Many years ago, I had a long-time client call me to ask for my assistance on an Iraq deal he would be doing. This was not long after the fall of Saddam. I told him I wanted no part of it and that I thought he was crazy to be planning to go there. I strongly suggested he would be better off staying alive for his children than making a few more million dollars. He was initially irritated with me but called me back a couple of weeks later to tell me I had been right and he was done with Iraq. I swear it was only days later that I learned of American businessperson Jeffrey Ake (who I had heard speak in Seattle only weeks earlier) go missing in Iraq. Mr. Ake remains missing. Mr. Ake has four children.
The greater the risk, the greater the money. But the greater the risk, the greater the risk.
I thought of my client and of Mr. Ake this morning when I read a bunch of articles that readers have sent me regarding Glaxo’s recent troubles regarding bribery accusations in China. Most (all?) of the readers sent me the articles along with a comment along the lines of how China is cracking down on bribery by foreign companies in the pharmaceutical industry even though “everyone knows” bribery is rampant throughout that industry in China. The general theme being that China is focusing on foreign bribery and ignoring domestic bribery so as to tilt the playing field more towards China’s own pharmaceutical companies.
I say “yeah so” because I do not care why China is right now doing what they are doing with respect to pharmaceutical bribery. My reasons for not caring are two-fold. One, I have no idea whether tilting the playing field is the reason or not. As I have been pointing out pretty much since we started this blog, going after foreign companies in China is simply good politics. It always has been and it always will be. Read Machiavelli. Read Sun Tzu. Read Animal Farm. Read 1984. Look at what pretty much every country in the world does.
And two, going after foreigners virtually always picks up during economic slowdowns, for what I generally believe are political reasons.
About a year ago, I wrote a piece for the Wall Street Journal discussing the impact China’s slowing economy is having on American businesses that do business with China and how they should respond to that. The article is entitled, “China’s Slowdown and American Business” in the US Edition and “China’s Slowdown and You” in the Asian edition, and if you want to read the whole article, you should Google either title and “Dan Harris” and then click the leading link and the full article will appear.
In the article, I asserted, among other things, the following on doing business in China during a slowdown:
- The Chinese government “is much more concerned with social harmony than with economic numbers” and that is why it is continuing to encourage wage growth even though higher wages make China’s factories less competitive.
- China’s prioritization of its citizens’ contentment means that China is going to get tougher on foreigners, just as it (and nearly every other country) has always done when times are tough. Everything foreign businesses do will be under heightened scrutiny.
- The key to weathering China’s slowdown will be for foreign companies to go back to basics: think afresh about what a company contributes to China’s economy and how that is likely to shape policy makers’ opinions; focus on scrupulous regulatory compliance; and renew focus on due diligence at a company-to-company level.
Way back in 2006, in a post entitled, URGENT ALERT: Register Your Company In China NOW, we issued our first “urgent alert,” noting a crackdown on unregistered companies doing business in China and stressing how foreign companies are never going to be treated like domestic companies:
Long ago, when I was a young lawyer, I wrote an article entitled, “Four Essential Principles of Emerging Market Success,” positing that a failure to abide by the law in the country in which you do business is the surest way to lose your business without any basis for complaint:
In many emerging market countries, local businesses take advantage of corruption to avoid complying with laws. This may work for the locals, but it won’t work for you. The easiest way for a local rival to drive you out is for you to do something illegal. Neither you nor your government will have good grounds to complain if your rival gets your business closed down due to your illegal activity. It might even be your own partner who reports you so he can assume full ownership and control of your business.
The strength of my views on this has only increased as my firm has been contacted far too many times by companies driven out of countries for having engaged in illegal conduct no different from thousands of other foreign companies in the same country. These companies assume they have legal redress, but in reality they almost never do. So long as the law of the country in which the company was operating allows for closures and/or penalties (and in every such situation my firm has encountered, it has), the company is essentially out of luck.
There was a time where most foreign business was illegal in China, particularly as a Wholly Foreign Owned Enterprise (WFOE). Those days are pretty much over now and the Chinese government knows it. If you came into China as a representative office (rep office) back when that was the only way, and your “registered office” is engaged in business activities that are improper for such an office, the time is now to get that right also.
If your local people in China are telling you this is not how Chinese business is conducted, you need to remind them you are not Chinese and the government will treat you differently. Also remember that your employee’s knowledge that you operating illegally in China gives them tremendous leverage.
Then in 2007, I wrote of this same disparate treatment issue back in the context of China’s environmental laws, in a post entitled, “China Warns Foreign Companies On Pollution“:
China has always and will always (at least for the foreseeable future) enforce its laws more strictly against foreign companies than against domestic companies. I am constantly writing about this not to complain about it, but simply to point out the reality. Just because your Chinese domestic competitors are getting away with something does not in any way mean you will be allowed to do so.
Beijing is also now at the stage where it is pretty much neutral about all but the largest foreign companies remaining in China. I am not saying it is neutral about foreign direct investment (FDI) in general, but I am saying that it really could not care less about whether your individual business stays in China or goes. And if your business is a polluter, it actually would probably rather see you leave.
Lastly, going after foreign companies is politically popular.
I ended that post with the following:
Bottom Line: Obey the law, particularly the environmental laws. It is good business.
Similarly, in China Fines Unilever For Mentioning Price Increase. What That Means For YOU, we noted how foreign companies doing business in China cannot expect to be treated like Chinese domestic companies:
As long time readers of this blog know, one of our consistent themes has always been that foreign companies in China should not expect to be treated the same as Chinese domestic companies, no matter what the laws may say. The reality (not just in China) is that it is usually good politics to go after foreign companies and it is usually bad politics to go after domestic companies. The reality also is that when a large number of citizens have a particular problem, it is very good politics for the government to show that it is trying to solve it.
So I assume that you are by now wondering how going or not going to Iraq is linked to Glaxo’s bribery problems and to China’s unequal treatment of foreigners. Here goes.
Many of us (I intentionally say us because I myself clearly fit into this category) are competitive and goal oriented. We love winning and we hate losing. And we pursue winning with intensity, sometimes to the point of blindness. My client who ended up not going to Iraq? This is a guy who has made tens of millions of dollars around the world in businesses so diverse as to be almost laughable. This is also a guy who works 16 hours a day and who discusses business 99% of the time during lunch. This is a guy who was so focused on the new big deal in a new and unchartered place that it had simply never even occurred to him that he would be risking his life and that maybe doing so would just not be worth it. Only after I pointed this out to him did such thinking even enter his head.
I bring all of this up because at least a few times a year I have to tell someone that what they are doing in China is illegal as in go to jail illegal. Much of the time what we are discussing is a plan to hire someone in China who is “really connected” and paying that person enough for them to exert their influence. Sometimes, it is even more simple. The company wants to pay someone a lump sum to assure business. I always instruct them not to do what they are proposing and I emphasize that people go to jail for such things. I then ask them if it is really worth the risk of five years in a Chinese jail for the potential of making x dollars — usually not all that high a number. About 80% of the time, the person on the other end of the phone pauses and then says that they hadn’t looked at it like this and, no, it’s not worth it. About 20% of the time I am given the brushoff or flat out told that I do not understand their market.
Bribery in China? Is it worth it? Am I the only one who would like to ask this question five years from now of the Glaxo people currently facing bribery charges in China?