Foreign Scandals: Smoke Screen For Government Shortfalls

Beijing is returning to a time-tested tactic from its PR playbook with a sudden flurry of high-profile probes of major multinationals, which are being accused of everything from price manipulation to bribery. This latest series of “scandals” has snared some of the most active foreign firms in China, including pharmaceutical giant GlaxoSmithKline, milk powder maker Mead Johnson and packaging products titan Tetra Pak.
If anyone notices some irony and skepticism from my use of quotation marks around the word “scandal,” it’s because the news of so many new probes in less than a month seems too rapid to be coincidence. Instead, I suspect this sudden stream of investigations is designed to discredit the foreign multinationals in the eyes of Chinese consumers, while distracting them from domestic problems like a slowing economy and a nonstop series of corruption and food safety scandals.

Before I go any further, I should clearly state that most of the allegations in this sudden stream of probes against foreign firms are probably true. But many of the allegations wouldn’t even be considered crimes in the west, where government supervision is often much stricter. What’s more, many Chinese companies are guilty of many of the same transgressions, making some of the recent allegations look like they unfairly target the big foreign names.

This recent flurry of probes began in early July, when central media first reported that foreign milk powder makers were being investigated by China’s powerful state planner, the National Development and Reform Commission (NDRC). The investigation covered most major foreign manufacturers that sell in China, including Danone, Nestle and Meade Johnson.

Those companies were accused of selling their powder for high prices, which had risen by up to 30 percent over the last 5 years, the NDRC said. At least part of the price rise was no doubt due to inflation, as consumer prices for many products in China have jumped sharply over that period. But the foreign companies could also boost their prices partly due to plummeting consumer confidence in their domestic rivals, which have been caught up in a number of product safety scandals since 2008.

I have no doubt that the western multinationals, which use stricter quality control standards, could raise their prices as demand for their products jumped due a corresponding plunge in sales for the domestic brands. But this kind of price increase is just a market phenomenon, which allows makers of better products to charge a premium for their higher quality.

Reports of the milk investigation were barely a week old when central media broke news of another probe, this one against foreign drug makers including global giants GlaxoSmithKline, Merck and Novartis. Similar to the first investigation, this second probe was also spearheaded by the NDRC and involved allegations that the companies set their prices at artificially high levels.

Like the milk powder case, I would argue that these drug makers were simply charging a premium for their products, which enjoy greater consumer trust in China than their domestic rivals.
News of the drug investigation was just days old when central media disclosed word of yet another probe, this one against packaging giant Tetra Pak. Once more, this latest investigation accused the Swedish company of using its size to engage in anti-competitive behavior.

The biggest in the recent string of anti-foreign probes came just days later, with word that GlaxoSmithKline, already accused of price-fixing in the earlier probe, was now under investigation for bribery. In that case, the government accused the company of transferring 3 billion yuan, or nearly $500 million, to 700 travel agencies over 6 years to bribe doctors, hospitals and other medical professionals to buy its drugs.

Unlike the previous scandals, which stayed in the news for just a few days each, this last scandal has lingered in the headlines for longer, thanks to emergence of a steady string of new details that include the detention of several GSK executives. While bribery should never be condoned under any circumstances, it does seem like GSK was being unfairly singled out in this case for a practice that is common in China and is often considered a cost of doing business there.

This sudden flurry of investigations could well be part of a broader push by Beijing to bring order to China’s many unruly markets, and if that’s the case then the NDRC deserves some praise for its efforts. But the fact that these probes are almost all aimed at foreign firms also seems like a reason for suspicion.

China and its state-controlled media are highly skilled at writing negative stories about big foreign multinationals, a topic that I’ve discussed in my new book about the media in China. Such foreign firms lack the government connections, or guanxi, that often protect many domestic Chinese companies from such probes and negative reports in the state-run media.

Foreign companies also usually enjoy better reputations than their Chinese peers, many of those big state-run enterprises. Thus these kinds of negative reports are a convenient way for the government to discredit big foreign names, showing average Chinese consumers that such firms are far from perfect.

Lastly and perhaps most important in this case, scandals involving foreign companies can conveniently divert public attention from other domestic problems. These new investigations seem to imply that foreign firms are at least partly responsible for China’s high inflation of the last 3 years, even if the real reasons for that inflation are much more complex. These scandals can also divert attention from China’s slowing economy that is hurting many businesses, and from the steady stream of domestic food safety and corruption scandals that are constantly in the headlines.

At the end of the day these scandals will probably quickly fade as the accused companies show proper contrition, which we’ve already seen with announcements of price reductions by many of the powdered milk makers. And over the long run the companies’ will continue to enjoy strong reputations in China, even as public attention slowly returns to the many bigger problems and challenges now facing the government.