How to Prepare for the Worst in China and Why You Should

Not so long after the fall of the Soviet Union, I, along with others in my law firm, had to spend considerable amounts of time in fairly remote places in Russia — places like Vladivostok, Petropavlovsk-Kamchatsky and Yuzhno-Sakhalinsk. Things were very uncertain in that part of Russia back then, and we developed certain rules to protect ourselves. For instance, we always made sure each person had at least enough cash to buy a last minute flight to Moscow and then from there back to the United States. Before leaving the United States, we also would contact our Russian friends (including the spouse of a Russian Federal Marshal and a couple of Vice-Governors) to ascertain where they would be while our people were there (most of these people did not have cell phones or email) and to confirm we could contact them if anything should happen. In other words, we planned our escape route before we even went.

I once went to Papua New Guinea to recover helicopters for a long-time Eastern European client. PNG (for the conoscenti) was in the throes of various insurrections at the time (I think this is nearly always the case) and I would be going to Goroka, which was fairly near at least one of them. I spent days planning the trip and set up all sorts of contingency plans. I even grew a beard and bought a backpack to look like a hiker, not a businessperson.

When I was in high school I lived in Istanbul, Turkey, for around fifteen months. At the start of my stay there, everything was great, but during our last month, there was a military takeover and it was a bit jarring to see two blank-faced 17 year-olds from the villages on my buses holding machine guns. I can remember attending a meeting with my parents and consular officials where we plotted out various exit strategies to employ if things turned for the worse.

One of the things I used to like about China was that none of these sorts of thing were really required.

That has changed.

It seems like every time I talk with serious China people these days, they want to talk about what is going to happen in China regarding treatment of foreign companies and foreigners. Many of them say they wince every time there is an announcement of a Western company planning to leave China or reduce its footprint there. As one friend of mine puts it, “The fewer foreign companies and foreigners that remain in China, the greater the chance it will be my company or my family that gets singled out for mistreatment.”

But even if you do not believe there will at some point be even more change for the worse for foreigners in China, it at least makes sense to be ready for it. I can tell you that virtually all companies big enough to retain risk consultancies are doing so. Frankly, I am always amazed people do not think about these sorts of things more often.

Many years ago, a long-time client/friend sought my assistance on an Iraq deal, not long after the fall of Saddam. I told him I wanted no part of it, and I proceeded to rail on him about how nonsensical it would be to leave his family and thriving businesses (in the U.S., Poland, Vietnam, Mexico and South Korea) to go there. I mentioned how he would be better off staying alive for his children than in trying to do yet another new deal. He was initially irritated with me but called me back a couple of weeks later to tell me I had been right and he was done with Iraq. I swear it was only days later that I learned of American businessperson Jeffrey Ake (who I had heard speak in Seattle) go missing in Iraq. Mr. Ake was kidnapped in 2005 and he has not been heard from since.

The greater the risk, the greater the money. But the greater the risk, the greater the risk.

So good for Joseph Sternberg of the Wall Street Journal for way back in 2011 writing A Businessman’s Guide to China’s Collapse: It might not happen soon, but when it does it will pay to be prepared. The article focuses on the need to be aware of and prepare for China risks.

It is just wrong to assume and act as though things cannot and will not change. As Sternberg notes, “Four months ago, no one would have predicted imminent mass unrest in Tunisia, Egypt, Syria, Bahrain, Yemen or Libya,” and he warns companies to “consider managers trying to evacuate staff, safeguard physical property or keep supply chains operating as smoothly as possible.” He then provides “a brief guide to keeping your business afloat if China goes kablooey”:

  • First, recognize that it really could happen. Human nature is to assume the status quo will continue indefinitely.
  • Understand where your vulnerabilities lie. “You may already have ‘a detailed list of expat staffers in China, their addresses and dependents, to aid in a worst-case evacuation’ but you should also ‘track executives who might be visiting, in case one of those should happen to be in town’ when something serious goes down.”
  • Think about your specific risks. “Are your factories identifiably ‘foreign,’ and is that likely to be a sore point in the eyes of local residents? Have you previously stirred controversy for hiring lower-wage workers from other regions instead of locals? Are you in a controversial industry . . . that could make you a target?”
  • Perhaps the biggest risk companies need to manage in China is one that hides in plain sight: supply-chain security.  The key is to diversify supply chains, a practice some—though by no means all—companies already have adopted. This is not necessarily cheap. But those companies that invest in a little excess factory capacity in another country or buy insurance against supply-chain disruptions may one day find the additional expense a price worth paying.
  • Think ahead as to how you will “respond to varying degrees of disruption.” What events would trigger a factory closure for a couple days, or a reduction in factory hours, or moving workers’ dependents to another area, or in the worst case an evacuation of expat staff entirely? Who would make those decisions, based on what sources of information, and how would the decision be communicated down the line. And so on.

There is nothing wrong with being prepared. What are you doing to make sure neither you nor your staff end up involuntarily having to spend an extra 10-15 years in China?

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