China exposure a minefield for Apple and Steve Wynn shareholders -- China Boss update 12.09.22
Update
What happened.
Although Steve Wynn "was key to remaking the Las Vegas Strip from an organized crime-controlled backwater into a modern, family-friendly entertainment destination," he may yet become legendary for his legal troubles over “dealings with Beijing elite” in Macau, the Wire China’s Katrina Northrop reported. The U.S. government sued Wynn last summer to compel him to register as a foreign agent of Chinese government after he lobbied officials in the Trump administration to have a PRC national removed from the US on China’s behalf. Ultimately, the DOJ’s action failed but “Wynn’s connection to a senior Beijing official” - who, the US says, “had leverage over Wynn due to ‘his desire to protect his business interests in the PRC,’” was revealed, she said.
Northrop, The Wire China:
But this wasn’t the first time that Wynn had obscure relationships with people connected to the highest echelons of political power in China.
Records show that in 2012, a subsidiary of Wynn Resorts made a $50 million payment to a firm linked to two mysterious businessmen — Ho Ho and Ho Hoi — in order to develop the $4 billion Wynn Palace on Macau’s Cotai Strip, which Wynn once called “the single most important project” in the company’s history. The deal attracted significant scrutiny at the time, and lawyers for Wynn Resorts told The Wire what they have said before: The Macau government had “earmarked” the plot of land for a company controlled by Ho Ho and the deal was necessary in order to gain access to the land.
No regulatory body has ever accused Wynn Resorts or its affiliates of any wrongdoing in the decade-old Cotai land deal. But The Wire’s four-month-long investigation has uncovered new evidence about Wynn’s partners, including the determination that Ho Ho and Ho Hoi were using aliases. The two men are brothers who grew up in Beijing and had multiple passports, deep ties to the Chinese military, offshore companies and indirect business connections to the relatives of China’s supreme leader, Xi Jinping.
Emphasis added.
Why it matters.
Overexposure: Apple
Earlier this week, editors of the Wall Street Journal breathed a sigh of relief at “the most important signal to date that Western CEOs are wising up about business risks in the People’s Republic,” reporting that Apple has “plans to move much of its iPhone supply chain out of China.” “Any corporate board that isn’t doing the same is doing a disservice to shareholders,” they said.
Editorial Board, WSJ:
Apple hasn’t announced its investment plans. But the Journal reports that the company is telling suppliers that it will move more assembly of Apple products elsewhere in Asia, especially India and Vietnam. This will no doubt be costly given that other countries lack China’s workforce of engineers and network of suppliers.
But the recent protests at an Apple supplier in Zhengzhou have highlighted the business risks of draconian Chinese Covid policies. News reports say Apple’s iPhone production could fall six million units short this year. Apple is also under growing pressure in the U.S. and elsewhere to speak up against Chinese human-rights and other abuses, though doing so would risk Communist retribution. Moving to be less dependent on China makes sense.
On LinkedIn, Jonathan Ward, founder of Atlas Organization and Author of China's Vision of Victory, zoomed out to the bigger picture, saying “we have been living through a systems failure when it comes to high-risk US economic exposure to China: corporate boards and executives can be slow to act in their own long-term interests, government has yet to set comprehensive guardrails on corporate exposure to China, and shareholders have been late to catch on to the world-changing nature of the problem.”
Ward, LinkedIn:
The amount of China-risk that has now concentrated in companies like Apple means it may be very unlikely that a company like this one will keep its soaring market cap in the 2020s. Apple is a great example of a company that is in the bullseye of many of the major forms of China risk: supply chain, revenue, assets, reputation/brand (in both China and USA), and more. Without a new global strategy, Apple is unlikely to remain the company that it is today. But is there evidence that they are ready to act with urgency?
Cautionary tale of Steve Wynn
Although news of Apple’s “diversification” away from China might be the tipping point for western firms, Steve Wynn’s case is more poignant as a cautionary tale for shareholders and for foreign executives, themselves. While in October, according to CNN, a federal judge ultimately agreed that Wynn could not be forced to register under the Foreign Agents Registration Act - since "even if the allegations were true” the obligation to do so expired “by October 2017, which is when DOJ alleges that Wynn’s relationship with the Chinese government ended" - the reputational damage is done. Standing accused of being a foreign agent of China by the US government is, in ordinary times, bad press. But these days, China is flagged as “a threat” by officials across local and federal agencies almost daily.
Worse, official labels are not only sticky, they may result in additional inquiries.
In her extensive review of Wynn’s China business, Northrop oscillates between the success that Wynn had in Macau and the muddied ways in which “money and power intersect on [the] tiny island in China’s shadow.” While Northrop said her investigation did not reveal conclusive proof “of wrongdoing,” she believes that it “raise[s] questions” regarding whether Wynn’s companies - both of which are publicly traded - failed to properly carry out their due diligence duties “to ensure that [the] large payment to the Ho brothers’ firm did not run afoul of the Foreign Corrupt Practices Act (FCPA).”
Northrop, The Wire:
The deal with the Ho brothers has attracted intense scrutiny over the years, but The Wire is publishing the most detailed and comprehensive account yet of the origins of the Macau land deal and the people behind it. To confirm the identities of the Ho brothers, this publication reviewed scores of corporate records, land registries and court filings from Hong Kong, China and Macau. Our investigation also drew on access to the Panama Papers — which were shared by the International Consortium of Investigative Journalists and Süddeutsche Zeitung — to review identity cards and other documents.
In doing so, we have reconstructed a business alliance that sheds light on the often impenetrable universe of high stakes dealmaking in Macau, one of the world’s biggest gambling hubs. In the past two decades, Macau, which became a Chinese “special administrative region” in 1999, has been rocked by scandals involving bribery, corruption and links to organized crime. Experts say seeing through the city’s veneer and doing background checks on Macau’s businesspeople — who often hail from nearby mainland China and Hong Kong — has long been difficult, even for multinational corporations like Wynn Resorts.
But for those who think their China risks are mitigated because they don’t have business in Macau, China Boss reminds you of the 2013 SEC investigation into JPMorgan’s ties to then-premier Wen Jiabao on the Mainland. She stresses that the company’s legal troubles began only after New York Times broke the story. In other words, while the SEC may be spread a little thin, it can recognize bribery violations when it sees them in the headlines, and - unlike Vegas - what happens in China doesn’t always stay there.
New York Times (CNBC reprint) (2013)
For the last two decades, Wall Street banks and multinational corporations operating in China have sought out so-called princelings as employees, consultants or partners in major Chinese business deals. Many banks talk freely about the ability of princelings to open doors and offer insights into government policies and regulations.
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Have a great weekend.