"Western consulting and audit firms that have long done extensive work in China are increasingly caught in rising geopolitical tensions between Beijing and Washington.
Firms such as PricewaterhouseCoopers and Boston Consulting Group are allowed to work there, but are treading a fine line in pursuing business in China. The Chinese government questioned and detained some Western consultants in recent years as it has shrouded its economy in greater secrecy on the national-security grounds. At the same time, the firms are doing business with Chinese state-owned companies that are deemed sensitive in the U.S.
Chinese authorities in September fined PwC's operations in the country $62 million and imposed a six-month ban on its business there because of the firm's audits of a Chinese company at the center of the country's property collapse. Around the same time as that audit work, another PwC unit there won a $200,000 contract with a local government in Xinjiang, where the U.S. alleges human-rights abuses occurred, according to a copy of the contract reviewed by The Wall Street Journal.
Boston Consulting Group signed a deal last year valued at about $530,000 to advise city officials in Beijing on the establishment of an artificial-intelligence hub, according to a copy of the contract, just as the U.S. government tries to limit China's advances in sensitive technology. Officials in Shijingshan, in western Beijing, asked BCG to endorse the principles of the Communist Party in order to take on the assignment, according to the bidding documents.
Spending on consulting services from the "Big Four" accounting firms -- KPMG, PwC, Ernst & Young and Deloitte -- as well as McKinsey, BCG and Bain -- grew 53% in China between 2017 and 2023, among the highest of any region, according to an analysis published this year from Kennedy Intelligence, a firm that advises the consulting industry.
Western firms have largely navigated rising tensions between China and the West through a unique structure in which their Chinese units, along with those in other countries, are staffed and run by local teams that are legally separate from headquarters. The Big Four firms use a franchise model, where country units split profits among their partners but pay licensing and other fees to the global firms, and share technology, branding and intellectual property.
Many of the firms have taken on extensive work for government agencies and state-controlled companies in China, signing thousands of contracts since 2017, according to a review of bidding documents, company news releases and other records. At least 100 of the contracts are with units or affiliates of companies that have been sanctioned by the U.S., the Journal's review found. Dozens are with companies designated by the U.S. as Chinese military companies.
The type of sanctions at issue prohibit Americans from investing in sanctioned Chinese companies, but don't affect consulting work.
Representatives of the Big Four firms declined to answer questions about specific contracts, citing client confidentiality. BCG said it "has robust risk and compliance systems to ensure our work meets the laws of all countries in which we operate," and said the firm's local team interpreted the guidelines that required endorsing party principles as necessary to comply with local laws.
PwC China said all of its work "is carried out in accordance with all applicable laws and regulations." EY's, KPMG's and Deloitte's China units, and regulators under China's State Council who oversee the country's state-owned enterprises didn't respond to requests to comment.
The narrow nature of the U.S. sanctions underscores how Washington has tried to manage strategic competition between the two countries through a messaging campaign, taking only small steps against Chinese companies of greatest concern, national security experts said. The Biden administration in September proposed banning Chinese hardware and software from cars on U.S. roads.
For some, the tensions over working with Chinese state companies have driven a reorientation of China strategy. McKinsey, which came under scrutiny for hosting a retreat in Xinjiang and running a think tank in China that advised the government on national planning, refocused its work in China toward multinational firms and private-sector companies there, a spokesman for the firm said.
After the earlier criticism, the firm defended its work but reduced such engagements and assigned several executives, including one who once ran its China practice, to assess projects for geopolitical risks, according to people familiar with the matter. "We follow the most rigorous and comprehensive client service policy in our industry," the McKinsey spokesman said.
The Big Four still impose standards for the work their units take on, said Mark O'Connor, chief executive of Monadnock Research, which tracks the consulting industry. "If they felt as though their affiliate in China was doing things that weren't consistent with its way of doing business, they could easily jettison their affiliate," he said.
One contract signed by Ernst & Young involved streamlining administrative processes for a regional office in Yunnan province of the United Front, the branch of China's Communist Party responsible for keeping ethnic minority and religious communities in line at home, in addition to less-sensitive activities like promoting cultural events.
In 2022, Deloitte signed a $1 million contract on a construction project for a unit of China National Offshore Oil Corp., which was placed under sanctions in 2021 for what U.S. officials describe as its work with the Chinese government to press unfounded territorial claims in the South China Sea.
Even as China tries to reduce its reliance on the West, it needs help navigating barriers erected by Washington and other Western capitals so it can maintain its connections with overseas markets, said Dexter Roberts, a director of China Affairs at the Mansfield Center, University of Montana. "In some ways Chinese authorities and companies need foreign consultants even more today," he said." [1]
1. Advisers in China Face Dilemma --- Big Four, others have signed thousands of contracts despite geopolitical tensions. Viswanatha, Aruna; Fan, Wenxin. Wall Street Journal, Eastern edition; New York, N.Y.. 07 Oct 2024: B.1.
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