Commentary

Lucent Knows How To Play By Both Sets Of Rules

Tech Market WatchBy Perry Wu
What do Chinese businesses really want? It seems Lucent has known better than most. Lucent this past week announced it sacked the top management of its China subsidiary based in Beijing. Apparently, these executives had been providing kickbacks and offering travel services to customers who bought Lucent's products.

Foreign kickbacks are generally not a problem in the home countries of most other multinationals. Some European, African, South American and Asian countries, while making laws to forbid bribery in their own nations, don't forbid bribery done by their national enterprises while operating overseas. Or they turn a blind eye.

But for the free-market U.S. system, things are different. About 30 years ago, the U.S. passed a law known as the "Foreign Anti-Corrupt Practices Act". This law prohibits U.S. companies and their subsidiaries from paying kickbacks in foreign countries to win business. So not only must Lucent adhere to non-corrupt practices in Iowa, they also must remain clean in distant offices around the world. You could argue that this puts U.S. companies at a competitive disadvantage, but the law is the law. American companies often get around the law overseas by employing "government relations" companies and some public relations firms to do the dirty work for them. China, for its part, realizes that corruption is a problem. Foreign wholly-owned enterprises operating in China are expressly forbidden from engaging in corrupt practices. It's the law. And any general manager of a foreign enterprise in China should be able to recite this law to you as it's part of the agreement companies sign when they setup in China. Whether this Chinese law is meant to provide an upper hand to domestic businesses, is any cynic's guess.

It is not clear whether Lucent deserves credit for this voluntarily disclosure to the SEC or whether Lucent was forced to do so since the U.S. authorities were already looking into similar issues in Lucent's Middle East operations. You could see this as an example of how far-flung subsidiaries of Western companies are often subject to minimal controls from head offices. The most famous example is the Singapore subsidiary that led to the collapse of Barings Bank nearly ten years ago. In that case, a British trader was able to successfully hide rogue trades over the course of a long period of time. That may be marginally similar to Lucent's case, but there is still something quite different going on here.

The Lucent executives were all Chinese nationals. Doubtless they obtained their positions with Lucent not only because hiring locals is generally cheaper than hiring expatriates, but because Lucent probably figured they would do a good job at establishing the magical "guanxi" that would lead to major contracts on the mainland.

It's a widespread practice among foreign enterprises operating in China that in some job openings, the applicants' pedigree is often much more important than their skills and knowledge of a particular industry. There's nothing wrong with it either–to win contracts in China (and many other countries, including the U.S. where being in the good graces of Cheney seems to get you just about everything) you need staff who have contacts in key government and industry positions. Do an Internet search or look through just about any English-language book on doing business in China and the subject of guanxi will appear. The idea is the same, the underlying implication is clear–surely, a foreigner who comes to China has little idea about what it takes to make a deal and should rely on Chinese colleagues, right?

So foreigners entering the Chinese market need to use local Chinese who have guanxi. There is something of a mystique surrounding this word as if only a Chinese person who has grown up in China knows how to make guanxi, and as if this is a wholly alien concept to Westerners. Westerners, as the story goes, have to exhibit a special sensitivity to the unique traits of the Chinese. But this is an old canard, perpetuated not just by self-serving Chinese, but by feckless foreigners who pretend to know about Chinese business.

So how did these Chinese Lucent executives apparently find the magic formula to win business and establish guanxi? Was it their charm? Was it that they knew something more about Chinese culture and knew something about special Chinese sensibilities? Or was it because they spent endless hours with potential customers at expensive karaoke bars? Well, apparently not, it was something much more understandable and easily done by anybody on the planet–they apparently gave money.

China, like any other country, has its own culture. But don't be fooled into thinking that Chinese have an entirely different set of instincts than other people. Universalities among people are much more common than differences. Y-chromosome holders all around the world generally want the same thing–money and sex. And it seems Lucent's Chinese execs knew at least how to provide the former.

And Lucent played the game well. They made deals in China, while offering services on the side. The local Chinese employees sold Lucent's wares and created a better bottom line for their investors. But when the crap hit the fan, Lucent took a page from the Asian business playbook and sacked the three employees. Were these the only offenders in the organization? Most likely not. But for a face-saving gesture, and to put themselves in the good graces of the SEC, the deed had to be done. Lucent squeezed their lemon into lemonade.

About the author:
Perry Wu is a writer and correspondent for ChinaTechNews.com and can be reached here at the site. Perry Wu does not hold any positions, long or short, on any of the Chinese or American company securities mentioned in this article.

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