Business, Economics and Jobs

Is China on a witch hunt against multinationals?


China's pervasive corruption has been blamed for everything from toxic milk to high speed train wrecks. Now foreign companies are under the spotlight.



BEIJING, China — You don’t have to be a shareholder or a corporate sympathizer to wonder if there’s something fishy about China’s vigorous campaign against foreign pharmaceutical companies.

In the last two months, four major Western firms have been accused of corruption by Chinese regulators or media, in the midst of a probe by Beijing into health care price fixing.

First came GlaxoSmithKline, which regulators charged with giving doctors $490 million in bribes to boost prescriptions of their drugs. Four executives were arrested for “severe” violations of the law. Then came Sanofi, a French firm, and Novartis, a Swiss company, which China’s 21st Century Business Herald newspaper said had paid thousands of dollars each to illegally increase sales. Last up was Eli Lilly, the American maker of Prozac and Cialis, which a whistleblower said had doled out nearly $5 million in kickbacks in a single year.

Yet at the same time, not a single Chinese company has been publicly accused of similar practices, though domestic companies control 70 percent of the market, and corruption is known to be widespread in China’s health care system.

“Multinational corporations are not the only ones doing this,” said one Chinese health care industry veteran. “Everybody in the industry knows that local companies actually do much more than them.” In fact, the source said, Chinese pharmaceuticals are much more likely to give cash payments to doctors than research sponsorships or training, which the multinationals prefer.

Little wonder, then, that some analysts suspect that Beijing is selectively cracking down on bribery in order to give local producers a leg up against their US and European competitors.

“This growing wave of investigations doesn't seem to have a strong common theme, except for the fact that all are targeted at foreign firms and seem aimed at discrediting those companies in the eyes of Chinese consumers,” says Doug Young, a China business commentator. “In that regard, the campaign does look rather like some of the previous crackdowns by Beijing against foreign firms that have become too powerful in the domestic market.”

This view is supported by Beijing’s simultaneous move against foreign automakers, tech companies, and milk-powder producers. This month, regulators slapped a record $110 million fine on six manufacturers of infant formula, five of which were foreign. In late July, representatives from General Electric, Siemens, and more than two dozen foreign companies were told in a closed-door meeting that they should write “self-criticisms” confessing to antitrust violations or face fines. China also appears to be investigating foreign car companies’ pricing practices, to see if they have been imposing a minimum retail price, which would violate Chinese antitrust law. IBM and Oracle have also been warned by the Ministry of Public Security that they are being examined.

It all adds up to what seems like a chilling picture for foreign corporations operating in China. But the motives may be more complex than simple protectionism. Many analysts believe that one of Beijing’s primary goals is to cut consumer prices across the board in order to placate the growing middle class.

And earlier this year, Premier Li Keqiang said that reducing corruption was essential to improving China’s health care system. The Ministry of Health set a goal of eliminating the practice of overprescribing medicine for profit in 50 percent of China’s counties by the end of 2013.

From that perspective, the crackdown is less about hobbling Big Pharma than about taking a first step to stop the bribes. Behemoths like GlaxoSmithKline, which was fined $3 billion by US regulators in 2012, simply make for easy first targets.

“Since last year, the government has decided to adopt much more strict ways to control corruption,” said the health care insider. “And it may take several steps, but multinational corporations just happen to be on the top of the list, and it’s easy to start with them.”

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Of course, making a whipping boy of American and European companies won’t address the root of the problem: Chinese doctors are very poorly paid. They earn roughly $490 a month on average, so most medical practitioners routinely take “gifts” from patients and perks from pharma companies as a way to supplement their income.

While Chinese regulators deny there’s any anti-foreign pattern to the probes, only time will tell whether Beijing is equally serious about bringing domestic corporations to heel, despite their greater ties to powerful interests. In the meantime, the country’s rulers see little to lose in pressuring foreign drug firms.

“China wants to do what it can to keep its citizens happy, and reducing drug prices is certainly a good way to achieve that,” says Dan Harris of the China Law Blog. “And doing it as part of a China bribery investigation is a major two-fer.”