Part two:
The role of the Chinese government in the business context.
To continue with this new series of entries on cultural obstacles when establishing a presence in China, today I am touching upon the role of the Chinese rulers when it comes to apply or interpret their own laws and regulations, in fact it is interesting to note how they approach this theme.
The role that China’s government plays in the law can be a bit confusing. As mentioned in my previous entry China’s laws and legal framework, sometimes, are not clearly defined. This situation gives Chinese governmental authorities more discretionary power than their counterparts in North America or Europe. The effect such a situation can have on business was clearly shown a few years ago (2009) with Coca-Cola’s failed attempt to acquire Chinese juice maker Huiyuan.
The case of Coca-Cola’s rejected takeover of Huiyuan on anti-monopoly (
http://www.fdi.gov.cn/
) grounds is of interest because it is a significant example how Chinese authorities interpret their own rules and laws:
– Coca-Cola Co. on September 3, 2008 had offered to buy the Hong Kong-listed China Huiyuan Juice Group for the equivalent of 2.4 billion U.S. dollars in cash. As Coca-Cola seeks to acquire China’s largest juice company “Huiyuan”, the Ministry of Commerce stated that the government would insist on the principles of market-oriented economy under the legal process which also involves the application of the new Anti-monopoly law. Any concentration should be reviewed when it has a global trade volume of 10 billion yuan (about 1.46 billion U.S. dollars) and the total domestic trade volume of the two sides exceeds 400 million yuan in the previous financial year, according to the Anti-monopoly Law implemented on August 1, 2008, and the Regulations on the Thresholds (August 3, 2008). On 18
th
March 2009 China’s Ministry of Commerce ruled against Coca-Cola’s plan to acquire beverage maker China Huiyuan Juice Group on the basis of the new Anti-monopoly Law. The acquisition by Coca-Cola would have been the largest ever buyout of a Chinese company by a foreign rival. If passed, the deal would have been Coca-Cola’s largest overseas acquisition and the company would have been able to expand its dominant position in the carbonated drinks market. The official one-page rejection was produced by the Ministry of Commerce, guardian of the country’s anti-monopoly law. According the MofCOM, allowing the takeover
“would have an unfavorable impact on competition”
and the US company
“may have been able to use its dominant position in the carbonated soft drinks market to use bundling and tie-ins of juice beverage sales leading to consumers being forced to accept higher prices and fewer choice of products”
. It added:
“Furthermore, the concentration would have narrowed the room for survival of medium and small-sized domestic juice firms, creating an unhealthy impact on the competitive structure of China’s juice market”
.
(A comment on the case available at:
http://news.xinhuanet.com/english/2009-03/19/content_11032929.htm
).
Although the Ministry of Commerce stated that the proposed acquisition violates the provisions of the Anti-monopoly law and it applied strictly the law, some commentators affirmed that this was entirely a political decision and the law (or its interpretation) has been stretched in order to appease the sentiment of populist Chinese websites and the sentiment of protectionism present in China. This is factor to be considered when planning to buy a well known Chinese company.
It should always be remembered that the needs of the government always come first in China. However, China realizes that it needs to be more transparent, at least with decisions related to business, in an effort to attract more FDI. However, as clearly shown by Google’s struggles with the Chinese government in early 2010 (
http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/BSTR374.htm
) there is no way the PRC will ever let a foreign company use laws or outside pressure in order to make them change their stance on a certain issue.
Next entry will be about “social relationship” and the concepts of “guanxi” (i.e. relationship) and “mienzi” (i.e. face). In fact these aspects have always to be considered when entering the Chinese markets. Without a solid understanding of these elements is more difficult to establish and expand a business presence in China.
– Cristiano Rizzi