Is Glaxo’s corruption probe an isolated corporate problem and does it suggest a change in the China corporate terrain?
While the details are fairly clear, the outcome for the corporation is likely to be similar as for RTZ – there will be a period of absorption of the problem, a trial, an outcome and then a period of tension and uncertainty, followed by olive branches to China, the development of a new innovative project, which might otherwise not have been allowed by GSK, maybe based in a third country and a slow return to relations – all taking about three years.
But let’s look at two distinct issues that lie within this.
First, corruption in the Health sector in China, and then the effect on doing business in China.
Having taken a leading pharmaceutical company into China in the early 1990’s, it was my experience that the transfer of multinationals of production into China in the early 1990’s when access to the domestic market was first allowed, (following the success of the joint venture I created in 1984 with domestic access), that they moved in middle to lower level Hong Kong managers to build the domestic markets inside China.
It soon became a standard operating procedure to chase individual doctors and reward them for each prescription they wrote for the company’s drug. This became common practice and China seemed oblivious to the practice.
For me it was something I would not become involved in, and I parted company from my principal who had to make a difficult decision to go along with dubious practices, or not penetrate the Chinese market.
Even when towards the late 90’s when the multinationals started replacing Hong Kong managers by local managers the practices were too deeply embedded for any new manager to try and reverse them and report diminished sales and losses.
The multi nationals chief executives caught in a stock market demand for increased Asian and Chinese shares of total revenue – 20pc and 5pc were commonly quoted for Asia and China – made it impossible for local market bosses to baulk at the practices.
The Chinese market became known as corrupt, but the practices had been imported and China stood by and turned a blind eye. This was going on in many other areas as well in different forms.
It is why many business people would chatter about corruption and China. It affected the way people did business there. It was imported but it was tolerated. My view was that no one senior understood what was going on, and they were preoccupied by developing the economic engine of China and not by the ways that it was developing.
Before long this merged with a sense that those with power could demand value for their support or authority, and though many – the majority – were not corrupt, the environment was unclear, and middle men prospered in the shadows, but no one knew where the funds really ended up. I was often challenged that another route could be used, with “incentives”, to gain market share, to which I would always reply you will never know where any funds ended up, and you will be vulnerable for ever. It is a slippery road to start down, and some would say it is wrong, in principle, to ever do it, even if it is a so called feature of the market.
Now the high profile cases of RTZ and GSK have changed that. Corporate officers have become vulnerable – and that terrifies them – their careers and pensions could disappear in a whiff – and the message is clear – stop paying off in China.
It is a rare wind of rain and clear air that is coming through as China signals that corruption at the corporate level is not going to be tolerated. This is connected to a change in the attitude of senior Chinese who now realise that China has been caught in a web of corruption and intend to attack it aggressively.
So secondly what does this imply going forward?
It makes life easier for corporate officers to know that in the future the answer to pay off or not is going to be easy – NO.
But, and this is a big but, it will be 2-3 years before this goes easily through the system, and, in the meantime, corporates are going to have to say no to business that is out there that might appear to be available with a bit of dodgy dealing.
But in the end the message is clear – China is tidying up buying business in China, but the corporates have to ask, through chambers and National Governments for guidance on how to deal with occurrences, and there will be many, and China will need to respond in a very sensitive but rigorous manner . China needs to make it clear that things have changed for ever, rather than a bootleg convoy or two have been knocked back.
Difficult time for corporate managers.
But there is also a second major issue at work here.
As the West sinks under an ever over-burdening welfare state, taking up to 30-35 per cent of GDP, completely unaffordable and completely irreversible without social disorder – the result of generations of politicians buying votes with welfare programmes – so China is building the first new one for generations.
China’s health as a per cent of GDP is likely to be around 6-7pc against 18 per cent in the USA. China’s will be paid one third each by individuals, the state and the employers .
The costs are going to be contained and forced down. The hospitals, probably, extensively privatised to create competitive situations where service and price flourish as opposed to local government bureaucracies.
But it is the cost of drugs where Premier Li’s planners have been hard at work in the preparation of the new Health sector.
They first started work at Chinese pharmaceutical companies and quickly found that prices, and thereby profits, were being artificially raised by corrupt practices focused on paying off the doctors, who had little choice in the matter – the payoff’s arrived whatever they did! So the new forces of the Health industry went to war against the practices and then the foreign pharma companies came into sight, and were seen complicit and GSK became the model to demonstrate this must stop. Others are likely to get drawn in but a vendetta is unlikely.
The campaign has two aims. Firstly, to drive out corruption and send a loud message that no one misses – Chinese or Foreign. Secondly, it is a key part of a plan to drive down the cost of drugs and protect the Chinese Health industry’s new total budget.
This second aspect has major implications for international drug companies, who are among the world’s most profitable companies. The Chinese market will be more price competitive, although the “costs of doing business” will reduce. But the Chinese market will be less profitable in the aftermath, but it is going to grow substantially in size as China provides Healthcare to a much bigger share of the population and in a deeper form.
Is the China initiative to compress their ability to sell and profit, going to affect other markets? Will we see an international campaign begin against drug volumes and prices as China sets a new measure of Health cost controls?
China will redefine the welfare state and its costs, I have little doubt.
China will limit the Welfare state to about 12pc of GDP, and the Chinese state will hold at around 25- 27pc of GDP compared to 50pc in the West with major implications for the development of the economy.
Western politicians should be flooding to China to find out how the new Welfare state will look, and see what they can learn about extracting bloated government bureaucracies and badly considered cost bases, such as paying landlords to subsidise accommodation. In the UK alone they pay £25billion to landlords to house poor people instead of building them new accommodation.
China will demonstrate a completely new approach to all the Welfare state.
The Health costs are just the first to hit the headlines.