The Chinese bears are out again – and we’re not talking about pandas. Talk of a China economic downturn is finding its way into the more responsible corners of the financial press – Moody’s and Fitch have downgraded government debt (slightly) and Market Watch is talking about the potential of trades that profit from China’s fall.
Does a slightly poorer China mean more leverage for international managers and entrepreneurs trying to do business in China? The answer is a clear No, Maybe and Maybe.
Doing Business in China during a Downturn — We’ve got bad news and unclear news.
No. If Beijing goes to its familiar stimulus playbook then waves of cash are headed for SOEs (state owned enterprises) in China’s interior. Chengdu seems to be popular in the state press these days. While this will undoubtedly mean more money sloshing around in the economy, the net impact will be fewer business opportunities for private Chinese businesses – and their overseas partners, suppliers and distributors. SOEs compete directly with domestic Chinese private companies. Lately there has been more pressure (or at least talk about it) to cut back on “bridge to nowhere” infrastructure spending on the local level – so look for the stat- run giants to get even more involved in activities that private could potential profit from.
Maybe. Western firms with the ability to put new plants or job-creating offices on the ground will have a bit more leverage than they did a few years ago. If you have been weighing expansion or hiring plans, shop around to see if second or third tier cities are cutting more creative deals. There may be improved chances for partnerships, tax incentives and cheap land, power & water – but you should plan on moving pretty far inland. The numbers will only work for certain businesses.
Maybe II. As the business environment – and the ecological environment – both deteriorate, more and more successful Chinese will be looking for ways to establish a foothold in established Western markets. There has already been plenty of Chinese overseas buying – whole companies in Europe, and real estate in the US. Western businesses that know how to leverage their Chinese partners’ aspirations for international mobility can cut some good deals as locals with cash push to build overseas escape routes. Every downtick in the China indices means a Bay Area realtor gets his wings.
Chinese on the street have been pretty insulated from the downturn, and feeling pretty happy since the crash forced American and European managers to re-evaluate their worldview in 2008. Beijing policy and party guys are the ones doing most of the panicking right now, but if they get jumpy then the skittishness will trickle down. The party plan is for SOEs or state aligned privates to take a bigger role – that’s probably one reason that BJ has turned a blind eye to the capital flight that WSJ and other Western business press have been crowing about for the past 5 years. The “regular wealthy” are concerned with securing wealth, and that may mean moving both family and business interests overseas. This gives savvy investors an opening – but just once. Use it wisely
Mainstream Chinese media is not always foreign-friendly
lines down, readers’ worst fears are confirmed when 81% of Americans surveyed said Japanese brands were no problem. But wait a minute – that’s only a 13% differential. The China Daily could have gone a completely different way – proudly announcing that 68% of Americans were confident buying Chinese. The article they published was slanted to make it seem that US consumers had a strong anti-Chinese bias.
The Chinese Party Line isn’t Anti-American – It’s Anti-Chinese
Westerners doing business in China have to get used to the Chinese self- image as victim of Western imperialism, hegemony and unfair treatment. Kids in Chinese school are raised to see Europe, Japan and the US as conquering bullies and China as the righteous yet hapless victim. They are taught that the Party has been the only source of strength or dignity for the Chinese People.
Go With the Negative Flow
Americans portrayed as evil invaders bent on China’s destruction definitely works against you when negotiating with Mainland distributors and bureaucrats in China. But, as more and more Chinese businesses and middle class families look to establish footholds in the US and other Western destinations, savvy businessmen can make this deep-seated suspicion work to their advantage. Suppress those politically-correct urges to comfort and connect – work the fear and turn your home-town connections into a marketable service .
Tips for Americans to Spin the Chinese Party Line
1. Give in to the fear — their fear. Instead of reassuring your Chinese partners, suppliers and distributors, play to their insecurity and fear. They see the glass as 1/3 empty — don’t waste time and opportunity trying to convince them it is 2/3 full. The worse your story about America, the more they’ll believe you – and the more they’ll think they need you.
2. Expand partnerships. Pre-2006, few Westerners ventured into China without a local partner. Sure there were more legal restrictions in those days, but there were also plenty of structural barriers and culture gaps. Westerners were told that they couldn’t function effectively without a local partner. Chinese expanders are starting to hear the same story about their efforts in the US and Europe- so go with it. Every negotiation about you entering the China market should include a few inquiries about their plans to expand abroad.
3. Use the force – of law, IP and copyright. This is a good time to revisit your IP protection efforts in China — and take a look at what kind of IP breaches you’ve suffered in China. As a pragmatic business person, you had to accept that there was nothing you could do about it there — but lots you can do here. Don’t underestimate the power of a lawsuit in the US. It’s annoying and an expensive inconvenience to you — but to Chinese businessmen it conjures up nightmarish images of Kafkaesque entanglements. Huawei and Sinopec’s problems weren’t reported in Chinese as legal or national security issues — they were seen as concerted efforts to “contain China” through trade restrictions and anti-Chinese biases. Your Chinese partners need you to help navigate the labyrinth of US regulations.
4. Push the US as the land of brand opportunity. As the Chinese economy goes through a rare period of contraction, savvy negotiators will turn the tables and talk about the strength of the US market relative to China’s stagnating private sector. Another point of the China Daily article – and part of the mainstream Chinese message – is that Chinese brands have no presence or traction in the US. Once you start talking to your existing partners about establishing their business in the US, insecurity about their brand is one of their buttons you will push. If they don’t bring it up, you should.
5. Play up the importance of powerful guanxi connections — in Main Street America . The US has laws prohibiting closed bidding and anti-competitive behavior — but Chinese don’t believe in them. They are being fed a steady diet of stories about rabid anti-Chinese bias in America — but at the same time are being encouraged to establish overseas business. This is going to be a windfall for someone — why not you?
China exit strategies — for when things go too well.
Western entrepreneurs and managers don’t understand is that success brings its own challenges and dangers. When your very foreign brand starts gaining traction and doing well in their very local markets, it isn’t cause for celebration all around. Unless partners, suppliers, distributors, staff and
You need a China exit-strategy for when things go too well.
Success is a curse in China. In the old days, when China was still a land of shortage, savvy Taiwanese companies would practice elaborate maneuvers to look poor and struggling. It was partially a tax dodge, but they also remember the old stories of wealthy landlords and bourgeoisie getting into trouble. Garish displays of wealth are a recent phenomenon in China. Chinese have a long tradition of hiding wealth behind brick walls and humble countenances. There is a good reason for modesty in China – but the WSJ and CNN have rendered such behavior impossible. You need to face up to the fact that all the wrong people will know about your good fortune – right away:
Management strategies for managing runaway success in China:
1) Share the wealth. It’s harder for local Chinese to call you out as a “foreign exploiter of noble peasants” when they are making most of the profit. Successful international brands have been enticing the right partners to defend their interest by giving up majority stakes within the Mainland. GM does it. Disney does it. Western brands earning less and keeping more will be the new thing.
2) Look and act Chinese. Play local rules. Keep a low profile, and follow the local customs. I don’t mean just follow the customs you like – like banqueting, keeping ernai and tons of servants. You also have to follow the traditions you DON’T like. (See the Chinapology.) Keep you head down, look as local as possible, and get along.
3) Be the harmony guys. Successful foreign enterprises should support local Chinese charities, educational efforts and community groups. Give money, support kids and education; hire lots of locals – especially poor and economically challenged. It’s of limited effectiveness on its own, but works well with these other strategies.
4) Cozy up to the near-Chinese. Taiwanese make the best partners, Singapore is ok. HK has too much baggage, but will do in a pinch. These guys know how avoid sticky conflict. Look at Foxconn (Hon Hai) – they routinely get caught violating Chinese labor laws (and a few UN Human Rights guidelines), but they are Teflon as far as government regulators go. Companies of a certain size should have arrangements in place in case they run into real trouble with Beijing.
5) Always be ready to bail. It’s happened before. Don’t be a hero, Johnny. You may have to pull up stakes someday. Have a go-bag by the door, copies of your passport, and multiple exit routes prepared. Every China plan should include an exit-strategy – and for successful MNCs and entrepreneurs that means developing a contingency for when you (or your country) fall from favor.
Brad is a client’s nephew – and like most nephews he has a business plan that centers on revolutionizing the ____ industry in China. He’s being graduated from a well-known MBA program in the near future, so he is ready with a polished slideshow and spreadsheet.
Brad is happy when I ask him what can go wrong. His slideshow has a “Challenges” section, and his spreadsheet jumps to a worksheet with a light red background. He’s ready.
What about the upside potential? Brad doesn’t miss a beat. He’s even anticipated the old-school VC koan – what if an investor offers you 10X the funds you say you need. He’s good with growth.
What will your Chinese partners do if everything goes well? Brad tilts his head and, for the first time since I’ve met him, has nothing to say. I have to repeat the question a couple of times a couple of different ways, but in the end Brad gives the one answer that is genuine: he has absolutely no idea what his Chinese partners will do in the event of success.
Americans Plan for Failure
Western risk management techniques are all about failure and loss. We go in with risk assessments, thick contracts, penalty clauses and lines in the sand. We know what to do if everything goes to hell.
In China, Success Brings Problems In China, however, failure is a relaxed, low-key affair. We all know what happened – the product didn’t sell, the regulation never came in, the process didn’t work. The money is gone, the tech didn’t meet its promise, the market has spoken. In China, however, life gets tense when the business works – and now there are assets and cash-flows worth fighting for and stealing. When you are transferring funds into the business and paying the bills, it’s all guanxi bromance and harmony. But the minute there’s a bank or a brand, its all “The Prince vs. “36 Stratagems” .
Every managers, partners or entrepreneur entering the China market needs to be able to answer these three questions:
a) What will your Chinese counterparty do if things go wrong? (Best Buy, eBay) This one is simple – they’ll say goodbye. You’ll pull up stakes and he’ll update his CV (if he hasn’t already done it that already). The fact is – he probably knew before you did. b) What will they do things go according to plan? (Ikea, YUM, Starbucks) He’ll collect a paycheck, learn whatever he can and prepare for the next phase of his career – adjusting your brand for China, or working for another local who has the same idea but more capital. This is business as usual. c) What will they do if results exceed expectations? (Danone, Apple, AMSC). Chinese partners at successful businesses will have two imperatives – getting your business (brand, process, IP) and getting you out of the picture.
Failure in China is simple and manageable. This is what most Americans plan for when they develop business plans. If things go well and the China business does fairly well, Western bosses are at their best – managing growth, developing a brand, leveraging off successes.
But Westerners in China tend to get in trouble when their brands, products or services are a big hit. That’s when partners and governments decide that it is worth the time and effort to make a concerted play for your business. Unfortunately for Westerners taking a traditional approach to risk-control, contracts, courts and due process don’t really work in your favor. If someone steals from your shop in China, you have recourse. If someone steals your chain of shops, the same people with power to protect you are probably already involved.
The simple bureaucratic maneuver that undoes American managers in China.
Tim Cook does it – but Eric Schmidt doesn’t. Li Gang had to do it. I’ve done it – a bunch of times.
Early is good. Late is worse than not at all. The best ones are brief, boring and just slightly embarrassing.
The ChinApology – a rite of passage for western managers in China
The ChinApology. As an American or Western manager working in China, you may find yourself pressured into saying you are sorry for something that you probably aren’t really sorry for at all. But that’s the point.
It’s about bureaucracy – not honor.
I was recently on a conference call with some American mangers who were worried about a potential conflict with a Chinese partner of theirs. The friction was at the middle levels of each organization, and revolved around some pretty mundane paperwork issues. The Chinese partner was closely aligned with several State Owned Enterprises, and the American side described them as “bureaucratic” several times. When pressed, one American VP revealed that because of a misunderstanding in the company’s US headquarters, the Chinese side had to redo an application for a local approval and issue an invitation letter for two new Western engineers to apply for visas to work in China.
When I suggested that the Americans consider writing an apology letter to help contain the growing conflict, they laughed at me. Not derisive or nasty. Pleasant. Fun. They thought I was making a light-hearted joke, before I offered REAL advice. When I told them I was serious – that in my professional opinion their best option was to nip this thing in the bud before it took on a life of its own, they seemed ready to fire me. They told me they’d get back to me – but something tells me the next time I hear from they will want to figure out why their Chinese partners have stopped responding to calls and emails.
Definition – What does “Chinapology” mean for American managers?
Think of the Chinapology as a controlled display of preventative humility. It’s not an admission of guilt, but rather an acknowledgement that you broke unspoken, sublime rules of social etiquette. It’s tied to giving face, guanxi, harmony, avoiding conflict —all the buzz words.
Remember ChinaSolved’s rule of Chinese Social Customs:
They may not every help you, but if you mess them up they can hurt you.
The goal of a Chinapology
The Chinapology is defense. It’s a blocking move – not a strike. The goal is to make you non-radioactive so that the people who want to do business and ignore the culture stuff can get on with their lives. It’s so your secretary and salesmen don’t have to quit. It’s not about you and another individual person. It’s about your institution and the Chinese people. I’m humble, I’m sincere, and I acknowledge you (China) are important. You are simply demonstrating that you understand the rules of society and don’t consider yourself above them.
Never write anything that can’t be read in public later and elicit anything but amusement.
Understand the limits
The Chinapology extinguishes a fuse – it’s not throwing your body on a live grenade or fighting an inferno. It can defuse a potentially ugly situation, but it doesn’t repair damage. It doesn’t always work – but not doing it almost always fails.
A Good Chinapology is Content-Free
You are apologizing for making a cultural mistake, for offending the Chinese people, for inconveniencing the noble staff, for being rude. You’re not admitting to a crime or making any sort of material confessions. No justification. No explanations. No zingers or observations about who is really to blame or what society should be like. Don’t embarrass yourself, your company or your country. This can be read publically in the US or China and it won’t kill your career or embarrass your family.
Rules of the Chinapology:
a) Timing is everything. This is preventative. Defensive. Dragging it out only makes it worse. The optimal time to Chinapologize is just after the potential conflict or scandal becomes real (you don’t want to jump the gun) but before it takes on a life of its own.
b) Be quick, dull, and non-memorable. A good Chinapology is brief. It’s a pro-forma indication that you understand the rules and consider yourself to be on the same team.
Apologize and shut up.
c) No justification. No blame. No mitigating circumstances or innuendo. No snarky, American-lawyer style damage control. No “it’s unfortunate that you feel bad about this situation”
d) Make it as drama-free as possible – as unentertaining as you possibly can. You are going to be sincere, but not too sincere. Heartfelt, but not overwrought. Serious but not grim. Americans shouldn’t overdo the humility, or it will keep happening.
Mechanics of the Chinapology
A good Chinapology should be no more than 200 words (yeah- you have to write it out). The general vibe is that you are writing this to the entire Chinese People and that it will be public and kept on file forever. Cover these five points:
Acknowledge that there is a problem. (Your feelings are important.)
We have studied the situation carefully and know how you feel. (We have put in a lot of hard work and sleepless nights on this issue.)
We admit to being insensitive to Chinese people, the residents of XXX town/province, or the hardworking staff. Apologize for ignorance, arrogance, failing to understand, thoughtlessness. NO CONFESSIONS.
We will improve. (List your concessions, new policies, new programs, or other forward-looking resolutions)
We pledge long term commitment and support.
If you follow these steps, your first Chinapology should come off well. Good luck out there.
Motivating self-important, geocentric, ultra-nationalists… who aren’t American
Chinese employees at American or multinational corporations used to be easy to manage. Westerners had the cash, the plan – and the prestige. Remember prestige? What a difference a Crash makes. Americans and Chinese were once united by our differences –they lacked the things we already had, and that made us seem smart. Since we also thought we were smart, everyone got along. Now the Chinese are becoming as self-satisfied and narrow-minded as Americans – and it is driving us further and further apart.
1. Talk about what THEY care about — schools. Chinese white collar hires used to come to MNCs expecting prestige, money and advancement. No more. The only ace left in the New China Hand’s deck is western education. (Forget the Schwarzman scholarship noise – the most optimistic plans call for 200 western grad students going to Beijing. During the 2010-11 academic year 157,588 Chinese students were studying in the U.S.) If you want to retain key Chinese talent, one of the strongest options to explore is helping their kids get into schools or working up some kind of tuition assistance program.
2. Ask for advice -- particularly about interpersonal, management and marketing issues. They may or may not have great ideas, but they notice when you don’t ask. It’s quick, cheap and makes the Chinese believe you actually care what they think. (Hint: there’s a good chance that they believe you don’t.)
3. Talk in terms of them working & living in the US. This approach will not ring everyone’s bell, but will be huge with the right guys. Float it as a trial balloon with a couple of high-potential young staffers and see what happens. One of the big beefs white collar Chinese have with western employers is that there is no visible career path. Individual Chinese may not love Americans (the people) – but they still have a pretty high regard for America (the place).
4. Select staff, suppliers and counterparties carefully– and know what you are getting yourself into. You may still be able to work with arrogant, nationalistic or competitive Chinese – but you aren’t going to change their behavior or attitude. They aren’t as afraid of losing their jobs as Americans or Europeans. If threatening to fire people is your big management move, consider broadening your repertoire. Motivating Chinese knowledge workers is a crucial skill, and typical “carrot and stick” approaches may not work.
5. Remember that propaganda and censorship work. In the US we call it “marketing” and “news”, but it’s the same principle. Don’t try bucking the trend. The good news is that you know exactly what everyone is thinking – just read the People’s Daily (for policy direction) and ChinaSmack (for reality-TV type insights). The bad news is that it may be hard to spin your company message so that it aligns with Weibo sensibilities — but that’s what you have to do.
Chinese Banquets aren’t for small talk — they are for BIG TALK
Use your guanxi-building social events to sell your company vision — and learn about your new Chinese partners. Develop a “Big Talk” strategy — part due diligence investigation, part PR campaign. Prepare big picture questions and topics in advance so you can subtly guide the conversation with potential Chinese associates where you need it to go.
In China identifying, training and retaining the right people for management positions has become a significant constraint on management and expansion. Meanwhile, management teams in the US and Europe have been shedding staff and cutting benefits as quickly as possible.
US C-level Orientation towards hiring middle managers:
Staff is a necessary evil. The fewer people working in the middle levels of the company, the better.
Workers are parasites, feeding off the hard work of heroic leaders and visionaries (a la Ayn Rand)
Star system. US compensation plans are meritocracies on steroids. We used to believe in the 80-20 rule, where 80% of the benefits accrued to the top 20% of personnel, but that seems socialistic by today’s standards.
Staff exists at pleasure of boss. Job security has become a thing of the past.
Workers are lucky to have any job at all.
China manager orientation towards working for an MNC
Working for a foreign MNC is now a risk that requires reassurance and guarantees. In Ancient China (2006) China’s best and brightest flocked to work for famous foreign brands, and they were humiliated, under-utilized and ultimately fired. Modern Chinese MBAs won’t make the same mistake.
MNC bosses are interlopers. The New (foreign) Boss is the same as the Old Boss. Since 2008, homegrown companies with proven business models are safer bets that offer more upside potential. This recent crop of foreign invaders will pull up stakes and leave when the going gets tough – like so many have before.
Community. Work is supposed to be a social activity, conducted by an extended family of workers, staff and related companies. Western managers don’t understand the difference between sophisticated knowledge workers and factory peasants.
What’s my path both in your company and beyond? Western firms are little more than grad schools. They are appropriate places for high-potential young leaders to go for basic training in international business, but since there is no clear path for advancement or improvement then there is no real future.
They are lucky to have me. Chinese managers read the papers, too. They know that competent, experienced middle managers are in high demand and short supply.
Western Advantage or Vulnerability?
Western corporations invented the in-house university, leadership development programs and employee benefits. They also pioneered outsourcing, mass lay-offs and dehumanizing efficiency programs. What works in the West won’t work in China. The ability to recruit, train and retain used to be a significant competitive advantage for international firms in China — but now it seems to be working against them.
ChinaSolved is an online resource for international managers operating in China – and those who are considering a China deal. Whether you are an expat, overseas Chinese or Mainlander involved in international trade, ChinaSolved aims to provide you with answers and solutions. ChinaSolved is forward looking and willing to take risks. We may not always [...]more →
In China you may be the last to know that your counter-party has become aggressive and competitive. In many cases, competitive behavior is the finale in a combination of tactics that begins with flattery and relationship-building. […]