In this exclusive interview, VentureOutsource.com speaks with Kerry Brown, Ph.D., committee member with 48 Group Club (www.48groupclub.org), a business network committed to promoting positive relations with China.
Dr. Brown is also an associate fellow at Chatham House (www.chathamhouse.org.uk), a world-leading institute for the debate and analysis of international issues.
Dr. Brown is the author of Struggling Giant: China in the 21st Century and, The Rise of the Dragon: Chinese Inward and Outward Investment in the Reform Period.
Learn about three common mistakes western executives make when engaging Chinese executives, protecting your product design, Dr. Brown’s ‘must-do’ checklist, and more. Transcripts from that discussion follow.
VentureOutsource.com: You have considerable expertise regarding business engagements with China and China’s private sector. On this note, executives from western manufacturing companies that engage Chinese companies must be cognizant of business protocol when navigating the Chinese business environment.
What three (3) common mistakes regarding business protocol, or etiquette, do you often see western executives make when engaging their Chinese counterparts in the Far East?
Brown: Mistake #1: Viewing the Chinese business environment as similar to ours, and to assume the division between government and the commercial sector is as clear cut as it is in developed countries in the EU and North America.
China has changed radically since the death of Mao Zedong in 1976, and the beginning of the Opening Up and Reform period in 1978. China has become much more integrated into the global economy, has constructed, pretty much from scratch, a rule of law, contract law, bankruptcy law, investment regulations, etc.
But the bottom line is that it is still a one party state, and the Communist Party is very much in power. China is a government-saturated environment.
|Kerry Brown, Ph.D.
Committee Member, 48 Group Club
Associate Fellow, Chatham House
Government exists all around, which is why it is best to talk about the `non-state’ sector in China (ie, with the word `state’ still very much present) rather than `private sector’. So, any company going into China needs to have an almost dual-track approach, building government relations into what they do, even if it is only to make sure government officials are aware of the projects companies are involved with, and that some efforts have been made to keep them informed. This pays good dividends if, somewhere along the line going forward, problems occur.
Mistake #2: Misunderstanding the highly fragmented nature of the Chinese economy. There are massive differences between the urban coastal cities (like Shanghai and Guangzhou) and the inland provinces, with the former operating on nearly separate economies.
Indeed, as U.S.-based scholar Yasheng Huang pointed out in his very good study of Chinese inward investment, Selling China: Foreign Direct Investment During the Reform Era, it is as hard for a Chinese business person in one province to invest in, or do business operations, in another province, as it is for them to simply operate abroad. There are different tariffs; regulations, markets, technical levels and consumer bases.
Assuming China is more integrated than it is can lead to massive disappointment when it is clear that, in fact, there are multiple markets, and multiple dynamics. Business plans have to be adopted to take this into account.
Mistake #3: Not being patient. Chinese are much more patient when making deals, and can often use the impatience of their foreign counterparts to hasten them to sign agreements in order to finalize something.
As Beijing-based, U.S. businessman Jim MacGregor writes in, One Billion Customers, his book based on 20 years of experience in China, the Chinese are very good at wining and dining visitors, disorientating them with overwhelming hospitality, and thereby creating a sense of obligation which is difficult to sidestep when agreements come to be negotiated. As he so eloquently says, “The Chinese will frequently ask for ridiculous concessions because the opposite party might just agree.”
VentureOutsource.com: If you were to develop a checklist containing the top five (5) items western executive visiting China should be sure to do during their first meeting with a Chinese counterpart, what would be on that list? Why the importance of each item?
Brown: 1.) First, executives should work out the power dynamics of who is sitting opposite them, and find out as much as they can about people’s backgrounds.
If the Chinese company or organization is large, who is the person with the real clout? It is often not the case where it turns out to be the person with the most senior title. Some people have complex and rich, wealthy backgrounds that aren’t immediately obvious.
Either this comes from their family background, or from party positions which they hold concurrent with their commercial positions, or simply from having good networks. China still now remains relatively unchanged from previous centuries with regard to one aspect – power is largely concentrated in the hands of a few people.
A lot of the time, foreign business executives will need to find out who the key decision-makers are in an organization, and then determine how to court and lobby them. This is as true in non-state as it is in state companies in China. As the ancient Chinese military theorist Sun Tsu said in his much celebrated Art of War, “If you know your enemies and know yourself, you will not be imperiled in a hundred battles.”
2.) Try and determine exactly what it is the other side might actually want. This might seem self-evident, but all too often, foreign executives travel into China assuming they know what the other side wants – technology, for instance, or partnerships to open up markets, or investment. But, this isn’t necessarily the case. The Chinese might want a variety of things.
The Chinese might want investment, for instance, for the technology it brings (China is, after all, at the moment, awash with investment), or the management expertise a joint venture might provide. Chinese generally perform plenty of research on whoever they are dealing with – finding out about company background, company operations, business scope, even down to the detail of ‘who’ is in a company and as well as personal backgrounds. Executives going into China should try and do as much work as they can to match this effort.
3.) Be wary of business tactics that might be used. Chinese are good negotiators, and will use a number of tactics to get to their desired outcome. An executive needs to be aware of what his bottom line is, and think through the various outcomes possible (and alternatives), so he can be prepared for anything unexpected that might be thrown into discussions.
On the whole, Chinese are far more knowledgeable about the West, and western business practices, than western business executives are about China. The Chinese executive will use a number of ways to influence negotiations; from creating a sense of obligation through generous hospitality, to appealing for someone to `help them’ and thus attempting to create a very personal contact that way. All of this can be disorientating.
4.) Chinese organizations and companies operate against a different sense of prioritization. In China, it is important to establish relations first, to demonstrate trust, to get to know each other rather than immediately getting to the nitty-gritty of business deals. A common experience will be doing most business negotiations and sealing-the-deal during dinners rather than in actual business meetings.
In China, the power of relationships is very strong. Displaying an interest that you are `friends’, and that you are looking for long-term benefits is important – not just that you are there to seal a quick deal, and walk away after that transaction is over. The interest and respect in long-term relations needs to be articulated. This expression of friendship can lead to real misunderstandings when it comes to signing contracts.
Contract law in China has only existed since the last two decades. China has built up its legal infrastructure in a very short period where there is still often weak implementation of law. Many Chinese business partners view the signing of a contract as a gesture, and are not likely interested in being bothered by detail. So, they might sometimes agree to take, for instance, one million items, then, upon signing the contract, following taking delivery of the first one-tenth of a series of shipments, communicate they regard this as enough and that the rest of the contract can now be forgotten. This leads us to a very important aspect when managing dealings with China…
5.) Good translation. Countless times, deals are scrapped because of misunderstandings between both sides that have arisen because of poor or imperfect translation. Relying on the other side’s translators is not good enough.
Both sides need to have good quality translators, and they are worth paying good money for. Even western executives with decent Chinese language skills need to have a translator to make sure that they have really understood what is being said.
The Chinese language can be rich with ambiguity and this can occur often because of its wonderful brevity (one word for male and female, with no distinction, no tenses for verbs, and no irregular verbs or complex declension). Good translation leads to good communication.