DOING BUSINESS IN CHINA
Businesses and the business world in China often operate more on the basis of connections and bureaucratic whim than market forces and rule of law. The China expert Sidney Rittenberg. Told the New York Times that to do business in China candor is essential; patience in required and three times more preparation time is needing to cinch a deal in China than in the United States.
Justin Fox wrote in Time, in the early days of the economic reforms in China “capitalist bosses loved working with officials of the nominally communist Chinese government, who were far easier to deal with in than politicians back home, And why not? On one side, you had autocrats who feared losing their grip on power if the economy didn’t keep growing on the other were autocrats who feared losing their grip on power if profits didn’t keep growing.”
Dan Mintz, whose DMG Entertainment is a leading producer and distributor of movies in China, told the Los Angeles Times that doing business in China requires a partnership approach. "The more you reach out, the better your relationships will be," he said. Journalist and China expert James McGregor wrote in the Washington Post, “China is about unity, focus and leverage. Chinese officials and business executives are obsessed with a single question: What advantage do I have over you?”
To do business in China requires having some help navigating through the vast Chinese bureaucracy. It is important to under understand the nuanced ways communication is carried out, who has the power to make decisions and understand how proposals are being perceived.
Complex corporate structures, unreliable accounting practices, murky government involving, opaque banking practices make it difficult to gage the health of Chinese companies and give them Standard & Poor ratings.
Chinese sometimes have difficulty organizing into effective work units. Scholar William McNeil once wrote: "The Chinese have never been able to organize collective effort with the sort of enthusiasm and efficiency of the Japanese. There is a kind of ruthless individualism in Chinese life, a competitiveness and acquisitiveness, that may make modern large-scale industrial organization difficult.”
Mintz said, “One big reason American firms stumble in China is that the government tends to favor locals when it comes to regulation...One way to make sure that doesn’t happen is to allow the government to own a stake. Beijing wants to own stakes in foreign firms because it is trying to control them. Its ambitions may at the moment look unrealistic to us, but that does not mean swaggering — and strategic-thinking — Communist Party officials do not hold them."
Websites and Sources on Consumer Customs and Behavior: ; Paper on Chinese Consumer Behavior pdf file fransgiele.be ; Ogilvy Mindshare Power Point Presentation on Chinese Consumers authorstream.com ; Business Customs, Manners and Etiquette: Understanding Chinese Business Culture legacee.com ; Book: Chinese Business Etiquette, Manners and Culture in the People’s republic of China by Scott Seligman (Warner Books, 1999).
Success in Business in China
According to Chinese philosophy three factor are key to success: “timing and climate, location and human relations.” In the early Deng era, connections were important. Now there is widespread belief that if you work hard, study hard and take advantage of opportunities that appear success will come your way.
Dale Carnegie books such as How to Friends and Influence People and How to Stop Worrying and Start Living sell well in China. Other popular book that fit into the “success studies” category includes “Rich Dad, Poor Dad,” “Who’s Moved My Cheese” and “Harvard Girl,” the story of a young Chinese girl from a working class industrial town that managed to get into Harvard. It sold 1½ million copies. Books by Bill Gates, G.E. CEO Jack Welch and Hong Kong tycoon Li Ka-shing also sell well.
By some counts success books make up a third of all books sold. These including a whole genre books on Jewish success with titles like The Eight Most Valuable Business Secrets of Jewish Wealth, The Legend of Jewish Wealth and Jewish People and Business: The Bible of How to Live Their Lives. See Jews
People from Wenzhou are famous throughout China for their entrepreneurial skills. Books about them include The Jews of the East: The Commercial Stories of Fifty Wenshou Businessmen; You Don’t Understand the Wenzhou People; and The Feared Wenzhou People, the Collected Stories of How the Wenzhou People Make Money
Many feel that the real secret to getting ahead in the Chinese business world and understanding Chinese business customs is understanding which Communist official is in charge of which sector, how to pacify Chinese rivals and the art of giving bribes to the right people.
Risk, Success, and Competition in China
In the West risk takers are generally praised as people with ambition and drive while in China they are often viewed as overly emotional and careless.
Chinese can be very competitive. They are very serious about games and will do anything to the win. One Uighur man told the New Yorker that Chinese never fight fair: “It’s not because of their culture, and it’s not because of their history. It comes from something inside their blood.”
It traditionally has been considered to be in bad taste to come across as too ambitious Many Chinese today however are obsessed with achieving success. Peter Hessler wrote on National Geographic that he found the following slogans inscribed next to a worker’s bed: “Find success immediately,” “Face the future directly,” and “A person can become successful anywhere; I swear I won’t return home until I am famous.”
Connections in China
Connections (guanxi) and family bonds and informal networks of relationships and obligations are very important in business and life in China. Sometimes it seems like everything is done with the help of a personal contact. If you can't find someone with a service you need you find someone knows someone who does. One telecom executive told the Washington Post, “In China, to do business you have to be everybody’s friend.”
Personal relations are morally and legally ambiguous, existing in a gray and ill-defined zone. In some cases, personal connections involve corruption and favoritism, as when powerful cadres "go through the back door" to win admission to college or university for their children or to place their relatives or clients in secure, state-sector jobs. In other cases, though, the use of such contacts is absolutely necessary for the survival of enterprises. Most Chinese factories, for example, employ full-time "purchasing agents," whose task is to procure essential supplies that are not available through the cumbersome state allocation system. As the economic reforms of the early 1980s have expanded the scope of market exchanges and the ability of enterprises to make their own decisions on what to produce, the role of brokers and agents of all sorts has expanded. In the countryside, village and township cadres often act as brokers, finding markets for the commodities produced by specialized farming households and tracking down scarce inputs, such as fertilizer or fuel or spare parts for agricultural machinery. [Source: Library of Congress]
“Although the form and operation of guanxi networks clearly has traditional roots, as well as parallels in overseas Chinese societies and in Hong Kong and Taiwan, they are not simply inheritances or holdovers from the traditional past. Personal connections and informal exchanges are a basic part of modern Chinese society, are essential to its regular functioning, and are in many ways a response to the specific political and economic structures of that society. They thrive in the absence of formal, public, and overt means of exchange and may be considered a response to scarcity and to blocked official channels of communication. In modern China, those with the most extensive networks of personal connections are cadres and party members, who have both the opportunity to meet people outside their work units and the power to do favors.
Businesses need help from the government. Li Qingfu, a rich businessman who made hundreds of millions in printing and textile manufacturing told the New York Times, “In China, you have to have relations with the government. We still need lots of approvals.” He said much of his time is taken up petitioning the government and entertaining officials. Often the most important factor for success is family affiliations within the Communist Party.
Connections are often more important than qualifications or education background when it comes to hiring new employees.. Banking decisions are often made based on connections and government policy considerations rather than on economic fundamentals and good commercial credit guidelines.
Guide to Proper Guanxi
Didi Kirsten Tatlow wrote in the New York Times, “Chinese are masters of "guanxi," or connections, using the art of relationships “and its close companion, corruption “to secure everything from safe childbirth to a prestigious burial, taking in education, jobs, a fancy home and a Porsche Cayenne S.U.V. along the way. That’s the popular wisdom, held by many Chinese and non-Chinese alike. [Source: Didi Kirsten Tatlow , New York Times, August 24, 2011]
"Chinese people are good at guanxi," said the novelist Fu Shi, whose real name is Hu Gang. "Of course, it’s not just a Chinese speciality. It exists in the West, in the United States, too. But in China, it’s just deeper." Fu wrote "Chinese Guanxi," an advice book that teaches people how to cultivate social connections with dinners, expensive gifts and "red packets," or cash-filled envelopes? Don’t they already know?
"Some people are real masters at it, and some aren’t. Not everyone is an expert," the novelist said by telephone from his home in Changsha, the capital of Hunan Province. "I want to help the weak ones advance and take away the oxygen from the experts," he said. For Mr. Fu is no mere peddler of corrupt ideals, with a dystopic solution to a serious problem. His goal is to create a new kind of level playing field, where everyone benefits from an unfair arrangement by exploiting it equally. In other words: Fight fire with fire, and corruption with ... more corruption. The approach reflects what experts say is widespread cynicism about the chances of curbing corruption, in the absence of independent monitoring agencies or free news media.
Mr. Fu’s first piece of advice: Don’t be shy. "You can use people at any time and any place. And they can use you, too," he writes. Chapters include: inviting powerful people to dinner (do not get your guest too drunk, he might forget what you talked about); giving red packets (de rigueur in hospitals); and giving gifts (present in person, shut the doors and windows first). The book was published in June, and people flocked to book signings in Changsha in July, according to ent.changsha.cn, an entertainment news portal.
Mr. Fu’s first novel, "Green Porcelain," released in 2006, about guanxi in an auction house, sold more than a million copies and was serialized by the Web portal Sina.com, earning Mr. Fu nearly 4 million renminbi, he wrote.
He has since published another, "Red Sleeve," and plans two more “a guanxi quartet. Each has a color in the title: green, red, black or white. Together, the words form a Chinese expression meaning "right and wrong." For now, absent real solutions, he says, the only hope is to publicize guanxi’s tricks. That way the socially skilled lose their advantage over the socially inept. "Build a new set of rules," he wrote. "Make these things more open, transparent, and, in this way, more free, equal and fair."
Renting a Foreigner for Day in China
In Hangzhou foreigners have been paid $455 a day, plus food and transportation for simply making an appearance at a meeting to prove that the company that hired them has foreign connections. During one presentation a Briton who had been hired to do this said all he was required to was sip a drink. He didn’t even have to make conversation if he didn’t want to. He told the Times of London, “Their international partner didn’t want to send someone all the way to China for one meeting that might lead to nothing, so I was asked to just stand in. [Source: Jane Macartney, Times of London, July 2010]
There are advertisements in Chinese newspapers and magazines to “rent a foreigner.” Most of the clients are small or mid-size companies that feel they need the presence of a foreigner to boost their credibility. One company that charges up to $737 for someone to stand in as a CEO told the Times of London, “So long a the customers don’t request someone from small and specific country, such as Burma, then we can normally find the proper person for them. Chinese people think that if a company can hire foreigners, it must be large scale and well-off.”
Joint Ventures in China
Foreign businesses generally need a Chinese partner or have to form a joint ventre with Chinese enterprise to do business in China. Joint ventures provide Chinese companies with aces to foreign cash, technology and expertise and gave foreign companies access to market with companies that already had established market shares, and provided guidance through alien legal, business and culture environment.
Foreign businesses no longer necessarily need to form joint ventures to do business in China. Many foreign companies don’t like the set up because they feel a Chinese partner cramps their style and they worry about rules that allow Chinese partners to buy out a foreign company’s shares after 14 years.
On the matter Martin Sorrel, CEO of WPP, wrote in the Times of London, “Joint ventures are crucial. Anyone doing business in China must learn to cooperate...Far from being a straightjacket, joint ventures have been immensely helpful in building business in China...A partner adds value because the Chinese know the market. It would be arrogant to think we come into the country and know everything about its thirty or so provinces.”
Problem with Joint ventures. See Drink, Danone and Wahaha, People and Life.
Entrepreneurial Spirit in China
According to Global Entrepreneurship 14 percent of the population was involved in starting business in the previous 48 months compared to 2 percent in Japan and 12 percent in South Korea.
The entrepreneurial spirit of the Chinese displays itself in modest ways in the countryside. One National Geographic reporter met a young boy and his grandfather who bought baby ducks in Chongqing in Sichuan Province for about nine cents a piece then walked for three months to the grandfather's hometown of Chengdu, with the ducks growing fat eating what they could find along the roadside. When the boy and the grandfather arrived in Chengdu they sold the ducks for ten times what they paid for them in Chongqing. To pay for their expenses along the way, they sold eggs. Cracked or broken eggs were eaten by the boy and his grandfather.
Even the men who clean the rest rooms are looking for business opportunities. Some ideas haven’t panned out such as one in which someone suggested combining a plastic surgery clinic with tailor shop that make alterations on the clothes of patients who have just had operations.
Budding entrepreneurs have difficulty securing loans from banks and thus rely on borrowing money from relatives and friends to start up businesses. Many men have borrowed money from a relative to buy a small truck and charged people for hauling stuff around. With that money they purchase bigger trucks and with that money more trucks and drivers until they have a small trucking company.
Describing the Chinese entrepreneurial spirit Michael Dunne, an automotive consultant told The New Yorker, “The Chinese are a little like Americans. They want the touchdown, They want the home run...But I don’t see the patience and perseverance. It’s more like, we can leapfrog.”
Working Habits in China
China has traditionally had an obedient work force, which helps keep management costs low. Photographs of Chinese factories often show rows of workers with no supervisors in sight. In some work places it is not uncommon to have only 15 mangers for 5,000 workers. Working together is expressed by the Chinese proverb: Eight hermits sail the ocean with the might of each other.
It’s not only cheap labor that drives China’s economy. Chinese workers are hard working and efficient. Marril Weigrod, a consultant for China Strategies, told the New York Times: “Culturally the Chinese put a very high premium on not losing face. In manufacturing, that translates into not making mistakes on the production line. Their self-discipline and their ability to adapt are key factors in driving Chinese competitiveness.” If one worker is not up to snuff there is another worker waiting in the wings to take his place.
Private Property Laws in China
In February 2007, China approved a property rights law that protects private property along the lines of similar laws in Europe and the United States, creating the viability of private property rather maintaining the principal of state property. According to the law:: “The property of the state, the collective, the individual and other obliges is protected by law, and no units or individuals may infringe upon it.
The law states that savings investment and gains are be protected by the law. “The infringement on property rights, such as abusing power to arbitrarily seize property will be prohibited? The laws states that if land or other property is expropriated fair compensation must be offered.
The new property rights laws was aimed at giving foreign companies more confidence to operate in China and prevent land seizures. It was seen as signal that China was truly becoming a market economy. The move was opposed by leftists who said it would undermine the state’s control of the economy and help the rich at the expense of the poor and elevated private property to same status as the state.
The new law went against one the primary principals of socialism: that private property is a bad thing because it has traditionally been used by the rich to exploit the poor. The Chinese word for Communism, gongchan zhuyi, literally means “theology of sharing property.” Under the Communists, land was owned and controlled by the state. People who used land have traditionally been given land use rights — often 70 year leases — rather than title to private property. In the case of farmers, land was sometimes easily and arbitrarily taken away by the state or local authorities with little or no compensation. See Private Wells, Energy. Land Seizures, Agriculture.
Other property laws has been passed in recent years. In 2004, the Chinese legislature moved to amend the constitution to allow full protection for private property. The amendment, stated that “private property obtained legally shall not be violated.” A constitutional change on in 1999 declared private business an “important component” of the economy but failed to clearly defines the rights of entrepreneurs and their property.
Implication of Private Property Laws
Private property laws are the heart of the decision about what direction China will take in the future. Will it be one in which property rights and protected by the law r one in which the connected and powerful can make arbitrary decision and the victims of their action have no recourse.
The new private property law will give urban dwellers the right to their as oppose to the 70-year leases they have now and theocratically could give property owners the right to refuse demands by developers and even the government.
Private property laws that existed before allowed urban apartment dwellers to buy and sell apartments but didn’t allow farmers to own the land they worked, giving local officials the right to routinely seize farm land and village property and provide only minimal compensation. The new laws still favor the urban middle class, protecting things like cars, real estate, and stock market assets but doesn’t allow farmers to purchase their land. Instead they are still required to lease it from the government.
In the 1990s almost all of the urban housing was owned by the state. Now most of it is privately owned. The transition has been made without the Communist Party hold on power being compromised and has been the source of extraordinary growth and has help give rise to a stable middle class. This in turn has generated landlord committees elected by property owners — independent of the Communist Party — to protect their rights and look out for their interests of the property owners.
Drafting of the new property law was held up almost single-handedly by a an elderly law professor named Ging Xiantian, who launched an Internet campaign, complaining the law “protects a millionaire limousine and a beggar’s staff in equal measure” and was the “biggest deviation form socialism since the 1949 Revolution.”
Abuses of private property laws will no doubt continue to exist. Some businesses are vulnerable because the government, especially in remote eras, does not keep accurate ownership records. “one legal expert told the New York Times, private ownership record “are unreliable in Beijing and Shanghai and get more hopeless the further you travel out of the interior provinces.”
In August 2007, the National People’s Congress approved an antimonopoly law that bans price-fixing, collusion, excessive market concentrations and other monopolistic practices by private and state-owned businesses. It also includes a clause that allowed the Chinese government to review foreign purchases that could harm national security. The law went into affect in August 2008.
The Economist reported: “Eager investors and canny locals have found ways around the rules. Perhaps the most important is the creation of a complex investment vehicle called a “variable interest entity” (VIE). It works like this: valuable Chinese assets are placed in a Chinese company. This entity, the VIE, must be run by a Chinese citizen. A series of contracts are then arranged, shifting the returns from the VIE first to a foreign-owned company registered in China and then to an offshore company, perhaps in the Cayman Islands. [Source: The Economist, July 7, 2011]
Management and Business in China
Hierarchy is important in Chinese business. Deference is shown to superiors. Paternalism is shown to subordinates. Decision are usually made at the top and orders are issued through the chain of command. In regards to big problems, low level employees are rarely blamed; their superiors receive the blame.
Foreign managers sometimes have difficulty working in China. An American owner of a software company told the New York Times, “Chinese people individually are very, very smart, but many, many people together are sometimes stupid. We aren’t good at managing projects. We can sometimes get 70 or 80 people working together, but 1,000 people. Impossible?
Standard business practices such as record-keeping and accounting are not widely practiced and when they are are not through. It is relatively easy to hide money.
Failure is not tolerated. Most Chinese grew up in a economic environment where state-owned enterprises never failed. In the rough and tumble world of capitalism, with risks and winners and losers, losers are frowned upon. They often have a hard time making a comeback because of the loss of face they suffered in their first failure.
Superstitions often play a part in business and decision making. Fortunetellers are consulted today by supervisors making hiring choices; and by store owners picking names of their business, the most auspicious time to open, and the best floor plan and orientation of the rooms. After consulting a fortuneteller one restauranteur told the New York Times he decided to open his business in the slow season because the date was auspicious and to relocate his kitchen because rooms with fire should face south. According to one survey, the majority of business people believe in the god of fortune.
Capitalism and Democracy in China
It was originally thought by some in the West that an emerging class of entrepreneurs and businessmen would push for democracy in China but by absorbing many of them into the system and the Communist Party and establishing links between the state and business so that it is difficulty to tell where the public sector leaves off and the private sector begins the Communist Party has been able to subdue any challenge the business community may have presented to its grip on power.
To get ahead businessmen generally need access to state bank loans and contacts with officials that control land, government contacts and bureaucratic authorizations they need. The same is true with students who want a successful career. Bruce Dickson, a China scholar at George Washington University and author of “Wealth Into Power The Communist Party’s Embrace of China’s Private Sector”, told the New York Times, “The party seems happy with that. They are not looking for die-hard ideologues. They want to co-opt people into the their system, And they’ve far more successful than people realize.”
Books: “Wealth Into Power: The Communist Party’s Embrace of China’s Private Sector” by Bruce Dickson, a China scholar at George Washington University; “The China Fantasy: Why Capitalism Will Not Bring Democracy to China” by James Mann.
Social Control Versus Economic Openness
Barbara Demick and David Pierson wrote in the Los Angeles Times, “The Communist Party has long wrestled with how to weigh the competing dictates of economic openness and social control...When there’s been a clash of those interests, Beijing almost always has come down on the side of control.”
Kenneth Lieberthal, a former Clinton administration official and senior fellow at the Brookings Institute, told the Los Angeles Times, “The Chinese are very mindful of the potential political repercussions of openness — they make no bones about it — and on the margins, their desire to maintain social stability will trump any other issue.”
Strategy for Foreign Companies in China
The general strategy for doing business in China seems to be gain a toehold there, whether some tough times and be prepared to seize the moment when the market bursts open.
Jeffrey E. Garten of Wharton School of Business told the New York Times, "The Pepsis, the AT&Tts, the Honeywells and General Electric are really in it for the long term. They have very sophisticated strategies. They have really dug in and invested in Chinese communities built education institutions in China and developed webs of connections with all levels of Chinese society."
He also said, "many small companies tend to get carried away by the hype that China has suddenly become a market economy...There are pockets of it. But in order to succeed in China today, you have to establish yourself as an entity that is aligned with the government's long term goals. That does not mean Communism but it does mean training people and showing you are not a fly-by-night company and you actually care about Chinese society."
The Western companies who made the greatest profits are those that sell cheap consumer items such as Coca Cola and McDonald's, and have utilized China's cheap labor. Many companies that have made money in China have used China as a platform for manufacturing or exporting. Few have been able to cash in China 1.3 billion person market as has been hoped.
Foreign companies try to create strong bonds with the leadership in Beijing for no other reason than to sweep away obstacles created by local officials.
Image Sources: 1, 3) University of Washington; 2) Louis Perrochon
Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.
Last updated April 2012