GLG and the Future of Expert Networks in China

Gerson Lehrman Group (GLG), a US-headquartered expert network and consulting company, has reportedly joined the list of due diligence firms reducing their workforce in China due to increased scrutiny by Beijing for national security reasons.

According to several sources familiar with the situation, GLG, which provides due diligence services for transactions for global investors, initiated staff cuts in China this year. While GLG declined to comment, an insider revealed to the Financial Times that the company implemented a global workforce reduction of approximately 3.5% in May.

Offering further insight, the unnamed insider mentioned that the staff reduction in China was consistent with the global reduction plan. However, earlier this year, GLG had initially intended to expand in China, relocating employees to a new office in Shanghai and hiring new staff. “GLG was bullish in March and said business was booming. They were hiring and had just moved into bigger offices,” the source noted.

Moreover, in its prospectus for an initial public offering (IPO) filed in the US in 2021, GLG disclosed that its "Greater China Business Unit," which included mainland China, Hong Kong, and Taiwan, accounted for 6.8% of its total revenue in the first half of that year. However, GLG later withdrew the IPO. In the prospectus, GLG warned about potential government interventions or influence on its operations and the volatility of rules and regulations in China.

The GLG staff cuts came as the Beijing authorities tightened pressure on expert network groups and other consultancies conducting due diligence in China. Last May, state media disclosed that Capvision, a company operating extensively in China, had been raided by the police for national security reasons. Capvision was accused of acquiring sensitive information, including military-related data, from individuals within the government to provide to overseas clients.

The raid on Capvision was part of a series of investigations undertaken this year targeting foreign consultancies in China, including Bain & Company and Mintz, whose five local employees were detained in March. In response to the growing restrictions on foreign businesses operating in China, US group Forrester Research announced job cuts and the closure of its China office as part of a previously announced global restructuring.

The tightening of regulations by the Chinese government has raised concerns among international investors, causing many to question the future of Chinese financial opportunities. Many foreign companies rely heavily on consultancies like GLG to navigate the complexities of the Chinese market and a withdrawal of their services would make it more challenging for them to operate in the country.

Investors and foreign corporations have expressed difficulties in conducting due diligence for investments and procurement contracts with Chinese partners and suppliers due to the intensified crackdown, causing many to resort to smaller and remote firms outside China. This includes ENC which still has connections with the country’s industry and is able to gain insights for due diligence purposes and offer advice on upcoming regulation changes.