Dietary supplement firms doing business in China need to map out local bureaucratic power relationships, Andrew Mertha, PhD, stressed at a seminar co-sponsored by the United Natural Products Alliance.

In China, "it's not necessarily simply who...you know," he said.

Mertha, an assistant professor of political science and international relations at Washington University and the author of "The Politics of Piracy: Intellectual Property in China," spoke during UNPA's "Challenge of China" seminar in Salt Lake City, Utah.

The program also was sponsored by the Utah Governor's Office of Economic Development, International Trade & Diplomacy.

"Try to figure out where the power relations are," Mertha advised. Firms should learn "how China's institutions work, how they interact, where the power lies, where the authority lies and who...you go to if you've got a problem," preferably before the problem exists, he emphasized.

"These seem to be fairly simple questions, but, in fact, in the context of Chinese politics, the answers are usually hidden from view," he noted. "If you wait until there's an emergency...it might be too late, or it will be a lot more costly."

According to Mertha, around 75% of bureaucracies in China are decentralized. Under this management system, a local bureau is beholden to its local government rather than its national counterpart.

In contrast, under a centralized management system, bureaus receive binding orders from their "functional counterpart at an administratively superior level," he explained. In other words, orders flow down internally through the different levels of a specific bureau.

However, even if the local bureau does not receive binding orders from its state government, it may still have consultative relations with it. In China, there are two types of inter-bureau relationships: leadership and professional, Mertha explained.

A bureau only has leadership relations with the bureau from which it receives binding orders. However, a bureau may have consultative or professional relationships with several other departments.

Further complicating the issue is what Mertha has termed China's "soft" centralization. Namely, some agencies in China are centralized down to a certain level - at which point the bureaus have established leadership relations with the local government.

For firms doing business in China, "there's really no substitute for just asking people in a systematic manner" who they have leadership relations with and who they have professional relations with, Mertha added, because "this is the kind of thing that doesn't really appear on organizational charts."

For example, "many people who are not particularly familiar with the intellectual property [IP] environment in China are often greeted with" the idea that the State Intellectual Property Office [SIPO] is at the apex of the IP system. "In fact, that's absolutely wrong," Mertha said.

"First of all, [SIPO] is outranked by these other bureaus that it's supposed to be managing. Second of all, not only does it have decentralized relations within its own bureaucracy, but it has decentralized leadership relations with the other bureaucracies" it is supposedly managing, he explained.

As for etiquette, Mertha suggested asking questions about leadership and professional relations in a "straightforward fashion." In his experience, most Chinese are "impressed" that a foreigner understands the relationships and give "matter-of-fact" answers.

Identifying Allies

"Almost all parts of the government have some relevance or control over our business," attorney Michael Chen, Kirton & McConkie (Salt Lake City & Beijing) pointed out. "The important thing is to find out who can be our friend in the government."

Consider "whose interests align with ours, and [who] wants to see us have more growth, more revenue," he said. "You know the tax department wants to see us grow [and] have more revenue. The labor [department] wants to see us hire more people." The Ministry of Commerce usually will help foreign firms as well since their "goal is to attract foreign investment," Chen added.

Competition between bureaus can also benefit firms, Chen and Mertha noted separately.

"The local government wants to see us make more investment locally" because local government officials' jobs are "evaluated upon how much foreign investment they can bring in, and they are competing for foreign investment," Chen said. "So, if you're being closed down or relocated, they will stand up and fight for you."

Additionally, inter-bureau competition is slowly improving anti-counterfeiting enforcement, Mertha argued.

China has been working to streamline its entire bureaucracy since 1998, namely by cutting people and merging bureaus, he said. In a self-preservation effort, the relatively young Quality Technical Supervision Bureau adopted an anti-counterfeiting mandate, thus stepping on the toes of the Administration for Industry & Commerce.

In the past AIC had exercised its enforcement very selectively in the anti-counterfeiting arena. Now, faced with the possibility of being trimmed, it has stepped back to the plate.

"The two bureaucracies actually started to compete with one another," Mertha explained. "So, it's a situation where the AIC and the QTSB - particularly the AIC - have gone to U.S. companies and said, 'Look, we'll issue the maximum fine on these pirates if you just please give us the case.'"

Geographic Considerations

"I think it's important to realize that when people talk about 'China wants this' or 'Beijing wants this,' it's not the same thing. There are a lot of different interests," Mertha stressed.

"One of the most important...cleavages is between what Beijing wants and what the locales want," and a decentralized management system "gives local governments a tremendous amount of power over the functional units within their domain," he said.

"When you hear talking heads on TV talking about China as a top/down authority system, they're really missing...a huge part of the picture," Mertha noted.

"It's not fair to look at China as one country in the sense that China takes the same view on anything," Chen concurred.

"It's not fair to look at the government as one body because different provinces have different attitudes toward foreign investment, and some provinces are known as friendly, open [and] attract foreign investment. Some are more hostile towards foreign investment," he said. "So, if we know what their attitudes are, [that] helps us choose where we are going to set up our business."

The regions will also vary in terms of the types of products they prefer.

"The United States has regional differences," Susan Haeger, a global affairs consultant for New Hope Natural Media, noted. However, "when you get into China, it is so big and the regional areas are so uniquely different" it becomes extremely important for a firm marketing products to "have a view of the region that [it is] in versus just the whole country," Haeger stressed.

Like Chen, Haeger asserted that "central and provincial governments are investing - as well as looking - for foreign investment."

"They're looking for companies to come in and bring new and novel nutritional products to the Chinese consumers and help Chinese live healthier lifestyles," she added.

China's central government approved a five-year plan including a public nutrition platform in March, she pointed out. "This is very significant because the government has made a decision to make nutrition a key part of the government's focus over the next five years," Haeger said.

Notably, a government agency, the Public Nutrition & Development Center, was formed under this plan "specifically to develop investment and [the] nutrition industry in China and also to educate the public about nutrition," she stated.

"Even though there's a tradition of natural and fresh foods and [traditional Chinese medicine], there's also enormous poverty...and very significant environmental pollution," Haeger stated. "People have very challenging health issues as a result of that."

- Katia Fowler

Success In China Requires Command Of Bureau Power Relations – Panel

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