This is the first in a series of eight real world examples of how western companies became aware that their ‘man’ in China was on the take.
China is a unique place with a culture, especially its business culture, that continues to confound western business people.
Whatever ethical norms you’ve come to expect, they don’t apply in China. Why should they? This is a different place. The more opportunity there is to profit personally from your operations through fraud, the greater temptation there will be to take advantage of you and your company – and in ways you would never suspect. Think Wild West.
Innumerable pitfalls await the unwary in China. But there are ways to safeguard yourself and your company. In this series of “Eight Signs,” I am going to suggest that you keep an eye out for behaviors and circumstances that singly, or in combination, could indicate that something is amiss in your organization.
Please treat these items as caution lights indicating potential trouble, not proof of wrongdoing. If you notice several signs adding up, you should begin to be even more vigilant.
You can’t get ahead of your competition.
Some years ago, I had an interesting conversation with the newly hired China Country Manager of a well-established US industrial systems manufacturer. The company made and sold bespoke pneumatic systems for factories to their industrial customers.
In this particular case, the company was number 1 in industry rankings in every other market on earth, but in China they were, and stayed, at number 3 and somehow, they never seemed able to catch up with their competitors.
Even with a booming market
And the market in China was absolutely smoking hot; demand was explosive due to the build-out of so many industries and the arrival of so many western companies, setting up their manufacturing sites all across the country.
The company led its sector, and had been no. 1 in all the markets where it had a presence. It had come to China with great hopes and invested tens of millions in manufacturing facilities, a sizeable sales force, distributors, agents, technical installation and commissioning teams, after-sales service – the whole nine yards.
The general manager was a local Chinese with a very credible career track record. He was among the first hired into the company and was responsible for the creation of quite a large infrastructure, human and physical.
Steady growth but…
The company grew steadily year-on-year, but not in the way it had been imagined it would originally. For some unclear reason, the company’s revenue growth, though seemingly healthy by western market growth standards, always seemed to lag its two global competitors, and margins weren’t quite what they should’ve been either.
More rankling was the company’s seemingly permanent no. 3 ranking rut in China. This went on for 8 years and never seemed to change much, despite all manner of efforts from US headquarters.
Finally, out of frustration really, the company engaged me to recruit the Country Manager mentioned above. They wanted to be number one in China and his job was to get them there. Chinese himself, he knew enough to start with a look under the covers.
Hey, what’s that smell?
Among his first actions was to hire an attorney and open an “official investigation” with the local police. This permitted probing into company officers and company matters in general, among them, its distributor / agent arrangements, a primary area for corrupt activity in China.
Specifically, the new Country Manager asked the police to say whether the General Manager and the northern China distributor were related. Within 72 hours, he had his answer (the police simply checked the national IDs for each on record in the national data base): yes, they were related – they were husband and wife, though, as is the common practice in China, using different surnames.
Boom! For eight years, the company’s top man in China, the general manager, and his wife, the north China distributor, had conspired to defraud the company and cream off a large part of the company’s China profits – and they had succeeded. They had made millions for themselves by convincing headquarters that the China market was really tough. They had used their positions to line their pockets, rather than push the business forward.
The loss to the company, it was calculated later, turned out to be in excess of US$ 8 million. The GM and distributor were fired, but never taken to court. I got the feeling the CEO just wanted to sweep it all under the carpet, be done with it, and move on. In a way, I didn’t blame him.
Over the next several years, under the new Country Manager, the company’s China business recovered and its profit margins were restored, so you could look at it philosophically and say they lost a few years and a bucket of money, but bounced back. Slowly but surely, the company has made it to number 2 in the China market, with number one still a few years out.
Precautions you can take
You absolutely have to take pre-emptive precautions against this kind of fraud happening, minimizing tempting opportunities by employing internal checks and balances, a formal approval process, conducting audits, spreading authority, ensuring sensible reporting lines, etc. For your top positions, you might even consider having a due diligence investigation run by Kroll or one of the other service providers.
So. To start: what are your company’s industry rankings in China compared your market rankings elsewhere in world? Does something about this strike you as not quite right? If so, put a tick in the box and move on to the next item…