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?

I spent all day yesterday co-chairing a Doing Business in China Seminar and I suspect that I will be doing a number of posts on that over the next week or so. I’m starting at the start though, with who should be going into China and why.  Ben Shobert of Rubicon Strategy Group gave a fascinating and highly informative talk on China healthcare/China senior care.  At one point in his talk, Ben went into MBA mode (he has an MBA from Duke, so this is excusable) and talked about the analysis companies should use to determine whether they should be going into China.

Before he talked of this, however, Ben attributed at least some of his thinking on this to a book, The China Ready Company, by Steven Ganster of Technomic Asia and Kent Kedl of Control Risks.  Ben called that book the best he had read in terms of determining whether it makes sense to go into China, or not.  I read that book many years ago and I wholeheartedly agree.

Ben had this to say about what it takes for it to make sense for a company to go into China:

  • China should be a strategic, not purely opportunistic, pursuit.
  • The decision to go to China should reflect a holistic appraisal of internal capabilities, financial resources, and risk appetite versus other domestic or foreign investment opportunities
  • The process of choosing should allow key management team members and other stakeholders to ask questions, raise concerns, and feel their input has been sought and incorporated into the final decision.
  • If a decision to go forward in China is made, your management team should have several different market access strategies presented with a comprehensive analysis of each, along with an idea on how to properly market your services to the Chinese consumer.
He went on to say that the analysis should consist of the following four “distinct questions”:
  • Question 1: Do we, as a company (management team & ownership) have the bandwidth and cultural DNA to export our business model to China’s emerging healthcare economy?
  • Question 2: If yes, what is it going to take to export our business model? This is a resource and process question that isn’t specific to China
  • Question 3: Could we more easily export our business to another country versus China? Here, the analysis begins to get China- specific, but also is looking at opportunity costs for China.
  • Question 4: If China is the right choice, what will it take to successfully export our company to China? What should we be prepared for, what can we do to avoid the typical China market entry errors specific to the healthcare industry?
Our seminar focused on the “new China,” where opportunities for foreign businesses are just as likely to be on the selling of products and services than on the manufacturing of products.  Just as ten years ago, there was the idea that “we have to start manufacturing in China now or we will fall behind,” the idea that “we have to start selling in China or we will fall behind” is pretty prevalent now.  Though it is certainly true, that many companies should be (and are) looking at China as a market for their goods and services, it is also true that going into China to sell those goods and services is not the right thing for all companies right now.  Some should sell their products or services into China using a distributor relationship.  Some should profit from their goods or services by licensing some aspect of that to China.  Others should just stay in their home country and sell direct from there.  And for still others, China may make no sense at all.
When it comes to China there is obviously no one size fits all.  I take it you-all agree?

The other day I did a post, entitled, “Beware The China Joint Venture,” where I again railed against doing joint ventures in China.  It listed six of my previous posts highlighting problems with joint ventures. Kent Kedl, of Technomic Asia, which describes itself as “a strategic consultancy firm whose mission is to assist globally expanding companies to build their Asian businesses through high quality market strategy and implementation assistance,” left a great comment analogizing joint ventures to marriages.  Kedl says that just as a high divorce rate does not mean all marriages are bad, so too the high rate of joint venture failures does not mean all joint ventures are bad.  I completely agree, but note the rate of bad joint ventures seems to exceed that of bad marriages.

Mr. Kedl really shines in pointing out the two most common ways companies fail in their joint ventures:

In 20 years of doing China market entry and growth strategy work, we have seen our shares of VERY bad JVs (and participated setting up a couple of them in the very early years) and have concluded that foreign companies most often fail in two ways:

1. They see a JV as their “China strategy.” A JV is NOT a strategy: it is a tool to realize your China strategy (which should be expressed as “We are going after China growth opportunities in Market X with Product Y through Distribution Channels A, B & C and defending ourselves against Competitors D, E & F”). The JV should be seen as only one option for realizing this strategy. China is becoming more open every year to creative structures so a potential JV should be compared to many other options…and chosen ONLY when it is the best way to realize your identified strategy.

2. The second way companies fail in China JVs is to “marry their first date.” Honestly, too many times have companies approached us saying “we want to do a JV with this company that we just met at a trade show.” One US company we know tried to force-fit a JV with a Chinese company like this and (thankfully) gave up after trying for two years. We started over with them again, confirming and validating their China strategy (see above) and, once we determined that our strategy required a JV of some kind, then looked at over 250 different companies before settling on 4 companies to do some serious due-diligence on and then, finally, one to begin negotiations with. By this time they were confident that a JV structure was for them, they knew EXACTLY what it needed to look like in order to work, and they had (as much as can be expected) confidence that they had found the right partner.

So true.