My friend Kent Kedl co-wrote an article for the Moscow Times today, entitled, Why Russia Is Just as Good as China.  In that article, Kent (who knows China as well as anyone) tries to argue that businesses should be just as interested in Russia as they are in China and that corruption in Russia is no better or worse than corruption in China:

For some reason, investors find Russian corruption harder to metabolize. It is puzzling. The problem is as corrosive in one country as in the other.

Wrong, wrong, wrong.  Dead wrong.

And I say this based on my law firm’s own experiences and on the experiences of foreign businesses, as reflected in the leading corruption indexes.  Let me start out by saying that I love Russia.  Or more accurately, I loved it when I was younger.  I studied Russian.  I have been to many Russian cities.  But I knew Russia and Russia is no China.  Not even close.

Let’s start with corruption.  Transparency International ranks China 80 out of 177 countries. Russia is 127, right between Pakistan and Bangladesh.  World Audit ranks China 61 out of 150 in corruption, with Russia at 110.  I have noticed the difference in concrete ways.

In Doing Business In China. Not That Bad, I compared corruption in China to corruption in Russia:

Back in April last year, I spoke at an Economist Magazine Business Without Borders event on China.  I mostly spoke about intellectual property protections in China, but my introduction dealt with China’s legal system as a whole.  Video of my introduction (but not the whole talk, near as I can tell) is online and was referred to me today.  I watched it and liked what I saw and I had it transcribed, per the below.

What I liked is how I try to put China and its legal system in their proper perspective, which is sometimes necessary.  It is sometimes necessary because we Westerners too often compare China to from whence we come, rather than to other countries closer to where China is socioeconomically.  This causes China to seem worse than it is, and also tends to exaggerate the difficulties in doing business in China.

Here’s my spoken intro, transcribed:

I’m going to start out not really focusing so much on intellectual property, but talking about China’s legal system generally. I’ve been dealing with emerging market countries for the last 20 years or so, mostly helping American companies navigate emerging markets. And my focus in the last 10 years has mostly been on China. In comparing China to other emerging market countries, my conclusion is that China’s legal system is actually more advanced and less corrupt than just about any other emerging market system.

And I’m not the only person who believes this.

As I was driving in this morning I was listening to BBC interviewing a Russian oligarch who was talking about how great Russia is for business, and he mentioned that Russia is actually better than China for business. And the interviewer called him out on that and said well you’re saying that, but no one else seems to say that. And he quoted a number — which I was going to quote today — which is that Transparency International (which is the most respected and the leading ranking of countries on corruption) ranks China 75 out of 176 countries, so it’s actually in the top half in terms of the least corrupt countries. The World Bank ranks China 91 out of 183 in terms of ease of doing business. And in my firm’s own experience, China is not that bad.

We have registered thousands of things with the Chinese government — trademarks, copyrights, licensing agreements — and not once have we ever been hit up for extra money. That’s not true in a lot of other emerging market countries where you do get hit up for a fee to expedite things. But you’re not really being hit up with a fee to expedite things; what they’re essentially telling you is if you don’t pay the fee to expedite your trademark application, your company trademark application is going to go into that “dark corner” over there.  And that generally does not happen in China.

Now, just yesterday, the new AmCham China member survey came across my desk. This is a survey of American companies that do business in China, and one of the questions asked of the members who have been involved in intellectual property litigation in China was what their impression was. And 63% of those members said that they were either satisfied or very satisfied. Now to me that’s an amazing number, because here in the United States, the word “satisfied” is usually not a word that’s associated with litigation.

So, I’m not saying China is perfect, it definitely is not and there are major issues there, major issues of corruption, major issues with its legal system, but what I am saying is for the average American company, it’s not that bad at all. And those are the sorts of things I am going to be talking about later.

I have been to China probably five times as often as I have been to Russia and yet I have been shaken down for bribes by police officers in Russia more than once and that has never happened to me in China.

I have a lawyer friend in a Russian province who tells me that it is a known fact (and trust me when I say that he knows) that 12 out of approximately 15 judges are on the take.

Now let’s talk about costs and safety.  Russia can be an incredibly expensive country to visit.  I remember a few years ago when one of my firm’s lawyers went to Moscow and I saw his $900 a night hotel bill.  I asked him why he needed to stay in such an expensive hotel (in Moscow).  His reply was that it was a Courtyard by Marriott and the Marriott was $300 a night more.  He went on to say that one pretty much has to stay within a certain area of Moscow for safety reasons and there just are not that many hotels there.

Violence against businesspeople is also more common in Russia than in China, not that it is unheard of in China. I am basing this both on the experiences of my clients and of what they tell me, and on what I have read.

Saying that both have corruption is meaningless.  The United States has corruption.  Even Denmark has corruption.  The issue though is not the existence of corruption; the issue is how prevalent it is and how much it impacts foreign businesses seeking to do business there.  Everything tells me that it is far worse in Russia than in China and I think I would be hard pressed to find anyone who disagrees with me on that.

I am not saying that American companies or European companies or countries from anywhere outside China and Russia should be ignoring Russia because I do not believe that at all.  I think Russia has a wealth of opportunities for those who have the staying power to cut through its difficulties.  Heck, we represent a number of foreign companies that are thriving in Russia and some of them have been doing so for going on twenty years.  What I am saying though is that Russia is difficult, for so many reasons, and if you are going to go there, it behooves you to understand this before you leave.

Please note that I am also NOT saying that China is not without its own major problems, because it isn’t.  And I am not saying that doing business in China as a foreign company is easy (or even fair), again because it isn’t.  But again, it just isn’t as bad or as risky as Russia.  It just isn’t.

I just got back from a long trip to Vietnam, which generally ranks a few notches below Russia in the various corruption indexes.  And yet I am very bullish on Vietnam for many reasons — not the least of which is that the US has deemed it to be in its political best interests to do whatever it can to assist Vietnam — and our practice there just keeps on growing.  At the same time, just as with Russia, its “difficulties” should not be downplayed.

One interesting thing in the Russia/China comparison is that we have found Russian companies are better able to function in countries in which bribe-paying is not a wise way to go, and we wrote about this in Bribe Paying Countries. China Is Second Worst:

We have confronted bribery issues head on many times with both Russian and Chinese companies and they virtually always respond very differently.

Let me explain.

A couple of times, Russian companies have strongly hinted or just come out and suggested that we pay off government bureaucrats or judges to get things done. Each time they have done that, I have made very clear that my law firm will not be a part of that and that if they are not comfortable with that, they should fire us right then and there. I then point out to them that their Russian lawyers referred them to us because we know how to handle things in the United States and the right way to handle things in the United States is NOT by paying a bribe. Every time I have had this discussion, it has worked. Sometimes, in fact, the Russian company has come back and said that they had mentioned our conversation to their Russian lawyers and their Russian lawyers had said we should not be fired.

Our results with Chinese companies have been very different. They tell us that “so and so told them that they can get this done in two weeks because they know so and so at the government and they know how the system works.”  We tell them this is not how the system works and, in fact, what they are proposing to do is only going to turn something relatively easy and straightforward into something difficult and illegal. The Chinese company often acts like we are a bunch of naive idiots and moves on, which is fine by us.

Anyway, I think the difference between Russian companies and Chinese companies (and yes, I realize I am generalizing from a relatively small sample) is that the Russian companies are much better able to adapt to where they are doing business. They simply have a better understanding for the fact that just because they do business one way in one country does not mean they must do business that same way in every country. I do not have any illusions about whether the Russian companies who choose not to pay bribes in the United States are paying bribes elsewhere, but I am impressed with how they are able to do things correctly in the United States. Far too many Chinese companies seem unable to believe that not all countries do business the same way.

Anyway, Russia is worse than China, it just is.  But it does have its opportunities and it should not be ignored.
Kedl concludes his article with the following:
In the world of compliance, we talk about “adequate measures” that a company takes to protect itself against corruption. But the recent probes into health care companies in China are forcing companies to redefine the meaning of “adequate.” For example, one adequate measure is due diligence: doing background checks on suppliers, distributors and other third parties with whom you will do business. The same is the case in Russia. Whether you’re doing business in central Moscow or the provinces, you need to know as much as possible about your partner and the potential risks that a company presents to you.

In most environments, a quick look at a business database and a credit check are sufficient. But in China, where neither databases nor credit checks are possible, “adequate” due diligence means sending people out to discreetly talk to the partner’s customers, vendors, regulators and former employees to get a deep sense of who the company is and how they do business. Russia presents a strong parallel here, as well. Quick database or credit checks are either hard to come by or fail to present a complete picture.

Many of the problems with health care companies in China today are a result of not doing adequate due diligence. Who cares if there are a billion Chinese customers if you’re going to destroy your company and your reputation in trying to reach them?

So Russia may not have a billion potential customers. It may also be a popular whipping boy for its business behavior. But companies who avoid Russia because of corruption and rush into China because of its market size are missing the point. Both countries contain the same risks, and each harbors significant reward.

I agree with virtually all that he says directly above. Russia and china do “contain the same risks” in that any company doing business in either country should conduct the sort of due diligence Kedl calls for and they also should require their employees participate in full-fledged anti-corruption training taught by outside professionals.  But the degree of risk is different.
I think in the end though, it really comes down to the company and its product/service and its expertise and its risk tolerance.
I’m just saying….
What do you-all know?

The mainstream media has given massive coverage to workers in China holding Chip Starnes, the president of an American company, hostage for alleged non-payment of wages.  Just as we usually do whenever a hostage taking hits the press, we ran our own blog post, The Single Best Way To Avoid Being Taken Hostage In China, setting out how to avoid getting yourself into just such a situation.  And just as we always do, we link back to all of our prior posts on the subject, to let everyone know that “we told you so.”

But how common are these foreigners being taken hostage situations and how worried should you be?  I was called by three reporters yesterday asking me the commonality question.  I told all of them the same thing, which was essentially as follows:

We learn of a foreigner getting held hostage in China probably once a month.  We learn about this from the media (as in the case of Chip Starnes), from spouses and co-workers calling us to see what we can do, and from readers who simply email us.  My law firm has worked on a handful of these cases over the last five years.  They really are not all that complicated in that one almost never has any choice but to negotiate.  We have used Chinese lawyers to try to get the police to end the stand-off, but that has never worked. Heck, in at least two of the cases we have handled, the police were actually assisting.

The common theme in every hostage taking we have handled (and I think of which I am aware) is money; money allegedly owed for a breach of contract, for wages, or for a personal injury. But the person with whom you really should be talking is my friend in Shanghai at an international risk consultancy company because I know that his company constantly handles China hostage situations.

As for whether these hostage takings in China are getting more or less common, my answer is yes and no.  How’s that for a lawyer answer?  I do not think they are getting either less or more common in the sense that they are either increasing or tapering off due to societal or legal or cultural reasons. Instead,  I think that they are starting on a new increase and I expect that they will continue to increase as China’s economy slows.  As I mentioned earlier, these hostage situations stem from money allegedly owed and now that China’s economy is in a downturn, we can expect there to be more situations where Chinese companies and individuals believe they are owed money and more situations where Chinese companies and individuals will feel compelled to take things into their own hands to get paid. With this we will no doubt see more hostage situations.

Does this sort of thing happen outside China and as much?  I don’t know enough to make comparisons, but I assume this sort of thing goes on in most emerging market countries.  I know it has happened in Vietnam and I know it has happened in Russia, where someone I know was held upside down out a third floor window until he agreed to pay a dubious debt.  So yes, it definitely happens outside of China but I just cannot quantify it.

So what is the answer then about the numbers?  Who really knows?  But what I find so interesting is the initial response my China risk consultancy friend gave by email to the first reporter that contacted him (I was cc’ed):

We work on several cases of unlawful detention like this per month (and, depending on the month, sometimes several per week) … this kind of thing is that prominent in China these days.

I look forward to seeing the articles.

In the meantime though, how worried should you be?  Not that worried. And here is why.

First off, not a single client of my firm has ever been involved in a China hostage situation.  Every time we have been called in to assist on one, it is for a new client. And much of the time, assisting consisted of little more than telling the company that they probably would be better off paying the USD $10,000 claimed, as opposed to paying my law firm to try to contest the amount owed while their employee indefinitely remains guarded in an office by three men or in jail for an indefinite stretch.  But the real point is that all have avoided this problem and the reason they all have avoided it is because they simply do not go to China when there is that risk.

Just the other day, a client of ours called us while walking down the street in a smaller Chinese city.  He told us that he had gone over there to look into what his company should do now that one of its suppliers had just shut down.  During the conversation we learned that the Chinese company had shut down owing its employees all kinds of money and our client was calling us to discuss our assisting in his company possibly buying the factory.  We quickly told him to leave town.  Now.  We explained how if he went to the factory and explained who he was, the workers might well kidnap him.  We have dealt with this exact situation.

Foreign company buys product from Chinese company.  Chinese company shuts down and foreign company goes to Chinese factory to see what is going on and to see if its already paid for (or not) products may be sitting in inventory.  Chinese workers learn of the foreigner in their midst and grab him or her (it is almost always a “him” but I am aware of at least two cases involving a “her”) and demand that the foreign company pay the outstanding wages. The foreigner explains how they too have been hurt by the shutdown and they certainly do not owe anyone in China any wages.  The Chinese workers see things very differently.  Their explanation is that they worked hard to make product for the foreigner and the foreigner got the product and the workers never got paid and so now the foreigner needs to pay the workers and if it does so, he or she will be freed and they can even leave with their product.  The fact that the foreign company already paid once for the product is simply irrelevant.

Anyway, our client left safely.

Not only are these hostage situations generally preventable, but (and I know this is only small solace) these situations in China do not typically involve violence in that the person taken hostage is usually not beaten nor killed.  I am not saying violence never happens, but I am saying that I am not aware of an instance where it did.  Should you be so worried about being taken hostage in China that you do not try to conduct business there?  No.  Should you at least consider the possibility of a hostage situation.  Yes, you should at the first sign of any sort of potential dispute.

What do you think?

UPDATE:  One of the articles for which I was interviewed just came out and I was provided a copy of it.  This article was written by Leslie Pappas of Bloomberg BNA.  I was provided with a pdf of the article, but it is hidden beyond a paywall.  I wanted though to highlight the portion of this article quoting my Shanghai risk consultancy friend, who I can now reveal to have been Kent Kedl of Control Risks.  Kent highlighted the commonality of these China hostage situations and the benefits of thinking and planning before acting when a hostage situation is possible:

The commercial element of the Starnes case is “typical” of other hostage situations in China, which are increasing as the economy slows, according to Kent D. Kedl, the Shanghai-based managing director for Greater China and North Asia for Control Risks, a global risk consultancy based in London. ”

“We work on several cases of unlawful detention like this per month — and, depending on the month, sometimes several per week,” Kedl told BNA in a telephone interview June 26. Unlike countries such as Mexico and Nigeria, it is extremely rare in China for a company executive to be kidnapped and held for ransom, Kedl said. In China, cases usually arise because of a commercial dispute, which may involve a company’s employees, distributors, suppliers, or other affiliates. “It’s someone who gets upset and doesn’t know what to do,” Kedl said.

Control Risks has seen a “sharp increase” in hostage situations in China in the past two years, Kedl said, and has seen an increase in threats and actions against company management and foreigners. Kedl attributes the change in part to China’s slowing economy, as companies reassess their businesses in China and in some cases start to restructure–news that often comes as “a shock” to workers. Restructuring “is an anathema to most Chinese employees,” said Kedl. “It’s been nothing but growth for the past 10 years. . . . In China, business hasn’t come and gone. It has only come.”

Companies need to think through all aspects of a downsizing or restructuring, including the compensation strategy, the communications strategy, and relationships with local officials before they undertake a restructuring, Kedl said: “It is the company’s responsibility to think through what they’re doing and think through what could happen.”

I agree.

Less than a month ago, we wrote a post, entitled, How To Form A China Company (WFOE or JV). Hong Kong Entities. They’re Baaaaack. The gist of that post was that my law firm was now favoring the forming of Special Purpose Entities in Hong Kong to hold the soon to be formed Mainland China Wholly Foreign Owned Enterprise (WFOE) or Joint Venture (JV).  We wrote on how our position on this had changed due to China’s having recently become increasingly tough on company formations involving non-Hong Kong companies:

It is relatively easy to prove the existence and organizational structure of a Hong Kong company. The process is straightforward and the Chinese investment authorities understand the documents and readily accept them. This is not true for corporate documents from other countries. The Chinese authorities want documents that are similar to their own. They do not understand foreign company systems, and will often challenge perfectly standard documents from foreign jurisdictions that do not accord with the way they think the world should work. For example, the Chinese authorities will often demand notarized documents. When the notary is from a common law jurisdiction like the United States or England, they will object to the form of the notarization because it does not look like a Chinese or civil law country notarization.

In other cases, we have had Chinese authorities object to United States limited liability company documents because the officers’ titles do not match the equivalent terms in Chinese. For example, in most U.S. jurisdictions, a limited liability company (LLC) does not have directors and officers. Instead, the LLC is either member managed or manager managed. We have had Chinese authorities object to both forms of management because they do not understand the U.S. system. Of course, the issues can be even worse when the investor company is based in a system even more different from China, such as the Middle East, Central Europe or Africa.

All of these sorts of problems are solved if the foreign investor sets up a Hong Kong company and specifies the Hong Kong company as the shareholder of the Chinese WFOE or Joint Venture. For this reason, many of our clients will almost automatically plan to form a Hong Kong company as the first step in the China company formation process.

We received a not surprising amount of blowback to that post, both in the form of comments and in the form of a fairly large number of angry emails.  As I have written many times previously, virtually whenever we say anything that might lead anyone to believe that doing business in China involves little more than just walking in, we get push back, mostly from those whose incomes depend entirely on a smooth flow of China business. Anyway, we received plenty of communications saying or hinting that absolutely nothing had changed in China and that it was either all in our heads or due to our inability to negotiate China’s bureaucracy.

This is the “I told you so” follow-up post.

I just read a Financial Times article, entitled,  “China, India and Russia less business friendly,” on how “executives around the world” think China has become “less friendly towards business over the past three months,” as based on an FT/Economist Global Business Barometers Survey.  This survey is conducted every three months of 1,500 global senior executives.  According to the survey, of the four largest emerging market economies, only Brazil has eased up on business; China, Russia and India have gotten tougher. “The survey comes amid concerns that growth in Brazil, Russia, India and China – together known as the Brics – is slowing.” Brazil was the only one of the four Brics that more consider friendly than unfriendly towards foreign business.

I yearn for the day when China views getting “friendlier” towards foreign business as its best reaction to a slowing economy, rather than getting more “unfriendly.”

What are you seeing out there?

 

By now just about everyone has a rough outline on the goings on surrounding Bo Xilai, Chonqing’s former power boss.  To grossly summarize:

  • Xilai and his wife were very powerful.
  • Businesses (including foreign businesses) were taken by Bo Xilai and his wife’s power and sought to ally with them.
  • A British businessman, Neil Heywood, who did at one time ally with them is dead and Bo Xilai and/or his wife may have had some connection with his death.
  • Bo Xilai has been removed from power.

Believe it or not, the above makes for a great learning experience.

The first lesson is that you should not think that allying yourself with the very powerful in China is necessarily such a great thing.  Of course it can be, but it also can be a double-edged sword, as we discussed extensively in “You Want China Guanxi? You Can’t Handle China Guanxi“:

Having grown up in a small Midwestern city, I have an inherent (and what I see as a healthy) distrust of government. Every government. Anywhere.

I was yet again reminded why when I read this excellent Wall Street Journal article on British Petroleum’s recent problems in Russia, entitled, “Misreading the Kremlin Costs BP Control in Russia Venture.” BP thought its getting close with key Kremlin players would protect them in Russia. Most unfortunately, for BP, however, when its key Kremlin players fell out of favor, it too fell out of favor. Russia can be particularly problematic, but other countries certainly are not immune. I have seen up close and personal how allying with government can be like playing with fire:

  • Many years ago, I was working with an American company who was on the verge of getting a huge supply contract with the Korean navy. The son of the President was setting up the deal. I knew the deal was in the trash when I saw the son on the US evening news getting into a Korean police car in handcuffs.
  • Many years ago, my law firm had a very close relationship with a Russian vice-governor. His beloved daughter was one of our paralegals and, lo and behold, company after company from this Russian province would contact my firm for international law assistance. This work dried up rather quickly when the father was axed to death.
  • Many years ago, we had a client who ran a business on Chinese military bases. The whole practice was of questionable legality, but his closeness to a high ranking military official seemed to isolate the enterprise. Then the high ranking official retired and within less than a year, our client was off all the bases and a new company was there in its place.
  • We had a Russian company as a very good client, the owner of which decided he wanted to be Governor of his province. He ran and lost, in a fairly close election. Within a year, his various companies had become greatly diminished because of constant government investigations that appeared to have been done to keep our guy in his place and to teach him not to run for office again.

Government people come and go and when “your” people are gone, much or all that you have worked for goes with them. This is NOT a reason not to ally your company with government, but it sure is a reason to remain wary.

The second lesson is that you should not underestimate the potential for your business relations to turn violent.  We have written extensively on this over the years and just about whenever we do, someone accuses us of being alarmist.  We are being alarmist, but for good reason. We also sometimes get accused of trying to scare people to drum up more legal business. That accusation is absurd because as far as I know, telling people to beware of their life and limbs in China is not a terribly good way to score more China legal business.

In “Shanghai Thugs Forcibly Remove Shanghai Residents. Why This Matters For YOUR Business,” we talked of how those doing business in China should at least be cognizant of the threat of violence:

Though China is relatively safe, one should absolutely not write off the possibility of violence in one’s business dealings in China. My law firm has been called in at least a half dozen times where violence was either threatened or occurred. We tell our clients that if they owe money to a Chinese company or are involved in any sort of dispute with anyone in China (partner, employee, etc.), they should avoid meeting to discuss the dispute/problem anywhere other than in a neutral, very public place in the day time. A high end hotel lobby in Shanghai or Beijing is a good choice.

We wrote the above about a year ago and if I were to write it today, I would say that the number of times where we have been involved in matters with violence or threatened violence is up to a dozen. A few weeks ago, I was talking with a friend of mine who works in China for a leading international risk management/security/hostage negotiation company. I was telling him that we had been seeing a big increase in Chinese companies making veiled (and not so veiled) threats against our clients over alleged debts. This friend then told me that his company was getting three business hostage takings a month, up from about one a month in the last few years. I then sought to clarify what he meant by “hostage takings” and he said that did not even include the situation where a large group of people menacingly hang out at your business; he was talking about only those situations where someone was being held against their will under threat of violence.

I am not saying that China is a violent country and I do not think it is. But it is still a developing country with an inchoate legal system. What this means is that frustrated people are a lot more likely to “take things into their own hands” than in most Western countries. What this means for you is what I said above: at minimum, if you are in any sort of dispute with a businessperson in China, do not go to that person’s turf to try to resolve it.

And for those who think I am being too alarmist, I end this post with two emails I received this week, to show that at least I am not the only one:

  • As you know, Bo Xilai was removed from the Politburo today. His wife is being investigated for the murder of Neil Heywood. While it seems to be a plot from a thriller novel, the Chinese themselves admit to the investigation. See the official Xinhua report below. However, I want to point out that Heywood was apparently murdered as the result of a financial dispute with the Bo Xilai group. Often in my discussions with clients, I advise extreme caution when dealing after financial disputes have arisen. Some people accuse me of being overly cautious. The Heywood event shows why I am concerned. When money is involved, the rule of law doesn’t seem to matter much and too many Chinese businesspeople deal with it using gangster techniques. If Gu Kailai was willing to commit murder, think about what a local person would do, particularly when desperate.
  • I am seeing violent incidents like this [Bo Xilai] increasing, not decreasing. The money in business in China just keeps  rising and the more money involved, the greater the chance for violence. There is a lot of talk about the poor economy and I think that is helping to increase violence. Ten years ago, the Chinese were afraid to beat up a Laowai but that has changed.

What do you know?

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Transparency International has just come out with a new ranking of bribe paying countries, entitled the 2011 Bribe Payers Index (h/t The Diplomat). This index “ranks 28 of the world’s largest economies according to the perceived likelihood of companies from these countries to pay bribes abroad. It is based on the views of business executives as captured by Transparency International’s 2011 Bribe Payers Survey.”

Not surprisingly, “companies from Russia and China, which invested US $120 billion overseas in 2010 and are increasingly active in global business, are seen as most likely to pay bribes abroad. Companies from the Netherlands and Switzerland are seen as least likely to bribe.”

Though I know there is no wholly objective way to measure a country’s scale of bribery, I am always impressed by Transparency International’s rankings because they always correspond fairly closely to my own “sense” of what is going on out there and the same is true of this ranking. However, in my own experience, China is far worse than Russia.

My law firm does a lot of Russia, as well as China work. We have many good Russian clients. We have only a few good Chinese clients. I am defining “good” here as a company that understands how to use lawyers, pays its bills, treats those in my firm with respect, and abides by the law.

We have confronted bribery issues head on many times with both Russian and Chinese companies and they virtually always respond very differently.

Let me explain.

A couple of times, Russian companies have strongly hinted or just come out and suggested that we pay off government bureaucrats or judges to get things done. Each time they have done that, I have made very clear that my law firm will not be a part of that and that if they are not comfortable with that, they should fire us right then and there. I then point out to them that their Russian lawyers referred them to us because we know how to handle things in the United States and the right way to handle things in the United States is NOT by paying a bribe. Every time I have had this discussion, it has worked. Sometimes, in fact, the Russian company has come back and said that they had mentioned our conversation to their Russian lawyers and their Russian lawyers had said we should not be fired.

Our results with Chinese companies have been very different. They tell us that “so and so told them that they can get this done in two weeks because they know so and so at the government and they know how the system works.”  We tell them this is not how the system works and, in fact, what they are proposing to do is only going to turn something relatively easy and straightforward into something difficult and illegal. The Chinese company often acts like we are a bunch of naive idiots and moves on, which is fine by us.

Anyway, I think the difference between Russian companies and Chinese companies (and yes, I realize I am generalizing from a relatively small sample) is that the Russian companies are much better able to adapt to where they are doing business. They simply have a better understanding for the fact that just because they do business one way in one country does not mean they must do business that same way in every country. I do not have any illusions about whether the Russian companies who choose not to pay bribes in the United States are paying bribes elsewhere, but I am impressed with how they are able to do things correctly in the United States. Far too many Chinese companies seem unable to believe that not all countries do business the same way.

So even though Transparency International says Russian companies are a bit more likely to pay bribes than Chinese companies, my sense is that the opposite is true in those countries (like the United States) where bribery is rarer overall. My experience has been that a Chinese company is more likely to pay a bribe in the United States than a Russian or any other one. I also note that our American clients have a much tougher time convincing their people in China to eschew bribes than they do in convincing their people in Russia not to pay bribes.

What are you seeing out there?

I love it when my wild assertions are proven right.

I am always writing about how terrible the service is at China’s hotels and restaurants and I have often posited that service in China is the worst in the world.

In “This Is China. I Laughed, I Cried,” I wrote about a blogger’s “Kafkaesque situation that  so often occurs at hotels (or other businesses) in China” and concluded by noting that “China does not have a monopoly on bad service, but the [horrible] treatment TFF received is so way more likely to happen in China than anywhere else.”

In “Win-Win Negotiating In China. It Is More Than Just A Panda,” I again lit into China for its service and compared it very unfavorably to Vietnam:

Every time I go to China, I come back planning to write an excoriating post on the place. I mean, let’s face it, it is one of the (if not the) most exasperating places on earth. I found it even more exasperating this last time because before hitting China, I spent two and a half weeks in Vietnam (mostly Ho Chi Minh and Hanoi) and once again was shocked at how a country like Vietnam (which is considerably poorer than the places I tend to go in China) can, at least on some levels, appear to have its act so much more together than China.

Let’s take service for example. I am never ceased to be amazed at the downright horrible service in China, and that includes at so-called five star hotels.

I am feeling vindicated today after reading a New York Times article, entitled, “Where to Get the World’s Best Service,” which puts China next to the last in service, behind only Russia. And I agree with the rankings, based on the following countries I know well:

Japan.  Japan came in first place and anyone who has been to Japan knows why. The taxis there are impeccably clean and their drivers are always polite and know where they are going. No matter how cheap the restaurant, service is quick and professional. The hotel staff are so good and so pleasant, it’s almost scary.

Canada and the United States. Canada came in third and the United States came in seventh. Not sure why the difference as to me they are pretty much the same but I agree generally with their rankings. Both countries usually provide excellent service. Excellent, but not amazing.

Turkey.  Turkey came in twelvth and that seems about right to me. I lived in Turkey for a year and I’ve been back a few times for extended stays. The service there is generally very friendly and sincere, but probably not top tier.  

Vietnam. Vietnam came in fifteenth and that seems about right to me. The hotels and restaurants and even cab drivers there just “seem to get it” more than in China. They actually try hard.

China.  Twenty-third and next to the last. Russia got the honor.

Russia.  Service in Russia isn’t so much bad as non-existent. They don’t even try and on some level, you have to respect that. I once was fumbling with my money at a really nice store in Vladivostok when the storekeeper derisively yelled across the store to everyone else there to “look at this stupid American who can’t count to ten.” My Russian was at its zenith at the time and so I was able to understand what she was saying and deliberately counted out my payment ruble by ruble in Russian and then swore at her and left.  Russian service is consistently rude, bordering on mean, but without any pretense. You do not get the unbelievable type stuff that you get in China, but I guess that it is consistently worse.

So does China really deserve such a poor rating? I say that it does.

UPDATE:  This post has received a number of fairly strong comments, to which I say great, but would like to respond.

Some imply that good service equates to being a servant and imply that I am a snob for seeking it out. I will leave it to others to decide if I am a snob (I don’t think I am), but I will say that good service does not mean being a servant. I kill myself and I expect my collogues to kill themselves as well in providing good service to our law firm’s clients. Is it because we are servants. Hell no. There are countless times where we just flat out tell our clients they are wrong and there are other times where we tell them that if they want a lawyer to do what they want us to do, they need to hire another law firm. I view that as good service in that we are doing exactly what we think is right for our clients, but that is not being servants.

“Service” goes beyond hotels and restaurants. If you have a plumbing problem in your house (and come on people, be honest here) that needs an immediate repair, in what countries do you think you will get it fixed quickly and correctly and in what countries do you think it will be difficult to get someone to fix it correctly at all? That too is service.

And to all those who make it seem that the Chinese service problem lies with me, I say bunk. You could claim that if the article were not based on interviews with hundreds of world travellers. In fact, I am going to flip it around and say that your love of China or your lack of travelling elsewhere may be blinding you to reality. 

I also have to say that I really notice the lack of Chinese service when I take my wife and kid(s) with me to China. Just by way of one recurring example is how often the people at the hotel have absolutely no clue on how they should go to major tourist sites and they make no real effort to find out. That is a phenomenon pretty much peculiar to China.

One commenter asked for examples so I am going to reprise some that I set out in a previous post, all from just one China trip:

Let’s take service for example. I am never ceased to be amazed at the downright horrible service in China, and that includes at so-called five star hotels. Some examples from this last trip:

  • At breakfast one morning, I was waiting as an employee was loading massive amounts of French toast. I wondered to myself whether he had seen me and knew I was waiting and gave him the benefit of the doubt. He then looked right at me and continued loading, while I waited. This at a five start hotel in Shanghai.
  • Towards the end of my stay in Shanghai, I got sick and needed to keep extending my stay. Twice, I called down in the morning and received confirmation that my stay would be extended at the same rate and twice at around 4:30 in the afternoon I would receive a phone call pretty much giving me three minutes to get the hell out of the hotel or the police will be called. I should further note that for at least five years I have been the highest level frequent stay member at this particular Western hotel chain.
  • At a Beijing five star hotel, two days in a row for breakfast I was seated where someone else had already been seated. One of those days, I was re-seated, got my food, then got up for maybe 30 seconds to get my drink and my food was gone. I probably could have gotten my food faster by going to the grocery store.  

Then there are the cab drivers who have never made any effort whatsoever to learn anything about their city and who get mad at you when you are unable to give them street by street directions to where it is you are seeking to go (another, as far as I know, peculiarly China phenomenon)

And here are a few more that pop into my head with no effort:

  • Restaurants in China, way more than restaurants in any other country I have ever been (with the exception of Russia) simply do not have what is on the menu. Come on people, can you honestly tell me that you have not ordered something at a Chinese restaurant, been told it doesn’t have it, ordered something else as a replacement and then been told it doesn’t have that either, then ordered yet another replacement item and been told it does not have that item either and then, in complete frustration, ask what exactly it does have? Has that ever happened to you anywhere other than in China?
  • How many times have you ordered something in a restaurant or bar and then had it substituted without your permission in China as compared to elsewhere in the world? China wins hands down on this, doesn’t it?
  • How many hospitals in China do not make you wait five+ hours and are clean?
  • The planes in China run later than in any other country (except Russia) of which I am aware and the information given out regarding flight times is typically either non-existent or just flat out untrue. 
  • Back to the plumber example above. in what country do you trust your plumber, your landlord, your accountant, your hospital, your baby formula, your milk, your eggs, or your fake Ikea or fake Apple store less? That’s service too, isn’t it?

Keep the comments coming….

Not quite sure why, but I have been writing a lot lately about the risks of operating a business in China. A few months ago, I did a post entitled China Is The Risk. I See Clouds and a few weeks ago I did a post entitled Secure And Insecure Countries. In Light Of Egypt. An Open Thread. Both of these posts talked of the risks of being in China and sought to compare that risk to other countries.

In response to the Egypt post, a loyal reader sent me a link to a super-cool interactive country by country risk map compiled by Aon Corporation, a leading “provider of risk management services.” The map ranks countries from Low Risk to Very High Risk, with Medium-Low Risk, Medium Risk, Medium-High Risk, and High Risk in between those two extremes. The rankings are based on the following:

  • Exchange Transfer
  • War/Civil War
  • Strike, Riot, Civil Commotion, Terrorism
  • Sovereign Non-Payment
  • Political Interference
  • Supply Chain Disruption
  • Legal & Regulatory

Here are how various countries fared:

  • China —  Medium Risk
  • India —  Medium-Low Risk
  • Vietnam —  Medium Risk
  • Bangladesh —  Medium-High Risk
  • Thailand —  Medium-High Risk
  • Singapore —  Low Risk
  • Cambodia —  Medium-High Risk
  • Laos —  Medium-High Risk
  • Hong Kong —  Low Risk
  • Taiwan —  Medium-Low Risk
  • Japan —  Low Risk
  • Russia —  Medium Risk
  • Malaysia —  Medium-Low Risk
  • Indonesia —  Medium Risk
  • Egypt (before the street demonstrations) —  Medium Risk
  • Brazil Medium —  Low Risk
  • Mexico —  Medium-Low Risk
  • South Korea —  Medium-Low Risk
  • North Korea —  Very High Risk

Interesting. What do you think?

Just watched a ten minute or so movie on Goldman Sach’s website, entitled, “The BRICS Dream” [link no longer exists] (h/t to the Cal Poly MBA Trip Blog).  BRIC is an acronym for Brazil, Russia, India, and China and the movie, “led” by Jim O’Neill, Goldman Sach’s Head of Global Economic Research, notes it was Mr. O’Neill who created the BRIC acronym way back in 2001.

The thesis of this fascinating movie is that over the next 50 years, Brazil, Russia, India and China — the BRIC economies — are likely to become a much larger force in the world economy.  The movie maps out GDP growth, income per capita and currency movements in the BRICs economies until 2050:

The results are startling. At the projected pace, in less than 40 years, the BRICs economies together could be larger than the G6 in US dollar terms. By 2025, they could account for more than half the size of the G6. Of the current G6, only the US and Japan may be among the six largest economies in US dollar terms in 2050. The list of the world’s ten largest economies may look quite different in 2050. The largest economies in the world (by GDP) may no longer be the richest (by income per capita), making strategic choices for firms more complex.

The movie predicts a huge increase in the middle class of these four countries and, interestingly, sees Russia having the highest per capita income among the four, based in large part on its diminishing population.  O’Neill believes this rising middle class of the four BRIC countries will lead to massive car buying, and he forecasts China becoming the largest purchaser of cars by 2050.  The growth of the BRICs will lead to energy consumption worldwide increasing by 2.5% per year, in contrast to the 1.5% increases in the past.  O’Neill sees the stock markets of these four countries doing well even if they institute few structural changes, but becoming “fantastic” if they evolve in terms of their transparency.  O’Neill sees the currency of all four nations rising considerably between now and 2050, with China’s Yuan rising the most, at 289% between now and 2050.

All of these predictions are prefaced by many “ifs” and, as excited as I am about the economies of all four of these countries, (as well as many of the countries Goldman Sach’s calls the “next eleven,” particularly Turkey, Vietnam, Indonesia, Korea, and the Philippines), I recognize that so much can happen between now and 2050 that it is virtually impossible to make economic and investment predictions for 2050 with any real degree of accuracy.  This is even more true of the BRIC countries whose political stability is not rock solid — yes, I know Brazil, India, and, nominally Russia, are democracies.

Does make for great viewing though.

In “Service Sectors in China Will Reign” and in “The Little Red Book of China Branding, we wrote of how China’s economy is ripe for entry of foreign service businesses.  Just this year, as per the WTO, China greatly liberalized its laws allowing entry of foreign service businesses.

In Today’s Wall Street Journal, however, in an article entitled, “Agencies Find China Land of Opportunity And Unhappy Clients,” highlights difficulties in operating a service business catering to Chinese companies.  Though the article deals solely with advertising agencies, my own experiences and those of our clients tell me that much of what is said here is true across the board for service industries with Chinese clients.

The article talks about how Chinese advertising clients usually have little experience with or patience for “the institutionalized ‘creative’ product traditional ad agencies try to sell them.”  The advertising agencies in China “say it takes resources and commitment for their creativity to work — and are dismayed to see their client relationships sorely tested, with their China shops hired and fired much faster than in other markets.” The average agency-client relationship in China lasts just 2.8 years, as compared with 6 years in the U.S. and Europe.  Chinese companies prefer using advertising agencies on project-based contracts, instead of building long-term professional relationships:

“The degree of tolerance is very low as compared to the U.S.,” says Pully Chau, the China chief executive of Publicis Groupe’sSaatchi & Saatchi. “We cannot afford to take any clients for granted or else they will go elsewhere.”

                                                      *   *   *   *

“Clients are in a start-up mode, and so are unbelievably tight about spending money on an agency,” says Michael Wood, CEO of Publicis’ Leo Burnett China. He says the recent boom in buying traditional ad spots in Chinese media is “somewhat illusory for creative agencies who can’t always keep up with the pace.”

*   *   *   *

 Agencies say the fickle nature of many Chinese clients makes it hard to predict and plan for growth there. “The greater the number of Chinese clients, the less the profit,” says TBWA Shanghai’s Mr. Heron. “Why? Slow payment — and then a post-agreement negotiation for discounts. And then, 12 months later, the end of the contract.”

Some of the advertising companies are choosing to educate their clients on the ways of advertising in an effort to retain them longer:

In the past year, Interpublic Group’s McCann Erickson has put more than half of its clients in China through full or half-day presentations on what it calls its “demand chain process,” teaching how to build a brand over time and to measure an advertising strategy’s effectiveness.

“China is a results-oriented society, and if they are not sensing results, often the agency gets blamed,” says Don Norris, the managing director of McCann-Erickson Guangming China.

Of course, China is hardly the only place where advertisers are clamoring for results from agencies. But in China, creative shops start from scratch in explaining basic advertising concepts to their clients. For instance, the big neon signs all over China’s cities may flatter the CEO’s ego but they don’t necessarily sell products.

I have experienced similar things with my law firm’s representing Chinese clients.  Co-blogger Steve Dickinson and I met for hours with a Chinese company and negotiated a flat fee for the United States legal work we would be doing for them.  Pursuant to the Chinese company’s instructions, we drafted a contract reflecting our agreement.  The Chinese company returned it with a whole host of changes, including a substantial reduction in the fee and a previously never discussed spacing out of the payment.  We incorporated a few of their changes (but not the fee) and sent it back to them. They then sent us another new contract that barely resembled anything we had ever discussed.  When we then told them we were no longer interested in representing them, they completely backtracked and said they would agree to the last contract we had sent them.

The contract arrived but now with a list of step by step instructions on how we were to handle this U.S. legal matter, the first item on the list being just about the worst thing we could have done in this situation.  At this point we decided to decline the business and we sent an e-mail explaining the importance of a good and trusting lawyer-client relationship. I have heard of numerous similar experiences from professionals in other fields providing services to Chinese companies.  Many have told me of being hired to do something for which they are well known, only to be given a very specific list of exactly how they are to do it.

Bottom Line:  The service sector will reign in China and the opportunities for growth there are huge.  Chinese company understanding of service businesses will improve. I have seen such maturation occur with Korean and Russian companies and it will eventually occur with Chinese companies as well.

But, in the meantime, If you are a service business working with Chinese companies, you must recognize the difficulties you will face as you seek to establish the same sort of relationships with your Chinese clients that you have with your other clients.  Your relationship with your Chinese clients will likely be less collaborative than you would like and you must act accordingly.  Do not compromise your fees or anything central to the way you operate.  Do not do this “to get that first project in the door,” thinking you will be able to build a long term relationship.  If you compromise on the first project, your Chinese client will almost certainly just push you for more compromises on the next one.  You must be firm and you need to go in with your eyes wide open.

Are there others out there with similar stories?  Are there readers with a different experience?  The comments section (as always) is open, please share your stories and views with us.

For more blog reading on service industries in China (especially media and public relations issues) check out Danwei and Imagethief.