Kowtow Now

Why foreign companies need to swallow their pride and get used to apologizing to China.

This week, after Apple apologized to Chinese consumers for arrogance and substandard service, a cold wind blew through the foreign business community in China. The American computing juggernaut had made small, dumb mistakes with its customer service policies. It boasted about its revenues in a region where doing so can attract jealousy and scrutiny from the wrong quarters. And unlike other top tech executives, its legendary founder and late CEO, Steve Jobs, never deigned to set foot in the country. But there was no schadenfreude from Apple's competitors, for the leaders of China's global business community understood a simple fact: Tomorrow, or perhaps the day after, that could be them.

Despite 35 years of rhetoric about China being open to foreign business, and explicit promises China made on its accession to the World Trade Organization in 2001, foreign companies in practice have no right to operate in China. China's policy makers -- and no small number of its people -- still maintain that it is a privilege for foreign firms to be allowed to access the Chinese market. Moreover, that privilege may be revoked at any time for a range of reasons, some of which are not laid out in law or on contracts.

One unwritten clause attached to every business license granted to large foreign firms in China is that they are expected to set an example of a higher level of corporate behavior than local firms. A central government official speaking at a conference several years ago was asked what kind of corporate social responsibility activity foreign firms should undertake in China. His answer was revealing: Obey the law, pay their taxes, and treat their workers fairly. Simply by doing that, they could improve China by their example.

At another conference in Beijing some years later, an exasperated young Chinese executive blurted in frustration to her foreign bosses: "Don't you realize? What the Chinese people want from foreign companies is to show Chinese firms how to behave." Technology and capital are not all foreign firms are expected to bring to China: Their standards of corporate citizenship and customer service are also part of the package.

The implications of this insight, lost on many companies operating in China, are staggering. Suddenly, Apple blaming local retail partners for service lapses, for example, or excusing its warranty policy by citing the law of the land offers but the thinnest of fig leafs. "When in Rome, do as the Romans," coming from foreign firms rings in Chinese ears as hollow at best, and at worst, as betrayal. If you are going to behave just like local firms, consumers and government think, then why do we let you do business here? What good are you?

When both foreign companies and local firms are guilty of the same transgression, the foreign companies are better targets. Singling out the abuses of local companies to try to change industry behavior is fraught with political risk: China's complex web of special interests means that officials never know exactly on whose toes they are stepping. Foreign companies, largely lacking political air-cover in Beijing, make for highly visible, politically safe victims in government campaigns to smack businesses back in line. Thus the old Chinese saying: "Kill a chicken to scare the monkey."

When a foreign company makes even the slightest misstep, it becomes a juicy target for opportunistic regulators and petty demagogues alike -- and the more successful those foreign companies, the better. When an entire industry pollutes a river, blame the foreign chemical firm, even if its factory isn't the source of the problem. When there are unsavory practices in the grocery business, go after Wal-Mart and Carrefour. When local restaurants are using cooking oil recovered from the gutter, crack down on McDonald's and KFC. And when dairies are faking protein content by pumping poisonous melamine into the milk, go after the joint-venture dairy. And when consumers complain about poor service from phone manufacturers, make Apple your main target (even though the company now ranks sixth in China's smartphone market).

The payoff for Beijing is superb. The local companies get the message to clean up their acts -- for a while, anyway. The government comes off like a guardian of consumer interests; and the foreign brands get yanked down a notch, if not taken out of the game altogether, meaning bigger market share for domestic firms. Everyone wins -- except the foreign company.

The foreign company has little choice but to apologize for its missteps, and make immediate and thorough (and perhaps somewhat melodramatic) amends. After being caught mislabelling regular pork as organic in its Chongqing stores, Wal-Mart offered an abject apology, sacked its China head of operations, agreed to close its stores for two weeks in one of China's largest cities. After a China scandal around mislabelling of a processor on one laptop model in 2006, Dell not only offered an apology, but also full refunds to affected customers. As Asia Society's Orville Schell pointed out in early April, "Apple may not quite realize it, but the historical aquifers that irrigate any such dispute with an iconic foreign company, are seemingly inexhaustible." Getting into a protracted battle with the Chinese government, even behind the scenes and with consumers on your side, is a road out of China, not into it.

The better course of action for companies is to try to avoid becoming a target. Take the double standard and use it as an advantage by proactively behaving at a higher benchmark: when in Rome, doing as the Christians, as it were. Making China a "most favored nation" by adhering in China to your highest operating standards from around the world -- in finance, customer service, hiring, and ethics -- is not just a nice idea, it is a corporate survival strategy.

The wisest among the multinationals operating in China will take this as a cue to dig deep into operations and root out those actions and behaviors that leave them vulnerable. Start by finding out where and how in the organization Chinese are treated to a lower standard of service than customers elsewhere. Expunge them. Then set a higher standard and force the industry to catch up. Your competitors will hate you. Xenophobes will mumble under their breaths. But you'll never have to say sorry.

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The Ayatollah in His Labyrinth

The competing forces in Iran's political system are poised to collide in this summer's presidential election.

At the heart of Iranian politics there is an irreconcilable tension, rooted in the democratic nature of the 1979 revolution and the undemocratic power structure that emerged afterwards. On the one hand, there is the country's quasi-republican institutions and regular, albeit controlled elections; on the other is the state's guiding concept of god as the sole sovereign, and the Supreme Leader as the unimpeachable manifestation of this divine authority.

The contradictory aspects of Iran's political system are poised to collide in the June presidential election. The testy relationships between the Supreme Leader and elected presidents has long been the most obvious reminder of the tensions within the Islamic Republic: As Ayatollah Mesbah-Yazdi, the closest ally of Khamenei, announced recently, every president since Khamenei became leader 24 years ago -- Akbar Hashemi Rafsanjani, Mohammad Khatami, and Mahmoud Ahmadinejad -- has lacked a firm enough belief in his divine mandate. In the coming election, the Supreme Leader has the difficult task of ensuring the election of a pliant president without provoking the rise of uncontrollable domestic discontent.

Three different sources of tension threaten to make this election problematic for the Islamic Republic. First, the widening rift between Ahmadinejad and Khamenei -- supported by his allies in the Islamic Revolutionary Guard Corps (IRGC) and the conservative clergy -- is increasingly hard to hide, even manage. A key element of this feud is Ahmadinejad's effort to not only challenge the authority of Khamenei, but to ensure the election of his own hand-picked successor -- Esfandiar Rahim Mashaei, who at one time held 14 important posts in the government and is also father-in-law to the president's son.

For a long time, it has been the common lore of Iranian politics that Ahmadinejad and Mashaei are planning to do a Dmitry Medvedev-Vladimir Putin duet in Iran, swapping the presidency back and forth between each other. The conservative clergy, including Khamenei himself, have in the past openly objected to Mashaei, accusing him of all manner of malfeasance and disreputable views -- particularly the belief that Shiism's 12th Imam has been directly guiding and managing the affairs of the Ahmadinejad camp. As conservative clerics never tire of claiming, such "contacts" and "guidance" from the 12th Imam are the monopoly of the Supreme Leader -- and a critical source of his claimed legitimacy.

Money will be a key weapon in this struggle for power: According to sources inside the regime, Ahmadinejad has amassed billions of dollars in a slush fund to use in the upcoming election. In an unprecedented act, the government's own intelligence minister -- who Ahmadinejad had fired, but was then reinstalled by the special order of Khamenei -- warned last month that government funds might be used illicitly in favor of one candidate. The government also announced a plan to hire hundreds of thousands of new employees, a move denounced by Ahmadinejad's opponents as an attempt to place his supporters in areas needed to ensure his victory. The hiring spree was subsequently declared null by the Government Accounting Office, which added that governors who hire anyone will be prosecuted.

The vitriol between the Ahmadinejad and Khamenei camps is only getting worse. Some in the regime have accused Ahmadinejad of being in secret negotiations with not just the United States, but with the domestic opposition. High-ranking officials in the regime's security and intelligence apparatus have warned of planned disturbances even larger than those after the 2009 election, where an estimated 3 million people came out in Tehran to protest what they considered Ahmadinejad's rigged reelection. This time, the officials claim, the "troubles" will begin in smaller cities and spread to the capital.

Ahmadinejad has proved his willingness to strike back against his rivals. The president's camp is reported to have many potentially damaging documents and recordings from prominent members of the regime, giving the upcoming election a peculiar air of theatrical and political anticipation. The show has, in fact, already begun: In February, Ahmadinejad played a recording in the Majlis that purported to show the speaker's brother asking for kick-backs.

Considering the increasingly harsh criticism of Ahmadinejad by high-ranking members of the IRGC and the president's continued defiance of Khamenei, there is even a low possibility the president might not be allowed to finish his term. Last month, the Khamenei-controlled state television broadcast a half-hour documentary ostensibly about the impeachment of the Islamic Republic's first president, Abolhassan Banisadr. However, many saw it as a direct warning to Ahmadinejad that a similar faith might await him if he continues on his current path.

The second source of tension revolves around whether reformists will be allowed to participate in the election -- and even if they will want to. If they do participate, the question will be who they are allowed to field as a candidate. Khamenei recently met with a delegation of three reformist leaders, and 18 reformist groups subsequently asked for another meeting with the supreme leader -- indicating at the same time their view that the only viable candidate who can help navigate Iran through this period is Mohammad Khatami. Some reformists have also named Rafsanjani as a possible compromise savior.

Many in the reformist camp have hinted that freeing reformist leaders Mir-Hossein Mousavi, Zahra Rahnavard, and Mehdi Karroubi -- who has been under house arrest for their role in the 2009 protests -- is a precondition of their participation in the election. Clearly Khamenei and the IRGC have to make a cost-benefit analysis: Does the domestic discontent, the increasingly dire economic situation, and their international isolation pose enough of a threat to justify bringing Khatami or Rafsanjani -- two men they have vilified in the past four years -- back into the fold? Or would such a tactical retreat only bring them embarrassment and signal their weakness?

Khamenei and his allies could, of course, allow a nominally reformist candidate -- one with little name recognition or charisma -- to run. Such tokenism might help fulfill the regime's stated goal of engineering a large voter turnout: the head of the National Police said that according to their surveys, a minimum of 60 percent of voters -- but more likely around 70 percent -- will participate in the upcoming elections. The fact that local council elections are slated to take place at the same time as presidential election is also intended to increase voter turnout.

There is clearly discord in the current regime over how to proceed. Two of the most important IRGC commanders have recently been replaced -- one was in charge of the IRGC's university, and the other was in charge of one of the IRGC's most important economic conglomerates, a firm called Khatam al-Anbia that is engaged in everything from building roads to defense to oil and gas pipeline construction. Moreover some of the more radical elements of the IRGC continue to insist that reformists of all hue are "tools" of American, British and Israeli designs to defeat the Islamic regime. 

The third source of tension in this unfolding saga is the behavior of the candidates clearly favored by Khamenei and his allies. This troika calls itself the 2+1 Coalition, and is made up of Ali Akbar Velayati, for many years Iran's foreign minister and now a senior advisor on foreign relations to Khamenei; Mohammad Bagher Ghalibaff, the mayor of Tehran and former commander of the IRGC's air force; and Gholam Ali Hadad Adel, Khamenei's son's father-in-law. Each of the three has carved out a niche for himself: Velayati markets himself as the experienced, pragmatic foreign policy hand, Ghalibaff is a capable manager of the economy, and Hadad Adel's claim to fame is his proximity to the leader. There are a disproportionate number of "fathers-in-law" in critical positions of authority in Iran -- a subject that might one day deserve a study of its own.

The coalition appears poised to present a united front in the coming election. Velayati recently announced that the group will soon announce their candidate for the presidency, and said that they are already in the process of forming a cabinet - which, he added, will surely include the two other members of the coalition.

While the troika has positioned itself as closest to the Supreme Leader and most subservient to his wishes, there are at least two other announced candidates who consider themselves part of the same "Principalist" camp: The longtime IRGC commander Mohsen Rezaei and the colorless former Foreign Minister Manouchehr Mottaki, who was embarrassingly fired from his job while he was negotiating in Africa. There is almost no chance that either will emerge as a serious candidate in the months ahead.

There is one more important factor to consider: The outcome of the upcoming election is related not just to normal domestic feuds, division of spoils, and concerns about the level of discontent in society, but also to the regime's international policies. The nuclear negotiations and sanctions are forcing the regime to make tough choices -- to either go down the path of some accommodation regarding its nuclear program, or further entrench its defiant posture.

Some of the reformists have indicated that the burden of proof of the peaceful nature of the country's nuclear program now rests with Iran, due to its past mismanaged policies and reckless statements. Thus, they favor more intrusive and comprehensive inspections. But even advocates of the status quo seem poised to accept more limited stockpiles of 20 percent enriched uranium and more flexibility in allowing inspections, in return for an end to sanctions. The latter group, led by Khamenei, is really insisting that whatever the nature of a possible agreement, the Islamic regime must be allowed to declare victory.

No matter the outcome of the coming election, Khamenei and the IRGC will still hold the key levers of power in Tehran. But who will be allowed to participate -- and who will be allowed to win -- will be a crucial sign in understanding the labyrinth of power in Iran, as the regime prepares to tackle its mounting domestic and international problems.