Regulatory crackdown is forcing some firms to take a degree of ‘short term pain for longer term gain’ says risk consultancy

China Economy IMF

Multinationals based in China may need to lower their growth forecasts to comply with the country’s tougher regulatory environment, warns a global risk consultancy.

Control Risks senior managing director, Australia Pacific, Jason Rance told StrategicRISK that many firms in the region are taking “a degree of short term pain for longer term gain”.

“Those companies that are responding to the regulatory crackdown are having to lower their growth forecasts in order to conduct business in the right way and be set up for a long-term position in the Chinese marketplace,” Rance says.

Rance says regulators are targeting firms and sectors with “super profit growth” and perceived anti-competitive behaviour, which are both red flags for potential bribery and corruption.

“[China is] a fascinating market at the moment because of its size and strategic importance and also the pace and degree of political and regulatory change that’s taking place, and how the two are connected.

“It will be very challenging [for multinationals in the country]. But those companies that move quickly to understand and adapt to the regulatory environment will have a first mover advantage.”

Medical devices industry targeted

China began its crackdown on anti-competitive behaviour in 2012 and has introduced a number of measures that aim to promote local business and curb corruption.

The latest incident involves a multinational medical device producer, which is allegedly under investigation for commercial bribery and unfair competition practices involving as many as 1,000 hospitals. Chinese state media reports suggest the company was accused of donating large devices to hospitals in exchange for exclusive sales contracts.

Rance says the increased regulatory scrutiny of foreign medical device makers is likely to be partly intended to support the growth of local companies.

This is in line with the ‘Made in China’ strategy, announced in March by the State Council, to move China up the production value chain and to become a ‘high-tech manufacturer’ by 2025.

Medical devices are one of 10 industries targeted, and local Chinese players can expect to receive more government support in the coming year.

But the government is unlikely to want to drive out foreign competition completely, Rance says.

The ‘Made in China’ push is likely to include devices manufactured locally by multinationals, or by those in joint ventures with less than 50% foreign stakes. Chinese authorities’ goal is to increase the competitiveness of domestic companies.

“We also expect that multinationals selling products directly to the public at high prices, and with substantial dominance of their market, are likely to be highly scrutinised. The government has been anxious to bring down healthcare costs, and is highly critical of any market behaviour that keeps prices elevated,” Rance says.

Rance says this latest investigation should serve as a warning for all multinationals operating in China.

“If you have managerial oversight of your operations in China then be sure you have a full understanding of how your local team goes to market, including any local partners, distributors or other third parties,” he says.

“If you have a strong ‘tone from the top’ in terms of regulatory compliance and anti bribery and corruption measures, then ensure they are part of the local team’s culture and given equal weight to employees sales incentives and commercial targets, rather than a tick-box compliance exercise.”