Off The Record

by Ravi Garla*

What do CNOOC’s failed acquisition and Lenovo’s successful one have in common? They both played into a strengthening, negative perception, prevalent in western news reports, of China as a rising threat—a perception that few Chinese companies are taking into full account.

China hogged the headlines in 2005, but many of the biggest stories involved the more spectacular scandals and abortive acquisitions that hit Chinese private and state-owned firms. Reforming the lending practices in the banking sector and the corporate governance of firms, while necessary, isn’t going to change the fact, made ever more obvious in 2005, that there is a building crisis of trust that faces all Chinese companies.

The scandal with China Aviation Oil (CAO) is instructive. CAO, a subsidiary of a mainland state-owned enterprise listed in Singapore, hid mounting losses from risky oil speculations went bad. More importantly, the lessons foreign audiences are drawing from individual scandals with Chinese companies are much broader. The Economist’s December 9, 2004 headline for the CAO scandals was “Fool’s Rush In: A reminder of the risks of investing in Chinese companies.”

Perhaps, you might say, reforming SOE’s don’t really count, and investors can tell the difference between duds and stars. The coverage on the scandal at D’Long, a private Chinese investment group that just recently had to auction away its massive headquarters in Pudong, tells a different story. Here is David Murphy and Ben Dolven’s take on it, writing for the Far Eastern Economic Review:

The picture broadens, however. The scandal at D’Long, along with implicating private companies, also led some to worry about Chinese companies’ overseas M&A, owing to the fact that D’Long had made acquisitions abroad of Western companies, who are now in limbo.

These concerns - Chinese overseas M&A matched up powerfully with fears of China’s rise - came conveniently packaged for popular consumption during the CNOOC-UNOCAL controversy. CNOOC’s bid for UNOCAL transformed from the financial evaluations between the previously Western-approved stud of Chinese SOEs and a minor oil company in the United States into a full on political battle involving national security and bilateral trade issues.

The more daunting development, stated at the start, is that both Lenovo’s historic purchase of IBM’s PC division in 2004, a mutually beneficial trade, and CNOOC’s no less historic failure with UNOCAL, have somehow still played to the same negative narrative, in reportage, of China’s troublesome rise. A headline in The Christian Science Monitor on December 9th 2004 captures this popular journalistic trend: “A Landmark Move for China Inc.”

The last time there was rhetoric of the same magnitude was in the 80’s with Japan. Foreign audiences, especially in the United States, were afraid of the aggressive and unfair trading practices that they felt characterized Japanese companies, neatly stereotyped as “Japan Inc.” Today, within the growing China-watching industry, “China Inc.”, is beginning to gain currency as a meaningful description of the ambitions of Chinese companies and the government. Denoting an opaque and untrustworthy entity, the “China Inc.” perception represents something very different to China’s “peaceful rise”.

Fair or not, this is the reality—or perhaps more correctly stated as the perception of reality. The specific crisis of trust with Chinese companies is a growing perception that is a daunting, but ultimately resolvable, challenge. Apart from overcoming corporate governance challenges, companies need a proactive communications strategy that, first, moves beyond just dispelling rumors to building a strong reputation, but also has a long-term commitment to nurturing relationships with key stakeholders—media, government agencies, investors, consumers, among others.

These actions would go a long way towards distinguishing a company with its domestic audiences.

Conversely, for its foreign audiences, the struggle to change perceptions will be a long uphill battle. CNOOC knew what it was up against when it hired help in DC for its UNOCAL bid, retaining six PR and lobbying agencies in total. But the communications blitz was more like trying to hack a path through an uncharted jungle than cementing an already well-tread path. Sobering as the example is, any Chinese business that has ambitions that involve investors or companies beyond its home turf had better start moving to distinguish itself from the pack and improve its perception among stakeholders today.

To defeat the perceptual haze that threatens to suffocate rising Chinese companies, they will need to humanize and internationalize.

To distance itself from the “China Inc.” perception, a company must put a face and feeling behind it: it must humanize its image. This could include positioning the CEO as a leader in the field, something done far too little on the mainland, to profiling the entrepreneurial culture of the firm, or even highlighting how responsibly the company contributes to the communities in which it operates.

Companies need to build a brand based more on products and services than country of origin. This isn’t denying a company’s roots. Internationalizing means genuinely communicating and demonstrating to stakeholders that their interests are the company’s only agenda. A few of the most successful like BENQ and Pfizer, elude national identification. Building relationships with foreign journalists and consistently supplying rationale for strategy and actions will go a long way towards dispelling the conspiracy theories; while never fully admitted, these theories hold that all Chinese companies are controlled from within Zhongnanhai.

Healthy companies are often bolstered by statistics proffering hearty returns. But recent history has shown how numbers and their mavens can be wrong. Rating agencies still had positive recommendations for several Asian banks right before the Asian Financial Crisis uncovered all the crony capitalism and bad loans. Eight weeks before bankruptcy was filed, Enron was being touted as “the best of the best” by Goldman Sachs. Consequesntly, gaining and holding the trust of stakeholders requires more than a consistently solid financial performance. Profits can be fleeting, reputations must not be.

Chinese companies are being painted with a large brush; smart companies need to start distinguishing their specific outlines in the picture. Strategic public relations can help them de-demonize their images.

* Ravi Garla is an Account Coordinator at AC Capital Strategic Public Relations.

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