China: Bribe, Beg, or Barter

I have had a plethora of speaking engagements in the last month or so. One discussing China's Banking System & Shadow Lending (Cleveland Foreign Credit Group), one discussing China and US Trade Relations (Miami University of Ohio), another on The Risks of Doing Business in China (Columbus, Ohio and again at Lincoln Electric in Cleveland, Ohio) with more lined up later this year. At times I was the only speaker, and other times there were a few of us presenting on related topics. At MANY of these events other speakers and/ or attendees either stated or questioned whether graft (bribes) were common in China. Actually a couple people said they were commonplace, and they often blamed their struggles in China on having to bribe someone to conduct business. They said "I had to bribe someone to do their job."

We are going to examine how the Chinese use bribes, in various forms, and the U.S. response to that and whether these bribes are requested or offered, and whether the bribe is for the employee to do their job, or to do something other than what they are supposed to do. There is a difference between bribing some one to do their job (where typically they ask you for money or they won't perform) and bribing someone to not do their job (where you initiate the bribe because you want a more favorable outcome).

In China 30 years ago it was very common to incentivize someone to do their job by giving them a gift. Why? The China of the late 1980's and into the 90's was a communist economy that relied on 95% government controlled business. And in that communist economy there was very little difference between the salary for the GM of a factory and the guy who mopped the floor. So how were they compensated for their relative value to the organization? The GM could "gift" some of the company's products to someone else, who often then re-gifted that to someone they wanted to influence and so on and so forth. By gifting them, the GM was able to get a slightly larger apartment, or their child in a better school, or some other economic benefit. People recognized their relative power in the economy by giving and/or accepting gifts. Sometimes cash, but frankly there wasn't a lot of cash to go around. Much of this was actually bartering, trading your goods / access / influence for someone elses.

In the booming late 1990's and into the early 2000's as people were allowed to own a business things changed a bit. How do you move a government owned / controlled economy to a privately held one? Where do individuals get the money to buy apartments or companies if they weren't making much cash beforehand? In this period of transition there were a lot of instances of people using their power and influence for economic gain. From how these government companies were taken private (and ownership and shares divided up) to how people came up with the money to buy apartments or build new ones. In this environment for all the people in high positions who clearly benefited from the rules they created, there were also people in lower positions who still held authority to approve (or not) some key aspect of the transaction. These people (whether it be building regulatory authorities, customs, or a purchasing agent) saw the money being made at the higher levels of power and they wanted their share - and now there was the cash to pay them with. Although gifts that could be monetized were still important.

Towards the late 2000's and into today, we are looking at a China where many people (but not all) are in a position to make money in very direct ways. Through entrepreneurship, increased education and wages, investment, taking risks on new ventures, or changing jobs to accelerate their careers. For much of the population they are not stuck in a powerless place where bribes are their only way to obtain value from their position of authority. Certainly it still exists, and there are still people who feel that they can't (whether that's truth or their perception) get ahead so they exact a little extra $$$ on the side.

When I hear that a US company has used bribes I start to think - what is the underlying cause of the transaction? And when I heard repeatedly at these recent events that many people still feel bribes are common practice in China it got me thinking....were we still paying people to do their jobs? And so I had an "ahh haa" moment. We assume a bribe is when you are paying someone to do their job. And yet what I have seen in 99% of these situations in the last 5 -10 years is that you are paying for is for someone not do their job. You are incentivizing someone to behave other than in the best interests of their job (or their company's interests). Because you don't want to follow the rules in place, you want a different (better) outcome. How so?

Example: A company was importing components from China, using both their own team in the country to find the suppliers and control the orders as well as a trading company. So the initial question (by one segment of the US management) was why are we paying a trading company to buy and export the goods if we can do it ourselves? The short answer is that the US wanted to utilize lower HTS codes for export (to save money) and Chinese Customs didn't agree with that classification, but if they used a trading company who could pay Customs a bribe, then they could export the components under the "wrong" code and save money.

Example: A company was setting up a factory in China, the local government was concerned about the air emissions from their manufacturing process. In the U.S. the company had shown that the emissions were well within range of EPA guidelines. The local Chinese agency was not convinced and asked for more tests and documentation. The company was left with options - see if there was an "economic incentive" that would encourage the regulatory official to approve the paperwork, or spend a few months and thousands of dollars doing the research to prove their manufacturing met the guidelines.

Example: A company was selling products into China, and their sales team in China said that in order to make a sale they had to bribe someone in that organization to choose their product. The US used a middle man (trading company, distributor) to manage that aspect of the sale. Why did they need to pay someone off to choose the US product over the competition? Because the end customer didn't value the benefits of the US company's products for the cost. They (whether you agree with their value system or not) were comfortable with a less sophisticated component, and for them to spend more money on a "better" product they had to convince someone in their own management to take the risk. Risk? Its a risk to deviate from the components you have been ordering, that your boss is quite satisfied with, to try a new foreign component that may or may not perform better. You are stepping out of your comfort zone to justify the value of the purchase of a new / foreign component.

What do we see here? Whereas in the early days of China's opening up it was quite common to bribe someone to do their job, in the last 5-10 years a lot of what people are bribing someone to do is to deviate from their job and the company's best interests (as they see them). Now I have heard every sort of justification; "my competitors are doing it, I can't compete if our prices at export are higher" and "our product performs better, provides more value to the customer, and we need to get into the market to show them or they will never change their preferences" and "the purchasing agent is a relative of one of the managers of the end customer and this is how they make money." In the end - whatever your justification - you are asking someone to do something that is outside the normal course of their job. And that is what you are paying for.

When someone tells me their salesman has to pay favors to a customer to get an order, my response is that that is a sign of a few things... Their salesman is too lazy to work to sell the product on it's merits. They don't know how to explain the value proposition to the customer. The value proposition doesn't ring true to the customer because the company is selling product in China that the market doesn't want. If you have a superior product, and the value is understood, your product will sell in China on it's merits.

Disclaimer: Clearly U.S. companies need to be compliant with the Foreign Corrupt Practices Act as well as their own company ethics code. This post is not suggesting, advocating or approving the use of bribes in business. If anything I am challenging the often repeated "we have no choice" statements that some executives make about "having to" pay them. Foreign companies need to recognize their role in paying bribes is often more significant - they are the ones asking the Chinese to break the rules. No matter how the foreign company justifies it (unfair competition, delayed approvals, etc) the outcome is the same, they are creating the bribe.

I know this post will garner a lot of discussion and could prove unpopular. But frankly I am tired of hearing U.S. executives who "had no choice" but to pay someone off, when in fact they had a choice. And in many instances they were initiating the bribe, not responding to a request for money but offering money as incentive for the Chinese worker to deviate from their professional responsibility. I would like to see them acknowledge their own part in this, rather than laying 100% of the blame on the person receiving the bribe. It takes two parties for this type of transaction to occur. Own up to it. And explore the underling cause of the situation to see if you can find another way to meet your goals - and to eliminate putting the company and employees at risk.

Note: this deals with U.S. company interaction in China. Bribes that are Chinese - to - Chinese can be different.