Rio Tinto: repeating Foster's cultural mistakes in China

by 26 Aug 2009

Rio Tinto is repeating Foster's cultural mistakes in China - and may not see the full costs until much later, writes Dr Mona Chung

Rio Tinto has fallen into the same trap as Foster's Group in failing to recognise China's unique culture and the importance that relationships play in doing business in that country.

The issue with Foster's was something I dealt with in detail in Shanghaied: Why Foster's could not Survive China, the book that came out of my PhD. In my thesis I examined why Foster's failed in its 15-year sojourn in China.

The fundamental failing was that Foster's - along with any other company seeking success in China - needed to employ bicultural people.

A bicultural person is someone who has a depth of understanding on both sides of the culture of doing business - especially its delicacy when playing with relationships at a political level. Not only can such a person communicate fluently, but they can understand the communication styles, patterns and context.

Bicultural people understand the differences between the Australian and Chinese business approach. They are not just someone Chinese who speaks some English. Someone who speaks both languages is not necessarily bicultural.

You need a bicultural person to control your strategic plan because that determines your market entry, your human resource choices and marketing strategies.

Local Chinese understand the way business is conducted in China, however they often fail to communicate that effectively to Australian business executives. This causes a disconnection between plans and the actual strategies deployed when doing business with China.

On a recent trip to Shanghai I saw another Australian organisation repeating the mistakes made by Foster's.

Chinese employees were running things differently to the instructions that were given by Australian executives, taking advantage of the Australian executives' lack of language and cultural recognition skills.

“Revenge in 10 years is not too late”

Companies need to take into account that the Chinese Government has different levels of power to Western governments.

China's different legal, political and economic systems and their impact on management of business has no comparison to Western systems.

While Western countries continue to pressure the Chinese legal system to be "transparent", they fail to see that the differences cannot be made "transparent" unless one understands how the system operates.

One important cultural characteristic of the Chinese, something that I pointed out in my book, is that they never forget - nor forgive. There's a Chinese proverb that says "To a gentleman, revenge in 10 years is not too late".

Rio Tinto's mistake is not just rejecting Chinalco's recent offer, which, itself, is a huge slap in the face, but they also miscalculated the price "win" in the negotiation they had with BHP in 2006.

China had become the largest iron and ore purchaser in the world for the first time and had hoped to become the international iron and ore price dictator for the first time as well. Rio Tinto and BHP forced China's hand by setting the price point with Japan first. That was a huge face-losing event for the Chinese. Had they lost the chance to the Europeans, it would have to be less humiliating.

Instead, they lost the chance to the Japanese, with whom they have an historically poor relationship. (In 2009 Rio Tinto and BHP are repeating the same mistake, leaving China in a difficult position on the price negotiation.)

The current Rio Tinto contest is an opportunity for the Chinese to demonstrate that they are better at playing business games at a political level than their competitors. While the rest of the world portrays the Chinese as unethical business players, to arrest an Australian citizen on bribery charges is a big slap back.

To date, Rio Tinto has made more than one cultural mistake. Meanwhile, BHP is heavily tainted with Rio Tinto in many of their associations - including the newly announced joint venture deal. Unless they start doing business differently with the Chinese, they will have a long and bumpy road ahead.

Further spin-offs will affect all of the Australian economy's export sectors - for example the Chinese media is calling on the general Chinese public to boycott travelling and studying in Australia.

Putting all the issues to one side, what is the future for detained Rio Tinto employee Stern Hu? His Australian citizenship does not seem to have helped his situation by much - but it may save his life eventually.

The report published by the Chinese Government's secret service bureau's website on 9 August by Mr Jiang Ruqing put a clear price tag on his crime: "70,000 billion yuan, or for the entire Jiangsu province people to work 2.5 years free" is a sum far larger than some government officials have lost their heads for in the past. Mr Jiang later stated that his article represents only his personal view.

Changing the charge from "state secret" to "commercial secret" makes little difference to the level of accusations against Mr Hu. In a legal system, this is called bureaucratic law, using common law judgement and experience will be sure to cause confusion and frustration - a complete lack of comprehension.

In Australia, under the Criminal Code Amendment (Bribery of Foreign Public Officials) Act 1999, bribery is subject to maximum penalties of imprisonment for ten years or a fine of up to $66,000 or both. Corporations can also be liable where their employees, agents or officers commit offences while acting within the scope of their employment. The penalty for a corporation which commits an offence can be as high as $330,000.

If there were also to be evidence of bribery - "receiving and giving" by Mr Hu (his salary of six years is not enough to have funded the several luxury villas he allegedly owns in Hong Kong) - and Rio Tinto head Sam Walsh continued to maintain that "our employees have acted properly and ethically", is Rio liable for Mr Hu's action?

The Hu incident is merely an opportunity for China to remind Rio who is in charge of this relationship in their own country. Although many say China needs all the iron ore it can get from Australia and that they will buy regardless, Rio, perhaps, should not view the situation so simply through this ethnocentric view.

China purchased $53 billion of iron ore last year - the equivalent of both Japan and Korea's total purchase. This relationship is delicate and dependable.

As much as Rio Tinto believes an Australian business culture should bring China to the game of international business, ignoring the importance of cultural factors, a sore relationship is like building a house with a leaking roof. Constant mending of the roof (or the relationship) is then required for comfortable living.

China is talking to the Brazilians and a large list of any others who have iron ore. One of them is Australia's Fortescue Metals Group, which has just signed a deal for a 35 per cent price cut - which is 2 per cent below the agreement between Rio and the Japanese. Fortescue has given China the chance to save "face" by obtaining the lowest price. They will win more in the longer run.

To compound matters, Rio's expressions of dismay to the Australian Government are not helping - either through its comments or actions. Foreign Minister Stephen Smith's statements to Chinese diplomats have been seen as impolite and improper by the Chinese general public.

Perhaps Mr Smith doesn't realise that Chinese people are culturally high-context people - one cannot tell them to mind their own business in a one short simple sentence. One needs to use many more words to deliver the message, with the message between the lines. Yes, when the Chinese tell Americans or Australians to "mind their own business", it is fine. It is a low-context message, delivered to low-context culture people in a low-context manner.

On top of all this, the Australian Government continued to support exiled Uighur leader Rebiya Kadeer. As recently as last week, one of my clients was told the Port of Qingdao had refused to fumigate wood products coming to Australia. For $100, this service is provided to goods going to any country - except, currently, Australia. Even the usual Chinese "guanxi" (relationship or connection) approach has been given the red light this time. Things have become too political between the governments - no one is allowed to touch it.

The irony in all of this is that Kevin Rudd is the first prime minister to speak Chinese. He called himself a China business consultant before being elected. He spoke Chinese in Peking University but did mention Tibet.

Still the Australia-China relationship is currently at its lowest point. This is lower than when Bob Hawke said all Chinese students could stay after the 4 June Tiananmen Square events, angering the Chinese Government. Multiple disruptions of business activities between the two countries is evident for the first time in recent history.

Is the Rio Tinto-China buyer-seller relationship a chicken and egg question? Or is it a case of ignoring the cultural difference because it is just not a tangibly visible issue for Rio?

Rio, as an Australian company doing business in China, is not the first to ignore strategic cultural planning and the costs may well be similar to those paid by others. To draw a medical analogy; all seems well on the outside, because culture lies under the skin, but it remains at the heart of everything and can bring the whole system down because of a massive heart attack.

Dr Mona Chung is a lecturer at Deakin University. Her PhD and recent book Shanghaied: Why Foster's could not Survive China examined why Foster's failed in its 15-year sojourn in China

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