Caixin
Dec 12, 2017 07:56 PM
DOING BUSINESS IN CHINA

Microlender, Kindergarten Scandals Spotlight Need for Crisis Plans

Having lived and worked in Greater China and the U.S. for the last quarter century, I can say with a high degree of authority that the mainland is easily the most prone to corporate scandals among these major markets. We’ve seen two such scandals in just the last month, both involving major publicly-traded companies. Some of these cases were handled better than others, but the bottom line was that the group of about a half dozen companies involved saw hundreds of millions of dollars disappear from their market value in just days.

The first scandal began with some slightly naive remarks from the chief executive of a newly listed company named Qudian Inc., which earns money by making very small loans of around 1,000 yuan ($150) to individuals and small businesses. His remarks exposed just how underregulated this group of startup online microlenders was, prompting regulators in Beijing to snap to action with a series of moves aimed to show they were on top of the situation.

The second crisis erupted late last month and involved kindergarten operator RYB Education, which was accused of abusing children at one of its schools in Beijing. A police investigation confirmed parents’ claims that their children had been jabbed with needles as a form of discipline, though allegations of other forms of abuse have yet to be substantiated.

In the U.S., Hong Kong or Taiwan, scandals of this magnitude would be relatively rare, perhaps breaking out two or three times a year at most. But in China they seem to be much more frequent.

A number of factors are at work in China, including the huge power of social media as a shaper of news. That’s relatively unique to China, as many people often turn to such media for information due to widespread mistrust of traditional media, most of which are state-owned and closely follow a government agenda. A second element is China’s inexperience at government oversight, which often leads regulators to make rapid decisions that send confusing signals and only make crisis situations worse. The kindergarten case was clearly one closely tied to the influence of social media, while the microlender case was exacerbated by rapid and confusing signals from inexperienced regulators.

Yet another element that is truly unique to mainland China is corruption among both traditional and newer social media. Many such smaller media make significant money by blackmailing vulnerable companies, such as ones in crisis or getting ready to make IPOs, when they are especially sensitive to negative news. One of my sources at a major microlender said his company was approached by such corrupt media during the latest crisis and asked to pay money or risk having a negative story written. He said his company ultimately refused to pay, but added the experience did leave everyone very aware of the growing power of an emerging field of opinion leaders on China’s powerful social media.

Being prepared

All that said, let’s turn to the important question of what companies can do to prepare for these kinds of crises, which can hit just about any company at any time. Obviously large, high-profile companies like controversial telecom giant Huawei Technologies make the easiest targets. But foreign companies in general are quite vulnerable too, as they are also relatively high-profile due to their foreignness and lack the government connections that can sometimes help protect them from negative publicity.

The biggest message I got from contacts I consulted on the subject is that advance preparation is key. “Don’t wait till the house is on fire to try to make the plan,” said one, nicely summarizing the situation. He noted that not only is it important to have a plan in place, but it’s also important to practice that plan and keep it updated. I was quite surprised when, while research a related topic a few months back, one of my sources who led several major multinationals’ China operations told me none had ever had a plan for how to handle a local crisis. If such major companies aren’t preparing, I can only imagine that most midsize and smaller ones don’t have any such plans either.

Not surprisingly, everyone I consulted said that quick and regular communication and transparency are also critical, even if you don’t have much to say. The important thing is just to show people that you want to be forthcoming and not holed up in your fortress, which is the typical mentality among many local companies.

One contact also noted that separate crisis plans are often necessary for Chinese and foreigners, as each may require a slightly different approach. One good example of that is the tone of contrition that’s necessary for Chinese responses, which often include some form of apology from a very early stage. By comparison, we Westerners seem much less interested in apologies and contrition and instead are more concerned about what is being done to fix a problem.

A couple of sources pointed out that the best way to avoid these kinds of crises in the first place, or at least limit their scope when they happen, lies in creating a positive relationship with the media and general public before problems occur. One thing companies can do in this direction is to work with other local organizations on social responsibility projects and broader community involvement. They can also regularly remind their investors and business partners that China is a land of reactive regulators that periodically kick up dust, but that in the end things usually blow over and business returns to normal.

At the end of the day, the likelihood that your company may find itself at the center of any major crisis in China is probably quite small. But being prepared for such eventuality never hurts, even if that just means having some informal internal discussions. If nothing else, such preparations are a good exercise for navigating a China market that is often unpredictable and prone to such crises.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com.

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