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A Look at China’s Unethical Business Practices

Dec. 15, 2021
Most companies understand that manufacturing in China exposes their companies to a high risk of theft of intellectual property.

My last column focused on questionable business practices in the United States. Today, we’ll flip the script and look at unethical business practices in China.

Here are some examples:

1. Rebating. A company I worked for had manufacturing facilities in both the U.S. and China. Quoting the exact same part from one of our domestic plants and then one of our China plants, I was able to document that the Chinese government had a policy of “rebating” 15% to manufacturers on exports. I related this incident in detail in a 2016 column.

2. Drawbacks. For those unfamiliar with this term, it applies to excise or tariffs a government puts on imports. To understand how China applies this practice, all you need to do is look at the up to 100% tariff it applies to many imports of automobiles. More on that later.

3. Theft of Intellectual Property. Most manufacturers understand that manufacturing in China exposes their companies to a high risk of theft of intellectual property. This can lead to a situation where soon after operational launch, they face competition from a Chinese company producing—for all intents and purposes—the exact same product they, themselves, are manufacturing. These same Chinese companies frequently have military ownership participation.

This typically happens through Chinese “minders” that are assigned to foreign manufacturing start-ups. Their stated purpose is to “help” the non-Chinese manufacturer navigate the ins-and-outs of doing business in China. In reality, though, U.S. manufacturers are forced to accept and familiarize Chinese nationals with the nuts-and-bolts of both their product and manufacturing processes.

4. Price Cutting. The Chinese government’s practice of under-valuing their currency—by about 7%—is essentially price cutting, encouraging exports and discouraging imports. This has been going on for a long time and severely undercuts other countries’ competitiveness. It certainly is not a free-trade practice.

In China, foreign firms’ complaints regarding unethical business practices often fall upon deaf ears. In other words, there is no sheriff in town. I am aware of one U.S. company that started manufacturing in China that had their actual physical computer server—which contained the design details of their products—stolen. This was reported to the local police, who did nothing. Later, a couple of miles down the road, a Chinese firm started manufacturing a competitive brand that was, for all intents and purposes, the same product produced by the U.S. firm. Again, this was reported to Chinese officials. Again, nothing happened. 

One big difference between unethical business practices in the U.S. and those in China is that the U.S. is a democratic republic and China is essentially a one-party dictatorship. So, while the U.S. outlaws unethical business practices through laws like the Sherman Anti-Trust Act and has a judicial system that enforces those laws, there is little expectation of any checks and balances in China. This has resulted in unethical practices that far outweigh those practices in the U.S. in type, frequency and magnitude. I fear that is unlikely to change in my lifetime.

I’d appreciate hearing about any experiences you have had or know of relative to Chinese business ethics, either in the comments section below or to me personally.  If I hear of enough instances, I will use them as a basis for a future column.

Paul Ericksen’s book is Better Business: Breaking Down the Walls of the Purchasing Silo. Ericksen has 40 years of experience in industry, primarily in supply management at two large original equipment manufacturers.

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