China: Bad Meat, Cultural Differences And Anti-Corruption Compliance

In the last year or so, our China lawyers have been seeing something new: more and more American companies that have been doing business in China deciding that they “cannot take it any more.” The following two things made me think of that today:

• A U.S. company that paid a Chinese company a fair amount of money to set up a WFOE in China. This U.S. company just learned that the WFOE was not properly set up and that the money it sent to the bank in China was never earmarked for the WFOE’s capital requirement. When I asked this company what it wanted us to do, they made clear that they “had had it with China” and all that they wanted was their money back.

• A New York Times article by Stephanie Strom, Weak Links in China’s Food Chain, on the bad meat problems McDonalds and KFC have been experiencing in China.

The New York Times article is on the current China meat scandal and after reading it, my first thought was that my law firm needed to focus even more on our Vietnam practice.

My second thought was that we (those of us doing business with China or in China) cannot give up. Things (I am being intentionally vague here) are constantly getting better in China and they are better now than they have ever been. At least the things relevant to the New York Times article.

Most problems American companies have with China stem from the American company’s own failure to properly protect itself from what can and does so often happen in China. For some posts reflecting that view, check out the following:

• China Law: Don’t Blame It On The Gray.
• How To Avoid China Corruption Charges
• China’s “Quality Fade.” Is There Really Such A Thing And So What If There Is?
• Having China IP Problems? Whose Fault Is That?
• China Product Sourcing Problems. Don’t Even Try To Blame It On A Subcontractor. Not Anymore.

As China attorneys, we almost have to believe that most China problems can be prevented either by not doing the deal because it is just too risky, or by setting up protections to prevent against the panoply of potential problems.

So I get very frustrated when I read about a company that appears to have done everything right and still has a problem. Mattel’s lead paint problems was an example of that. Near as I can tell, Mattel did just about everything it reasonably could have done to prevent the exact problem that eventually befell it. I am getting the sense that the company at the heart of the recent meat scandal also did most everything right.

According to the New York Times article, OSI — the company that supplied McDonald’s and KFC with meat — has a sterling reputation and is anything but a China neophyte. It also appears to have acted above board since problems were discovered.

So what caused the problems? The Times article provides a few hints:

Although the company had been in China for two decades, OSI embarked on a $400 million rapid expansion plan in 2011 that included three new poultry production and processing facilities and additional capacity at its Shanghai and Beijing plants. “The goal was to completely recreate the U.S. system — from feeding and watering regimes down to the exact rate of air flow and size and placement of windows in the poultry houses — but to make it locally relevant,” according to a 2013 Harvard Business School case study about OSI’s China business by Prof. David E. Bell.

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Experts in food safety and plant operations say, however, that even the most rigorous protocols and standards can be undermined by culture, particularly at a fast-growing company — OSI’s revenues doubled between 2011 and 2013 — in a country where high monthly turnover of factory workers is not uncommon.

“The average Chinese factory worker comes from someplace where food has likely been scarce and picking up a piece of meat that has dropped on the floor and eating would not be unusual — it’s not unusual for us to drop food on the floor and anyway eat it,” said Andy Tsay, a professor of operations management at Santa Clara University who was one of the authors of a paper on recalls of Chinese made products in 2007.

Steve Gruler, chief executive of Global Quality Consultants, a firm that provides risk management advice to a variety of companies, recalled visiting a grain elevator in China where workers were unloading grain onto trucks. “A plume of dust comes from under the door of the elevator and rises up over the truck,” Mr. Gruler said. “Our eyes got about as big as saucers.”

Grain dust is highly combustible and such explosions have been deadly. Mr. Gruler and a colleague asked the engineer at the facility whether it had a dust collection system. “Oh, yes, he said, but it had been shut off to conserve electricity,” Mr. Gruler said. “He didn’t understand that dust could cause an explosion that would blow the place apart.”

OSI itself acknowledged such challenges in interviews with Professor Bell of Harvard. “When we began building modern broiler houses, we found that the workers often took shortcuts even though every detail was spelled out in the plans,” Stefan Chen, senior vice president and general manager for OSI’s poultry operations in China, told him. “For instance, they would change the size of a window to save material. This seems like a small thing, but it affects the ventilation, which affects the production efficiency.”

This post is NOT going to address OSI’s safety issues nor will it address safety issues in general. We are lawyers not safety specialists.

So instead, it will look at a somewhat similar issue, but one which we know well because it lies at the heart of our international compliance practice: preventing corruption.

When it comes to preventing corruption in China, American companies are all over the map. Some essentially give their law firms a blank check to help prevent corruption. Others believe that they need nothing from lawyers on that score at all. We are constantly engaging in back and forth with our clients regarding their anti-corruption policies and programs.

There are services out there that for a few thousand dollars will conduct what is essentially little more than an English language internet search regarding Chinese companies and key personnel. Some of our clients believe this is sufficient to make sure they are not doing business with disreputable Chinese companies/people or companies/people on various sanction lists. These sorts of searches are worth almost nothing especially because they are not even in Chinese. Some companies simply do not want to hear this.

We have dealt with companies that insist that they do not need any anti-corruption training for their personnel in China either because they do not have anyone who would engage in corruption or because they have already made clear to their employees that corruption is not okay. When we try to tell them that the average Chinese employee has no idea what really constitutes corruption as that should be defined for an American company, they still have no interest in going any further.

If you want your China employees to perform to the standards you have set for them, you absolutely must do more than just set out those standards in a policy manual somewhere. You have to make sure again and again that they 1) understand your policies, that they 2) are abiding by your policies, and that 3) a failure to abide by your policies will have real repercussions.  For more on this, check out the following:

• China And The FCPA. Just When You Thought It Could Not Get Any Worse.
• Going To Jail For China Bribery. Now That We Have Your Ear….
• China Corruption. Let’s Talk Business.
• The FCPA And China. Be Afraid. Be Very Afraid.
• Doing Business In China Without An Anti-Corruption Compliance Program? Are You Crazy?

Cause as the New York Times implies, there are cultural difference.  What this means is not that Americans are not emminently capable of corruption themselves, but that the understandings surrounding corruption and how best to serve as an employee can differ.

What do you think?