Chinese authority Dr. Kerry Brown on China’s issues and western ways

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. VentureOutsource.com: What are your thoughts on foreign electronics OEM companies partnering with Chinese firms and, having the OEM's product(s) reverse-engineered, then being mass-produced by a Chinese firm (for the Chinese market) under a different brand name? What two (2) changes would you like to see in the way Chinese law addresses intellectual property (IP) infringements? Brown: Of course, one thing the nation of China is hungriest for, and has been hungry for for many years, is intellectual property and know-how. China depleted its human capital during the late Maoist period from 1966 onward, and the Cultural Revolution, and has set itself back many years by this intense period of isolationism and anti-intellectualism. As a result, in 1978, China's development began from a low starting point, and much of the imperative behind its initial moves to develop investment in China was not so much the capital itself, as it was for the ‘know how' such investments gave access to. I think, today, the Chinese are disappointed with their results. The bottom line is that as of 2006, 88% of China's high technology exports are made by foreign invested enterprises. Chinese indigenous companies are very weak performers, and simply haven't progressed very far up the value chain. This is the driving force behind very weak intellectual property protection in China. The central government may issue very clear and good legislation, but, in fact, in many provinces it is simply disregarded. Reverse engineering of goods is common, with ‘Chinese brands' used to service China's domestic, or internal, market. One business person I know in Beijing who worked for a multinational company there simply says that the moment a product is sold to one person in China control is handed over to the unknown, with the likelihood the product will be copied. As China-based British businessman, Tim Clissold, writes in Mr. China: A Memoir, his account of doing business in China in the 1990s, he opines about competitors blatantly setting up copy-cat factories, producing the same goods, right next to the foreign enterprises. Sorting this out is a major challenge. First, the Chinese government needs to get much tougher on implementing its own laws. China has good patent protection on its statues, and in theory, firm measures in place to punish violators who contravene. But something is still wrong. China is the source of 70% of the world's counterfeit goods, running from technical equipment to consumer goods. America took issue with China in front of the World Trade Organization (WTO) in early 2007 because the U.S. experienced China's generally relaxed approach to copyright infringers. At the moment the problem seems endemic. Only a small percentage of those involved in IP theft in China are caught, and few infringers are punished. In addition to tougher implementation, China needs to create a culture in which there is a greater respect for IP. This is a much tougher task and it must come from the very top Chinese officials, and business people, who must realize that IP violation hurts Chinese companies as much as foreign organizations, and that it is in everyone's interests to reinforce this. Being seen as a global IP infringer is also damaging to China's global image, and its credibility, and this is something that matters to the business and political elite in China. VentureOutsource.com: What characteristics, specific to the Chinese mindset, do you see causing, or influencing, some Chinese companies to feel they are entitled to steal another company's IP? What are your thoughts on Chinese innovation? Brown: China aspires to be a knowledge-based economy. However, at the moment, the nation's fundamental economic model is still very much based on:

• importing partly finished goods (which account for roughly 30 % of its imported goods)

• ‘processing' such goods with the plentiful and cheap Chinese labor (although this has been drying up in recent years as more manufacturing moves to China)

• followed by re-exporting the finished goods to developed markets such as the EU (China's largest trade partner), Japan and the U.S.

The Chinese very much want to climb up the value chain. This is the nation's aspiration contained in the government-issued `Five Year Guideline' that runs from 2006 to 2010. They want to emulate the United States and the EU, with a greater number of knowledge workers, higher numbers of skilled workers, and a shift away from the energy-inefficient and environmentally-destructive manufacturing they have been practicing for the last three decades. This is a difficult mountain to climb. China needs as much help as they can get. Much of China's foreign investment in the 1980s and 1990s, particularly from Japan, was to gain knowledge and management expertise. China now needs to move faster, and expand more intelligently. Companies are putting more effort into research and development (Chinese telecom giants Huawei and ZTE are leading the way), with 10% of profits going back into R&D). But, as the work of Peter Nolan, Sinyu Professor of Chinese Management at Cambridge University, has made clear, the expenditure of Chinese companies in R&D has been much lower than that of western counterparts. Chinese state and non state companies work on very narrow margins, and have simply not had the latitude to develop in this area. More fundamentally, there is a clear mindset in China that the West, since the end of the Qing period from 1840 onward, bullied and used China, robbing it of much of its power and pride. This is the narrative taught in school text books. Humiliation was a constant theme for the Chinese during the Qing Dynasty. China refers to a period leading up to the founding of the People's Republic in 1949 as `The Century of Humiliation'. China views itself, with some good reasons, as being one of the world's leaders in scientific knowledge and development, up to the 17th and 18th centuries. This has been well documented in the late, great sinologist Joseph Needham's `Science and Civilization in China', which shows that China was instrumental in inventing gunpowder, the printing press, water clocks, and a range of other fundamental innovations. Chinese now feel that in many ways the West almost owes them technology because of this past, and that using IP in the way that many do in China, is simply fair game. As China develops, this mindset is changing, yet still lingers. There is a bright spot. China produces more mathematicians and engineers than the rest of the world put together each year. Many of China's leading politicians are engineers, or geologists, people with strong scientific background. As a result, China is placing huge importance on its scientific development, and is developing stronger innovation capabilities. As China continues to develop, it is likely to grow significantly in this area, though there are key questions about how a one-party state, with limits on freedom of expression and political control, as China clearly is at the moment, can really become a fully innovative culture. Such questions will be answered in the years to come. The best outcome is that China then becomes a key technical partner, helping to tackle some of the huge problems of environmental technology and energy efficiency in the years ahead. VentureOutsource.com, March 2008