Recent crackdowns highlight heightened risks for multinationals
China’s increasingly stringent approach to policing information will have significant implications for multinationals methods of conducting business in the country. These changes will primarily affect functions such as marketing, business intelligence, and compliance, as information domestically becomes more expensive and less reliable.
The changes will also affect major corporate strategic decisions, such as M&A and key investment projects. This is because such strategic decisions are typically made based on critical business intelligence, which often relies on high-quality, and sometimes even proprietary and exclusive, data and information. However, multinationals access to this kind of information is now significantly restricted. Consequently, the quality of key business decisions now hangs in the balance.
For example, due diligence is a crucial process for any multinationals considering M&A. However, with corporate registry information now much more restricted for overseas entities, multinationals must conduct more due diligence within China, a process fraught with risks under the amended anti-espionage law. This also heightens the risk of non-compliance for multinationals, who now have to navigate murkier waters with a less clear understanding of potential pitfalls.
In previously unimaginable scenarios, authorities can now inspect facilities and electronic equipment of organizations, as well as digital devices like smartphones and laptops belonging to both foreign and local individuals suspected of spying. In the worst-case scenario, China-based staff could be detained, similar to what happened with Mintz and Astellas.
As the availability of high-quality data in the market decreases, multinationals will find it more challenging and costly to obtain basic information, such as details about business partners and local competitors, because the risks associated with gathering that information have considerably increased. For multinationals, navigating China’s already complex business environment will become even more intricate.
- Since the “Two Sessions” in March, China has tightened foreign firms’ access to data and information and resorted to dramatic law enforcement measures.
- The offices of a number of multinational consulting and due diligence firms, including Bain, Mintz, and Capvision, were raided by the Chinese police in the past few months, and some of their local staff were detained.
- The state broadcaster CCTV even aired a special program about the investigation into Capvision’s business and how some of its experts leaked state secrets.
- In April, China’s Cyberspace Administration also launched a national security review of the products of Micron Technology, the largest American manufacturer of memory chips.
- Earlier this year, a China-based senior executive of Astellas Pharma, a Japanese drugmaker, was arrested and was accused of engaging in espionage activities.
- Forrester Research, a US technology research group, recently made the decision to fire most of its China analysts and close its China office.
- China has also taken actions to restrict access to key economic and corporate information by overseas users, who, for example, are no longer able to access the website of the bureau of statistics of Fujian Province.
- China recently revised its anti-espionage law, stating that all “documents, data, materials, and items related to national security and interests” are under the same protection as state secrets.
Restrictions on foreign firms’ access to China’s data and information have intensified over the past two months despite the business-friendly messages repeatedly conveyed by new Premier Li Qiang, who took office in early March. This development strongly suggests that concerns over national security, and more broadly, national interest, now take precedence over almost everything else in China’s policymaking process. Consequently, the acquisition and use of data and information will be subject to significantly greater scrutiny moving forward.
The issue is that China has a very broad and opaque definition of what types of data and information are considered “national security” sensitive, not to mention what constitutes “national interest.” This creates a challenging environment for all businesses that rely heavily on information collection and analysis, including multinationals. Such stringent requirements for data access will very likely discourage multinationalsfrom making major business decisions in China, at least for a while.
The recent amendment to the anti-espionage law has only heightened concerns, as China’s law enforcement now possesses greater authority to examine any data or documents for potential threats to national security. Activities previously considered normal business practices, such as gathering intelligence on local supply chains, competitors, and business partners, could now be deemed acts of espionage if it serves the interests of authorities.
In summary, these recent crackdowns on data access will significantly alter the business practices that multinationals have become so accustomed to in China. It is yet another indication that China has entered a new era in terms of its engagement with the world. While China is unlikely to close its doors again, it is increasingly requiring those who wish to tap into its market to play by its own rules.
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