Question

INTERNATIONAL MARKETING Case Study

Coping With Corruption in Trading With China

Corruption is on the rise in China, where the country’s press frequently has detailed cases of, and campaigns to crack down on, corruption. Indeed, China has been rated by Transparency International as #41 of the 52 countries the German organization rates on its “Corruption Perception Index.” Denmark is rated the least corrupt at #1 and Nigeria as the most corrupt at #52. Corruption’s long arm now is reaching out to touch China’s foreign business community. Traders, trade consultants and analysts have said that foreign firms are vulnerable to a variety of corrupt practices. While some of these firms said they had no experience with corruption in the PRC (People’s Republic of China), the majority said they increasingly were asked to make payments to improve business; engage in black-market trade of import and export licenses; bribe officials to push goods through customs or the Commodity Inspection Bureau (CIB); or engage in collusion to beat the system. The Hong Kong Independent Commission Against Corruption reports that outright bribes as well as gift or payment to establish guanxi or “connection,” average in the PRC 3 to 5 percent of operating costs, or $3 billion to $5 billion of the $100 billion of foreign investment that have been made there. The most common corrupt practices confronting foreign companies in China are examined below. Paying to Improve Business. Foreign traders make several types of payments to facilitate sales in China. The most common method? Trips abroad. Chinese officials, who rarely have a chance to visit overseas, often prefer foreign travel to cash or gifts. (This was especially true when few PRC officials had been abroad.) As a result, traders report that dangling foreign trips in front of their PRC clients has become a regular part of negotiating large trade deals that involve products with a technological component. “Foreign travel is always the first inducement we offer,” said an executive involved in machinery trade. In most cases, traders built these costs into the product’s sale price. Some trips are “reasonable and bona fide expenditures directly related to the promotion, demonstration or explanation of products and services or the execution of a contract with a foreign government agency.” But other trips, when officials on foreign junkets are offered large per diems and are not invited specifically to gain technical knowledge, may be another matter. Foreign travel is not always an inducement – it also can be extorted: In one case, a PRC bank branch refused to issue a letter of credit (L/C) for a machinery import deal. The Chinese customer suggested that the foreign trader invite the bank official on an oversea inspection tour. Once the invitation was extended, the bank issued the L/C. Angling for Cash. Multinational companies (MNCs) also are asked sometimes to sponsor oversea education for children of trading officials. One person told a Chinese source that an MNC paid for his/her United States (U.S.) $1,500-a-month apartment, as well as a car, university education and expenses. Firms find direct requests for cash payments – undeniably illegal – the most difficult. One well-placed source said that a major traders, eager for buyers in the face of an international market glut, has fallen into regularly paying large kickbacks into the Honduran, U.S. and Swiss accounts of officials at a PRC foreign trade corporation (FTC). 2 | P a g e M K T G 3 4 1 0 / J u n e 2 0 2 0 Refusing to make payment may not only hurt sales, it also can be terrifying. A U.S. firm was one of several bidders for a large sales; a Chinese official demanded the MNC pay a 3 percent kickback. When the company representative refused, the official threatened: “You had better not say anything about this. You still have to do business in China and stay in hotels here.” Not surprisingly, the U.S. company lost the deal. Traders of certain commodities may be tempted to purchase on the black market those import and export licenses that are difficult to obtain legally. A fairly disorganized underground market, for instance, exists for licenses to export China-made garments to the U.S. Some branches of the CIB also have posed problems for some traders. Abuses have emerged in the CIB since it started inspecting imports in 1987. A Japanese company, for instance, informed CIB officials of its intention to bring heavy industrial item into China – items that had met Japanese and U.S. standards. The officials responded that they planned to dismantle the products on arrival for inspection purposes. The problem was resolved only after the firm invited the officials to visit Japan. Some traders get around such problems by purchasing inspection certificates on the black market. According to the press accounts, these forms, complete with signatures and seals, can be bought for roughly U.S. $200. Some claim that, for the appropriate compensation, customs officials in a southern province are most willing to reduce the dutiable value of imports as much as 50 percent. Because the savings can far exceed transport costs, some imports that would logically enter China through a northern port are redirected through the southern province.

Why marketers are so eager to enter the China market even the corruption in the China’s foreign business community is on the rise?

For the appropriate compensation, customs officials in a southern province are most willing to reduce the dutiable value of imports as much as 50 percent. From this statement, what are your comments about the customs and its officials?

Answer 1

Q: Why marketers are so eager to enter the China market even the corruption in the China’s foreign business community is on the rise?

A: The Chinese demographics is the size of its population which makes China the single largest global market for the sheer size of its sales turnover and volume of various consumer products, thus inspite of the existing corruption which is on the rise, international businesses and marketers prefer to enter the China market, and is also referred to paying to . Several international businesses and marketers do not mind this illegitimate expenditure (corruption) since they can recover these additional costs by including them in the sales price of the products and therefore pass it on indirectly to the consumers thereby incurring no further expenditure to themselves but a net profit. Further, one well-placed source said that a few major traders, eager for buyers in the face of an international market glut have fallen into regularly paying large kickbacks.

Q: For the appropriate compensation, customs officials in a southern province are most willing to reduce the dutiable value of imports as much as 50 percent. From this statement, what are your comments about the customs and its officials?

A: From the above statement, it appears that the customs and its officials in the southern province are corrupt and are easily approachable and amenable to inducement/bribes and temptation and because the savings can far exceed transport costs, some imports that would logically enter China through a northern port are redirected through the southern province. This means that these southern province customs officials are corrupt unlike their northern counterparts, and further are causing immense losses to the Chinese government through these rampant corruption activities bypassing rules, and procedures. No surprise that indeed, China has been rated by Transparency International as #41 of the 52 countries the German organization rates on its “Corruption Perception Index.”