Guanxi is "a Critical Factor in Business Success" in China. Who Knew?!

According to a recent survey by YouGov and London’s Legatum Institute, "93 percent of Chinese entrepreneurs cite guanxi—connections with government officials—as a critical factor in business success."I had a client email me this article and ask me, "Is it really still like this?  I thought that China was much more developed" than this.   My response, “This is exactly what China is like.”  But there is more to it than just “connections” as we like to think of it in the West.You can interpret this survey in one of two ways.  First, “Of course guanxi is important!  It’s not what you know but who you know in the US too.  Stop picking on China.”  Or second, “Doing business successfully in China requires you to have someone in your organization that is well connected and can play the games, pull the strings, motivate in culturally appropriate ways and host the dinners and other events necessary to both keep the doors open but keep others from coming in too often.”Here is what I’ve seen personally and/or been told first hand about in the last decade in Chinese business:

1. At an official’s request, factory gives multiple pages of signed blank letterhead to govt offical to get all the proper permits completed.
2. Office must pay a cash bonus of thousands of US dollars simply to have govt officials come out and do their job.
3. Any and all testing documents can be purchased and have “official” stamps on them for set (and quite publicly known) prices.
4. Any shipment can be passed through customs if you’re willing to change some of the details on the export documents and pay a price.
5. Anything can be imported into China, for a price.
6. Worker protests and wage demands at one factory are affecting the attitude of works at neighboring factories.  A call to the local security bureau brings out armed police and attitudes are quickly and forcefully returned to normal.
7. New factory that is being built and it will compete directly with other factories in the area which are owned by the local gentry.  New factory can’t get the permits, inspections or certification for workers that it legally qualifies for.  After a 1 year delay, factory is open and then shut down twice in the first 8 months for “violations” of the local health and tax codes.
8. Factory pays off QC to approve shipment which is then paid for in full by foreign client and then rejected by foreign customs for not meeting legal standards.

In my experience there are a few things that are "still" true in China.  First, The “gray market” and “gray economy” are probably as big as the real market and real economy.  Ditto for Thailand and probably every other developing Asian/African/South American country.  What that means for the foreigner doing business here is that what is public and what is on the table is really only ½ of the story.  Yes you can certainly stay out of the gray areas and maintain your principles, but if you refuse to participate in the “gray” areas or refuse to allow your factories to participate your prices will reflect your lack of participation.  Doing business legally in China costs more.  Period.One of the most ludicrous comments that I ever heard made by foreign businessmen in China was the comments of a man with 2 partial years experience in a large company in SZ, no Chinese language ability and no direct contact with suppliers or anyone outside of his English speaking administrative staff.  He said to me, in all sincerity, “There is no one in our entire company that has ever even been offered a bribe or has offered anything to a vendor or official.  Our standards are so high that everyone we work with knows that we just won’t do that.”  I've picked on this guy for this comment before.  I can't believe that he is right, but I know him personally and I do believe that his personal standards are indeed this high and he would not do this (or consider that anyone working for him would either, obviously).  I know very few other people with this level of commitment to high moral standards--and many of the people I've meet in China think that is position is, at the very least, unwise if not flat out crazy.  For his sake, I hope that he’s right.  But I’m pretty sure he’s missing some of what's "really going on."

SIDE NOTE: The second most ludicrous statement every made to me was from an recently divorced foreign English teacher who had just come to Asia for the first time in his life, had been in China for 3 months, couldn’t speak Chinese, had self-admittedly recently read his first 3 books on China, had just “fallen in love” with a local that couldn’t speak a word of English and who said to me with more than a little pride in his own intellectual achievement, “I don't know what the big deal is.  I think that I’ve got China figured out.”  I laughed out-loud in his face (he got offended and left).

Second, the only long-term relationships that suppliers have are with local officials, their sub suppliers and their bank accounts.  Don’t delude yourself into thinking that anyone in China cares or even believes you when say that your order is “really big” or your “next order will be huge” or your company has “tons of potential” .   Buyers come and go—usually hundreds a month asking for quotes and “fishing” for the best price.  Suppliers know that most buyers will leave for cheaper pricing at the drop of a hat.  Where’s the value in investing in a long-term relationship if it’s really only one sided?  IF you actually place and order and IF you actually pay your bills and IF you order with the same supplier a few times, things will change.  But don’t expect them to treat you special right off the bat.Third, government officials’ job performance is directly tied to economic growth and tax revenue is related to land and housing prices.  What that means for you is that if you’re not directly adding substantially to economic growth then you’re not important.  Of course this means that you can most likely fly under the radar for years in China.  That’s good.  But if, for whatever reason, you need more, the only way to compensate for a lack of status is to pay money directly to officials (maybe just to get what you are should have access too and/or are legally required to have in the first place).  This will most likely put you in direct violation of your home country’s laws.But it doesn't have to just be working with govt officials that requires good connections and a knowledge of local "customs."  You have to know your business partners too.  For example, we try to work exclusively with factories that we have either audited first or have read reports from others that have done audits.  Despite that precaution we've seen the following, multiple times each.

1. Factory refuses to ship product until we pay for "additional costs" that they did not anticipate.
2. Factory makes mistake(s) in production but refuses to redo the product unless they are paid more.
3. Factory agrees to meet their own internal standards but then doesn't do it and expects us to pay for all substandard product anyway.
4. Factory parks large trucks in front of their gates so that we either can't leave or can't get in or get molds/tooling out.
5. Factory subs out all/most production and then refuses to either do QC or take responsibility for the product.
6. Factory commits to production standard that they know they can't meet and then spends a couple weeks/months trying to figure out how to fake it.
7. Factory doesn’t think that the standards in the contract they signed are fair so they hold our QC hostage until we either change the contract, pay more or both.

Third, there are really too many stories to detail in a single post--but THE solution to all of these experiences is having the right person HERE dealing directly with factory owners and managers.  This is the person that negotiates with your factories.  Like the person that deals with the govt on your behalf, this person must be both local and entirely loyal to you--they have to know what you don't know you don't know, they have to have the ability and permission to negotiate and they must be completely transparent with you.  At the same time they have to have enough chutzpa and experience to be able to navigate the the industrial and governmental labyrinth that is China.  In other words, you need someone with great guanxi.Fourth, as a foreigner you’re different, you’re a target and you’re in the minority.  As much as I and others complain (about real problems) in China, we’re not going to change China.  We’re never going to be accepted as “Chinese” no matter how long we live here, now matter how much Chinese we learn, no matter who we marry or what our kids look like.  This affects EVERYTHING you do—on a professional level, it absolutely changes the price of goods you buy and nature of business relationships you have.  And this isn't necessarily a bad thing either.  It just is.Finally, China will be exactly what you make it (up) to be.  It can be Shangri-La or hell on earth.  It can be one of the most exasperating experience of your life or a trip through the proverbial tulips.  I’ve found that it’s usually some of both.But what China will not do is change for you.  Especially now with the bad western economy, you’re not special and your “potential” will not get you any special treatment.  You are coming to China to do business and China doesn’t need you, at least they don’t think that they do.  You have to both do business in China they way Chinese do business and figure out a way to keep your own principles at the same time.