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Business Analysis & Features

Chinese corruption can be bad for your health

It's a mistake for Western firms to bribe their way to business in the world's fastest-growing economy

A British businessman who spends a lot of time in China got a sinking feeling one day when he was called up by an official whose approval was needed for a new investment deal. The official suggested that the businessman take him out to dinner to discuss the matter in more detail.

"I knew what he meant," he recounts. "Dinner means 'give me money'. As soon as I heard, I didn't want to deal with it."

It would be an exaggeration to say that corruption – of the sort in which the pharmaceuticals giant GlaxoSmithKline has connived – is an inevitable hazard for foreigners doing business in China. But in some areas, pharmaceutical sales apparently among them, it is hard to avoid.

"It is well known that in the medical industry in China, doctors receive various kinds of payments and perks to sell more medicine," says Roy Graff, a French marketing and business development consultant who works in the People's Republic.

"Doctors don't have a big salary compared with what they earn in the UK, and in second-tier [Chinese] cities the salary is even worse," explains another executive. "This is why they are looking for another way to make an income."

But foreign companies, such as Glaxo, which succumb to the temptation to boost sales by paying bribes, can find themselves hit from two directions. On one side are resentful local businesses looking to hobble big foreign competitors; on the other are officials who need to show their superiors in Beijing they are actively cracking down on corruption.

"Often Chinese companies use anonymous tips or their connections in government to target their Western competitors," explains Mr Graff. "In many industries, companies are worried about foreign competition and they are not shy to use these kind of methods to get rid of competitors."

However, some disagree with the suggestion that foreign firms get a rough time of it despite recent headlines. "Everyone says 'oh my God, the Westerners are being singled out' but the locals have had more taps on their shoulder," says one American financial analyst. "It is not so much that foreigners aren't welcome – it's that there's a paradigm shift at the top of the politburo to weed out corruption."

But corruption is notoriously flexible. Some say that graft has evolved under the pressure of the Beijing authorities rather than disappeared.

"People are getting clever," says one businessman who works regularly in China. "Before, I would come to your house and bring you a lot of money. But officials know they will be in trouble if they get found out. So now they have a new way to bribe the next generation. Maybe the government official's kids are here in the UK. The Western business owners will buy things, including houses in the UK for the family, so people wouldn't find out."

Other ways of keeping corruption beyond the gaze of prosecutors is gifting shares in a company to someone's relatives, or overpaying for supplies from their relative's shop.

One businessman explains how it works: "Maybe your brother has a furniture company. If I set up an office, I'll buy the furniture from your brother because you're the government official, and then the brother will charge me five times higher than normal."

And some Western firms are astonishingly proactive when it comes to playing the corruption game. "They will do a lot of research," says one business man. "For example, if you're the government official, they will talk to your secretary about what you like, where your family are. A lot of people go even deeper and use middlemen."

But this can be their undoing because the chain of people involved in the corruption grows longer and, thus, more vulnerable.

"As foreign companies, they often have to pay middlemen and fixers to handle all the things local companies handle directly. That means local companies are better at hiding it," says Mr Graff.

All of the Western firms whom The Independent spoke to insisted they had never paid a direct bribe in China, although some had been invited to do so. And some admitted to softer forms of corruption, such as lavish entertainment for officials. But even that practice is under pressure.

"As for foreigners, let's say you work for a big institution. Suddenly, what's acceptable to put on expense accounts – someone dips into an allowance and labels it as corporate entertainment – well that's is no longer legitimate corporate entertainment," said one US financier.

Mr Graff is warning firms that might do business in China that bribery is simply not worth the risk.

"I would advise foreign companies to just focus on areas where they have a strong competitive advantage based on technology, customer service, etc, and focus on that – because ultimately it's hard to know who to trust," he says. "If you're allowing a third party to act on your behalf to give bribes, for example, it is unrealistic to expect that you wouldn't be found out."

Ben Chu's book 'Chinese Whispers: Why Everything You've Heard About China Is Wrong' is published on 10 October by Weidenfeld and Nicolson

AstraZeneca sets up anti-graft task force for China

AstraZeneca's chief executive has set up a task force to "double and triple-check everything" it does in China after rival drug maker GlaxoSmithKline was embroiled in a £320m corruption scandal.

"As soon as the first news came out of China we set up a task force to check everything we do," said Pascal Soriot. "We took all our suppliers through a validation process, and have gone through an entire analysis of our business to check everything we do is totally compliant. So far we haven't found anything of concern."

At least 20 people have been detained in China over claims that GSK funnelled millions of pounds to travel agencies to bribe doctors, hospitals and other officials. But Mr Soriot said Astra was still committed to China, where its revenues rose by 23 per cent in the first half to $896m (£590m). "There are 1.2 billion patients in China so we're very focused on growing in that country," he added. Overall, AstraZeneca's pre-tax profit by slumped 37 per cent to £1.5bn as generic competition hit some of its best-selling medicines, including the cholesterol-buster Crestor.

Lucy Tobin