Rio Tinto is a massive Anglo-Australian mining conglomerate that spans the globe. Its 71,000 employees are spread over seven core businesses, operating in 25 countries and selling products around the world.
The rise of China and its appetite for steel created a massive opportunity for Rio, BHP and Vale, the mining triumvirate, who together account for 72 percent of the world’s iron ore export supply.
By 2009, China accounted for half of the world’s steel production and was importing more than $20 billion worth of iron ore from Australia alone. China’s demand roiled the markets, creating record high prices and supply shortages. The fact that China was on a building and infrastructure binge, fueled by its domestic stimulus program, intensified the maelstrom. The jockeying between competitors in the steel business was intense, as the profits everyone was making were huge.
The large players on the supply side, including Rio, sought to use their bargaining position to lock in profits using long-term supply contracts. China, as the world’s largest buyer, was trying to expand its footprint on the supply side, through exploration, development and acquisition. With a per capita resource ratio which ranks it near the bottom 100 of nations around the world and ambitious expansion plans, China was not anxious to leave its economic future to the tender mercies of a market dominated by a threesome of foreign players.
One part of China’s strategy has been the massive investments in Africa, where its “infrastructure for resources” pitch has garnered many takers, if not major profits so far. The second prong has been to buy shares in market players like Rio. The difficulty is that China’s acquisition overtures have run into the national interest concerns of countries like Australia, the United States and Canada – countries that are reluctant to have their resources economically colonized. In Rio’s case, it is probably more of a cultural bias as it is an international conglomerate, listed in both Australia and the United Kingdom, which did not seem to bother anyone until China entered the picture.
The game
In July 2009, four members of Rio’s China team, Stern Hu, an Australian of Chinese heritage, and his Chinese colleagues Liu Caikui, Ge Minqiang and Wang Yong were detained. They were responsible for tracking industry information and managing iron ore term contracts. In August 2008 they were arrested and charged with stealing confidential information and taking bribes.
After much diplomatic saber rattling, complaints about the opaque legal system and selective prosecution, by the international press, Kevin Rudd and the Australian government, all four pled guilty to accepting bribes and theft of commercial secrets, and were promptly disowned by Rio.
Apart from Wang’s case, the bribe payers were all from small and medium-sized private steel mills seeking access to high-quality ore on long term contracts, rather than being forced to pay spot market prices.
Playing loudly in the background of these events was the collapse of an offer by the Chinese state-owned aluminum firm Chinalco, which had sought to increase its stake in Rio from 9 to 18 percent. The deal was rebuffed under pressure from the Australian government.
Rio continued doing deals in China. Shortly after the conviction, Chinalco and Rio entered into a joint venture agreement to develop an iron ore project in Guinea.
The Lesson
Rio made a couple of mistakes. First, they clearly were not supervising their staff, if four of their most strategically important personnel were routinely soliciting and receiving bribes. Second, they failed to grasp that in strategically sensitive areas it is a very bad idea to cause a loss of face to your Chinese suitor. In the end, Chinalco got a part of the Guinea iron ore project, but it would have been far better if Rio had vetted its proposed sale to Chinalco at the beginning, or structured their participation in a way which would have been more palatable to the Australian government and people.
Big players who come to China have to remember that “local rules” are in effect. In the vast scheme of things, the bribes received by the Rio Tinto employees was not the issue, but that does not excuse their actions and in the end it cost Rio a lot of headaches and probably a few concessions on their joint venture deal with Chinalco. The moral is: supervise your staff because their sins could end up costing your company.
On a side note, this case indicated clearly that the routine rule bending and law breaking, which many expats had taken for granted as acceptable under “local rules,” could and would be used against them and their companies, a trend which has been continuing. Also, for those who get involved in illegal activity in China, given the number of laws against corrupt practices, do not count on your company coming to your rescue if you get caught.
Einar Tangen, formerly from Milwaukee, now lives and works in Beijing, China. He is an adviser to Heilongjiang Province, Hebei Province QEDTZ, China.org.cn, China International Publishing Group, Beijing Baotong and DGI DESIGN. He is also a weekly public affairs commentator for CCTV News’ Dialogue and the author of “The Kunshan Way,” an economic development history of China’s leading county level city. While in Milwaukee, he was a partner at Jackson, Morgan and Tangen, president of E-Tech and a senior vice president at Stifel Nicolaus. He chaired various boards in Milwaukee and was a member of the Federal Home Loan Bank of Chicago. Readers who would like to submit questions or suggest areas of interest can send an e-mail to steve.jagler@biztimes.com.
