China Still Plays by Different Rules
Despite unprecedented economic growth―one need look no further than the hundreds of cranes dotting the Shanghai landscape—China still plays by its own set of rules. And by these, we do not just refer to a lack of democracy in the country (which goes without saying in the communist/capitalist nation). No, far more important from a Western perspective is the different rules set China plays in issues ranging from supply chain safety to government meddling and influence in order to support its own nationalist objectives.
Consider, for example, the recent pet food supply chain safety breach which took the lives of dozens―perhaps hundreds―of pets in North America. According to the Los Angeles Times, who sent reporters to cover the unfolding saga into Xuzhou, China, the plant in question which had turned out the toxic pet food ingredients for export to the U.S. had caused serious environmental damage to the surrounding area for years. Specifically, “Farmers in this poor rural area 400 miles northwest of Shanghai had complained to local government officials [that the] factory was spewing noxious fumes that made their eyes tear up and the poplar trees nearby shed their leaves prematurely. Yet no one stopped [the] company from churning out bags of food powders and belching smoke.”
In any part of the Western world, such a facility would be subject to local, state and Federal scrutiny. But in China, it was allowed to continue on without meeting any environmental standards or controls. However, when U.S. Food and Drug Administration inspectors were just days away from inspecting the facility for its own investigation, the factory was mysteriously bulldozed. At that point, there was no evidence to gather, let alone inspect. In our view, this is the latest in a string of similar cover-ups going back to Tiananmen Square, when the government killed hundreds―possibly thousands―of protesters, but attempted to cover-up the damages and hide them from the world (not entirely successfully, as we all know).
The moral of this story is work with Chinese suppliers—and by extension, the Chinese government—at your own risk. Of course you might still be able to have someone’s head on a stick (literally) if the Chinese government rules in your favor in a given case. According to local wire services, the former director of China’s State Food and Drug Administration was “sentence to death by a Beijing court for taking bribes and dereliction of duty” in various incidents unrelated to this recent scandal. One could argue that rulings like this make Sarbanes Oxley look like child’s play. After all, the Enron, Tyco and WorldCom executives indicted for fraud in recent years only ended up in jail―not facing a firing squad.
In our experience, if you are thinking about working more closely with China―either sourcing from or selling into the country―it is critical to fully think through the rules your potential partners are playing by. Granted, the region still presents significant opportunity for manufacturers of all sizes to not only lower their cost structures, but to tap emerging market demand as well. We have been involved in a number of transactions in the Far East (including mainland China) which have helped organizations save tremendous sums while actually increasing quality. It can be done. But the risks can be especially high for companies which are not prepared for the different rules of the Chinese market. Perhaps you might believe the odds to be in your favor given a metaphorical good hand you’ve been dealt in what you thought was a game of Blackjack, but when the other cardholders are playing Texas Hold ‘em with the same deck unbeknownst to you, watch out.