The Challenge of Chinese Joint Ventures (or “More Melamine Mis-Adventures”)

December 2, 2008

China has the problems of any transitional economy," says Yanzhong
Huang, a global health expert at Seton Hall University in South Orange,
N.J. "But the deeper and more fundamental challenge China faces is a
systematic lack of business ethics."

"You cannot fully police the whole food chain," adds Dali Yang, a politics professor at the University of Chicago. "A lot
depends on changes in social norms. People have to recognize that integrity does matter.

 from "Behind bad baby milk, an ethical gap in China’s business"  Christian Science Monitor, 17 September 2008. 

The business ethics of substituting melamine for legitimate protein sources has already been a topic of discussion on my blog.   In June of 2007, the topic on my mind was use of melamine in dog food (!F92952EA9124A41B!2105.entry ).   

It makes little difference what the context, I think.  Dog food, infant formula, milk chocolate candy:  it’s all the same when you get down to it.  Fill in the blank with the product of the day, and it still fits right into the same equation in terms of business ethics. 

Namely, the current melamine-to-dilute-milk scandal exemplifies an attitude of doing anything to cut cost — without regard to quality, in disregard of health or safety standards — all in the name of greater profit.  It exemplifies a willingness to engage in deceit, or else an uncanny knack for focusing on petty terms of a contract (e.g. level of protein in milk) without regard to the underlying substance of the values those terms were intended to protect (e.g. a certain nutritional standard for food).

The other striking thing about this melamine scandal, as the ripples run through the food supply chain, is just how widespread it was.  If it had just been one bad producer, or one bad company, it wouldn’t be so surprising.  In this case, the problem is so widespread it points to a systemic failure of values. 

In a real sense, melamine is truly just the tip of an iceberg.  While the last melamine substitution scandal involved dogs and dog food, I hate to say it but I am so, "not surprised" that the line was not drawn at adulteration of food intended for animals.  In the adulteration scandal before the dog food (the one that didn’t make it into USA newspapers because it only affected people in Third World countries), Chinese manufacturers had substituted chalk for the key medicinal ingredient in a pill to treat malaria.  They had even put acetaminophen (the ingredient in Tylenol) in the counterfeit drug, luring people into thinking they were recovering from malaria instead of receiving further treatment.

Think about it.  Someone sold chalk under the pretense that it was a pill to cure malaria.  As reprehensible as it might be, selling chalk as a cure for the common cold isn’t likely to kill someone.  But selling chalk as a cure for a treatable, deadly disease, and on top of that to insert an ingredient that disguises symptoms and thus further delays real treatment until the person really cannot be saved by any medicine?  This goes beyond audacious.  In an earlier blog entry on the malaria topic, I equated this conduct with murder because of a legal analysis regarding the elements of intention and forseeability of death. 

If a culture has fostered an ethical system that values profit more than human life, why does it come as a surprise that the same value system would be applied when it came to the business opportunity to substitute melamine as a "protein" ingredient in baby formula and milk products, even knowing that it would cause harm to thousands upon thousands of humans?  The only difference here is that the consumers affected were more powerful than dogs or people in Third World countries who were afflicted with malaria.  As such, they aren’t taking the news standing down. 

Well, here’s my take on it:  "Three strikes and you’re out."  How long will the world go on trusting Chinese companies (or Chinese regulators) to ensure the safety of any product that goes into the world market stream?  It’s amazing that the Chinese government can act so swiftly and effectively on some things, and be so stymied by others.  Something does not compute. 

Rather than beat these dead horses, however, I’ll move to a different topic that is highlighted by the current case study in the news.  That is, the danger that lurks for Western companies contemplating the formation of joint ventures with Chinese firms.  The precise danger, highlighted by the current melamine scandal, is that Western-based companies might fail to realize the extent of the difference in values, and hence in business ethics (and decisions stemming from those ethics), between themselves and their Eastern-based counterparts or culturally nonwestern managers. 

Just last month, I spoke in a blog entry of the need to listen to the white noise, to pay attention to cues that things may not be what they seem.  This is one area where the white noise consists of small indications of a value system that is widely different from one assumed by many Western managers to be common everywhere.  I once watched a television round table discussion in Hong Kong consisting of CEO’s of various large, multinational enterprises doing business in Hong Kong.  None of the managers, whether Western or Asian, would admit that there was a screaming disjunct in values between a Western and an Eastern based enterprise.  In this regard, and in the interest of being "politically correct," I think they were being less than candid. 

Many companies only see a potential market in Asia, or a potential labor source, and they fail to recognize crucial cultural differences which much be addressed as a condition to successful integration of business in the East and West.  A Western company seeking to enter the playing field in Asia must force itself to see outside its own cultural paradigm in this regard; it absolutely must be conscious that very different cultural standards govern the way business decisions are made in different cultures.  A manager, or company, that fails to understand this, will find itself surprised in some way if they assume that the standards of the native country will be adhered to in the host country. 

This is not to say that Asian organizations lack values.  They just place them in a different hierarchy.  It’s a hierarchy that has some distinct strengths, but it’s a different paradigm than that which a Western company will take for granted.  As just one example, a Western paradigm of what a "corporation" is fundamentally is based on the idea of a joint stock company, where the owners are shareholders and the management works on behalf of the shareholders.  As such, objective competence is highly valued; training or promotion opportunities depend upon demonstrated competence and leadership.  An Eastern paradigm, however, is more in line with a small family enterprise grown big.  Managers are groomed and promoted based on family ties and loyalty; with training and promotional opportunities allotted based on status and seniority. 

There is strength in the approach of grooming and promoting managers based on personal ties.  The strength of such an organization, of course, is that it keeps control within a very tightly defined circle of confidants.  It works particularly well for personal security of the individuals who are insiders within the management structure.  But in a western organization, much of what happens would be negatively categorized as nepotism.  I’ve been told that a typical Asian work force is so closely tied by blood and relations, that a new management can only be brought in by wholesale housecleaning.  Someone coming from a Western model based less on personal loyalty and more on personal competence, however, had better be aware of this from the outset.  One of my western friends working in an Asian organization described not a glass ceiling but a steel one, as he realized that he could devote his entire career to one company and never overcome the "outsider" label.  On an institutional level, it can mean that the western managers and eastern ones are simply not on the same playing field, as the same duty of loyalty is not owed to the outsider. 

As a corrolary to this, I’ve been told by more than one source (not that I’ve verified it myself) that an Asian organization will often have two sets of books.   One set is the "real" set of numbers, kept in a secret off-site location and known only to a few top managers who are very loyal to each other, and a second set of books which is the official copy.  One friend of mine even told me of a computer program that automatically took the numbers input for one and created the numbers for the second one.  This second set of books is the one which the Chinese organization will share with its western partner in the joint venture.  (Squeamish yet?  Better to know than not to know!)

In my opinion, the real value of the expatriate manager is that he or she brings the home country corporate values and culture to the overseas operation.  The best success comes when the expatriate manager is given tools and training to help drive those values into the Asian counterpart.  That tool chest must include actual control over the company and its day to day management.   Companies that are successful at incorporating their Western managers into their Asian operations manage to merge the greatest strengths of Western companies (quality, integrity, precision, design, human rights) with the great strengths of Asian ones (leanness, cost effectiveness, worker diligence, loyalty).  Companies that do this will thrive.  Those that fail to do so will fail.  It is a high stakes decision.

Having observed the life of an expat manager, and having become friends with many expat managers from many companies and many countries, I’m more convinced than ever of the truth of this.  Many companies move operations to Asia as a means of cutting cost while taking advantage of an excellent labor force.  In cutting cost, they may be tempted also to cut the cost of the expat manager, who tends to cost much more than a local hire.  This trend is evident in recruiting literature.  Companies think they can save a lot of money hiring a native of the host country to run their overseas operation. 

Certainly, there are advantages.  The person is likely to work for a lower salary than an experienced top level international manager.  Moreover, they are unlikely to need the support that an individual needs when working outside their home culture, for example education allowances for children or translators.  They will also have none of the issues associated with personal and family adjustments to living in a foreign culture. 

I think it’s a mistake, however, for a company to imagine that a non-expat manager could possibly have the same perspective as an expatriate.  Just think of one thing, the issue of cultural adjustment.  At some level, isn’t cultural adjustment what it’s all about?  The idea is to have cross cultural fertilization, to gain the benefit of meshing the best of two very different cultures, isn’t it?  If the company’s home culture is left at home, that won’t happen. 

What value does it bring to a company to have an expat manager?  Well, if by enforcing a quality standard the manager saves a company from being bankrupted by products liability claims, he’s more than earned his keep.  In terms of driving company values, the expat manager just might be worth his weight in gold, sometimes literally. 

While the essence of driving corporate values can be regarded as intangible and even unimportant, it’s not, really.  When western values are driven into the corporate culture, it does show up in the bottom line.  Among other ways, it shows up in risk management.  When there’s an earthquake, concrete has been properly reinforced and mixed, and buildings don’t collapse.  There is no lead paint in toys.  It shows up in employee retention, raising the level of expertise and reducing the need for constant retraining.  These are just a few things I can think of without even trying.  I’m sure that a good business student could brainstorm a few more. 

Indeed, I’d venture an opinion that the most important thing an expatriate manager can do is to drive corporate culture and corporate values into the overseas operation.  This is the soft, squishy realm of mission statements.  It means grappling with the policy issue of "what kind of company do we want to be." 

The mission statement, that statement of corporate values, is so important because it sets the guidelines for how the company will respond to more specific questions.  It points to the answer to questions like:  "Do we want to focus on bottom line balance sheet issues and ignore the safety and health violations on our factory floor?  Do we want to supply modern equipment, training, and safety standards including ear plugs even if that adds a few dollars to the cost of what people will pay for our widgets in Wal Mart?" Values, indeed.  A company doing business in an international environment faces a significant crisis of identity, namely:  "Whose cultural values do we espouse?" 

Do we live by the values of the home culture or of the host culture?  Certainly, to some extent when in Rome we do as the Romans do.  Yet, there is also a bottom line which, if we cross it, causes us to lose the essence that distinguishes us.  A good expat manager knows where that line is.  A good expat manager is, of course, sensitive to and respectful of the values of his host culture.  With sensitivity, and with common sense, he will drive the values of the home office into the guts of the overseas operation. When the various sets of values are meshed and integrated, the three snakes working as a team are transformed by their efficiency into a dragon. 

This risk of joint ventures is that the Western values are not fully heeded or integrated.  The risk that expat managers will be overruled in the values department is a lesson that I bet the company Fonterra wishes it had learned sooner rather than later. Fonterra, a New Zealand company, owns a minority interest in Sanlu, a milk producer in China.  Sanlu happens to be the milk producer at the epicenter of the melamine scandal.  It was Sanlu’s expat Fonterra executives who happened to be the whistleblowers on the whole melamine-in-milk scandal. 

Here’s how the scenario played out:  The Fonterra executives sitting on the Sanlu Board, in their minority position, became aware of the melamine adulteration.  The New York Times reports: 

For Sanlu, a pivotal moment came on Aug. 2 when company officials informed the board about the melamine problem. Sanlu is a joint venture with the New Zealand dairy giant Fonterra. Fonterra owns a 43 percent share and has three members on the board. Fonterra’s executives say their representatives immediately pushed for a public recall at the board meeting, only to be overruled by the rest of the board.


The problem was finally exposed in September when the New Zealand government, after discussions with Fonterra executives, contacted authorities in Beijing. Beijing officials say they knew nothing about the scandal until September, though a Fonterra company spokesman said the company believed the central government knew in August.  [All emphases supplied.]

Now imagine something.  Imagine that you were an executive sitting on that Sanlu Board, and you learned about the Melamine.  And then you learn that it’s no surprise to your Asian counterparts, that they are complicit in the decision and want to cover it up!  Think about it.  This is the Corporate Board.  It’s the highest level of corporate governance.  And think of how many lower, middle, and upper managers were aware of it, and all of them were complicit in the activity.  It’s as if the apple were rotten to the core.  Fonterra failed in the essential task of driving its corporate values into any portion of its joint venture with Sanlu. 

While the violin is different, the tune is not.  This same scenario gets played out day after day in joint ventures involving Chinese companies. There are many companies who, figuratively, look the other way.  They fail to notice quality issues, human rights issues, safety violations, supplier problems, tax evasion, double sets of books.  This may work, for a short time, but it’s not sustainable.  It’s a matter of probability:  something is going to come back to bite. 

One of my friends told me of the misadventures of her husband’s company.  I first met "Hilde" and her husband "Alfie" when Alfie was the freshly arrived general manager of a joint venture manufacturing operation.  It was easy to see why Alfie was a CEO.  He was extremely well educated and articulate, incredibly gregarious, outgoing, cheerful, and personable.  I imagine he had already proved his competence as a manager, since he had started factories on several continents for his company and had been successful.  He was eager to learn Chinese, to experience Chinese culture, and he was looking forward to the new China venture.   When I met him, he had already built the plant and was running it, with a Chinese staff, in the joint venture.  At our first meeting, he told me that the Chinese production managers had jumped the gun just a bit.  They had started production a few weeks ahead of schedule, resulting in some poor quality product, but he was certain it was a matter of training and the learning curve. 

But two years later, I learned his company was pulling out of the plant and was building a different facility in a different province of China.  Why?  The story was all too familiar.

Alfie’s home company was a German company, with a German company culture.  They wanted things done right.  They wanted their factory to be neat and clean, their processes and products precise.  They wanted the i’s dotted and the t’s crossed.  They valued their longstanding reputation in their industry, and they wanted to always be known for the quality of their products.  They viewed their reputation and the quality of their work as paramount.  Moreover, the particular product involved serious safety potential.  If manufactured incorrectly, people could be harmed. They took safety very seriously. 

None of these more or less intangibles computed with the Chinese managers.  In the eyes of the Germans, these Chinese partners seemed to care less about precision, cleanliness, safety, quality, or long term results.  And the Chinese owned 51% of the joint venture.  The Germans were stuck with an unworkable venture. The last straw had to do with the seeming lack of regard for quality.  As  result of quality issues, the company was losing reputation and market share. 

When I last saw her, Hilde told me that Alfie was the only German member of the management team left at this site.  The other Germans simply couldn’t tolerate what was happening.  When they would fly in for meetings, their meetings with the Chinese managers just deteriorated into shouting matches.  Hilde’s cheerful, optimistic husband had met his match.  He had thrown in the towel, and he was leaving, too.  At the new factory they were building in a different region of China, she said, Alfie’s German company was going to have full ownership and control, because they were not going to tolerate the kinds of management decisions driven by Chinese values. 

There’s another secret, too.  The Chinese managers know about the culture wars before the Western ones catch on that they even exist.  What surprises me about the Sanlu – Fonterra situation, actually, is that the Sanlu managers let the Fonterra managers in on the secret.  In many companies, the Asians would simply not tell the Westerners.  This underscores why it’s important to have Westerners on the ground, in positions where secrets are more difficult to conceal. There’s nothing like personal inspection to expose what’s in the closet. 

I won’t be popular for saying this, but yes, there is a culture war.  Yes, it really is all about values.  The question is, who is going to win the values decision?  What is the values statement your company wants to make?  Will the move to China, for your company, involve sacrifice of the very values which make your company unique and successful?  Do you still think the expat manager is too expensive? 

My mom once said to me, "If you think education is expensive, try the cost of not having one."  In a similar vein, I’d say, "If you think an expat manager is too expensive, try the cost of not having one."  Good luck. 

For a citation to the N.Y. Tmes article, see: 

International / Asia Pacific

Despite Warnings, China’s Regulators Failed to Stop Tainted Milk


Published: September 27, 2008


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