Silk Road International Blog

The following are a collect of stories that I’ve either see, experienced directly or been told by the first had participants in the last three weeks. The point to the stories is this: if you’re not a huge MNC (and sometimes even if you are) doing business in China is very different from the books that you read about doing business in China or the classes on international business that you took in grad school. Business is business, yes, but understanding where you are doing business is important too. This is what business is really like—on the ground here.

New factory? What new factory?

We’ve been working with the same “product” factory for about 5 years. They have a large capacity and great service and overall our relationship with them has been an exceptionally good experience. So you can imagine my concern when our main contact, one of the owners, told me that he was starting a second company. Now, in China guanxi rules Chinese relationships so the old factory ownership didn’t dissolve; the new factory, though a direct competitor, still actually shares much of the same clientele and some of the same ownership. But they are not “partners” or “sister” factories. Odd, to say the least. Anyway we are comfortable with their relationship and I’m still getting the product that I need.

All the rules that aren’t fit to print.

A couple of other items about this restructuring that make it interesting. First, there are a number of “unwritten” rules that affect the new factory. Recycling is not optional. Not just recycling but which company you can use—the local officials are “requiring” new factories to use a recycler that was chosen by them. While there are many legitimate other options and no one recycler is contracted legally with the local government the local officials are still forcing factories to work with one service provider. Further the “sponsored” recycler pays much lower rates per kilo than the other recyclers. So…factories are hiding their total recycling amounts and giving only a small percentage to the “sponsored” recycler. The rest is sold at market rates to other providers in the middle of the night. Getting caught doing this is not just expensive but can result in officials finding “problems” with your registration or taxes or whatever and shutting you down.

Another “requirement is a local manager. All factories must hire a single person that the local officials provide as a manager and pay them a dictated monthly salary. Most factories just pay an annual “salary” to this person and then don’t ever have them come to the factory. Paying money is one thing, but having a “patsy” in house is more trouble than it’s worth (i.e. they could spoil the midnight recycling).

Undocumented fees and “insurance” are also “suggested” by the local officials. Of course, like the mafia, you ignore the suggestions at your own peril. So, may factories just cough it up. Some refuse and are hassled out of business and many with lawyers quietly see their cases lost or dismissed. Or so says our PVC factory owner. Some factories are asked to sign and stamp blank pages of corporate letterhead and just give them to the local officials—I was told a similar story in 2004 by another factory in another part of Guangdong province as well. They sign documents and then don’t ask questions.

Under employment + snow + new labor law = extra long vacations.

The new labor law is a disaster. Coming home from Chinese New Year employees believe that they have the ability leave early or come back late and have little if any repercussions from their employers. The job market is tight in Guangdong—there are more jobs than employees and the perceived power that the new labor law gave employees have combined to create a perfect storm—pardon the New Year pun. Just about every one left for home early because they had to catch a train/bus/plane and then are coming back late because they couldn’t catch a train/bus/plane back on time. Their not scared that they are late coming back; the attitude being “What are you going to do? Fire me?”

The ultimate end game.

The pitch goes something like this: “If you don’t pay the balance in cash immediately (11PM Saturday before Chinese New Year) we won’t release the goods; contracted terms be damned.” If you need product shipped to meet deadlines there is very little that you can do expect pay up. An associate of ours was given just this choice last week. After confirming the final product (and rejecting some for quality problems) the factory dropped this little gem on her as she was walking out the door heading for CNY. Being Chinese herself she worked though all the typical issues she could think of but by midnight was left with no other choice—and that’s precisely why the factory made the demand. She scrambled for the next hour with multiple ATM cards, many of them personal to get the cash and get the loaded-truck out to the port.

What are Chinese lawyers good for?

Have you heard the one about the three lawyers, three real-estate agents and two clients trying to close a home purchase deal in China? They meet once for the “legal” contracts (which were completed with a much lower than market value amount) and then met again for the “personal” contracts with the real market values. This is what lawyers are used for in China. I wish that this was just a joke—I can confirm, that it’s not.

If you didn’t see it, it didn’t happen.

Even after more than a decade working in Asia, last month I forgot that verification is the most important part of production. We made some simple changes to a product that we’d not yet started production on. The changes were cosmetic but required a bit of attention at start up to make sure that they were done correctly. We got caught up in the CNY rush and didn’t check on the changes and, sure enough, they didn’t happen. The factory confirmed that they were done but when we went to do QC we not only found them not completed but no one, outside of the guy on the phone, even knew anything about them. It wasn’t a big deal and didn’t sink the project but the lessen was re-taught clearly—if you don’t see it happen it didn’t happen.

“We didn’t read the contract.”

Yup, they really said that. And not once but twice. When a factory was going to miss a delivery deadline just before CNY we sat down with them and re-read through the contract they signed and chopped. When we pointed out that if they missed the deadline they were going to be either paying for airfreight or taking a huge cut in the final payment. We went round and round with them trying everything to get us to change our position, but we had them sign the contract for a reason and didn’t waiver. It wasn’t easy. It wasn’t fun. But we had the legal documentation that saved our bacon when they claimed ignorance.

This exact same comment was made when we were working out the production problems with another factory. After a really bad day of pre-production QC we (again) pointed out all the spec’s of the project and found that most of the problems were the result of ignorance—the production manager had not discussed the details with the floor engineers. In trying to get us to let them off the hook they said straight out “we didn’t read the contract.” My response? “We read through it with Mr. X (the manager) before you started. Did he give it to you? Did you review it with him?” Of course no was the answer to both questions and they started over.

Other common variations of this are “You’re really going to be that strict?” Or “But nobody can really do that. We just thought you wanted us to try.” Or “But none of our other clients do that.” And, my personal favorite, “The Japanese don’t even ask for that.”

The daily black market.

There are limits on the amount of foreign money that some types of Chinese and foreign businesses can exchange each year. Even banks in China have limits. So we get calls all the time from people that want us to help them change dollars into RMB. We don’t do it, period. But what are businesses to do if they can’t exchange the money they need to do business? They go to the black market. And the black market is HUGE in Shenzhen. Every AM in Louhu you can see people exchanging duffel bags of money. (Just imaging how many bank notes you’d need if you had to do business in cash and the biggest bill you had to use was a $20!!) Yea, the exchange rates are lower that what you’d get a bank but there are a ton of businesses that just don’t have any other choice.

A side note to the “bags of money” comment above: can you think of anything stupider than the Bank of China giving people bags printed with the bank logo to take home their cash? I can’t either. I mean, nothing says “target” like a person walking out of the bank with a full Bank of China plastic bag on their arm.

Tags: Business, Culture, Politics by david
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Every now and again the real truth comes out. Once when I was in grad school (at the now infamous NIU) writing my thesis on Thai/Chinese Corporate Culture (Professional Networks and Relationship in a Bangkok Law Firm; Southeast Asian Cultural Anthropology) my thesis advisor broke her academic façade and turned to me and said, “It’s all just B.S. isn’t it? I mean, it’s all just bribery, no matter what we call it, right?” She then went back into her academic mode and continued talking about “gift giving” and we never talked about “bribery” again.

Now, without betraying my Anthropological roots, I have to say this: the truth is that business in China is just like business anywhere else. Yes there are some things about the system that make it different from anywhere else too, but those traits are not, I don’t think, non-existent in other business cultures.

This admission comes after years of fruitless searching for the “secrets” of Chinese business. Maybe I’m jaded, but I just don’t see anything that is uniquely Chinese in my daily business transactions. Sure, there are specific issues with face/pride, hierarchy, regionalism, language, underdeveloped infrastructure and over involved governments and IPR violations but how are those things unique to China? The answer is, they’re not. Personal relationship networks and face are easily as or more important in the Middle East as they are in East Asia. The legal and political infrastructure in Central and South America is similarly underdeveloped and overly corrupt involved as it is in China. Regionalism and language issues are huge barriers in South and Southeast Asia too.

As I mentioned last month, recent research bears this fact out too. If you’re good at business in other places you’ll most likely be good at it in China too. Compensating for risk, finding and relying on good people, investing in your people, extensive research and accurate market knowledge, on-the-ground experience and presence, good products/services, honesty and great timing are keys to success no matter where you work.

In the last few years I have read probably 50 books on doing business in China—looking for the “key” or the “secret” or the “whatever” it is that makes business in China seem so different to foreigners. I haven’t found it. There are a ton of books about big companies coming to China and either failing or succeeding. There are likewise a ton of books about life in China written by such and such expat either in this century or the last. There are a thousand books on Chinese history and culture. Most of these have value in preparing you to work here. But there isn’t some golden key to unlocking the inscrutable Chinese.

Now having said that I totally agree that Chinese culture is unique. Chinese history is unique. But the lessons learned from history and culture and the resulting business practices today are not some cryptic Chinese code based on Confucianism, Guanxi and bastardized Chinese Communism. The goal of commerce is to make money and the purpose of all organizations is to standardize the process in a changing and competitive external environment. In this sense the Chinese are no different than anyone else.

Which brings me to my latest book review: Inside Chinese Business; A Guide for Managers Worldwide; by Ming-Jer Chen. This is a great book—a great introduction into Chinese Culture. The goal of the book is to introduce Chinese management practices to the foreign audience, and it does that quite well. What I like most is that he is not sharing “secrets” to Chinese business but rather reflecting some culture patterns that affect the business environment.

Mr. Chen’s takes business practices and couches them in terms of Chinese history and culture. He does a great job of contextualizing business from the Chinese perspective. The idealistic Chinese business is presented with some real multi-cultural educational, business and life experience. He knows what he’s talking about when he describes Chinese culture in the business setting. He doesn’t convince me that business in China is unique but he does effectively remind me that there are cultural forces in play that any successful businessperson should be aware of.

Chen’s book starts with a look at the most important roles and responsibilities; after the introduction, the first three chapters are about Family, Guanxi and Social Roles. I agree with Chen that these are probably the Chinese cultural traits that influence business the most and are probably the most uniquely “Chinese” concepts that are presented in the book.

Business is family and family is business. Chinese would rather work with family or at least people from the same region than with strangers. And while this preference may still be true its practicality is quickly disappearing. But, nevertheless, blood is thicker than water and family will always come first in China. Chen cites many examples of businesses, large and small, that are “families” none the less and maintain their genetic and/or emotional familial roots. Certainly there are (hundreds of millions of) Chinese that just “go to work” every day, but this is the ideal and the preference if the choice is available.

One Chinese friend once said to me: “Insider-trading is just smart!” To me this is the essence of Guanxi. You maintain and use and pay back relationships precisely because there is a value, potential or immediate, to the relationship. That value can be both lost and accessed. They are almost tangible properties that must be cared for and cultivated.

Social roles are defined by Confucian philosophy. Confucianism focuses on hierarchy and relationships and I would say that Confucianism in China is as easily as influential over the last 2500 years as Jesus Christ has been in the West over the last 2000. Don’t underestimate the power of defined roles. Don’t get all philosophical about them either—just know that Chinese companies are vertical and decision-making is limited.

Other influential “Chinese” concepts:

• Time is not linear and experiences are not accumulative.
• Business and individual do not prioritize individual tasks but work simultaneously on many.
• Chinese do not like transparency in business.
• Distraction and misdirection are acceptable and effective ways of (avoiding) dealing problems.
• Chinese, especially on the Mainland, are “accustomed to rapid and unpredictable political and economic change.”
• Westerners value efficient while Chinese value effective communications (information vs. relationship management).
• Westerners need to hire trusted interpreters rather than educated translators.
• Knowing with whom you are working is of utmost importance.
• Without face-to-face communications the Chinese language (high context) is very limited in it’s ability to convey details.
• Chinese do not like to say no.
• Negotiations are never ending regardless of if there is a signed contract.
• Nationalism is alive and very close to the surface.

Other concepts from the book that I completely disagree are “Chinese” or are really even part of business in China today.

• Chinese salespeople want long-term relationship instead of quick profits.• Harmony in the extended community over market dominance.
• Businesses will take loses to maintain long-term relationships with (foreign) customers/clients.
• Chinese investors like property and not mass-market goods because it allows them to keep a low profile.
• For Chinese the ultimate goal is win-win.
• “The best defense in ambiguous situations is strong guanxi with your business partners: Networks act to protect their members, and no one loses in the long run.”
• The goal of Chinese business is relationship-building (not making money).

Now a couple of issues with the book.

One is the generalization of what is a Chinese Business. Throughout the book the terms “Chinese-Style” and “Chinese-Owned” are used interchangeably when referring to the nebulous “Chinese business.” The problem I have with this lack of clarity is that Chen assumes that Lenovo, Haier, Alibaba and the small printer with 10 employees (his example) are all both Chinese Owned and being run “Chinese-Style” at the same time. I highly doubt it. There is no way that the organizations structure of Lenovo, which is the purchased PC arm of very American IBM is organized, run and understood the same way that the family run and owned print shop in China is run. Neither the concepts of organization nor the motivations (family vs. investors) are the same. But the reader is continually asked to believe that the Chinese models are at work in each and every example.

Another issue is his willingness to; as many Chinese do, downplay the fact that the “Chinese” cultural aspects of business in China do indeed facilitate and may even promote dishonesty and illegal practices and relationships—illegal and dishonest according to Chinese Law, not my Western morality. Face, Guanxi and Family-style business practices, all priorities in Chinese culture, can and often do conflict with the tax, IPR, finance and other business laws of China, not to mention other countries. But Chen, if he comments at all, mentions these illegalities in passing as minor aberrations in an other wise moral system. I have to admit, I don’t know a single Chinese company that does not have multiple sets of financial records—for taxes, for shareholders, for internal accounting, etc. Technically this is illegal in China (and every other developed country). This whitewashing of common on-the-ground activities is probably not an intentional cover up ( I’m sure I do for my American Culture too) and is in many books written by Chinese about China.

Finally, specifically when talking about multinational business much of what is called “Chinese” is no different than Western management theory with new names. I have to disagree that huge multinational Chinese companies (of which there are very very very few) are as uniquely Chinese as Chen claims. For example:

Winston Chen offers a comprehensive illustration of how balance and holism can be applied to practical corporate affairs. An overseas Chinese living in the United States, Chen is the owner of Solectron, rated by Business Week s the number three among global IT enterprises, with a market value of $24 billion in the year 2000 and $9.4 billion in sales in 1999. Chen attributes his success to his application of Sun Tzu’s philosophies of balance to the management of his own company. For Chen, tao (the right way) means emphasizing employee relationships and common objectives. T’ien (heaven or harmony) is equated with timely adaptation to the changing environment. Chen interprets di (surrounding) as strategic positioning, and jiang (leaders or leadership) and seeking the best possible managers. Finally, fa (law or method) points to the importance of implementing well-defined policies and managerial systems. Chen’s translation emphasizes the interrelationships of all parts of the business and the need for a dynamic balance among these parts. (p.87)

While I admire Chen’s desire to define his business as “Chinese” I don’t think that any of these concepts or their application are uniquely Chinese. Maybe Sun Tzu’s Art of War was written earlier than Machiavelli’s The Prince so the Chinese can take credit there, but a business that focuses on human capital, flexibility, skilled (instead of family) managers, strategic positioning and well defined systems sounds incredibly American and quite the antithesis of the family guanxi hierarchy that was described in the first half of the book. Indeed, current business literature about China would suggest that most if not all of these concepts are completely foreign to the current Mainland Chinese business environment.

The book is great a great insight into Chinese culture and how it influences business. Chen provides detailed analysis that is both clear and useable. I don’t agree with all the examples and dislike the willingness to whitewash some of the negative results of Chinese cultural influences on business. But it’s very much worth the time and money.

Tags: Book Reviews by david
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