An excerpt from China’s Super Consumers: What 1 Billion Customers Want and How to Sell it to Them by Michael Zakkour and Savio Chan, published September 30, 2014 by Wiley
Michael A. Zakkour is a leading authority on Chinese consumption, consumers, branding, retail, and e-commerce as well as operations and supply chains in China. He is a principal at the global business consulting firm Tompkins International where he heads the “China/Asia Pacific Practice. He is also a contributing writer at FORBES, CNBC and Entrepreneur magazine.
Mario Cavolo and Andrew Hupert take two different views on China’s emerging business environment.
China’s economic and regulatory policies are a work in progress that are constantly evolving. Lately the pendulum seems to be swinging against the interests of multinationals, but the reality defies easy answers or rash generalizations. ChinaSolved.com presents for your consideration two different views on recent developments and future directions of Chinese economic policy:
China’s Evolving Business Environment Favorable to Some
Mario Cavolo, Vice President – Media/PR Training; Scott PR China, www.scottpr.cn and author of China: The Big Lie? published by Long River Press, North America
Mario Cavolo reminds us that not all the China business changes are negative – and some beneficiaries of recent policies are the good guys.
Any worthy China watcher has noticed the increasingly unfavorable trend toward foreign entities present here, whether it is reporting on security issues with Microsoft and Apple or the recent position papers by the European and American Chambers delivering a somber rather than upbeat view of the current business environment in terms of ease of doing business. It’s not all bad, but we wish it was better.
The Chinese bureaucracy is much more tolerant of overseas companies that spend than of overseas companies that earn in China. That means integrated MNCs must adjust their business models – and their approach to regulators – when they are selling.
Western negotiators in China are finally coming to accept
that no matter what the deal on the table may be, their most significant counterparty is the Chinese government bureaucracy. The Chinese government has a much different attitude towards international businesses coming to China to buy or manufacture as opposed to those coming to China to sell and market. International managers are still coming to grips with this dichotomy, and it is causing problems and costing money.
Ask not what China can do for you – ask what China wants from you.
China bears and the Chinapologists are spreading myths that lead to terrible business decisions. The truth lies somewhere between these two extreme – and dangerous viewpoints.
Last week we talked about China realities. The ultimate conclusion was that while the Chinese business environment isn’t fair, it’s still the best game in town in terms of growth and opportunity. As a China negotiator and decision-maker, you have to decide early – go all in or get completely out for good. China is a terrible place for half-measures.
Two types of China myths. China bear and Chinapologists.
Chinapologists are the China experts who support and spread the orthodox China party line. You can usually spot them because they tend to preface every statement with, “I’m not supporting the Chinese party line but…” and then they proceed to do so. When a Chinese person does this it’s pretty easy to spot them as either 50 Cent Army (paid posters on online chat and BBS sites, who are alleged paid half a mao – or fifty cents – for each pro-government entry) or direct beneficiaries of Chinese policy. It has become common for Westerners living in China for a long time or hoping to curry favor with bureaucrats or officials to actively defend Chinese policies that many Westerners consider unfair or discriminatory. Sometimes these Chinapologists feel they are winning points with decision-makers who will soon repay the favor; sometimes they got to this position via a slippery slope of defending elements of Chinese business or society that they genuinely believe in- but ended up completely in the China camp; and sometimes they are merely mouthing politically correct positions in public while take a much more realistic stance in private or with paying customers. However they may have come to act as apologists for the Chinese bureaucracy, their arguments usually fall into one of three main categories:
China Business Reality Check – It’s not fair and isn’t getting better. Deal with it.
For Westerners, doing business in China is
going through anther sea change — so this is a good time to take a fresh look at the operating environment as it impacts on international management decisions.
1) The business environment in China isn’t fair to Westerners.
2) China is one of the top two economies in the World by just about any standard.
3) Negotiating and operating successfully in China will probably get tougher before it gets easier.
1) Chinese government / CCP policies give an automatic edge to all Chinese businesses compared to Western operations.
2) Western companies can’t make money in China.
3) China is about to go bust / will quickly see how much it needs Western good will.
1) China is more capitalist than any other economy at any time.
2) Chinese companies have it just as tough if not tougher than Western firms.
3) The situation is worse in the West / the situation is improving in China.
Let’s look at each one of these in a little more detail.
Reality #1: China isn’t fair to Western businesses. It just isn’t. Let’s accept it and move on. Western companies pay more, take longer, have fewer options, and are more likely to be prosecuted/penalized than local firms. Now, here’s the business point you have to take away from this – it doesn’t matter if there are good historical, cultural, or political reasons; it doesn’t matter if Chinese firms are treated just as badly or worse when they go abroad; and it doesn’t matter if Western firms used to get preferential treatment, so today’s unfair treatment is somehow “fair” in some obscure way. That’s all just academic theory or babyish whining. Man-up and play to win. All that matters is that you, as an international manager, are going to be held to the letter of the law and will always face slower, more stringent treatment from the bureaucracy. You know it, you have time to plan for it, and you have to deal with it. Literally. You have to structure your business plans and negotiating strategy to compensate for harsher, unequal treatment from bureaucratic authorities. Stop trying to cut corners or assume you can get local treatment. If you are getting advice from locals, make sure you are have some kind of filter i’n place to make sure they understand the ‘Xpat Factor’. You aren’t in Kansas anymore, so stop managing or structuring deals as though you were.
Guanxi-building gifts, premium pricing for prestige brands, and closely guarded trade secrets used to be the hallmarks of a savvy international management team in China – now they are prosecutable offenses.
Glaxo SmithKline. Mercedes Benz. Yum. McDonalds. The list of Fortune 100 MNCs getting into high-profile legal trouble in China has been growing – and the
severity of problems growing more intense than ever. With the conviction of a well-known Western consultant and the widespread deployment of China’s Anti Monopoly Law, even the most die-hard Chinapologists are having a hard time arguing that international firms are getting fair treatment from Beijing. In the past the biggest problem facing Western managers and negotiators in China was the lack of consistent laws – now the problem is too much law and uneven enforcement.
In Chinese negotiation, don’t confuse polite rhetoric with concerted strategy.
American and European negotiators treat their Chinese counterparties’ “general principles” discussion like the “terms and conditions” screen – we just check the box and look for the real content. Big mistake.
General Principles Discussion can come back to haunt careless negotiators
Westerners in China often make important concessions without even knowing it. It’s common for Chinese negotiators to frame their position with a discussion of “general principles”. Westerners tend to shrug them off with vague agreement – particularly since these conversations tend to be phrased in vague, wooden rhetoric like “harmony and shared responsibility”. It all sounds like meaningless propaganda to us, and it mixes easily with the toasts, proverbs, unfamiliar historic references and folksy anecdotes that characterize a boozy banquet night in Shanghai or Beijing. Western negotiators tend to focus on transactions, and aggressive negotiators will make every effort to control the negotiating agenda and nail down concrete deal points – but the Chinese side never gives up on their deal points or general goals, regardless of the appearance of compromise or concession.
Relationship Building Not a One-Off Activity in China
In ChinaSolved’s latest book, “10 Common China Negotiating Mistakes”, 3 on the least wanted is “coasting on good starts and early successes”. While this is one of the biggest dangers that deep-pocketed MNCs (and their representatives” face in a long-term China business, it can be very hard to anticipate. Fortunately for us (but unfortunately for them), Microsoft provides a telling case study of how the best efforts don’t always yield successful outcomes.
Negotiating in China means talking about the relationship. (Sorry guys.)
Western businesspeople already know that to do business in China you have to have a relationship. This is the whole basis of guanxi and harmony. The problem is the way Americans and Chinese view relationship. To us Westerners, “relationships” are emotional – they are a matter of personal chemistry. We hear the word relationship and we think of family, romance, marriage, and friendship. In China relationships are regarded differently. They are more like a due diligence investigation – and you definitely have to negotiate for access and openness.
May has been another tough month for international negotiators doing business in China.
The indictment of 5 alleged cyber spies form the PLA threatened to bring US-China relations to a
new low. Meanwhile, territorial disputes escalated between China and the Philippines, Viet Nam and Japan threatened to spin out of control with disturbing regularity. That’s why there was so much headline space (though not all of it on the front page) devoted to a high profile energy deal between China and “Reliable Friend’ Russia. What does all of this mean for Western negotiators in China?