Why Corporate Fraud Is On The Rise

Lax boards, equity-linked pay lead to rise in financial wrongdoing.

Newspaper headlines aside, only a fraction of corporate executives who manipulate or misrepresent their companies' performances get exposed by regulators for such misdeeds. My company, Audit Integrity, is in the business of uncovering such wrongdoing because it represents a substantial risk to stakeholders.

A subset of such manipulation and misrepresentation is securities fraud, which itself is so egregious that the Securities and Exchange Commission does prosecute some offenders civilly. An indication of just how common such behavior is appears in a study analyzing fraudulent financial reporting in the decade through 2007 that was recently released by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.

It is important to note that, while auditors actively support fraud-detection research, they do not guarantee in their audited statements that they will uncover it. That's because auditors believe they too can be misled by clever fraudsters. I understand the auditors' reluctance; material manipulation and misrepresentation are difficult actions to uncover. Turning to the COSO report, the interesting conclusions include these:
--The number of fraud cases increased between 1998 and 2007 in comparison with the level in the prior 10-years studies.

--The dollar value of fraudulent financial reporting soared in the last decade, despite the implementation of the Sarbanes-Oxley Act of 2002.

The Risk List

--Companies involved in fraud were much larger than those observed in a 1988-1997 study.
--Fraud occurred most frequently in the computer hardware and software industries.

--The SEC cited a company's chief executive officer and/or chief financial officer for some level of involvement in 89% of fraud cases studied.

--The most common fraud techniques involved improper revenue recognition, followed by overstatement of assets and bogus expense recognition.

--Among firms involved in fraud, 26% changed auditors between the filing of their final clean financial statement and their final fraudulent financial statement. Sixty percent of the firms involved in fraud that changed auditors did so during the period the wrongful reporting was taking place; the remaining 40% changed auditors in the fiscal period just before the fraud began.

--Press reports of an alleged fraud resulted in an average 17% abnormal stock price decline in the two days surrounding the announcement. News of an SEC or Department of Justice investigation resulted in an average 7% abnormal stock price decline.

--Long-term negative consequences of fraud included bankruptcy, de-listing from a stock exchange or material asset sales.

--The most commonly cited motives for fraud included the desire to: meet earnings expectations; conceal the company's deteriorating financial condition; bolster performance for pending equity or debt financing; or to increase management compensation.

–The average period during which fraud occurred was 31 months.

The Risk List

--There appears to be no difference between the number or character of frauds since the passage of Sarbanes-Oxley. (Note: the sample periods after 2002 are shorter than those prior to 2002.)

--Fraudulent firms disclosed significantly more related-party transactions than non-fraudulent firms.
--All 347 firms prosecuted by the SEC for financial fraud during the decade studied received unqualified opinions from their auditors for their final set of misstated financial filings.

--Financial statement fraud sometimes implicated the external auditor.

--The consequences associated with financial statement fraud were severe for the individuals allegedly involved. However, the severity of the penalties may not be a sufficient deterrent, the COSO believes.

--There were few differences in the boards overseeing companies involved in fraud and those that weren't.
Audit Integrity's independent findings largely mirror the COSO's conclusions. From our perspective, four important issues stand out:

1. Fraud continues to increase, despite Sarbanes-Oxley.
2. The motivations continue unabated.

The Risk List

3. The methods of committing financial fraud have not materially changed.
4. Traditional measures of corporate governance have no impact on predicting fraud.

While the COSO study does not categorically state that fraud has increased (or, at least, has not diminished) since the implementation of the Sarbanes-Oxley Act, it does confirm that there is no evidence Sarbanes-Oxley has had any impact on the commission of fraud.

We are highly doubtful that additional analysis would show any decline in the fraud rate. As mentioned in the COSO report, 89% of the fraud cases implicate the CEO and/or CFO. Sarbanes-Oxley's primary focus is on establishing more rigorous internal controls (Reg. 404); those controls are targeted at multiple levels of management but only indirectly at the C-suite. The board of directors is responsible for protecting stakeholders; it is our opinion that until corporate directors are held to a higher standard, fraud will continue regardless of the rigor of internal controls.

As the economy has faced mounting stress, many companies have been feeling pressure merely to survive. This pressure may lead to fraudulent behavior to mask decaying operations, the COSO points out.

The COSO and our analysis concur that the methods of committing fraud remain unchanged: The majority of the fraud metrics included in Audit Integrity's Accounting and Governance Risk (AGR) model have remained relatively stable over the past decade.




Revenue recognition, asset/liability valuation and expense recognition are the keystones of the AGR model.
It is interesting to note that insider trading was involved in 24% of the cases; insider trading is a key high-risk metric in assessing potential fraud.

In contrast, board composition resulted in no significant difference in the prevalence of fraud, the COSO found. Audit Integrity's research likewise indicates that board composition plays a very small part in predicting fraud.

We do, however, believe certain governance metrics that are independent of accounting metrics do have an impact. These include frequent amendments to financial filings; boards chaired by the CEO; prevalence of incentive pay vs. annual pay for the CEO and CFO; a high ratio of CEO to CFO total pay; large volumes of stock sales by top executives, relative to market capitalization; frequent legal and regulatory issues; and frequent officer changes.

The Risk List

• The Risk List

• Comprehensive Rankings

• Why Corporate Fraud Is On The Rise

• In Pictures

• Retailers Flashing Financial Danger Signs

Among the important conclusions that could be used to curb future fraudulent activity are the following:

--Fraud will persist until boards of directors are held more accountable for their actions.

--If the economy remains under pressure, fraud will continue to increase.

--The 347 cases of fraud prosecuted by the SEC between 1998 and 2007 represent a small number and a nadir during which a blind eye was often turned to fraudulent activity. Under Chairman Mary Shapiro, the SEC appears to have "found its legs." We believe the number of enforcement actions will increase substantially in the coming years.

--The 347 companies prosecuted in the decade through 2007 represent a small fraction of the number of financial fraud cases that occurred. Very few frauds result in SEC enforcement action; many more are adjudicated by class actions. Most are recorded only in stakeholder disappointment, large price drops, bond defaults and insolvency.

James Kaplan is cofounder and chairman of Audit Integrity, a financial research firm based in Los Angeles.

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‘Shameful’ suicides

THE differences between Western and Eastern, particularly Confucian and Buddhist-based, cultures and attitudes towards crisis, hardship and austerity are great, like day and night.

As debtmocratic Greece has shown in the current debt crisis, the ordinary Greeks have resorted to violent demonstrations, strikes and public anger over the various austerity measures being tied to the proposed eurozone and International Monetary Fund rescue package.

While the public outburst over the corrupted Greek government is somewhat justified, their reaction is grossly different from the Confucius and Buddhist-influenced Asians.

The ordinary Greeks should take a very hard look at themselves, and ask honestly whether they should bear a big part of the blame for the serious debt crisis that Greece is in now instead of only violently pointing their fingers at the government for all the blame.

The way the Confucius and Buddhist-influenced Asians would have reacted in such situations would have been totally different. They would have taken the blame mostly on themselves.

We all know that the Japanese economy has not been performing well for the last 20-odd years but do we know the social costs of this slump?

The number of Japanese who committed suicide in Japan in 2009 stayed above 30,000 for the 12th straight year, with suicides due to hardships of life and job losses rising sharply, states a Japanese police survey.
More significantly, suicides traced to job losses surged 65.3% to 1,071 while those due to hardships in life jumped 34.3% to 1,731.

More worrying, depression continued to top the list of reasons for the suicides.
Perhaps even more worryingly, the number of suicides per 100,000 people came to 24.1 among those in their twenties, an all-time high for that age category, and 26.2 among those in their thirties, a record for the third year in a row.

Not surprisingly, the number of suicides jumped in October 2008 – a month after Lehman Brothers collapsed.
This taking-all-the-blame on oneself instead of looking for easy scapegoats can also be seen at another level.
In 2009, monthly suicides increased year-on-year from January to August.

They were especially rampant from March to May as fiscal year-end fund demands picked up during the period.

From 1990 onwards, even as the ordinary Japanese increasingly suffered under the grossly inept Liberal Democratic Party, one has not seen the violent demonstrations, strikes and public anger that is being seen in Greece, at present.

Instead they take their own lives, probably in shame.
As the ordinary Japanese suffers in silence, the economy stumbles from one recession to another. The cycle repeats.

Now, with the global economic recovery in full swing, the ordinary Japanese gets another cyclical and temporary respite from the rising economic hardship.

How to Prevent Deepwater Spills

Safety upgrades are critical but could mean higher prices for oil and gas

A culture of tighter safety and more experienced regulators might have prevented the BP Deepwater Horizon leak. But equipment modifications and new technology will be needed to minimize the risk of such deepwater oil leaks. According to some petroleum engineers, recommended technology upgrades could price some deepwater resources out of the global energy market.

A mess: Workers clean up oil from a beach on Grand Isle, LA, earlier this week.  Credit: U.S. Coast Guard/PA2 Gary Rives

This could help extend the six-month moratorium on deepwater drilling instituted by President Obama last month. "I tend to be kind of a glass half empty guy, but I think there's a 50/50 chance that the current six-month moratorium will stretch out," says Paul Bommer, a senior lecturer in petroleum engineering at the University of Texas at Austin.

Documents and statements released by various federal investigators point to several decisions and at least one faulty piece of equipment that allowed uncontrolled gas and crude to blow out and destroy the Deepwater Horizon rig in April, initiating the worst oil spill in U.S. history.

Engineers contacted by Technology Review insist that conclusive answers will come with completion of the investigations, but criticize, for example, BP's decision to install a continuous set of threaded casing pipes from the wellhead down to the bottom of its well. "The only thing I can figure is they must have thought it was a cost-cutting deal," says Bommer of BP's well design.

This can be problematic in deep, high-pressure wells for two reasons. First, it seals off the space between the casing and the bore hole, leaving one blind to leaks that sneak up around the casing pipe (as the BP Deepwater blowout is suspected to have done). Second, the long string gives gas more time to percolate into the well. A preferred alternative in high-pressure deepwater is a "liner" design in which drillers install and then cement in place a short string of casing in the lower reaches of the well before casing the rest of the well. This design enables the driller to watch for leaks while the cement is setting. "It takes a more time and costs a little more but it's a much safer way to do it," says Geoff Kimbrough, vice president for deepwater operations at Houston-based drilling consultancy New Tech Engineering.

Kimbrough cautions that transforming corporate cultures will take time because choosing the more conservative operation can easily cost $10 million to $20 million. Not all companies have leaders who readily support these decisions, says Kimbrough: "The courage to do that doesn't come overnight. It comes from years and years of support from senior management."

Regulatory ideas for how to push a culture of safety appear in a 30-day safety review delivered to Secretary of the Interior Ken Salazar late last month, and include establishing new drilling guidelines, operator certification requirements, and tougher inspection regimes. Kimbrough says the Interior Department must simultaneously boost its internal training so that it can effectively review drilling plans.

Attention has also focused on the failed blowout preventer, or BOP, that could have saved the Deepwater Horizon. The Interior safety review calls for upgrades to BOPs to address various failure mechanisms that may have doomed the Deepwater Horizon, such as placement of redundant shear rams strong enough to cut through the toughened threading between casing pipes.

One inherently safer option that many petroleum engineers are considering is bringing BOPs to the surface. In this scheme the BOP on the wellhead thousands of feet below the ocean surface is backed up by a second BOP on the drill rig that would be accessible for more regular inspection and testing. Doing so would mean hardening the risers that link the wellhead and the drill rig to handle extreme pressures.

It's a suggestion that Kimbrough thinks is impractical. "The cost would be somewhere near prohibitive," he says. "Just the cost to develop the system would be astronomical." Mandating something like that would delay new drilling by at least several years. "You're talking about years to develop and test and prove up something like that."

But Bommer says the potential costs are likely to be small compared to the economic impact and incalculable ecological damage that the Gulf region has sustained from BP's leak. In Bommer's view, if such "brute force" safety engineering pushes oil and gas companies to question whether it's economically viable to tap deepwater reserves, so be it. "Cost is the last thing people should be thinking about now," he says.

Another area pegged for technology development is deepwater leak response. BP's ad-hoc response to the Deepwater Horizon leak has revealed the lack of equipment and procedures for high-pressure remote operations. BP's CEO Tony Hayward acknowledged as much last week, saying that despite assurances in its drilling permit applications, BP "did not have the tools you would want" to respond to a deepwater leak.

In fact, the tool shortage for deepwater intervention is an issue long recognized by petroleum engineering researchers. The months-long process of drilling a relief well was, until now, the only proven fallback available in cases where the BOP fails to stop a blowout. A 2003 presentation by Texas A&M University researchers modeling deepwater blowouts cited reliance on relief wells as evidence of a "fatalistic mind-set in the industry."

The lack of progress since then supports that assessment. Since 2005 Congress has left deepwater research primarily in the hands of the Research Partnership to Secure Energy for America, a U.S. Department of Energy-supported petroleum industry consortium in Sugar Land, Texas. But RPSEA has focused its $17 million annual budget for deepwater R&D on production-related issues.

Drilling engineers say the BP accident could finally provide the impetus for deepwater response tools. Funding to perfect some of the schemes that BP has thrown at the spill, they say, should spawn an entire deepwater response industry, analogous to the well-control contractors who secure hundreds of dangerous onshore wells per year worldwide.

James Pappas, RPSEA's vice president of technical operations, claims that his consortium is already beginning to refocus its research agenda toward safety-related R&D. For example, he sees an opportunity to improve sensing capabilities inside deepwater wells after the drill bit is pulled: "That's a weak spot right there, a blind side, that we haven't really addressed as an industry."

But Pappas and other engineers acknowledge that better training, BOPs, and response tools may not convince an outraged country that a sequel to the Deepwater Horizon disaster is impossible. They say it may take more radical upgrades to drilling technology to lift the current six-month moratorium. "We have to go back to square one and prove that we're reliable and responsible enough to take care of our business," says Pappas.

By Peter Fairley

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Related Articles

» Another Chance to Stop the Gulf Leak But BP's "top kill" method to stanch the spill could also break it wide open.

» How Technology Failed in the Gulf Spill The disaster exposes overreliance on blowout preventers that has been long disparaged by insiders.

» Nano Sponge For Oil Spills A nanowire membrane that sops up oil while repelling water could be used for cleaning up oil spills.

The Best And Worst Of Times For China's Environment

There's great progress afoot. Just don't breath the air or drink the water.

 
Gordon G. Chang,

It is the best of times for China's environment.

Chinese officials are determined to clean up their air, land and water. This month Beijing said it would subsidize purchases of electric cars and plug-in hybrids in a pilot program in five cities. The central government already offers a tax break for purchasers of smaller-engine vehicles and will follow up this year with a nationwide subsidy for gasoline-powered cars with engines no larger than 1.6 liters. These programs, according to the National Development and Reform Commission, will cover more than 4 million vehicles by 2012. The finance ministry, in recent days, announced it will also subsidize the manufacture of high-efficiency electric motors and power generators.

While cap-and-trade legislation is stalled in the swamp we call "Congress," the Chinese are racing ahead. At the end of last month Beijing said it would start a domestic market for trading carbon emissions by 2014. Just about half of the credits granted pursuant to the Kyoto Protocol's Clean Development Mechanism are for projects in China. The Chinese government is committed to reducing, by 2020, carbon emissions intensity--the amount of energy used per unit of gross domestic product--by as much as 45% over 2005 levels.

Even Beijing's social engineering programs are helping Mother Earth. The one-child policy, for example, saves 1.83 billion tons of carbon dioxide emissions a year according to official estimates.

Last year China spent $34.6 billion in clean-energy initiatives, about twice the U.S.,which has an economy three times as large. "The Chinese aren't waiting around," noted Senator John Kerry last month. They have, he said, "surpassed us in renewable energy investment."

China is now the world's number one market for wind energy, the number one manufacturer of solar panels and the number one builder of nuclear energy generating stations. "Well, folks," writes New York Times columnist Thomas Friedman, "Sputnik just went up again: China's going clean-tech." The country is no longer "Red," he assures us. We should, on the contrary, call it "Green China" now.

That's a catchy moniker, but you still wouldn't want to live there. It is also the worst of times for China's environment. The country stands on the edge of a monumental environmental crisis, perhaps the worst in world history, or at least the worst since the flood in Biblical times. Sixteen of the world's 20 dirtiest cities are located in the People's Republic, including the worst, Linfen, a coal-mining center in Shanxi province.

The rivers run black, the skies are dark gray, the land poisoned by a deadly brew of chemicals and metals. Weather patterns are changing, and storms seem more violent. Parts of the country are now uninhabitable due to sustained environmental degradation. Conditions across Green China are, in general, deteriorating. There are around 750,000 premature deaths each year due to air pollution alone.

That was the conclusion of the World Bank, relying on official Chinese data, in 2007. The Financial Times reported that Beijing forced the institution to suppress this ghastly statistic. "The World Bank was told that it could not publish this information," an unnamed advisor to the bank told the FT. "It was too sensitive and could cause social unrest."

A statistic could cause social unrest? This unfortunate episode illustrates why, despite all the money spent by the government, China's environment continues to get worse. The country's one-party state is suppressing information that could lead to citizens promoting, demanding and working for positive change. China does not have an environmental problem as much as it has a political one. To cripple potential rivals, the increasingly insecure Communist Party stepped up its campaign this year to suppress citizen groups, including those that have been so effective in creating environmental awareness.

Thomas Friedman extols the virtues of Chinese authoritarian leaders--he referred to them as a "reasonably enlightened group of people" last September--and thinks they do a swell job when it comes to the environment, but the regime that puts together wind turbines also built the disastrous Three Gorges Dam and is now working on the monumentally misconceived South-to-North Water Diversion Project. Today's leaders, unfortunately, are still waging Mao's war against nature.

And they are losing. Energy intensity, for instance, is going up. In the first quarter it jumped 3.2%, reversing the trend of the last half-decade. This unwelcome development is a direct result of Beijing's emphasis on heavy industry in its most recent fiscal stimulus campaign. Due to this and other factors, Chinese officials said this month they are "not very optimistic" on cutting carbon dioxide emissions. In fact, emissions are going in the wrong direction as well, up 1.2% in the first quarter of this year, a reversal of another trend.

We should not be surprised: Communist Party plans to promote economic growth trump just about everything else. That's why Beijing no longer publishes Green GDP statistics, which measure growth minus the cost of environmental degradation.

The Chinese may one day live in a green society with a clean environment, but that will only happen after they demand and build a new, open political system.

Gordon G. Chang is the author of The Coming Collapse of China. He writes a weekly column for Forbes.

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China Turns Its Focus To Africa

Ray TsuchiyamaBio | Email
Ray Tsuchiyama has extensive business operations background in the People's Republic of China, India and Japan, and has recruited and led teams globally in semiconductors and embedded software. 

 

When I was with a U.S. semiconductor firm I once visited the French subsidiary's Paris office.  An ethnically Chinese sales manager, who spoke English with a distinct French accent, greeted me.  During our conversation the manager explained he was born and raised on the large island of Madagascar (where French, English and Malagasy languages are spoken), off the southeastern coast of Africa, and later attended a Paris university before joining the U.S. chip firm.

His parents had traveled from Guangdong Province in southern China and settled in the capital city Antananarivo (and eventually owned several restaurants).  The Chinese population in Madagascar is larger than 50,000; the Mauritius islands have a similar population.  South Africa now has the largest Chinese community in Africa with approximately 300,000, with newly-developed Chinatowns in the eastern Johannesburg suburbs.

That country, which boasts the strongest economy in Africa, had a surge of Chinese immigration after apartheid’s end in the early 1990s. There are three South African Parliament members of Chinese descent, including two with the African National Congress (identified with former President Nelson Mandela, an isiXhosa-speaker) and one with the Nathan Freedom Party. It is not uncommon that South Africans with Chinese ancestry speak English, isiZulu, isiXhosa or Afrikaans with neighbors and friends, plus possibly Cantonese/Mandarin. (See my note on language in South Africa at the bottom of this post.)

Africa and China--seemingly entirely different worlds--are not easily linked. True, July 11 is celebrated as a holiday in the People’s Republic of China, in honor of the first voyage of Admiral Zhen. He, an extraordinary 15th-century Imperial fleet commander who completed seven long ocean voyages, including beyond the Indian subcontinent, reached the Horn of Africa and what is now Tanzania and Kenya.  His expeditions returned with giraffes and other exotic creatures to the astonishment of the Imperial Court.  (The Ming Dynasty was rather an open society; high-ranking Admiral He was both a Muslim and a eunuch.)

Even now Chinese porcelain pieces are uncovered during excavations in ancient trading cities like Zanzibar and Mombasa.  However, after these fantastic voyages, Chinese interest in “blue ocean” exploration waned and it was not until the early 1990s that Chinese re-engagement with Africa began anew and continues unabated today in many ways.


Now Africa is hot--in a political-economic sense. Africa used to be known for civil strife and famine; unfortunately, both continue in parts of the continent.  Other regions are experiencing intense competition in trade and natural resources, including oil and minerals, by firms from Europe, U.S., Japan, Korea and China.  Also, the World Cup in South Africa this month loudly heralds the arrival of Africa onto the world sports stage.

Many citizens in the U.S., Europe and Japan are unaware of the great emphasis China is placing on the African continent and its undeveloped market of 900 million people.  Over the past two decades thousands of Chinese government and state enterprise officials have fanned out throughout Africa for diplomatic recognition, educational and arts programs, FDI and business loans, giant construction projects, and business and trade deals.

By 2007, according to the New York Times, 750,000 mainland Chinese nationals were estimated to be living and working throughout Africa. Chinese financial assistance and engineering prowess completed the Lagos-Kano railway in Nigeria (a $8 billion project), the Beguile railway line in Angola with access from the Lobito seaport to interior copper mines, a freeway in Algeria and oil pipelines in Sudan.

A 2008 U.S. Council on Foreign Relations paper entitled “China, Africa, and Oil” by Stephanie Hansen paper pointed out that “Africa registered 5.8% economic growth in 2007, its highest level ever, in part because of Chinese investment. Experts say the roads, bridges, and dams built by Chinese firms are low cost, good quality and completed in a fraction of the time such projects usually take in Africa.”

From the African perspective, it is hard to build anything--bridges, roads, schools and hospitals--without money.  To do business, to sell palm oil or flowers or coffee, African small firms need money to buy seeds, fertilizer, tractors and trucks. To an African government official trying to complete a paved road to an airport or a struggling farmer in need for a loan to expand his overseas coffee sales, Chinese assistance is probably a godsend.

At the highest government level, the official multi-lateral organization between African states and the People’s Republic of China is the Forum on China–Africa Cooperation (FOCAC).  Over the past decade there have been four meetings. In 2006 in Beijing, Chinese President Hu Jintao convened with top representatives from 35 African countries. Acting more like a developed, mature economic power, he signed $5 billion worth of low-cost loans to African countries.

Three years later, at the 2009 meeting at the resort town of Sharm el-Sheikh, Egypt, the number of African states’ attendees increased to over 50. The list included 35 African heads of state, 6 heads of government, 1 vice president, 6 senior officials and the African Union Chairman. It was a rare instance because so many top Chinese leaders were out of China at the same time; Premier Wen Jiabao, Foreign Minister Yang Jiechi and Commerce Minister Chen Deming all attended.

At the overflowing 2009 FOCAC session China committed to $10 billion in low-cost loans, plus an additional $1 billion in loans for African SME firms.  The total loan figure was not all: Wen, a geologist by training, also committed funding for 30 hospitals and 30 malaria centers, training for 3,000 doctors and nurses and 1,500 teachers, 50 China–Africa friendship schools (including Confucius Institutes in 16 African countries--since Confucian teachings revere elders for wisdom, there is synergy with traditional African culture), 20,000 health and technical professionals--and, startlingly, increased the number of Chinese government scholarships for African students to 5,500 by 2012 and a new plan to bring 100 African post-doctoral fellows to do research in China.

These latter African student figures are of high significance, since the programs would dramatically increase the number of Mandarin-speaking Africans. It is challenging to find other well-funded, multi-sector African assistance programs undertaken by other developed countries, like, say, Japan, the world’s second-ranked economy, where fewer African students study at Japanese universities even though it too is a superpower.  In other words, in poker terms, China was all in for future China-Africa relations.

According to the “China, Africa, and Oil” report, from 2002 to 2003, trade between China and Africa doubled to $18.5 billion; by 2007, it had reached $73 billion.   Furthermore, the paper continues: “Much of the growth was due to increased Chinese imports of oil from Sudan and other African nations, but Chinese firms also import a significant amount of non-oil commodities such as timber, copper, and diamonds. China recently began to import some African-manufactured value-added goods, such as processed foods and household consumer goods. Eighty-five percent of Africa's exports to China come from five oil-rich countries (Angola, Equatorial Guinea, Nigeria, the Republic of Congo, and Sudan), according to the World Bank...But Chinese interest in Africa extends beyond oil. China now ranks as the continent's second-highest trading partner, behind the United States, and ahead of France and Britain.”

If China-Africa engagement continues into the future in such an explosive fashion, there will be large communities of newly arrived Chinese traders, engineers and manufacturing professionals from Cairo to Addis Ababa, from Lagos to Luanda, from Harare to Maputo to Capetown.

New Chinese enterprises will launch plants for “local products,” including clothes, pots and pans, plastic buckets, watches, shoes, soft drinks, packaged convenience foods, soap and cosmetics and low-end mobile phones. They could also make and sell consumer electronics, like localized versions of MIT Media Lab OLPC laptops and PCs, and white goods, like televisions, air-conditioners, fans, rice cookers and refrigerators.  There will be factories for cement and steel beams for new apartment and office buildings, for furniture and solar power panels.  Employing thousands of new plant workers, a line of Tata’s Nano-like inexpensive car and utility truck/SUVs could be produced in South Africa for export throughout the continent.

Simultaneously, these new Chinese-funded projects would require IT support, specialized oil drilling expertise, design services, project management skills and factory floor manufacturing equipment--in short, a new Chinese-led African business and technological eco-system with an appetite for a wide range of products and services.

What should be the future strategy for multinational firms trying to take in this Chinese wave of raw materials imports and low-cost manufacturing and sourcing in Africa?

The answer lies in the thousands of African students arriving at mainland China technical schools and universities via the aforementioned multi-year FOCAC China-Africa assistance programs.  Foreign firms should establish long-term interaction with leading Chinese faculty at Chinese universities, from top-rated Beijing University to Tsinghua to Fudan (in Shanghai) to other colleges in Tianjin, Dalian, Nanjing, Wuhan, Xiamen and Guangdong.

Employing first Chinese graduates of these colleges as liaison staff (and later Mandarin-speaking African college graduates), multinationals should sponsor Chinese faculty research in key areas like petroleum engineering, manufacturing operations and international commerce, and seek out talented students from Angola, Zambia, Congo and Sudan.

Multinational firms can train these recruits, and pay for their visits home to establish contact with their communities for further tapping of local talent.  Then these employees representing--say, Microsoft, Procter & Gamble, Bechtel or Ford--can visit Chinese-run offices in Brazzaville and converse in Mandarin about a RFQ. It's a scene that should become as familiar as a Chinese speaking Swahili or Yoruba or Malagasy-accented French, like the semiconductor sales manager I met in Paris years ago.

A complex China-Africa emerging-markets strategy of geography, products and commerce is not easy for a firm headquartered in Chicago to grasp all the pieces of the puzzle, but the first step is to identify the right talented staff who have in-depth knowledge about the two seemingly disparate worlds of Africa and China--peoples, cultures, languages and markets.

(Note: When I was working in Johannesburg, South Africa I was surprised by the ease the hotel reception staff pronounced my last name. Usually it is mangled by Americans and Europeans, as the opening “tsu” sound does not exist in Indo-European languages.   The South Africans explained that the “tsu” sound, plus other syllables in my name, is used among Bantu family language [isiXhosa or isiZulu] speakers.  I felt quite at home.)

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