Christian Knake, Partner aus dem Bereich Governance, Risk, Compliance & Technology bei Warth & Klein Grant Thornton hat mit Dr. Tim Klatte über den Markteintritt ausländischer Unternehmen in China gesprochen. Herr Klatte ist Partner im Bereich Forensic Services bei Grant Thornton Shanghai. Er verfügt über mehr als 25 Jahre berufliche Erfahrung in China, davon 14 Jahre am Standort Shanghai. Einer seiner Tätigkeitsschwerpunkte ist die Entwicklung und Optimierung von Compliance-Programmen. In diesem Bereich hat er umfangreiche Erfahrungen aus der Beratung von rund 500 Mandanten in China und Asien.
Tim, you are a U.S. national, first arrived in China in 1994 and then accepted a job transfer from New York to Shanghai in 2006. You have been based in Shanghai for nearly 14 years. How do you see the current developments and conflicts for China, U.S., and our European economy?
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Tim Klatte: The current development, namely the Trade War, has been costly for both the U.S. and China, the world’s two largest economies as tariffs, and what could possibly become a currency war escalate. This is not only a bilateral issue between the U.S. and China. In fact, the entire global economy is impacted, and particular industries around the world are feeling the effect. This isn’t good for the world as a whole, but leaves opportunities for Europe and other economies to fill the void in each side’s marketplace that would typically have been supplied by the other. China especially can be expected to be much more cooperative and open to Europe as it has very few ways to retaliate against the U.S. without hurting its own long-term development as well.
Particular European industries that could benefit from this trade war are chemicals, transport equipment, motor vehicles, and medical instruments. This is because these products are among the top 5 imports from Europe for both the U.S. and China and are currently being affected by tariffs. Also worth mentioning are European aircraft manufacturers. While aircraft have been removed from the Chinese tariff list that was released in July, if China decided to escalate and add them back on the European aircraft manufacturers would be more likely to realize significant gains than all of the previous industries as they would face no significant competition from any other country.
All of this, of course, assumes that Europe maintains its neutral stance in the trade war and isn’t targeted by either side directly – a situation I don’t foresee happening. The EU also needs to move quickly, as other countries are working hard to take the now-available market share in these industries and potentially disrupt the U.S. and China as the world’s largest economies. Some countries, such as Russia and Japan, have already started to see some success in this endeavor, so the pressure is on for Europe to take action.
I have been traveling between the U.S. and China for more than 25 years and have witnessed tremendous growth in China over the past 2 ½ decades. Given the global importance of these two economies, I am often reminded of the saying, “when the U.S. or China sneezes, the rest of the world catches a cold.” The actions taken during the trade war carry a direct economic impact beyond the two borders. For example, enrollment of Chinese students is down in the U.S., but this doesn’t mean they have stopped going abroad for higher education – they are just selecting other destinations, like Europe.
Please tell us about the clients you help to navigate through China, its culture, and the opportunities of doing business in China.
Tim Klatte: Within the Grant Thornton suite of services, my team provides proactive and reactive Forensic Advisory support, primarily to Multinational Corporations of all sizes – from a Fortune 50 company in the U.S. to a small family business in Bavaria. I am focused on helping organizations navigate the challenging China environment from a fraud risk management perspective. We assist companies in establishing a robust compliance system to detect corruption in their China organization and mitigate risk, as companies enter or expand their operations in the Chinese market.
Many of my clients seek local and high-quality advisory support in navigating the complexities of the Chinese market. The reason they seek our help is that it’s often deceptive just how nuanced China really is. It’s hard to describe Chinese culture as a whole because China can be aptly described as more than 30 different countries in the cloak of one unified nation. Each province remains unique in its culture, expectations and overall style and usually does business differently. There is no cookie-cutter approach to doing business in China and experience has taught me that companies only get one chance to build and preserve their reputation. Once it is damaged, it’s hard – if not impossible – to recover.
In the world of risk management, they are many considerations in China, especially as a developing nation. China’s business practices revolve primarily around Guangxi – connections. If you make secure connections, then relationships become localized. Opportunities will naturally come to you, and your business has a higher chance of success in China. This, unfortunately, creates temptation to take shortcuts to advance further – i.e. more attraction to commit fraud and corruption. I often remind clients that wherever a supply chain exists, there is a high percentage some element of fraud has been embedded within it. This creates a significant need for Forensic Advisory Services, and once a proper compliance system is designed, the company enjoys a higher standard, which brings in even more opportunities (and staff temptation) to remain competitive. So the cycle continues, and the demand for my Forensic Services grows.
What are some of the major pitfalls that companies and investors from abroad can make, and how did you help clients in the past? What are the common and expensive mistakes that companies from abroad make?
Tim Klatte: Based on my experiences, many companies don’t take into account the intricacies of each deal. Business negotiations can be long and drawn-out, especially when dealing with important terms and pricing. A lack of understanding of the bureaucracy and approvals required can cause a company to have a less-than-optimal experience during negotiations.
Companies will just shake hands and do deals without doing their proper due diligence or understanding the environment. China is a great country with equally great business opportunities. However, the reality of the situation needs to be understood when doing business. According to the 2018 corruption perception index, China was ranked 87th out of 180 surveyed countries. That’s almost the bottom 50% in terms of the global perception of corruption in Chinese business. If you come from North America, Europe, or Australia where the common opinion of corruption ranking is significantly less, you might not expect to do as much due diligence in your deals, which is the reason many western companies run into problems when they do business in China. This, combined with many companies’ inexperience in Chinese business practices and culture results in opportunities for occupational and financial fraud or other forms of corruption, which can cost a company and its partners dearly.
Where my team comes in is providing a familiar and reliable, but local expertise in providing fraud investigations, anti-corruption & bribery services, and advisory services on best practices in regards to whistleblowers, compliance training, and other services to minimize compliance risk to your company.
Many MNCs also fail to take into account integration issues. Post-deal, it’s essential to have a plan in place to deal with local management and potential issues, so new problems do not arise down the line. This is always something to consider, but requires special attention when operating internationally, due to culture clash and the unique set of potential problems it can create that would otherwise not be a possibility.
That means that you help clients to fulfill their duties in clarifying the facts in quite sensitive cases. How much does it help to understand not only culture but multiple jurisdictions?
Tim Klatte: This is true. Going into each case with an investigative mindset is essential to a successful outcome for the client. Often, one of the most significant challenges is to scope the problem accurately from the start. I have led many cases in which the surface looks a little fuzzy, but when my team begins scratching and researching the issue, an intricate web of conflicts and unethical behavior is revealed. Clients are then faced with a real business decision to either terminate those employees in question, although they may represent 40-60% of the sales force, and take a financial hit or keep the employees and hope the problem can be eliminated through training and reprimands. As such, all parts of the investigation must be fact-based and evidence must be reliable. There is no margin of error for this type of work and combine this with one more challenge – culture.
Understanding culture is vital. Many investments by foreign entities have not realized their potential because of a lack of understanding as to how business is conducted in modern China. The country has undergone an unprecedented transformation and China of even 2018 is not like the China of today. In my world, this means it’s essential take proactive measures to enhance the compliance strategy locally. Ensure the code of conduct and ethics policies are current, training takes place at least bi-annually and in-person, and each employee has a sense of responsibility for corporate compliance. It is especially important to understand each jurisdiction you operate it, because to remain compliant you may need to perform operations with varying degrees of difference in each area. As I mentioned before, I don’t recommend looking at China as a single country.
What value can a robust compliance system bring to the company?
Tim Klatte: Simply answered – success, sales, and general business contentment to be operating in one of the largest markets globally with peace of mind those high ethical standards – just like back at the German headquarters – are being applied. A robust compliance system allows a company to avoid all the legal penalties that would occur from not having one. This protects and increases shareholder value, helps a company to maintain its reputation and image, and reduces the likelihood of reputation loss.
In addition, the rights and interests of the company’s employees are protected. A benefit of this is that employees develop a sense of pride and security in working for a company that promotes compliance. What needs to be understood is that compliance awareness permeates all aspects of production operations, so when a company believes in and maintains its compliance values, compliance then habitually becomes the basis for all of its business decisions.
Achieving these characteristics doesn’t come without its challenges. Working with external experts, with rich experience across multiple industries, can get the company on the right track and certify that it remains complaint. I regularly remind clients that developing a sustainable fraud risk management strategy is essential, but ensuring that it is applied, adequately understood and allowed to evolve as risks change is essential. Having trusted advisors who know the local environment is critical to delivering stakeholder value in China for the organization.
Your team consists of nearly 30 experts. Tell us about your team and its expertise.
Tim Klatte: My team brings to the table a variety of disciplines to advise clients in this challenging market. I have a team of Forensic Accountants with strong interviewing skills to weed out accounting-related fraud. I also have a team of technology experts that manage highly complex data analytics, cybersecurity or e-Discovery challenges for clients. In addition, I have a team of Forensic Researchers who conduct background checks, or Integrity Due Diligence, when clients seek support to better appreciate the reputation or profile of companies or leaders within Chinese organizations. Recently, we were asked by a German company to help them assess their China operations, in terms of GDPR compliance – also an area in which we can advise.
Personally, I have been working around China for more than two decades and conducted more than 500 investigations. Upon completing my MBA in 2000, I joined the US State Department to focus on US-China economic matters. I then spent ten years in a Big Four Accounting firm and have been with Grant Thornton for 3½ years now. I hold a DBA with my Doctoral Dissertation focused on the manufacturing sector in China –to offshoring back to the United States. My team is equally eclectic and holds abundant experience to apply their skills in problem-solving for clients across China. I am honored to lead this talented group of professionals.
Which advice can you give our clients from the German manufacturing sector?
Tim Klatte: While the Chinese market has seen a slowdown in foreign direct investment, this is mostly due to Trade War and economic ambiguity, but not any particular concern on the Chinese side. The GDP in China tells a story of the “New Normal,” which can be interpreted as an opportunity for German companies to fortify their presence and grow further with the nation that will overtake the U.S. GDP in due time. The manufacturing sector, automotive in particular, has been impacted by the recent volatility, but I believe this leaves a market ripe with opportunity. Each organization must ensure they have an influential culture of compliance and conduct due diligence with every business operation in China. Over the past 18 months, I have personally witnessed an uptick in Forensic and Compliance-related requests from European nations – which is a positive sign that these organizations are leveraging this timeframe of uncertainty to reflect internally and improve internal controls. Again, this is a positive sign that MNCs from other jurisdictions can note, and I encourage those companies in the German manufacturing sector to replicate this approach.
Tim Klatte: The current development, namely the Trade War, has been costly for both the U.S. and China, the world’s two largest economies as tariffs, and what could possibly become a currency war escalate. This is not only a bilateral issue between the U.S. and China. In fact, the entire global economy is impacted, and particular industries around the world are feeling the effect. This isn’t good for the world as a whole, but leaves opportunities for Europe and other economies to fill the void in each side’s marketplace that would typically have been supplied by the other. China especially can be expected to be much more cooperative and open to Europe as it has very few ways to retaliate against the U.S. without hurting its own long-term development as well.