China Risk &

The New Reality

September 2014

Based on“Risky Business in China”A book by Jeremy Gordon

Published by Palgrave September 2014

Are you ready for China’s new risk reality? Prepare with some of the key

themes from the book here…

“Risky Business in China”1. Author Background: Jeremy Gordon2. China is Not Uniquely Risky. But…3. Rapid Change = Real Risk4. Current China Challenges5. China’s Risk Amplification6. Complicated Chinese Characteristics7. Bad News is News 8. Due Diligence. Not Optional!9. Due Diligence. Not Narrow!10.Due Diligence Toolkit11.Due Diligence Checklist12.The New Reality

Author Background: Jeremy Gordon

• Jeremy Gordon

– Over 20 years on strategy & risk in China

– Director of China Business Services & China Edge

– Previous experience includes:

• UK Trade & Investment (UKTI) Business Specialist for China

• Honorary Secretary of the 48 Group Club

– Follow on Twitter & LinkedIn

• @ChinaBlogTweets & @RiskyBizChina

• https://www.linkedin.com/today/author/6807941

China is Not Uniquely Risky. But…

• Heritage Foundation 2014 Index of Economic Freedom– Brazil 114, India 120, China 137, Russia 140

• World Bank 2014 Ease of Doing Business– Russia 92, China 96, Brazil 116, India 132

• Transparency International 2013 Global Corruption Perceptions Index– Brazil 72, China 80, India 94, Russia 127

• …But China is not optional!

2

Rapid Change = Real Risk

• 1980’s-Present: Times have changed!

– Speed of change is 5x faster than the West

– From (relatively) closed to open

– From rapid to slower growth

– From low cost to rising cost

– From production to consumption

– From FIE focus to national champions

– From anything goes to anti-corruption

3

Current China Challenges

• Main themes of EU & US business association surveys 2013

– Rising costs of labour and other inputs

– Slowing economic growth

– Growing competition, especially domestic

– HR, recruitment and retention

– Protectionism

– Legal, including corruption, IPR etc.

4

China’s Risk Amplification

• Scale– World’s 2nd largest economy– Largest trader of goods

• US$4.16 trillion in 2013

– Largest trading partner • of 120 countries and regions

• Supply chain concentration– “China +1” strategy is not a solution

• Future growth market– A strategic focus for many businesses

5

Complicated Chinese Characteristics • “Guanxi” networks

– Relationships need not be corrupt, but do need care

• Giving and losing “face”– Can complicate relationships & create misunderstandings

• Political rule of law– The Party is in charge while the law is a tool

• Differences and disparities– Locations & motivations differ. Bribes can be

tempting to the low paid

• Information informatization– Death by a mass of dodgy data is a real risk

• Local practices– Legal representatives, chops, shadow banks,

fapiaos, VIEs etc. create risk for the unwary

6

Bad News Is News

• Frequent reports of MNC problems– Bribery & corruption, e.g. GSK– Investment losses, e.g. Caterpillar– Supply chain failures, e.g. KFC

• History repeats– All the issues are news, but not new– The warning signs were there– Businesses have not been adapting

• Risks can be mitigated– With strategic, localised due diligence

7

Due Diligence. Not Optional!

• Due Diligence Approaches

– Proactive or reactive

• Best to be proactive, but ready to be reactive

– Overt or covert

• Both can be used, but need careful management

– Investigate or review

• Better to lift the lid than look at the label…

– In-house or outsource

• Depending on resource & objectivity needs

8

Due Diligence. Not Narrow!• Political & Regulatory

– The importance can not be understated

• Commercial– The wider context should not be ignored

• Operational– On-site checks are essential

• Legal– Needs to be flexible & in a commercial context

• Financial– A narrow focus on accounts will miss the big risks

• Compliance– Important for Chinese and foreign anti-corruption

• Environmental, Health, Safety and Social– No longer an optional issue

• Reputational– Essential, especially for owners / founders

• Employees– Don’t skip references and document checks

9

Due Diligence Toolkit• Online searches

– For a range of company registration, court, trade marks, reputation etc.

• Litigation, media & credit checks

– Need to dig locally, on and offline

• Site visits & sourced interviews

– Essential, practical and insightful

• Government records & authentication

– Confirm official records at AIC etc.

• Professional assistance

– External specialists may be needed

10

Due Diligence Checklist• Approach

– Needs to be objective, broad, well managed, & asking the right questions

• Context

– Needs to account for the policy agenda and commercial reality

• Operations

– Site visits, owners & HR records need to be the focus, not documents

• Verification

– Accounts & courts may not provide certainty, so verification is needed

11

The New Reality

• Challenging times:– Rising costs: squeezed margins and cut corners

– Slowing growth: harder to achieve targets legitimately

– More competition: pressure to obtain unfair advantage

– Increasing scrutiny: especially for foreign companies

• Changing needs:– Strategic risk management: now a core issue

– Beyond compliance: no box ticking

– Vocal localisation: localise for the long term

– Balanced values: align ethics and targets

12

“Risky Business in China”"At the heart of this book lies the contradiction between the reality that investing and operating in

China is a risky business but that China is simply too big to ignore. Any business person would do well to read this excellent brief on the perils of dealing with China's vast and

endlessly fascinating business landscape."Tim Clissold, author, Mr. China

“Jeremy Gordon has written an accessible manual on how to assess risk and due diligence in China. A must-have guide for the world’s potentially largest market.”

Linda Yueh, author of China's Growth: The Making of an Economic Superpower; Fellow in Economics, St Edmund Hall, University of Oxford.

"China, long the most attractive market on earth, has also been regarded as the riskiest…Risky Business in China provides a vivid portrayal of the multifold, manifest China risks but also

provides a road-map for navigating them. This is a must-read for all those involved, or aspiring to be involved, in China business.“

Bill Fischer, Professor at IMD; Former President and Dean of theChina Europe International Business School (CEIBS) in Shanghai.

Order the book “Risky Business in China” from: www.Amazon.com; www.Palgrave.com

@RiskyBizChina #RiskyBizChina

Stay in Touch. Stay Safe!

• Twitter: @RiskyBizChina

• LinkedIn Group: Risky Business in China

• LinkedIn: https://www.linkedin.com/in/jgordon

• Email: jg@ChinaBusinessServices.com

Order the book “Risky Business in China” from:

www.Palgrave.com, www.Amazon.com

@RiskyBizChina #RiskyBizChina