Risk Reduction in Chinese Business: Relationships

Western managers who delegated the “guanxi” or relationship-building function need to audit their China operation.

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Ever since I published the  eBook – Guanxi for the Busy American  – I’ve been on the receiving end of an endless stream of jaded Old Hand derision and criticism.  It usually takes the form of a fast-paced 2-Step.  First they declare that they are tired of hearing the overworked and

misused phrase, “guanxi” and they don’t bother with it anymore. The next step is to delegate the entire relationship-building process to a trusted Chinese associate or agent.  (A typical response to any mention of the g-word:  “I don’t bother with guanxi nonsense since it isn’t really necessary and never helps westerners anyway.  Instead I have, over the years, built up a strong relationship with my Chinese partner/lawyer/director/wife/classmate.”)

At ChinaSolved we have a simple rule for dealing with Chinese business cultural issues. Chinese customs may never help you, but if you get them wrong then they can most definitely harm you.  The guys running the China branches at Bayer , GlaxoSmithKline, Sanofi and other international firms being investigated for graft, corruption and money-laundering in China were doubtlessly all told the same thing – “don’t worry- your Chinese staff knows how to handle the red envelopes, everyone does it, it’s expected,  it’s simply the only way to get things done here…”  Western managers who dismissed guanxi and relationship-building as a technical or operational issue that needn’t bother C-level strategists must now assess their entire China structure and try to determine if they are vulnerable.  Smart managers are examining every sale and every regulatory approval to make sure that they haven’t broken laws on both sides of the Pacific.

The guanxi/relationship issue is only as complicated as senior decision-makers want to make it.  If you approach business relationships as part of the negotiation process and handle it as a top-down strategic challenge, then you will spend a lot of time and energy on them, but will stay in control of your brand, reputation and team.  If your approach to Chinese relationships is to brush them under the carpet like bits of dirty business that you don’t want to deal with, then eventually you will have to manage a full-blown crisis that threatens to undermine your business.

The anti-graft campaign has been a limited success

China’s anti-graft efforts have been a limited success.  No, China is not getting any less corrupt or transparent.  The success is limited to making foreigners look bad and thus making business-as-usual Chinese businessmen feel good.  The anti-MNC campaign is a great press in China – it’s one of the few bright spots in the Xi administration’s big clean-up crusade.   The problem for you is that the Chinese establishment generally likes to keep doing what works.  For now it’s drug-makers and dairy products – but if you are in autos, retail, supply chain or any other industry that sells in China and has ever passed a red envelope to an official (and that includes a lot of businesses) then you may have to face the same difficulties.

Five Risk-Management Tips for Chinese Relationships

  • You may already be dirty.  This is no time to believe your own press releases.  If your firm has been engaged in corruption and graft (and yeah – that’s what we’re calling the red-envelopes now) then you may want to start making preparations.  Senior Chinese-Americans residing in China might want to explore other living arrangements before the authorities do it for you.  We used to say that white guys didn’t have to worry about doing jail time in the PRC, but the Peter Humphrey case has changed all that.   It’s “come to Jesus” soon – but in China confessions don’t save your soul.  They get prime-time slots and YouTube hits.
  • The more things change, the more they stay the same – in a bad way.  Corruption is still the grease that makes the wheels turn, but now it’s radioactive and glows in the dark.  Your newest challenge is figuring out how to clean up your business practices without losing your network of associates and regulatory approvals.  This is definitely a new competitive problem – locals will find ways to disguise payoffs and favors.  MNCs and foreign WFOEs are in the spotlight.
  • Westerners more exposed and vulnerable – even if you think you’ve delegated and outsourced the relationships.  You are more likely to get caught, more likely to leave a trail, and more likely to get sold out by your friends & staffers.  Saying “everybody does it” or “my Beijing lawyers and consultants told me it was OK” isn’t a justification.  It’s an admission.  The laws are the same for everyone in China – enforcement is not.  You are an easy, high-value target.
  • Your partners and high-level execs are still working the old playbook.  They’ve got no other plan.  The guys you’ve been counting on to get approvals, open markets and negotiate with partners all these years have been paying.   Your winners are the guys who were the most competent at bribery, graft and working the system.  Are you now relying on them to make sure you are clean?  It’s risky.
  • Double jeopardy.  Compliance is more important than ever – but it’s not just a China problem.  Paying bribes in China is illegal in the US and Europe.  Glaxo – a UK entity – is being investigated in the US for FCPA (Foreign Corrupt Practices Act) while it is still dealing with Beijing authorities.  The FCPA is administered by the Department of Justice – a group not known for their leniency or understanding.  (They’re they guys who got Martha Stewart.)

Keeping your hands clean is not enough. 

Senior executives overseeing their China operation have to white-glove test their business before the authorities do it.  Your people over there may be exposed – and your reputation, your brand, and your staff are at risk.  Do an internal audit, ask the hard questions (preferably in HQ first) and take action.  This is no time for complacency or yes-men advice.

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The Fragile Bridge
The Fragile Bridge: Conflict Management in Chinese Business
Guanxi for the Busy American
Because what you don’t know about guanxi can really hurt.

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