Monday, February 01, 2010

Goodbye China, hello India !

The spat between Google and Chinese authorities has raised many issues. But one major issue raised is how foreign companies do business in China and whether they would do better by shifting their enterprises to new shores. 

Rules of engagement

Unclear rules of engagement have left some in extremely hot water. Last year Rio Tinto executive Hu Stern and three Chinese colleagues were arrested on bribery charges and subsequently charged with industrial espionage. 

The issue made front page headlines in Australia and around the world as speculation grew over how business relationships in China might be affected in the future. Information found stored on Hu's personal laptop, seized by investigators, allegedly contained confidential business information of several dozen major business partners of Rio Tinto, including storage levels and sales plans, deemed much too specific and precise to have been acquired through legal means. This information, in the opinion of Chinese investigators, demonstrated that Rio Tinto, an exporter of iron ore and Stern Hu's employer, had an unfairly sophisticated and questionably thorough level of understanding of the Chinese market. 

As such authorities suggested that such information could only have been obtained through bribery and other illegal means. "Competent authorities have sufficient evidence to prove that they have stolen state secrets and have caused huge loss to China's economic interest and security," the Chinese Foreign Ministry spokesman Qin Gang said shortly after Hu's arrest.

But speculation was already circulating as to the real reasons why Stern Hu had been detained. Rio Tinto, concerned for its other employees, advised many to leave the country. While sources told the Wall Street Journal that a number of staff had been told to leave or not return to China, Rio Tinto's London office declined to elaborate. "We still have a number of staff in China," said Nick Cobban, a spokesman for Rio Tinto. Meanwhile the head of the company's iron-ore operations, Sam Walsh, has insisted allegations that Rio staff had bribed officials at Chinese steel mills were "wholly without foundation."

Press reactions

The sharpest criticism was found in the press. "What makes it so sensational is the combination of a highly publicized major commercial negotiation that has failed with the immediate arrest of a principal figure, raising the possible inference of retaliation," Jerome Cohen, a leading expert on the Chinese legal system, told at the time.

Many analysts supported the retaliation theory. The four arrests came just days after the iron-ore price negotiations between China's steel industry and Rio Tinto and other producers ended without agreement. Rio Tinto also rejected Beijing's recent attempt to take a big ownership stake in the mining giant. On the face of it, the arrest of the four employees appeared like an attempt to teach a foreign company a "brutal" lesson. 

There was even speculation that Hu Jintao, China's president, ordered the arrests personally, though the Chinese Foreign Ministry denied any such involvement. Rumours persisted however, and there was also a belief that internal political posturing may also have had some bearing on the case.

Uneven playing field

To conduct business in China, it's all about relationships. There may be rules and regulations, but long-time China hands will often say it can be a complicated and often frustrating experience. So one needs to find the right person, either in government or the private sector, and that person must like you.

A little wining and dining may not seem unreasonable in order to build on that relationship. Entertaining a senior member of the Chinese team which negotiates the price of iron at a luxury box during the Olympics, as BHP did last year may seem appropriate. It's not illegal, but it is a legal grey area, says Xianfang Ren, a senior analyst with Global Insight. Talking to CNN, he says, "The line between entertainment, public relations, and government relations and bribery, commercial bribery it's kind of blurred here in China...Especially in a country where good government relationships are important in getting deals and contracts."

Derek Scissors from Heritage says the situation can suddenly change, especially during high-level iron ore negotiations where billions of dollars are at stake. "The international message they're sending is, if things get ugly enough and important enough we're going to break the rules. We'll follow our rules not international rules; we're not going to respect the rights of multinational executives'," Scissors tells CNN.

The line of acceptable behaviour may have been redrawn. Guanxi, or "developing good long-term relationships", is now a more difficult and more dangerous minefield. Xianfang Ren suggest that foreign companies stick to their own high standards. In short don't do in China what you wouldn't do back home, even if it seems as though everyone else is doing it.

But the difficulties of doing business in China have existed for a long time, and there is no level playing field. "This case illustrates some of the uncertainty of getting involved in business in China," said John Frankenstein, assistant professor of economics at the City University of New York. "A Chinese lawyer once told me 'basically, the state can legitimately intervene in any deal at any time under any pretext'."

"There are a lot of multinationals who came to China and have a fact-finding, commercial information arm. For those people it's certainly worrying," says Tom Miller, of the Beijing-based economic consultancy Dragonomics. "If you are in the kind of business where you think there might be an overlap between commercial information and state secrets, you would be concerned. The problem is that Chinese law on this is very, very oblique and frankly no one knows what a state secret is."

The worst fears of foreign investors appeared to have been mitigated by the details that emerged from the Rio case. "I don't think it's as alarming as it looked on day one," said one business adviser who asked not to be identified. In fact many people are reluctant to speak on the record, or have been instructed not to do so by their companies, in a sign of the case's sensitivity.

Google highlights new issues

Less than six months later it was Google that raised the spotlight. Highlighting the risks posed by possibly government sanctioned hackers, threats to intellectual property and rekindling debates over censorship, Google have more than rattled the cage, they have virtually broken it. While the issue over Hu Stern raised eyebrows, Google have made draws drop. Senior politicians in the US have made statements and other companies have voiced their support. 

The number of column inches given over to the story has grown exponentially and China, while initially trying to downplay Google's statement, has come out fighting with many equally forceful statements of its own.

The Google issue seems also to have drawn a line in the sand. China says companies are welcome to do business in the country, but must follow its laws. This is a fair statement, at face value. But as the Hu Stern case seems to show, China is not playing by the rules itself when it comes to its own companies.

India offers opportunities

Some have suggested that some companies might shift their operational bases to regions less hostile to business operations. Writing on the Huffington Post website, Ernest J Wilson says that the fracas might "open up space for India to attract more foreign investment from the West as a safer haven than China." 

An article in the Asia Times also points to China's southern neighbour. "Inevitably, the attractiveness of China's emerging rival, India, as a market for Google and ally for the United States will enter into the mix," Peter Lee writes. Google already enjoys an overwhelming market share for its search engine, media and networking business in India. Around 89% of Internet searches go through Google, 68% of India's social networking occurs on Google's Orkut service, and 82% of media is viewed on Youtube, according to the Internet marketing research company Even more astonishingly, Indian users spend almost 30% of their entire online time on Google sites, three times the world's average. 

William Pesek, a Bloomberg columnist writing in The Age, an Australian daily, says India may well gain advantage from the recent débarqué between China and the West. "India has a track record of innovation and a stable of internationally competitive companies that China doesn't," he says, "India also has far superior laws on intellectual property and corporate governance. And China's willingness to blow off Google plays to India's relative advantage in these areas."

Cheap labour is one thing, but the future is based on ideas, information and technology, Pesek agues. "Letting Google leave may dull the long-term benefits of the trillions of yuan that China is throwing at the economy. It limits the participation of entrepreneurs in an age where ideas and impulses mean more than sweat on factory floors," he says, "The world is now driven by knowledge flows, making it vital to stay attuned to the latest developments in any field. Only then can innovators ride the latest waves in international business and finance and create the hundreds of millions of jobs needed to raise living standards."

Pesek speculates that India's billionaires "must be rubbing their hands together in glee as China's leaders make an expensive miscalculation." According to a 2008 Forbes magazine poll, India may have the most billionaires by 2017, and while China's ultra-wealthy are growing in numbers, it's better, Pesek suggests, for one's billions to come from new ideas than from bubbles in the Chinese stock market. "What China lacks is a growing roster of homegrown knowledge-based and technology outfits creating jobs, pushing the country up the value chain and inspiring young people to become the next Bill Gates."

Nandan Nilekani, the co-founder of Bangalore-based Infosys Technologies, is often called India's answer to Microsoft's co-founder. When asked about the secret of India's success in technology, Nilekani points to a free press and a rabid embrace of information flows. In other words, if India censored cyberspace, companies such as Infosys or Wipro wouldn't be what they are today. Gordon Chang predicted China would fail in the coming years in his 2001 book "The Coming Collapse of China". He has yet to be proved right. But if China's leaders fail to embrace the 21st century, it may well be left behind as companies seek new pastures to build their technological dream without hindrance from the state.

tvnewswatch, Beijing, China

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