Takeaway – Established Western brands will continue to defend their global leadership positions for a while yet, but Chinese corporates are taking control of growing niches and new categories. Look for Chinese entities to disrupt industries through enforced localization and substitution – not head-to-head competition.
Welcome to the Multiconomy
Phase 1: Frenemies on a Glass Bridge
The status quo of US – China commerce can best be described as frenemies who need each other more than they like each other. Up until now, both Chinese and Western commercial systems have been multi-faceted and opportunistic. National policies have been one of many inputs in business decision-making.
This situation can be characterized as brittle, but not necessarily fragile. Think of our existing system as a strong glass bridge. It’s very stable – right up until the moment it starts to crack. Then it can no longer support its own weight, but is very difficult to repair.
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.
The trade relationship will grow incrementally more challenging and MNCs may finally air their grievances in public.
2014 will be challenging for international negotiators in China, but not particularly unstable or erratic. An unsettled economy in China will bring out protectionist impulses in Beijing bureaucrats, who will be increasingly defensive and conservative about what happens within their borders while at the same time becoming more ambitious and assertive in their dealings abroad.
Access to the the Chinese market will become a touchier issue for deep-pocketed MNCs, who will exhibit a greater willingness to go public with their complaints about market access to China — and may even mobilize connections at home to limit Chinese access to western markets. China in 2014 will continue its trend of greater nationalism, protectionism and defensiveness, but shouldn’t hold too many surprises for experienced international businesses. Savvy negotiators will find ways to turn bureaucratic heavy-handedness to their own advantage by offering Chinese partners help moving offshore to more attractive, less restricted markets.
Strategies for email and online negotiation with Chinese counter-parties.
Chinese negotiators value relationships more highly than Western negotiators do, which presents a unique set of challenges when deals are being discussed long distance.
Here is our Top 10 list for carrying on successful long-distance negotiations with Chinese counter-parties.
Send a photo and email signature. Email presents special challenges – assuming that English is your first language and it is not his. He will be uncomfortable and self-conscious using written English, and you have to acknowledge this and take steps to level the playing field early. If you have never met your Chinese counterpart or met in a group setting long ago, consider starting with a cordial introduction – including a photo and some non-business background info. Don’t assume they’ll remember you, that they’ll search the company site or that they’ll automatically check out your profile on LinkedIn. If they don’t know you then they’ll be suspicious and hesitant to work with you. That’s ok if you are ordering a shipment of manufactured goods (maybe), but not if you hope to build a long-term business. No trust, no business.
Confirm website availability – including links. Can he see your site? What about the videos on your site and newsfeeds? Just because you don’t consider yourself political doesn’t mean that your site isn’t getting the wrong kind of attention. Remember – in China web users won’t see any YouTube, Google, Twitter or Facebook feeds (even if they are embedded in your site) and many other types of web content are blocked to some degree. Skype works for now, but that may change. Google services (such as G+) are hit or miss. If you share a server with a sensitive site, you may be blocked. If you link to Bloomberg, the New York Times or other properties deemed inappropriate by Chinese authorities, you may be blocked. It’s not your fault, but it is your problem.
Ask what type of platform they prefer. They may prefer VOIP, phone or video conference calls. Or email. Of some kind of SMS (consider signing up for WeChat http://www.wechat.com/en/ ). Email has become commonplace in China, but it wasn’t always so. Remember that Chinese access the internet via mobile phones much more than Americans do – for many Chinese businessmen, smartphones are still their primary device. They may find threaded email conversations burdensome, and prefer short messages.
Have a fax machine available. Fax machines are less prevalent than they once were in China, but still far more common and useful that they are in the US. Invest in some kind of fax program or app that will allow you to send and receive on your laptop, or get private access to your office machine.
Schedule conference calls with their time zone in mind. 11 AM EST is convenient for New Yorkers and OK for the West Coast, but incredibly difficult for China. They have a 12 or 13 hour time difference – you’re not winning any friends in Shanghai when you make them hang around the office until midnight for routine calls. Allowing them to log on from home is a C+; scheduling with them in mind is an A.
Short, simple and frequent messages – no long, complex letters. Save the legalese for the final version of your agreements. Chinese negotiators work better with rapid-fire text exchanges – not 3-page documents.
Check holidays and timetables. Nothing says “pushy, clueless foreigner” like scheduling calls before (or during) national holidays. I still laugh about the group of Taiwanese analysts who scheduled a visit to NY for Dec 20. It was a critical deal so people took their meetings – but the reception was poor and no one understood what they were doing there. Don’t be that guy. Chinese holiday calendars are easy to find.
Invite them to visit. This one is a no-brainer, and I don’t understand why it isn’t done more often. The Chinese side almost always talks about your last visit to China or asks about your plans to come. Do the same. You don’t have to offer to pay or nail down any solid dates – but extend a general invitation. It’s very possible that they have studied overseas, have relatives who live in the region or have other interests that they want to share. If they are talking about you visiting China, then it’s just good manners – and common sense – to reciprocate.
Let them know who is involved in the conversation on your end – and find out who is involved on their side. Two of the big issues with email and online messages are permanence – and forwarding. Who is looking at your messages? This is important everywhere, but when Chinese counter-parties are involved it can take even more complexity. Start by sharing some basic information about your decision-making process – who is involved and how long you expect things to take. Then ask him about his side. This is always a sticky point with Chinese negotiators, and you may not get a complete (or even candid) answer. Still – you might be surprised.
Relationships first, then transactions. We end up where we begin. The Chinese side of a business deal puts more emphasis on personal relationship, character and trust than– the western side. They want to know who you are, and expect you to find out about them. Americans believe in test orders, contracts and building trust over time. We end up in the same place, but take different routes to get there. When you are discussing business long-distance, it is even more important to make the effort to build a relationship.
Partnerships are back in fashion this season in China, but the focus is on smart, win-win tie ups that make sense for both sides. Be proactive and find a Chinese partner who will help you execute your China plans.
For the Chinese side technology is the goal, time is the weapon.
Chinese negotiators often assess the success or failure of a deal by the technology and IP they acquire. They don’t really care how they get it.
Chinese negotiators view guanxi from a family connection as a rare commodity that they are contributing to the venture – one that will benefit the entire organization and should be borne by all beneficiaciaries.
When the literature talks about ‘cultural barriers’ between China and the West, be aware that the key differences are not “fork & knife vs. chop sticks” superficialities – they are deep-seated core beliefs like guanxi vs. due diligence.
When it comes to the value of guanxi in China, the international community is split between the true believers and the heretics. Believers share the Chinese conviction that guanxi is the single most important predictor of success in China, and that if you have the right connections then everything else is just a detail. Heretics think that while guanxi may indeed be quite useful for locals, it just doesn’t work well for non-Chinese. Lately the skeptics have been rising in terms of both numbers and volume – warning that it doesn’t help all that much, and may cause problems.