The future of the burgeoning research sector in China has been pitched into uncertainty by a new ruling requiring all firms engaged in polling, surveying or general investigations to register with the government.
The Chinese market's opacity has generated huge demand for the service of a range of companies from pollsters to corporate investigators. However, unregulated growth in the Yn550m-a-year industry has drawn the attention of officials who have evoked a pressing need to protect 'state secrets' as a pretext for forcing market research and investigation firms to accept supervision of their activities by the State Statistical Bureau (SSB). The bureau has become the designated gatekeeper of all sensitive market information and will, at least in theory, have the right to approve all surveys before even the commissioning clients get to see them.
The new central government regulations require that all market research projects conducted on behalf of foreign firms must first receive approval to operate from the SSB. A second stipulation of even greater concern for international companies trying to enter the fragmented Chinese market is that all the results of research projects must first be submitted to the SSB for review.
Value lies in exclusivity
The new rules were first published in August 1999 and took effect in the middle of November. While the measures will add to the catalogue of obstacles that overseas businesses must face in trying to get a foothold in China, the implications are potentially much more far-reaching than simple additions to the bureaucratic maze.
Information on the subtle aspects of any market, for any product, is a valuable commodity. Sensitive information about aspects of a potential market, such as demand, perception of brands, consumption patterns and the impact of marketing campaigns, is valuable in all markets but especially so in China, where the consumer market is still in its infancy and the risks faced by foreign businesses are high. This makes China market research especially valuable but the premium lies in the exclusivity of the information.
Officials have estimated that the 800 research firms in China generate a total revenue of Yn500m. Industry executives credit market research organisations with helping to bring about the rapid development of the Chinese economy since the market reforms were launched in 1978.
Doubts over confidentiality
Mr. Richard Burkholder, director of world-wide operations for Gallup, said recently that the new rules raised many questions about "whether the findings of surveys will actually remain proprietary and confidential or whether they will be vetted or at least made available to the competition."
Gallup had not been asked to submit survey questions or results when conducting national polling in 1994, 1997 and 1999, Burkholder commented. But his company "will play by whatever the rules are" for future surveys.
Chinese officials justify the new regulations by saying they are aimed at regulating the market and raising the standard of survey companies. "What we want to rectify with the regulations are surveys that are harmful to state security and the public interest," said Xiong Zhennan, the director-general of the SSB's policy and regulations department. According to one official in the department, implementation of the ruling will be enforced slowly. There are currently just four officials who have responsibility for the new policy.
The ambiguity of the rules, however, has cut to the heart of how foreign companies lay the groundwork for entry into the China market. "You've got to do your homework and figure out the right entry strategy into this market. There's just no other way," says one foreign businessman with more than a decade's experience in China. "That means being able to do research to figure out who you are dealing with, to check out your partners, to get information on the local political situation like who's paying off who and who is vulnerable to being purged."
Analysts now assume that this sort of due diligence, as well as potentially sensitive questions regarding quality of life expectations, will be proscribed under the new rules.
Under normal circumstances, market information is treated with extreme sensitivity. Only certain members of a company's staff are permitted to see it, and confidentiality clauses are added to employment contracts to ensure the information is not leaked. In China, the need to maintain confidentiality is enhanced because corporate fraud and industrial espionage are widespread.
Intellectual property theft is rampant and proprietary information carries a high price. It is not unusual for local employees with access to distribution networks to divert sup-ply lines to other factories in which they have a financial stake. Illegally produced compact discs, replica football kits and Hollywood blockbuster videos, to name just a few examples, are sold in huge volumes on Chinese streets, produced at parallel factories to joint venture operations. Many genuine products are routinely diverted to the black market.
Executives who check into expensive hotels and proceed to make deals via the business centre are often surprised that sensitive details are picked up by rivals, having been stolen and sold by hotel staff who intercept faxes or break into laptop computers left in rooms. As Transparency International reported in the autumn, China tops its Bribe Payers Index of countries where businessmen are most willing and likely to pay bribes.
Cancellation of research plans
In this environment, the fear is that market research will disappear out the back door of a Chinese government department responsible for vetting its contents. Rarely are culprits caught as collusion often goes right to the top. Compensation for the loss is rarely pursued by foreign business people in China.
In the face of regulations that threaten to institutionalise the innate risks, many multi-national firms are cancelling planned market research projects all together. Procter and Gamble, the household consumer products multinational that has conducted extensive market research in China since 1985, has reportedly held discussions with the SSB on how confidentiality can be maintained.
Premier Zhu Rongji has predicted that direct foreign investment in China would fall by US$10bn in 1999 and these constrictive measures are unlikely to help improve matters. Existing foreign investors will be hoping that the government soon realises that the rules are counter productive or, failing that, China's likely entry into the World Trade Organisation in 2000 will force it to comply with international practice.
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