ISSUE 11: CHINA: PROCUREMENT FRAUD

Donald Trump weighs in

Please note all content is personal opinion only. This does not reflect the opinion of my employer – or maybe it does. Also Donald Trump did not contribute to this – I just channeled him to make the advice more to the point.

A week of cruising around Croatia blocked efforts in putting out last week’s issue. I would like to say I was overwhelmed by readers getting in touch to see if everything was ok. I would like to say that but as no-one reached out this would be misleading.

As we looked at in previous issues China is still the world’s factory and everyday ships billions in product around the world. This amount of trade not only generates huge revenues but also massive amounts of fraud. Much of this fraud results from individuals not having sufficient integrity or honesty. For this reason, we are honored to have a guest commentator who has been literally unimpeachable – the former President of the USA – Donald Trump – channeled via me.

Do-Gooder Compliance Team on my Ass

Dear Donald,

We are a Midwest company which has appointed an American as General Manager of our operations in China. Our new GM has glowing references and 15 years’ experience in China. From the very start we just seemed to “click”.

I feel very relieved that we have Bob as China is far away from our headquarters – Bob was able to get us a factory space 30% cheaper than Beijing as his wife has strong relations there. It is just a literal plane to Chicago (when they were flying) then to Shanghai then another plane to Shenyang and finally a 3-hour car drive. The car drive is always a source of excitement and recalls particularly hair-raising stunts from the James Bond movie franchise. Each trip would take over 34 hours – so we are happy Bob is there … so we do not need to make the journey. You can say what you like about COVID but one silver lining has been that I have not had to make that God forsaken trip since 2019. We in headquarters feel we have done a great job in finding the right man for the right job at the right time.

As our parent is a listed company we have had their compliance team on our case – see below correspondence:

As a man who has been able to shut down audits do you have any advice how to deal with these party poopers?

Yours sincerely,

Miffed in the Midwest

Do I really need to Wait until the Employee is Dead before I fire him?

Dear Mr. President,

We are a company out of Detroit.

We have an issue with our head of procurement in China. He is stealing money and requiring suppliers to pay him kickbacks. This goes against our company policy and we told him he is not allowed to do this and we wished to terminate his employment contract.

But the problem is that he tells us that it is not easy to terminate employees in China. Worse I looked at the employment contract drafted for this employee by our US lawyer. Unfortunately, the contract only foresees termination under specific circumstances and then with two weeks’ written notice. The specific circumstances included being found to be an alcoholic (although a number of expatriates may well fear this provision, our guy is a teetotaler); found to be mentally insane (this seems a little subjective); or most peculiarly, in case of his death (but we think killing him would go against our US termination policy even though it is not explicitly mentioned).

So we are in something of a quandary here. What can we do?

Desperate in Detroit

Protecting Our Man in China

Dear Donald,

Recently there has been a change in management in our China operations.

The new expat GM, who is Danish has raised concerns about our procurement manager (also Danish but long time China resident).

I think this is just a new guy acting like a know it all. The procurement manager Andreas is a long-term employee of ours, he has had a very stable team (no one has left for 10 years), enjoys great decades long relationships with the key suppliers (they always send a Mercedes to pick him up from the airport) and has a great network in a specific region.

Despite all this the new guy says there is a risk of Andreas being on the take!

What do you think?

Concerned in Copenhagen

Q1:  Our headquarters ___________ our China operations.

        A)    is keenly interested in supporting and keeping a close relationship (including the sending of technicians and management (even during COVID) with

        B)    conducts a regular external audit of

        C)    knows that we have

        D)    is unaware of

Q2:  Our China operations are headed by ___________.

        A)    this guy we have known for many years in the company and who is now working in China for 2-3 years

        B)    this guy we have known for many years in the company and who is now working in China for 10 years

        C)    some guy recruited from outside and has been trained in the headquarters for a period of time and comes here regularly (at least he did before COVID)

        D)    some guy, I forget his name

Q3:  Our annual internal audit _________.

        A)    found some minor issues of non-compliance.

        B)    found some major issues.

        C)    found perfect compliance, so everything must be fine.

        D)    did not take place.

Dealing with Procurement Fraud

Always remember to:

Keep an eye on the operations … always

Do not place complete and full trust in any one individual

If you sense that there are problems, it is highly likely that there are problems. Do not overreact but it is also not wise to shrug off indications that something is amiss.

Take the time to plan an appropriate strategy to deal with procurement fraud

Once you have the plan, implement it quickly (things are unlikely to improve) and stick to the plan

Next Issue: Restructuring in China After Covid

China in 2022 is not the China of 1992 – many JVs and WFOEs are coming to the end of their initial terms. No-one could have predicted in 1992 how China would be 30 years later. Accordingly, as COVID recedes international businesses will need to tussle with difficult questions that have likely been put on ice for a few years. Do we renew our JV? Do we re-negotiate it? Is our China operation too small or is too big? Are we still located in the right place?  Do we need to share risk with a Chinese partner? All these and many other questions will be answered in the next weeks (but not next week as I am in Tel Aviv eating humus).

See you soon,