Monday, April 5, 2010

Harvard Business Magazine: The Truth Behind China and Rio Tinto, and the Jail Sentences

by Liu Shengjun

China's legal system isn't transparent, as the world has always known, but that has become, once again, the topic of heated debate after the Chinese government handed down jail sentences last week to four employees of Rio Tinto, the Anglo-Australian mining company, for taking bribes and stealing commercial secrets. Businesspeople conveniently forget that while the Chinese government may enforce laws selectively, it doesn't discriminate against foreign companies. In fact, it acts against multinational companies only when forced to do so.

Fact is, Rio Tinto's employees failed to respect "face" — key in our culture — so the government had to step in. Bribery is a weapon that companies, both local and foreign, often use in China, and courts and governments overseas have indicted several multinational companies — such as Lucent, Siemens, Daimler Benz, Carrefour, IBM, and Wal-Mart — for using corrupt practices in China. According to a survey conducted in 2007 by the Anbound Group, the Chinese government investigated 500,000 corruption cases between 1996 and 2006, and 64% of them were associated with international trade and foreign investment. Nothing is easy but everything is possible, as the Chinese saying goes, because of the enormous power and low salaries of many bureaucrats.

With Rio Tinto admitting its executives took bribes and then firing those executives, no one can deny that they played the corruption card in China. Contrary to some opinions, the case had nothing to do with the abortive bid by Chinalco to take over Rio Tinto in 2008 and everything to do with iron ore deals. The prices that Chinese companies paid for ore have mysteriously risen every year: by 71.5% in 2005, 19% and 9.5% in 2006 and 2007 — and by 79.88% in 2008. However, the multinational company and its employees failed to understand that iron ore is a critical input, and its price affects most Chinese companies as well as national security. This situation exerted pressure on the Chinese government and while it tolerates ambiguity, it could not afford to lose "face" by doing nothing. Once public concerns reached a certain point, the government had to take legal action.

Read the rest here.

1 comment:

  1. I find this article very confusing. Dealing with the Chinese government is about "trust" and saving "face?" But watch out for "public opinion" which can even impact "court decisions." Who appoints these judges? Add to this the fact that Rio Tinto fired its executives and it sounds like China is a worse snakepit than the U.S.

    On the other hand the writer makes no sense. He states this corruption case was about "iron ore trade" not about Chinalco's failed bid for Rio Tinto. If the failed bid was not about iron ore trade what the heck was it about?