innovative in finding ways of cheating,” he says. “There is a Chinese idiom that says, ‘Whatever the emperor says, the guys on the ground have 10 ways to get around it.”’
An example of borderline B2B practices is the year-end tradition in China of giving out hongbao (red envelopes containing cash) to family, friends, and business contacts during the Chinese New Year festival. “You do business with the company all year, and at the end of the year, you give red envelopes to the buyers or extra money to the supplier,” explains American consultant Gene Slusiewicz. He adds that this “gray practice” is declining in larger, more Westernized cities such as Shanghai. Another entrepreneur comments that such practices are still business as usual. “It’s a given that the supplier gives the buyer a gift [money] at the end of the year. Even if the buyer is totally honest, he or she expects a package from the supplier during the New Year holiday.”
China’s gift-giving culture presents another example of social customs seeping into the business culture to create “gray” practices. The giving of gifts may or may not be corrupt, depending upon the scope and scale of the gift. Business development startup Shah Firoozi explains: “I don’t think relationship building is necessarily corrupt, and part of relationship building is the old tradition of exchanging gifts and showing hospitality. We do no more than is normal [in China]. We get the same treatment from our customers. My customers give us gifts and invite us to social events, so it’s true relationship building and reciprocity.”
However, some of our other entrepreneurs had clearly been exposed to corruption. Taiwan-born restaurant owner Michael Yang says the hospitality and retail industries are rife with the practice of kickbacks or payment shaving: “In my business, we have vendors [in China] who send us meat and vegetables every day. Sometimes, they give us less than we ordered or products of a poorer quality, but they still ask for the same money. They give my chef some money and ask him not to tell me. So, I have to check it out myself. I have to hire buyers who I trust and who wouldn’t take kickbacks from vendors. Even with big supermarket chains, buyers always ask for something from vendors. Otherwise, they won’t put the vendors’ products on the shelves.”
Procurement Problems
One type of business that is rife with corruption is product procurement and purchasing. Our interviewees recounted many examples of their buyers being tricked, sometimes expertly, into purchasing low-quality goods.
After seven years of trading between China and Macedonia, Oto Petroski says the practice of passing off low-quality goods as high-quality products is “everyday life in China—I don’t find it happens just occasionally.” He describes having bought ceramics, such as “Italian” ceramic tubs, that initially appeared to be of a high quality, only to find that “the color disappears after three months” or they break after a few days. “They are made with a very teeny layer of [genuine] material as a cover,” he explains.
Petroski describes attending a trade fair and finding a Chinese supplier of toilets. “They had a 150-page catalog and a great website. My client saw beautiful products and wanted to order some.” As soon as Petroski placed an order, he knew that something was wrong. “The order should have been completed in 45 days, but they said they needed three months. So I knew immediately that they had never manufactured toilets before,” he says. “You learn these things only by experience, by knowing the business.”
When he visited the company, he learned even more. “When I found the supplier’s actual company, I found a house with pigs walking around the yard. In the end, a worker told us that the catalog and website showed samples that her boss had purchased in Italy. They were just waiting for an idiot to come and place an order—then they would try to make an imitation.”
On another occasion, he ordered a set of porcelain tubs. While the sample shown weighed 2.5 kilograms, the model produced by the company weighed only 0.5 kilograms. Petroski rejected it. “In the end, after we had paid a deposit, after six months, they simply said ‘Dui bu-qi’ [Sorry], we cannot produce this’,” he recalls. How can buyers avoid such situations? Petroski says the only way is, first, to know the business so well that you cannot be fooled by low-quality imitations; and second, “[to] spend time and build relationships with qualified suppliers.”
On the other side of the corrupt procurement equation are buyers seeking perks, benefits, and kickbacks. This is also extremely common, according to our interviewees. Construction businessman Phillip Branham tells of procurement officers for companies openly seeking “gifts” in return for orders placed. “For example, when we were negotiating one purchasing contract, one [procurement officer] said: ‘Why don’t you take me on a shopping trip to Hong Kong or Macau?’ That was her condition for getting the contract signed.”
One consultant interviewee agrees that China-based buyers often demand perks and benefits when negotiating with suppliers. He says his clients, especially manufacturers, are often approached for kickbacks. In a recent and typical case, a China-based company ordered product from a manufacturer on behalf of a foreign client. The company rep told the factory to add 20% to the price charged the client—an extra fee that the company planned to skim off before paying the foreign client. “It is very common, and the worst offenders are Western companies in China,” says the consultant. He adds that larger foreign manufacturers are refusing to pay these kickbacks. “They are big enough to say ‘no,’ but it’s quite tough for small companies. SME owners feel very unhappy paying these fees, but if they don’t do it, they don’t get the order.”
“When we were negotiating one purchasing contract, one [procurement officer] said: ‘Why don’t you take me on a shopping trip to Hong Kong or Macau?’ That was her condition for getting the contract signed.”
Phillip Branham (USA), Founder and President, B & L Group
Stealing Intellectual Property
China is well-known for intellectual property rights (IPR) infringement, for good reason. Another common form of corruption faced by our entrepreneurs is the stealing of IPR—or, less severe, copying of business practices and methods—often by employees within the company.
Few of our interviewees voiced confidence in protecting their business practices or IPR. Language instruction entrepreneur Ken Carroll is a typical example. He says several competitors copied various aspects of his first China-based business, a series of English-as-a-second-language schools called Kai En English Training Center. “Some schools took our website, copying literally every part of our website, and just changed the logo,” he says. Looking back, he says companies should simply expect to be copied, at least to some extent. “I think we need to have a sanguine attitude toward this. It’s going to happen,” he says. Rather than spending time trying to fight small-time competitors, especially with hard-to-prove cases such as copied websites, he and his business partners believe it is better to focus on making the product and services outshine those of their competitors.
His second China business, web-based language instruction sites, now has “tons of competitors,” but he says they lack “the technological element” offered by Praxis. Overall, Carroll considers copying from competitors an unavoidable hindrance when doing business in China, but in most cases not a serious obstacle.
“There’s little you can do [about being copied]. You don’t come to China and get upset because competitors copy you—that’s how it is. It is you who were stupid enough to come here not knowing that you might get copied.”
Jan Borgonjon (Belgium), President, InterChina Consulting
Consultant and entrepreneur Jan Borgonjon agrees that IP infringements are a fact of life in China for nearly any successful company. “There’s little you can do. Let’s put it like this: companies that come here have to accept this as part of the game, as ‘one of those things.’ You don’t come to China and get upset because competitors copy you—that’s how it is. It is you who were stupid enough to come here not knowing that you might get copied.” Borgonjon tells clients to expect to be copied, then to take measures to limit or fight against it. (See the sections on anti-corruption strategies, at the end of this chapter.)
Trayton Group founder Simon Lichtenberg has faced many instances of copying in his 15 years of operating furniture-manufacturing operations in China. “You can’t say Chinese people are not very innovative. They are, but in very specific areas,” he says. “Typically, they don’t invent new sofas, but they are very good at copying new sofas. They can improve the sofas technically, but not aesthetically. Their ability in cost engineering is top notch—they figure out how we can make the same sofa more cheaply by taking out everything inside that can possibly be removed. They are very good at that.” Lichtenberg argues that these strengths have roots in traditional Chinese culture. He points to the difference in Western versus Chinese appreciation of art. “Traditional European paintings are all different, but traditional Chinese paintings are mostly the same motifs. In China, the artistic master of any time period is the one who could create the best copy of a painting by an earlier master.” Thus, the Chinese concept of artistic excellence focuses on expertly copying the works of previous masters, making copying a revered skill.
Unethical Employees
Corruption against a company from its own employees was one of the most harmful challenges faced by the foreign business founders we interviewed.
“I insist that we use legitimate copies of software. But my employees come up to me and say, ‘Are you an idiot? Nobody does that.”
Steven Ganster (USA), Founder and Managing Director, Technomic Asia
Wendy Tai recalls the problems she faced in 1989 when she relocated her silk flower manufacturing business from her native Taiwan to Xiamen, in China’s Fujian province. “I handled the business alone in Xiamen, while my husband was still in Taiwan. One day, something weird happened: I only had enough materials to make 20% of the products as normal because some of the materials had disappeared. It was a big problem for me. I hired new women guards instead of the male ones to check female workers at the end of work. Surprisingly, that day, the missing materials showed up on the ground near the gate. The workers were scared of the guards, so they just threw away all the materials they had stolen.”
Two decades later, Tai says her company rarely faces such employee theft these days. “Nowadays, we don’t encounter such serious stealing problems. Maybe it is because people are getting richer and they don’t care about stealing small things anymore.”
But many of our other interviewees weren’t as positive about today’s environment for employee theft. At the low end of the internal corruption spectrum were instances of well-meaning Chinese employees who had cut corners for the company in order to save costs. For example, consultant Steve Ganster says many of his client companies—mainly foreign invested SMEs in China—tell of being urged by employees to avoid paying taxes. “For entrepreneurial companies, you are looked upon as stupid if you don’t take advantage of the loopholes,” he says. In fact, foreign managers who insist on following local regulations may find that their domestic employees have never followed the regulations fully before. Another common example of employee pressure concerns software. Says Ganster: “I insist that we use legitimate copies of software. But my employees come up to me and say, ‘Are you an idiot? Nobody does that.’ “In their minds, buying illegally copied software is just how everyone does things.” While domestic employees easily know where to buy pirated software, they may not know where to buy legal versions.
Another typical ethical challenge mentioned by foreign business owners in China entails suppliers and business partners offering perks and kickbacks to your employees. Entrepreneur Aviel Zilber explains: “It’s very common for a travel agency to tell your office manager, ‘If you buy plane tickets from me, I’ll give you a kickback.’ It’s unbelievably normal in China.” Zilber gives a real-life example: “When we moved from one office to another, my wife was responsible for all the relocation, design, and renovation. She got offers from each and every supplier telling her that, if she did business with them, she would get kickbacks.”
With such tempting offers available, what can an employer do? Indian education executive Prakash Menon says the main weapon for combating unethical behaviour among staff is clear, zero tolerance communication with employees. Menon gives an example: when his purchasing director recently bought 96 computers for the training center he operates, the supplier offered to deliver one extra computer to the director’s home, as a show of appreciation. “The purchasing director argued to me that the computer company got a good order, so they didn’t mind making this kind of ‘donation.’ In his mind, he was innocent. He actually told me that he got the extra computer—he never thought it was a problem. I didn’t fire him, but I explained to him that it was unethical to take such gifts.”
Menon tells of another instance of “gray” employee misconduct. “When a person travels, she stays in different hotels depending on her level and position. If she is allowed to stay in a hotel at RMB300 [US$43] per night, she might go to a RMB100-a-night [US$14] hotel but produce an invoice for RMB300, then keep the difference for her own pocket. In the Chinese mindset, if the company is willing to pay RMB300 per night, what’s wrong with keeping the difference? We have to explain to them that it is not correct behavior; that it has to do with the image of the organization. If the company pays for a business class ticket due to company image, you cannot fly economy and keep the difference. But many Chinese don’t see this as a lack of integrity.”
“The worst thing for me is if my employees cheat me. I know my suppliers will try to cheat me, but I take my employees very seriously and I treat them well. We put a lot of money into their training and education.”
Simon Lichtenberg (Denmark), Founder and CEO, Trayton Group
Our interviewees also stressed that Chinese staff are not the only group susceptible to loose ethics at work. Construction company founder Phillip Branham says the temptations to accept kickbacks impact both domestic and foreign hires, especially in the procurement field when buyers are constantly forming deals with suppliers. “When I first came to China, someone I knew of was skimming US$10,000 in cash from the company every month. He was a foreigner, an American.”
Starting a Competing Business
As the previous case indicates, one of the most damaging types of corruption our entrepreneurs face occurs when former (or even current) employees set up directly competing businesses, using the knowledge, training, and contacts gained through the original employer. Simon Lichtenberg explains the feelings of frustration and betrayal: “By far, the worst thing for me is if my employees cheat me. I know my suppliers will try to cheat me, but I take my employees very seriously and I treat them well. We put a lot of money into their training and education.”
Internal theft is even more serious in cases where valuable intellectual property (IP) is at stake. Software entrepreneur Eric Rongley faced a serious case several years ago at Bleum, when a team of employees working on a specific project hatched a plan to quit the company and take the project and the client with them to form their own company. The team members all planned to quit on the same day. “In the middle of their planning, we discovered the plot. We found out what these people were doing,” says Rongley. “We fired half of them, but we kept half on temporarily, until the project was completed. If we had fired all of them, the impact to the customer would have been significant.” This created an extremely awkward and negative environment. “I would have liked to fire them all immediately, but the customer also needed them. We fired the worst offenders first, but kept on the others—that way we worked out a transition plan with our customer.”
In another case, Bleum’s information security officer was using the company’s resources to operate his own side business. “The moment I found out, he was fired,” says Rongley. “It affected me a lot, because I counted on him as one of the people I trusted. He was a shareholder in the company, but the temptation to do his own business on the side was too much for him.”
Avoiding Government Corruption
Our interviewees offered the following advice for avoiding corruption when dealing with the Chinese bureaucratic system.
Strategy #1: Stay off the Slippery Slope
Import/export startup Juan Martinez advises new companies to try hard to avoid paying hongbao (red envelopes) and kickbacks; once you start, he says, it can be a slippery slope with no guarantee that the pay-outs will bring the results you are seeking. He explains: “The thing is, sometimes the rules in China are not so clear. You ask for the rules, and they will give you a piece of paper, but many details are not written down—details that you need to understand.” He adds that while regulations are becoming clearer over time, especially in the urban centers, “some people still try to use [the lack of clarity] to find ways and get opportunities to get extra money.” Martinez says that companies often come up against bureaucrats seeking hongbao when applying for a business license or other types of approval necessary to start or grow their business. “It is important that you don’t follow this path,” he says. “If you follow that path, you will be trapped and nobody will guarantee you anything at the end of the day.”
“In China, you need to be very careful about the personality of your key employees. Back home [in Australia], you want to hire people who are better than you—super-good at everything. Here, you have to be very careful about the personality of the people you hire, to make sure you can trust them.”
Susan Heffernan (Australia), Founder and Managing Director, Soozar
Another entrepreneur gave similar advice, warning that once a company pays the first bribe, this can lead to more and more requests. “When I was applying for my first license, my company was approached for a payment of RMB2,000 [US$286]. My first thought was to pay the money and solve the problem. But another friend always said, ‘Don’t pay—otherwise, next time the problem will be bigger and bigger.’ He fought so hard against it, and he was right. Now I realize that people never want just RMB1,000 or 2,000 [US$145–286]. When I talked to another person, they paid RMB2,000, and then RMB20,000 [US$2,860], and then RMB200,000 [US$28,580]. So, it became worse and worse.”
Meal delivery services entrepreneur Mark Secchia agrees with the “don’t start” policy. He has been able to expand Sherpa’s steadily over nine years and has launched other businesses, while following a zero tolerance policy, but he says he has lost much time and met with many frustrations along the way: “At Sherpa’s, we don’t pay [hongbao]. We haven’t paid, but we have had to spend so much time and energy discussing problems that could have been solved for a few hundred RMB.”
Avoid using under-the-table practices. Once you begin paying officials, you may end up paying “extra fees” constantly, with no guarantee of effectiveness.
Investigate which agency, and even which officials, have the authority to give you the permits you need. Involve as many agencies as possible; when regulations are vague or unclear, play one agency against another.
Strategy #2: Involve Multiple Agencies
If more than one government agency is involved in the license approval process, Juan Martinez suggests playing one agency off the other by demonstrating to one how another agency is successfully moving your case forward. “Some people have tried to ask for money, but we always try to involve some other government organizations so that they can see that we are not alone.”
Martinez also advises doing lots of due diligence to find out which government agencies, and even which officials, truly make decisions on your case. If your company is pressured into “giving gifts,” he warns: “First, make sure there is really no other way to get the license.” After all, paying a bribe is not a guarantee of success. “Remember that, even if you pay hongbao, nobody can guarantee that you will get what they have been promising. I know people who have this problem—they paid [the bribe], and then nothing happened.”
Strategy #3: Give the Government “Face”
Another way to avoid extra expectations from officials is to win them over to your side from the start. Serviced offices provider Maggie Yu gives the following advice on winning over Chinese officials, and dissuading them from misusing their positions of power against your startup: “Taiwanese attitudes are a little different from Chinese ones. When we talk, we can be very polite. That can be very impressive to Chinese government officers. They feel we are too polite, sometimes. That’s the biggest difference. You can use it here. If you are not polite to the government officers when you ask for something, they won’t want to help you, even though they can. If you are very polite and very humble, they are more willing to help you.” (Note: There are many more tips on developing the right attitude toward government officials in Chapter 1.)
Strategy #4: Hold Your Ground, Be Persistent
Eric Rongley gives another example of how to beat corruption through persistence. His software company recently applied to receive government subsidies for which it was qualified after its software products were awarded the top quality rating of Level 5. However, Rongley found himself facing “a bit of goofing around” from bureaucrats. Before Bleum could receive the subsidy, he says, “We had to make sure we gave gifts to various people. If not, they would forever have been saying, ‘First, we need to consider this, then we need to consider that.’” Even after the gifts were distributed, some officials were still dragging their heels. Rongley took direct action. “What finally made them pay [the subsidy] was that we had a press conference to announce that we had been awarded Level 5. We brought in the government officials and had pictures taken with them, holding our certificate. Then there wasn’t really any plausible way for them to deny us the funding. So, they paid us.”
Even though the process was frustrating, Rongley credits China for offering the subsidies to foreign invested companies in the first place. “There aren’t many countries in the world where a foreigner is treated almost equally with the local people. In India, we weren’t treated equally. In countries in Africa, and even in Europe, I don’t know. So, I can congratulate China on that.”
A humble and respectful attitude toward officials can be the best strategy for getting things done.
Strategy #5: Raise a Fuss
Several of our interviewees stressed that, if you or your company end up paying a fine or fees to a government entity, the fees often can be negotiated or bargained down. Import/export company founder Oto Petroski explains: “The funniest thing here is that when you get a penalty, you can go to the government and bargain over the fee. When I show my face, increase the volume of my voice and shout a little bit, a penalty of RMB100,000 [US$14,300] becomes RMB20,000 [US$2,860]. This shows that there is no law, in the way that we understand the law. It is just a game.”
If you are sure you are in the right, defend your case by making as much noise as possible. Use your guanxi, use the media, and bring the case out into the open.
Another case involved furniture entrepreneur Simon Lichtenberg. In the mid-2000s, it wasn’t easy for him to find high-quality leather for his sofa factory. So, in 2004, when he found a qualified supplier in the town of Leshan, Sichuan province, Lichtenberg bought RMB37 million [US$5.3 million] worth of leather from him. However, RMB3 million [US$428,600] worth of the leather was of very low quality, so Lichtenberg withheld payment of that amount and returned that part of the merchandise.
He then heard nothing of the incident until, one day, two judges and two judicial police from Sichuan appeared in his Shanghai office with an order to freeze RMB3 million from his bank account and RMB4.2 million [US$600,000] of company assets. The four people had traveled more than 2,000 kilometers just to issue Lichtenberg with the order. The owner of the leather factory had managed to use his guanxi to present a claim in a local court where he could control the judge, and had paid for the travel, hotel, and more. “What can a foreign business owner do in that situation?” Lichtenberg asks. “He closed my bank accounts and wanted to take assets worth RMB7 million [US$1 million]. He thought by doing that, he could force me to pay, even though I was in the right and not liable to pay anything.”
When you are confronted with dirty methods and corrupt courts, you have to fight back the same way, Lichtenberg believes. He decided to make as much noise as possible through as many of his own connections as possible. “I used a high-ranking military officer, the Danish Embassy, the party secretary of Sichuan province, and a High Court official, a very good friend of mine—four big potatoes putting tons of pressure on this Sichuan leather supplier. He thought it would be easy to get a stupid foreigner to pay up, but he came to the wrong foreigner.” What happened in the end? Lichtenberg won. “The leather supplier ended up paying me RMB800,000 [US$114,300] in compensation.”
Lichtenberg stresses that his experience cannot be extrapolated to the whole of China. “This case is a very good example of what happens in Western China, which is far behind Shanghai.”
Assess upfront whether corruption is a big factor in the sector and region where you plan to launch your business in China; then decide whether you should really launch.
Blocking B2B Corruption
A different set of strategies should be used to avoid business-to-business corruption than is appropriate when dealing with the government, our interviewees stressed. For one thing, entrepreneurs can freely choose their business partners, suppliers, vendors, and even customers. Here are some other key strategies shared with China Entrepreneur.
Strategy #1: Pick Battles You Can Win
Six-year China veteran consultant Steven Ganster first advises clients launching in the China market to research their market, and pick sectors in which it is feasible to operate with minimal corruption. “My advice is to be aware of where corruption is and what options exist to deal with it. Does it mean you really can’t do business here? Understand the situation going in, so that you don’t get blindsided here. Structure yourself so you are insulated from, or just don’t participate in, certain markets,” he says.
Ganster advises his clients that some sectors may not be worth the effort. “Besides having the right kind of people and the right governance—the more traditional things—you also need to assess upfront whether corruption is a big factor for your business here [in China]. If it is, you need to ask, ‘Should we even be here?”’ Ganster stresses: “There’s a lot of paranoia among American companies. Since the passage of the Sarbanes Oxley Act, they are pretty religious about playing it safe.”
Strategy #2: Play the “Foreign Card”
One method of staying away from corruption is simply to play the “foreign card” —explaining clearly and often that your firm must abide by home-country rules and regulations. This will likely cost your company some business and will slow your growth prospects, but it is often worthwhile in the long run. Rules such as Sarbanes Oxley are becoming known and understood in China, and can be recognized by Chinese as reasons why foreign companies must not engage in under-the-table deals.
When possible, use anti-corruption legislation from your own country to support your position. Chinese businesses are beginning to understand the need for foreign businesspeople to abide by their home-country legislation.
Strategy #3: Cut out the Corrupt Middleman
Facing “pervasive” corruption in procurement operations for his newly opened Shanghai-based construction company, B & L Group founder Phillip Branham explains why he has decided not to use the method of choice for many foreign firms: hiring a consultant to act as go-between. Using a middleman often results in engaging in bribery and kickbacks along the supply chain, says Branham. “A lot of [foreign] companies have hired consultants. The consultants get paid and then arrange the necessary hongbao and kickbacks. The company doesn’t even know how the things get done, because the consultants handle it.”
“A lot of [foreign] companies have hired consultants. The consultants get paid and then arrange the necessary hongbao and kickbacks. The company doesn’t even know how the things get done, because the consultants handle it.”
Phillip Branham (USA), Founder and President, B & L Group
But Branham advises against this, saying he took a tough stand against paying under the table after launching his company. With a concerted effort, he says foreign companies can use their foreignness to avoid paying out. “When I hire procurement people, I let them know that taking bribes isn’t acceptable. I tell the vendors that if I even suspect that anything is happening, I will stop it.”
Branham requires suppliers to sign a document stating that if any corruption issues are exposed, the agreement with the vendor will be terminated. “I explain this company policy to the vendors in front of my employees. I explain that the vendor shouldn’t pay anybody in the company for the contract. If they do pay for the contract, I tell them I will both fire the employee and cancel my contract with the vendor.” Asked whether this method will work in China, Branham says: “Even this kind of effort cannot get rid of 100% of corruption; it’s pretty pervasive.”
Make it clear upfront that corruption practices aren’t accepted in your company. Explain to your suppliers that any attempt at corruption will result in cancelation of your contract with them.
Another Western business owner agrees, advising large companies setting up in China to avoid going through middlemen as much as possible. During his time in China, he has found that clients who rely on service companies often end up paying more, because the middleman skims off any discounts offered to the client.
Strategy #4: Create Internal Control Systems
Furniture manufacturer Simon Lichtenberg gives a first-hand account of how internal cheating works in a manufacturing company. “You buy 100 rolls of fabric, for example, and your purchasing guy takes 20 rolls and drives only 80 rolls to the warehouse. The guy at the warehouse writes down ‘100 rolls’, and he splits [the 20 rolls] with the purchaser. This is a real story.” Another scam involves the quality control controller accepting sub-par products. “The supplier says, ‘If you let it go, I will give you something.”’
To fight such practices, Lichtenberg recommends setting up “control systems.” First, his company has established an Internal Audit Department. Second, he has separated the sourcing and buying functions in his company. “The Sourcing Department finds the suppliers and fixes the price, and the Purchasing Department handles the actual buying—two completely different people in two different departments, to some extent competing, and keeping an eye on each other. We have also split the authority over Quality Control and Warehousing at a high level,” Lichtenberg says. “If you really want to cheat, you need to convince Sourcing, Purchasing, Warehousing, and Quality Control. Without linking those four together, you can’t do anything.” Finally, another effective safeguard, he says, is job rotation—moving people to new positions before they can develop the guanxi necessary to begin cheating.
“When I hire procurement people, I let them know that taking bribes isn’t acceptable.... I explain this company policy to the vendors in front of my employees. If they do pay for the contract, I will both fire the employee and cancel my contract with the vendor.”
Phillip Branham (USA), Founder and President, B & L Group
A strategy that Lichtenberg warns must be used with caution is anonymous internal reporting systems, where employees can write a letter denouncing misbehavior among their fellow employees. “The problem with this system is that it sometimes gets misused. You sometimes get fake stories. So, if you use this system, you have to punish fake stories as well as punish the perpetrators in the real stories.”
Strategy #5: Dissuade the IPR Pirates
While IPR infringement is a fact of life for many business operators in China, our entrepreneurs offered battle-tested advice for surviving in this environment. One piece of advice to consider from the start: make your product less of a target for IP pirates by not pricing your goods too far above market rates. The wider your profit margin, the more likely that your product will be targeted by pirates. In fact, consultant Nicolas Musy suggests to some clients that, to avoid becoming a target of IP pirates, they reduce their profit margin in China a little. “For example, machinery made in Switzerland is very expensive. If you copy it here, you might cut the price to one-third or one-fourth, especially when you can get rid of some features that aren’t needed here. If you make it here, compared to importing it, it’s much cheaper. But if the foreign company comes to China and sells its equipment at a reasonable price, there is much less chance that a Chinese company will start copying it because the margin is much less. If the Chinese counterfeiters can only sell their products for half of your price instead of one-fifth, then they are less of a threat to you.”
Put internal control systems in place to halt corruption. Divide tasks among different departments such as Sourcing, Purchasing, and Quality Control.
Fighting Internal Corruption
Fighting corruption among your own employees is often the most difficult task, but not doing so can have the most devastating results for a startup. Our interviewees discussed how to dissuade and detect corruption among the employee ranks.
Strategy #1: Run a Tight Ship
At the most basic level, our entrepreneurs advised treating all employees—including the entry-level staff—strictly but fairly. Says Mark Pummell, “We are careful in small details, such as the way we manage our ayi [cleaning personnel] and the guards who lock up at night. I think it’s about how we relate to people. They can make our life easy or very difficult. The security guards at night, for example; if they like you, they keep your place very safe. If not, they might loosen your locks. It happens.”
For high value-added products, it may pay to adjust your margins in China. Counterfeiters will find it less tempting to copy you when the margins aren’t so attractive.
At Sherpa’s food delivery service, founder Mark Secchia says he controls employee corruption and theft by first establishing clear accounting systems and making it clear that any theft—of food or money—will be detected. “I will find out, at the end of the month, if a courier or the call center operators give some food for free or keep the money. In the database, I know who the courier for that order was and who the call center operator was—so I don’t worry about these little things. It’s self-regulating.”
If something seems fishy, it probably is fishy. Don’t hesitate to investigate. Your employees expect and accept “snooping around” from the boss.
Logistics entrepreneur Jeffrey Bernstein stresses that fighting internal corruption must be made a regular part of business operations in China. “Staff training in ethics cannot be accomplished in a once-a-year annual training session, which some MNCs do in China, and then just check off the box. Fighting corrupt practices is the full-time job of the manager. He or she needs to be thinking about it every day, finding opportunities to talk to the staff about the right and wrong things to do, really leading by example. There is no alternative to being very involved. Not micro-managing, but having ethics at the forefront of your mind.” Bernstein also warns foreign managers in China that, if something smells a little fishy, chances are high that it is fishy. He urges managers to investigate if any situation seems unusual. “Even though some staff might chafe when the manager ‘snoops,’ it is more accepted here because people know how big the problem of integrity is. The Chinese are very entrepreneurial, so they empathize with the boss in such a situation. If they were running the company, many of your staff members would investigate and snoop around.”
Strategy #2: Protect IPR against Insiders
Consultant Jan Borgonjon tells client companies that they can expect to lose technology through former employees to a certain extent. “Of course, you can try to limit the impact. First, you need to pay attention to the people you employ; then you have legal means; and finally, you could decide not to bring some new technology to China as a way to safeguard it. If there is some really key technology, don’t transfer it to China. China might not be ready yet.”
To minimize IP risks, compartmentalize your technology and limit clients’ and employees’ access to it. In addition, put legal protections in place.
Another alternative is to “compartmentalize your technology,” by limiting access to it among your employees or clients. Borgonjon admits, however, that this method isn’t always feasible. “We know companies [in China] where there are no hard drives, no disks, and no USB ports on the computers; every piece of information that goes in and out has to be certified. You can have that kind of control.”
Fellow consultant Nicolas Musy agrees: “This is the case for those areas where you may not have patents. A lot of people copy. If you don’t have a patent for machinery, then there’s nothing wrong with the copy, legally speaking. If you have a patent, you can actually act. In general, if you do things right, and you make sure to have certain precautions when you come to operate here, I think it’s better to come to China than to stay at home. It’s more risky not to come. You can always keep your key elements in Europe so that nobody in the China operation knows how to make it.” Musy also recommends not sharing all aspects of key technology with any single staffer. “You can split that knowledge through the different functions of the company. Unless the whole group is going to leave, or the whole management team is going to leave, they are not able to build a new company. Usually, when you are making technology-intensive products, the required capital is high. It’s capital intensive, so it’s difficult for them as well.”
Consultant Ruggero Jenna offers this advice: “Instead of focusing on bringing people to court [for IPR infringement], or getting the patent registration, IPR strategy should be based on planning what technology should be transferred here. Every product has core parts, the most advanced features; while other things are less crucial. So, if you want to produce something here, you can ship the core parts from your own country. You see it in many cases like the chip in the computer, or the engine in the car. It’s impossible for the people to copy it from here. We can give this advice to our clients.”
“If you hire a new person and that person used under-the-table methods in his previous job, he will assume that he can do it again. This is something that needs to be managed carefully.”
Kobus van der Wath (South Africa), Founder and group Managing Director, The Beijing Axis
Strategy #3: Hire Young, Train Well
One challenge when hiring seasoned employees is that, the more experience they have, the greater the chance that they have learned unethical practices at their previous jobs. South African consultant Kobus van der Wath describes the pressures inherent in B2B transactions in China: “In business-to-business, whether you can win a deal or not depends on what you are willing to do—your willingness to compete by using under-the-table methods. You need to have a clear policy on that. If you hire a new person and that person used under-the-table methods in his previous job, he will assume that he can do it again. This is something that needs to be managed carefully.” Brazilian entrepreneur Winston Ling agrees: “I decided not to hire older people; only young and inexperienced people. If you teach them from the beginning and you are consistent, they will do the ethical thing.”
Consultant Jan Borgonjon stresses the importance of screening employees before hiring—not only for skills, but for the right ethics. “Any applicant who is going to have any level of responsibility in the company must go through roughly 10 interviews with me and other people in the firm. We have many people to judge the applicant. We select 50% based on personality—we look for a combination of honesty, integrity, and aggressiveness. It’s not easy to find all these elements together in one person.” He also stresses the need to check references and call previous employers—practices that are now catching on in China.
When you hire, don’t assume that good English skills in a Chinese manager will translate into Western-standard ethics.
One warning: Good English skills don’t necessarily mean a good understanding of Western values or ethics, says Bernstein. “There are so many organizations, especially large ones, that will hire a U.S.-educated Chinese manager and assume that, because he speaks English well, he has good American-style ethics. But when that manager returns to China, he might not act in ethical ways.”
Conclusion
In this chapter, we have covered corruption and ethics at three levels: government, business-to-business, and internal employees. The gravity of corruption in China varies depending upon the nature of the business activity, some activities being more affected by corruption than others. Geographical location is another factor affecting the level of corruption; bigger cities and those on the coast are closer to international levels, while small cities and interior areas are more corrupt. A special problem is corrupt practices between companies and by unethical employees. These factors need to be considered when doing business in China. However, our entrepreneurs advised that they weren’t deterred by corruption from starting their business or operating successfully in China. One key message is that while giving in and participating in corrupt practices can provide short-term advantages, once a company starts down the path of giving kickbacks and bribes, it is very difficult to stop such practices later. It is better to play the “foreign card” (claiming that under-the-table dealings are not allowed in your home country), and to grow slowly but ethically.