Transcript: McKinsey’s China problem

This is an audio transcript of the FT News Briefing podcast episode: ‘McKinsey’s China problem’

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Marc Filippino
Good morning from the Financial Times. Today is Thursday, February 29th, and this is your FT News Briefing.

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Uber’s CEO is in the big leagues now, and Adani has answered India’s call to arms. Plus, McKinsey is in hot water over its links to the Chinese government. I’m Marc Filippino, and here’s the news you need to start your day.

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Uber has hit $120bn valuation, and its CEO is being rewarded generously for it. Dara Khosrowshahi just got about $136mn in stock options after hitting the performance target. The company’s high valuation seemed pretty out of reach the first few years after its initial public offering. Uber struggled with tens of billions of dollars in losses, but its share price jumped almost 150 per cent in the past year. That’s because Khosrowshahi cut costs and brought in new sources of revenue. The new stock options put Khosrowshahi’s pay on par with big tech CEOs like Amazon’s Andy Jassy and Alphabet’s Sundar Pichai.

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India just produced its first military surveillance drone. The only thing is: it wasn’t made by India’s military or its government but rather the huge private sector conglomerate Adani and an Israeli military producer called Elbit. The partnership is an example of an Indian corporation that has answered Prime Minister Narendra Modi’s call to build a world-class defence industry, which is something India has struggled to do for years.

John Reed
They’ve been very slow to develop an indigenous arms industry and relied for many, many decades after independence on imports from first the Soviet Union and now Russia.

Marc Filippino
That’s John Reed, the FT’s south Asia bureau chief.

John Reed
There were various state-owned companies that were involved in developing things like fighter jets, but things have gone slower than perhaps they should have. And now, belatedly, the Modi government, which took power a decade ago, has been pushing private sector conglomerates to jump into the sector, usually in partnerships with foreign companies that will bring some technology to the table.

Marc Filippino
India is still the world’s biggest arms importer, but now it’s trying to get foreign and domestic companies interested in beefing up the country’s military production capabilities.

John Reed
So couple of years back, India started allowing foreign companies to be majority partners in defence companies. So that made it much more attractive for a foreign company to come into India. The other thing that India has done is to leverage its sort of growing foreign policy as a way of luring them into partnerships in India. You know, getting defence companies to invest as a way of smoothing the path for their own arms sales. They’ve done a similar thing here. They’ve basically said if you invest in India, we might be more likely to buy your arms, and your relations with us might be better.

Marc Filippino
Which brings us back to the Indian conglomerate Adani and its partnership with the Israeli company Elbit.

John Reed
So specifically, Adani is very good at building stuff — airports, infrastructure, different kinds renewable energy. We don’t have a lot of granular detail on how that Elbit partnership came to be. We do know that since 2015, the Modi government, and Modi personally, has drawn much closer to Israel. So there’s been definitely an alignment on the geopolitical side. And also, Adani has its own business connections with Israel. They operate the second-largest port in Israel at Haifa. So there’s a bit of a history there, both on the government side and on the Adani side.

Marc Filippino
But there are some questions about whether things like that surveillance drone are actually going to set India on the path towards being able to produce its own weapons.

John Reed
I would be careful about exaggerating it too much. This is not technology that was developed in India. It’s very much Elbit’s technology. That said, it does help an Indian company, in this case Adani, develop its expertise in manufacturing and sort of observing the process. But it’s going to be, I think, a long time before India becomes a real, original equipment manufacturer, to use the jargon, that is a company that develops its own defence products.

Marc Filippino
That’s John Reed, the FT’s south Asia bureau chief.

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McKinsey is coming under fire in the United States for its links to the Chinese government. The consulting firm led a think-tank that advised Beijing on one of its planning projects, and the company claimed in marketing materials that it worked directly with the central government. The FT’s Stephen Foley broke the story about McKinsey, and he joins me now. Hi, Stephen.

Stephen Foley
Hi, there. Nice to speak to you.

Marc Filippino
Good to have you on. So just give us a quick rundown of what you uncovered.

Stephen Foley
Well, we’ve been working on this throughout February, partly because Bob Sternfels, who’s the leader of McKinsey, was in front of a congressional committee on February 6th where he was asked about the firm’s work in China. And he was very emphatic, saying that they had not worked for the Chinese central government. And it seems that there are some definitions of the word “work” that perhaps need to be debated here. It turns out that a McKinsey-led think-tank, called the Urban China Initiative, played a role in the central planning process for the 13th Five-Year Plan, which was the 2015-2016 plan in which China made a great effort to become more technologically independent. And that was kind of a trigger for the trade war with the Trump administration so a very pivotal moment in US-China relations. We were also looking also at an old McKinsey China website, which has since been shut down, where they talked about working directly for the central government in China. So some contradictory claims by McKinsey.

Marc Filippino
OK, so if I’m understanding this correctly, Stephen, the issue is that McKinsey’s consulting basically contradicted US policy goals, right?

Stephen Foley
It certainly provoked a reaction among China hawks on Capitol Hill. I should say that McKinsey has been very emphatic that it stands by the statements that Mr Sternfels made under oath, and which it’s been quite consistently saying for several years. It says that the old marketing website that we were looking at, and it contained inaccurate characterisations of its work in China. And it points out that the Urban China Initiative, which did that work, is not McKinsey. It was founded in partnership with two other universities. So McKinsey and the UCI, they’re putting distance between those two things.

Marc Filippino
Still, McKinsey’s reputation is in danger right now. What’s at stake for them?

Stephen Foley
They are a big contractor to the US government, and a large proportion of that is work for the Department of Defense, which is why Republican lawmakers in particular are concerned to get to the bottom of exactly how McKinsey works in China. They raise questions about national security, making sure that there’s firewalls between different projects and also just a general conflict of interest between working with a government and a country, which at least some see as a competitor, if not a foe of the United States. There’s been renewed calls for McKinsey to be stripped of its contracts for the Pentagon and a moratorium on new work for the federal government more generally.

Marc Filippino
This isn’t the first time McKinsey’s consulting projects have come under fire. Can you put this episode into context for me?

Stephen Foley
Yeah. I mean, there is a general question about McKinsey’s work for governments around the world. You know, this is a firm that has expanded government work over the last few decades, and that has meant, you know, that it is working for regimes that have a very different perspective on things like human rights and other issues to the United States. So there can be conflicts between what looks like acceptable work in some countries versus another when you’re working for governments.

Marc Filippino
So, Stephen, what are these problems say about the future of McKinsey?

Stephen Foley
Well, it’s very interesting because it does play into this question internally in McKinsey about how it responds to all of these different pressures. Bob Sternfels has just survived what was quite a strong challenge to his leadership actually. He’s now got a second three-year term. But there’s certainly been concerns inside McKinsey about a leadership style that is centralised decision-making in what has traditionally been quite a loose partnership around the world. But Mr Sternfels and the people around him are absolutely adamant that it needs to have centralised controls, centralised decision-making, in order to make these decisions about what work is acceptable and whether or not its reputation might be damaged by taking on some of these clients. So that centralisation process, I think, is going to continue inside McKinsey.

Marc Filippino
Stephen Foley is the FT’s US accounting editor. Thanks, Stephen.

Stephen Foley
Thank you very much.

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Marc Filippino
You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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