Bad Meat, Cultural Differences and Anti-Corruption Compliance

China corruption and cultural differences

In the last year or so, my law firm’s China lawyers have been seeing something new: more and more American and European companies that have been doing business in China deciding they “cannot take China any more.” The following two things made me think of that today:

  • A U.S. company that paid a Chinese company a fair amount of money to set up a WFOE in China. This U.S. company just learned that the WFOE was not properly set up and that the money it sent to the bank in China was never earmarked for the WFOE’s capital requirement. When I asked this company what it wanted us to do to remedy this situation, they made clear they “had had it with China” and all they wanted was their money back.

The New York Times article is on the current China meat scandal and after reading it, my first thought was that my law firm needed to double-down on helping our clients figure out whether China is really the right country for them.

My second thought was that we (those of us doing business with China or in China) cannot give up. Things (I am being intentionally vague here) are constantly getting better in China and they are better now than they have ever been. At least the things relevant to the New York Times article.

Most problems American companies have with China stem from the American company’s own failure to properly protect itself from what can and does so often happen in China. For some posts reflecting that view, check out China Law: Don’t Blame it on the Gray and Is There Really “Quality Fade” and so What if There is?

As China attorneys, we almost have to believe most China problems can be prevented either by not doing the deal because it is just too risky or by setting up protections to prevent against the panoply of potential problems.

So I get frustrated when I read about a company that appears to have done everything right and still has a problem. Mattel’s lead paint problems was an example of that. Near as I can tell, Mattel did just about everything it reasonably could have done to prevent the exact problem that eventually befell it. I am getting the sense that the company at the heart of the recent meat scandal also did most everything right.

According to the New York Times article, OSI — the company that supplied McDonald’s and KFC with meat — has a sterling reputation and is anything but a China neophyte. It also appears to have acted above board since problems were discovered.

So what caused the problems? The Times article provides a few hints:

Although the company had been in China for two decades, OSI embarked on a $400 million rapid expansion plan in 2011 that included three new poultry production and processing facilities and additional capacity at its Shanghai and Beijing plants. “The goal was to completely recreate the U.S. system — from feeding and watering regimes down to the exact rate of air flow and size and placement of windows in the poultry houses — but to make it locally relevant,” according to a 2013 Harvard Business School case study about OSI’s China business by Prof. David E. Bell.

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Experts in food safety and plant operations say, however, that even the most rigorous protocols and standards can be undermined by culture, particularly at a fast-growing company — OSI’s revenues doubled between 2011 and 2013 — in a country where high monthly turnover of factory workers is not uncommon.

“The average Chinese factory worker comes from someplace where food has likely been scarce and picking up a piece of meat that has dropped on the floor and eating would not be unusual — it’s not unusual for us to drop food on the floor and anyway eat it,” said Andy Tsay, a professor of operations management at Santa Clara University who was one of the authors of a paper on recalls of Chinese made products in 2007.

Steve Gruler, chief executive of Global Quality Consultants, a firm that provides risk management advice to a variety of companies, recalled visiting a grain elevator in China where workers were unloading grain onto trucks. “A plume of dust comes from under the door of the elevator and rises up over the truck,” Mr. Gruler said. “Our eyes got about as big as saucers.”

Grain dust is highly combustible and such explosions have been deadly. Mr. Gruler and a colleague asked the engineer at the facility whether it had a dust collection system. “Oh, yes, he said, but it had been shut off to conserve electricity,” Mr. Gruler said. “He didn’t understand that dust could cause an explosion that would blow the place apart.”

OSI itself acknowledged such challenges in interviews with Professor Bell of Harvard. “When we began building modern broiler houses, we found that the workers often took shortcuts even though every detail was spelled out in the plans,” Stefan Chen, senior vice president and general manager for OSI’s poultry operations in China, told him. “For instance, they would change the size of a window to save material. This seems like a small thing, but it affects the ventilation, which affects the production efficiency.”

I am not going to address OSI’s safety issues nor will I address safety issues in general. I am a lawyer, not a safety specialist.

I will instead look at a somewhat similar issue, but one which my law firm knows well because it lies at the heart of our international compliance practice: preventing corruption.

When it comes to preventing corruption in China, American and European companies are all over the map. Some essentially give their law firms a blank check to help prevent corruption. Others believe they need nothing from lawyers on that score at all. We are constantly engaging in back and forth with our clients regarding their anti-corruption policies and programs.

There are services out there that for a few thousand dollars will conduct what is essentially little more than an English language internet search regarding Chinese companies and key personnel. Some of our clients believe this is sufficient to make sure they are not doing business with disreputable Chinese companies/people or companies/people on various sanction lists. These sorts of searches are worth almost nothing especially because they are not even in Chinese. Some companies do not even want to hear this, believing that their having paid $2,000 for an English language search will somehow protect them when their government knocks on their door, and for really small companies, it might.

We have dealt with companies that insist they do not need any anti-corruption training for their personnel in China either because they do not have anyone who would engage in corruption or because they made clear to their employees that corruption is not okay. When we try to tell them that the average Chinese employee has no idea what really constitutes corruption as that should be defined for an American or European company, they still have no interest in going any further.

If you want your China employees to perform to the standards you have set for them, you must do more than just set out those standards in a policy manual somewhere. You must make sure again and again that they 1) understand your policies, that they 2) are abiding by your policies, and that 3) any failure to abide by your policies will have real repercussions.

Because as the New York Times implies, there are cultural differences. What this means is not that Westerners are not eminently capable of corruption themselves, but that the understandings surrounding corruption and how best to serve as an employee can differ as between China and the West.

What do you think?

5 responses to “Bad Meat, Cultural Differences and Anti-Corruption Compliance”

  1. Dan:
    I think you get at an excellent point in this post, and one I have been long arguing – if you want to do business as a foreign firm in China you need the right expertise (legal and professional), you need the right China Hands (internal or external foreign experts on China), and you must reinforce, instill, and celebrate the company culture that has made you great abroad.
    The reality is that few American companies in China do this. I am now meeting more and more Americans who have some ability with the Chinese language, and this is excellent! What is not excellent is how few American companies employ these people in a capacity where they can help.
    In America we see all people as the same. We have equated sameness to globalization, but the reality is Americanism ends the moment you leave our shores. The Chinese people think differently, feel differently, and are loyal to a civilization and not a foreign employer. So to communicate this mine field of governmental, social, and moral differences you need both excellent Chinese staff, as well as Americans who share in your companies cultural values, and are able to communicate the Chinese perspective honestly, and without casting judgement.
    There are two strategies of doing business in China. One strategy involves rolling up your sleeves, sending trusted staff abroad, and bringing trusted Chinese staff back to the US for training. Exchanging people to reinforce company culture and to build greater understanding. This in many ways compares to the MacArthur strategy of rebuilding imperial post war Japan. Foreign led cooperation that does not impede on local social norms.
    The other way is what I call extremism. You open up an office in China, hire a bunch of locals to run it, and send them resources and satellite train. In this way, much like an extremist organization, your foreign office operates like a terror cell, with excellent knowledge of the local landscape, but little chance of success save minor chaotic victories, plagued by enormous potential risk.
    Most American organizations favor the terrorist cell approach because it is cheaper, and they believe Chinese people are the same. True respect is not assuming everyone is like you, or needs to be like you, but understanding that only through collaboration and mutual understanding can success be achieved. Respecting and understanding difference so that you can work around it is the mark of a successful international company.
    The sad reality is that many foreign companies in China have grown too far in the wrong way, and now China has become a major liability. Just like a terrorist organization, they are willing to let the cell die, to keep the extremism alive.

  2. The explosion at the GM contractor factory probably also belongs to this blog (exploding dust like the grain bin mentioned above), but of course, investigation is still ongoing in the tragedy.

  3. I don’t see questions of corruption and safety standards as an issue of cutural difference, but a difference in the level of (economic) development.
    Rule of law is a concept that has been included in the Chinese constitution just a few years ago. Many workers are recruited directly from the villages, without any vocational training. These things are changing, not at a speed that many Western companies would like to see, but reasonably fast.
    Culture may take centuries to change (better say develop), that are different dimensions.

  4. This article is a bit bias… one should ask the question that given china has a huge labour pool, why must IOS employ only people of such standards ? Why not get better managers whom comes from major cities to oversea the production with the lesser skilled workers?

  5. Mattel and OSI failed to practice a vital step in sourcing products from China factories. At the beginning, with frequent updates, one needs to ask “what could go wrong with my product?” Then they need to set up a thorough test protocol to test actual product, not samples provided by the factory. Three Mattel engineers in a room could have identified “lead in the paint” as a potential problem within 15 minutes. But they lacked a consistent process to survey their products on an ongoing basis.

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