BJCG Article: Game Interrupted – Doing Business in China

Doing business in China is never simple, as Rio Tinto exec Stern Hu found out the hard way.

Corporate standards differ across cultures, something foreign companies ought to remember, even when the going is good. Playing by the rules is one thing, but rules differ across cultures, writes Cecilia Fan.

If you have ever watched how children play their own games, you’ll know that it can sometimes be lively and fun, and sometimes disconcerting. Some broad trends in human behaviour are evident in these games. A good game always needs a few players. In some cases there are existing rules, and in some cases the children change the rules or make up their own.

It is exciting to play a new game; players can take turns in a “role play”, immersed in the fascination of their invented world. Unfortunately though, no game lasts forever. Always at some point, one child or a couple of children form differing ideas about the rules. They may want to change the rules halfway through the game. This will in turn lead to some kind of argument. Games are played in the commercial world too, albeit on a much larger scale.

The game played by Rio Tinto, Aluminium Corporation of China (Chinalco), China Steel, and a number of Chinese iron and steel mills was certainly a big one, which has left four former Rio employees behind Chinese bars. We are certainly not looking to make any judgments here, in either a commercial or political sense. It should have been an enjoyable game, China has created an economic growth miracle, and Rio has been able to export iron ore to China with huge price increases every year. This was a happy game for a number of years. However the price negotiations have always been a sensitive area for the relationship. Rio, of course, would like to maximize profits, while the Chinese side aims to minimize costs. As is the basic nature of the commercial world, prices go up when demand exceeds supply – the issue is always how you manage it. The game became more complicated when Rio then agreed to Chinalco’s offer to increase its shareholding in Rio to 18 percent, but then later changed its mind. Chinalco, despite relying on bank loans to execute the sale, was in a good position to acquire Rio’s shares, but was not moving quickly or effectively enough, due to either inexperience, or an attempt to secure a lower price for the share purchase. China Steel was of course annoyed as well, while it stood up to bargain on behalf of its “gangs” (the Chinese buyers), a few “smarty pants” started making side deals, causing China Steel to lose significant negotiating power.

There is no doubt that corruption or kick back situations are fairly common in China, and there are a handful of corruption cases involving foreign nationals. Stern Hu was not the first overseas Chinese to be charged under Chinese law, nor will he be the last. Back in the early 1990s Australian citizen James Peng was sentenced to 16 years imprisonment for “corruption”. He served 11 years in a Chinese jail before being deported back to Australia. He too was playing a high-stakes game, with a number of influential people and a municipal government in southern China.

Stern Hu and his colleagues may seem a little unfortunate, maybe they are, maybe they are not – most things do happen for a reason. For those of us who are still working with Chinese organizations, there are several lessons to be learnt from this incident:

  1. Try not to break your agreement, even though you may be legally able to do so, regardless of how tempting it may be.
  1. Make sure you “leave some cheese on the table.” Do not push your competitors or counterpart to a dead end. People will take extreme measures when they feel desperate. Moreover, if you do get a good deal, don’t smile straightway – have a quiet celebration behind closed doors.
  1. Be aware of the balance between short-term loss and long-term gain. Be prepared for any unintended consequences that may arise as a result of a short-term gain.

Western culture tends to clearly reward the winner and penalize the loser, whereas Eastern culture is more focused on a Yin and Yang that always exist in an inseparable way, with a relationship that is expected to move around from time to time.

There is no set-rule for Rio or for China Steel in terms of how to play their own game; the only simple rule is perhaps to avoid anyone becoming too upset. Sometimes it is alright for children to disagree in order to understand each other better, as long as the fight doesn’t involve too many bruises and doesn’t cause permanent damage. It is also natural for children to try to resolve their differences and to continue the game in one form or another.