Political Crisis Poses Ethical Challenge for U.S. Firms in China

Among American business leaders in Hong Kong, the ethical dilemma of doing business in China has taken the form of an unsettling riddle:

The chairman of an American corporation has come to China to check on operations. While there he meets with Premier Li Peng, a key member of the Chinese leadership that ordered the bloody crackdown on pro-democracy demonstrators.

What would you advise the chairman to do if he were asked to shake hands with Li Peng?

“The answer is always universal silence,” said Jamie Horsley, a Hong Kong-based attorney who represents IBM, Amoco, H. J. Heinz and other companies in negotiations with the Chinese. “No businessman wants to appear as if he condones the Chinese government’s actions.”

The military assault on pro-democracy students in Tian An Men Square three weeks ago and the subsequent arrests and executions of demonstrators have caused a soul-searching among corporations doing business in China that has not been seen since South Africa and apartheid forced corporate America to examine its conscience.

From branch offices in Hong Kong to boardrooms in Southern California, companies doing business in China are grappling with several knotty questions implicit in the riddle:

Is there a course that is both ethically appropriate and fiscally prudent? Is there a valid distinction between the state and the people? Does the presence of U.S. firms in China benefit the people or a repressive government?

“It’s a very delicate situation,” said Stephen Wai, director of business development for Allergan in Irvine, which has two joint ventures in China to manufacture contact lenses.

“On the one hand, you want to show you deplore these kinds of activities in China,” Wai said. “At the same time . . . I believe most businesses are trying to bring economic progress to the whole Chinese country and its people, not to the government.”

After years of negotiations to get into China, few corporations want to leave and forfeit the chance to do business in theworld’s largest untapped consumer market. Neither do they want anyone to think they support the brutal suppression undertaken by leader Deng Xiaoping and Li Peng.

“Business people are thinking about the ethical questions. There is meeting upon meeting upon meeting being held by people trying to decide how they can do the right thing,” said Lois Dougan Tretiak, chairman of the China Commercial Relations Committee of the American Chamber of Commerce in Hong Kong.

Some 200 American companies doing business in China have pulled out their non-Chinese employees, and at least some have temporarily shut down operations. So far, few have returned. “If they were simply motivated by money, they would have gone back into China already because the shooting has stopped,” Tretiak said. “There are ethical concerns here that go far beyond just the decision of how to make a buck in China.”

Time and again, businessmen and analysts compared the current ethical crisis in China to the moral quandary presented by South Africa’s policy of apartheid. During the 1980s, a strong anti-apartheid movement resulted in severe economic sanctions and a divestiture movement that swept many firms out of the country.

Right now, most business leaders say they are taking their cue from the Bush Administration, which has admonished the Chinese leadership while emphasizing the need to maintain a relationship.

Bush has cut high-level contacts between the two nations and ordered action to block China’s access to loans from international financial institutions. But many members of Congress have criticized Bush for not taking a tougher stand.

High-level managers of several Southland companies said they wish to remain in China and believe their presence there will ultimately benefit the people--the same refrain companies used regarding South Africa--but they expect pressure from shareholders and religious groups.

Timothy Smith, executive director of the Interfaith Center on Corporate Responsibility, a New York coalition of 240 church investors, says they are right.

“We believe that U.S. corporations doing business in China need to be carefully watching the human rights situation there,” Smith said. “Why, if in South Africa U.S. companies are vigorously challenging the government for its apartheid policies and vigorously criticizing it for human rights abuses, why won’t they or can’t they apply the same standards in a situation like China.”

Smith’s concerns are not entirely falling on deaf ears.

“Obviously, we need to re-evaluate the situation,” said Gene Lu, president of Advanced Logic Research Inc. in Irvine. “I’m not really happy with what’s going on over there.”

The ethical issues engulfing corporations doing business in China touch a corporate nerve, and plenty of companies--McDonnell Douglas, Fluor and Occidental Petroleum among them--refused interview requests on the subject.

Few, however, echoed the feelings of a spokesman for Walt Disney Co. in Burbank, which sells the cartoon program “Mickey and Donald,” broadcast in China. “Frankly, it’s nothing to concern ourselves with,” said Erwin Okun, a Disney representative.

Make Distinctions

Executives said they are trying to figure out a way to satisfy conflicting needs--namely, the desire to protect their own image, the Chinese citizens working for them and the millions of dollars they have invested in China.

Like Allergan’s Wai, many in the business community distinguish between the regime of Deng Xiaoping and the people of China, whom many business people have worked with and befriended.

“We’re not doing business with murderers,” said William Conlin, president of Calcomp in Anaheim. “We’re doing business with Chinese oil companies, with construction companies, with people like you and I.” Calcomp sells computer graphics equipment used in the exploration of oil and minerals.

Conlin, Wai and others believe their presence will ultimately help China’s people get back on the path to economic and political freedom.

“Business people are the best diplomats,” said Hong Kong attorney Horsley. “By setting up a factory and working among them you are spreading ideas among the people. Businessmen are great carriers of democracy and Western ideas.”

“The question is a long-term one,” said Paul Freedenberg, former undersecretary for export administration at the Commerce Department. “By staying there, can you help the economic reform which will lead to political reform?”

Some Skepticism

Louis Rosso, president of Beckman Instruments in Fullerton, which sells medical instruments in China, said the answer is a resounding yes. “I’ve been at this for 31 years. I think that one of the better ways to communicate with people and to establish bonds is through commercial endeavors.”

But the argument that firms are in China for the good of the people is received with some skepticism.

“I don’t think they enter with the idea of helping the populace,” said Mary Ann von Glinow, a USC professor specializing in China and business ethics. “I think they enter with the idea of making money and having a long-term presence in China. After the fact it’s a nice way to rationalize.”

Whatever action companies take--short of pulling out--is bound to attract the attention of shareholders and not only for ethical reasons.

“By staying, are we getting ourselves into a deeper situation of instability, hurting our own shareholders?” asked Freedenberg.

Several mutual funds that advertise ethical investing policies said they intend to raise the moral issue of doing business with China.

Jon Lickerman, research analyst with the Working Assets Money Fund in San Francisco, said the fund’s board this August will reconsider its list of unacceptable countries for companies to do business in. Firms doing business in those nations will be dropped from Working Assets’ portfolio.

“China will come up,” Lickerman said. “It will be something we will be discussing.”

The Chinese government has gone to great lengths in the last week to pressure American corporations into returning.

But their continuing executions of dissidents has business people worried that public opinion at home is against a return.

“People in China don’t realize the role of the shareholder in American companies,” said Tretiak. “They think the CEO rules by fiat.”

For now, it appears most business people will continue to look to the Bush Administration for direction. “We are very much a company that will follow the direction of the Commerce Department,” Lu said.

Rosso of Beckman goes a step further. “We (the U.S. government) haven’t even decided to cut off diplomatic relationships,” Rosso said. “On that basis, one could feel quite comfortable by going ahead on a commercial basis.”

Of course, should the situation in China worsen, the issue of right and wrong may become as clear as black and white.

“Obviously, you are dealing with a regime many Americans find abhorrent at the moment,” said Freedenberg. “If the regime continues to be oppressive and brutal, it’s going to be hard for a lot of companies to stay there.”

CHINA’S BRAIN DRAIN

Many of the best and brightest young people are studying abroad and reluctant to return to China. Part I, Page 1