Chinese Law Prof Blog

Editor: Donald C. Clarke
George Washington University Law School

Sunday, September 21, 2008

Lessons for foreign investors from the Sanlu scandal

The Sanlu milk power scandal raises interesting issues relating to foreign investment in China, as Sanlu is 43% owned by Fonterra, a New Zealand-based dairy conglomerate. What did Fonterra know and when did it know it; what did it do and what should it have done? These questions are addressed in this article from the New Zealand Herald. But there are other angles to the story as well. The purpose of this post is to offer perspectives from two experienced China hands - Jerome Cohen and Sidney Rittenberg - on the problems of management faced by foreign investors in China. The comments below are reproduced with their permission (and my thanks).

Jerome Cohen:

All foreign investors had better review the adequacy of their representation in the management of PRC joint ventures in light of the milk tragedy. What kind of person to post to a China venture's day-to-day management has been a problem from the day Schindler Elevator and Jardine's started the very first industrial JV in 1980. Finding the right people to take on this delicate and responsible task has never been easy. If the designee is not fluent in Chinese and a clever observer and diplomat, as well as someone who has previously worked for the foreign investor or otherwise enjoys its confidence, he or she will not be effective. I have been involved in ventures where even skilled PRC nationals who have been posted to a JV by the foreign investor have been shut out of the inner workings of the enterprise because they were not part of the local partner's "system". In some other cases, even when the foreign company's rep knows that something improper is going on, he or she, especially if a PRC Chinese or ethnically Chinese, is subjected to heavy local pressures and incentives to "go along" and not report it to headquarters back home. This has often posed severe moral and even legal dilemmas for the foreign company's rep and eventually the company itself.

Sidney Rittenberg:

One problem in appointing competent joint venture personnel is that PRC Chinese usually are in the best position, other things being equal - especially if they have been trained in the USA and are clued in to the corporate culture. "Clued in" here means that they do not have an "us and them" attitude towards foreigners. We have had cases where a Chinese staffer who protects the legitimate interests of the American corporation will be called a "traitor" by the same corporation's Chinese representatives.

At the end of the day, everything depends on having the right people. We say, "the Three Cs" - Character, Competence, Connections. Strange though it may seem, some of our excellent corporations overlook the primary issue of character when picking either foreign or Chinese personnel for China. What is their track record? Are they loyal to their commitments? Can you depend on their word? Are they good to work with? This is an important (and challenging) part of due diligence, and due diligence is the name of the game. Sometimes, even the country general manager is picked because he has workable English, shoots an impressive line of self-recommendation, lays on a great banquet (or even a massage parlor), and enthusiastically agrees with everything you say. The hardest kind of case that we get, as consultants, is when the American corporation is already plagued with the wrong hire and has to get rid of him without seriously damaging the company in China.

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My 11 year old daughter is always asking me whether I can drive any slower. I usually respond by proving that I can. Seems almost as though China is now doing the same thing to me in response to my constantly harping on the dangers of China joint ventu... [Read More]

Tracked on Jul 15, 2009 8:44:43 PM


This latest food tragedy may make some foreign investors conclude that the risks of manufacturing in China outweigh the potential rewards. China's contaminated milk powder scandal, like its previous food safety problems, contains many lessons for foreign investors, as well as others. Those lessons also apply to foreign investment in other Chinese industries, and in other countries, too.

Posted by: BizBlogged1 | Nov 6, 2008 2:04:57 AM

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