Expanding into China can be risky. Ian Gilchrist suggest some solutions.<

Expanding into China can be risky. Ian Gilchrist suggest some solutions.

International companies are eagerly eyeing China because, once it joins the World Trade Organization (WTO), they will have unprecedented access to the world's largest market. Yet China's huge consumer market, cheap labour and low operating costs maybe a siren's song - luring many companies into potentially treacherous waters.

As WTO entry intensifies competition, negatively impacted Chinese enterprises and laid-off employees may increasingly take out their frustrations on foreign companies. Few managers are fully versed in how to manage these risks.

Not so stable environment
One of China's greatest attractions as an investment destination is its supposed social and political stability. But the strains of sweeping econormc changes are beginning to show. Reforms launched in the 1990s to ease the financial burden on enterprises are at the root of worker discontent and the sometimes desperate measures of managers. Recent incidents demonstrate the volatility of China's business environment.

For example, one Chinese supplier, fearing bankruptcy and loss of income when a foreign-funded company instituted an open bidding process to cut costs, issued threats of violent protest, industrial action and sabotage in a bid to extract compensation. In another incident, around 70 workers detained a group of expatriate managers from a packaging company in Tianjin for more than 40 hours. In a city in Northeast China, some 20,000 laid-off workers rioted against a foreign-invested company over low severance pay.

Foreign-funded enterprises are perceived to have limitless financial resources, making them a lucrative target for strikes, compensation claims and extortion. Progressive human resource policies, plant security and fostering close government relations are some of the strategies companies employ to protect themselves. But these measures are only part of an effective risk management strategy.

Know your partners and employees
Safeguarding your company and its assets begins with knowing the people with whom you are dealing. In a place where everyone claims to have "guanxi" (good connections), screening potential business associates can save valuable time and money. The same holds true for recruiting employees.

You need to be sure the individuals you hire as consultants and employees actually have the experience they claim and can be trusted to safeguard your interests and assets. There are countless stories of industrial espionage, counterfeiting, theft and cyber-terrorism being perpetrated by employees.

Standardised checks on recruits and business partners, often called the "human due diligence protocol" and "company reputation due diligence protocol,"can protect your interests. The results are not necessarily negative. In many cases, checks put subjects in a positive light.

Your reputation is your business
Several recent, highly publicised cases of labour abuse have seriously damaged the reputation and credibility of well known multinationals sourcing in China. Although they had commendable policies and procedures, these companies still became caught up in child labour and sweatshop operations.

Word of labour abuse travels almost instantaneously through the internet. China, perceived as one of the last remaining bogeymen from the Cold War era, is a natural magnet for human rights watchdogs, critical of corporate compliance in social and environmental exploitation.

Plan ahead, plan early
Companies typically do not go far enough in their crisis management planning to prepare for the unique hazards of business in China. They need foresight and sustained monitoring to avoid or mitigate the problems, and even the very best plans need a well-trained crisis management team.

Such corporate crisis teams that have been prepared to engage in active conflict resolution have proven to be very effective in addressing the cause of disputes and in averting potential conflicts. The ultimate aim in any situation is to keep disruption to a minimum and protect the company's reputation. Maintaining communications with key individuals and organisations, such as law-enforcement officers and business partners, serves as an early warning system and as a crucial base of support if things go awry. Managing the communications between loyal allies and disgruntled parties is equally important. Remember, without a contingency plan, the best business strategies could unravel in the face of a crisis.
Ian Gilchrist is operations director of Asian based risk management consultancy Hill & Associates, Tel: (852) 28022123, e-mail: info@Ml-assoc.com .