First, if you’re not reading The China Sourcer Magazine already, please do–it’s free! The China Sourcer Magazine is part of the new China Sourcing Information Center. If you’re sourcing from China, then you’ll want to check it out. Yea, I’m involved in it, so I’m not unbiased in my recommendation. But I also know the others involved and I’ve read all the content so far published and I know that it’s a collection of valuable information. And it’s free!
Finally, the China Law Blog group at Linked In has a great discussion about “What is Guanxi?”–something that everyone working in China has to, at some point, deal with. I deal with this all the time–personally (Chinese family) and professionally–so my answer was too long for the form. But you, you lucky devil you, get it for free here! And you don’t even have to sign into Linked In to get it. Consider these two free offering my apologies for not posting much this summer.
What is Guanxi?
What it is is relatively easy. I personally think that there are three kinds of Guanxi. And there is really no problem with guanxi until it’s used in a context where the legality of relationship comes into question.
The first is the natural human relationships between associates, friends and family. Every culture has this. Everyone “uses” these kinds of connections—you ask your neighbor to help you with something heavy. You ask your friend to help you get some tickets and you’ll pay him back later. You don’t have cash on you so you borrow 100RMB from your co-worker. These are favors that are not illegal or morally questionable in any culture—it’s friendship. Chinese are always saying that westerners don’t have renqing or guanxi like they do since we are a more mobile society and are more nuclear-family oriented than they. My response is that they misunderstand us as much as we misunderstand them. We all share, help, love and work together. We just haven’t had 5000 years of “continuous” history to formalize it like they have.
The second kind is relationships that are completely illegal in most legal systems—China, the US, anywhere. These are legally defined lines and when crossed constitute nepotism, insider trading, under-the-table deals, kickbacks, cash payments to officials, etc. There is no question that foreigners AND Chinese alike should not be participating in these types of Guanxi. It blows many clients away to find out that the dinners and gifts and “bonuses” they are paying for are not only illegal in the US but in China too.
The third, then is the middle/gray area between these two. This is where most people get caught. There is no line, no definition where these end and where they end. For example, your client knows a buddy that does printing and he gives the client a special deal and the client then takes him out to dinner to say thanks—legal or not? Probably not a problem, right? But what if he gives the deal and the return is dinner, Karaoke, some companionship and a hotel room for a weekend? What if it’s just straight cash (homie)? Now, is it still clear what’s legal and what’s not?
Another example. What if you buy a license for something that would cost thousands of dollars to actually qualify for? Clearly illegal, right? But what if your sub-supplier buys materials with fake credentials—and come to find out they always have, you just didn’t know about it, AND the “fake” materials will pass the tests too? Now, is that an illegal use of connections or not?
Another example, what if you legally do all you are to do go get your license in China to do business. But one of the offices that you must use “requires” you to give a “gift” of thousands of dollars to the inspector or he will not even come out to your office. There is no way around this you’re completely legal, but this guy has to have some cash or you don’t get your license? What if you can “pull strings” with others you know in the govt and get the cost reduced, but not eliminated? Of course you have to pay the “others” back too, but it’s cheaper. Legal or not?
Lastly, what if your factory clearly breaks the law and holds your goods hostage for a “ransom” payment before they ship it? You know a local policeman and call him in to help. For his help, you have to pay either a cash payment or host a lavish banquette for him and his friends. What do you do? Where does Guanxi end and bribery begin? (This is really the money question, as far as I’m concerned.) What is a favor between friends and what an illegal kickback?
All of these are real situations that we’ve seen over the years. How do you work in a corrupt system and keep your hands clean? How do you do business in a system that has as one of its founding social principles the use of personal guanxi over adherence to law? I love guanxi—I got box seats at a soccer game in the States this summer because I knew someone. My Chinese staff can solve many problems with production because they know how to talk to and how to work within the system using “relationships” to fix problems. But you have to define your own lines and say: “No mater what, I don’t do X.” I promise that if you’re here long enough, you’ll be asked to do X—and you better have decided before you get to that day what you’re going to do or guanxi will become a problem for you too.