Risks and Opportunities Are Structural in Nature

March 4, 2009

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Li Hong
by Li Hong

Li Hong, Senior Partner and President of Fleishman-Hillard China, offers his views on managing corporate reputation within the Chinese environment

What are the risks and crises a company faces in its daily operations? How a company prevents and manages the risks and crises determines its viability and relevance in the fast-moving world of business. In practice, companies face many risks, and for that matter, opportunities, that are structural in nature. As a result, they must tackle, fundamentally and structurally, issues that may lead to risks and crises.

Industry Environment and Judicial System

Since China became a member of the WTO, a growing number of companies, are, in managing crisis and setting up crisis prevention and management systems, moving from the past singular and inward-looking model to a more plural and outward-looking way to analyze the risks and identify opportunities that may exist in the industries these companies operate in. This is due to the fact that no company, big or small, can isolate itself from the general environment of an industry to which it belongs. For these companies are faced with challenges as well as opportunities that are either inherent to their industry or occurring as a result of major transformations within their distinct industries, particularly fundamental changes in various industries brought about by a more globalized economy in which China has played an increasing crucial role.

But no company can successfully prevent and manage crises and seek opportunity without the support of a sound and fair judicial system. This is imperative for their operations. In recent meetings on the legal system, the Chinese central government emphasized the importance to strengthen the independence of the judiciary. It is not hard to imagine the risks many companies and industries will encounter if the court fails to provide a sound and independent process of litigation and final judgment.

Risks and Opportunities Within Industries

These issues are demonstrated in no better industries than the real estate and construction, food and food processing and machinery manufacturing industries.

A case in point is China’s real estate industry which currently is now going through a rough patch. In addition to the one huge problem plaguing the industry, i.e. completion rate drastically lags behind construction starts, significant changes or transgressions are happening within the industry. From the PD of the Project to the general contractor down to sub-contractors, real estate and construction industry is known to engage in practices to lower cost to maximize profits at the expense of project quality. Besides low completion rate, real estate industry is notorious in generating legal lawsuits as a result of poor quality. These industry-related risks have already spread to other industries such as banking and architecture and affected migrant farm workers in urban areas, and finally the consumers.

Now, let’s look at food and food processing industry in China which is a giant industry worth of thousands of billion yuan with no less than 400,000 enterprises, including 380,000 with less than 100 employees each. Although the governments are dedicated to food quality, the business and production models of these enterprises made it difficult for the government to effectively manage quality issues.

For example, during the Melamine crisis, the massive quantity of the products made it extremely difficult for the 15,000 control and test portals set up by the government across the country to successfully complete the considerable responsibilities in terms of human resources and management. China needs to tap into the experiences of other markets and other countries on this issue in order to raise the level of food safety. In addition to government involvement, civilian forces can also be part of the solution to establish a test network for food safety. This is not just solving one single crisis, but it is the minimization of the risk from the source and at every link of the value chain.

Within the machinery manufacturing industry, an increasing number of enterprises need to establish a crisis prevention system on a fundamental and structural level regardless they are competing with overseas brands or battling for market share locally. These companies need to consider factors in different markets, especially overseas markets, such as legal, environmental and cultural issues.

Where There are Risks, There Also Exist Opportunities

Opportunities in the construction industry lies in areas of government involvement at appropriate level, government control on setting up a quality assurance procedures, government approval process with safety and quality as important yardsticks, fund provision and source of funding. The ‘industry fund’, which the Ministry of Construction is planning to establish, should make the quality issues of applicant companies in their previous projects a pre-requisite. The current market, which is in need of “normalization”, should allow for foreign investments along with management technique, including a global agency service which also will gradually help standardize the real estate agency market.

Growth opportunities are believed to be huge in the food and food processing industry which has just started what is called “deep processing”, i.e. processing for food quality. However, food processing industry in Japan and Korea, for example, has been experiencing a rapid growth. In comparison, Chinese food processing industry is less advanced in terms of products, technology and marketing, and local brands can hardly compete with imported ones.

Machinery manufacturing industry has more potential as well. The advancement of upstream machinery manufacturing industry is of extreme importance to the downstream industries, such as household appliances, lighting, hygiene, pharmacy and food processing, as well as automobile manufacturing and aeronautics. To this end, the government provides policy supports to upstream machinery manufacturing industry. The government and financial institutions, however, should also incentivize enterprises which serves the upstream companies from both financial and policy perspective to encourage them to adopt ‘new technology’ to ensure a sound development at both ends.

That risks are structural is not limited to the above-mentioned industries and it is inherent across a broad spectrum of industries. Companies should analyze and fully comprehend the risks within the industries they operate in. Only by doing so can companies identify opportunities in their endeavor to maximize their growth potential.