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Through the
Wall
A
cross-cultural guide to doing business in
China
By David M Lenard (Jun
'06) |
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Negotiating: Just a little patience
The Chinese
negotiating style is very sophisticated but also
very time-intensive, reflecting the lesser value
placed on time relative to the West.
(Interestingly, Hong Kong is drastically different
in this respect - decision-making there moves
at light speed, even faster than in the US.)
The single most important quality required
for successful negotiations with Chinese is,
therefore, patience. Fortunately, there is a
general willingness to compromise (partly due to
the heritage of Taoism, which rejects absolutist
positions). Stating a "take it or leave it"
position at the outset, particularly on price, is
almost always unwise, since your Chinese
negotiating partner will expect you to permit
price reduction through bargaining in order to
save face. Having said that, it is still necessary
to be tough; if something is truly a deal-breaker,
do not give in - do not get frustrated or lose
your temper, but remain firm, even if the
negotiations drag on endlessly over a single point
of contention.
The Chinese are
certainly not above using time pressure to their
advantage - it is imprudent to inform them that
you will be required to conclude the business by a
particular date, because they can use this
information to force concessions just prior to the
deadline.
The importance of patience was
underlined by author Kevin Sinclair, who in his
book Culture Shock: China, gave 11 rules
for negotiating with mainland Chinese:
1)
Patience
2) Perseverance
3) Stamina and
persistence
4) Friendly sincerity
5)
Firmness to press your point
6)
Flexibility
7) Tact and sense of humor
8)
Technical knowledge of the product
9) Simple,
clear language
10) Honesty and frankness
11) Willingness
to sit through endless banquets, drink gallons of
tea, toasts with maotai
(a distilled
spirit), etc
We're
big, we know it, we really
like to show it
The vast size, at
least potentially, of the Chinese market has been
the main factor drawing foreign entrepreneurs
there for more than 200 years. China does, indeed,
have enormous market potential. But, unfortunately
for the foreign businessman, Chinese know this
very well and have become extremely adroit at
fully exploiting the fact to extract the maximum
benefit from the foreign investments they receive
- while minimizing the benefits for the foreign
firm.
Many foreign firms in China have found that
they become just successful enough to keep them in
the country, but not nearly as successful as they
wanted to be when they made the decision to
invest. All too often, great success seems just
around the corner, but somehow never materializes.
Having said that, foreign companies' profits
in China have never been as high as they were
in 2005; and many longtime players who suffered
disappointment in the 1980s and 1990s are now
reaping the benefits of roaring 9% annual growth.
The auto market has been a great success story;
for auto makers Ford and General Motors, China has
become a badly needed bright spot given severe
weakness elsewhere, as a mass market for vehicles,
prematurely predicted for decades, finally began
to materialize after 2000.
Over
to you, Mr
Wang
For
foreign firms in China, one of the most noteworthy
recent trends is a shift from extensive hands-on
supervision by expatriate managers to handing over
more responsibility to Chinese. This is an
inevitable development, reflecting the rise of a
younger generation of local managers much better
equipped to operate in a modern corporation than
their elders, and it should be welcomed.
In the long run, companies with a "glass
ceiling" for local managers will not be able to
succeed in the country, not only because their
reputation will suffer, but because they will not
be able to attract the best talent. In addition,
locals have a superior understanding of their
market, which will ultimately become indispensable
for the company's success.
Finally,
a predominance of Chinese nationals in higher
management will make it easier for the company to
ride out xenophobic episodes, such as the
anti-Japanese riots of 2005.
Intellectual-property wrongs
Many a foreign
company has been shocked to find its former
joint-venture partner opening up a competing
factory (sometimes literally right next door) and
making a knockoff of the JV's intended product.
Indeed, forests have been felled to print articles
about China's weak
protection of
intellectual-property rights (IPR).
The problem
is far more extensive than the well-publicized torrent
of pirated digital video discs (DVDs) and
computer software; in fact, there is practically
no tangible product that has not been
counterfeited, including clothing, luggage, tools,
entire models of motorcycles and cars, and even
aircraft parts (whose inferior quality presents a
frightening safety risk).
There are many reasons for
the IPR problem. Fundamentally, China is a
developing country that needs knowledge and
technology to catch up with the rest of the world,
and there is a reasonable moral argument, at least
from the Chinese point of view, for appropriation
of this knowledge and technology from foreigners.
Many developing countries, including the US in the
18th and 19th centuries, have displayed a similar
lack of regard for others' intellectual property.
Often, too, Chinese firms exist in such a
hyper-competitive environment that IPR fees would
make a business non-viable - for example, the
license fees for using the DVD technology are so
high relative to the cost of production (sometimes
accounting for more than 50% of the factory price
of low-end DVD players) that the Chinese
electronics industry is actually promoting an
alternative, locally developed video standard -
EVD, for enhanced versatile disc - solely in
an effort to escape the costs.
In
addition, the group orientation of Chinese culture
legitimizes the appropriation of IPR to some
extent. Since foreigners (and their companies)
have no defined place in Chinese society, there is
therefore no sense of social obligation to them;
while formal and legal obligations may exist,
these are far weaker than social sanctions in a
country where developing the rule of law has been
a major challenge.
It must be said
that Beijing has devoted enormous efforts to
the protection of IPR; China is required to take
many such measures as a condition of its accession
to the World Trade Organization (WTO). But
the government faces many obstacles to its
enforcement programs, chief among them the vast size of
the country and the difficulty of enforcing
central directives in remote provinces, or even
with branches of the government. For example, a
few years ago, it was widely reported
in the Western press that most factories
producing pirated discs were controlled by the
Chinese military - a fact that contributed to the
forced divestiture of many military-run commercial
projects in the 1990s.
In the short to
medium term, the best hope foreign firms have for
IPR protection is China's need to maintain the
flow of foreign investment; if the country is seen
to turn a blind eye to IPR theft, this would be
endangered. Companies should strive to maintain
strong relations with local officials, and have a
place in the community; this, together with
working on IPR enforcement projects alongside
other foreign firms and with home governments, are
useful ways to protect IPR in China. In the long
term, as economic development proceeds, China
itself will ultimately generate IPR, and therefore
have a stake in protecting it.
Forms of foreign
ventures
The most
common way foreign firms enter China is by forming
a representative office, which can be set up
relatively simply with a small up-front
investment. Representative offices cannot actually
conduct business; their purpose is to give the
parent firm a "base" from which to explore the
possibility of more extensive investments, such
as joint ventures.
All
representative offices must hire local staff (there is a
requirement for at least one Chinese employee
for each expatriate employee) and the local employees
can only be hired from an authorized list
of foreign-services companies; however, this setup is
quite liberal compared with past years, when there was only
one authorized foreign-service firm, the Beijing
Foreign Enterprise Services Corp (known as
FESCO).
Many foreign investors who
choose to become more deeply involved do so by
forming joint ventures - tie-ups with a Chinese
firm. A typical example would be a overseas
manufacturer finding a Chinese factory to produce
some items in its product line; the Chinese firm
would be responsible for production, while the
foreign partner would provide necessary design
expertise, technology, connections to foreign
buyers, etc. In the 1980s and 1990s, there is no
question that this was the most common model
adopted by foreign companies in China.
Joint ventures have many
advantages (well-established setup procedures; a
ready-made staff; many routine problems can be
taken care of by the local partner) and many
potential pitfalls (the risk of counterfeiting or
giving away secrets to one's future competitor;
the need for negotiation with the partner before
making routine decisions; incompetence or
overstaffing; quality problems; and of course,
cultural clashes).
Selecting a joint-venture
partner is a bit like finding a mate - it is an
extremely complex process, with little assurance
of sustained success, in which a great deal of
random chance is involved. As in any dyadic
relationship, either side can be a
source of problems - the Chinese media have
reported cases of overseas managers literally
emptying the company bank accounts and then
disappearing.
The ideal joint-venture partner would be
professionally competent with good connections,
knowledge of local markets, and ideally the
recommendation of another foreign firm. However,
partnering with a well-connected firm can be a
Faustian bargain: the same connections that help
the foreign firm if the partnership is succeeding
can hurt it if a dispute develops. In any case,
the advice "marry in haste, repent at leisure"
certainly applies to the formation of joint
ventures, and the need to conduct careful research
on prospective partners will be the most important
early challenge faced by many new entrants to the
Chinese market.
In recent years,
partly because of the many well-publicized travails of joint ventures,
there has been a trend away from them in favor
of wholly owned foreign enterprises (WOFEs)
- the number of industries where these are legal
has been increasing steadily as a result of
China's WTO commitments.
The
mei you mentality
Chinese businesses, especially
state-owned ones, do not exactly have a strong
record of satisfying the customer. To some extent,
this is a hangover from the Maoist era; before
1978, a situation prevailed where demand for
almost all goods chronically exceeded supply -
this in effect obviated the need for
customer service, creating two generations of
workers with a total indifference to consumers'
needs. All too often, queries from customers would
be met with a curt "mei you"
("we're out") - typically
pronounced with an air of infinitely jaded
disinterest in the puny customer/molecule daring
to clamor for service.
With most goods now in
overproduction and intense competition the rule in
virtually every sector of the economy, the
situation has fundamentally changed. Supply now
exceeds demand, meaning that only firms that
exceed customer expectations can survive
long-term. Unfortunately, old habits die hard -
especially since attitudes at companies are most
affected by senior managers, and the current
generation of these is among the worst affected by
the mei you
mentality - many of them have a
production-target orientation that does not pay
sufficient attention to quality, design or
marketing. These people are certainly not
accustomed to thinking in terms of productivity,
profitability or shareholder value.
However, as with so much else in China, this situation is rapidly
changing. Consolidation is becoming more and
more evident in many industries as the strongest
firms - which often means the ones best
serving customers - pull away from the pack. And
the next generation of managers, many with Western
MBAs (master of business administration degrees) and experience
abroad, can be expected to inculcate higher
standards of customer service in the firms they
control.
Quality, schmality
The "appearance over reality"
tendency mentioned in Part 1 certainly
manifests itself in the quality of manufactured
goods. In this respect, the Chinese-made items
found in shops overseas are actually misleading
because, as export goods, they have to meet higher
standards than domestically sold products.
The quality of ordinary manufactures sold
inside China can be so bad it has to be seen to be
believed. The author's own experience has included
a videotape whose magnetic coating came off in the
machine; a hairbrush (copied off a Taiwanese
design) that broke within days of purchase; and a
shower heater that constantly emitted threatening
popping and creaking noises and random bursts of
steam.
Of course,
there were many good products also - and one of
the key factors differentiating the "winner"
companies starting to emerge from the vast throng
of Chinese enterprises is their ability to produce
reasonably good-quality products. This is, of
course, exactly what competition is supposed to do
- but there is a long way to go before Chinese
companies can match the kind of "six-sigma"
quality produced by the top international brands.
For the time being,
the ubiquitous claims of high quality - such as the
ISO9000 certification that has been faddishly
pursued by thousands of Chinese firms - should be
regarded with some skepticism.
The
buck stops
... where?
Surprisingly, it can be
difficult to find out who is the head of a Chinese
company - and even the nominal person in charge
may be a figurehead not actually making
operational decisions. One reason is that,
especially in state firms, there was a custom of
putting retired cadres or People's Liberation
Army (PLA) officers out to pasture by making
them heads of firms.
In such
cases, it can take time to determine what is
actually going on, and it is necessary to spend
the time required before forming a long-term
relationship with a Chinese supplier or partner.
Also, state firms are required to have a Communist Party
secretary, and this official often wields great
influence, in some cases more than the nominal
manager. Obviously, this issue is less important
when dealing with private firms or joint ventures.
Clear contracts now, or pay later
Paradoxically, in
view of the weak rule of law in the country, it is
extremely important to have clear contracts drawn
up that follow the relevant laws to the letter.
Most companies will have to retain their own
lawyers with experience and expertise in Chinese
business law; it is unwise to rely on the legal
advice of the Chinese partner.
It
is especially important to be very clear
about performance standards and payment terms.
Companies should strictly observe all technicalities such
as initialing all contract pages, and be particularly
leery of clauses that call for actions they cannot
control. For example, if a company is required to
allow experts from its Chinese partner to visit
its factory in the West, and the country then
refuses visas to the experts, the entire contract
might be considered invalid.
Normal profits,
normal risks
Often,
foreign firms' eagerness to be in China is so great that
they are willing to accept conditions and
prospects they would never accept anywhere else. This
is usually a mistake. Companies should do the
same rigorous risk analysis for a China project
that they would do anywhere else, and be willing
to walk away if the result is negative. There
has been a tendency to accept years of losses in
the early stages of China initiatives in hopes of
a turnaround later on; sometimes these hopes
have been met, but very frequently they have not.
Top
executives should also be wary of the "seduction"
phenomenon: Chinese are extremely skilled
at charming powerful foreigners, including corporate
chief executives, on visits to the country,
impressing them with the market's vast potential
and their own eagerness to do business. This often
leads to open-ended commitments by awestruck
business leaders who do not realize that their
middle managers will face a brutal period of
negotiation with a Chinese partner instilled with
the Art of War
negotiating style.
There is
a marked tendency for what the foreign firm might
see as a "loss leader" - a necessary early
sacrifice to enter the Chinese market - to turn
into a permanent loss, as the foreign company's
floor becomes the Chinese partner's ceiling.
One
country, many markets
China is a huge
country with enormous geographic, climatic and
cultural diversity. There has been enormous
publicity to a relatively small wealthy elite
living mostly in the coastal cities, but most of
the population is still impoverished and rural.
Consequently, the decision to go into China
is not a simple binary choice; rather, it is the
first of many decisions: should the company
concentrate on one region or offer its product
nationwide? Should marketing efforts be focused on
urban areas, or is it worth the effort to
penetrate the vast countryside, and if so, how? Is
western China (where incomes are lower and
transportation difficulties much greater) worth
the trouble, or should one focus on the affluent
coastal provinces?
As a practical matter,
regional rollouts followed by gradual expansion
have a better record of success than a national
rollout - it should be recalled that provinces in
China are the size of European countries and
almost as culturally distinct; there are also
great interprovincial differences in economic
needs, infrastructure and official behavior.
The limitations of the Chinese market
should always be kept in mind: urban per capita
income is still only about US$1,300, and the
corresponding rural figure about $400. By the
measure of purchasing-power parity, the figures
are quite a bit higher, but it is still true that
the spending power of the Chinese consumer is
limited, and this has a great impact on the types
of products that are likely to succeed.
It also affects some unexpected issues such
as container sizes; for example, small shampoo
packets sell well in rural China, because many
country people who would consider a full-sized
bottle too expensive can and will purchase a
small packet.
Show
me the money
In China,
there is a big difference between making the sale
and getting paid, and woe betide the foreign firm
that forgets this.
It is necessary to pay
close attention to nuts-and-bolts payment issues:
how payments are made, when they are made, and in
what currency. Legal advisers with China
experience are very useful here. Also, bear in
mind that the Chinese yuan remains a controlled
currency and this can create difficulties with
remitting profits in hard currency.
Letters of credit with international
banks are commonly used to protect firms against
non-payment by Chinese customers. Terms involving
partial payments in advance of delivery, such as
"70% advance payment and 30% letter of credit",
are also common. Never agree to unsecured payments
after delivery - this makes a foreign businessman
look naive.
Marketing
Marketing in China is an
enormously complex subject and includes many
subtleties. For example, product logos and package
designs in China appear to be more visually
complex than in, say, Japan, reflecting the
cultural preference for more ornate orientation.
There are also color preferences distinct from
those in the West - red and white have positive
connotations, black negative.
Even
the basic decision of how to render a product's
name in Chinese can assume enormous complexity,
due to the fact that 
Chinese characters can be
sounded differently in different dialects, and the
problem of similar-sounding words with silly or
offensive meanings. The story of Coca-Cola's
attempts to name its product in Chinese provides
an instructive example. When the company first
entered the Chinese market in 1928, Coke officials
began searching for a combination of Chinese
characters which sounded like "Coca-Cola", but had
a positive meaning.
However, while this
effort was underway, Chinese shopkeepers (who had
begun selling the product in the meantime) began
coming up with their own transliterations. Many
used the character for "wax" (pronounced "la"),
resulting in constructions such as keke
kenla. Unfortunately for Coke, many of these
unauthorized attempts had silly meanings, like
"female horse fastened with wax" or the
oft-reported "bite the wax tadpole", depending on
the dialect. Eventually the firm settled on
characters pronounced kokou kole, which
means roughly "happiness for the mouth", and this
was duly registered in 1928.
Faced with
such subtleties, many companies have
understandably thrown up their hands and continued
to use Roman characters in their trademarks; those
who have been successful at translating brand
names have generally consulted with Chinese
experts who help to select a name that has
positive connotations and conveys associations
that are desirable for the product.
Well-known international
brands still have tremendous appeal - but also an
equally tremendous tendency to attract knockoffs,
and in light of China's strong nationalistic
propensities, it is debatable whether it is a good
strategy in the long term for a company to become
too closely identified with its parent nation
(just ask the Japanese electronics firms whose
sales plummeted after last year's anti-Japanese
demonstrations).
Notes
for exporters
Exporters need to have a very
clear understanding of their products and be able
to explain clearly their features and
advantages to Chinese buyers. Well-translated
brochures, presentations, etc will be invaluable.
For
aspiring US exporters, the US Commercial Service
(USCS), an agency of the US Department of
Commerce, offers an International Partner
Search (IPS) program to help exporters
find appropriate sales agents in China. For a
modest fee, the USCS will find potential agents or
distributors in a specific geographical area; this
can be a useful way to gauge interest in a product
and begin the process of finding a suitable
representative.
The agency also offers a
Gold Key Service
that helps representatives visiting
China to meet pre-selected Chinese
business contacts; meetings through video conferencing can
also be arranged. Last, exporters within the US
can use the agency's toll-free query number
for trade-related questions, 1-800-USA-TRADE.
Communications issues
It is not usually realistic
to make rapid telephone inquiries to companies in
China, as one would might in the West. There are
several reasons for this.
Many Chinese
will simply hang up on a person speaking in a
foreign language, or in poor Chinese - this is
because, if the answerer's English is not
good, he would rather hang up than struggle
through a conversation and therefore lose face.
Even if the person's English is good (or the
foreign businessman speaks excellent Mandarin),
there is another problem: a reluctance to help the
caller, because of the
information-is-power tendency discussed in Part 1.
Formal letters (possibly faxed - faxes are
very popular in China, partly because they avoid
the difficulties associated with entering Chinese
script into a computer) remain probably the best
way to introduce your firm to prospective Chinese
supplier or partner, or to make any other kind of
business query.
After one has established a relationship, an
enormous amount of business is conducted on mobile phones
- cellular technology is staggeringly popular
in China, now the world's biggest mobile-phone
market.
E-mail has become very
prevalent, but the extent to which it has
penetrated ordinary business practice still trails
the West. This means that, for example, one cannot
assume that an e-mail query to a company will be
rapidly answered - it may be answered the same
day, or never, depending on the firm.
In
the latter case it is not necessarily because the
company is not interested in the proposal; it
could be simply because the company obtained an
e-mail address but never assigned someone
specifically to monitor it and pass inquiries on
to the appropriate person. This phenomenon can be
explained by the appearances-over-reality
tendency, and also to the group
orientation that causes individual
responsibilities to be not clearly defined.
Having an e-mail address
is highly desirable for Chinese firms because
it gives companies a modern, high-tech image. But
often, no one bothers to integrate the
technology into the company's actual operations. In fairness to
the Chinese, it has taken decades elsewhere for
information technology to be usefully integrated
into business practice.
It
is often necessary to use interpreters; sadly, the
demand for good ones greatly exceeds the supply,
and often causes foreign companies to use
marginally qualified people who might have
difficulty translating the jargon in a particular
line of business, or simply lack experience. This
can cause serious difficulties because, in most
cases, a local interpreter will be unwilling to
admit that he or she is having problems
and, instead, simply muddle through or, worse yet,
give inaccurate translations, which can cause
serious misunderstandings to develop.
Also,
companies should be leery of depending on their
own ethnic-Chinese employees to perform
translation duties; such people are typically not
trained for the work, and can also find themselves
presented with conflicts of interest that might
color their translation.
The 'Hotel California'
syndrome
"You can check out any time
you like / but you can never leave ..."
Attracting foreign investment
has been a huge priority for the Chinese
government for 25 years, and there is a now a vast
official infrastructure dedicated to this task.
Because of this, firms desiring to get into the
country find their way is eased at every turn.
Unfortunately, this can create a misleading
impression - especially in the event that the
business fails and the foreign firm decides to
withdraw.
Closing down a business in China
requires a number of official permissions
comparable to those required to enter - with
the crucial difference that, unlike in the latter
case, officialdom has little or no incentive to
cooperate.
The same applies for local
ex-partners. An atmosphere of mistrust can easily
develop that has, in past incidents, led to one or
both parties taking extreme actions, such as the
foreign investor emptying company accounts and
disappearing on the next plane out, or local
partners in effect holding the foreign
partner hostage until a satisfactory financial
settlement is reached.
As a consequence, companies
planning to shut down their Chinese investments
should proceed cautiously and only after receiving
extensive guidance from experts on the process.
Part 2 conclusion
It is true that international
companies cannot impose their ways of doing
business on China. On the other hand, China
actually wants and needs overseas firms to
introduce more modern practices as a way of
whipping domestic businesses into shape.
In
practice, this contradiction leads to a situation
where foreign firms cannot simply behave as they
would at home or in other developing countries,
but they cannot behave like Chinese firms either -
flexibility and a close attention to the rapidly
changing, ambiguous environment are the best
guides.
Part 1: General
themes
Part 3:
Practicalities
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