Cash-starved Japan companies fighting kickbacks at last

Kickbacks are a widespread practice in China.

DALIAN, China -- Japanese companies with operations in this Liaoning Province city in northeast China are finally starting to tackle the widespread local practice of bribery -- by necessity.

     Now that the economic slowdown and higher wages are making it harder to grow profits, businesses no longer can afford to ignore employees who improperly put company money into their pockets.

     "Please don't give bribes to our employees anymore," an official from a Japanese company told an executive at a Dalian-based parts supplier in December. He even asked him to sign a pledge.

     The fraud here refers to the Japanese company's purchasing officers pocketing the difference between actual prices and inflated prices paid by the Chinese supplier. The going kickback rate is said to be 10% in Dalian. This quid pro quo arrangement is an apparently routine industry practice.

     The Japanese company is thus paying more than it should and the employees are clearly committing wrongdoing. But the Dalian parts supplier says ending the practice threatens its business.

     Chinese employees have been engaging in fraud for years but it hardly ever came to light. Managers dispatched from Japan usually stay in the country for no more than three to five years. If a scandal is uncovered during their stints, "the head office would blame it on me and my career would be jeopardized, so I have no choice but to ignore the issue," said the general manager at an autoparts maker.

     Japanese managers face another dilemma. It is not uncommon for local employees accused of misconduct to threaten to divulge corporate secrets or harm their supervisors' families. As a result, many Japanese expats choose to stay out of trouble, thus finding themselves entangled in strange "accomplice" relationships.

     But the recent changes in the economic climate have made it harder to overlook these problems. Japanese companies in Dalian, many of which used to tap cheap labor to produce goods at low cost for shipment back home, were able to afford to overlook wrongdoing as long as they were generating a certain level of profit. As the cooling economy has made it imperative to cut costs, the kickback practice has started to threaten profitability.

     A major electronics company with a factory in Dalian dismissed close to 10 locals last year, mostly for misconduct. "Now employees stiffen whenever they see me," a manager joked. Changing to a serious face, he continued: "If I don't take a firm stand, how would workers with honesty and integrity feel?"

     Masao Eguchi at corporate consultancy GML agrees. "If misconduct is left unaddressed, workers would think that the company is okay with wrongdoing, and it will decay as an organization," he warned.