Is China Now Inhospitable to Foreign Business?

Peter Humphrey's detention in connection with a GlaxoSmithKline bribery scheme has unsettled consultants who once flocked to the country.

A Chinese employee walks into GlaxoSmithKline's office in Beijing. (Jason Lee/Reuters)

Before he was detained by police in Shanghai on July 10 in connection with the GlaxoSmithKline bribery investigation, Peter Humphrey warned of the treacherous business environment for foreign firms trying to navigate China's opaque business climate.

"There is one industry that is booming in China like everything else but doesn't often get written about -- it's called fraud," wrote Humphrey, a British consultant, former journalist and past president of the Rotary Club of Beijing, in a 2008 magazine published by the British Chamber of Commerce.

"It can be in your supply chain, among vendors, distributors, employees and joint venture partners. Or it can be among the people who you use to transact an acquisition or a new partnership or a securities deal," he added. Humphrey's company, ChinaWhys, bills itself as "international business advisors with eyes in China, walking multinationals through the labyrinth of opportunity, risk and unfamiliar cultural environment." But now he has become the first foreign businessman detained in a widening bribery scandal.

It is not clear how Humphrey figures into the investigation of an alleged scheme to funnel millions of dollars in illicit payments to doctors, hospitals and government officials. GSK -- which admitted on Monday that "senior executives" of the drug company "acted outside of our processes and controls which breaches Chinese law"-- acknowledged to the Financial Times that Humphrey had done work for the company, but he has not been named by British embassy in Beijing or the Chinese government.

Nevertheless, Humphrey's detention has frayed the nerves of a fast-growing contingent of influential foreigners in China -- the thousands of consultants who act as middlemen for businesses trying to do business in mainland China.

"When I started in Hong Kong in the early nineties, you had people who were China consultants, and whatever you wanted do in China, they could help you do it," said Jeremy Gordon, the founder of China Business Services. "Now, China has become such an important part of the economy, and everyone needs to be there, so you have specialized people to do specific things."

If you're a foreign company that wants to do business in China, there's a consultant (often headed by a foreign-born man or woman) to help you figure out how to do it, whether it's manufacturing ice cream, or entering the film industry, or in the case of Humphrey, examining your business or partners for fraud.

These consultants can be ex-journalists -- Humphrey spent two decades with Reuters -- or they can be former corporate managers or foreign government employees who have spent many years in China. Sometimes they're employed by global law or advisory firm like Deloitte or IBM, but there's also a sea of self-employed consultants, like Humphrey.

Humphrey has been detained for nearly two weeks with little outcry from any business community, highlighting the impotent nature of the foreign-born China consultant if things go wrong.

David Wolf, a communications adviser who does work in China, tweeted that the detention scared "the living daylights out of me," adding later:

A host of China consultants, normally a chatty group (because building a reputation as an expert is an important part of their business) contacted for this story declined to speak on the record, citing the sensitive nature of the situation, though on background they called him "highly-regarded," "plugged-in" and "well-respected."

But Humphrey's plight shows that when you're an independent consultant in China, you're really on your own -- no matter how plugged in you might be.