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China demands U.S. apology on Chen Guangcheng’s entering U.S. embassy
(People’s Daily Online)
16:13, May 02, 2012
BEIJING, May 2 (People’s Daily Online) — China demands the U.S to apologize for a Chinese citizen’s entering the U.S. Embassy in Beijing, Chinese Foreign Ministry said here Wednesday.

It is informed that Chen Guangcheng, a native from Yinan County of eastern China’s Shandong Province, entered the U.S. Embassy in Beijing in late April and left of his own volition after a six-day stay in the embassy, said Ministry spokesman Liu Weimin.

This is a little unusual because of what was said, when the statement was released, and what was not said. But the most interesting thing is the timing.

China has demanded an apology – following a controversial, high-level negotiation about the fate of a Chinese lawyer who was most likely seeking asylum at the US embassy in Beijing. News of Mr. Chen’s presence in the embassy came only days before a high-level (and high profile) set of US-China meetings known as the SED – Strategic and Economic Dialogue ( http://www.treasury.gov/initiatives/Pages/china.aspx ) Sec of State Clinton and Sec of Finance Geithner are both in Beijing ahead of the meeting, and Hillary Clinton was said to have intervened in the Chen case directly. Now that he has left the embassy — of his own volition for the purpose of receiving medical treatment – all sides of the dispute will spin events to their best advantage.

The US will talk about values, personal liberty, and protection of rights.

The Chinese side will talk about sovereignty, the dignity of the Chinese people, and foreigners meddling in Chinese affairs.

There is a clash of values at play that many international managers will recognize. When the Chinese side talks about issues related to pride, honor, and image, the real issue is Face, or mian-zi. Demands for an apology accomplish several things for the Chinese side, that all international managers should take note of.

First — by appearing as the injured party, they are shifting the onus to the other side. This is a common – and highly effective – negotiating technique. Notice that the People’s Daily release makes no mention of human rights, mistreatment, or Chen’s months of house arrest. The ordinary Chinese people are the victim, and the US government is cast as the instigator.

Second — a new issue is created. The controversy now is “will the US apologize or not?” – not human rights (or how Chen managed to get to the embassy in the first place).

Third — focus now shifts to the street level. Netizens and bloggers will take up the issue, and the debate will be carried on by ordinary people (and the paid propagandists who will struggle to shape the event as a nationalist scandal)

Finally — Balance (or Harmony in China) is restored. China gets to start the SED meeting (important to them) without the nuisance or embarrassment of the Chen case (important to the US but not important to the Chinese officials) hanging over their head as a distraction.

The key take-away for international managers is that Face counts. Westerners tend to focus on substantive issues. We like to identify who was right, who was wrong, and see final, definitive justice served. The Chinese side is more concerned with what happens next. Americans solve conflict by looking at the events leading up to the incident — Chinese solve conflicts by looking at events that flow from the incident.

Neither approach is wrong, as long as each side recognizes the needs and customs of the other. Western managers who disregard matters of Face as unimportant mannerisms and emotional gestures are displaying just the kind of insensitivity that offends people and stirs up conflict. But Chinese stakeholders who cling too tightly to pride and quickly take umbrage at perceived slights end up embroiled in pointless conflict that can easily spin out of control. It is the job of the international manager to focus on business — and make use of the opportunity that “saving face” presents them to allow potentially heated conflicts to cool off and gradually fade away.

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Let’s start by addressing the elephant in the room. The book was supported with a grant from the Huawei Corporation. The author puts the disclaimer on the copyright page, right up front & clear as day. While he is not trying to hide anything, the reader approaches this work with a degree of suspicion and skepticism that is never quite dispelled. Wolf, publisher of the excellent blog Silicon Hutong, has earned a reputation as a straight-shooter who analyzes industry & political situations fairly and impartially. Huawei, however, is well known for its aggressive and imaginative PR efforts – so the author assumes the burden of demonstrating that this book is unbiased and credible. Huawei has an image problem in much of the Western world, whether deserved or not. The US House Intelligence Committee, as well as the governments of both Australia and India, have all publically branded the company a threat to national security. Huawei has also been implicated in at least one major case of IP theft (involving Cisco), and Symantec recently dissolved a joint venture with the firm. In spite of Huawei’s notoriety, “Making the Connection” barely makes even passing reference to public accusations that have resulted in the firm being banned from bidding on infrastructure projects in both the US and Australia.

The crux of “Making the Connection” is that the success of Chinese telecom giants like Huawei and ZTE is not due to government support, but rather to Beijing’s benign neglect of the scrappy entrepreneurial firms. Wolf presents some very thought-provoking and credible ideas. He succinctly and thoroughly examines the historic progression of the telecom industry in China, and is even-handed and persuasive when chronicling the record of government and institutional involvement. The work is insightful in describing the successes and failings of multinational corporations in China, and his discussions of how Western giants lost their leadership position in China’s telecom industry is both credible and eye-opening. Anyone interested in learning about competitive forces and responses in China should consider the first half of “Connection” required reading. There are few people who understand the mechanics and background of Chinese telecom as well as Wolf does, and he is at his best when explaining how the industry evolved and developed. He puts to rest many easy preconceptions about role that government policy really plays in Chinese industrial decision-making, and he is able to place a highly technical industry in well-ordered historical perspective.

He is less effective at fleshing out fully-formed profiles of industry players. He treats the PLA and Chinese government as the villains of the story, with Huawei and ZTE cast as the swashbuckling heroes – winning against all odds. Unfortunately, Wolf expects readers to take Huawei’s independence on faith simply because it is neither a wholly-owned SOE (state owned enterprise) nor a division of the army. One of the most controversial aspects of Chinese business today is the degree of influence that Beijing is able to exert over private Chinese companies. It’s easy to see how SOEs like China Mobile and policy organs like the railroad are directly controlled by policy makers, but it is far more difficult to discern how private firms are influenced by Beijing. It is unfortunate that this work doesn’t shed any light on the issue.

“Making the Connection” seems to ask readers to make the naïve assumption that Huawei and ZTE are operating with complete independence. Not only is this unrealistic for major players in a pillar industry like telecom, but it prevents the author from discussing Huawei’s current regulatory struggles in the US and other countries. It is admirable that Wolf has the discipline to focus on the development of the telecom industry within China, but by ignoring the charges being leveled by foreign governments he is sacrificing credibility and exposing the weakness of his own argument. We are expected to believe that Huawei and ZTE triumphed in China’s “competitive crucible” because of their independence, but it is precisely that independence that many observers are so skeptical about.

In spite of the suspicion surrounding Huawei’s connection to the PLA, “Connection” explains away the controversy easily. Wolf introduces Huawei as, “Founded in 1988 by Ren Zhengfei, a former researcher with a small military research center in Sichuan. Ren had been out of the army for over a decade…” and then says little more about any PLA link. At no point does he brook the argument that Huawei and ZTE might be successful precisely because they actively seek to accommodate Beijing’s policy goals. Instead he relies on aphorisms, such as “the mountains are high and the emperor is far away” and “winning is flying low.”

It would have been a much more effective book if Wolf had dealt with the official public accusations leveled by the US and Australian governments. Credible or not, claims that Huawei is working with or on behalf of the Chinese government will have a very real impact on its growth and development. Huawei has done a lot to dispel rumors that it is a security risk, and taken extraordinary measures such as revealing source code and giving government regulators a level of transparency that other technology companies wouldn’t dream of providing. Wolf missed an opportunity to present both sides of the issue and clearly state the Huawei position and response to some very serious charges. He would have been much more convincing had he taken the time to dismantle the claims of the various Western governments that branded Huawei a threat. Any book that sought to explain the modern rise of US corporations like Halliburton, Exxon, or Goldman Sachs without thoroughly exploring their relationship to the US government and lobbying efforts would seem incomplete and suspect. In China, where guanxi and policy play such a large role, it defies credibility that leading companies in such a sensitive industry enjoy complete freedom from Beijing.

Wolf returns to form in his final chapter, where he sums up his view of the telecom industry – and Chinese competition in general. His warnings that Westerners ignore Chinese competition at their own peril may seem a bit obvious to those with years of China experience, but will come as valuable food for thought to most American managers. Likewise, his observations about Chinese innovation being different but not inferior to Western creativity is essential for decision-makers who already compete with Chinese companies — or will soon. He has some very interesting things to say about the limitations of government control and the evolution of state capitalism, though he may be extrapolating a bit much from the failure of a few SOEs in the telecom business.

Overall, “Making the Connection” has more important things to say about the history of the telecom industry than about the individual companies operating within it. It is a valuable work for international managers and policy-makers, with some powerful insights about the nature of Chinese competition and innovation.

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Treat your first China negotiation as though it were a separate business – complete with a business plan, budget, and cost-benefit analysis. In China there is a big difference between doing the deal and doing the business. A Chinese negotiation is a long-term commitment – not a quick conversation. The only thing you can know with certainty is that if you botch the negotiation due to poor planning, then you will certainly lose the business opportunity.

In the last post we introduced the idea of a China negotiation plan.  If you are new to China, you have to look at the negotiation as a protracted campaign. You are venturing into territory that, while not necessarily hostile, is certainly risky. You need to keep your options open, control your costs, and know where the exits are at all times. You have to be able to assert some level of control over the process – which usually means not relying too much on anyone who stands to gain from you or your assets.

This time we will be looking at the second set of five questions you should be able to answer in preparation for your first China deal.

6. What will you have to sacrifice to get this deal? Every negotiation requires you to give up something to get something else. Ideally, you are giving up things that are relatively low in value (to you) but receiving something of significantly higher value. This means knowing how the other side values the assets on the table — but it is even more imperative that you to know what is important to you. In China, the stakes are different. You have to consider a range of new variables like trademark, proprietary technology, promotional material, and business model. In the US you might not consider these things to be negotiating variables, but in China they most certainly are. If you don’t perform an audit of your IP, technology, and processes BEFORE you start negotiating, you are likely to give away valuable assets for free. It happens all the time. Once they see your design, trademarks, and business plan, they won’t “unsee” them if the deal falls apart.

The simple method for figuring out how much you are willing to sacrifice is to identify what scares you the most. When Cisco had their first meeting with Huawei back in the early 2000s , the Chinese firm was struggling to produce simple telecommunications hubs and routers. The Americans, thinking they had nothing to worry about, allowed their engineers to cooperate too much in an effort to get entrée to the China market. Huawei is now eating Cisco’s lunch in most major markets — including Europe. Had Cisco paid more attention to what could go wrong and established sensible limits, they would have saved themselves some big legal fees – and had a less threatening competitor.

Know your own boundaries BEFORE you start negotiating.

7. What can you get from China? One of my biggest frustrations is working with Westerners who have no idea what they want. It’s vital to have a goal, as we discussed in the last post. You want your goals to be SMART – Specific, Measurable, Actionable, Realistic, and Timely. Read more about the China aspects of SMART goal setting here…

If you are new to China, however, you also have to consider your variables and benchmarks. Variables are what you ask for. This is how you convert general goals into specific deal terms. If you want to make money, then that’s your goal. But good negotiators are careful to talk about currency, guarantees, contingencies, timing, payment terms, payment methods, banks, etc. Those are your variables. In China, you have to worry about far more variables than you do back home. If you don’t ask, you won’t receive — but you have to make sure you ask for the right things.

The classic example has to do with one of our favorite subjects — Power. When Americans and Chinese negotiate the JV, the Americans typically want control. They demand the majority of seats on the board, and the right to select the CEO, the CFO and other top brass. The Chinese will quietly give in, reserving for themselves a couple of mid-level spots — including the financial controller and the company secretary. Later in the negotiation, the Chinese side will ask for access to the Western side’s technology or trademarks. In exchange the Chinese side offers to take responsibility for managing local operations — which includes preparing and looking after the company chops – or seals.

Newcomers might think that the Western side has just locked this deal up — but in fact they have just locked themselves out. Chinese courts normally recognize the holder of the financial seal as the sole party controlling the bank accounts, and the company seal has de-facto control over the company registration – i.e.: ownership. Old hands know that these are key variables, and usually specify how the bank accounts and company registration are organized. Newcomers win the wrong fight and end up paying for it.
Ask for the right things, and set benchmarks that matter. In the case we just looked at, the key benchmark is Chinese corporate law — not American or “International” best practice. If you need other examples, examine the problems that Apple is having with Proview over who sold what to whom, where.

8. How long will it take? This is really two questions. How long will it take to get the deal, and how long will it take to do the business. Right now, we are concerned with the first part. How long will the negotiation take? The answer is really pretty simple — much longer than you think. There seems to be an inverse relationship between the level of cooperation and congeniality at the initial meetings and the time to takes to finalize the decision. Guanxi and relationship-buildingtake a while, and the Chinese side won’t generally start getting down to specifics until they feel they know who you are.

It’s almost always to the Chinese side’s advantage to build relationships quickly, but then make the process drag on for a long time. They consider the early phase of a negotiation a learning opportunity. They are learning about you — which is fine. But they are also learning about your business, your technology, your solutions — and this is precisely the information you should not be revealing until you are A) working together and getting paid, or B) getting valuable information in return.

The more of a rush you are in to “wrap things up”, the more concessions you make in terms of useful information and solid deal points. Once you start cracking, they have no incentive to allow any real progress, and you are working from a position of weakness from then on. The more information they get for free, the less value you will offer as a partner.
You’ve got to budget for a protracted negotiation. Even a simple, straightforward JV or partnership will take at least 6 months (though it won’t be a daily activity). Sourcing and simple manufacturing, however, will be much quicker. If you are selling or partnering, however, just reaching a contract agreement will take months, and the actual agreement can take much longer.

9. Who in your operation will run the China business? If you represent a small or medium sized business, you are probably delaying any big manpower spend until the China operation is up and running. Still, you should have a good idea of what kind of person you are looking for — and how much to budget for senior staff. Unfortunately, this won’t be cheap. Experienced local managers are going to cost you as much as expats, if not more. Allowing your local partner to run the show opens you up to all kinds of problems — from company strategies that get rewritten without your knowledge to wholesale theft of your IP, technology, assets and clients.

A sensible solution is to start building your China team in-house by having a team of candidates (who already work for you) take charge of the negotiation process. That includes the research and preparation. The best case scenario is that you have people on hand who are responsible, engaged, and ambitious enough to add real value to the process. But you might find that you lack the talent, the time, and the other resources to get the ball rolling. This is an important observation, and you have to find a way to close the gap.

It’s never too early in the China negotiating process to start thinking about manpower and managerial talent.

10. What is your first step? If a potential Chinese partner, supplier or client has contacted you, then simply reacting to his proposal is risky business. You have to step back and consider how you are going to participate in the negotiating process. Many Westerners take a passive, “let’s see what their best offer is like” approach – mistaking this for conservative, safe play. It’s not. Whenever you are talking, they are learning about your business and IP. The Chinese are famous for being able to backwards-engineer the pieces of a puzzle, but still need help putting them together in a meaningful way. That’s where you come in. If you don’t know what you are doing, there’s an excellent chance you’ll give them far more help than you realize.

You’re first step is to know more. That might mean educating yourself, hiring the right people, or taking a trip out there to get the lay of the land. One of the absolute worst things a China novice can do is to rely on their negotiating counterparty for basic information about the economy, market, or regulations. If you don’t have the ability to analyze their claims, evaluate their offers, and make informed counter-proposals then you are going to get slaughtered.

Next: Your First China Deal Part III: The Research Plan

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Chinese are initiating more and more deals with Westerners, both at home and abroad. A Chinese entrepreneur or SOE representative might be on his way to your office RIGHT NOW – and he is ready to charm your sick-of-the-recession-socks off with El Dorado stories of 1.3 billion consumers and great connections. Before you go chasing China market dreams, do a quick reality check and figure out if you are ready to swim in the deep end of the shark tank.

I’ve been living outside of China for a little over two months, and I’ve had the chance to talk business with many smart people who are considering doing deals in China but lack experience. I’ll repeat one of the best single pieces of China business advice I’ve ever heard — “Don’t Check Your Brains at the Border.” (I heard that line from a speaker at an NYU business school presentation years and years ago – anyone who knows who originally said it wins a prize.)

Let’s be clear on two things.

• 1) Yes, it’s possible to do absolutely great in China — but it is neither quick nor easy. If you are talking to Chinese counterparties or consultants who are making guarantees or telling you that it’s a sure thing, you should be concerned.
• 2) Trying to succeed in China without a plan is like playing blackjack while blindfolded. In a burning building. On the rim of an active volcano. You may win big — but it’s not likely.

The China Story is not all bad.

It’s 2012, and Europe has left the building. Japan too. The US, while not roaring back, has been upgraded from critical condition to serious. China — well that’s a funny story…   In China the people with the least to worry about are the only ones panicking – even if it’s about how much can go wrong. That’s a pretty good definition of the successful entrepreneurial class in China today. And they are looking at the US as their saving grace, or at least a solid Plan B.

SOEs (State Owned Enterprises) are also starting to expand their reach to Western shores. They like natural resource plays, and tend to make big bets on mines, farms, forests, oil fields, and the like. But they have also been known to get involved with SMEs that service or support infrastructure or resource firms.

In other words, you may very well come into contact with a Chinese counterparty who is serious about doing business in your backyard. He may represent a private firm expanding to the US, a potential partner, or even a representative of a giant SOE. But once the initial flush of excitement wears off, you have to make some hard-headed decisions about whether or not it’s worthwhile to explore the deal. The good news — the Chinese side of the equation is looking better and better. Chinese businesses are on a much more solid footing than most other countries’, they have cash, and are motivated. Privates need to expand into Western markets, and SOEs are under pressure to source abroad and improve their internal operations.

There’s Harm in Talking

The downside of “exploratory talks” with Chinese counterparties is that they probably want information, technology, and know-how. That means you have plenty to lose from just talking — unless you know who you are involved with and where you want the conversation to go. For information-oriented companies, there isn’t always a huge difference between relationship-building introductions and your intellectual property. If you make microchips, you know where to draw the line. If you restructure companies or market products, the line can be a bit fuzzier. Experienced China hands know that saying less is more, but newcomers to China often give away too much — particularly when drinking and socializing is involved. Chinese counterparties have been known to suffer isolated intellectual blockages when Westerners are explaining what they do for a living. Don’t make your proposal so detailed and specific that you solve the problem for free.

What’s the Plan?

It’s hard enough to do well in China if you know what you’re doing and have a solid plan and a lot of backup options. Unfortunately, inexperienced China newbies are falling for the “I’ve got guanxi” patter that Chinese dealmakers use as a throwaway line to introduce themselves with. Old hands don’t even hear it anymore, but it’s apparently still a door-opener in the US.
If you can’t answer these basic questions, you may want to delay your China negotiation until you’ve done a little more groundwork:

1. Why China? There are a lot of great reasons to do business in China, but “some guy offered me a deal that was too good to be true” isn’t one of them. Opportunistic one-off China deals falling into your lap from complete strangers have a pretty low hit rate. Can you justify the time, effort, money and manpower needed to bring this deal in. Question two — do you have any idea how much time, effort, money and manpower will be needed to bring this deal in?
2. How did this opportunity come about? There are three possible answers: On plan, off plan or out of the blue. On plan means you were intentionally cultivating the China market or developing sources or other business there. Off plan means that an opportunity has arisen that is right in your wheelhouse. Maybe it’s the same business that you’ve been doing in another overseas market. You know how to operate in an international environment, and now you have the chance to add the China market to your multi-cultural business roster. Out of the blue means it’s a business you don’t really know — in an unfamiliar environment. If you are working out of the blue in China, then Excelsior, Sir! I salute you. You will be dead soon. Dead and broke.
3. What’s your goal for this deal? This is another one of those pesky strategy questions that the Ivory Tower types are always asking. It’s like this – you gotta have a plan. Making a lot of money isn’t a plan. It’s a wish. I don’t want to be a buzz kill, but everything in China takes longer, is more difficult, and pays off less than you were led to believe. You need an overarching strategic goal to keep yourself on track. It lets you know when things are going right, and when they are going wrong.If you don’t know what a win looks like, then you are at the mercy of your environment and your counterparty. If you can’t describe what success is, then you are just a compulsive-gambler type working hard at losing. In China you have to know when to fold your hand, and when to cash out a winner. You need to decide on benchmarks before you start.
4. Can you do this deal now?How disruptive will a China negotiation be to the rest of your operation? Put another way — when the phone rings at 3:00 AM, who picks up ? If you’re the boss you are now grappling with the eternal choice. Delegate to someone who is not as good as you – or work even more insane hours and make your current wife start calling divorce lawyers. Of course, you may have hooked up with a potential China partner who doesn’t even bother calling — so someone’s got to chase him down just to keep you in the loop.How long will the negotiations take, and how many trips to China are involved? While it’s impossible to know the right answer, I can tell you that “quickly, and none” are rarely the right answer. Americans in China tend to be better at planning for failure than success. You know what you’ll do if they say “no”, but in China you are much more likely to hear, “maybe” — or “soon”. Can you drop everything and get on a plane to Beijing tomorrow? Do you have someone else on your team who can?
5. What resources will you have to devote to it? Yes, of course you are brilliant and resourceful and an incredible powerhouse who never needs to sleep or rest. But a China deal is more like Hannibal crossing the Alps than a quick sprint across the street to the ATM. You’re going to need a budget – and a timetable. But you have to distinguish between operational plan and negotiating strategy. In China, you have to treat deal-making like a campaign that requires a separate budget, manpower plan and timetable. The Chinese do. If you run out of resources or over-extend your supply lines midway through a deal, they are going to eat your lunch.

Next: Your First China Deal Part II — 5 more questions.

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China’s VP (and presumptive new President) Xi Jinping will be touring the US this week. The visit is officially hosted by US VP Joe Biden, and is more of a meet & greet than a high-level diplomatic negotiation. Forget the noise about Syria UN votes, Iran nukes or gunboats in the Pacific. Nothing will be decided on this trip – but the symbolism surrounding this trip points to a new narrative in US-Chinese relations.

The accepted wisdom is that China is a relentless juggernaut that will inevitably overtake the US and the rest of the West in terms of economic, social and military power. But a closer read of recent events seems to reveal a few vulnerabilities in the China Century story. China can’t feed itself, can’t educate itself, and can’t pay its bills.

VP Xi will be returning to Iowa, which he first visited as an agricultural official in 1985  . Iowa sold around $670 million worth of grain to China in 2010. More and more of the soy and grain that China imports goes to feed livestock that will eventually end up on  middle class and elite dinner tables. China is producing more food than ever, but still must import record amounts to feed itself.

He won’t be visiting Boston, where his daughter is attending Harvard. The presumptive first daughter is part of a growing trend among Chinese with power and money – passing on elite Beijing schools in favor of US institutions. Education reform has fizzled in China – particularly at the college level. US schools are setting up branches in China at breakneck pace, but MWMs (mainlanders with money) are still choosing to send the princelings to the US for their degrees.

The US economy seems to be struggling to its feet just as China’s looks to be stumbling. In a worrying move, China has ordered its banks to roll over loans to local governments, in what can only be seen as an under the table bailout. Imports (with the exception of food) are off, and inflation seems to be back.

The takeaway for American and western managers in China is that you might have more leverage than you did in the past few years – but you have to manage it. There is still demand for the right overseas products and services – but the main value you off might be in helping successful Chinese entrepreneurs and business owners set up shop in the US or other overseas markets.

In Charged Moment, China’s Political Heir Tries Introducing Himself to U.S.: NY Times 

As Xi visits, China’s U.S. crop demand a balm for tensions: Reuters

China Tells Banks to Roll Over Local Government Loans: FT

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There’s a very good post in the Harvard Business Review Blog this morning titled “How to Get Promoted in China” by Andy Molinsky.  His main idea is:

“The overall message — no matter which foreign culture you find yourself in — is to “go local. Do your best to find out how self-promotion is handled in that local culture and adjust your behavior accordingly. By doing so, you are enhancing your ability to move seamlessly across the global economy and increasing the chances of creating positive impressions in any cultural setting.”

Molinsky presents an illustrative case and offers readers four very astute take-aways:

Tip 1: Be patient
Tip 2: Develop your networks
Tip 3: Adapt your own communication style
Tip 4: Find a better fit

Two points he doesn’t mention explicitly, however, are also important to international managers approaching the China market in search of profits, not promotions.

1)Guanxi / network-building is a function of power and hierarchy. Americans and Europeans are used to two types of guanxi-building.  The most familiar situation is exemplified by Chinese salesmen and potential partners trying to curry favor – often offering guanxi and connections as their only significant asset. International managers are also accustomed to banquets, gift-exchanges and relationship-building events with potential partners or clients. This kind of networking is horizontal between parties of roughly equal status. There is however a third type of guanxi relationship, where an outsider or lower-status individual must work to gain admittance to a group or win the approval and cooperation of a higher-ranking actor. While this type of networking is increasingly important in post-crisis China, it remains a persistent mystery to many western deal-makers. A decade ago, international managers had a cache and status that opened doors and leveled every playing field. Those days are gone.

2) More and more MNCs in China are finding that they compete directly with local firms not only for raw materials and customers, but also for talent. In pre-crisis days, American and European firms had their pick of the best & brightest young executives in China, be they homegrown, returning Chinese or expat. Nowadays international managers can’t take anything for granted. Top Chinese grads are said to prefer jobs at steady SOEs or bureaucratic posts to all but the most famous MNCs. Mr. Molinsky seems to be hinting that up and coming young western managers are starting to see private Chinese firms as viable career options as well.

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2003 was a complex time, and it wasn’t always easy being an American working overseas. Our government was extremely unpopular with many of our trading partners, and individual expats found themselves doing business with people who did not think highly of our foreign policy. Now the situation is changing and Washington has once again found its moral compass. The PRC, as evidenced by its unfortunate vote in UN supporting the Assad regime in Syria, seems to be moving headlong in the opposite direction. China is becoming a frightening, threatening place that routinely abuses the rights of its own citizens, countenances sweatshop conditions that would be illegal in the US, bullies its neighbors, breaks international law and supports tyrants around the world.

So where does that leave Americans doing business in China? The relationship between Washington and Beijing has always been politically charged, but so far that hasn’t affected us on the ground too much. Up until now, Chinese trade policy has been a trickle-down affair for expats, and we have only had to deal with the ups and downs of trade relations through regulations and bureaucratic red tape. China’s foreign policy may be taking us on a new trajectory where front-line managers have to make hard decisions.
As someone with experience doing business from both positions on the moral see-saw, I have a few helpful hints for those just starting to do business with Evil Inc.

1. Your direct counter-party is the same guy he was when the tables were turned and America was looked down upon. The odds are he doesn’t make a lot of foreign diplomacy decisions. You weren’t on Rumsfeld or Cheney’s speed-dial when the US was making bad policy, and your counterpart is just as removed. When Chinese or European businesspeople tried lecturing me about US policies in the 2000s, I saw them as petty and foolish – regardless of their arguments. Chinese tend to be more nationalistic than most Americans, so be advised that small comments may have big reactions. It’s best to focus on the business and leave politics out of it.

2. You don’t get paid for morality, but you may pay for immorality. If you are working with SOEs or sensitive industries like oil service, international finance and dual-purpose technology, you have to be very careful and perform serious due diligence. If you are seen to be aiding an organization that contravenes sanctions on US enemies like Iran, then you are going to have big problems. The same goes for Americans whose supply chain depends on child labor or inhumane working conditions. Remember that many US laws apply to American citizens no matter where they are – including rules about corruption and bribery.

3. You will have to go home again. Even if you do not care about politics, that doesn’t mean you can ignore political issues. People back home don’t know how the business gets done, don’t want to know, and have no intention of trying to understand. Right now practices like outsourcing jobs, selling technology and cooperating with Chinese SOEs is par for the course. It’s great to have government connections and to be photographed with officials. The Chinese expect you to preserve harmony by saying the right things to media and at public events. In China, you are expected to observe the rules of Chinese business etiquette. But you will go home again, and home has not always been the most accepting of places. Standard operating procedure in China will raise eyebrows in the US. The new head of Apple, Tim Cook is finding out the hard way that American consumers (or at least American reporters) are willing to express fresh outrage over stale news if the political equation favors it. Former US Ambassador to the PRC, John Huntsman saw his loyalty to America called into question, and he worked for the US government! China is moving further from the US-centric community of nations, which means your trip home is getting longer. Make sure that you aren’t carrying the wrong kind of baggage home with you.

Americans in China have to plot a more deliberate course in their China relationships than they used to. The Chinese side of the equation is likely to be a bit more defensive and prickly than in years past when it seemed that liberalization and reform were going to be the norm. But ‘Chinapologists’ and those who curry favor with officials may find that their home fires have gone cold when they return.

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There are two types kinds of outward investment, and they mean different things to international managers with China experience.

State or policy-driven  investment is almost entirely concerned with natural resources. This category of outward investment is either undertaken by SOEs or driven by policy-oriented large corporations with strong government ties. State directed overseas investment is often highly political in the target economy, and unfortunately the Chinese tend to ruffle feathers and attract all the wrong attention. Whether building roads in Africa or oil service firms in the US, Chinese policy investment sets off alarm bells.

For most expat managers in China, the opportunities are somewhat limited. Public relations people may have some potential, and law firms could also benefit. In general, however, old-school SOEs are bad clients for service providers. Things are changing, however, and companies like Huawei and CNOOC are making a conscious effort to raise their game.

The other side of the coin is the burgeoning Chinese middle class, who seem to be moving wealth out of China at an increasing rate. The investment of choice right now is real estate, but that is likely to expand into other areas. Another big spend for mainlanders of means is education. The Chinese diaspora is facing many of the same problems that Westerners encountered when they arrived in China 10 years ago. They simply don’t know how things work or how to get things done. Will the Shanghaiese flock to their overseas network? Yes – if they have to. Chinese entrepreneurs tend to see other Chinese as their biggest competitors, and Westerners as somewhat more manageable. True or not, expat managers should be mobilizing their home-town networks.

Chinese State or Policy Driven Overseas Investment — Recent Headlines:

Anxiety in New Zealand as Chinese Buy Dairy Farms
By NICK PERRY Associated Press
WELLINGTON, New Zealand January 27, 2012 (AP)
Chinese investors are buying New Zealand farmland for the first time as economic ties with the Asian powerhouse grow ever deeper, sparking considerable anxiety in a country where livelihoods are heavily reliant on agriculture.

China decries US ‘obstruction’ in Huawei bid
(Agencies/Xinhua) Updated: 2011-02-22 10:01
BEIJING – Beijing charged Washington with blocking Chinese investment in US companies after telecom gear maker Huawei dropped buying assets from server technology provider 3Leaf.
The ministry of commerce said “the US side has used all kinds of excuses, including national security, to engage in obstruction and interference in the trade and investment activities of Chinese businesses in the US.”

Obama’s Keystone Denial Prompts Canada to Look to China Sales
Bloomberg By Theophilos Argitis and Jeremy Van Loon – Jan 20, 2012 2:14 AM GMT+0700
President Barack Obama’s decision yesterday to reject a permit for TransCanada Corp.’s Keystone XL oil pipeline may prompt Canada to turn to China for oil exports.

Africans are asking whether China is making their lunch or eating it
The Economist Apr 20th 2011 | NAIROBI
Once feted as saviours in much of Africa, Chinese have come to be viewed with mixed feelings—especially in smaller countries where China’s weight is felt all the more. To blame, in part, are poor business practices imported alongside goods and services.

 

Individual Chinese Investor Headlines:

Chinese investors target property in Canada
With China’s housing market starting to cool down, many Chinese investors have shifted their focus from the domestic property market to Canada, where property represents a better investment.
Chinese investors home in on American properties
China.org.cn November 24, 2011
Fifty percent of Chinese investment in the U.S. has gone to the country’s real estate sector during the last decade, China Business News quoted Feng Lun, chairman of Beijing Vantone Real Estate Co. Ltd. as saying.
U.S. senators proposed a bill late last month which seeks to tempt foreigners into buying houses with the promise of residence visas.

Why Are the Chinese Buying Record Quantities of Gold?
Forbes, 1/29/2012  By Gordon Chang
A better explanation for the gold-buying binge of Chinese citizens is that they are using the shiny commodity as an inflation hedge, as the Financial Timesr ecently suggested.  Yet the buying of gold has increased while inflation has eased.  And that means there must be another explanation.  The best explanation is that individuals in China are using gold as a substitute for capital flight.

 

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If China had sent officials, the pressure on them to help bail out Europe and to reform the RMB exchange rate regime would have been intense.   Beijing has no interest in doing either of those things, but PRC leaders have a hard time spinning their message.  After all, the CCP prop-line has always been a Dangerfieldesque, “We don’t get no respect” on the international stage.  Yet every time the Dragon is asked to fly to the rescue, it quietly demurs.  If they step up, they will be sucked in to the global mess even faster.  But when they say “no thanks” they are accused of gaming the system.

This year’s Davos discussion centered on Europe and it’s desperate need for international support (i.e.: a bailout).  That could have led to some very awkward pauses and long looks in China’s direction.  Fortunately for Beijing, the World Economic Forum organizers still haven’t learned to work the non-Christian setting on their Evite calendar.  The only thing the Chinese like more than saving money is saving face, and Madame Lagarde and the planning people in Switzerland have given China the nicest New Year’s surprise ever.

Xin Nian Kwai Le.

Back to work.

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