China Bribery Scandals: Of Witch-hunts and Warlocks

Is it a witch-hunt if the people implicated were really practicing witchcraft?

CS-logo-print-2.pngIt’s getting hard to keep up with the growing list of Western and MNC firms implicated in Beijing’s anti-corruption campaign.  Drug companies have been the prime suspect, but baby formula and luxury autos have also been implicated.

Western observers are sensitive to any indication that the business environment is shifting against foreigners in China – and we have good reasons to be watchful.  But if the companies in question are actually guilty of bribery and market manipulation then claims of a xenophobic witch-hunt are completely baseless

If everybody else jumps off a cliff…

The latest Western MNC implicated in a Chinese bribery scandal is Danone,  whose Dumex baby formula subsidiary is accused of bribing staff and doctors at a hospital maternity ward to make sure that the first thing a newborn tasted was their baby formula.  The supposition was that these Dumex Babies would develop a taste for the stuff — or that the doting parents (and grandparents) would accept the hospital’s use as a seal of approval and quality – and become habitual users.

As details emerge it gets harder to believe that Western companies are the victims here — either of xenophobic prosecutors or of a few rogue salesmen buried deep within the company hierarchy.  The schemes being described are complex, far-reaching, and require a great deal of planning and coordination.   What’s even worse is that industry insiders are quietly saying that these same companies employ the same practices in the US and Europe – but that authorities here don’t or won’t do anything about it.

Marketing Strategy – Not Rogue Salesmen

The Chinese charges are not about  a salesman sending a working-girl up to a buyer’s hotel room at a conference or passing a red envelop under the table at lunch.  The scandals being described are strategic- they are designed to change buying and pricing behavior over the entire market.  Some of the schemes described involve millions of dollars and creation of new departments to coordinate and facilitate payments.

MNCs weren’t dupes – they were driving this kind of behavior.  Western companies knowingly used Chinese personnel and the worst of local methods to alter price levels and dominate the market in sensitive areas that would have a direct negative impact on regular Chinese consumers.  The companies involved went out of their way to find, hire, retain and promote local salesmen, marketers and managers with the express purpose of buying influence and making bribes.   Chinese consultants, lawyers and executive search firms made “guanxi” their main product, and senior MNC decision-makers knew exactly what they were buying.

But Everyone Else Was Doing It

Everyone else in China was doing the same thing, it’s true – but that’s not a particularly effective defense.

  • It’s a confession, not a justification
  • Plenty of locals are getting caught too – and they get a bullet in the brain
  • Westerners seem determined to distort normal market forces and manipulate price levels (which puts them in direct competition with the party)
  • If the Chinese government is serious about reducing corruption, it has to include foreigners – and MNC execs had to know this.

Bad Business as Usual

One of the reasons this isn’t raising too many eyebrows in the West is that MNC decision-makers are serial offenders in China.  Every few years there is a new scandal.  In the 2000s it was child labor at sub-contractors (running shoes), and then it was dangerous products (lead paint in toys, toxic pet food) then dangerous factory working conditions (cell phones).  Today’s bribery/price fixing scandal fits in with the pattern of predatory business practices – justified with weak claims of ignorance and cultural barriers.

The Power of Positive Thinking

Calling out MNCs for bad Chinese business practices isn’t naïve or unrealistic.  It’s true that western companies face an un-level playing field in China, and that these government –sponsored scandals weaken foreign presence in strategic Chinese markets.  Defenders of the MNCs will claim that this is the only way to do business in China – but Big Pharma and the baby formula companies are running successful campaigns to dominate and distort Chinese markets (just as they seem to have done in the US and Europe).  The drug and formula cartels have made themselves – and by extension all international business – easy targets.

MNCs need better decision-making at the top of their China operation, and better training in HQ to understand what is happening on the ground.  Bribery scandals are not “black swan” events – they are the result of strategic miscalculation and poor internal communication.  Western companies must stick to the moral high-ground in China as a matter of basic risk management – not high minded ethics.

You can’t complain about a witch-hunt if you knowingly hire Warlocks to run your marketing department.

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