A Businessman’s Guide to Success in China

What to Expect

• Fatigue, food, and drink are negotiating tools. If your Chinese counterpart wants to finalize a deal after a mao-tai-soaked banquet, it is better to throw up on the contract than sign it.

• The Chinese government uses competition from foreign busi¬nesses to reform its own system and companies.

• To be truly powerful in China is to be able to avoid responsibil¬ity for your decisions.

• The Chinese now understand the outside world much better than the outside world understands them.

• China is seriously schizophrenic: It is confident, reasonable, and eager to become a world-class competitor while also paranoid and insecure about the outside world.

• China is modernizing, not Westernizing. The country’s goal is to modernize but retain the Chinese “essence,” which it is still struggling to define.

• China has lots of slogans but no leading ideology, other than to make itself rich and powerful by relentlessly pursuing inter¬national trade and commerce.

• Chinese negotiators are masters of making you feel you need them more than they need you.

• The Chinese often try to extract a payment, in the form of a lopsided deal, for the opportunity to do business in China.

• The Chinese will ask you for anything because you just may be stupid enough to agree to it. Many are.

• You will never be successful walking into a meeting cold. Know who you are dealing with and what they really want and need.

• The Chinese always need to get concessions from you.

• Don’t take what your Chinese counterpart tells you to be the truth. They will often cite regulations or rules or practices that are nonexistent just to put you in a box in working out the deal.

• The Chinese try to play you as being “unfriendly” to China if you don’t give them what they need. Don’t be afraid to tell them that friendly business is based on a fair deal for all.

• Foreign businesspeople who come to China often have too much goodwill, too much trust, and too little patience.

• Pay attention to political trends and the priorities of the Chi¬nese government so that you
can fit your business within those when it works to your advantage.

• Mutual respect and equality are extremely important. It is use¬ful in negotiations to wrap your position in these principles.

• Contracts are not a guarantee of anything. It is the relation¬ship built in negotiating the contract that will give your busi¬ness some hope.

• Frame your China strategy as a roadmap. This will help keep your own company on track through the inevitable difficulties, and show your Chinese counterparts the value of maintaining a long-term partnership.

• China has a survival culture with a “zero-sum” mentality. For somebody to win, somebody has to lose. The concept of “win-win” is new and not widespread, and will have to be constantly reiterated to be successful.

Mistakes to Avoid

• Avoid joint ventures with government entities unless you have no choice. Then understand that this partnership is about China obtaining your technology, know-how, and capital while maintaining Chinese control.

• In a government joint venture, your partner’s political power can easily trump even a significant majority equity share.

• If China requires that you joint venture, get a majority stake, control the board, and install your own CEO, CFO, and HR director.

• If you don’t trust your CFO like your mother, give your mother the job.

• The position of HR chief in China is much more powerful than in the West because those who are hired often feel personally indebted.

• Don’t suffer from double vision. Make sure that your vision for the joint company is compatible with your Chinese partner’s vision.

• Expect that the relationship with your Chinese government partner will, at best, amount to “peaceful coexistence.”

• Never trust a Chinese feasibility study. It will be aimed at attracting your interest, not defining the real opportunity. Do your own study.

• You can’t do too much due diligence on prospective partners. Understanding your partner’s political and family connections is essential. Forget “face,” get the facts.

• Start with harmony at home. Headquarters politics kill as many joint ventures as do disagreements with the Chinese partner.

• Contract details matter less than the personal relationships developed in negotiations. The person who will run the busi¬ness should negotiate the contract.

• Stress respect and equality with your Chinese partners and employees. Insults and slights are never forgotten, and retri¬bution is a certainty.

• Place both your expatriate and Chinese executives on an equal footing.

• Fairness, honesty, and strong personal relationships will over¬come inevitable differences.

• Chinese employees are looking for leaders. Choose capable and strong-minded mentors, not dictators or risk-averse bureaucrats, to run your China business.

• Eliminate revolving doors in the executive suite. Choose expatriate managers who have a deep interest in China, and keep them in place for an extended period.

• Roll up your sleeves. There are no passive investments in China. Expect that revenue and profits will not justify the high ¬level management time required for the first several years.

• Don’t hire the party secretary’s kid. Those political connec¬tions can also be turned against you and spoil your corporate culture. If you need such help, consulting contracts with time limits are best.

• Don’t mistake language ability with business or management competence. The savviest and smartest Chinese managers often don’t speak English or have a Western university degree.

Chinese Business Corruption

• If you decide to sell your soul and succumb to China’s cor¬ruption, get a good price and focus on charity work in your old age.

• China’s modernization is aiming at “rule by law” not the “rule of law,” so relationships and personal power reign supreme.

• China is all checks and no balances. Chinese government anticorruption drives are not cynical exercises, but the effect is minimal because the overall system is almost incompatible with honesty.

• Your Chinese employees and partners have a confused ethi¬cal and moral framework, the result of a society turned upside down by reform in a country led by a party that has shifted from wealth repudiation to wealth creation.

• The gold rush of privatizing government industries in China is ending and officials and entrepreneurs are focused on snap¬ping up state assets. Young people, sensing the end to easy money, may be more eager than their elders to “feast on the emperor’s grain.”

• China has returned to its traditional symbiotic relationship between the merchants and
mandarins. Officials clear the way for business. The businesspeople pave the way for offi¬cials to accumulate assets.

• Senior party members in China seldom engage in direct cor¬ruption, preferring nepotism as the means to building family wealth. For the ruling elite, gathering family assets quietly is quietly accepted.

• To help your lawyer sleep at night, adhere to “don’t ask, don’t tell.” Choose legitimate agents and consultants to obtain licenses and approvals, and seek as little information as pos¬sible about how they obtain them.

• Don’t bribe. Nobody stays bought and the Chinese know it is against American law. Instead, invest in long-term, mutually beneficial relationships with customers including training, travel, and recreation opportunities.

• At its core, Chinese society is all about self-interest. It is very strong on competition but very weak on cooperation.

• In China, a conflict of interest is viewed as a competitive advantage.

• Draw bright lines for your employees. In Chinese culture, there is an indeterminate line between a gift and a bribe.

• Pay your employees sufficiently well to warrant their honesty, have them sign a code of conduct, and let them know there are real consequences for violations.

• Treat your entire company as if it were the finance depart¬ment, installing CRM software and other technology solutions to promote data control and transparency, removing power from individuals.

• Assume your procurement department is corrupt unless proven innocent. Rotate procurement officials frequently into different products.

• Move boldly to confront scandal in your company. Prosecute wrongdoers rather than pay them to go away.

• Guanxi the oft-cited Chinese word for relationships or con¬nections, is overrated, temporary, nontransferable, and re¬sides in the hands of the individual who has it. Never, ever put your business in the position where you are dependent on one individual for access to government officials.

• Inform your suppliers that they will be eliminated from consid¬eration if they try to bribe your employees. The suppliers appreciate being let off the hook.

Adapting to the Chinese Business Culture

• Trying to “contain” China as a national or corporate strategy is nonsense.

• Technology companies that don’t make government relations and education a key component of their China business plans could find their business short-circuited by political storms.

• China is moving fast and changing faster, an environment in which few Western companies are structured to compete. Your China business model must be configured for constant changes in every aspect of business and politics.

• Never use the Chinese market as a last resort to save your business. The Chinese can smell desperation and will take advantage of your weakness.

• Exploit your advantage in China. A country that practices information and thought control stifles innovation. Transfer what knowledge you must, but hold back the rest.

• If the Chinese have a strategic objective to obtain a certain technology, they will get it from somewhere. The only solution is to innovate rapidly when Chinese companies use your tech¬nology to compete against you.

• Cultivate relationships with Chinese officials, but don’t base your business on those relationships or special deals from the government. Kiss the cadres, but embrace the customer.

• Don’t bring home the Chinese way of going around rules to get things done. Follow explicitly all of the rules of your gov¬ernment. Taking shortcuts will come back to haunt you.

• If your company or industry gets caught up in the middle of a political battle in Washington concerning China – or a dispute between Washington and Beijing – duck, shut up, arid call your attorney and senator. The facts alone will not protect you.

• Politics no longer drive everything in China. To understand where China is headed, focus on analyzing the country’s busi¬ness and commerce more than deciphering People’s Daily headlines.

• Acknowledge that your overseas Chinese employees can become pawns in political battles. Openly discuss and deter¬mine strategies to prevent China from taking advantage of them and the United States from accusing them of disloyalty.

• Relations between the United States and China are caught up somewhere between the Cold War and hot competition. Rec¬ognize that underlying the diplomatic and business coopera¬tion between the two countries are strong political forces on both sides that see the other as a future enemy.

• China constantly erects political or regulatory roadblocks aimed at limiting foreign business opportunities and helping domestic companies. Don’t confuse your administrative victo¬ries in these battles with genuine business accomplishments.

• Get your own copy of Lucian Pye’s classic text, Chinese Negotiating Style, and read it. It’s still very relevant.
Advice for Executives

• Avoid the “slobbering CEO syndrome.” Don’t fall for China’s brilliant use of its huge size and two-thousand-year tradition of manipulative political pageantry to intimidate foreigners into accepting unwise deals.

• If your boss wants to do a quick deal in China, lose his or her visa.

• Make your business a fact of life in China. Then it will be hard to unseat you. This often entails taking big risks.

• You don’t win in China by getting only to the top guy. You win by enlisting supporters at all levels.

• The most talented businesspeople in China are great human observers who can analyze the people elements of a business situation. Lawyers in the West find loopholes and use legal reasoning; the Chinese find people who can nudge their inter¬ests this way or that way.

• In business relationships, the Chinese seek stability and trust more than intimacy. They want to feel comfortable that you will offer no surprises that will hurt them, but they don’t need to be your best friend.

• Reforms in China are achieved by networks of like-minded people who protect each other politically and push the enve¬lope when opportunities arise.

• Don’t cede government relations to your partner. Your Chi¬nese partner has connections, but he also has his own agenda, issues, and baggage.

• Information is a tool that serves the interests of those in power in China. The truth is always shaded to preserve privilege and maintain harmony.

• The Chinese media is struggling between shaping the way people think and informing them sufficiently to compete in the global economy.

• Objective news is making progress when it serves the inter¬ests of the state, but don’t expect a free press in China in your lifetime.

• Government propaganda is a key form of control, so the gov¬ernment is stuck in a pattern. It doesn’t matter so much what they are saying because any message serves as a defense against other ideas popping up.

• Foreign companies live in a media free-fire zone. Chinese reporters, severely restrained in reporting on domestic politics and social issues, can attack foreign companies, something the government allows and often encourages.

• Treat reporters in China with respect, but be very wary. Most Chinese journalists have little or no professional training. Objectivity isn’t part of their playbook. For many, being a reporter is just a stepping-stone to a business career.

• Educate key reporters about your business, maintain regular ties, and show them a good time. It is all about personal rela¬tionships. It is hard for Chinese journalists to attack friends, easy to attack faceless foreign companies.

• Your company public relations department can learn from the Communist Party. Keep low-key propaganda campaigns going. This doesn’t mean always generating headlines. It means regularly putting out your own spin.

Future Business Planning

• When Chinese see something that works, you don’t have to talk them into expanding it. You need to get out of the way or get run over.

• China is taking off with the help of the Communist system, not in spite of it. Growth is fueled by the people’s pent-up ambi¬tion and entrepreneurship. But government planning often provides necessary direction and focus.

• You can’t ignore Beijing, but don’t sit and wait for approvals. Do your politics at the same time as you develop your busi¬ness. The best strategy is to avoid forcing a government decision.

• China is not one market, but a collection of many local mar¬kets, each with its own practices, traditions, and methods of local protectionism.

• It is often best to start your business at a provincial level where officials are more entrepreneurial and often resent con¬trol by Beijing. They can be very loyal and protect you.

• When introducing a new product in China, you need to com¬bine a perfect sales pitch, a perfect political pitch, and unbe¬lievable persistence.

• While China seeks the latest technology, it is often the most appropriate and affordable technology that wins in the mar¬ket. Slimming down your price and focusing functionality for China is often the key to success.

• In China, you only need two companies to have a price war.

• Chinese state-owned companies are listing on overseas stock markets for the explicit purpose of getting money without ceding any control to foreigners.

• The most carefully constructed legal contracts will easily die when politics go against them.

• China doesn’t forgive, and it never forgets. China has a long memory and seeks retribution when foreign companies defy its desires.

• China is limited to incremental innovation both by culture and politics. Rote education and a political system with informa¬tion and thought control don’t create an environment for breakthrough discoveries and inventions.

• The hundreds of research labs established by foreign compa¬nies in China could transform the above equation. As hap¬pened in manufacturing, Chinese researchers will adopt foreign management practices and research techniques to build their own world-class operations.

• Any tech company doing business in China should assume that its designs and products are being copied.

• Court protection of intellectual property in China is improving but remains unreliable and biased. China is building an elec¬tronics exporting powerhouse, but Chinese products will be blocked at foreign borders if they have pirated foreign tech¬nology.

• When forced to share your technology in China, isolate various technologies from each other so that your partner doesn’t have the whole picture.

• Protect your technology crown jewels because China’s tech sector is built on reverse engineering foreign products. One approach is to embed your most valued IPR assets in compo¬nents built offshore.

Entrepreneurial Management

• What are the four most important – and troubling – words in a Chinese company? “Up to you, boss!”

• Chinese entrepreneurs tend to diversify into anything and everything rather than paying attention to the core business. The consequences are often fatal.

• Education is China’s greatest strength and greatest weakness. The Chinese are great memorizers, mathematicians, and sci¬entists who run tedious routines. But the rote education sys¬tem leaves many weak on powers of analysis and leadership.

• Layer your management. Your top managers will surround themselves with their own kind, be they Hong Kong Chinese, Taiwanese, Shanghainese, or Beijingers. For your corporate culture to dominate, instead of the ethnic culture or Chinese pecking order rivalries, place foreigners and Chinese from various places at all levels in the management structure.

• Management is situation, requiring flexibility and creative decisions. But Chinese managers are looking for techniques and formulas to follow.

• Deep scars from the Cultural Revolution and the upheaval of a sudden shift to getting rich has created an atmosphere in which nobody trusts anybody. In China business, the expec¬tation is to be cheated.

• Long-term mentoring is the single most effective technique for foreign companies to build an effective Chinese executive corps. Mentoring should involve real projects where people make decisions and can learn how to make them in the future.

• An entrepreneur in China must understand politics but cannot directly participate in politics. Your company also has to help solve the country’s problems.
• The Chinese have two identities: the individual and the organ¬ization person, which results in people acting one way but thinking another.

• The Chinese don’t separate the personal and professional, so power struggles and politics often dominate Chinese corpo¬rate behavior.

• The traditional path to status and wealth has been through passing an exhausting litany of tests. This tradition has cre¬ated a nation of people always cramming for final exams, not just in school, but also in their careers.

• The Chinese appear to the West to be a collective society. They eat together, travel together, and have fun together. But always simmering just below that collective veneer is a dog-eat-dog competitive spirit that makes the Chinese among the world’s most individualistic and selfish people.

• Chinese respond well to charismatic and visionary leaders who will take care of them and who can tell them what to do to be successful.

• China’s greatest management challenges are to create organ¬izations that are not dictatorships, to treat others as equals, to accept responsibility for mistakes, and to share information, all behaviors that have been almost absent.

• China’s rush to get rich is accompanied by deep distrust of the system, and anyone outside one’s immediate family or cir¬cle of close friends. This has created a business environment that is steeped in dishonesty and in dire need of transparency and fair dispute resolution systems.

• If you ever get depressed by Chinese ill-treatment of foreign¬ers, or foreigners’ ill-treatment of Chinese, take solace in the knowledge that the Chinese are treating one another even worse.

Adapted from: James McGregor. One Billion Customers: Lessons from the Front Lines of Doing Business in China. Wall Street Journal Books. Published by Free Press, New York, NY. 2005.