Why 37% Of Foreign Businesses Fail In China Within 2 Years..

An Expert's View about Country Risk in China

Last updated: 4 Mar 2013

You'll be shocked to see why it is so easy to go belly up in China even when you are getting plenty of new custoimers every month! In 2012, 1,723 foreign companies in China folded. Don't be next!

I n China, this is much easier said than done Catching a thief in China is one of the most difficult jobs in town, primarily because there are so many of them with highly- specialized skill levels. As confirmed by the International Chamber of Commerce and Interpol stats, the numbers are frightening if you are a business owner, large or small… ξ 78 % of all employees in China admit stealing from their employers at least once a year ξ 24% of all employees in admit to stealing from theft employers at least monthly ξ 17% of all China employees admit to stealing from their employees weekly ξ 44% say they steal office supplies, gasoline on company credit and other items less than $1,000 in value per year ξ 29% of company employees admit to stealing overtime they never worked and use other employees to “clock them in and out” ξ 32% say they steal property or inventory with values that average $6,500 per year ξ 12% say they steal data that can be resold such as client, price, and vendor lists along with confidential quotes on large contracts. Average annual value exceeds $50,000 ξ 12% say they steal “gifts” that they intercept from banks, suppliers, clients that were destined to top executives that include liquor, mobile phones, VIP gift cards, etc. Average value is $12,000 per year. Over the last three years China Security Solutions of Beijing caught 279 of these company thieves and only 13 of them were prosecuted. The others offered to cooperate and be interviewed in exchange for amnesty and repayment, and here are some interesting results from that cooperation… Only 13% of those caught ever feared getting caught because they knew the worst that would happen to them would be job termination. The thieves enjoyed this confidence because of Chinese “Mian zi” or “face”. In short, they knew their employer neither wanted to be embarrassed nor cause embarrassment. So if and when they were caught they expected just to be quietly dismissed and their co-workers would be told they were “transferred abroad to work on a new project”, or “had to return to their hometown due to a family emergency.” CSS also learned that most company thieves worked for the company more than a year before they began stealing regularly, whereas new hires that were stealing were usually “moles” sent to infiltrate a company for a competitor. See: http://www.cityweekend.com.cn/beijing/articles/blogs-beijing/expat- life/scam-alert-business-mole/ Many senior employees who felt they were not being compensated enough for their loyalty and years of service stole company assets out of a sense of revenge or entitlement. Most employee thieves never get caught and those that do usually steal an average of 19 months before being exposed. In the West 68% of all employee theft is reported by other employees as compared to only 9% in China. Again this relates directly to the face factor explained above. In China, without professional loss prevention assistance from consultants, only about 5% of the thieves are ever caught. Harmony in the office is more important to workers than loyalty to the employer, or general honesty. Chinese do not judge one another as much as westerners due to the financial hardships 80% of the nation’s citizens have endured over the years. On the contrary, those who can cheat and enrich themselves without getting caught are admired as being “clever”. Others interviewed justified their actions with the rationalization that foreign employers were so rich, they would not miss a few dollars here and there. Cumulatively however, those “few dollars here and there” equate to 9% of a company’s gross annual profits and has been cited by the ICC as the primary reason 37% foreign businesses fold every year in China. Other discoveries made through the CSS interviews and analysis show that 11% of the thieves actually selected their potential employer by what they could still and sell on the side to supplement their salaries since China is home to the largest black markets in the world. See this link for some scary China horror stories that would seldom ever take place anywhere else in the world: http://www.zimbio.com/Exposing+Scams/articles/DVXIxvijonb/Foreign+Companies+China+Hit+Hard+E mployee. According to Shanghai police sources, on any given day 7 containers go missing at the Shanghai port alone, which by the way, has state of the art security! Read between the lines friends. Only half of the thieves are “lone wolves” while the others need collusion to either sell their stolen goods or gain access to them. One multi-national food company caught a ring five employees earning over $3 million a year siphoning off and diverting 2%-3% of almost every shipment after realizing most customers trusted the name brand so much they never bothered to check bulk shipments. CSS also learned that 53% of all the theft they uncovered was perpetrated by former, and not present employees of a company. Many employees will actually accumulate CRM databases and other valuable IP and proprietary company data months before announcing they are leaving the company to seek another job. One bold thief even stole all the company’s banking and credit information and after assuming the identity of the company’s CFO, effected a $800,000 wire transfer to an offshore account belonging to his brother in Panama. Others (6%) who feel that perhaps they were unjustly terminated, for whatever reason, feel compelled to satisfy a personal grudge by stealing. Yet still other employees who knew their employer might collapse, be acquired, or go public, feared they might be let go by a new management team and had to prepare for a long period of unemployment by stealing. “Clearly people steal for different reasons” remarked Todd Beam, a CSS investigator from Shanghai. When a theft occurs at the work place, the black sheep of the office are often accused – and wrongly so. CSS has learned that office thieves, embezzlers, and hackers come in all shapes, sizes, races, and age groups. “There is no typical profile and the thieves are as varied as their economic needs” adds Todd. As one might suspect, accountants and hackers pose major risks to a company’s assets and require the most tedious work to detect. “Trusted long-time accountants are mistakenly taken for granted” says Todd. CSS employs white hat hackers to bait and snare the black hat hackers using sophisticated tracer software and various schemes that basically steal from the thief in reverse sting operations. Learning all the above from the thieves themselves gave CSS the intelligence they need to choose and use the right bait to catch their thieves. Without revealing their proprietary methods, suffice it to say that they are very creative, patient, and resourceful. More importantly they are determined and successful with an 83% track record. As Todd explained, “We often go into a job looking for a certain type of theft and in the process discover others as well. It is not unusual to find 3 or 4 active thieves in a company of only two dozen employees, when in fact we were only hired to find one.” Are large or small companies more vulnerable? According to CSS, the bigger the bureaucracy in a company the easier it is to hide the thefts since there are obviously far many more suspects when something goes missing. But small companies have only 3% less theft than large ones and usually the executive management is too busy running the company to even think about loss prevention and risk management. Professional thieves using phony IDs prefer the “hit and run” approach on small companies, usually seeking copies of keys and access codes to warehouses which they plan to loot with organized rings. They vanish into thin air once the thieves claim their prize. Given all the above data and variables, any company doing business in China can increase both their profit margins and survival rate in the world’s second most competitive market by spending a day with a CSS risk management consult to perform an “RVA” (risk and vulnerability assessment) or a REIC (random employee integrity check). Then again if your company is doing so well that you can afford to lose 9% of your gross revenues to employee theft, you just wasted 15 minutes of your life reading this article. Then again – perhaps not. – Jonathan Reid You can get a free Company Security Checklist For China from CSS along a 2012 white paper on employee theft, with ten tips on safeguarding you company assets by sending an email from your company mailbox to ChinaWhitePaper@ChinaSecuritySolutions.com
Posted: 04 March 2013, last updated 4 March 2013

See more from Country Risk in China

Expert Views    
Why 37% Of Foreign Businesses Fail In China Within 2 Years..   By China Security Solutions Ltd.
Hot Tips    
Cyberspace Due Diligence Options   By China Trade Commission
Due Diligence Doubts?   By China Trade Commission