Business Risks in China
Tanya Crossman
I recently stumbled onto Thunder Post - there are some good posts on international business and I’ll take some more time to have a look around later. Right now I want to bring to your attention a post from November – an interview with Neal Beatty, Regional Director (Global Client Services) with the company Control Risks.
Overall some good and solid advice; worth reading through the whole piece if you want a more detailed advice on business risks in China (read it here).
I enjoyed the way Neal pointed to a common sense, middle-road philosophy to risk in China. To treat China as the same as everywhere else is no worse than to think China is totally different to everywhere else. Some things hold true in every market; some differences have a huge effect on business.
Everyone’s read the books on “doing business in China” and that’s a great start for people new to the country. But that’s just scratching the surface, and often seems to lead managers to over-emphasize or over-simplify a few features of operating environment… There’s also a tendency even these days to get carried away with the “China is different” concept, and lose sight of commercial and risk-management principles and processes the company applies elsewhere. China is different in many ways and understanding the differences is vital, but that doesn’t mean there’s some mysterious formula here that only a few people understand – like everywhere else, you need a well-informed, comprehensive and rigorously planned out approach to managing risk, not silver bullets.
Neal was asked about risks common to business in China. Lots has been said about the risks associated with corruption and IP, but I was pleased to see Neal highlight risks in the supply chain and HR. Knowing where all the pieces are coming from is important – it can be difficult to control the supply chain in a place where subcontracting is extremely common. As for HR, it is important to be very clear on what labor laws require – there can be local requirements separate to national regulations. Hiring foreign staff also requires a lot of precision, including which companies can legally hire a resident alien and sponsor their work permit and visa.
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… 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.
Neal has touched on something very important here – the importance of senior management in making this part of company culture. The topic of corruption is raised in most Imports Oriental job interviews. We talk to shortlisted candidates about the value we place on honesty and integrity, including when it comes to bribes and other ways to curry favor. Employees sent to visit suppliers on site or at a trade show are given a clear policy on what they can/cannot accept from the supplier, services they are not permitted to provide, etc. These conversations can be uncomfortable, but are part of clarifying where the line in the sand is. For example, is it okay for the supplier to buy lunch for our staff in a nice restaurant? What should our staff not do with a potential supplier, even when done in order to build up a relationship? Laying down the answers to these questions, and the reason behind the choices, BEFORE someone is in the situation makes it clear what our company’s policies and expectations are.
I don’t believe Chinese people are any different in terms of morals or bad behavior than someone from Northern Ireland. But in China, there are cultural norms that sometimes conflict with the corporate expectations. For example, the concept of a conflict of interest is not understood in the same way as in the EU /US. To many Chinese people it seems perfectly reasonable to consider engaging a supplier owned by a family member or old school classmate. After all, I trust these people far more than some random supplier that approaches me at a trade fair.
A good example of the difference between a moral issue and a cultural issue. What may seem a clear-cut case of business ethics in the US or Europe may not be seen the same way in China.
Where these three areas (political v cultural v commercial) often overlap is when doing business away from the big Tier One cities. Generally speaking, the influence of local politics on local business is more unrestrained away from the biggest cities. This can pose its own set of unique risks that can only be mitigated by a very thorough due diligence process prior to forming a business relationship in that location.
Another reason to do your research ahead of time – even if you’ve been in China for a while, a new location may have different hoops to jump through.
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.
I like that – it’s about mitigating operational risk through knowledge. Know the potential for problems, and know your current risk exposure.
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