Kowtow Now

This week, after Apple apologized to Chinese consumers for arrogance and substandard service, a cold wind blew through the foreign business community in China. The American computing juggernaut had made small, dumb mistakes with its customer service policies. It boasted about its revenues in a region where doing so can attract jealousy and scrutiny from the wrong quarters. And unlike other top tech executives, its legendary founder and late CEO, Steve Jobs, never deigned to set foot in the country. But there was no schadenfreude from Apple’s competitors, for the leaders of China’s global business community understood a simple fact: Tomorrow, or perhaps the day after, that could be them.

Despite 35 years of rhetoric about China being open to foreign business, and explicit promises China made on its accession to the World Trade Organization in 2001, foreign companies in practice have no right to operate in China. China’s policy makers — and no small number of its people — still maintain that it is a privilege for foreign firms to be allowed to access the Chinese market. Moreover, that privilege may be revoked at any time for a range of reasons, some of which are not laid out in law or on contracts.

One unwritten clause attached to every business license granted to large foreign firms in China is that they are expected to set an example of a higher level of corporate behavior than local firms. A central government official speaking at a conference several years ago was asked what kind of corporate social responsibility activity foreign firms should undertake in China. His answer was revealing: Obey the law, pay their taxes, and treat their workers fairly. Simply by doing that, they could improve China by their example.

At another conference in Beijing some years later, an exasperated young Chinese executive blurted in frustration to her foreign bosses: "Don’t you realize? What the Chinese people want from foreign companies is to show Chinese firms how to behave." Technology and capital are not all foreign firms are expected to bring to China: Their standards of corporate citizenship and customer service are also part of the package.

The implications of this insight, lost on many companies operating in China, are staggering. Suddenly, Apple blaming local retail partners for service lapses, for example, or excusing its warranty policy by citing the law of the land offers but the thinnest of fig leafs. "When in Rome, do as the Romans," coming from foreign firms rings in Chinese ears as hollow at best, and at worst, as betrayal. If you are going to behave just like local firms, consumers and government think, then why do we let you do business here? What good are you?

When both foreign companies and local firms are guilty of the same transgression, the foreign companies are better targets. Singling out the abuses of local companies to try to change industry behavior is fraught with political risk: China’s complex web of special interests means that officials never know exactly on whose toes they are stepping. Foreign companies, largely lacking political air-cover in Beijing, make for highly visible, politically safe victims in government campaigns to smack businesses back in line. Thus the old Chinese saying: "Kill a chicken to scare the monkey."

When a foreign company makes even the slightest misstep, it becomes a juicy target for opportunistic regulators and petty demagogues alike — and the more successful those foreign companies, the better. When an entire industry pollutes a river, blame the foreign chemical firm, even if its factory isn’t the source of the problem. When there are unsavory practices in the grocery business, go after Wal-Mart and Carrefour. When local restaurants are using cooking oil recovered from the gutter, crack down on McDonald’s and KFC. And when dairies are faking protein content by pumping poisonous melamine into the milk, go after the joint-venture dairy. And when consumers complain about poor service from phone manufacturers, make Apple your main target (even though the company now ranks sixth in China’s smartphone market).

The payoff for Beijing is superb. The local companies get the message to clean up their acts — for a while, anyway. The government comes off like a guardian of consumer interests; and the foreign brands get yanked down a notch, if not taken out of the game altogether, meaning bigger market share for domestic firms. Everyone wins — except the foreign company.

The foreign company has little choice but to apologize for its missteps, and make immediate and thorough (and perhaps somewhat melodramatic) amends. After being caught mislabelling regular pork as organic in its Chongqing stores, Wal-Mart offered an abject apology, sacked its China head of operations, agreed to close its stores for two weeks in one of China’s largest cities. After a China scandal around mislabelling of a processor on one laptop model in 2006, Dell not only offered an apology, but also full refunds to affected customers. As Asia Society’s Orville Schell pointed out in early April, "Apple may not quite realize it, but the historical aquifers that irrigate any such dispute with an iconic foreign company, are seemingly inexhaustible." Getting into a protracted battle with the Chinese government, even behind the scenes and with consumers on your side, is a road out of China, not into it.

The better course of action for companies is to try to avoid becoming a target. Take the double standard and use it as an advantage by proactively behaving at a higher benchmark: when in Rome, doing as the Christians, as it were. Making China a "most favored nation" by adhering in China to your highest operating standards from around the world — in finance, customer service, hiring, and ethics — is not just a nice idea, it is a corporate survival strategy.

The wisest among the multinationals operating in China will take this as a cue to dig deep into operations and root out those actions and behaviors that leave them vulnerable. Start by finding out where and how in the organization Chinese are treated to a lower standard of service than customers elsewhere. Expunge them. Then set a higher standard and force the industry to catch up. Your competitors will hate you. Xenophobes will mumble under their breaths. But you’ll never have to say sorry.