Excellent post by Rich Brubaker of the All Roads Lead to China blog on his discussion with Neal Beatty entitled, “Identifying, Measuring, and Taking Action on the Risks of China.” It is the kind of post every company doing business in or even with China should read.
The post sets out an amazingly comprehensive (yet blissfully concise) list of risks businesses face in China:
- Compliance & integrity issues: internal fraud (kickbacks and conflicts of interest are most common)
- Corruption & Graft: recognized by the government in Beijing as a serious issue in China. And now an increasingly serious issue in the US and UK with the growing impact of anti-corruption laws.
- IP issues – counterfeiting, internal theft of critical information, and the protection of your trade secrets are major issues
- Business partners: Who really is your prospective JV partner? How did they accumulate their wealth? Does your partner or key staff have undeclared family or business connections to a competitor or supplier?
- Political and regulatory risks – this is largely more of a strategic, ‘big picture’ issue, but companies who lose touch with the prevailing political pressures affecting their industry can find themselves exposed to problems or shifts that they weren’t expecting.
- Supply Chain risks – lack of transparency and controls along the chain
- Natural Disasters – typhoon, flood, earthquake
- Business disputes – the concept of “illegal detention” by business partners as a means to settle a dispute over payments due; threats by disgruntled former employees.
- Restructuring & labour disputes – closing a factory, or dealing with the disgruntled employee who seeks revenge on a manager
- HR risks – associated with the new HR law and the complexity of hiring & firing staff.
It goes on to note, absolutely correctly, that the extent of each of these risks varies with the companies. I did a post, entitled, “China’s Lack Of IP Protection: Overrated. Overrated,” and an article in the Conference Board Review, entitled, “In China, Piracy is no Excuse,” on how foreign companies are sometimes overly hamstrung by piracy and the lack of IP protection in China.
I particularly like the post’s no-nonsense approach to law-skirting:
One of the most serious potential risks to any business in China is the tacit acceptance of the “This is China” approach to business ethics and compliance issues. “We can’t do business without paying the occasional bribe to win contracts” or “it’s OK to allow employees to take a few kickbacks from suppliers – that’s how business is done here”. I’ve heard similar sentiments from managers in China and I worry that they are leaving themselves exposed to more serious issues further down the line. By condoning “low level” corruption within the organization, there is a serious risk of it getting out of control and in the worst case putting the entire operation in jeopardy. A zero tolerance approach is certainly not easy, and requires time, effort and budget, but I would say it is the best way to operate in China, just as in other parts of the world. And it is essential that senior management lay down the law and set out the company culture towards such issues from the very start.
I am often criticized for emphasizing (or over-emphasizing) the risks of not complying with China’s laws. Those who criticize me are usually violating one or more laws and their “evidence” is that “so and so has been doing the same thing for five years without any problems.” All I know is that in my experience (which consists of having represented and/or spoken with thousands of companies doing business in China), nearly all foreign companies with unresolvable legal problems in China have those problems not because the Chinese government or Chinese laws are “crazy,” but because they either ignored or clearly violated Chinese law.
Note how I use the word “clearly.” I do so because so many times when foreign companies assert that their problems are due to a lack of clarity in Chinese laws, that simply is not the case. Way more often than not, when foreign companies find themselves on the wrong side of Chinese laws, it is because they either willfully chose to ignore the laws or because they chose to search out an English language explanation (usually not by a lawyer) to justify what they sought to do. For more on this, check out “China’s Business Laws. Ignore Them At Your Peril.“
The All Roads post nicely notes the role of lawyers in helping to understand and mitigate a company’s China risk:
If you are new to China, whether sourcing, selling or manufacturing, the first step needs to be to ask for advice. But who to ask? Lawyers are a necessity, but as I have seen from my own experience, they do not always give you the full picture of the risks your operation may face. So the biggest risk is actually not actively assessing and properly planning for the risks! Many firms still don’t really do this until something goes wrong.
I completely agree. Lawyers cannot give the full picture or the risks your company may face in China because no lawyer can ever know your company as well as you do, no lawyer is ever going to be positioned to see the day to day matters with which your company has to deal, and, most importantly, most of the risks your company is going to face in China are not going to be related to the law.
So how then can your company operate risk free in China? Well of course it cannot:
I don’t think any company can run “risk free”, no matter what sector or what size of operation. From the largest MNC with multiple manufacturing and distribution facilities around China, to the “one-man-band” sourcing operation, everyone will face risks.
Moreover, you can never reduce risk to zero. No matter how good your risk management program, there will always be someone who does something without considering the possible outcomes and impacts thoroughly, or simply faces a problem that couldn’t be anticipated or couldn’t be prevented. And thus you need to be able to react appropriately and have contingencies in place. But a good awareness of the risks from the very beginning, along with regular (twice a year) reviews of your level of risk exposure, will go a long way to mitigating many of your operational risks.
What are your business risks in China? How do you quantify them? How do you deal with them?
