Know the guardians of the lucrative Chinese galaxy

When Chinese web drama series Guardian (镇魂) first aired in June, nobody had expected it to become an instant hit.

The show, adapted from a Chinese fantasy novel of the same title, tells the story of two male protagonists who work together to fight off alien villains.

It was plagued by issues right from the start – in particular, and unsurprisingly, Chinese censorship, which prohibited any depiction of gay people. The novel was explicit about the homosexual relationship between the protagonists.

To skirt the censors, the drama ran on a watered-down version of the original storyline, depicting the relationship between the two protagonists as a “bromance” instead.

Still, the show was wildly successful. By the end of July, with a total of 40 episodes, Guardian had been viewed more than 1.8 billion times on Youku, the country’s top video-streaming platform.

A special term “Guardian girls” (镇魂女孩) was coined to describe the show’s fans, while firms jumped at the chance to ride the wave of China’s hottest drama series. A perfume company began to sell fragrances that embodied the two protagonists themselves.

A smart move – or so they thought.

The bombshell came in August, when the show was removed from Youku overnight.

It joined a growing list of Chinese productions that were similarly pulled or delayed following an official directive to “clean up TV programmes of harmful and vulgar content”.     

Clearly, the producers had taken a huge risk with Guardian, thinking they could dance around censorship boundaries and get away with it.

So did the perfume company, which was eventually asked to stop selling their products online, even though they had already received plenty of pre-orders.

The lesson here is this: when in China, abide by the rules, or you are out.

The thing is, rules, regulations and policies shift often in China, and quickly. For businesses, trying to predict what changes lie ahead is not easy.

That the government does not always clearly spell out the reasons behind their actions makes it even trickier to tackle such changes.

But China’s fast-moving regulatory environment does not always have to mean it is “game over” for those affected. All it takes is proper risk management, and an effort to stay close to the ground.

This means that before entering the market, for instance, companies should engage in discussions with various players, from lawyers to academics, to evaluate risk and look at how the industry could change.

Take the peer-to-peer (P2P) lending sector, which aims to connect investors with borrowers over the Internet.

These platforms tap into a big gap in the market as banks do not dispense loans to small businesses, which do not have an established credit score system.

Demand for such P2P loans in an unregulated sector soared to a point where such platforms – with some even becoming billion-dollar companies in just two to three years – totalled a record 3,500 in 2015.

That is, until the government stepped in with tighter regulations. About half of those 3,500 platforms have since closed.

Just this week, Beijing has also said it will ban new online lending platforms.

In a country where the authorities have been completely focused on tackling financial risk and weeding out fraudulent players, can we safely say that the government’s strict stance on P2P lending came without warning?

It would be foolish not to have acknowledged the red flags.  

When regulatory changes like these threaten the business, companies should think about “pivoting” – finding another way around the new policy or changing/diversifying the business model completely – while still engaging in discussion with policy-makers.

After all, establishing good public relations and government relations can make or break a business, especially in times of crises.

Just look at American food supplier OSI Group.

In 2014, the group found itself in the centre of a high-profile food safety scandal for selling expired meat – dubbed “vampire meat” by local media – to fast-food giants, including McDonald’s and Yum Brands Inc, which owns KFC, Pizza Hut and Taco Bell in China.

And in a highly unusual move for any company operating in China, OSI disputed a Chinese court’s ruling, claiming it had been the subject of a smear campaign.

Fast-food chains eventually cut ties with OSI, likely at the behest of the Chinese government, and shifted to other suppliers.

OSI took a financial hit of nearly US$1 billion, and its market share in China has since shrunk significantly.

What OSI should have done was to “make amends”.

It could have shored up its reputation by setting up a new value-added operation in China, for instance, whether in research and development, processing, or production.

Such a move would have been a display of commitment to the Chinese economy, while demonstrating that the product was not being “dumped” but, in fact, was in high demand.

For businesses, understanding the ins and outs of Chinese politics and policy-making is critical to staying in the market for the long term.

It should be seen as an important investment right from the start, be it knowing who’s who in key government positions, their temperaments, their policy preferences, as well as rumours and market chatter.

In short, know the guardians of the Chinese galaxy.

ABOUT THE AUTHOR:

Josh Lim is a co-founder and Executive Director at IJK Capital Partners, a cross-border investment and advisory company with a China focus. IJK has offices in Shanghai, Hong Kong and Singapore.