Improving Local Government Affairs

To be successful in China, foreign companies must build strong, lasting relationships with not only the central government but with local governments as well.

By Nancy Huang and Julie Walton

Local PRC government offices exert a significant amount of influence on foreign companies’ operations in China. The influence can stretch beyond expected areas—such as product and investment approvals, customs clearance, and taxation—to touch on matters such as land use, human resources, and marketing. Given the extensive reach of government and quasi-government entities in China, many foreign companies seek best practices to manage the wide range of government relationships.

Continued expansion of US companies into China has brought a heightened recognition of the importance of government relations at all levels. Many companies have a dedicated, centralized, corporate-level government affairs (GA) staff based in one location in China, frequently in Beijing. With the increasing number and complexity of policies that affect US companies in China, GA staff often focus on maintaining relations with central government officials and linking broader corporate goals to national government priorities. This broader focus often leaves little time to manage local government relations that are essential to ensuring smooth daily business operations.

The US-China Business Council (USCBC) in 2011 interviewed more than 20 China-based GA practitioners from among its membership to compile best practices in managing local government relations. Interview questions focused on topics such as municipal- and district-level relations, staff structure for managing local government relations, the role of company GA staff in operational activities, and strategies to handle local problems to support company development in China.

In addition to GA work at the national level, companies often manage government relations at the sub-national level, which includes provincial, municipal, district, and county levels, to support business operations in that specific jurisdiction. Sub-national GA work tends to focus on compliance and implementation to ensure smooth daily operations at the company’s local facility rather than on policy development. Companies that cultivate relations with local officials when business is going well increase the likelihood that they will have channels to use when specific problems arise.

Administrative levels in local government affairs

A company may need to work with all local government administrative levels depending on the issue. In general, provincial-level government agencies set the goals and development strategies for the whole province. GA work at the provincial level tends to focus on promoting awareness of the company’s products and services to influence top provincial decision-makers and on gathering information about the province’s plans for implementing industrial and macroeconomic policy. In addition, certain provincial regulators, such as provincial development and reform commissions and provincial bureaus of commerce, have approval authority for foreign investments above a certain threshold or in certain industries.

District and zone government agencies are generally micro-regulators responsible for implementing the policies that touch on daily business operations, such as business licenses, tax registrations, import and export clearance, work safety inspections, and utility supply.

Structures for managing local government relations

Because all local facilities must interact with the government, companies use various methods to manage local relationships. The top three methods follow:

• General manager as local GA lead  At some companies, the senior executive at the facility, including a factory, store, branch office, or warehouse, serves as the local senior company representative who interfaces with government agencies at the city, district, or zone level. An advantage of this structure is that a competent local senior executive may be more readily able to identify and respond to problems before they get out of hand. This individual usually also has the title necessary to ensure an effective level of access to the relevant government agency. Because the government relationships rest so heavily on one person, higher-level company executives should ensure that the executive embodies qualities the company would like local officials to associate with the company.

•  Deputizing other functional staff as local GA lead  In some cases, a corporate GA professional and the local facility executive will “deputize” local functional staff to handle local government affairs in addition to their other daily roles and responsibilities. Local human resources, finance, operations manager, or any other local employee who interacts frequently with the local government because of his or her existing responsibilities could serve as the local GA staff member. To ensure an effective local government relations strategy with this structure, interviewees offered three suggestions: Create specific GA training for staff, establish a local GA committee or similar group for deputized staff who will handle local GA work, and add GA responsibilities to the local designated staff ‘s performance criteria. These strategies ensure that he or she fully understands the function’s importance and is motivated.

• Hire a full-time local GA manager  Under this method, the full-time local GA professional mirrors the corporate GA function but tends to be more junior. This individual usually reports directly to a senior, corporate-level GA professional, but also reports to the local facility senior executive.

When to create a full-time local GA role

A company might make this decision if it:

• Has a concentration of investments in a particular area, such as eastern China, and needs one GA professional to manage the local relationships in that jurisdiction.
• Operates in a regulatory-intensive industry, such as retail, chemicals, or healthcare, and must maintain strong relationships with many local officials from supervisory agencies, such as quality inspection or customs bureaus.
• Needs to support a specific business unit in multiple localities, even if the geographic territories are not near each other.
• Has a large, complex local investment that is important for the company’s China development strategy, such as a regional headquarters, a multi-million dollar plant, or a flagship store.

Internal communication

According to USCBC interviews, effective internal communication and information sharing among local facilities, business units, corporate GA staff, and local GA staff from different localities are important factors contributing to effective local GA. For example, senior corporate GA professionals can offer tools and resources to support local GA work. The GA professionals can provide updates on company interaction with central government agencies, brief local staff about which agencies are implementing new policies, share best practices or common standards of conducting local GA work, and inform staff of internal company developments or experiences that might be useful in other jurisdictions. This helps equip local staff with better tools to handle a range of issues and allows them to take preemptive measures to prevent local crises.

Many companies also bring the GA team and business units together on a regular basis—at least annually, but often semi-annually or quarterly—to review business development goals and identify areas that need GA assistance. This regular interaction allows the GA team to craft its plans and strategies in line with the needs of the company’s business units.
Basic tasks and responsibilities

Not surprisingly, staff members who manage local GA generally maintain close contacts with working-level officials and representatives from various government entities, especially officials from the relevant development zone, to ensure that local operations run smoothly. In practice, this may mean working on different local operational issues such as tax payments, utility supply, human resources management, brand building, customs clearance, and business development. They can support local operations by regularly interacting with local officials in formal settings—such as individual company meetings—and informal settings—such as seminars and events. They must also pay attention to how local agencies implement national-level policies to ensure local company operations comply and are not unfairly disadvantaged. Additionally, local GA practitioners:

• Follow up on approvals and licenses  By following up with different government bodies on project approvals and business licenses, companies can potentially alleviate the long delays in securing necessary licenses and approvals. This may include managing an environmental assessment by the local environmental protection bureau or participating in an energy consumption assessment by the local development and reform commission.

• Identify future problems  Staff members who manage local GA should take a lead role in identifying where problems may occur in the future. For example, if a facility is located near a natural resource or near a downtown area, GA staff should monitor local land policies and changes that could cause problems based on the facility’s location.

• Conduct due diligence  Companies considering new or expanded investments may approach specific development zones or foreign investment promotion bureaus to learn more about potential incentive packages and how the local government interprets relevant policies and regulations. Involving GA staff in the investment planning process at an early stage can also ensure a continuous relationship once the deal is finalized. Local GA staff involved from the pre-investment stages can serve as a bridge between officials and the new operating team.

• Support negotiations  Key business units and operational staff often handle negotiations directly, but GA professionals can facilitate contacts between the company and government. This can include following up with local governments to determine their perspective on what was discussed in the meetings. Usually such follow-up requires that GA staff talk with different government departments, such as officials responsible for tax or land use, to understand their viewpoint on what was discussed and promised in the meeting. This step helps minimize miscommunication among agencies, and between agencies and the company.

• Monitor pilot projects  The central government often tests policies through pilot projects in select locations. Interviewees indicated pilot projects have important implications both for companies operating in those areas and for the regions to which those policies may apply. In addition, local governments may allocate a certain percentage of their budgets to promote region-specific development. Therefore, it is important for local GA staff to be aware of any local incentives that companies may be eligible to receive.

Identifying relevant local officials

Not all local government agencies are relevant to companies’ operations, and not all levels of a particular agency are relevant. Interviewees reported that limited resources made it essential to identify and prioritize agencies and levels and to allocate resources accordingly. What might be a strategic relationship for one company may only be an opportunistic one for another. For example, entities with many minimum-wage employees may find more value in maintaining solid relationships with district-level human resources and social security officials than entities with fewer employees.

At the same time, interviewees confirmed that it is important to cultivate relationships with certain agencies because of the broad nature of their work. For example, district officials from the local tax, administration of commerce and industry, and commerce bureaus are important to know well because they have primary and ongoing approval authority for all aspects of business operations.

Who should interact with local officials

When seeking to interact with officials from various local agencies, the issues to be discussed and the official’s level will determine who from the company side should lead and attend the meeting. In most cases, local GA staff will interact with officials from relevant functional government agencies at the district or zone level, such as the zone management committee, tax bureau, customs, quality inspection and quarantine, and administration of commerce and industry. China-based GA executives and local staff responsible for GA-interface meet with city-level government agencies that oversee foreign investment, industry, science and technology, foreign affairs, and more. China based-GA executives and senior corporate executives meet with related provincial-level agencies. Sometimes senior China GA executives must also work with officials from the city, district, or zone when local staff cannot resolve problems. In addition, the nature of the subject to be discussed in the meetings may affect who will attend from the company side. For example, a meeting about expanding an investment may bring in a different level of company executive than a meeting about relocating.

Interviewees commented that meetings with most local government officials are not routine but rather are focused on specific issues, tasks, and projects. What companies have said about central-level officials is often true of local government officials: Busy schedules, increased workloads, and more professional attitudes leave little time for courtesy calls.

Informing local officials about a company

Companies also recognize that the educational and professional level of local officials varies in China. Some specific ways to educate officials about a company’s products or business operations include:

• Using well-known customers to introduce industrial products to local government officials.  One company’s airport customers in China agreed to serve as a reference and allow the company to bring officials from other localities to see the systems in operation.

• Working to correct misconceptions about certain sectors.  Many people perceive companies in certain sectors, such as chemicals, as polluting. Introducing past safety records and best practices helps local officials better understand the business.

• Organizing industry-specific events at which officials can hear other examples about the industry.  For example, a machinery manufacturer for the food processing industry presented industry best practices at a food processing seminar with officials from the food and drug administration and health bureau.

Cultivating local relationships in a new region

Interviewees said that cultivating local government relationships is challenging if their companies do not have physical investments in that area. Because those companies might not contribute to local gross domestic product growth and tax revenues, local officials are less inclined to listen to them. But companies may need local relationships for business growth because local governments may have influence that could directly affect sales performance. A local government agency may also supervise aspects of a company’s potential customer base.

For example, in the healthcare sector, the local food and drug administration, development and reform commission, and health bureau have jurisdiction over drug pricing, bidding, and tendering. Their decisions affect product sales, so local GA staff assists the local company team to coordinate with the municipal and provincial health bureau, drug and food safety bureau, and development and reform commission even if there is no manufacturing in those locations.

Troubleshooting local problems

Regardless of the strength of local government relationships, companies will always have problems and unexpected challenges to solve. A failed safety inspection, an overtime violation, or an error on a customs declaration form may result in a need for local GA support. Situations that require companies to interact with local government officials do not only result from negative circumstances, however. Company growth and the need to build new or relocate existing facilities, launch new products, or provide new services can result in significant bottlenecks and bureaucratic headaches that require sustained company involvement with local government agencies.

Interviewees noted several best practices when troubleshooting:

• GA staff should collect as much fact-based information as possible from relevant company departments and external parties before acting.
• GA staff should investigate the causes of the problem, including whether it may be an internal government dispute that is not rooted in a company issue.
• Companies should analyze relevant policies, including interpretations from relevant authorities at the municipal, provincial, and central government levels.
• GA staff should consult internally about whether their investments in other locations have encountered similar issues and how they may have been handled.
• Companies should show sincerity and patience when communicating with local officials, demonstrating a willingness to be flexible to resolve the matter.
• Even in situations where a company believes that the problem has resulted from local government actions, the company should be prepared to accept a certain amount of responsibility and to create opportunities for officials to save face and find solutions.
• Companies should weigh the pros and cons of escalating a local issue to higher level authorities, and carefully consider how and when it may be appropriate to do so.
• Firms should evaluate whether other companies are experiencing similar problems in the same geographic area and consider whether to form a coalition with those companies.

Escalating a problem to a higher level

Interviewees advise considering and answering the following questions when evaluating whether to raise a problem to a higher-level government authority:

• Have all possible solutions been exhausted at this level before approaching a higher administrative level?
• Does the company have all the relevant information to be able to understand the full picture of the issue?
• Is the judgment by the lower-level administrative agency legitimate or biased? If it is biased, does the company have proof?
• Are other companies experiencing the same issue? How have they resolved it?
• Does the company have the internal resources to support the escalation, commit upfront to dedicating the time and personnel needed to see the escalation through? In addition, does the company have a clear idea to which government level, agency, or senior official the problem should be brought? Is there any evidence that the official with authority has provided a favorable determination in the past on a similar question?
• Will the escalation negatively affect the future operation by creating tension, embarrassment, more work, or censure for the lower-level officials or agency?

Boosting operations and government relations

In China, local governments are involved in the daily lives of all companies—foreign and domestic. To manage the multiple relationships, companies employ various strategies based on their business needs and internal corporate structure. Successful companies can develop internal structures and communication systems that allow the companies to collect and use information that keeps the operations running, while simultaneously keeping in touch with relevant government stakeholders to ensure positive working relationships.

[author] Nancy Huang was manager of business and policy research at the US-China Business Council’s (USCBC) Shanghai office. Julie Walton ([email protected]) is USCBC’s chief representative in Shanghai. [/author]