Shaun Rein's  Instablog

 This commentary originally appeared in Forbes. www.forbes.com/2009/11/06/iphone-apple-china-leadership-managing-failure.html

Rumor has it that only 5,000 iPhones have been sold in China since the device's Oct. 30 debut. What happened? Apple's partner in China, China Unicom, had predicted sales of 5 million in the first few years. Many analysts argue the iPhone's high price (the 16 gigabyte 3GS model goes for about $730 up front) is stopping Chinese consumers from buying. Is that really the explanation?

No. In fact, consumers have paid even more for cracked versions smuggled into the country over the last two years. There are more than 2 million cracked iPhones, and more than that many people have bought them. Younger Chinese typically change their phones every nine to 12 months, and many have profitably sold their iPhones on the secondhand market after using them for a few months. My firm, the China Market Research Group, estimates that as many as 3.5 million Chinese have at one point owned an iPhone. So if price isn't why sales haven't lived up to expectations, what is? Is the iPhone doomed to fail in China, or can Apple turn the situation around?

The iPhone does have a good future in China, but Apple is going to have to change its strategy, and fast. Here are three lessons we can learn from Apple's experience.

1. Take into account local consumer preferences.

The iPhone has sold badly because Apple surprisingly failed to consider consumer preferences and market conditions. The phone is being sold packaged with monthly subscription plans, just as in the U.S., but the vast majority of Chinese prefer to buy pay-as-you-go charge cards. Top-up cards can be bought and recharged cheaply at street vendors everywhere in less than 30 seconds, with no identification required. Subscribing by the month is a pain. You have to go through a mountain of paperwork. Often you need to get sponsored by your company or, if you're from another area, by a friend officially born and registered in the city you're in. This can take hours, if not days. It isn't worth the hassle.

Moreover, our research suggests that although consumers are willing to pay for a handset for prestige, most are extremely price-sensitive when it comes to talk and data plans. The typical consumer spends less than $12 a month, choosing texting over voice calls to save money. Many buy different SIM cards for different cities, to reduce their roaming fees when they travel. Even wealthier consumers do this, because they've gotten used to switching SIM cards when traveling to Hong Kong, where different carriers control the market.

Also, the iPhone's core target market, early adopters, always want to have the latest phone. They don't want a contract tying them to one device for several years. They want to try new ones. For them it makes more sense to use pay-as-you-go cards and switch phones every few months. Some we interviewed used the iPhone, sold it for a profit, and then bought it back again when they realized it was a far superior phone and prices came down.

2. Choose the right partner.

In other parts of the world, Apple has dominance over telecom operators. Carriers see their stock price soar when they sign deals with Apple. In the U.S., consumers have rushed to use AT&T simply because they wanted the iPhone. Apple knows it's at the top of the food chain and can afford to negotiate aggressively with carriers.

China Mobile is the nation's dominant player, with a nearly 70% share of China's 702 million mobile phone users. China Unicom, Apple's carrier, holds the remaining share. It tends to have a less wealthy consumer base.

Our research suggests that most consumers believe China Mobile has better signal stability than China Unicom, especially in regional cities beyond Shanghai and Beijing, where more and more business trips and vacations are taking place. People told us they didn't want to change carriers, because they didn't want to worry about weak signals when traveling, even if that meant staying with China Mobile's slower connection. There is also no phone number portability between China Mobile and China Unicom, and consumers don't want to change their numbers just for a new phone.

Why change your phone number and take the risk of bad signal strength when you can buy a cracked iPhone and keep the same number and operator?

3. Launch globally all at once.

Finally, one of Apple's biggest mistakes was that it didn't launch the iPhone around the world all at once. It took far too long to get to China. In today's world, companies can no longer be strongly Americentric, starting product launches in the U.S. alone and only gradually reaching other markets as supply chains catch up. The new growth markets will be in places like China, India and Brazil, where consumers are still spending. Consumers in those places don't want to wait years to get a product they read about online the moment it comes out.

You can't marginalize developing markets anymore. Often they're now the main markets. China has become the world's largest market for both telephones and automobiles.

Despite its rocky start, the iPhone still has a lot of potential in China. That 3.5 million Chinese have paid what it costs to buy cracked ones shows that the market is huge, and customer satisfaction with the iPhone is unbelievably high. Apple just needs to do a better job of taking consumer preferences into account, and to work with its partner, China Unicom, to better deliver what Chinese want.

Shaun Rein is the founder and managing director of the China Market Research Group , a strategic market intelligence firm. He writes for Forbes on leadership, marketing and China. For more from Shaun Rein, click here.

 

This commentary originally appeared in Forbes www.forbes.com/2009/11/03/oprah-winfrey-success-leadership-managing-secrets.html 

Last year, Oprah Winfrey earned $275 million--more than those three Wall Street rogues Ken Lewis, Dick Fuld and John Thain combined--yet no one is calling for her head. Her TV show and O, her magazine, remain wildly popular. She moves entire industries. Twitter's traffic surged 43% after she tweeted for the first time. A recommendation from her turns obscure authors and products into best-sellers.

On her way to becoming one of the most influential people in the world, Oprah has helped millions of people feel better about themselves and lead more fulfilling lives. Here are three core business reasons she has become one of the world's richest people.

She truly understands and relates to her core target market.

Oprah genuinely sympathizes with her audience's struggles and aspirations. She does not pretend to have led a fairy-tale celebrity's life; rather she has revealed that she was sexually abused when growing up and has been candid about her battles with her weight. She uses real, shared pain to get closer to her audience. As she conquers her demons, her audience feels they can conquer theirs.

They trust her. She is more than a talk show host. Too many people in charge of brands don't get the importance of understanding and relating to consumers. Companies launch advertising campaigns that consumers can't identify with, even as those consumers, looking to stretch their dollars farther than ever before, yearn to turn to companies they feel they can trust and connect to emotionally.

Skin care company Clarins got it all wrong in targeting Chinese men. It used ethnically diverse metrosexual models they couldn't relate to. The company failed to understand that Chinese men don't want to be seen as at all feminine or exotic. Nor do Chinese women want to see their men that way. Sales sputtered, while L'Oreal's Biotherm line prospered with Asian models who came across as the epitome of masculinity.

Another company that successfully relates to consumers in its marketing is Unilever.. Its Dove Campaign for Real Beauty employs as models everyday women with all sorts of body shapes and sizes, not the airbrushed waifs who grace the covers of fashion magazines like Vogue and Elle. People buy Dove's products because they identify with the familiar yet beautiful women who use the products in the ads. The five-year-old campaign has been one of the most successful of all time.

She knows that making the world a better place and earning money is not a zero-sum game.

Whether inviting experts like Dr. Mehmet Oz to give health care advice or giving suggestions on how to find happiness, Oprah does what she does to make people's lives better. That is true leadership. She clearly is unwilling to do anything for money alone. She takes a moral and long-term perspective--and that way, she makes even more money.

Far too many are driven by simple greed. Too many senior executives have enriched themselves at the expense of front-line workers and shareholders. Too many unscrupulous executives have engaged in financial chicanery like backdating stock options. Not only are Main Street and Congress up in arms, but large institutional investors like the California Public Employees' Retirement System have begun to use corporate responsibility as a key metric in investing. Last year CalPERS publicly called out five corporate underperformers, including Cheesecake Factory and La-Z-Boy, citing corporate governance failures. It is pushing to implement provisions to claw back the compensation of executives who engage in illicit activities.

Corporate boards need to be on alert that misbehavior will hurt their stock prices. CNBC's Jim Cramer publishes his Wall of Shame for disappointing CEOs, like United's Glenn Tilton, who made $17 million over the last five years, and more than $6 million in 2008 alone, while United's share price dropped around 40% and the pay and pension of its front-line workers was slashed.

Nobody thinks of Oprah as greedy.

She understands how to honestly leverage her brand.

With profits falling almost everywhere, businesses need to find new sources of growth. Oprah understands this well. Her work with Dr. Phil and Rachael Ray has resulted in successful spinoffs that hold true to and extend her core value of helping people.

For corporations, leveraging a brand can mean looking to new markets, as GM and Barbie have done in China (as I wrote in "Barbie Goes to China"), or it can mean branching out into new product lines. For instance, Giorgio Armani has expanded the scope of its business to include household accessories. Bulgari and Versace have moved beyond jewelry and clothing, respectively, into high-end hotels. Such expansions make sense, for they are being done so they dovetail with the brands' core emphasis on luxury, sophistication and exclusivity while opening up new streams of revenue.

Oprah has energized an entire industry by staying true to her ideals. She reminds us that business can be done ethically and profitably at the same time. Too many executives over the last few decades have acted immorally, scammed the system or even engaged in outright thievery, like Jeffrey Skilling at Enron. The most successful enterprises--individual and multinational alike--are the ones that create emotional bonds with their customers, stay true to their core and use their brands and ideals to lead.

Shaun Rein is the founder and managing director of the China Market Research Group, a strategic market intelligence firm. He writes for Forbes on leadership, marketing and China. For more from Shaun Rein, click here.

 

Disclosure: none

 This commentary originally appeared in Forbes

www.forbes.com/2009/10/27/china-exports-labor-leadership-managing-connections.html

China's gross domestic product grew 8.9% in the third quarter. The country has become key to growth for even the largest multinationals. Paul Otellini, the chief executive officer of Intel, recently said, "Thank God for China. They buoyed, certainly, our company through the depths." Yum! Brands, the fast-food conglomerate, generates a third of its business there, and brands like the Gap and Tiffany have announced expansion plans. As China becomes ever more crucial, here are three myths about business there that you should avoid falling for:

Myth No. 1: China's economy is export-led.

One of the main reasons China has withstood the financial crisis better than analysts like Gordon Chang, author of The Coming Collapse of China and a Forbes columnist, predicted is because the export sector accounts for far less of the economy than the approximately 40% figure that they believe. For a while after China entered the World Trade Organization, in 2001, exports did take up that much of the economy. The government was green-lighting practically every project proposed to it in a rush for economic development. That fast-growing capacity couldn't be used to make things to sell to Chinese consumers; they were still too poor. So companies just set up factories for export.

That situation changed dramatically even before the financial crisis. My firm, the China Market Research Group, estimates that by 2008, exports accounted for just 20% of the economy. A combination of rising costs and new economic policies caused the decline.

For one thing, the government stopped approving high-polluting, energy-intensive, low-intellectual-capital projects. Pollution was starting to cost the creaky state-run health care system too much, and the government wanted to reduce its reliance on foreign energy, so it pushed for a more service-led and less export-led economy. Scores of factories relocated to Vietnam, Sri Lanka and Mexico, where policies were more welcoming and labor and real estate costs were lower. Many factories shut, and larger manufacturers like Foxconn, the maker of Apple's iPhone, consolidated their market share.

The shift away from tiny, soot-belching factories to larger ones partially explains why energy use has not risen as fast as GDP over the last several months. The economy is less reliant on energy-inefficient factories.

The export sector is going to continue to play a diminishing role as domestic consumption increases, as I wrote in "Tap Into China's Swelling Consumer Base." We estimate that consumer-fueled domestic consumption will account for 50% of GDP within the next five years, up from 33% today.

Myth No. 2: China has a limitless supply of cheap labor.

People may think it does, but in fact recruiting and retaining talent has been difficult for companies even during the financial crisis. Many blue-collar workers are no longer willing to labor for low wages in manufacturing hubs like Guangdong, visiting their families only once a year. They've lost the fear of going hungry, so they've gotten more selective about employment. They have far more job opportunities closer to their homes, as China's $586 billion stimulus package has propped up the economy in the poorer regions that most construction and factory workers come from.

At the white-collar level, most multinationals need to rethink their human resource strategies. Job-hopping is high, with many companies losing 20% of their employees a year. The overwhelming reason younger white-collar workers leave their jobs is not because their salaries are too low but because they see no career paths there.

Nothing demoralizes young workers more than knowing that expatriates get out-sized pay packages at places where there are no mainland Chinese senior executives. They may have Taiwanese, Hong Kong and other Chinese-speaking executives, but those don't count. Mainlanders still see them as foreigners. Many mainlanders feel, why work for Google if you can get a job with its Chinese competitor Baidu and feel there's no glass ceiling above you?

Companies need to make clear to young Chinese that they're dedicated to retaining them. They need training programs, overseas rotations and clear paths for advancement. Also, companies need to have homegrown leaders who are paid as much as foreigners. Rainmakers who are Chinese should be paid better still, because they are scarce and hard to hold onto.

Myth No. 3: Connections are everything.

If a potential business partner or employee leads off a conversation by saying he is well-connected, and that's what he brings to the table, run like Usain Bolt. Too many companies hire the offspring of well-connected elders and think those connections will guarantee success.

Yes, who you know is important in China, as it is anywhere, but the economy is becoming more sophisticated. Regulations are more transparent than they were just five years ago, and in most situations you no longer need inside pull to get permits. Gone are the days when knowing the right people guaranteed riches. For most businesses, the four Ps of marketing--price, placement, product and promotion--are starting to prevail. Would you simply hire the son or daughter of a deputy mayor in a small town in California and assume certain success? I doubt it. So why would you in China?

Connections can actually damage your business if a factional fight breaks out and your well-connected partner is on the wrong side. The winning side might take business away from those closely associated with the losers. I have seen many companies depend on one big connection and then lose everything after an official lost power or was rotated to another province or ministry. You do need to cultivate relationships with government officials, but do not base your whole business on them.

As China emerges from the downturn relatively unscathed, companies need to understand it can no longer be relied on as a base for low-cost manufacturing. Workers and the government are both demanding change. The faster you can rid yourself of outdated myths about the country, the sooner you will be able generate profits there.

Shaun Rein is the founder and managing director of the China Market Research Group, a strategic market intelligence firm. He writes for Forbes on leadership, marketing and China. For more from Shaun Rein, clickhere.

This commentary originally appeared in Forbes www.forbes.com/2009/10/21/china-consumer-marketing-leadership-managing-rein.html

Treasury Secretary Timothy Geithner and Morgan Stanley Asia Chairman Stephen Roach have both been arguing that China needs to spur its domestic consumption by fixing its creaking health care and pension systems, so that older people start to spend. Will that really work?

The typical Chinese retiree has lived through a world war, a civil war, famine, the Cultural Revolution and political economic turmoil that make the current malaise smacking the U.S. look like almost nothing. Do you really think they will trust new policies so much that they stop saving and suddenly start spending? It is doubtful. Moreover, older Chinese have mostly missed out on the economic boom since 1978. They retired before the gold rush of the last few years, or they've been working in state-owned enterprises where the pay stays low. Even though their savings rate hovers around 60%, they don't have much money socked away.

Fixing China's health care and pension systems will not fuel domestic consumption in the short-term. What will be far more meaningful is unlocking the purchasing power of the 800 million Chinese who live in rural areas and third- and fourth-tier cities like Zhengzhou and Hefei. More than 100 Chinese cities have populations of more than a million.

The government is promoting consumption in those regions by giving rebates of 13% on purchases of household products and by building a network of small clinics to treat minor illnesses for low fees. Most encouragingly, plans are underway to let rural residents lease out their land, much as urban residents began to be able to do a decade ago, which unleashed China's urban retail boom. Many multinationals ignore these regions, thinking they are too poor and backward, but that is a mistake. Consumers there now have the income and the desire to buy foreign brands.

Aside from Chinese women in general (who I wrote about in "China's New Purchasing Powerhouse: Chinese Women"), www.forbes.com/2009/08/05/china-women-marketing-leadership-managing-retail.htmlresidents of third- and fourth-tier cities are the most optimistic consumers in China. The world financial crisis has had little impact on them, as they have benefited from China's $586 billion stimulus package. Most of them work for domestic businesses that, unlike many foreign companies, have pledged not to reduce salaries or cut work hours.

The next great growth area for many multinationals will be selling to Chinese consumers in these regions, but the battleground will be fierce, for emerging domestic brands like the apparel company Li Ning and the home appliance maker Haier will also be in the fray. How can you sell to these consumers and stave off the competition? Here are a few key things to keep in mind.

First, consumers in third- and fourth-tier cities are not as price sensitive as many think, but they are very value conscious, and they want premium products. For instance, while the 13% rural rebate scheme has been wildly successful in driving demand for air conditioners, it has failed with TVs, because plasma and LCD screens weren't included, only old-fashioned tube sets were. Consumers decided they would rather more money for better value flat-screen TVs. Samsung and LG Electronics have both posted record TV sales in China this year, driven by rural consumers.

The lesson there is that companies shouldn't just bring in cheap, watered down versions of their products. They need to bring in their top lines too, although they might have to change those products a bit.

Amway, the maker of cleaning products, is a case study in how to do it right. It sells detergents at far higher prices than competitors like Procter & Gamble's Tide. Customers believe Amway's products are superior. They can't afford large packages of the soap because the cost is too high, so Amway sells small packages at a final ticket price acceptable to consumers. Still, the price per gram is high, and Amway enjoys fat margins.

Brands can have to change their packaging, as Amway has done, to accommodate lower incomes while feeding the demand for premium products. You might need to have packages that can be packed easily on a bicycle cart, as that is how many products are distributed in poorer regions. Or you might need to have a larger package, if that will look like a better value to consumers even when the per-gram price is the same.

Second, while many Americans fear the "Made in China" label, consumers in third- and fourth-tier cities are even more afraid. They therefore base their buying decisions not just on brand but also on retailer.

Only a decade ago, 80% of food and household product sales happened at mom-and-pop stores. My firm, the China Market Research Group, estimates that over the next three years half of all sales will be made by big-box retailers like Wal-Mart. The shift is being driven by consumers who are scared of poor quality and fake products. A 28-year-old mother in Chengdu told us, "I will buy milk powder in Auchan because their quality-control standards are better than in smaller shops. The brand is important, but where you buy is even more so. There are so many fake baby products."

In our research we found that the majority of consumers were willing to spend 10% more for ingestible products from trusted sources. Companies not only need to build consumer trust; they also need to develop the right distribution strategies and understand the shift in retailing taking place in China.

No matter what policy changes Beijing enacts, retired consumers who are cautious because of many cycles of economic hardship will be hard to win over. Developing markets will continue to be what drives China's retail economy, and they are what companies looking for high growth need to focus on. To be successful in developing regions, make sure you are selling products not just on price but on value, and be sure you are doing so through sales channels that consumers trust.

Shaun Rein is the founder and managing director of the China Market Research Group, a strategic market intelligence firm. He writes for Forbes on leadership, marketing and China. For more from Shaun Rein, clickhere.www.cmrconsulting.com.cn

Disclosure: none

 This commentary originally appeared in Forbes www.forbes.com/2009/10/15/china-piracy-counterfeiting-leadership-managing-infringement.html

At a recent World Media Summit in Beijing Rupert Murdoch, the chairman of News Corp., exhorted China to clamp down on copyright infringement. Murdoch is right that piracy is a huge problem in China. Pirated DVDs, fake Ralph Lauren shirts, and cracked software are everywhere. Pushing the Chinese government the way Murdoch did, however, is unlikely to have any meaningful effect.

Most Chinese believe they should have the same access to products the developed world has even when they can't afford them. Why should the West get ahead by having better technologies, the reasoning goes.

What can you do if your China operations are hit by piracy? Should you turn a blind eye and think of it as brand exposure? Should you spend money battling in Chinese courts? Here are some key thoughts to keep in mind:

First, China's piracy problem is not a matter of morality. More than anything, it is a matter of poverty. Piracy was similarly rampant in Taiwan, Korea and even Japan until consumers there got wealthier and domestic forces emerged to press those countries' governments to take action.

The Chinese won't do much beyond the occasional high-profile crackdown to show it takes the issue seriously, except when there is serious domestic pressure, as there has been to root out fake medicine and milk powder, for instance. Even if the central government wants to crack down, it may not be able to make it happen politically at the local level. Municipal officials often resist directives from the top, as I wrote in "In China, Reputation Rules." www.forbes.com/2009/09/23/china-reputation-government-leadership-managing-rein.htmlDVD vendors, like other illicit business operators such as brothel owners, pay policemen to look the other way, and those policemen make only a couple of hundred bucks a month.

Second, you need to change your sales and pricing strategies for products like software and DVDs. Time Warner provides an example of how not to do it. It realized it needed to lower its prices, so it started selling DVDs for $3 apiece. The problem? Most pirated DVDs in China sell for less than a dollar. Even though Time Warner had lowered its prices far below American rates, the DVDs still remained uncompetitive. There was no compelling reason for consumers to buy them. After much fanfare, Time Warner retreated from the market.

What should the company have done? Perhaps it could have created a loyalty program for people who bought legitimate disks. Or it could have looked to pirate vendors themselves for direction. Savvy fake peddlers have recently increased their prices by 25% on most DVDs and doubled them on the highest-quality ones. Instead of selling them from haphazard piles on carts in the streets, they have opened Blockbuster-like stores, with air conditioning and wide selections. They've also started to guarantee refunds if products are of poor quality. Customers now have reasons to spend a little more, getting comfortable shopping environments and quality guarantees at competitive prices.

Microsoft is making headway by changing how it sells its products. It has computer retailers advertising that only legitimate Windows is dependably secure and stable. After years, it has finally lowered prices to levels acceptable to many Chinese. Buyers fork over extra cash to protect their computer purchases.

Shanghai's tax bureau is requiring businesses to use legitimate Microsoft software on all computers that issue official tax receipts. Without it they can't issue the receipts. Businesses can also buy the software, andHewlett-Packard computers, directly from the tax bureau itself and deduct the cost all at once, rather than amortizing as they would if they bought from elsewhere. By being creative in its sales channels and by touting stability and security, Microsoft is finally starting to make headway.

In luxury goods the piracy situation has gotten markedly better in the past three years. By the end of next year, China will overtake the U.S. as the second-largest market, after Japan, for genuine luxury products. My firm, the China Market Research Group, www.cmrconsulting.com.cn conducted what we believe is the most extensive research ever on luxury consumption in China. We interviewed thousands of consumers in 15 cities to understand how they consume luxury items and view fake products.

The vast majority of them told us they would buy nothing but genuine luxury products if they could afford to. Most said they already buy what real items they can and then match them with fake ones.

A 24-year-old secretary in Shanghai said, "Right now I can't afford to buy all real Gucci, so I save to buy a real Gucci bag and match it with fake shoes. But I'm not fooling anyone with the fake stuff. My friends can tell. As soon as I have enough money, I'll buy only real products."

Consumers value the real thing when it comes to luxury items, unlike with DVDs and software. Fakes don't bring them the status they aspire to. Therefore luxury goods companies shouldn't waste time and money suing or raiding vendors of fake goods. They should build flagship stores, penetrate third- and fourth-tier markets and launch marketing campaigns that truly connect with the Chinese to create brand loyalty.

Ultimately, taking a moral or legal approach, the normal American way, simply won't work. The courts will often find in your favor, but the compensatory damages will be low and may not even cover your legal costs. And you won't truly stop the problem anyway. Going halfway in changing your pricing strategies, as Time Warner did, won't help either. You have to be creative in your sales strategies, as Microsoft has been, and provide a real reason to buy legitimate goods, as Gucci has done by focusing on brand building and product quality.

As Chinese consumers get wealthier and as domestic forces get hurt by piracy, the situation will get better.

Shaun Rein is the founder and managing director of the China Market Research Group, a strategic market intelligence firm. He writes for Forbes on leadership, marketing and China. For more from Shaun Rein, clickhere. www.cmrconsulting.com.cn

Disclosure: none

THis column originally appeared in Forbes www.forbes.com/2009/10/07/china-corruption-bribes-leadership-managing-rein.html

It happened to Coca-Cola on Sept. 14, to Rio Tinto a month before. Even the management consulting firm McKinsey & Co. has been hit. The Chinese government has now investigated employees at all three of those companies in high-profile corruption cases. At Coke, a bottling plant employee was accused of taking $1.5 million in bribes. When your company is charged with corruption in China, you have to worry about not only bad publicity but also running afoul of America's Foreign Corruption Practices Act and a Chinese government that is increasingly clamping down on the corrupt activities of foreigners.

How big a problem is corruption in China? It's serious. Almost every day the Chinese government arrests someone. A few years ago, it was the Communist Party secretary of Shanghai, Chen Liangyu. Recently the mayor of Shenzhen was sacked. The country's richest man, Huang Guangyu, founder of the electronics retailer Guomei, was arrested. How do you prevent corruption from hurting your operations? And do you really have to give bribes to make money?

Most analysts lump all corruption together, but there is a big difference between government and commercial corruption. Unless, as a foreign executive, you do big real estate deals or projects that involve alcohol, you're unlikely to run into government corruption. It exists, but most officials don't feel comfortable taking money from foreigners.

Not only are there language and cultural barriers, but also they don't trust foreigners to understand how to play the game. The risks of being caught are too high, especially if they find themselves on the wrong side of a government factional fight down the road.

Often around the world, businesses must adhere to the adage "When in Rome, do as the Romans do." Don't in this case. It's not worth the risk. When political power shifts in China, politicians on the losing side often get arrested--along with businessmen who worked with them. No one is untouchable, and you don't want to end up in a Chinese jail.

Although you're unlikely to run into officials asking for bribes, multinationals often have to deal with commercial corruption. Either their employees take kickbacks or their potential clients demand them. Those situations are rampant, and in many ways they're more insidious than government corruption.

For example, a new vice president of marketing at a large company asked my firm, the China Market Research Group, to help him pick a new marketing agency for the company's China operations. He invited a leading firm to pitch against the one that already had the job--an agency I'd never heard of. He invited all 80 members of his China marketing and sales department to vote on the choice, thinking his team would be excited that he was clearly committed to China and wanted their input.

The challenger's presentation displayed great expertise; the incumbent's was amateurish at best. But when the vote was tabulated, it went 78 to 2 against the challenger. The vice president's shocked reaction: "Now I know why so many of them are driving BMWs and Mercedes when they only make $20,000 a year."

Commercial corruption is a very serious problem. You end up working with the wrong partners and suppliers. If the corruption is extensive, your own team members are working more for themselves than for you. Getting a handle on it is critical, but there is no silver bullet. Here are a few things to keep in mind.

First, many employees aren't loyal to the companies they work for. They think of themselves as free-agent entrepreneurs who use their employers as a way to make money, for themselves and for their guanxi social-circle network. They treasure their guanxis, as I wrote in "How to Avoid Getting Kidnapped in China," and they see helping them as a primary goal in life.

In the U.S., people generally trust others until proven wrong. In China, it's the other way around. You have to have serious checks and balances. Bring in outside experts to help choose important partners like public relations firms and outside accountants. That way you can point to those experts when corrupt team members complain that you didn't pick their choices. Also, rotate your employees into different divisions often, so they don't forge strong relationships with particular suppliers.

Second, tell potential clients asking for bribes that the American government is strict about corruption and there is nothing you can do. Playing the helpless foreigner works in these situations. Your Chinese employees can use this excuse, too.

The good news is that commercial corruption is decreasing. Executives are starting to see that they can make more money conducting business honestly. Younger executives, especially ones who have studied abroad, know about Western business practices.

When China initially embarked on its economic reforms, in the late 1970s, corruption helped grease the wheels of commerce. The laws on the books were outdated and not fit for a market economy. Now that the laws are more pro-business, corruption is nothing but a danger. That's why the Central government is clamping down hard.

In the end, never give a bribe. You can make money in China without it. Even if you have to give up some opportunities, the risks aren't worth it. The U.S. government will hold you accountable, and the Chinese government may nail you as it looks for more high-profile targets like Coke and McKinsey to show that it takes corruption seriously, and to set an example. You don't want to be that example.

Shaun Rein is the founder and managing director of the China Market Research Group, a strategic market intelligence firm. He writes for Forbes on leadership, marketing and China. For more from Shaun Rein, click here.

 

Disclosure: none