Background: When President Xi Jinping was inaugurated, he vowed to crack down on corruption in the communist party which was seen as a threat to stability in China. In several speeches since he took over the reins of the Communist Party last November, the President has warned that corruption could lead to "the collapse of the Party and the downfall of the state". A massive anti-corruption campaign has since followed suit. This is only expected to be stepped up in 2014, as Xi Jinping continue to wage what he calls the "war on corruption".
The war has already been waged to some effect, as it has led to countless arrests of low- and high level officials alike during last year. Also, the new measures has started to change the culture of gift giving and lavish banquets usually associated with communist party officials. Per Linden, CEO of Scandic Sourcing, has operated in China for over 11 years and has seen the changes first hand:
So much of doing business in China is about building relationships, or "Guanxi", with decision makers, local officials and such. Much of that has traditionally been through giving gifts and indulging in lavish dinners. How has this been affected by Xi Jinpings anti-corruption campaign?
Per Linden: There has been a revolution in the approach to gift giving and entertainment. For us who have spent many years doing business in China and having endured endless lunches and dinners drinking the kerosene like Chinese "bajiu" in smoke filled rooms, the change is remarkable, and very welcomed.
Much has happened in the last year but it started earlier than that. Already 2 years ago you started to see a trend were the senior government host at a dinner table did not drink alcohol. It was often the younger ambitious officials who set this example. Drinking with the guest was left to the underlings. In the last few months government employees have stopped offering "Baijiu" for lunch. Wine and beer is still allowed. We are also happy to also see much more restraint when it comes to smoking.
Western media is searching for a crisis in china, but few have noticed this crisis in the entertainment industry. The stock price of Gweichou Moutai, the premium brand in Chinese "Bajiu" liquor has dropped in nearly half, causing losses in the range of tens of billions RMB. There was also a recent announcement that Chinese government officials will not be allowed to spend government money on Chinese new year gifts this year. This is a multi billion dollar industry in China.
The government has also allowed social media to expose government officials who spent too much. While before officials often parked their cars outside the front door of expensive restaurants, they now park around the corner some with their number plates covered, if they dare to visit such a place at all.
How have you traditionally handled gift giving in China (i.e before Xi Jinping's anti corruption measures)? Can you give some background with examples of how that worked practically as you were building Guanxi and doing business here?
Per Linden: You have to give gifts in China. It is a way to show respect. You will for sure break your domestic corruption rules. You have to adapt to the local culture to some extent, but you need to draw the line somewhere and you need very clear policies for your organization. I have always worked with the policy to give gifts with a company logo or if I need to give something more expensive, something that represent Swedish culture and art.
What is currently the best approach for building Guanxi under the Xi Jinping regime?
Per Linden: Building Guanxi is a process. It cannot be achieved with a single gift or dinner. Like in other places in the world and in any relationship, it is important to spend the time, to communicate and show respect and reciprocal politeness. At the same time, we have to realize that if you are not Chinese and don't speak Chinese there is only so much you can achieve regarding Guanxi in China.
The really good news is that the new policy to some extent level the playing field for foreign companies when it comes to dealing with pure corruption such as direct request for cash.
It is much easier for businesses to say no due to Chinese government policy than the internal polices of a foreign company.
Johnas Rundgren is the newly appointed General Manager for Predire Testcenter. The parent company Predire Group is a family owned business with over 100 employees working with test simulations and quality assurance services, mainly within the automotive industry for customers such as Volvo, Audi, BMW and Mercedes. This year, Predire deceided to expand to China with help of Scandic Sourcing.
Why did you decide to move to China?
Johnas Rundgren: There were two reasons, one was that we wanted to situate ourselves close to Volvo which has a big plant in Jiading. Predire Testcenter is Volvos firsthand choice on their preferred supplier list; we also have 30 other customers operating here in Shanghai. The second reason was that Shanghai is on the way of becoming the biggest centre in the world for research and development within the automotive industry, and that's why it's important that Predire is part of that to keep staying ahead during the coming years, it's an investment for the future.
Why did you move this year?
Johnas Rundgren: We did actually plan to move last year, but then chose to invest in Germany instead. And this year we also got financial support from the investment partner Swedfund, and that gave us the push we needed to expand to China.
What was the process when you decided to go to China?
Johnas Rundgren: We contacted the sourcing firm Scandic Sourcing to help us set up a factory in the Jiading province, located close to the Volvo plant. They researched and found a group of suitable suppliers according to our requests; enabling me to start visiting possible candidates as soon as I stepped of the plane. Scandic Sourcing also helped us register our company, which makes the start-up process that much faster.
Why did you pick Scandic Sourcing?
Johnas Rundgren: We had some initial dialogue with their CEO Per Linden found that they had been established for a long time here and that they where here, on site in Shanghai. Furthermore, many of their co-workers had extensive experience of sourcing which we value greatly.
Johnas Rundgren inspects a possible factory hall.
What are your experiences this far?
Johnas Rundgren: I've only been here for a short while, but already encountered a lot which is very different from Europe. China is a dynamic market, a bit of a 'Wild West' atmosphere, a lot differ from how things are done back home, like for example, negotiations takes a lot longer here in China and all the bureaucracy is on a completely different level. Personally I like challenges, and there are so much to learn here, like the business culture, customer needs, priorities, language and last but not least how you run a company here as an entrepreneur. I find the whole thing very exciting.
Do you have any advice for other companies thinking about moving to China?
Johnas Rundgren: You need to do your research beforehand; I read a great number of articles and books and watched documentaries before I came here. That made me feel more prepared of how things work here in China, I developed a certain sense of how it worked here and that has really helped me. If you come to China unprepared you'll encounter more of a culture shock. Another tip is to get help from a consulting firm and then bombard them with questions – you cannot be afraid to ask questions; there are no stupid questions in China. What we take for grante din Europe can be found to be the opposite here, so you need to ask questions and not assume things to be a certain way.
How do you implement Western style Code-of-Conduct requirements in China, a country with a notoriously complex business culture and legislature? Per Linden, CEO and founder of Scandic Sourcing sits down on a one-on-one and talks about what makes or breaks a Code-of-Conduct program in China.
After operating a Sourcing company in China for over a decade, Per Linden, CEO and founder of Scandic Sourcing, was recently awarded a prize by the Swedish minister of commerce. Every year the Swedish Chamber of Commerce gives out an innovation prize and this time Per Linden received it for his creation of a whole new Code of Conduct program. This program has widely been used on a big number of Chinese suppliers. However, implementing it has not been a straight forward process.
The progression of gradually encouraging suppliers to change their standards according to Western ones as outlined in internationally adopted guidelines for sound business practices such as the UN Global Compact, OECD Guide Lines for Multinational Enterprises and the international Chamber of Commerce guidelines has not been an easy job, andmaking a Code of Conduct correlate with Chinese legislation has proved to be a precarious obstacle which Per Linden has learned all about negotiating.
Why is there a need for a code of conduct program?
Per Linden: After the Enron and Arthur Anderson incidents in 2003, industrial companies realized the importance of working with a well defined internal behavioral code and many companies thus decided to upgrade and provide clearer definitions to their internal programs.
Bridging the gap
What problems can a company face when implementing a code of conduct program in China?
Per Linden: China's rapid industrialization has brought about many improvements regarding the general standard in factory, health, safety, environment and labor treatment. However, there is an enormous awareness gap among workers, factory managers and the Chinese government regarding what standard that western companies expect. Another problem is that while head office values are understood by management and sales in subsidiaries; it can often be difficult to penetrate all the way through the purchasing departments, due to the local nature of the procurement business. Check lists produced by the headquarters and used by internal purchasing staff covering code of conduct items during quality or general supplier audits are commonly used but less effective as they are constructed for a different reality. Purchasing staffs main priorities has always been to negotiate price, delivery and ensure quality while attempting not to disturb the close relationships often developed in China between buyers and sellers with unclear issues that none of the parties fully conceived.
Finally, the millions of factories producing goods in China are run by people with little education. They do not study the laws and they are even less familiar with the UN global compact. Their only guidance is usually guidelines drawn up by local government officials. Using special relations to officials, suppliers can avoid or delay to conform to certain rules. Hence, lack of knowledge is also an all pervading issue in China.
How does the Chinese legislature fit into all of this?
Per Linden: Multinational companies usually have well developed code of conduct programs, often based on the UN Global Compact. However, many points in the UN Global Compact are against the Chinese law, such as independent unions, human rights as well as key labor issues.
It is extremely hard to impose Western ideas about working conditions when that implies going against standard procedures accepted by workers, factory management and government. It is also hard for staff working in foreign companies to always understand clearly what is expected.
For this reason these programs seldom penetrate fully through a foreign company's own organization in China, and even less often, all the way to its suppliers.
Furthermore, Chinese laws tend to be theoretical entities that are created centrally. These laws are usually implemented over entire decades during which there is big confusion over what exactly applies. To add to the confusion, laws are interpreted differently by different districts or officials active even in the same city.
How's your program been received by the suppliers being audited?
Per Linden: The starting point in Scandic Sourcing's approach is that most factories are not following international norms and Chinese laws deliberately,
but rather from a lack of knowledge. Engagement, education and encouragement are key tools to raise awareness among such suppliers.
To encourage changes it is necessary to build trust, set reachable goals and priorities and to communicate. Not everything can be fixed at once. Urgent, as well as easy items can be dealt with first to achieve early successes and to build trust in the process. Requirements can then gradually be tightened.
A general principle is that everybody needs to conform to Chinese applied laws and accepted praxis and gradually to policies under implementation in the industry. Sometimes the requirements are set higher, considering customers "key values". If there is a conflict between different systems in any area, it is normally judged from the fair interest/protection of the Chinese worker.
Most suppliers have been exited by the possibility to get approved by a foreign company on these issues. The possibility to measure improvements have given encouragement and discussion possibilities. A green light system was implemented with classifications of red, yellow and green.
In those cases where the companies have not responded well, it has often been a case that those suppliers had a murky track record in other areas as well, and several have been weeded out.
About 40 suppliers are now audited on a regular basis and the program will be expanded. The experience has been very positive. Suppliers have generally been very open to show their situation as well as listening to recommendations. Willingness to improve has been surprisingly good. Some supplier weaknesses that we identified were mostly issues regarding personal safety and facility management whose remedies are fairly inexpensive to correct. Other problem areas such as labor issues have been identified and a communication process started with the supplier informing about the recommended way.
Can you outline your auditing process?
Per Linden: We have defined 21 key areas. In each one of them several questions describing a future state has been defined. It is judged on a 5 point scale how well this future state has been met. Scandic specifically avoids Yes/No questions. Averages are calculated for each area.Critical areas are selected and minimum "requirements" are defined. For longer term goals we describe these as "recommendations". For example we have recommended everybody to follow the provisions in the new labor law, while we knew it would take them some time to implement so it was no idea to require it at that point. However, we got a chance to inform the suppliers about the important issues at hand and give them some time for preparation.During audits each area is reviewed by an Engineer and an HR specialist. Time is taken to inform about the purpose and also feedback and discuss recommendations.
Then what happens?
Per Linden: After each audit a detailed report is sent to the client and a summary and action plan to the audited supplier. Time for corrective action is set and action is followed-up. Records are kept and statistics compiled.
Where can this be applied?
Per Linden: The Scandic Approach is especially applicable in all production situations in China. Although they were developed for the mechanical industry, the principles are universal and can be adapted to any situation. Scandic provides consulting services to assist foreign companies to work with code of conduct issues in China. The program is after 4 years of trials now ready to be applied on a wider scale.
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