MULTINATIONALS: China Fines P&G, Procures On AliCloud

Bottom line: A record false advertising fine against P&G and Beijing’s selection of Alibaba to host its procurement platform reflect the current government bias against foreign firms, which is likely to remain strong for the next 1-2 years.

Crest gets record fine for false advertising claims

Today I’m grouping 2 headlines together that look quite different on the surface but seem to underscore a growing bias in China against foreign companies, despite Beijing’s insistence on no such prejudice. One headline has global consumer products giant Procter & Gamble (NYSE: PG) receiving what looks like a large and somewhat arbitrary fine for false advertising. The other has media reporting that Beijing has moved its online government procurement platform onto servers operated by AliCloud, the cloud computing division of e-commerce giant Alibaba (NYSE: BABA).

These 2 moves are coming from very different sources, though both are government-linked. The P&G action is coming at the very local level, with the Shanghai government fining the company a record 6 million yuan ($1 million) over allegations related to an advertisement for its Crest toothpaste. The procurement decision comes from the central government in Beijing, and has awarded Alibaba a contract to host a platform where billions of dollars in transactions take place.

Such nationalism certainly isn’t unique to China, especially in central government contracts, and both the US and European countries are also well known to give lucrative deals to locally based companies. But in China’s case, national security has also become a major concern for Beijing, which may be fueling a surge in negative developments for foreign companies in China over the last 2 years following revelations from the Edward Snowden scandal.

Let’s begin with the P&G case, which is almost laughable due to its details. In this case the Shanghai government has levied a record false advertising fine against the company over a commercial that boasts about the whitening power of Crest toothpaste. (English article) The complaint states the whiteness of the actor’s teeth in the ad was the result of computer manipulation, and not really due to use of Crest toothpaste.

I certainly have no objections to the government’s claims, and fully believe the images in the commercial were altered. Instead, my reason for calling this action biased and somewhat laughable is that this kind of exaggerated claim and image manipulation are rampant not only in China, but throughout the world.

Perhaps the Shanghai government is using P&G as an example to tell others that they could also be punished for similar exaggerated claims. After all, the size of the fine is insignificant for a company of P&G’s size, and Crest is unlikely to suffer any long-term damage to its reputation. But the targeting of this big-name company for a practice that’s rampant throughout China seems somewhat arbitrary, and I have to believe that P&G’s status as a foreign company was at least one of the reasons it was targeted.

Next there’s the AliCloud story, which has seen the company disclose that it began hosting Beijing’s Central Government Procurement Center platform more than a year ago. (English article) Transaction volume over the platform is quite large, with 400,000 procurements taking place last year worth 20.6 billion yuan ($3.3 billion).

There’s no mention of where the service was previously hosted, but the most likely answer is that it was hosted on government-owned servers. The win is an important one for AliCloud, though the size of the deal probably isn’t huge. It’s also important to note that many other Chinese companies probably also lost in the bidding, and that the number of foreign cloud operators in China is highly limited due to government restrictions.

But at the end of the day, it’s still significant that the business didn’t go to a big foreign name like Microsoft (Nasdaq: MSFT) or IBM (NYSE: IBM), which would have been equally or even more capable of hosting such a platform due to their background in IT services. This kind of bias against foreign firms does come and go in waves, but these kinds of signals seem to indicate the current wave still has plenty of momentum and is unlikely to ebb for at least the next year or two.

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