Seeing red over RioMathew Murphy ( The Age Online )
July 11, 2009
RIO Tinto competitors Fortescue Metals and Brazil's Vale will be called on to supply more iron ore to China with the fallout from the arrest of four Rio executives set to hurt the miner's standing in China as well as its new iron ore partner, BHP Billiton.
That is the view of Philip Kirchlechner, Rio's former Shanghai manager and the man who preceded detained Australian Stern Hu in the role in 2001.
Mr Kirchlechner, who held the position for five years, said Rio's reputation in China would be damaged by the latest allegations of espionage and bribes.
He said Rio's decision to abandon the $US19.5 billion ($A24.9 billion) tie-up with state-owned Chinalco and immediately announce a separate iron ore deal with BHP was "almost like a slap in the face to the Chinese".
"I think the Chinese will try and encourage other suppliers," Mr Kirchlechner said. "Fortescue has benefited a lot due to a good relationship with China and Vale is a huge beneficiary because their relationship with China is also excellent.
"Both will be strengthened as a result of this.
"I think BHP, though, will be tainted by its association with Rio. The Chinese can't freeze Rio out completely because China is sitting on very low-quality iron ore and high mining costs which makes them somewhat dependent on the big iron ore suppliers - and Rio is the second biggest."
It's unclear whether Rio's business interests in China will be irreparably damaged by claims its four executives stole state secrets by bribing staff of Chinese steel companies.
If China is set on weeding out bribery and corruption in its steel industry, then it could challenge its notion of guanxi, which is tightly woven into business relationships. Guanxi is the act of exchanging favours, which are done regularly and voluntarily, particularly on domestic dealings. While foreign countries are reluctant to operate with the Chinese that way on international deals, executives would have been exposed to this behaviour and potentially put under pressure to conform.
Mr Kirchlechner says it makes allegations of kickbacks and bribes a grey area.
"In the '80s, serious corruption would have been offering a bottle of cognac because China was so poor (and the) cognac constituted a big part of their wage," he said. "Now, because China has money, these sorts of things are more widespread.
"You then get into bigger items like a computer, a job, a visa and you find yourself constantly in an area where you don't want to go but where you feel pressure to do things their way."
With Rio's reputation in China under the spotlight, the global miner will take comfort from its jilted lover, Chinalco, rejecting comments in the China Securities News that quoted its vice-president Lu Youqing as saying Rio had "no business credibility as a company".
Chinalco said Mr Lu's comments were misquoted and they "do not reflect the company's view".
While Rio may have been portrayed as a "dishonourable woman" by some in the Chinese press, Chinalco moved to clear the air, saying it did not wish Rio Tinto any harm.
"Chinalco has been in contact with Rio Tinto expressing our mutual concern for the current situation with their staff," it said. "We have also reasserted that the situation is in no way related to any commercial dealings between Rio and Chinalco."
The statement is the corporate equivalent of the celebrity divorce citing "irreconcilable differences" but while still retaining mutual respect for one another.
But at a time when all comments on the relationship between China and Australia are being widely scrutinised, an attack on Rio's credibility would be sure to inflame and escalate the ill feeling.
Mr Kirchlechner says Chinalco's denial of any involvement should be taken at face value and that it would be "extraordinary" if the arrests were found to be retribution for Rio's Chinalco snub.
"This kind of behaviour I saw to some extent back in the 1980s, but that is behind us," he said.
"China has moved on since the '80s and the cultural revolution in the '60s. If this was true, it would show that China is stepping backwards. But I cannot believe it."
Rio maintains its surprise at the accusations against Mr Hu and his three colleagues and denies any knowledge.
"Rio Tinto is committed to high standards in business and integrity and takes its ethical responsibilities very seriously," the company said yesterday.
But Rio's ability to continue to do business successfully in China is at a crossroad.
Mr Kirchlechner says Rio's relationship with Beijing has been eroding over the past few years. The Chinese have not forgotten the decision of the iron ore companies to drive a tough bargain last year when the commodity was in short supply.
The global financial crisis has prompted a drop in demand, resulting in a weakened value for iron ore such that if China agrees to a 33 per cent discount, then Australia's export revenue is likely to fall by about $13 billion. China's steel makers have been pushing for a price cut as high as 45 per cent, even after Rio's Hamersley iron ore unit struck the "benchmark" agreement with Taiwan's CSC and Dragon, Japan's Nippon Steel and South Korea's Posco at a 33 per cent discount.
"I would say the relationship now between Rio and China has to be described as extremely complex," Mr Kirchlechner said.
"It will take a huge amount of knowledge and diplomacy to get through this."
Feng Juyan, who worked for Robe River before the merger with Hamersley Iron, says China's reputation is also on the line. Ms Feng, who resigned from Rio's China operations and now works for Australia China Trade, said cool heads should prevail until all the facts were known.
"If the matter is not handled properly, then there is a danger that the public could form the wrong perception about doing business with China," she said.
"China isn't the same place that it used to be. The world is watching and we have all witnessed the progress China has made and to damage all that for one incident is not advisable.
"I still think Rio is a good company. If there is anything in this, it will be an individual's behaviour, not Rio's behaviour as a company, and that should protect them to a degree."
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