Doing business when corruption is common

How do you compete in a business environment where bribes are common and, while you may prefer not to use them, you have competitors who are willing to?  An environment like China?

James McGregor takes this up in his 2005 book on doing business in China -   One Billion Customers.  Lessons From the Front Lines of Doing Business in China.  McGregor, a former Wall Street Journal China bureau chief, former chief executive of Dow Jones in China, former chairman of the American Chamber of Commerce in China, investor and consultant on China, knows how business is done in China.

"As a foreign company in China... you depend on approvals and favors from officals in order to conduct business, and you sell and distribute your product into a system that is lubricated by graft..."  So the question is, "...how do you deal with it without going broke or going to jail?" 

Here's his take:

First of all, cheer up...

...things may not be so bad - particularly if you're a large multinational:

...Do not succumb to the notion that all Chinese people are corrupt...Large multinationals can operate above the muck because their deals are often very large, very visible, and they are interacting with senior government and party officials.  They often win business in China as they would anywhere else in the world by selling top-quality products that China needs and bringing in state-of-the-art manufacturing capabilities and know-how...

And things are getting better as the private sector develops:

With the spectacular rise of private Chinese companies, often funded by venture capital or stock market listings, the business environment is more transparent and marginally more law-abiding...

...As China becomes more wealthy and sophisticated, it is getting easier to avoid corruption.  There are many foreign companies that have policies of zero tolerance for corruption in China, and still enjoy good business because their products are the best an in demand.  The Chinese market recognizes and seeks quality.

There are also some relatively innocuous fixes:

In the 1980s and 1990s, it became widespread practice, considered ethical and acceptable, to arrange overseas tours for Chinese business and government counterparts, mixing facility tours, business seminars, and training courses with generous opportunities for tourism and relaxation.  Many officials and state-enterprise managers don't have the money or the permission to travel overseas for learning or tourism on their own, so this formula is still effective...

Many of your Chinese business counterparts these days are well funded and well traveled, so free trips and business tours have little allure.  But these individuals are focused on building internationally competitive companies.  Exchange programs in which Chinese business partners work temporarily in a series of headquarters departments or home-country manufacturing operations are very effective.  Equally useful are high-level training opportunities...

But if you go this route:

The travel, training, and education for partners discussed earlier is a proven way to operate on a higher plane in China, but this also has to be accompanied by strict internal company policies.   Some companies require employees to sign code of conduct agreements.  I did this with our employees at Dow Jones, and clearly told them that any violations would not only lead to their dismissal, but that I would also notify the police.  We never had a problem, but we weren't selling widgets to factories in the boondocks, either.

You should organize your operations carefully:

As for internal company management, your CFO must be somebody you trust completely, and you should apply transparency to your sales and procurement systems through CRM software and other technology solutions that remove power from individuals.  Some of the better-managed Chinese companies shift their procurement managers every six months because they figure that is how long it takes for the sales and procurement people to develop close enough personal relations to arrange kickbacks.

But maybe you're not going to be lucky...

...apparently especially if you're dealing with the public sector, or state owned firms:

...China still doesn't pay civil servants enough to expect honesty, and the government workforce is so vast that to hike salaries to keep up with the private sector could bankrupt the government.  Young people today, both in government and in the private sector, are also aware that they are at the tail end of the Chinese gold rush, so many are eager to feast on the "emperor's grain" while they have the chance.

Once you get below the level of big multinationals doing large deals, China becomes a swamp.  If you are selling your product or services to the Chinese government and state-owned enterprises, you often have to decide how much of your soul you also want to sell.  The procurement process in China is usually corrupt at every level.  Whether it is factories purchasing equipment, retail outlets agreeing to purchase and display your product, or companies seeking professional services, kickbacks are often required.

...When you are working at the grassroots level in China, direct bribery is all too often the path to success...  The retail business in China is riddled with store buyers who require kickbacks in exchange for stocking your merchandise...  In a similar fashion, with China's newspapers, magazines, and television stations all under government control, local advertising agencies engage in a carnival of kickbacks to China's media managers.

A friend of mine who sells equipment to factories in the provinces explained the science of arranging kickbacks in China.  First, you get an information source in the company who can tell you who really makes purchasing decisions and how they are made.  Then you cultivate that person, or group of people, and wait for the signals.  "The moment they give you their home phone number, you know you are in, " my friend said.  Salespeople are happiest when it turns out that there is a single powerful person who can gaoding or fix the purchase and clandestinely distribute the cash to his colleagues.  If it turns out that multiple people in multiple departments make the decisions, then the salesperson will likely cultivate relationships through nighttime entertainment...and bankrolling group holiday excursions....

A more traditionally Chinese way of seeking business favors is to bestow gifts.  During the Chinese New Year, it is expected that businesspeople will visit Chinese officials and executives at their homes and deliver gifts...

Corruption has been a huge problem for the sourcing companies that act as middlemen between Chinese factories and foreign buyers.  Their biggest problem was not with the Mainland Chinese but with Taiwan and Hong Kong factory bosses in China.  They are often quick to offer envelopes of cash to sourcing company quality inspectors.... 

Another not infrequent step to the south side of the ethical line is the quiet funding of college educations and living expenses for the sons and daughters of Chinese officials and state-enterprise bureaucrats.  In some cases this is handled through foundations and similar entities so that the fingerprints of the company are not evident.  In other cases, it is as blatant as depositing money in an overseas bank account in the student's name and giving that bankbook to the official who is involved...

Some ways of coping...

...One sourcing company run by a friend of mine stopped this through strict rules for their inspectors that include no entertainment or meals at night with factory officials.  If a factory offers bribes, the sourcing company immediately cancels all orders.  "If you cancel orders a few times, word gets around that you are serious," he said.  Other companies arrange meetings at which they pull together all of their suppliers and announce they will blacklist permanently any supplier offering bribes or gifts to their buyers.  Many Chinese factories react positively because it takes the guesswork out of transactions.

Another strategy work through a middleman - and go out of your way to not know too much about the details:

...The solution chosen by many companies is to engage Chinese consulting firms or agents who act as middlemen in such transactions.  The Chinese entity will often introduce an agent or consulting company to the foreign company to advise them on the deal... Kickbacks or payoffs are never discussed or acknowledged because the foreign executives can't "knowingly" be engaged in bribery.  It is simply acknowledged that certain agents and consultants can be helpful in creating business opportunities...  American attorneys hate this practice, but many of them help multinationals draft contracts that do what they call "papering over" the FCPA [the U.S. Foreign Corrupt Practices Act - Ben].  In general, the process involves paperwork that demonstrates that you have done your due diligence, that there is a business reason for using this agent or consultant, that the entity wasn't created for this specific transaction, and the the operators and shareholders of the contracted entity can't be traced back to a decision maker or government official.  You also have to be able to make the case that you aren't overpaying for the service...

I'm curious how this case is made, when the purpose of the service is to pass money on, and those sums must be paid to the middleman, in addition to the payments for handling the money (or consulting).  McGregor doesn't get down to this level of detail.

...To preserve their sanity, some foreign executives go out of their way to not know what goes on inside their sales departments....

The whole thing can be stressful...

I have several American executive friends who couldn't wait to escape from their China assignments because selling their soul or wrecking their career was an unspoken daily dilemma.