Rattled by investigations, foreign firms in China beef up compliance

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A Chinese national flag flutters in front of a GlaxoSmithKline (GSK) office building in Shanghai July 12, 2013.

Foreign companies in China are getting increasingly jumpy about a spate of antitrust and corruption investigations by Chinese authorities and are hiring lawyers to make sure their operations comply with the law.

The investigations represent one of the most significant risks to doing business in China in years. Antitrust regulators have looked into sectors such as pharmaceuticals, milk powder and jewelry in recent months and suggested that autos, telecommunications, banks and oil firms could be next.

Corruption probes have targeted the pharmaceutical industry while authorities have also launched a major investigation into China's leading oil and gas company.

One executive from a foreign-listed medical device maker told Reuters he canceled his summer vacations plans and instead spent the past month criss-crossing China to make sure the company's operations were not violating any Chinese laws.

Lawyers in China say client enquiries related to a five-year old anti-monopoly law - suddenly being enforced with zeal - have jumped, including requests for antitrust audits.

Reuters spoke to two dozen foreign executives, business consultants and lawyers. All the company executives declined to be identified for fear of attracting scrutiny from regulators.

Overall, they said they were still optimistic about doing business in China, where hundreds of millions of more consumers will join the middle class even as the economy looks set to grow in 2013 at its slowest pace in 23 years.

While corruption investigations periodically make the headlines, the latest campaign appears to have more teeth than usual with President Xi Jinping, who took office in March, using the crackdown as a totem for his administration.

The biggest foreign firm in the spotlight is British drugmaker GlaxoSmithKline, which Chinese police have accused of funneling up to 3 billion yuan ($489.92 million) to travel agencies to facilitate bribes to doctors to boost the sale of its medicines. GSK has said some of its senior Chinese executives appeared to have broken the law.


The medical devices executive said he went to all his company's offices in China and reviewed third-party sales agents to ensure no "grey zone" business was being done.

"Doing business in China comes with risks, such as bribery. We have to juggle this against our business target and that has become increasingly difficult after GSK," he said, declining to be identified because of the sensitivity of the issue.

A veteran healthcare industry executive said his firm had increased the frequency of its internal audits.

"We have to make sure we see what's underneath," he said.

Seung Chong, a Hong Kong-based partner and regulatory expert at Orrick law firm, said enquiries from clients to get their codes of conduct up to U.S. and EU standards were growing, especially with anti-corruption policies.

It is the antitrust investigations, however, that have really accelerated.

Reuters reported on August 21 that an official from the National Development and Reform Commission (NDRC), which regulates prices, put pressure on some 30 foreign firms at a meeting in late July to confess to any antitrust violations.

In particular, authorities are paying attention to whether manufacturers are forcing retailers to set minimum prices for products, which would contravene the anti-monopoly law.

In some cases, legal teams had been hired to interview employees to ensure their behavior when talking to clients and competitors does not violate Chinese law, lawyers said.

"The recent level of enforcement is certainly making companies sit up and take notice," said Francois Renard, a Beijing-based antitrust expert with law firm Allen & Overy.


Officials have said little to explain the motivation behind the antitrust investigations.

China's three regulators - the NDRC, the State Administration for Industry and Commerce (SAIC) and the Commerce Ministry - did not respond to faxed questions for comment.

SAIC handles non-price related anti-competition issues and commercial bribery while the Commerce Ministry reviews mergers and acquisitions.

Official media have said the probes are part of efforts to toughen enforcement of the anti-monopoly law and are not just directed at foreign firms.

But various reports have also noted that Chinese pay more for some foreign products than in other countries.

According to a study by Dutch-based Health Action International, a non-profit group, prices charged for Western drugs in northwestern Shaanxi province last year were about 11 times an international reference price.

A Xinhua news agency commentary in late July said some imported cars were twice as expensive in China than overseas.

Tariffs and other duties do push up the price of foreign goods in China. Nevertheless, some executives said they believed multinational companies were being singled out.

The NDRC has launched nearly 20 pricing-related probes into domestic and foreign firms in the last three years, according to official media reports and research published by law firms.

But antitrust experts say that few involving Chinese firms were major cases or resulted in stiff punishment.

Of six milk powder makers fined a record $110 million in August for anti-competitive behavior, five were foreign including Mead Johnson Nutrition Co and Danone.

"MNCs are understandably obvious targets for this expanded enforcement on competition issues because of their size, market share and vulnerability," said Scott Kennedy, director of the Research Center for Chinese Politics & Business at Indiana University.


Antitrust experts believe bureaucratic rivalry may also be a factor behind the investigations. When the anti-monopoly law was being drafted, a single entity was supposed to handle enforcement, they said, which set the stage for the three agencies to work out distinct roles after considerable wrangling.

"The only thing the three could agree on was that they didn't want the other agencies - or even worse, a new agency, to get it. So a deal was made to carve up enforcement responsibilities," said Mark Williams, an antitrust expert and a law professor at Hong Kong Polytechnic University.

Five years later, many experts see the increased enforcement as an attempt by each agency to prove its worth.

Regardless of which leaders or agencies are setting the agenda, there is skepticism among scholars and lawyers that regulators have the mandate or the political clout to go after top Chinese state firms.

An exception appears to be energy giant China National Petroleum Corporation (CNPC). In the past week, authorities have announced that four senior executives and a former chairman are being investigated for "serious discipline violations", shorthand generally used to describe corruption.

Indeed, helping state-owned enterprises - which are effectively controlled by the ruling Communist Party via personnel decisions - challenge foreign firms is a government priority, said Williams.

"When you have that national agenda, one state organ impeding the operations of another state entity by investigating suspected anti-monopoly violations is very difficult," he said.

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