Managing Risk in the “New Era”

The sudden, frightful appearance of a new coronavirus in late December of last year caught many American companies by surprise. It seemed that in one minute, expat employees were planning their holidays and in the next, they were evacuated. Whether Black Swan or avian flu events, companies need to regularly update their risk profiles and have plans in place to deal with all possible exigencies.  Most risks do not pack the psychological punch of a mysterious communicable disease, but they should still be on the corporate radar.  Like a virus, risks are constantly mutating in response to the larger environment—vigilance against new forms of risk must be ongoing. The nature of risks in China has changed markedly in the last decade, and many foreign companies are not sufficiently prepared to manage them.  As a result, companies may run afoul of emerging threats, or lack the capabilities to take full advantage of the opportunities that China presents.

In 2017, President Xi Jinping declared that China has entered a new era, or 新时代 xin shi dai, characterized by consumption-led growth and innovation, territorial integrity, and “taking a driving seat” in solving global challenges. Its ramifications affect both domestic and foreign companies operating in China. “What’s worked well in the past will work in the future” is a common refrain. It’s also unhelpful in navigating the challenges of the day and in the other extreme can be quite dangerous.

New Era risk characteristics

1. Higher rates of domestic consumption of goods and services
2. Heightened national pride and occasional anti-foreign sentiments
3. Trade war and other conflicts with the United States
4. Economic nationalism
5. COVID-19 and supply chain vulnerabilities
6. Changes in legal and regulatory framework

All departments should be included in your risk management plan

In risk management planning, it is important to have the communications and government affairs teams deeply integrated into the larger team. Despite their awareness of the best strategies to communicate a company’s message as well as the inter-workings of the Chinese government at the national, provincial, and local level, these folks are often left out of the loop often due to panic and time constraints. The needed messaging is often late, directed at the wrong audience, culturally insensitive, or tone deaf. The executive suite also needs to play a constructive role and know what the real risks are versus those apprehended third hand. Upping the level of horizontal integration between functional teams and the C-suite can have a significant impact on business outcomes, especially in the middle of a public relations crisis.

We saw this last year with the National Basketball Association when a single tweet supporting Hong Kong protesters went viral. The NBA lost some lucrative contracts and received a lesson in crisis mea culpa. Not only that, the NBA was also criticized in the United States for its apology and for not defending cherished American values like free speech.  In such a scenario, it is important to execute in the early days of the crisis before it ping-pongs the organization across the Pacific.  In this new area, companies with business interests in China must map both official and public sensitivities and have a plan coordinated with their global and China teams in place to deal with them at Internet speed.

Don’t ignore the regulators

Because of the government restructuring under President Xi, the policy and regulatory functions are separate with their own specialists. It used to be that the policy folks were the most important because there were fewer enforcers—cybersecurity is a good example. The Cybersecurity Administration of China developed the policy but doesn’t enforce it.  The Public Security Bureau, China’s FBI, is an enforcer, among others like China’s Industry and Information Technology regulator.

When crises arrive, these days, they inevitably include a government angle, national, local, and sometimes both. When outside crisis management specialists respond, they often learn that the government affairs folks only have contacts with government officials on the market access side who they have built relationship with over the years as part of the license approval process.  Valuable as these contacts are, they are not helpful in a crisis. Government affairs professionals need to identify and engage the correct enforcers, too.

Articulating your company’s value to the local community

Strong relationships take time to cultivate, but the good news is that the government agencies are generally open to having a dialogue and are more insulated from an otherwise rocky bilateral relationship. As the conversation begins, companies need to explain what they do as well as listen to what government interlocutors are looking for. To succeed at the latter, companies can reasonably ask: What are you looking for? What’s important to you when you enforce this or that regulation or directive? Then, companies can draw conclusions about how their business objectives may align with government goals and provide constructive dialogue should government policies impede their ability to succeed.

The US-China Business Council‘s VP for China Operations Matt Margulies says that meetings with members and city government officials help solve myriad problems that only local government could solve.  “With problems hitting companies during the epidemic at a fast and furious clip, we needed face-to-face meetings to get things done,” he said.  Participants donned face masks and sat around a table at socially safe distances, discussing specific company issues and making sure everyone was on the same page. Local governments have helped member companies find solutions to challenges like equal market access, consolidating tax filings, and procuring critical supplies during China’s COVID-19 outbreak.

“Our members really value and prioritize strong relationships with the local governments in the areas where they operate. Local governments also have an important role in promoting and protecting foreign investments following passage of the Foreign Investment Law. Broadly speaking, we’ve found them to be accommodating and supportive of our members during what has certainly been a challenging few years in the macro US-China relationship.”

It’s important to remember that government regulators and enforcers are not always subject experts. They may not understand much about food production if they are enforcing food safety. US companies can add a lot of value by explaining best practices from experiences operating in other markets. Help government officials become more expert. “How can we help you do your job, while protecting our interests?” And be very honest and upfront about that.  Then, say: “Here are some things that might help us both achieve our goals.” Regulators and enforcers tend to welcome knowledge about best practices.

Another helpful thought experiment, according to veteran risk management expert and China hand, Kent Kedl, is for your team to ask: “What do you want the government authorities in the agencies that regulate us to think about your company in five years?” The answer will help you position yourself in the new era where Chinese competitors are rising and where your value proposition for China needs to be continually honed and communicated.

New Era risk checklist

1. Ensure the planning team integrates China operations with the c-suite
2. Involve the communications team in planning and execution
3. Map stakeholders including national and local government regulators and enforcers
4. Engage business associations to arrange meetings with local officials
5. Explain your value proposition to government regulators and rules enforcers and discuss best practices

The new era brings new challenges but also new opportunities.  Companies need to work in new ways to embrace both.