Monday, March 29, 2010

RioTinto, Google, China and you

The recent Chinese experiences of two huge MNCs - RioTinto and Google - can serve as cautionary tales to smaller firms looking to expand abroad. In today's globalized world, growth aspirations must be met with global aspirations. Any business can nowadays reap the benefits of a global marketplace through blurring geo-political boundaries and increased interconnectivity. While the strategy concerns that a growing and aspiring multi-national company must face are numerous, none is more important nor more difficult to accurately predict than political risk. For obvious reasons that have been briefly discussed in previous posts, China is one of, if not the most, attractive foreign market for a lot of companies. However, no country better demonstrates the hazards of political risk than China. While the Chinese example is indeed unique in many ways, it often helps to use the powers of exaggeration to prove a point.

As it has been widely reported, four RioTinto executives have been charged with and put on trail for taking bribes in China. It has been widely claimed that the trial, which concluded last week, has been highly politicized and far from transparent. While RioTinto initially stood by its employees and reprimanded the Chinese government for what it claimed was inappropriate handling of the case, its recent actions are in stark contrast to its initial reaction. RioTinto's chief executive recently attended a high level meeting with China's Prime Minister during which he outlined ways in which China and RioTinto could work more closely together. His statement coincided with an announcement that it has signed an agreement to develop a JV with Chinalco, China's state-run aluminum company, in Guinea. On the other side of the spectrum lies Google who recently followed through with its threat to pull out of the Chinese market should the government not ease its censorship laws.

While investors, customers and governments will have differing reactions to the actions of RioTinto and Google, a brief look at both companies in the context of China might shed some light on why their decisions were made. Certainly, the Chinese internet market is poised to grow at monumental speed; however, currently, in spite of being the largest domestic market in the world in terms of the number of users, it only represents a marginal percentage of Google's revenues. Even if the market doubles in size, it would still only be of limited importance. Beyond the fact that, economically speaking, the Chinese market matters little to Google, the fact is that Google matters little to China as there are a host of other players - both domestic and foreign - that offer similar services. Unlike the Google case, RioTinto and China are faced with a reality of inter-dependence: China's growth and continuing demand for its product make it a crucially important market to RioTinto while China's state-run companies require the experience of established companies like RioTinto to effectively expand across the globe. With this analysis in mind it quickly becomes apparent that while Google could afford to stand firmly by its principles, RioTinto cannot. If you are a business looking to enter the Chinese market, or any other market for that matter, you need to look at your potential position in that market and decided whether your decision to enter that given market more resembles Google's or RioTinto's and what that may mean in terms of which laws and policies you may or may not be willing to work with.

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