A cautionary tale from China - one company’s experience of fraud highlights the potential pitfalls of doing business in China

[mawilson 2,133]

Raiding his own company’s Beijing headquarters with the help of lawyers and a police escort

was not what Heinz Zuercher had in mind when he agreed in March to take over as chief

executive of Frankfurt-listed Business Media China.

But that is where he found himself in early June as he and another German manager broke

into the finance department while a group of his employees barricaded themselves inside

and hid under their desks.

The impromptu raid turned up a raft of evidence showing that a group of BMC’s senior

Chinese managers had – unbeknown to BMC’s German managers – set up their own company

within the advertising and exhibition business and, Mr Zuercher and the rest of the company’s

management claim, siphoned off its most lucrative advertising contracts.

“We’d been tipped off anonymously by one of our staff that some executives had set up this

secret company and were taking all of our clients,” explains Mr Zuercher, who is due to face

shareholders tomorrow at BMC’s annual meeting.

The case, which is under investigation by the Beijing police, involved at least seven senior

executives and has brought to its knees a company that controls billboard advertising at

dozens of China’s largest railway stations and airports.

Corporate identity theft is not nearly as common as intellectual property infringement or

outright bribery in China’s robber-baron economy. But the brazen betrayal involved in this

case provides a cautionary tale for any company hoping to do business in the country, where

legal protections are rudimentary and local allegiances and networks take precedence over

loyalty to foreign shareholders.

“There is an attitude among many in the Chinese business community that foreigners are

rich and stupid and therefore fair game; that deceiving them is somehow acceptable in a

way it wouldn’t be if they were Chinese,” says one intellectual property lawyer who has

worked in China for nearly two decades, who asked not to be named to avoid repercussions

for his business.

Business Media China was established in Germany and China in 2004 by Klaus Hilligardt, a

67-year-old engineer turned successful businessman from Stuttgart who sold his Germany-

based advertising and exhibition company to Frankfurt Exhibitions in the late 1990s, and then

turned his attention to China.

This was meant to be his swansong, the final triumphant business foray before retirement.

He felt he was well prepared for the “wild east”: he had been to China repeatedly and had

an affinity for Asia, having lived from 1967 to 1972 in Japan as a representative for Traub,

the German machine tool maker.

Mr Hilligardt believed in putting local Chinese in charge of his business, not only because they

spoke the language and understood the market but because they had connections and got

things done.

“My management philosophy was one of mutual trust and harmony, a merging of European

quality standards and discipline with Chinese drive and knowledge of the market,” he says,

sitting in his plush Beijing office surrounded by contemporary Chinese art. “I realise now

that the key to everything in China is not harmony but control.”

In daily business operations, Mr Hilligardt relied heavily on Li Yangyang, a young executive

he recruited from the China Hairdressing and Beauty Association in 2003, at the tender age

of 24, and groomed as his intended successor.

“I made him into who he is today; he was my partner from the start and he had my full trust,”

Mr Hilligardt explains.

In his private life, Mr Hilligardt, who does not speak Chinese, was completely reliant on his

secretary since 2001, Teresa Tu, whom he hired after she served as his assistant on an

earlier trip hunting for business opportunities in China.

According to Mr Hilligardt, Ms Tu managed many of his business dealings, his personal

finances, his shopping, accommodation and transport and also handled a number of his

personal investments.

A romance sprung up between Ms Tu and Mr Li after he joined Mr Hilligardt’s company,

and in April 2006, they married.

Mr Hilligardt says now that he felt somewhat uneasy about the control over his life that the

newlyweds enjoyed but he did nothing at the time because he trusted both implicitly.

With a war chest of nearly €40m ($57m £35m) raised from a backdoor listing on the

Frankfurt stock exchange, BMC expanded quickly in China, buying advertising concessions

and the rights to run large exhibitions such as the China Beauty Expo in Shanghai. “Our

exhibitions were always very profitable and in general you could say our business was

very successful,” Mr Hilligardt says.

But some of BMC’s other employees were uncomfortable with Mr Hilligardt’s hands-off

management style and the influence exerted in particular by Mr Li, who had recruited

many of his former university classmates to work for the German company.

“Under Mr Hilligardt you could do anything in this company except challenge the positions

of Teresa Tu and Li Yangyang,” says one BMC employee who asked not to be named.

“Li controlled everything and when he attended meetings the only thing missing was a

pinky ring and a cat in his arms.”

Present and former employees of BMC describe numerous situations in which Mr Li and

his former university classmates would flatter Mr Hilligardt, praising his Chinese language

ability in spite of the fact he could barely say anything and telling him that no other

foreigner understood the country like he did.

According to two employees, Ms Tu and Mr Li also introduced Mr Hilligardt to Lillian, a former

model in her early 40s who they say became his mistress. Mr Hilligardt declined to comment.

“He was a vain old man who trusted the wrong people,” says one BMC employee. “They built

up a world around him in which he felt safe and he didn’t see the problems in the business

because he didn’t want to see them.”

By early 2008, the business was doing well, shareholders were happy and BMC’s stock was

trading above €20. The stock now trades at about €0.40.

“Everything looked super but soon after the Olympics everything broke down,” says Mr Hilligardt.

“We thought it was the [post-event letdown] but I now know that my top Chinese executives

set up a shadow company and were taking our business for themselves. I blame myself for

this mess but this possibility never even crossed my mind.”

Advertising contracts for BMC’s billboards dwindled in the second half of last year and virtually

disappeared at the beginning of this year but the Chinese headquarters kept requesting more

funds from the German parent.

The board of directors in Germany then lost confidence in Mr Hilligardt and Mr Li, who was by

now a board member in the German parent company, and forced them to retire from the board.

Mr Zuercher, a prominent Swiss entrepreneur with extensive experience in Asia, was brought

in as chief executive officer in March by directors concerned at the company’s mounting losses.

When he joined, it appeared that BMC had lost most of its clients and was barely able to pay its

bills. But after the anonymous tip, Mr Zuercher visited the central Beijing railway station and

found the place covered in advertisements from clients the company had supposedly lost.

That was when he mounted the raid and found marketing material and other documents indicating

that seven former and current employees of the company’s advertising subsidiary, including

Mr Li and his former classmates, had set up a shadow business in August 2008, called BMC Heli.

This company even used a logo that was almost identical to BMC’s.

Mr Li and the other six executives did not respond to repeated requests for interview but Mr Li

did claim that BMC Heli was an agent for BMC and that it helped the company to sell advertising.

Two of BMC’s Chinese sales staff say they were informed in January by Chinese executives

involved with the new company that the German parent had set up a new subsidiary and that all

advertising contracts were now to be signed with BMC Heli. They also claim they were warned

in mid-May not to mention any of the contracts to the foreigners and if the Germans asked, they

were to say they had no clients.

A contract produced by BMC Heli when contacted by BMC lawyers appears to show that it paid

BMC Rmb4m ($585,462, €412,000, £354,948) for the right to sell all the advertisements and

keep all profits for locations that cost BMC more than Rmb30m in licence fees – a suicidal

business proposition for BMC.

Mr Hilligardt and every other German manager at BMC deny any knowledge of this contract or

of BMC Heli.

“It appears that at least since the start of this year, BMC was paying all the costs while this

shadow company was earning all the money,” Mr Zuercher says. “BMC was even paying that

company’s travel costs, printing costs and most of their salaries.”

As details of the case emerged, Mr Hilligardt claims to have discovered evidence that Ms Tu, his

trusted secretary, had used fake receipts to embezzle nearly €1m in the process of purchasing

two imperial courtyard houses in Beijing on his behalf.

Ms Tu has been in police custody since June 12 on charges of embezzlement and her detention

has been extended until at least mid-September while prosecutors build a case against her.

“These sorts of cases are what make people skittish about doing business in China,” says James

McGregor, author of One Billion Customers, a bestseller on how to do business in the country.

“But what this shows you is you can’t maintain a business by remote control in China and expect

other people to run your company in your best interests.”

For Mr Hilligardt, it a lesson he learned the hard way.

link

[Ban Hammer 14,271]

ouch!

[alienlovechild 75]

There is an attitude among many in the Chinese business community that foreigners are

rich and stupid and therefore fair game; that deceiving them is somehow acceptable in a

way it wouldn’t be if they were Chinese,” says one intellectual property lawyer who has

worked in China for nearly two decades, who asked not to be named to avoid repercussions

for his business.

The Chinese call it something like, "You can always fool a foreigner". Americans are richer and stupider than most in the eyes of the Chinese.

[Heracles 417]

Well it's American boards that sent jobs over there to save a dime. I am sure Matt has no qualms with this.

The Chinese are now milking these companies for knowledge which explains their rapid climb in production quality and engineering. You cannot go from nothing to where they are now and as quickly as they did without cheating.

That country has all of the plants so they have us by the balls in that sector.

Edited July 27, 2009 by haza

[Nagishkaw 510]

That was one long azz article.

[Peikko 1,575]

It's a wierd one. He doesn't speak Chinese and yet he chooses two people to trust implicitly who end up getting married to each other and it doesn't alarm him? I thought big business people put in more checks and balances than that ordinarily...oh well. Ouch indeed

[SuperDuper! 230]

I don't care what that article claims. I still think very highly of the Chinese people.

[mRx 16]

Well it's American boards that sent jobs over there to save a dime. I am sure Matt has no qualms with this.

The Chinese are now milking these companies for knowledge which explains their rapid climb in production quality and engineering. You cannot go from nothing to where they are now and as quickly as they did without cheating.

That country has all of the plants so they have us by the balls in that sector.

If this "screwing foreigners" is a common staple among the Chinese entrepreneurs (which I highly doubt), then it follows logically that China could lose some significant ground in the globally-competitive economies.

Surely, a man with your credentials and 6-figure salary realizes how quickly foreign investment capital can flow and drain from countries.

[justashooter 430]

If this "screwing foreigners" is a common staple among the Chinese entrepreneurs (which I highly doubt), then it follows logically that China could lose some significant ground in the globally-competitive economies.

the article describes what happens when young people in china get too much power too soon. they don't have the discipline to share the take, or keep the take small enough that it stays under the radar, or treat others in the network with adequate respect. most corrupt chinese are older than the ringleaders in this scam, and are less self centered, understanding that the web is wide, and that it needs to be fed at all levels.

living in china for 4 years and being responsible for $25M product per year, i saw this kind of corruption often, and saw what happened when people got greedy. sometimes they would end up face down in a corn field with the back of their head shot off (literally). sometimes they would just end up in prison, if they hadn't managed to escape to canada.

chinese people are great to interact with if you are part of the "family". family includes business acquaintances you are interdependent with, and close friends. if you are seen as an outsider, though, they have no compunction about taking everything you have, but will usually do it slowly enough that you don't cut the cords before the wealth is sapped.

some of my best friends are chinese, but i am wary of those who are not my friends. the chief engineer in my field office in luoyang has my implicit trust, as does his number 2 and their assistants, but the vendor they monitor for me i do not trust except to delay and attempt to re-negotiate price.

that being said, the world is full of naive people, and western bean counters will continue to push businesses into china in a failed attempt to serve the interest of shareholders. those that warn of the dangers will be cast aside and seen as " obstructing the path to huge profits". china will continue to grow and to exploit western business at every opportunity.