Note – the matters in this article were current when first written in 2017.
In about 2014, Crown spent USD$21 million to make this 1 minute and 30 second television ad featuring one of China’s most popular actors. It ran in mainland China…. for all of 4 days before disappearing.
Spot anything suss (apart from the very weird overly-dramatic music)?
How about if I told you gambling and advertising of gambling was illegal in mainland China?
Maybe the Chinese authorities would turn a blind eye to all those over-the-top gambling metaphors?
Or maybe it would lead to ultimately dozens of Crown employees being arrested and Crown being forced to sell its new flashy $3.2 billion Macau casino?
Place your bets!
As part of my studies in China, I examined some of the efforts of foreign companies to expand into China. They were often driven with a naive assumption that the Chinese market was an easy place to expand into. Many have been left licking their wounds, because it turns out, China is not an easy place for foreign businesses to operate in. So if you’ve got nothing better to so, grab a drink (ideally alcoholic) and tuck into Crown massive fail:
All In: The lessons to be learned from Crown’s China mistake
In 2013, Australian businessman and chairman of Crown Resorts Limited, James Packer announced his company’s plans to open a large casino in Macau. “Ladies and gentlemen” he declared “I have made many, many mistakes in my life, but investing in China is not one of them.”[1] Crown, unlike the Titanic, was unsinkable.
This article will examine how Crown sank – on full retreat from China, selling down its assets, fourteen of its staff languishing in detention in China, awaiting charge for ‘gambling related crimes’.[2] Its Chinese high-rolling clients have abandoned it in fear of interrogation by the police. Its shareholders are suing it in a class-action suit relating to its Chinese activities.
The players
Packer and Crown Resorts Limited
James Packer is the son of the late Kerry Packer. Kerry Packer was an Australian media tycoon and was at one stage, Australia’s richest man. After Kerry’s death in 2005, James Packer began focusing his efforts on the gambling and entertainment industries, incorporating the publicly-listed company, Crown Resorts Limited. Crown is now Australia’s biggest gaming company, owning casinos and resorts across Australia and the world. From its early days, Crown has set its eyes on a bigger prize – the international gambling market. Through several joint ventures, it has acquired stakes in casinos and resorts in Las Vegas, Sri Lanka and Macau. By 2013, it had a 37% interest in a Melco-Crown Entertainment. That company owned casinos in Macau which proved to be very lucrative, largely from revenue received from very rich Chinese mainlanders who visited Macau to gamble large amounts. Inspired by this success, Packer set his eyes on dominating the market for this growing class of people. His vision was to attract these high-rollers to Crown’s casinos in Australia. To achieve its goals, Crown needed to rely on some shady characters.
The shady middlemen
Crown needed help to conduct its business in China. It needed people who could attract Chinese high-rollers to its casinos. These people were known as ‘junket operators’ and they were usually paid a commission as a percentage of the gambling profits made from their clients they brought to Crown. Many of these junket operators had dark pasts, with links to criminal gangs (including the triads), corruption and money laundering. Gambling debts are not enforceable through the Chinese legal system, so an additional role of these operators was to enforce judgments in mainland China for Crown through ‘alternative means’ (i.e. threats, intimidation, physical injury, kidnapping and in some cases, murder).[3] Crown had an extensive network of these junket operators in mainland China and encouraged them to aggressively recruit high-rollers.[4] While Crown’s profits soared, the high risk of associating with these figures was a recipe for disaster.
The high-rollers
The high-rollers that Crown was targeting had various backgrounds. Some were just very wealthy individuals looking for some entertainment. Many, however, saw gambling as a way to launder money and to circumvent China’s strict currency controls. The main strategy of high-rollers was to open a line of credit with a junket operator and use that credit to finance their gambling activities.[5] Their winnings would accrue outside of mainland China and were not subject to currency controls. If they lost money, they could repay the junket operator in mainland China.
The Chinese Government
Since its rapid opening up since 1978, China has formulated a huge body of laws in a very short period. The enforcement of these laws, however, has been patchy and in many cases, politically motivated. While many business activities in China may technically breach a law or regulation, in many cases, authorities have been prepared to turn a blind eye because of bribes, personal relationships, the fear of powerful interests backing the business or a belief that the benefits of the activity outweigh the technical breach. In China, perhaps more so than in other countries, politics, money, power and personal relationships are all inherently linked. While this system plays to the benefit of business people when the cards are in their favour, it is inherently unstable and their luck can abruptly run out.[6]
The game
From the outset, Crown was playing a dangerous game – one of high risk with potentially high returns. Gambling in mainland China is illegal, as is the promotion of gambling.[7] A strange place to invest for a casino operator. But Crown was undeterred. It saw mainland China is a fertile recruitment ground to funnel high wealth individuals to its casinos outside the mainland. The growing Chinese upper classes were rolling in money and wanted to gamble. The opportunity was just too tempting for Crown and other casino operators to ignore. At one point, Chinese high-rollers were generating 17.5% of Crown’s total international revenues.[8] Crown was not ignorant of the risks. It ran the line (no doubt developed by its lawyers) that Crown was not promoting gambling in mainland China – it was promoting tourism to its resorts, which happened to exist alongside its casinos. To continue the ruse, in late 2013, Crown renamed itself from ‘Crown Limited’ to ‘Crown Resorts Limited’. This was an obvious attempt to highlight its non-gambling activities, despite its gambling-related activities generating about 75% of its revenue.[9]
The drama
Initially, Crown’s bet was paying off. So successful was the Macau joint venture that it began building a new AUD$3.2 billion casino in Macau[10] and in 2016, received approval to build a new casino in Sydney, Australia, aimed exclusively to visiting Asian high-rollers.[11]
But the game changed with Xi Jinping’s ascent to the Chinese Presidency in 2012.[12] The cornerstone of his presidency was an unprecedented crackdown on corruption. And when corruption was investigated, it inevitably led to the clientele of casino operators, who were channelling their ill-gotten gains out of the country through gambling. There are some estimates that at its peak, about USD$250 billion was being funnelled out of mainland China through gambling activities in Macau alone.[13] These huge outflows of currency were not only the proceeds of corruption, but also represented a serious economic threat, depriving China of financial capital on a huge scale and putting downward pressure on its currency.
The game was up. In October 2015, the Chinese Government arrested 13 Korean casino managers who were accused of luring Chinese high-rollers to gamble in South Korea.[14] One would have expected alarm bells to loudly be ringing at Crown headquarters, but surprisingly, Crown determined that those arrests did not pose any change in the attitude of the Chinese Government. With an eye to the profits and its funds already committed, Crown took no precautions and continued with business as usual.
On 13 October 2016, the Chinese police orchestrated midnight raids across the country, including in Beijing and Shanghai. Those arrested were employees, or associates of Crown. By chance, Crown’s head of marketing to China Jason O’Connor was in Shanghai at the time. He was tipped off about the raids and fled to the airport. He was arrested while attempting to board a flight out of the country.[15] Crown’s luck in China had run out.
The fallout
The fallout from the arrests was immediate. Realising the consequences, Crown offices internationally began purging data about its Chinese clients. But the damage had been done – the Chinese police had seized computers from the detainees. It didn’t take long for the police to begin interrogating the high-rollers. Understandably, as the word spread, Crown’s clients decided to permanently delay their next casino visit. As a result, conservative estimates suggest that Crown’s 46% of Crown’s total revenue was generated from high-rollers (albeit, not limited to mainland Chinese high-rollers).[16] On receiving news of the raids, investors deserted Crown. Its share price plunged 14%.[17]
But the headache for Crown was just beginning. It bore the ultimate responsibility for its employees who were then at the mercy of the Chinese legal system, notorious for its lengthy and ambiguous processes. At present, fourteen of Crown’s employees are detained in China without charge. The Australian Government expects that charges will not be laid for at least another year.[18]
And to add to its misery, Crown’s shareholders have brought a class action lawsuit against the company, alleging, that it had failed to disclose to the stock market the significant risks it faced by in its Chinese high-roller strategy.[19]
The lessons to be learned
Lesson 1: When it comes to China, don’t fly too close to the sun
A key lesson that can be distilled from Crown’s disastrous experience for foreign entities doing business in mainland China is to stay clearly within the rules. Know what the rules are and stick to them. Trying to circumvent them in one way or another puts you on a trajectory for disaster. Even if Chinese officials leave you to your own devices initially, at a moment’s notice, activities that were previously tolerated can become a matter of strict enforcement.
Crown was well aware of the tight-rope it was walking. It was always grappling with the problem of advertising in mainland China without promoting gambling. The result was creative to say the least. For a 1 minute and 30-second television advert aimed at the Chinese mainland, it paid Chow Yun-Fat, one of China’s most popular action movie heroes USD $21 million.[20] It had the script and the advert approved by the Chinese Government in advance. The advert is a slick compilation of symbols and imagery that effectively promotes gambling.[21] The Chinese Government quickly caught on and within 4 days, reversed its previous decision and banned the advert from playing in mainland China. An expensive experience for Crown, but it fore-warned it of the arbitrariness of law enforcement in China.
The fundamental problem for Crown was that its business model was that it was either breaching, or coming very close to breaching Chinese law. While it maintained the thin argument that it was promoting its resorts, in reality, its objective was to recruit high-wealth mainland Chinese gamblers, which was near impossible to do without promoting gambling. To think it could dance around the problem with neat technical legal argument was a tragic miscalculation of the Chinese Government. Playing on legal technicalities that at least breach the spirit of a law don’t work well when those who made the law also exercise significant control over the law’s interpretation and enforcement through the control of the judiciary.
Lesson 2: Make the integrity and reputation of your business your top priority
Maria Razumich-Zec, a Vice-President of ‘The Hong Kong and Shanghai Hotels’ is quoted as saying that in business “reputation and integrity are everything”.[22] That wisdom perhaps holds even for force when doing business in mainland China.
The clients that Crown targeted were extremely wealthy individuals in China. Many of those individuals had acquired their wealth by illegitimate means and saw gambling as a way to launder their funds. Crown was aware of such sensitivities, as is obvious by its coordinated efforts to destroy client records upon the police raids.
Further, Crown relied on unsavoury junket operators with dark backgrounds and connections to entice high-rollers and collect gambling debts, adopting an apparent blissful ignorance of their methods.
By associating with such people, Crown’s business slide into ethical bankruptcy. Profit was the top priority. Issues of money laundering, thuggery and breaches of Chinese law were not going to stop Crown’s gravy train. This ignorance put Crown in the crosshairs of the government officials, who under President Xi Jinping were determined to stop capital outflow from China and to crackdown on corruption.
In contrast, many foreign business forge a reputation of compliance and integrity in China. From that reputation develops a far stronger bond with government officials and creates a spirit of cooperation rather than distrust and hostility.
Lesson 3: React to warning signs
The Chinese Government is notorious for having many rules, but being selective into which it enforces and against whom it enforces them. Possibly the most important lesson in the Crown saga is that foreign businesses operating in China need to keep up to date with current developments and react to warning signs about changes in attitudes and enforcement policies.
This was perhaps Crown’s most egregious mistake. In February 2015, the deputy chief of the Chinese Public Security Bureau Hua Jingfeng issued a direct warning to casinos that were advertising on the mainland. He warned “A fair number of neighbouring countries have casinos, and they have set up offices in China to attract and drum up interest from Chinese citizens to go abroad and gamble. This will also be an area that we will crack down on.”[23]
If this unambiguous warning was insufficient, then Crown should have paid attention when staff of the South Korean casino operators were arrested in October 2015 for precisely the same activities that Crown was engaging in. After these arrests, two things should have been abundantly obvious: firstly, the Chinese Government was serious about cracking down on gambling; and secondly, the Chinese Government was not going to afford foreign companies any favourable treatment.
Instead of a swift and decisive reactions to these warnings, an assessment by Crown decided that the situation “did not signal a serious threat to Crown staff.”[24] That hubris proved to be a very costly mistake.
Conclusion
Crown’s experience in pursuing the Chinese market has proved disastrous to its fortunes. It has now effectively surrendered its push into the Asian market, selling its stake in its Macau casinos and retreating from other international investments.[25] The head of its China push, Michael Chen has left the company and 14 of its employees remain detained in China. Even if they are ultimately acquitted, the damage to the company is irreparable. Foreign companies that chase the often lucrative Chinese market should learn the lessons of the Crown’s mistakes.
Footnotes:
[1] Address by James Packer, Executive Chairman Crown Resorts Limited, 14 March 2013, accessible at: https://asiasociety.org/files/uploads/84files/James_Packer_AsiaSociety140313.pdf
[2] Grigg, Angus and Murray, Lisa, ‘Breakthrough for jailed Crown staff in China as lower court takes case’ (Australian Financial Review, 3 May 2017), accessible at: http://www.afr.com/business/gambling/breakthrough-for-jailed-crown-staff-in-china-as-lower-court-takes-case-20170503-gvy3q9#ixzz4j1XcX0wb
[3] Wilkinson, Marian, ‘Crown Confidential – Packer’s Losing Hand’ (ABC Four Corners, 7 March 2017), transcript accessible at: http://www.abc.net.au/4corners/stories/2017/03/06/4629069.htm
[4] Grigg, Angus and Murray, Lisa, ‘Crown aggressively chased big gamblers in deals with Macau junket operators’ (Australian Financial Review, 27 October 2016), accessible at: http://www.afr.com/business/gambling/crown-aggrerssively-chased-big-gamblers-in-deals-with-macau-junket-operators-20161027-gsbvm7#ixzz4j1iNGedZ
[5] Grigg, Angus and Murray, Lisa, ‘Crown aggressively chased big gamblers in deals with Macau junket operators’ (Australian Financial Review, 27 October 2016), accessible at: http://www.afr.com/business/gambling/crown-aggrerssively-chased-big-gamblers-in-deals-with-macau-junket-operators-20161027-gsbvm7#ixzz4j1iNGedZ
[6] See generally, McGregor, James, ‘One Billion Customers’ (Free Press, 2005), Chapter 3 “Eating the Emperor’s Grain” and Chapter 5 “Caught in the Crossfire”.
[7] Obviously, gambling is an industry that appears on the prohibited list of Foreign Investment Industries in China’s Catalogue for the Guidance of Foreign Investment Industries.
[8] Wen, Philip, ‘Meet ‘Mr Chinatown’ of Toorak, Crown Casino’s biggest whale catcher’ (The Sydney Morning Herald, 29 October 2016), accessible at: http://www.smh.com.au/business/meet-mr-chinatown-of-toorak-crown-casinos-biggest-whale-catcher-20161027-gscj6d.html
[9] Crown’s 2015 Annual Report, page 102, accessible at: http://www.crownresorts.com.au/CrownResorts/files/c5/c5b9b374-3ab2-410a-8735-9a3266f461fa.pdf ; and Crown’s 2016 Annual Report, page 92, accessible at: http://www.crownresorts.com.au/CrownResorts/files/ba/babe9e67-2a7b-4d26-8ffb-96cf5fec0c41.pdf
[10] Curtains Up! Studio City Announces Grand Opening October 27, 2015, Globe News Wire, 15 August 2015, accessible at: https://globenewswire.com/news-release/2015/08/05/757958/10144456/en/Curtains-Up-Studio-City-Announces-Grand-Opening-October-27-2015.html
[11] ‘Crown Sydney Set to Remain VIP Casino Only’ (Casino News Daily, 7 March 2017), accessible at: http://www.casinonewsdaily.com/2017/03/07/crown-sydney-set-remain-vip-casino/
[12] ‘Full text: China’s new party chief Xi Jinping’s speech’ (BBC 12 November 2012), accessible at: http://www.bbc.com/news/world-asia-china-20338586
[13] Wilkinson, Marian, ‘Crown Confidential – Packer’s Losing Hand’ (ABC Four Corners, 7 March 2017), transcript accessible at: http://www.abc.net.au/4corners/stories/2017/03/06/4629069.htm
[14] ‘China arrests South Koreans for luring Chinese to casinos’ (Reuters, 14 October 2015), accessible at: http://www.reuters.com/article/us-china-gambling-idUSKCN0S80XY20151014
[15] Wilkinson, Marian, ‘Crown Confidential – Packer’s Losing Hand’ (ABC Four Corners, 7 March 2017), transcript accessible at: http://www.abc.net.au/4corners/stories/2017/03/06/4629069.htm
[16] Wilkinson, Marian, ‘Crown Confidential – Packer’s Losing Hand’ (ABC Four Corners, 7 March 2017), transcript accessible at: http://www.abc.net.au/4corners/stories/2017/03/06/4629069.htm
[17] http://www.smh.com.au/business/markets/james-packers-crown-resorts-faces-class-action-from-investors-over-china-arrests-20170202-gu40x4.html
[18] Grigg, Angus, “Crown staff facing another year in Chinese jail” (Australian Financial Review, 16 January 2017), accessible at: http://www.afr.com/business/gambling/crown-staff-facing-another-year-in-chinese-jail-20170115-gtrpgf#ixzz4j1oIO3VW
[19] Chappell, Trevor, ‘Shareholders to push Crown in class action over China arrests’ (The Australian, 3 February 2017), accessible at: http://www.theaustralian.com.au/business/companies/shareholders-to-push-crown-in-class-action-over-china-arrests/news-story/0d67ef74d99377a052a303d978db4b2f
[20] Pearce, Daylan, ‘How To Market A Casino In China When Gambling Is Illegal’ (27 February 2014), accessible at: http://daylandoes.com/casino-marketing-in-china/
[21] The advert is accessible here: https://www.youtube.com/watch?v=_ikyYoipeNA
[22] Dormann, Henry, ‘Letters from Leaders: Personal Advice For Tomorrow’s Leaders From The World’s Most Influential People’ (Lyons Press 2013).
[23] Griggs, Angus, ‘Crown Resorts staff formally arrested by Chinese police’ (Australian Financial Review, 20 November 2016), accessible at: http://www.afr.com/technology/gaming/crown-resorts-staff-formally-arrested-by-chinese-police-20161120-gstg12#ixzz4j1rgDxVd
[24] Wilkinson, Marian, ‘Crown Confidential – Packer’s Losing Hand’ (ABC Four Corners, 7 March 2017), transcript accessible at: http://www.abc.net.au/4corners/stories/2017/03/06/4629069.htm
[25] Chappell, Trevor, ‘Crown pulls out of Macau with $1.34bn deal’ (News.com.au, 9 May 2017), accessible at: http://www.news.com.au/finance/business/breaking-news/crown-resorts-exits-macao-in-134bn-deal/news-story/e6bb8cfce4efd9c9f7fd755e423fca0d; ‘Australia’s Crown completes Macau gaming exit’ (Malaya Mail Online, 9 May 2017), accessible at: http://www.themalaymailonline.com/money/article/australias-crown-completes-macau-gaming-exit