I just listened to a great podcast on China’s kickback culture, where Bill Dodson (who writes the This Is China blog) explains how difficult it is to avoid kickbacks.
There are mainly two difficulties for foreign companies, whether they simply import from China or they have established local operations:
- Making sure the employees who approve the choice of suppliers and service providers do not use their position to get kickbacks. It is very widespread and difficult to prove.
- Communicating to all related parties that no gift is allowed, explaining the reasons behind it, and respecting that line no matter what.
Why is it so difficult? There are mainly two reasons:
- China, and South-East Asia in general, has a gift-giving culture. It is impolite to refuse a gift. But where does the difference between a gift and a kickback start?
- Purchasers can multiply their income by many multiples without substantial risks, and in many companies it is an established system.
We are talking about very small businesses (where the assistant gets something for herself when arranging a driver or a hotel) and about very large business alike. A friend in Huawei told me that the purchasers at Foxconn “ask for higher prices”…
Of course, the quality control industry has the same challenges. Whenever I meet someone working in procurement/sourcing in China, I have a 50% chance that this person asks me questions about inspectors corruption.
Everybody has a story about a representative of a large inspection firm getting bribed and accepting defective products. The three largest QC firms have a very poor reputation in China. I am sad to confirm that it is grounded in reality.
And it has two consequences on the industry. On one side, some buyers are afraid of it and manage their quality control themselves. But on the other hand, it is a good sales argument for smaller inspection firms who follow their inspectors closely.
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I’m not so sure if this applies to the QC industry, but one way to tell if an employee of my firm is taking a bribe/kickback is to talk to the supplier directly about price when the time comes for it in the deal making process.
This isn’t a sure-fire method, but if the supplier can negotiate on price with you, he’s probably not giving any money to someone else in your company. Of course, it’s not a 100% guarantee, and sometimes, the supplier won’t negotiate just because he doesn’t have any room to negotiate. But this method at least gives me some information on the chances of someone in my firm taking a kickback.
Another way to gather information about someone in your firm is, on the second or third orders, how eager is the supplier to get your business again. If he knows that his margins are slimmer with you because of the kick-back he may be a little more hesitant with giving you the order again. (This is another non-guarantee, but just provides a little more information to you on the overall situation)
Danny,
This is excellent advice for buyers. Thanks!