I don’t usually consider myself paranoid, but the rapid acceleration in Beijing-led probes against foreign firms seems to be hinting at a wave of growing anti-foreign sentiment that could bode poorly for multinationals in China in the months ahead. That’s my assessment following news of the latest probe against European drug giant GlaxoSmithKline (London: GSK) for allegedly giving out bribes. Such periodic waves of backlash against foreign firms used to be common in China, and usually followed periods of openness and rapid expansion. In this case, I suspect this latest crackdown could also be designed to divert attention from China’s sudden economic slowdown, which has left many average Chinese suddenly feeling uneasy about the future.
All that said, let’s take a closer look at the latest Beijing move against Glaxo, which is actually the second attack on the company in the current wave of anti-foreign actions. Media are reporting that investigators have uncovered evidence of serious commercial bribery and tax evasion by the drug maker, and that Glaxo executives have admitted to the accusations. (English article) The reports also say that 30 Glaxo employees in China are under house arrest and under constant surveillance as the investigation continues. (English article)
This particular case looks a bit like another case involving bribery accusations 3 years ago against Brazilian mining company Rio Tinto (Sydney: RIO). That case saw 4 Rio Tinto officials, including an Australian citizen, ultimately convicted of accepting millions of dollars in bribes and stealing state secrets, and sentenced to 7 to 14 years in prison. While some of the bribery claims were probably true, that case was also highly political due to frequent clashes between China and Rio Tinto over prices, most notably the price the Brazilian firm charged for iron ore.
I would obviously need to see more information on this latest GlaxoSmithKline case before making an informed assessment on whether or not the probe is politically motivated. But based on my knowledge of the pharmaceutical industry and how it operates globally, it’s quite common for the big drug makers to lavish doctors and hospitals with expensive gifts and vacations in a bid to sell their products. While I don’t personally approve of such practices, largely on ethical grounds, no one outside of China seems to think such selling tactics are illegal.
This investigation against GlaxoSmithKline looks even more suspicious against the backdrop of a growing number of actions against foreign firms over the last couple of weeks. That flurry of cases began earlier this month when Beijing launched a probe against 5 foreign makers of milk powder for infants on suspicion of charging high prices. (previous post) Many of those companies lowered their prices after the probe was revealed, including Mead Johnson (NYSE: MJN), which has announced it will reduce its prices this week by 7-15 percent. (company announcement)
That probe was followed just days later by news of another investigation of about 30 drug makers, who again were being scrutinized for their pricing policies. (previous post) GlaxoSmithKline was among the group of drug makers being investigated. Then last week, word also emerged that Beijing regulators were investigating Swedish packaging maker Tetra Pak for potential abuse of its market dominance in China. (previous post)
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. 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. Look for this current crackdown to continue probably through the rest of this year, as Beijing looks for external scapegoats to draw attention away from the sputtering domestic economy and the growing influence of foreign firms.
Bottom line: A corruption probe against Glaxo is the latest in an anti-foreign campaign likely to last through the end of the year.