ZHONG GUO - THE MIDDLE KINGDOM

ZHONG GUO - THE MIDDLE KINGDOM
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Mar 29, 2008

The Culture Effect

Unlike interactions with our Western counterparts, which typically involve straightforward communication and the specific business at hand, the Chinese approach all relationships business and otherwise as a trust issue. This tradition comes from millenniums of relying on the individuals within one's social group--family, town, and/or city. The Chinese word describing this phenomena is guanxi. The English translation of guanxi is relationships, however, the true meaning of the phrase has a much deeper connotation. Guanxi not only encompasses the relationships with a social group but also the corresponding obligations associated with them.

Greg Bissky describes the inter-workings of the guanxi dynamic in the below videos from Youtube.com. The title of Mr. Bissky's book,
Wearing Chinese Glasses: How (Not) to Go Broke in Chinese Asia, gives an accurate description of the attitude one must have going into business ventures in China. The western lenses through which Americans and Europeans use to view the Chinese culture create a significant blind spot making it much more likely to "go broke".

http://www.treasuremountain.com/



The second clip emphasizes the point of "Why Westerners Don't Get It". Again, Bissky discusses the need for Westerners to open their minds to a different way of thought. McGregor cites this point: "China is ruled by its deeply ingrained culture more than anything else." There are obviously multiple "right" ways to approach and succeed with a business or any other endeavor. The key to success in China is approaching it in the Chinese way. This is due to innate belief among the Chinese of their superiority. How can a civilization survive with the same general culture, institutions, beliefs, etc. if it is not the so-called "right" way? The notion of cultural superiority and survival was, however, shaken in the 19th and 20th centuries with the Opium Wars and resulting semi-colonization. Communism was embraced in large part due to the CCP's ability to force out the "barbarians". McGregor's quote "The humiliation visited on the Chinese are fresh in their memory, but so is the superiority complex...Thus you will find yourself facing the yin and yang of Chinese suspicion and arrogance" describes the exact paradox businesses face.

Consequently, Westerners must learn to work the "Chinese right way". As the economies of the developed world become unable to further generate growth, it will become imperative to adjust the Western superiority complex and learn to work wearing different glasses. Otherwise, access to world's largest market will be curtailed making it impossible to continue the economic growth and prosperity the world has enjoyed for the past 50 years.

One of the central tenets of Chinese society is its notion of how to maintain social order. Unlike the US, China is a shame based society not a guilt based society. The concept of "saving face" is paramount in all relationships which ties hand in hand with guanxi. Maintaining harmony is the key to all interactions both within and without a person. During my study abroad in China, one of the most fascinating ideas I encountered was how a Chinese person wakes in the morning--strange to compare with a business interaction but appropriate. Instead of getting up, making coffee, showering, and going to work as many Americans do, a Chinese will wake and then do a meditation of sorts to ensure/check that all of the parts of the body are working together in harmony. A mental appraisal of sorts is completed to make certain everything mentally and physically is working in conjunction. This is how all facets of the life are approached. Harmony, the yin and yang, must always be kept in balance. Consequently, external relationships are addressed in the same fashion. It is crucial that discord be kept at bay in order for all parties to maintain face.

Part of keeping face is keeping promises, both verbalized and not. Unfortunately, for the unaware Westerner, promises are inadvertently made and then broken. With guanxi, upon entering the relationship, you not only become obligated to your partner but also to your partner's friend's friend. Mia Doucet further expounds upon this concept of trust and guanxi in her article,
Building Trust, and echoes McGregor's statement "...friendship in China carries heavy obligation." Being unaware of this string of obligations can undo what would have been an otherwise successful business marriage. Chinese are also guilty of technically breaking promises through the manipulation of contracts. Bissky describes this notion with the Chinese notion of the future--man may propose things but the gods decide what happen. Therefore, the future is fluid and a contract becomes a hope of what will happen rather than what will happen as circumstances change.

Building Trust goes on to describe the necessary steps to prevent the common mishaps associated with working with the Chinese and intellectual property. Not only does she cover the same issues of earning and re-earning trust again and again to establish a true guanxi, but she also discusses the fundamental differences the Chinese have about ideas which leads into the next discussion, The Joint Venture Paradox.

Read this doc on Scribd: inital meetings key to success




Mar 20, 2008

The Joint Venture Paradox

Many companies view the joint venture as the only way to enter into the Chinese market. Little do they know how Chinese businessmen and the Chinese government view these supposed 50/50 arrangements. After Deng Xiaoping opened up China's markets in 1978, foreign direct investment (FDI) began to flood into the country. By the 1990's, roughly 60% of FDI was in the form of joint-venture agreements. Today, that number has decreased to 40%. The twenty percent decrease can primarily be attributed to the failure and complexities of many joint-ventures. The Chinese government generally requires just over 50% control in these types of arrangements. According to Western thinking, this translates to approximately equal control of the business, revenues, and control. Quite the opposite is expected for most Chinese partners.

China's aforementioned sense of humiliation contributes heavily to the perceived dynamic of how the joint venture should operate. Although there is a strong desire to work with Western companies in order to acquire needed tech know how, the fear remains. As a result, a power struggle can emerge making the joint-venture difficult to operate. McGregor's example of Morgan Stanley joint venture in China, China International Capital Corporation (CICC), demonstrates the risks a firm takes when entering a foreign market. There is a lack of infrastructure and social institutions in order to properly support and handle the issues that arise. Not to mention, the strive for personal gain, corruption, and politics further muddies the picture. The West's view of China, as the next BIG market and the subsequent potential gains, has created such fervor to enter and enter NOW. Greed, many times, overrules common sense and appropriate due diligence. Morgan Stanley entered with this attitude as it wanted to be the first investment bank in China and gain all the associated first mover advantages. However, the outcome exposed the challenges of being a first mover. It was impossible to learn from others and avoid their mistakes.

The Carrefour article demonstrates the idiosyncrasies involved in working with Chinese partners. Jean-Luc Chereau comments on his experience in entering the Chinese market:

"...I started talking with one of our Chinese partners who had signed those contracts, and nothing seemed to be happening. Finally, my assistant told me, "Just because he signed a 20-year contract 2 years ago with your former boss—a person who is not you—does not mean he will respect the contract." That was a big shock to me;
the contract was notarized and everything. But we started to renegotiate article by article. Five years later, during the Asian crisis, I invited this same partner to my office and said, "Just because I signed a contract with you does not mean I will respect it. We are in a crisis." So he said, "Fine," and we started to renegotiate, to reduce the rent."

The US legal system would run the Chinese partner through the ringer for violation of contract and sue until the company acquiesced or went bankrupt. In China, the legal system is not only not adequately prepared to undertake such a battle but also contracts are merely a starting point. As conditions change, everything is negotiable which again reiterates why relationship building is so important. Morgan Stanley learned this lesson in its CICC venture. As McGregor states: "China is not a legalistic society...If the Chinese want to do something, they find a way to skirt rules or laws." This notion refers back to the culture effect discussed earlier. The rules of the game are played differently in a shame-based society. Do whatever to be successful, but do not shame the family name or get caught.

Partnerships provide the necessary "in" into the market. They also give foreign companies a cultural road map and the grease to work within the paradigm of China's government and social institutions. Often the process is so different as well as the expectations on each side that both parties can or are sideswiped by reality. Ultimately, it is the relationship not the contractual piece of paper that holds ventures together.

The government's perceived role as judge, jury, and collaborator complicate business dealings even further. The CCP has two goals: to stay in power and to provide economic success so that it can stay in power. As a result, businesses must realize close relationships with officials are instruments to maintain the status quo. By "welcoming" joint-ventures, China is gaining unprecedented access to technology, know-how, and capital. All of which reinforce the CCP's role as benevolent dictator and economic driving miracle. While this arrangement will likely continue, as the gap between rich and poor and urban and rural widens, the CCP must be weary of their beloved proletariat (or peasants in China's case). Historically, dynasties fall when the power balance is tilted and the peasants become aggravated due to injustices. The unprecedented ability to move through the country and into one of six hundred plus unknown cities of 1 million plus will help to keep grievances at bay. The ability to move into an urban area allows for the possibility to earn well above the average annual peasant income of ~ 8000 yuan or roughly $1000. According to the Chinese Embassy's website (http://www.china-embassy.org/eng/xw/t268200.htm), as of August 2006, China's national per capita income reached $1740 or ~ 14000 yuan which represents an approximate 70% increase income just by moving to the city!

Joint-ventures and other FDI have in some ways fueled this wage increase by creating jobs in various sectors such as electronics, apparel, and other consumer products. A virtuous or not so virtuous circle (depending on one's viewpoint) is, therefore, continued. The government created an economically viable and prosperous environment; FDI continues growth in the environment; living standards are raised for all classes but at varying rates. All three are still forced to work within the guanxi paradigm governed by obligations and fake 50/50 arrangements.




Mar 17, 2008

Lining the pockets

McGregor defines Chinese society as "a system of organized dependency...China is not a place where individuals function alone...Your network of family and personal relationships are more important than the rules of the road. Your network keeps you secure in the absence of a fair and unbiased legal system." The fabric of which their society is based is fundamentally interwoven without a beginning or end. This, in turn, creates mutual dependency between commerce and government. The existing connection between government and business is in some ways reminiscent of the system of dynasties past. So while corruption is frowned upon and can be viciously punished, the very nature of the system is corrupt. Merchants depend on officials to speed through various measures of red tape and in return the officials expect "perks". The compensation of what appear to be "corrupt officials", however, is so inadequate that taking kick backs is merely a way to make ends meet. Of course, there are those who cheat the system whole heartedly and are much more malicious in their intent. The CCP provides a through system of checks within the system but does not have the balances to make an honest system. Raising wage rates of officials would help to bring their wages in line with their private sector counterparts. However, such a response would likely bankrupt the country.

The extent of corruption is usually indirectly proportional to the size of a firm. Large, multinational companies typically are dealing with senior officials and are engaging in highly visible deals. Consequently, the transparency of the transaction is greater and overt corruption would result in Chinese and American partners facing legal consequences. Even in lower profile business dealings, however, most Chinese are aware of the Foreign Corrupt Practices Act (FCPA). The FCPA prohibits the bribery of foreign officials and requires transparency in the accounting practices of public firms. Bribery is to be avoided at all costs for all firms.
An important reminder is self-interest is at the core of most dealings in China. Mutually beneficial, long term relationships are the foundation for success. While these foundations are based on "guanxi", it is important to develop several of these relationships. Relying on one individual for access to officials is a precarious strategy resulting in a unreliable future. The use of "guanxi" has been forced to evolve over the past 3 decades as well. As China has become a more mobile society, the opportunities to move within and to move up (inside a company, industry) have grown exponentially. Individuals are no longer "lifers" at one firm; the same shift has occurred in the US as well. Contacts transfer departments, get promoted, and leave companies. If the only basis of a connection is linked to a particular contact, then all of one's negotiation power is stripped away. One possible solution is the creation of contracts between functional units as described in Pedersen's Business Integrity in China. By establishing these types of relationships, companies are not dependent on individuals but rather formal units. Formal, contractual relationships can, therefore, be carried over regardless of who comes and goes resulting in a long term commitment.






Mar 13, 2008

Tradition's Irony

How History and Institutions affect business

China's xenophobia has created a legacy of suspicion among all ranks. Consequently, the processes foreigners must navigate through in order to accomplish many (what could be considered routine) tasks typically involve more effort than one might expect. In financial markets and the media, this web of intricacies is even more pronounced. Although China has been opening up considerably for the past thirty years, familiarity with certain requisite preconditions such as information sharing is lacking. In order to function in the modern economy, information must be able to be shared in order for business transactions to transpire. The financial markets of Shanghai and Hong Kong would be literally unable to work without news from the outside.

Dow Jones and Reuters came across these obstacles as they were entering the Chinese market in the late nineties. In particular, Xinhua, the Chinese news agency/propaganda agency, tried to regulate and compete with the two firms. Regulation would be defined as prohibiting most outside information from coming in at all; while competition would be defined as capturing both firms' consumer bases and technology and putting them out of business. The turning point came for these foreign firms when they asked the officials they were meeting with if they were competitors or regulators. The officials all responded, "Regulators." They were then shown a photo of themselves as "competitors". Needless to say, much face was lost that afternoon.

This anecdote demonstrates the entanglement within the Chinese paradigm. The officials want a piece of the pie. Therefore, they simultaneously try to be regulators, yet competitors at the same time. How can they lose? Make the rules to best suit your interests both as a regulator and as the competition. A win-win at least for them. Obviously, competition is practically eliminated in this circumstance and the true injustice is faced by the consumer whom is forced to pay artificially high prices for usually sub-standard quality.

Prior to the past two centuries, China was a relatively outward looking nation. It is through Chinese innovation the first paper and printing press was created as well as gun powder and the compass. Both the Tang and Ming dynasties engaged in maritime exploration. In fact, Zheng He, under the Ming dynasty, commanded 300 ships and 28000 crewmen in one voyage. As a result, extensive trade took place both to and from China. The Silk Road provided another outlet for trade with the West. The combined reigns of the Ming and Tang are roughly 600 years. How can a nation that's name for itself is "middle kingdom" (after centuries of trading) end up so wary of the outside world and yet crave its knowledge? Imperialism and colonization are the answers.

The resulting dynamic makes patience the most important tactic and secondly building trust. The Chinese government, while willing to open up for the economic benefit, fears that too much information would incite a revolt. How the Dow Jones and Reuters story ends shows this perfectly. Dow Jones and Reuters were able to continue the influx of foreign information into China to secure the success of the financial markets. However, the information is tightly kept in secret offices and is not leaked to the populace.

Rupert Murdoch also had to contend with the intricacies of working within the Chinese paradigm. The Chinese can be quickly offended if they feel threatened and that is exactly what transpired after Murdock's comment on "communications technology being 'an ambiguous threat to totalitarian governments everywhere'." Surprisingly, Murdock, himself, rules his empire much the same as the Chinese government or any authoritarian regime. He is in constant control of all that occurs within his domain. This similarity, ultimately, helped to thaw the tensions between the Chinese leadership as a whole but also specifically with Zhu Rongji, Vice-Premier, and JiangZemin, former President. Murdock's shared vision of calculated control allowed the mogul to help form and mold the Chinese media industry. His understanding of aiding media reform and simultaneously not bulldozing millennia of censorship/information control allowed him to become The mentor over mass media communications.

His partnership with Liu Changle also created an insider's path into the inner circle of the ruling elite. Liu not only provided a path but also had the savvy to work the political game. Although their individual visions eventually separated, both worked tirelessly to bring real broadcasting to the Chinese masses. Liu brought 24 hour news television and Murdock helped to create a more varied television environment albeit still controlled but light years ahead of senseless propaganda jargon broadcast over loud speakers in the fifties or the lifeless programming of the eighties and early nineties.

There is without a doubt a need for the continued flow of information into China. Without it, the Chinese will be unable to make informed business decisions and continue to spur on the Chinese economy. The CCP's relaxation of media controls reveals there is an understanding of the connection between making money and knowledge. However, "objective press" is still not the norm and stories are typically not exposed unless it behooves the Chinese government.


Read this doc on Scribd: the road ahead for capitalism in china