Government affairs in China means risk management as well as market access
Government affairs in China means risk management as well as market access
In the early days of foreign investment in China, good relationships often got you very far and foreigners in China were trading good relationships like gold – saying “I know the guy who can get that done…” was a sign of local credibility and expertise among foreign business people.
While relationships are still important in China, we classify them now as “necessary but not sufficient” for success. Relationships – particularly government relationships – can be good, but not all relationships are created equal. China has radically changed in the last five years, most significantly in the role, function and market-power of government agencies and regulators. The Communist Party of China (CPC) is now firmly out in front. As Xi Jinping famously said in early 2018 about China’s New Era, “The Party leads everything”. Also true is that regulators are starting to enforce everything and just “knowing the guy” does not help any more.
“East, West, North and South; Party, government, military, society and education; the Party leads everything.”
Xi Jinping (2018)
It used to be about market access
When China first opened to foreign investment, China’s regulators were mostly concerned about market access and foreign investors sought to establish connections with government in order to enter – and get established in – the market. Government affairs (GA) at that time were primarily about government access – getting approvals, licenses, land, utilities and so on. The success of a GA programme was measured by how widely a company could access the market. Sales teams and GA teams worked together to go after the market, the GA team preparing the road and the sales team handling the vehicle driven to customers. In fact, even today, some GA teams are called “market access teams”. This is particularly true in healthcare in which restricted access to public tenders makes province-level government contacts critical to a company’s success.
The most powerful government agency regulating access was the Ministry of Commerce (MofCom), followed by a variety of industry-specific agencies, for example the Ministry of Health and State FDA for healthcare. For many foreign companies in China today, their GA teams are still very focused on stakeholders that grant government access. Here is quick test you can take: how many of your GA team have a background in MofCom or other industry-related regulators? If it is more than 20%, you have an access GA team.
The days of market access are emphatically not over. Those agencies are still critically important; however, a GA team now needs to be focused on much more.
The rise of the regulator
When Xi Jinping came to power in late 2012, one of the first speeches he gave was on anti-corruption. He told his fellow CPC members that corruption was threatening the future of the CPC and its credibility with the Chinese people and he vowed to clean house. On the face of it, this was not so different from past Chinese leaders – or, really, from any other politician around the world starting a new administration. – What was new was the aggression and thoroughness with which he and his chief enforcer, Wang Qishan, pursued this goal. For the first year of his new administration, Xi went after CPC leaders and managers of state-owned enterprises. Xi said that he did not care whether an individual was at a high or low level. Both “tigers and flies” would be pursued. Nearly a year into his administration, Xi then started to go after foreign companies for corruption. The biggest of these was GlaxoSmithKline, the British pharmaceutical company which eventually confessed to corporate bribery under Chinese law and was fined nearly half a billion dollars. But Xi’s newly empowered regulators did not stop at anti-corruption: anti-competition, environmental protection, food safety, tax evasion, data privacy have all been subject to aggressive regulatory enforcement.
In March of 2018, during the annual spring CPC meeting, Xi announced a new ministry-level organisation, the State Administration for Market Regulation (SAMR), which would combine many regulators enforcing the issues listed above into one super regulator. The SAMR has just begun to get aggressive in the market, focusing mostly on anti-competition and data privacy issues; but the structure is now there to effectively and – as far as bureaucracies go – efficiently execute the will of the CPC to enforce China’s laws.
It’s now about risk management
Obviously, GA are even more critical in China now that regulators are more active in the market. However, a GA team focused only on market access is completely unprepared to understand and manage the new set of stakeholders foreign companies need in China’s New Era. These new stakeholders are focused on regulatory enforcement, so your GA team needs to broaden beyond market access to deal with risk management. This means understanding regulatory threats to your business, closing the vulnerability gaps in your strategy and operations, and running an effective crisis-response team should you face regulatory investigation.
There are several ways that foreign MNCs are addressing this:
1. Re-assessing the threat landscape – commercial threats such as bribery, conflicts of interest and intellectual property theft are still prominent in China. However, the regulators themselves have become a potential source of threat and you need a fresh view on what they might be interested in for your sector and why. For example, how does the National Development and Reform Commission (NDRC, now part of the SAMR) define “anti-competitive” behaviour in your sector? Is it pricing? Control of distribution? If Chinese regulators are not prominent on your list of threats, you are missing something.
2. Re-mapping stakeholders – the regulatory environment has shifted so the old maps cannot be your guide. In addition to players influencing market access, you need to understand the regulators who are enforcing the rules in your sector. For example, who in the NDRC is responsible for regulating your sector (and your company) and what are their goals and motivations? Do they share the same understanding of how your market works as you do? For example, do they know why you have the mark ups in your distribution channel that you do and in their minds are they reasonable?
3. Identifying vulnerabilities from this new landscape – we recommend using a process to penetration-test your China strategy and operations, a process we call “white-hatting”. If the NDRC were to do a dawn raid to investigate you for anti-competitive behaviour, how would you respond? Do you know what your pricing policies are? More to the point, do you know if they are actually being followed by your sales team and distributors? Have you had any recent complaints from distributors that they lack flexibility to decide on end-user prices? These are all questions the NDRC will be asking you, and you need a ready answer.
Been there, done that
The biggest threat we have found lately among foreign MNCs is complacency – “we’ve been in China a long time and our current GA approach has worked just fine. We don’t see a reason to change.” It is these companies that have the most difficulties when they face regulatory scrutiny. They do not see it coming and are not prepared for it. A more aggressive regulator is now part of New Era China and companies need to ensure that they are able to handle the challenges of the New Normal.