Sun, Nov 06, 2016 - Page 7 News List

China tightening its
grip on multinationals

British drugmaker GlaxoSmithKline failed to adapt to a changing political climate, compounding that with a series of errors in judgement and other mistakes that landed it the biggest fine for an international firm in China at the time

By David Barboza  /  NY Times News Service, SHANGHAI

Illustration: June Hsu

Peter Humphrey was in the bathroom of his Shanghai apartment when the police kicked the door off its hinges and knocked him to the ground. Nearly two dozen officers stormed his home. They confiscated files, laptops and hard drives related to his work as a corporate investigator.

Humphrey and his wife, Yu Yingzeng (虞英曾), were taken to Building 803, a notoriously bleak criminal investigation center normally reserved for human smugglers, drug traffickers and political activists.

Sleep-deprived and hungry, he was later that day transferred to a detention house, placed in a cage and strapped to an iron chair. Outside, three officers sat on a podium and demanded answers.

Humphrey knew the reason for the harsh interrogation. He and Yu had been working for GlaxoSmithKline (GSK), the British pharmaceutical maker under investigation in China for fraud and bribery.

The Glaxo case, which resulted in record penalties of nearly US$500 million and a string of guilty pleas by executives, upended the power dynamic in China, unveiling an increasingly assertive government determined to tighten its grip over multinationals.

In the three years since the arrests, the Chinese government, under President Xi Jinping (習近平), has unleashed the full force of the country’s authoritarian system, as part of a broader agenda of economic nationalism.

Driven by the quest for profits, many multinationals pushed the limits in China, lulled into a sense of complacency by lax officials who eagerly welcomed overseas money. Glaxo took it to the extreme, allowing corruption to fester.

When bribery accusations surfaced, the company followed the old playbook, missing the seismic changes reshaping the Chinese market. Rather than fess up, Glaxo tried to play down the issues and discredit its accusers — figuring officials would not pay attention.

Along the way, there were bribes of iPads, a mysterious sex tape and the corporate investigator, who gave his operations secret code names. The company’s missteps are laid bare in e-mails, confidential corporate documents and other evidence obtained by the New York Times, as well as in interviews with dozens of executives, regulators and lawyers involved in the case.

The aftershocks of the Glaxo case are still rippling through China. Authorities have unleashed a wave of investigations, putting global companies on the defensive. The government has intensified its scrutiny of Microsoft on anti-trust matters this year, demanding more details about its business in China.

And just two weeks ago, authorities detained a group of China-based employees, including several Australian citizens, working for Australian casino operator Crown Resorts on suspicion of gambling-related crimes.

Companies are racing to find new strategies and avoid getting locked out of China, the world’s second-largest economy after the US. Disney and Qualcomm are currying favor with Chinese leaders. Apple redid its taxes in China after getting fined. Some multinationals are training employees in how to deal with raids.

The crackdown has prompted a complete rethinking for Glaxo — and for much of the pharmaceutical industry. To appease the government, drugmakers have promised to lower prices and overhaul sales practices.

“For a long time, there’d been this policy of going easy on foreign enterprises,” said Jerome Cohen, a longtime legal adviser to Western companies. “The government didn’t want to cause embarrassment or give outsiders the impression that China is plagued with corruption, but they’re not thinking like that anymore.”

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