What's More Important? Part II

As I mentioned in the previous Chinese cultural knowledge vs. general business skills blog (What’s more important? part I) I’m of the opinion that you’ve got to have the business skills first. The cultural skills are also absolutely necessary but for different reasons and for resolving different business issues. This week, after numerous article about IP cases in China, some factory horror stories, some scary stats about Chinese government corruption and some questions about safety in China from a couple of clients, I’m adding a new wrinkle to the equation: non-Chinese specific cultural issues.Non-Chinese cultural issues include specifics about the current business climate in China that are not “Chinese” per se, but are more pronounced in China than in the States or Western Europe. Specifically, the lack of an environment of trust, governmental corruption, lack of legal recourse, and a general disregard for strangers.And before I get all the “China bashing” retorts, I will admit that all of these “cultural issues” are certainly present in other countries. But no would say that Europe or the US has an underdeveloped legal system. None of the Western States rank as high (or is it low?) on the corruption indexes as does China. And Western companies coming to China across the board fear IP theft. Not to mention that Western investors are undoubtedly more excited but also more cautious when investing in companies with Chinese assets due to lack of transparency. High profile Western cases such as Enron and Worldcom are the exception rather than the rule for Western business.Unfortunately scandal, theft and graft seem to be more easily found in China. This week’s news, for example lists some prime examples: By the government’s own admission, 60 to 90 percent of commercial land deals in major Chinese cities since 2004 are illegal (Chinese Ministry of Land and Resources, 2006). China is the largest source of pirated goods in the world. One of the top agenda items for the Communist Party Leadership for the last two years has been resolving internal corruption and restoring trust/legitimacy in the government and despite that, estimates are that corruption is on the rise, not declining. Accounting standards in China are NOT up to international par and most Chinese companies looking for international JV partners or their own IPO’s are hard pressed to meet these standards by WTO ascension at the end of 2006. This includes the 4 major Chinese banks.The point is not that China is “bad” but more that business culture, or, if you don’t like that phrase, the business environment in China is different than in the West.Specific activities, not in the general news but usually trotted out as example of cultural differences, that are considered “common practices” for medium to large (but not yet public) companies in China are not the same as for similar businesses in the West. Common practices in China include loaning money to people you know/have relationships with so that repayment is assured instead of strict adherence to objective standards (no angle investors in China); working only with people whom you have established connections (less flight risk); flat-out honest racism and sexism (“is your boss a black or white foreigner” is a question that we’ve heard more than once; gender requirements and pictures required for any receptionist jobs in Asia); government connections to secure both what you want and make sure that you don’t have problems with what you don’t want; use of physical intimidation or holding product “hostage” to ensure payment; offers for kickbacks from factories to project managers to secure contracts (we get these weekly); nepotism (most Chinese people I’ve talked to laugh out loud when told that hiring family/friends can be illegal in the US).Many of these issues are a result of a couple of truths about China or any developing country: first, while progress is being made, there is still little or no legal recourse for small to medium foreign (or domestic) companies who’ve been wronged in China. Without a structured, effective, consistent, and fair legal system there can be no trust between strangers, no end to corruption, no consistent enforcement of laws, and limited development of international competitive companies.Second, government corruption and selective enforcement of laws is the norm rather than the exception. If the government is corrupt why should the private sector be legit? Since deals are made and enforced (or not) in an environment of powerful people rather than powerful laws corruption will continue (and grow) until there is incentive (positive or negative) enough to do business another way. Right now there just isn’t that incentive—although foreign companies are increasingly providing that incentive one factory and one deal at a time.These are not specifically Chinese cultural issues, but they impact business in China in a very real way. For example, almost every US businessman that works in China that I’ve talked with (mostly small to middle sized US companies) says something to the effect that “other people may pay bribes in China but we don’t!” The truth, from my experience, is that the bribes are indeed being paid for, they’re simply included in legitimate expenses (hence the infamous Chinese accounting problems). It’s more often a case of the foreign boss not knowing that he’s paying because his Chinese staff never translates these items for him. And, of course, there are never printed receipts for these items either.Another example is quality control. If you’re not on the ground doing your own QC, the factory is going cut corners to save money if they think they can get away with it (and with you 3000 miles away, they do think they can get away with it.) This is probably the biggest advantage of using SRI. We are not shopping-out project QC to HK trading companies who then transfer the responsibility to “their guys” in the mainland. We’re here in the mainland ourselves and we actually go to all the factories ourselves.More? OK. Foreigners coming to China have to know that they will be considered “stupid” to assume that strangers can be trusted until they prove otherwise. Chinese don’t trust “strangers” so why should you when you’re here? Locals and big companies that have been here a while know what “life on the ground is really like.” And what it’s really like is not the same as the West. Companies, large or small, must have strict and well thought out policies in place as well as methods for detection and compliance.