Will Next Enron Come From China Tech?
32:29 Share

Hey, daily china is produced together with our friends at radio I, this awesome independent media platform. If you're interested in culture and innovation in china, you should definitely check out radio china outcome. He'll give you inside. Look, everything from china's underground music scene to bike sharing, that's R A D I I china dot com.

Even if you talk about the chinese internet bubble, right, if there even is one right, like who's accountable for these high valuations, this results in these issues happening. You just right the wave and then jump off at the peak.

A common refrain or a comment that we make about china's techsters or china and generals that developed so quickly over the past decade or a past few decades. So today, we're going to focus on the question of what happens when chinese tech companies grow too fast, compromise are made or what are some of the consequences of growing pains. Specifically, today we're going to talk about company in bezzle in or internal fried.

Our question is if the next and wrong case will come from chinese tech companies. The rest of this is the recent scandal of the drone company D J. I, where they just announced that they discovered losses of over one hundred fifty million us. Dollars .

based on .

employee .

investment chinese.

So a point of various studies, china's gaining industry .

is now effect, the largest in the world may know .

their messaging out called new chess, chinese outbound to chinese corporate or ying.

Because it's state clam the apples from major .

deal over in china, your chinese tech giants ten sent leading at eight point six billion dollars position to buy a major stake, a super fourteen .

point three billion dollars in sales locked by a chinese e commerce site in one wild day.

I think this is an interesting topic for us to follow up from our last episode, which was a little bit about work culture in chinese that companies verses U. S. companies.

So i'm interested to learn more about chinese management, why this issue seems to happen periodically in chinese test industry. This has happened with other companies as well, like sam smart for maker jd, which is an new commerce company, as well as by due china's largest search engine. So you interested to here and learn more about why or if there any systemic issues that are in chinese technology.

In order to cover this topic in the best possible way, we have invited alex, currently working with finance from one of the large interconnect e commerce companies in china. Welcome, alex.

Hey, guys decided to be here. My name is alex. I've been working at one of the large e comes firms here out in shanghai for the vast six months. I've had an opportunity see various aspects of the business, the most recently kind of working in the finance department, which gives you a very overall perspective of the various lines of businesses and money moves throughout the business.

You are one of those A, B, C, right? Chinese americans have moved back to the motherland to pursue career opportunities.

absolutely. So I kind of grew up by actually throughout the states um various regions. Most recently i've been working at century prior this for about six years in finance. Enterprise applications are primarily working with kind of largest sophisticated fortune five hundred U S. Organizations, uh helping them set up their financial enterprise applications. And with this involves is basically really understanding all their financial reporting processes, kind of pain points from an international perspective and helping them enable them, as with the transition to them um with technology.

Alex, so what was your reaction when you saw the news about this? I think goes one billion rb um loss in embassy ment .

via employees. Yeah um you know I I would can say I was very surprised. Obviously, you hear things about this happening frequently in china.

Yes, I think the product of some of these companies kind of growing ah a lot quicker than the process is can internally. So this results in a certain amount of money that's gonna be in a last or attributed to embassy. The other aspect of this is the governance flash regulatory issue internally. Uh what constitutes right and wrong in that large grey area um in between right are the concept of getting a kickback or bringing a supplier over. It's something I think in the west that's define more clearly and it's very I says more so black and White um versus here it's just a little more pervasive and I I I say kind of culturally accepted to get a kick back or do something that people in the west name interpret as corrupt or uh interpret as a scand or fraud yeah so basically .

what happened was that employees, together with vendors, were marking up costs, marking up Prices. I what they bought the parts for and therefore, you know, keeping the difference in their own pockets for a let A U S. Standard process like how would the american company solve this, not have investment lets going on.

Yeah I think when he comes the procurement um at most firms and I haven't been personally worked in procurement um but I think it's very integrated with your supply chain. There's a lot of checks and baLances that need to occur. I think there's a various layers of a management that need to sign off on basically was being purchased are given the size and the importance of what's being purchased in context to kind of what happened at D J.

I IT sounded like this was a pretty critical component. Um and what they were manufacturing and the scale in which they were buying this at seem very critical. So i'm i'm very shocked that you know I didn't get escalated beyond just the procured group. Um my understanding was that an entire department did get some get in trouble for what happened and there was level of CoOperation ah that needed to occur within the organization but also with the supplier obviously um but i'm just very shocked that they weren't more eyes on this from the get go .

saying employed apple would want to make one hundred fifty million us dollars by doing the same thing. You'll be much harder, right?

exactly. And I think it's um it's not necessarily just with the case appropriate um but you know most aspects in in which things are done in these kind of growing chinese internet companies versus more established western companies. IT just comes with more red tape even when you talk about bringing a consulting form, right, that's still an expense to the company.

Um and IT probably would go through procurement at some point. The stakeholder within the organization obviously needs to be part of some function at the the services of the firm is providing value tube. But ultimately in china, I think it's a lot more agile, it's a lot quicker.

It's easier get the um yes or no and just have a couple guys sign off and just get the services going or get the product into the in the doors verses in the west rate. The the drawback having all these checked bounds and governance is that it's gonna be a lot slower entire into and process. Um and because of that, you may be compromising value, time, speech, market things of that nature, right? I won't say what didn't happen in china, but yes, china is definitely sounds like more acceptable ble for something like this happening.

So why would that be much harder? Is IT because so much layers of management need to sign off.

Yeah and I can not draw from my experience, obviously working at the nee commerce firm in china and kind of the things I see right now, right? One thing is I was the company and management is very aware of things going on like this, and there's kind of various things they do to try to prevent IT. One thing is um they have special group or departments within the organization that are purely devoted to this.

Um they are called the and gen, which really is essentially kind of the in you can call IT an internal audit group uh for the organization that are kind of policy things. They'll do things like a data security. They do a lot of things of analytics and using analytics, the kind of trace basically where corruption and embassy maybe a occuring.

So they're looking at IT on a large scale. So it's kind of a data driven activity. And usually, if you see consistent patterns in the way things are being done, you can attribute that to uh to a high likelihood of embassy ment.

So I think that that that's the first thing also data security in terms of things going out, right? It's like with most chinese e commerce firms at the core of really what the value um the firm brings is basically the knowledge they've arrived and accumulated from all these data, right? So there's on lot of scrutiny that goes around, uh, the security of the data, depine the data as also which ice can have an access to certain types data within the organization because that is very, very valuable information.

Yeah so for me as an employee of a western company, uh if I were to say, let's if I want to to buy part for hundreds of millions of dollars, there would be so many people in the organization that needs to sign up on that so someone would may be, see, oh, wait a minute, isn't the unique Price to high? But that wouldn't happen in china.

I wouldn't say there's a direct translation. I think they close. This is internal order. Internal art focuses more on kind of accounting fraud, right, and White color fraud and as well as just basically going through the books and checking to make sure is they're apply to the the standards, the gap or, uh, no fast standards of I think what what what engine really does is less so that but because our business, there's a large cash component to IT, you can say there's a part of fradin investment that may occur also at the kind of blue color level, right? So maybe you might be for smaller sums of money, but it's associated with cash basically the to the markets um or cash that traction to the market um that essentially a lot of the workers can get their hands on before they get to the hands of basically our customers and the forms of subsidies. Uh, so there's that, that process that needs to occur where the exchange tends, uh, between multiple parties. And because that a lot of people who are aren't sitting in the office buildings, who aren't sitting in H Q, but because they're working and CoOperating with potential client customers and suppliers, that there's opportunity for them to get get a cut the pie.

So going back to you said that lendon, they have a lot of data tracking mechanisms to trace corruption and look at patterns that indicated is something wrong with cash. How did they do that then?

Um it's basically looking at the patterns in which how is ultimately deployed, giving a little more color. I guess there's various ways essentially our business will give up incentives and these to have people basically use our platform, obviously, right? In order to do that, a lot of times we're giving out money to the local cities.

The structure of the business really is you have basically call IT a general manager of a city and it's a pyrates below. Then they manage a large and elaborate sales force essentially to push the product, the platform as why is the services. So when he when the money gets basically already deposit to the cities, it's more or less not very transparent how that is deployed.

I think a lot of the authority as to how to use this money is in the hands of the general manager. Once is in the general manager's hand, we can really only look at the output or what they say the output or R O I is on this money were sending out. Obviously a lot of the money is, a lot of the transactions are put into the D R E R P or transactional system where the ata, where we get the data.

A lot of that comes directly from essentially the the point of sales is the ma. So you can kind of bypass that. So there's things you can see based on the number of transactions, the value of transactions, the value of subsidies that are a cut clean on a maco level that can that can indicate embassy. Obviously, you can only suggest IT and nothing over black and White. But again, if you you know, if you have enough incidents, ts, or just by that means of lot of large numbers, you can generally find highly suspicious people.

Let's take a Normal e commerce company online of flying in china. If I were to try to embassy money, how would I go at IT OK?

There's very aspects of ways to do this right within the company. Obviously, i'm not a professional edit, but accounting fraud is your you know probably typical way the D J I incident again was more of something where um the cash was being being transacted with suppliers and procurement IT sounds like. Was working with external suppliers to do this um in context to kind of how people can do IT here.

Um there's various ways, especially with an e common form. You know you you tend to try to intimidate new users, right? And you'll give them subsidies. In addition, you will give discounts, hey, heavily discounted things on your products, uh, not only to new users but recent users to retain them right in a visible this cash cineas sometimes be transacted with merchants.

The subsidies are not only given to uh, the end users but also merchants, right? So you can have CoOperation between essentially your sales folks that are technical part of your organization with the merchants that the company or the headquarters can be. Said he were offering a ten RMB discount on a certain type of good for this merchant.

But you know you need you need to meet these requirements or have x amount of transactions or you know you only be applicable for new users. One thing that's very common is you know these systems right now that can just create fake I P addresses to make fake transaction essentially. And because if you can make a fake transaction, where is the value is very low and essentially the value you're deriving from the sub city is tire.

You could do that on a massive scale. If you're doing that on a massive scale and on a poor transaction, you're actually only making call IT like one and two R B. But if you're doing IT on a massive scale and that's automated, that's generating these fake transactions and the merchant is aware of this and is not an actual exchange of goods, what you're essentially doing is just taking the subsidies from the organization.

I heard the story from a law of D, D. Drivers in the beginning when they had love lenses and subsidies going on to users, and they were these stories about them creating fake idea accounts. And let's say, they will get a cash bowlders if they get more than ten rights per day or something like that. And they would use these fake accounts just to order a ride, spent very little money on the in order for them to get the cash bonus. So IT will be something like that.

Them absolutely yeah, very something .

actually reminds me of thing in china, which is I don't know if you guys ever saw this, there are some articles about people receiving empty packages in china and and IT was a way to inflate numbers of deliveries for e commerce. I guess I would make you look like a shop solar was making a lot of transactions, maybe a way that I was tracked as like company packages are sending.

And then they had the scheme where they somehow got random people's addresses. So again, kind of another issue on data privacy or user privacy that people have their adjusted somehow out there and then some companies would send empty packages to inflate their delivery numbers. So that's pretty crazy, but it's similar, right, which is like gaming the system so that your KPI look higher for some kind of benefit.

I mean, it's kind of interesting, right? Because sometimes very chance of these are called growth hacking for startups to get their K P. I. up. And sometimes IT is just investment left and you go to jail culturally in china.

Why does this happen? Is this due to the size of the companies and they are more opportunities? Or are we overall seeing more of this in china, say, in the united states?

Yeah so I I think it's a uh, two proud answer, right? I think you the kind of the roots run deeper than just chinese internet companies. Obviously, I kind goes back to the whole kind grey area of what constitutes investment, what constitutes what's OK.

It's not um in terms of getting a kick back or is doing business in general in the environment. I think that's one aspect of IT that's been done around uh, much longer than the chinese internet companies. I think you see this issue very pervasive in the with chinese internet companies, though is again right.

The internal controls cannot keep up with the pain which the organization is growing and sometimes IT may be even intentional because they don't want to a hinder insignia growth for the organization. For some of the sales folks, it's almost probably the the amount of money is you know more less negligible really. The consequence would be IT affects the variable comfort this year or this month.

And we you know we didn't consider IT. IT was more so, say, hey, you can do this for the higher profile ones. I don't think that necessarily makes this list the higher profile incidents. I think I people are fired. It's just there's incidents is where people actually aren't, which is a little surprising as well.

But are they reported to authorities .

if it's a severe enough crime? absolutely. Lydon actually is is funny. You mention this has CoOperated with local government authorities as well, so they call IT. It's um I don't working to the group, but my understanding is there's a level of CoOperation with local government authorities as was the police department.

Can you give us a sense of like the range of money that people have? Embassy like for example, maybe one emails and just making up like someone took ten RMB. And then like the greatest number we've seen as like I don't know, ten thousand, I don't if you have a sense, like the range.

yeah I mean honesty is all over the place, right? On the smaller scale, they don't even mention, I think on the large um you know couple hundred thousand a RMB that is. But obviously the the the number of these incident may not be all in.

You are really interesting. Internet companies needs fast growth. Their entire model, short term, is to lose a lot of money based on top playing growth.

You know, I actually senior management are an incident device to fix these issues. And during these few years of fast growth, obviously, they are alert opportunities for investment ment. And maybe that's one of the cases we're seeing, for example, with J I. But I get the feeling when reading the D I news that it's only scratching the surface that the actually are much more existing out there, you know and this time he was just for such a critical party, so much money had to go public about IT.

Yeah I mean, I think we seems like this. My personal opinion is that there are still limitations in which in terms of the scale in which you can do this to yeah to do something of the calibre that, for example, happened at, in, on, which was really most accounting fraud d right?

You need such a levels, sophistication internally within the various groups, the various functions of the organization, as well as with external, a kind of finance and suppliers that I would be, I I think, to be very difficult foreign entire company to shade up, collapse over something like this, again, outside of accounting fraud. That being said, the the number of incidents can become more prevalent in the market, right? And how consistently this is happening among are a number of companies.

Um but when you say it's on the scale of like literally crippling the Operations of an organization, IT can make IT less competitive. I think absolutely and in the long run kind of delude the value, but I don't think it's something we can uh, I I see like kind of having a company collapse overnight. Uh, there will be I feel like there will be very difficult .

to do for my shareholder perspective. They would think all this is the cost of growth and will fix that later on.

A you are a be scary as a shareholder, absolutely right. Is one of those things that can it's either the cost of growth or is something that slowly chips away at the value the company that you can just fix overnight or identify the issue immediately, right? Um it's like chronic illness that Sally makes you less and less competitive .

in the environment. We are seeing chinese take companies going global now. And now we just have the recent IPO for my dep, and they actually have that kind of very cash business for me. IT feels very realistic that stuff like this would actually also happen within the publicly listed billion dollar company.

It's very true. I mean, I think that's the realities of working in a local environment. This concept of e commerce, I think you can say um can be global, but I think at the end of the date, still a very local localized business model. So um it's hard to get kind of uh this network effect with things like ah I say A A 滴滴 kind of 美团 外卖 or 美团 food delivery or even um a local hotel， right?

I think that's why you don't see the players like expedia and Price line big here fighting with the sea trips as was made times, why you don't see the uber eats out here and why amazon's that big out here is a very localized market because you're working in a very localized market. You're dealing with the local nuances of being a player in this market. So I think especially with are these chinese tech firms that something they're gona have to deal with.

One thing to note, though, i'd like to say is that I think the public opinion is if you're listed in the us, IT gives people a sense of oh, this company is credible. But actually the requirements to list overseas are less than that of in china. So it's a misconception actually that because it's listed oona, say, a back or new oran's stocks exchange IT went through a more stringent filtering process. Then if we were to be listed in china, which I found fascinating .

based on what i'd read before, I think in shanghai at least you had to show three years of a series of profit, which obviously for for a lot of tech companies is not feasible. So but they've been thinking about at least this year or last year um loosening up those requirements because trying to does not more its tech companies to list domestic.

Um you're probably tell me probably say the news about me having these discussions because so many big tech companies have listed overseas because it's easier to raise capital. I think there another point is that um there's a also the assumption that overseas tech investors are more savy and maybe that also contributes something them to raise bigger funds when you go public. This man understanding but yeah like the private thing, obviously I think for love other companies that would not apply from .

not understanding anything of this to now being able to listen to your opinions and your knowledge. Alex, I get the feeling that actually there are so many layers of so called investment ment, and because of the you know, scale of businesses and because of especially how many local small enterprises these big players such as meta damping or D J I or D D work with, you know, create so many more opportunities to kind of get a small kickback here there, or create a few fake orders to, you know, generate a cash. Pay out or what .

not absolutely.

I mean, I guess my question is like how would you fix this? Because I am maybe this is a question you deal with practically in your work, but how would you fix this? Because IT IT sounds like with the and jing and stuff that there even though what happens, I mean, it's hard to take one company and kind of extracted elsewhere. But I mean from from what I hear, that sounds like they are pretty serious about cracking down on this. If the bell team dedicated to a and then if that's so, like why is still happening and what .

how would you fix IT? Yeah, I think a lot of the things internally we're trying to do right now is using technology to kind of combat these issues. You know, one thing that i'm seen within the organization is trying to bring more the control of centralized, more the control of the decision making process at headquarters versus keeping them in the hands of the sales folks on the grounds.

What are the details associated with the various events, the contract negotiations, the details of how the subsidies are deployed? Um we're setting up internal system so they cannot be done electronically or digitally, right? And a lot of these decisions are gonna more so moving for a retrieved by data analytics instead of essentially the good will of the sales folks with our clients and customers.

Um it's gonna be kind of more methodical of a process as well, more structured of a process, and it's gonna more of a science than an art. I think once you have that, you're onna have more transparency. I think you know like like most things in the world, a lot of IT just gonna provided by transparency and a lot of these systems are going to be kind of, for us at this point, internally developed from like a variable from perspective.

Yeah, I think it's not just our firms that it's forever going to be a lot like very, very difficult right to complete in align centipede tween an organization and an individual uh, regardless of what the capacity you are, what kind of sales row the air and right, I think that's just the ultimate question. If someone can never figure that out, you'll probably have the best uh, growth team ever. Um so you know it's just completely not intended, not completely alive know like kind of a line, but there's always areas in which you can like kind of pole cos right and kind of hack the system.

People are savy to this, right? You're also working with people from different backgrounds in terms of know the sales folks. They come from a different world. You know literally, I think we recently just started uh, requiring kind of like college degrees for that. But you know obviously, they are not making as much money. So they're coming from different backgrounds where you know they they they're more color streets, right? They know these little hacks in order to you know they're are thinking about this because they are they're more sensitive to money.

I guess. Like do you think that this is something that's just a growing pains? Or do you think that there is like a big movement to crack down on the s and we'll see less of IT in the future? Or are you worried, alex, that this is something to systemic that's not given enough attention?

I think it's more so of a growing plants. I think just its internal controls and procedures that need to kind of catch up with the growth of the organization. And I think once that happens, you'd be seeing less of this on a microscale, obviously, like on a grander scale, every company is acceptable to this, but that's more so, you know, cultural slashed, the mentality of management, right?

And I think that's not necessary just an issue with china. But you know everywhere you do business, you know that's a question of morality. But I think on a micro level of the smaller incidences, I think IT IT can definitely be clean up.

Ick, use of china. Logy, are we in less accountability in china? U. S, yeah.

No, absolutely.

I think I think that definitely is the case when you say a low levels of accountants from stay holds the organization to outside, right, even if you talk about the chinese internet bubble, right? Or if there if there even is one right like who's accountable for these high valuations, right? Um are people really just writing the wave? Absolutely I think is she's kind of the um the horizon the time horizon of the stay holder and there not as long right as you you like them to be. So ultimately, this results in these issues happening in this podcast.

We've spoke in a lot about th Epace a nd s peed a nd t he g reat v aluations a re b eing c reated b y t he c hinese t ech s ector. And i'm happy that you know we finally have some time to be actually talk about the other side of IT or the dorrie side. And IT really feels like something, you know, short term. Now maybe it's not a huge issue for some of these companies because keeping on creating new value. But whatever this market gets saturated, this gotto be fixed othe wise, we're gona have a bunch of companies that actually doesn't function as companies yeah .

IT depends on whether this D. J. I scandal becomes like a learning moment for a the companies in this industry law enforcement who've ver complicit or if it'll just be buried, they i'll try to just bury the incident and move on quietly.

And with that, thank you, alex, for joining this digital china episode. Thank you.

Thanks again, as always for listening to digit china. We welcome any feedback or suggestions you can just send IT darkly to us.

Digital china is produced by me.

jack of then eva and tom shop, and this power mike radio.

an independent media platform expLoring culture, innovation and life in china. You can find them at radio china. doctor. Thank you for listening.