Why China's new crackdown on foreign firms will be mild

May 05, 2015 16:33
A GE magnetic resonance imaging (MRI) device awaits testing at a production facility in Beijing. The company is said to be among those being probed in China’s latest anti-bribery crackdown against foreign firms. Photo: Bloomberg

Summer time is fast approaching, which means it's time for China's latest crackdown on foreign firms to start heating up.

Such crackdowns are becoming an annual tradition, and have even developed a certain cyclicity that sees them begin in late spring, then reach a fever pitch in summer before fading in the fall.

This year could see a continuation of that pattern, with reports that the medical device units of global conglomerates Siemens, General Electric and Philips are all being probed over whether they bribed hospitals and other medical professionals to achieve their current market dominance.

Anyone who is getting a sense of deja vu from this latest headline would be correct to feel that way, since this probe looks strikingly similar to another one that also targeted foreign firms in the related pharmaceutical sector.

That wave of probes saw most of the major multinationals investigated in 2013 for bribing hospitals and medical officials to buy their drugs. The campaign culminated in a then-record 3 billion yuan (US$500 million) fine last year against Britain's GlaxoSmithKline, which was one of the most egregious offenders.

Since then a wide range of other industries where foreign firms have a major presence in China have also been targeted with probes focused on illegal practices like anti-competitive behavior and bribery.

Another one of those saw global smartphone chip maker Qualcomm (QCOM.US) fined a record 6 billion yuan earlier this year, wrapping up one of the many cases that erupted into the headlines during last summer's wave of anti-foreign probes.

Against that backdrop, the latest reports of probes against Siemens, GE and Philips for bribery hardly comes as a big surprise, especially as we head into the summer months.

According to the reports, the State Administration for Industry and Commerce (SAIC) actually opened its probe into the trio last year. Sources that revealed the probe were quick to add that the launch of an investigation didn't necessarily mean the companies had done anything wrong.

The reports also point out that the three companies now control about 80 percent of the lucrative China market for big equipment like MRI and CT scanners, which can cost hundreds of thousands or even millions of dollars each.

While such market dominance is certainly suspicious, it also shouldn't come as a huge surprise. That's because such product development and production is hugely expensive and China has few companies that can offer competitive alternatives in the area.

The case is slightly different than that for the drug companies, which operate in a far more competitive landscape that includes many local makers of cheap generic drugs. That reality, combined with a Chinese business culture where gift giving and bribery are common, was probably a major factor behind the broader series of probes that engulfed the pharmaceutical sector two years ago and ended in the record fine against GSK.

In this case I suspect that officials from Siemens, GE and Philips probably engaged in the usual wining-and-dining to win lucrative orders, and probably also engaged in some aggressive gift-giving. But SAIC is clearly being quite careful in its investigation this time, following an unprecedented chorus of complaints from multinationals and their home governments that Beijing is unfairly discriminating against foreign companies.

The previous cases saw foreign firms from a wide range of sectors, including milk powder, luxury cars and microchips, fined big amounts and ordered to change their business practices. A similar finding against Siemens, Philips and GE would immediately raise new complaints from the foreign community, even if some of the suspected bribery really did occur.

For that reason, I expect we'll see this case quietly settled with much smaller fines and promises from the companies to clean up some of their more aggressive business practices. With China's economy rapidly cooling, Beijing can hardly afford to alienate foreign companies too much, especially when its own domestic firms engage in equally bad or even worse practices.

For that reason, I believe this new probe won't mark the start of a new anti-foreign crackdown, and the coming months could mark the end of the recent cycle that has seen summertime emerge as a noisy attack season against major multinationals.

Bottom line: A new anti-bribery probe against the medical device divisions at Siemens, GE and Philips will end with a quiet settlement, as China scales back a wave of probes that have triggered discrimination complaints from multinationals.

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A commentator on China company news and associate professor in the journalism department of Fudan University in Shanghai. Follow him on his blog at www.youngchinabiz.com.