Rio & China’s Arrested Development

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The big China / corporate / M&A story of recent times was Chinalco’s bid for Rio Tinto (see here, there and everywhere). As we reported, the deal fell through – to the dismay of many in China. The state media made “The Perfidy of Rio” sound like sour grapes.

Now there has been a more serious turn, with the arrest the Rio iron ore sales negotiating team in China on charges of stealing state secrets (which can be defined after the fact).

From a business perspective that is bad enough, but add in the fact that one of those detailed is an Australian citizen, and that there were issues over communications and access, and it becomes a diplomatic incident. And there are few who fail to link the failed bid for Rio with the current crisis.

The details of the case are not clear – the actions may or may not have been sanctioned at high levels of government, and there may or may not have been bribery involved in obtaining the “state secrets” – but is very clear that the story is bad for China and bad for business.

It is bad for China because it creates uncertainty and risk for international businesses at a time when China is actively seeking to invest in politically sensitive resources in places like Africa, South America and…Australia. At a time when China seemed to be making progress (having learned the lessons of the failed Unocal bid) this seems like a significant step backwards, and one that could end up frustrating some of China’s more aggressive plans. Some would also suggest that it is good business maintain good relations with key suppliers.

People doing business in China are worried about the implications of what has happened in this case.

Business intelligence gathering is common, especially when the stakes are so high. Many companies chose to outsource it as it can be quite sensitive, and as they might not want others to know they are the ones asking the questions. Doing it in-house can carry commercial or reputational risks.

It often involves speaking to industry players and government contacts at a high level. Sometimes information is shared through the guanxi network, sometimes people are paid to go out and do field research (hopefully within a responsible framework – we have turned down “improper” offers in the past. But more on that another time!). Bribery is not allowed, so is not a good idea.

Foreign companies (especially big ones in sensitive sectors) in China, for whom the mantra has long been “localize”, may now wish to review their risks, and to ensure that they have a crisis management plan in place in case people in senior positions get detained – and to consider whether they can accept the risk posed by any of these people being Chinese, as they cannot be offered consular protection. That was a lesson learned by one of the oil majors some years ago when their Chinese chief representative was detained, again on the “state secrets” charge (if memory serves, State Council position papers on a big investment were involved).

Perhaps the most surprising thing in all this is that the “state secrets” supplied to the Rio team did not come pre-packaged with some strategic mis-information to assist the Chinese negotiation. After all, China (if we are to believe what we read) is also not new to the game of business intelligence gathering. Then again, who is?

See news links, as reported on our ChinaBlogTweets Twitter feed below:

• #Rio RT @DanHarris: Must read NYT article on China Rio Tinto arrest. Quotes my law partner, Steve Dickinson! http://is.gd/1wGLt #China

• Risk & #Rio “Hudunit”! RT @TheLexColumn: The detention of a Rio exec shows China is ill at ease… http://tinyurl.com/loue6z 1:40 PM Jul 10th from TweetDeck

• In China “state secrets” can be what the state states #Rio http://bit.ly/ioFr 8:37 AM Jul 10th from TweetDeck

• Bribery allegation and policy breach are key issue sRT @sinostream: http://xi.gs/06gC Gov’t: Proof against Rio Tinto spies sticks 7:35 AM Jul 10th from TweetDeck

• State secrets? Or business intelligence? RT @chinaherald: China confirms Rio Tinto staff arrests – Reuters http://tinyurl.com/n5rxzo 8:15 AM Jul 9th from TweetDeck

• …in that case it was a reminder of localization risk, and the need for consular protection for key execs (Rio’s Hu is Australian). 6:01 PM Jul 8th from TweetDeck

• Rio China update – espionage? Bloomberg: http://bit.ly/NIS80. Reminder of a big oil co some years back…5:59 PM Jul 8th from TweetDeck

• The Rio plot thickens – Business Day: Rio Tinto iron ore sales team arrested in China http://bit.ly/47YaYC 3:38 PM Jul 7th from TweetDeck

One Response to “Rio & China’s Arrested Development”

  1. Administrator Says:

    A useful note on the legal background from China Law Blog: http://www.chinalawblog.com/2009/07/chinasriotintoarrestsevery.html. It may indeed just be a criminal case of theft and bribery. The lack of transparency, and use of a “spying” charge, have not helped the Chinese case though.

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