Summary
Rio employees were arrested by Chinese government officials on charges of corporate espionage and bribery. This is a surprising twist in Chinese attitude towards their key iron ore suppliers. In post Beijing olympics world, is China taking a closer look at her important purchasing decisions or is it more than that? Is this really special to China and iron ore trade or is it more prevalent in other commodity trades also. Corporate espionage and bribery are not foreign concepts to foreign trade.
Analysis
It will be interesting to read the findings why Rio or BHP Billiton or any of their other smaller rivals have to offer bribes to get business from China. It seems quite simple - for many years now China has become the defacto destination for most iron ore shipments. China with its insatiable appetite for iron ore willingly paid top dollar by out bidding Japanese, Koreans and others to say the least. By doing so they have become the main country in annual iron ore price negotiations. After global trade collapse they claim effectively they have transferred or overpaid about $102billion in excess wealth to iron ore supplier companies. This claim may not hold water since the market was following a benchmark system instead of spot system. Perhaps Chinese never imagined this would become an issue since they followed their Japanese, Korean and Taiwanese friends in sourcing iron ore supplies and using the same system. Benchmark system seem to have worked well for other
countries. But when China appeared on the scene, the additional demand from Chinese steel mills put pressure on prices or at least that was the reason given by ore suppliers.
countries. But when China appeared on the scene, the additional demand from Chinese steel mills put pressure on prices or at least that was the reason given by ore suppliers.
In the absence of a globally centralized/screen based transperant sourcing process, any country can challenge the prices after the fact. Iron ore market presents a unique situation where the market leader BHP Billiton has no real close competitor. It can set a price and their competitors can followsuite within a range. When top 3 or 4 players control more than 70% of world's reserves it is quite an exercise in making the participants see the wisdom in new transparent methods. For China and other countries this is the true challenge. For a communist country with central planning and decision making powers, China may be in a position to push this agenda forward. It also begs the question why china missed the opportunity all these years.
Corporate espionage or bribery are not new concepts in international trade. They may take different shapes depending on specific commodity and specific country in question. Western companies have done this in many parts of the world through
accessing local political channels either through direct corporate political contributions or through influencing their own governments to shift the political will that ultimately opened the path for getting contracts. Similar cases can be found
in Japanese business practices also around the world. Bribery remains a factor and may always be a factor in determining which way that juicy contract will swing eventually.
accessing local political channels either through direct corporate political contributions or through influencing their own governments to shift the political will that ultimately opened the path for getting contracts. Similar cases can be found
in Japanese business practices also around the world. Bribery remains a factor and may always be a factor in determining which way that juicy contract will swing eventually.
In conclusion, it may be suggested here that major institutional investors should review their own portfolio companies and take this up as an ethical issue to shift corporate behavior on bribery issue while completely banning any hint of spying. Such measures may ultimately lead to better accountability at the source and safety to employees and capital.
Vijaya Iswara consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
