Comment: Stern Hu: Business as usual

It has been business as usual for Rio Tinto following the sentencing and jailing of its four Shanghai-based executives writes Rowan Callick.

Since the jailing of Stern Hu and his three Chinese colleagues with Rio Tinto for extremely long sentences for receiving “bribes” that three of them admitted, and for stealing commercial secrets, there has been an understandable rush to draw a line under the case – and under the men involved – and get on with business as usual.
But just before that happens, as is inevitable, it is worthwhile to consider the lessons that might be learned for and about businesses that deal with China. Rio’s chief executive Tom Albanese appeared so eager to draw a line, that he claimed at the China Development Forum in Beijing that opened on the same day as the trial in Shanghai, that “only in the last year have we come upon some difficulties” in operating with and in China, “which we are working hard to resolve.”
Other global corporations claiming 50 years’ enmeshment with China must have been stupefied to learn that Rio had enjoyed 49 trouble free, fruitful years doing business in what has often been one of the most challenging and complex economic environments in the world. The four men were sacked on the same day that they were jailed by the Shanghai court – in a country whose judges are acknowledged by most experts on the Chinese legal system to be primarily agents of party officialdom.
Rio referred in its accompanying statement, to “deplorable behaviour that is totally at odds with our strong ethical culture.”
This apparently meant, Hu and colleagues’ receiving payments for signing up private companies for long-term benchmark contracts when they would otherwise have been forced to buy iron ore for much higher spot prices, either from Rio directly or from one of Rio’s more powerful, state owned customers who have profited massively from selling Australian ore on to smaller Chinese mills. The contracts would have had to be approved elsewhere in the company, which was itself the principal victim of the corruption.
Thus was one of Rio’s “difficulties” of the last year rapidly resolved.
Another, that of the awkwardness of its relationship with its leading shareholder, Chinalco, is also being smoothed out as, step by step, the deal enmeshing the companies that was spurned last year, is implemented in a less ambitious and more cautious process, starting with joint ventures in Africa and probably soon, Mongolia.
So the first lesson to be learned from the Stern Hu episode, is that despite even the most publicly awkward dilemmas, deals that appear to be “winwin” commercially, can rapidly emerge once priorities have been readjusted on all sides, and once the cause of the awkwardness is let go. The Chinese government was so confident – correctly, it now appears in hindsight – that the harsh sentences would be received with equanimity in Australia, that it extended the usual deadline for issuing visas, to ensure a commercial TV crew was able to fly to Shanghai to cover the verdicts.
Another lesson is that Australian consular officials cannot necessarily gain access to court cases in China in which Australian citizens are being tried, despite an international agreement. In Shanghai, diplomats were denied admission to the still mysterious section of the trial about stealing commercial secrets.
A further lesson for foreign companies is that hiring people who are ethnically Chinese – whatever citizenship they may have – to represent them in China carries risks as well as opportunities. Risks not so much of the “deplorable behaviour” lamented by Rio – that can be policed – but of their being expected to demonstrate ultimate loyalty to Beijing, and by extension to the state corporations it owns, rather than to their own employers.
The Stern Hu case has starkly underlined this expectation. The case also emphasises the vital importance of keeping in touch with the flux of political fortunes, especially in Beijing where key decisions are made. Hu and his colleagues were given more scope to do deals with emerging mills, with Rio beginning to sell more of its ore on the spot market, just as the onset of the global financial crisis was triggering the re-emergence of old-fashioned central-planning forces in China, including the China Iron and Steel Association (CISA) – which wished to squash emerging private steel players.
For many companies like Rio, the Chinese market is for now irreplaceable.
David Pilling, Asia Editor of the Financial Times, wrote that “Google can live without China, Rio cannot.”
So Google is retreating to the US, while Rio is entrenching its relations with China, its biggest customer.
Another lesson, is that while “facilitation” is ubiquitous in China, it can be a risky game to play – in case, as noted above, the political tide turns, protectors vanish, and what seemed merely generous is now classifiable as corrupt.
In Western countries, it is the people paying the bribes who are in the most severe trouble. Laws in many countries allow companies and their managers to be charged back home for seeking advantage abroad by bribes. But in the Stern Hu case, it remains unclear what, if anything, has happened to most of those who offered special payments. It was those receiving them, who ended up in the high profile court case. Foreign companies can also take heart from the trial – that they can still be important enough, and their profitability and success potentially troubling enough to China, as is the case with Rio, that they are prone to being targeted in a manner that is in part designed to ensure they are more “cooperative” in the future.
This prospect should alert them to points of vulnerability.
The rapidity with which the Shanghai authorities seized the computers and files from the Rio office following the arrests last year, underlines the need for businesses to consider carefully where and how they hold and process valuable information. And the sophistication of recent international corporate cyber attacks, whose ultimate source remains mysterious, requires the creation of painstaking defensive processes. This may mean diversifying the countries in which data is stored, and indeed holding sensitive meetings in varied venues.
The Stern Hu case highlights that gathering commercial information can be an extremely dangerous pursuit, especially if the sources or markets from which or about which, a company seeks such intelligence, might be perceived by the Chinese party-state as “strategic.” Gathering commercial “secrets” – a word applicable to much information circulating in China – was the crime for which Hu and his colleagues were tried in secret.
Rio says that its new protocols concerning this necessary aspect of doing business anywhere, require pre-approval by the corporation’s lawyers, and that this information gathering be conducted openly.
This would appear, effectively, to knock the company out of the game – and to deter others from doing so. Whether intended or not, this is an especially fruitful outcome for China.
The official judgement of the Shanghai court says that the behaviour of the defendants “got Chinese steel enterprises into a disadvantaged position in the negotiation for imported ore” – which one must presume, was part of their job description. For in business, sometimes you win, sometimes you lose, and Hu and co were hired to help Rio win.
This goes to the heart of the issue.
Chinese business has grown used, over the 30 years of the country’s opening-up, to constant success, growth, and “win-win.” Its best practitioners can and do learn quickly and brilliantly from the occasional setbacks they have encountered. But there remain elements, especially the remnants from the old style of Ministry-run corporations, who insist that all risk is removed before they trade or invest. The lesson from the trial for China, is that while it is right to shine a light on the pernicious practice of bribery, it must be consistent in prosecuting all, in every sector, who give or take bribes, or else Hu and co are likely to be perceived as victims as well as perpetrators.
*Rowan Callick is the Asia-Pacific editor of The Australian.

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