Is it worth the effort and investment for foreign firms to do business in China? The answer depends on who you are and what you want from the market – and that’s a problem.
I spent a month in China trying to answer the question, “is it still worthwhile for Westerners to try doing business in China?” The international business press has been focusing on Beijing’s prosecution of the infamous Anti-Monopoly Law and use of national security claims to restrict foreign firms’ access to China’s burgeoning middle-class markets. Overseas readers of the WSJ and Forbes could easily get the impression that foreign brands are being chased out of China on a tide of xenophobic resentment and anti-foreign fervor – but it’s simply not the reality on the ground.
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:
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?
The story reminded me of a recent encounter I had at prestigious NYC networking event. I was introduced to a young professional woman from Beijing who was hired right out of Columbia Business School by a prominent private banking firm. She was well-educated, well-traveled, and well connected – both in NY and Beijing. I asked about the outlook for inbound Chinese investment into US hi-tech and agri-business industries . She responded with vague anti-government complaints that private investors were willing but Washington was blocking their efforts. For a moment I was hit with that jarring feeling you get when you experience something familiar in an unexpected place – like running into an old acquaintance while travelling in a strange city.
Doing business in China was once characterized by low costs, steep learning curves and a lack of best practices. No more. Nowadays, China is expensive in terms of funds, personnel AND opportunity cost. Still, if your business requires a global marketing footprint or relies on supply-chain efficiency, you may need to have some kind of China presence.
If you are going to China to negotiate a deal, then you occupy three distinct roles.
First, you are the point man on the field that must represent the home office and execute in its best interests.
Second, you are responsible for gathering pertinent information and moving it through your organization to maximum advantage. This involves a great deal of internal negotiation, which must be done well before you start negotiating in China. If you try to start changing your firm’s global policy, or acting on emerging opportunities (or newly discovered dangers) without first doing the necessary groundwork, you are going to face bottlenecks, conflicts, and unpredictable outcomes.
Third, you are the relationship builder. This is a delicate role under the best of circumstances and it is particularly challenging if someone back in HQ thinks that he has already established all the key personal relationships when he banqueted his way through Shanghai 18 months ago. If you are running point, you have to make sure everyone on your team—from the big bosses back home to the local staff supporting you—are all working off the same playbook.
HQ Bosses — Same Goals, Different Methods
If, on the other hand, you’re a top-down senior strategist based in HQ then you have to understand the mechanics of business in China. China deals terms are never “set and forget”—you cannot use US or European operating systems as a template for a new China business. We admire those senior managers who set bold strategies for entering the China market, just so long as they remember that for every self-congratulatory press release there will be 10,000 ground-level micro-decisions that must be executed properly. If you aren’t actively supporting your own people in the field then you are undermining them, and yourself.
1. The big story is the growth of the middle class – carrying with it the promise of new prosperity and the threat of greater environmental strains.
2. GDP in China will fall significantly. Although admittedly not economic experts, the panel mostly predicted that China’s economic growth would be somewhere around 5% YOY in the near future — or roughly 30% off official projections. China is shifting from an investment based to consumption based economic model.
3. Pollution will continue to be a major problem.
4. The demand for new health care is rising dramatically.
5. Chinese industry is becoming less competitive as wages rise and the cost of inputs continues to trend upwards. The new middle class is going to be big users and providers of services.
One of the most common questions/comments to come back from the report about western “worst practices” in Chinese negotiation had to do with the tension between developing good relationships with local counterparts and promoting one’s own interests. Which is more important in China – developing good relations or maintaining control of your own assets? While this has always been the negotiators’ dilemma (see Fisher & Ury; Lax & Sebenius; Malhotra, Bazerman or any of the other PON authors), it is particularly troublesome in China where guanxi and harmony are watchwords of business success.
ChinaSolved’s Least Wanted List #5: Training Your Own Competition
It may be true that Chinese businessmen are long-term planners, but that doesn’t mean that they intend to work with you forever. You may be a bit player in their grand epic story – and your role could be to supply them with technology, new products or business methodology. Know who your potential competitors are, and don’t treat them like partners.
Negotiating in China is as much about managing relationships as constructing business plans. Plenty of Western entrepreneurs and managers have had solid ideas that failed because they lacked suitable local partners – or had the wrong partner. You also have to remember that in China, the practical definition of “partnership” is much broader than it is in the West. You may run a WFOE or department of a western MNC that doesn’t have any Chinese equity partners, but from a practical operating perspective you can still be locked into a variety of exclusive partnerships or critical supply relationships. This discussion isn’t about legal details – it’s about negotiating with Chinese counterparts.