Cheated In China?

More American companies turn to Washington for relief from abuses

When Kimberly-Clark Corp. opened its Handan Comfort & Beauty Group in 1994, the Irving (Tex.) company had high hopes for its Chinese joint venture. But three years later, Kimberly-Clark has hired armed guards to protect the manager and employees of the operation, which has gone seriously awry. The source of the problem, according to Kimberly-Clark: A manager for its Chinese partner set up a rival company across the street to make the same products--and diverted materials from the joint venture to his new company.

Kimberly-Clark isn't alone. The American Embassy has seen a big jump in complaints over the past six months from disgruntled U.S. companies fed up with their lack of protection under China's legal system. Foreign investment in China will shrink "if a mechanism does not exist to ensure that local and provincial officials abide by a rule of law," warns John F. Fiedler, CEO of Borg-Warner Automotive Inc.

The problems have reached such a peak that the embassy wants U.S. Commerce Secretary William M. Daley to raise the most egregious cases during his visit to Beijing in early October. "Some of these problems will have to be resolved at the highest level," says U.S. Ambassador James R. Sasser. If Daley doesn't get satisfaction, it could cast a cloud over U.S.-China relations shortly before Chinese President Jiang Zemin's trip to Washington in late October.

The scale of the problem is much bigger than the number of cases that have come to light so far. Up to now, most companies have kept quiet about troubles with their Chinese ventures for fear of retaliation by officials. But the abuses have become so widespread that U.S. companies besides Kimberly-Clark are taking their complaints to top officials in Washington. And several of those companies talked to BUSINESS WEEK reporters about their ordeals.

TWINS. Forging a successful joint venture in China is usually difficult. But the problems are acute for companies that have ventured outside the major urban areas of Beijing, Shanghai, and Guangzhou. U.S. companies that rushed into China's far-flung provinces in the heady days of 1993 are discovering that local protectionism and cronyism are making business a lot tougher than expected. For example, it appears that Chinese partners with local political clout can rip off a foreign partner and influence courts to rule in their favor.

The Kimberly-Clark venture has turned into a tangled tale of intrigue and legal frustration. Its plant in Handan, which is 97% owned by Kimberly-Clark, produces around $10 million annually of feminine-care pads. Located in the northeastern province of Hebei, it is one of 12 company factories in China. The operation seemed to be running smoothly until last spring, when plant officials noticed a nearby factory was making a similar product. Worse, the Americans discovered that the head of the rival operation was Li Hongzhi, who was picked by Kimberly-Clark's Chinese partner, Xingha Factory Co., to be the manager of the joint venture. Li was "stealing" and "diverting materials" such as spare parts and pulp from the venture to the new factory, alleges Tina S. Barry, Kimberly-Clark's vice-president for corporate communications. Li has been unavailable for comment.

Kimberly-Clark stresses that partner Xingha is not implicated. But when the U.S. company raised the case with Handan authorities, it initially had difficulty getting action, Barry alleges, because "this unscrupulous individual had a lot of influence with local political officials." The Handan city government's foreign- affairs office denies that Li's connections influenced its handling of the case and says it took "energetic measures" to deal with the situation. But after Kimberly-Clark replaced Li with an American manager, Jim Rice, associates of Li showed up near the plant in what employees as well as Rice considered an act of intimidation. In response, Barry says, "we hired security to provide around-the-clock protection."

As a last resort, Kimberly-Clark called the U.S. embassy. It raised the case with both the Foreign Trade & Economic Cooperation Ministry and the Foreign Affairs Ministry, and also asked their help in getting police protection. Li was detained in late August. But Li's factory is still operating. Although materials are no longer being diverted from the joint venture, "our intent is to shut the [rival] plant down or take it over," says Barry. Kimberly-Clark alleges that the plant is still being operated with its materials.

WINNER TAKES ALL. Now that higher-level officials are involved, Barry says, Kimberly-Clark is optimistic that the problem will be resolved. Despite the trouble at Handan, Kimberly-Clark plans to expand its operations in China. But the company hopes that Daley will "stress to Chinese officials the need to put in place more legal protections for U.S. investors."

Chicago-based Borg-Warner Automotive Inc., which makes auto parts, surely shares that hope. Shortly after the company first signed its transmission joint venture in 1995 in Shiyan, Hubei, Borg-Warner realized that its Chinese partner had no intention of making the deal work. In fact, the Chinese were planning to set up a rival operation, says Donald H. Schlueter, general manager of now-inactive Huazhong Warner Automotive Transmission Co., though it never got close to production.

Late last year, Borg-Warner filed with the Hubei Commission of Foreign Economic Cooperation & Trade to end the venture on the grounds that the Chinese partner, Shiyan Automotive Transmission Factory (SATF), had not fulfilled its obligation to provide utilities such as water and electricity. Because of that, Borg-Warner had refused to accept the factory site. In March, it got the bad news: Its petition was denied, and in the interim, the local partner had filed suit in Shiyan court against the joint venture for rejecting the site. The court awarded all of the joint-venture assets of $2.2 million, 60% of which originally came from Borg-Warner, to the Chinese partner. By the time the Americans found out about the suit, it was too late to appeal at the local level: Without informing Borg-Warner, the general manager of SATF, Zhang Yuming, had not only brought the suit but had also represented the venture against the allegations in his capacity as chairman of Huazhong Warner.

Borg-Warner requested a hearing in Hubei provincial court but got no response. Three months ago, it filed a petition with China's supreme court, which is expected to rule within eight months. Like Kimberly-Clark, the company has asked the U.S. embassy for help as well.

Schlueter claims to have minutes of a meeting between city officials and SATF that show that the Chinese side and local officials worked together on the scam and that the joint venture was never intended to be carried out. Zhang flatly denies all of Borg-Warner's allegations, calling them "pure slander." When asked about Daley's plans to raise the case when he visits Beijing, Zhang said this would be "improper" and threatened BUSINESS WEEK with a lawsuit if it printed a story.

Beijing-based Asimco, an American direct-investment fund with 15 auto-components ventures in China, also has run into what it calls an unfair court decision. Asimco says the former general manager of its Zhuhai-based CAC Brake Co., Liang Jinwen, forged letters of credit worth $4.95 million and cashed them at the local branch of Guangdong Development Bank. On Sept. 2, the Zhuhai People's Intermediary Court ruled that Asimco has to pay the bank back. Asimco says the bank failed to follow written procedures agreed to by the joint venture and the bank requiring approval by four top officers of the venture to cash letters of credit. Besides, says Jack Perkowski, chairman of Asimco: "We have clear evidence that officials at the bank were in collusion" with Liang, who has since disappeared. Guo Zjojang, vice-president of the bank's Zhuhai branch, declined to comment, saying only that "the court has made its decision." A Zhuhai court official insists "the decision was made according to the law and not according to personal relationships." Asimco is appealing, after previously contacting the U.S. embassy.

DEAF EARS. For smaller U.S. companies, such stonewalling by Chinese courts is a familiar hazard. Hong Kong-based Revpower, a U.S.-owned contract manufacturer, has been trying for four years, without success, to get Chinese courts to enforce a $4.5 million arbitration award against Shanghai-based SFAIC, a Chinese company. SFAIC violated a pact with Revpower to make industrial batteries with machinery and knowhow provided by Revpower. But SFAIC has refused to pay the award, determined by an international arbitration panel set up under the terms of their original deal. Calls by BUSINESS WEEK to SFAIC were not answered.

Oddly enough, all of these troubles are festering at a time of rapidly improving U.S.-China relations. Daley's trip is designed to ensure a smooth summit between Jiang and President Clinton. Beijing's recent moves to privatize state companies, reduce tariffs, and offer favorable tax breaks to foreign companies all send a signal that China wants to improve its investment climate. But if companies in the field find that conditions are getting worse, high-level goodwill and special policies may not be enough to keep investors coming.