A World of Difference
When doing business in China, a little understanding goes a long way
By Yan Jiang
Business is business, wherever you go. But business people around the world conduct business in very different ways. A little understanding can be the key to building better business relationships.
China is a tough place for any Westerner to do business. On one hand, Western businessmen see potential profits in a country of more than 1.2 billion people with incredibly rich resources. It is predicted that U.S. exports to China will rise from $13.1 billion in 1999 to as much as $27 billion by 2005.1 The U.S. trade deficit with China was a record $69 billion in 1999.2 On the other hand, everything the American sees in China seems to be confusing, complicated and absolutely foreign. To quote Deng Xiaoping, 'It's like walking across a stream by feeling the stones underneath.' The rapid and dramatic policy changes that have taken place in China during the past decade have surprised even the closest of Western observers.
'Many Western businesses fail in China because they do not appreciate the Asian way of doing business,' said Robin Chambers, one of the foremost Australian experts on China.3 China is a country of diversities and extremes. Being willing to spend time learning about a completely different culture, way of life and way of thinking is the key to success in doing business with China. An explanation of the basic values of Chinese business behavior, and why that behavior is expected, is in order.
Last year I was sitting in a presentation on 'IP Practice in China' given by two Chinese who are currently practicing U.S. law in Portland and New York City. One guest asked a question: 'Why does everything take so long in China?' The guest speaker smiled and said: 'You mean, in China?' The listeners politely laughed a little, and the speech went on without answering the question.
There are many reasons why efficiency is hard to achieve in China. Foreign business has to keep in mind that the pace of life in China is slower than that in the United States. For instance, in the summer almost everybody in China takes a two-hour nap each afternoon. Although in big cities like Beijing and Shanghai life is almost as fast as that in medium-sized cities in the states, the rest of the Chinese still enjoy a relaxed and non-competitive life. The Chinese tradition prefers inaction rather than action because action produces chaos and chaos disturbs order and harmony. Confucius said, 'To handle lawsuits, I am resolved to eliminate lawsuits.'
The Chinese tradition believes if you have a tough problem, put it in a special folder called 'wait for the god to handle,' and the god will have solved the problem when you open the folder after one month.4 Chinese are tough negotiators, and it can take months or even years to arrange an investment or contract. A Chinese negotiator sometimes tells the opponent, 'I have heard what you said, but I have to discuss it with a higher authority before I make it final.' Most likely the Chinese will do nothing afterwards and just wait patiently for the opponent's reaction. When asked about the issue in question, the Chinese will reply that it is still under consideration. The Chinese politely use a strategy that leads to a subtle war of nerves in order to force concessions.
China is the world's oldest and most pervasive bureaucracy. Within a Chinese company, final decisions are finally made only at the upper levels. Decision-making can be very slow since it must work its way through a cumbersome bureaucracy. Chinese negotiators seldom have the authority to make decisions. They usually need to consult with colleagues and supervisors before making decisions, and everybody in the chain has to be careful of what he says in order not to disturb the harmony among them. The Chinese have a large group of middle management, but it is important to get to the top level as quickly as possible, as that is where decisions are made. The pace of the transaction gets much slower when the Chinese government intervenes. A lot of contracts entered into between Chinese enterprises and foreign investors must be reviewed and approved by the government; otherwise, the contracts are invalid. In order to make it in China, an American company has to work through different authorities at different government levels to get permission and help.
The value Chinese place on development can also work against Western investors' task-oriented business expectations. As a policy concern, the Chinese government will not allow an American company to invest a little, make quick bucks and run. In addition, China is now at a critical phase of economic development. New laws and administrative regulations are made and modified constantly. China may change its policies on short notice in a manner that could upset your business operations. The constant and appropriate adjustments to policy changes that American companies must make to survive in China require patience.
Chinese emphasis on relationships is rooted in culture. Unlike highly task-oriented Americans, Chinese are relationship-oriented. Many American companies lose a profitable business opportunity with Chinese enterprises because they do not first establish trust before they try to do business.
Americans in general interact on two levels: the professional (business) level, and the personal level. Chinese mainly interact on the personal level.5 The Chinese depend on a vast network of social relationships to get things done. They distinguish the 'insider' from the 'outsider.' To outsiders, the Chinese are formally polite, distant, unreliable and withdrawn; to insiders, such as relatives and friends, the Chinese are direct, frank, trustworthy and sometimes impolite. The closer to the 'inside' circle of the network, the more opportunities to establish long-term and reliable business relationships.
The Chinese believe that time should be taken to build solid relationships, especially before doing business. It is common that as soon as an American delegation arrives in China, the host company leaders will accompany the guests to their hotel to settle in, then to a banquet with key personnel of the Chinese company and possibly some important government officials, then to a well-guided tour of the city if schedule allows. Americans may be suspicious of such hospitality, while the Chinese are only trying to win Americans' trust with attentive care. The Americans can also use a little human touch to win the Chinese trust. For instance, the American company should send a management-level person to greet the Chinese delegation at the airport and accompany the Chinese visitors to a Chinese restaurant to have dinner. A well-arranged city tour should not be overlooked. To Chinese, human touch is more impressive than professional technical demonstrations.
In China, the government significantly involves itself in economic activities. The government plays four important roles: 1) it adopts national and local economic development plans; 2) it is the essential source of funds; 3) it is the key provider of information; and 4) it is the supervisor of economic activities. Important transactions require government approval. It is common practice for government agencies to give instructions to Chinese parties to guide them in an ongoing negotiation with foreign corporations. Therefore, business bodies in China are sensitive about their relationship with government authorities.
The Chinese government has a lot of control over markets, especially those markets that were historically dominated by big state-owned companies, such as finance, insurance, railroads, telecommunication, energy and the like. In the case of Motorola, the company was forced to form a joint venture with a Chinese company it was less than ecstatic about doing business with, despite the fact that Motorola is the largest investor in China.6 Another example is the just-about-to-open insurance market. A major American insurance company was forced to form a joint venture with the China Insurance Company as a condition of the grant of an insurance business license.
How to get to know government officials and form a comfortable relationship with them is a work of art. Bribery might work for a short period of time, but it will hurt your business in the long run because bribery is 'an endless black hole,' as Chinese put it. Again a little human touch will help in this context. A local government official may not be interested in hosting a Chinese manager at his home, but hosting a CEO of Dell or Nike is something else. Having dinners at each other's homes, taking Chinese officials' families to private swim clubs or amusement parks is a very good way for Americans to get to know government officials. However, serious business discussion should be avoided on those occasions. Sizable donations to various government-encouraged programs is another way to build up a favorable business environment. For instance, BAT, the tobacco company, has an education foundation and contributes to flood relief programs and the National Symphony.7
It is naïve for American companies to think they can deal with the government authorities totally by themselves without the help of local Chinese people. China has a huge population and a very structured society. It is very hard, if not impossible, for an American to walk through the system, to figure out where is the problem, what is the law and who has the authority to make the law. Besides, because of Chinese sensitivity to losing face in front of an outsider, the government officials, although polite, will not be truthful with a foreigner. An American company's key decision-makers can play an active role in developing a favorable impression in the first place, but once that goal is achieved, the Chinese (the hired hands) should maintain a constant information exchange with the government authorities.
Newcomers tend to make the incorrect assumption that in the Beijing central government lies the power to make everything work, but, as a matter of fact the Beijing ministries are the last place they should look for help.
For instance, The New York Times once published a story about a joint-venture hotel in southwest China. Although the central government's policy is to grant joint ventures autonomy, the joint venture hotel was constantly cut off from water and electricity. The local government used its government power as a punishment because the joint venture had not followed its 'instructions.'
'The best advice I could give a newcomer to China,' said one American manager, 'is to avoid the Beijing ministries altogether. The real action is where your factory and its suppliers are located. If you can't make it work at the local level, you can't make it work at all. If your contracts are not well-negotiated on the local level, and if you have not sorted out your local relationships, no Beijing bureaucrat can make it work for you.'8
The Chinese are hungry for respect. The word 'China' ('Zhong Guo') means the center of the countries. Chinese are proud of China's 7,000 years of recorded history and its literature, language and culture. The history of China from the late colonial period until the end of the Cultural Revolution has, however, cast a shadow over the Chinese pride. The Chinese are ashamed of China's currently being a poor and undeveloped country. For these reasons, certain issues become very sensitive and should be avoided. For example, the Chinese hate Americans who come to China tell them how to run their country and comment on the Chinese way of doing things. It hurts the Chinese pride and reminds them of the colonial period when China was invaded and divided by other countries. The common reaction is: 'Whatever our government does, it is our internal affair. It is much better than the time when the country was run by outsiders.' If an American behaves like that, he immediately becomes an 'outsider' and the trust is destroyed.
The Chinese have a strange political loyalty towards their government. It is very common now for Chinese to criticize government policies among themselves, while the Chinese will be offended if Westerners criticize Chinese government in their presence. Again, the Chinese think this issue is open for the 'insiders'(Chinese) to work it out and they do not appreciate outsiders' intervention.
Another obvious symptom of Chinese pride is that Chinese are afraid of losing face. They believe it loses face and breaks the harmony if one has to admit a mistake, is sued or is criticized for what he is doing. To save face, Chinese may withhold information, avoid responsibility, cover up or just do nothing. Foreign businessmen can expect a reply at the negotiation table that 'we will carefully study your suggestion.' This is the Chinese way of saying they are not pleased by the proposal. The Chinese will be more direct and frank if the foreign party has been recognized as an 'insider.'
For instance, I once worked with an American intern in a small law firm in Chengdu, China. He spoke some Chinese and everybody treated him as an 'insider.' He was quite playful, and every day he would come up with a joke related to socks to amuse himself. One day he pulled several numbers out of a business phone book and made phone calls one by one offering free socks to receptionists if they let him talk to their bosses. We all laughed at his childish behavior. After that he told one of my colleagues that 'Chinese socks suck.' My colleague was offended and started a war against him. He could not understand why the Chinese colleague took a joke so seriously. I explained to him that socks and clothing are China's major export product. Chinese think their socks are good and they are proud of them. The colleague was offended and was defending himself to save face when an American wearing Chinese socks said the socks were no good.
The Americans believe competition fosters creativity and contributes to high performance. One person is usually given power to make the final decision and bear all responsibility. The Chinese believe that everything must be in harmony for the world to function well and that competition leads to disharmony. They take a long-range view of things. The Chinese are very group-oriented. They focus on the group instead of the individual. Although the highest authority in the group usually makes the final decision, responsibility for that decision is borne by the entire group.
Because of the Chinese belief in harmony and because most Chinese run their business through a network of personal relations, conflict resolution is almost always accomplished through informal channels. Chinese try to avoid confrontation when they believe it is not helpful in realizing the goal. Bilateral negotiation and conversation are more successful than litigation. One foreign manager stated, 'If I have to resort to the Chinese court system, I know that I have already lost my case.'9 A lawsuit is very likely to disturb the whole network that a foreign business has built in the local area and forces the Chinese to lose face. Even if the foreign business wins in the court, it has lost out of court. The lawsuit will have long-term negative impact over the business operation. Mediation and arbitration are two alternatives to bilateral negotiation that have become more and more accepted in China.
The willingness of the Chinese to compromise when a conversation comes to a deadlock also reflects their respect for harmony. The Chinese are more than willing to compromise to avoid a lawsuit. Nevertheless, American companies should not threaten the Chinese side with a lawsuit unless they have to, because the threat greatly forces the Chinese to lose face. Whether or when to use the threat depends on the totality of the circumstances. It is more or less a business decision.
Unlike Americans, the Chinese believe that truth is relative to circumstances and human obligations. Chinese are willing to keep things flexible unless details are a must under the circumstances. Foreign businessmen do not understand that, for a long time, Chinese businesses have been struggling to survive under constantly changing political and economic policies. Keeping options open enhances the ability to react to new, different and unpredictable situations, which is vital for survival. Chinese culturally like to go for the essence of a situation rather than spelling out each detail. They prefer vague and general contract terms because they feel contract terms are always open to later negotiation when a casualty occurs. 'This is diametrically opposed to Western legal thinking which demands that every idea, every thought, every potential loophole be hammered out and explained thoroughly,' says Steven Meyers, a Los Angeles attorney fluent in Mandarin.10 Foreign businesses should keep in mind that getting a clause into a contract is not enough. They need to make sure the Chinese side really understands the obligation and will enforce the clause.
For example, in a technology transfer negotiation, the foreign party was annoyed to find that the Chinese counterpart invited personnel from a Chinese competitor to be present at the meeting, which was a violation of the parties' confidentiality agreement. The Chinese counterpart was very surprised at the foreign party's strong objection. Perhaps the best explanation for Chinese indifference to the confidentiality issue is the notion of public good, i.e., that in the big picture, one is just a part of a harmonized group and information should be shared within the group.
Because of the Chinese government's unpredictable policies and the Chinese tradition of not sticking with principles or contract terms, an American business must send representatives to visit China frequently, or better, set up an office in Hong Kong, Shanghai or Beijing to monitor the business activities onsite. The Japanese department store chain Yoahan has moved its headquarters from Japan to Hong Kong to better supervise the Asian market.11 However, office rent in Shanghai is now higher than Tokyo and setting-up costs are expensive. An expectation of the easy and fast buck in China is impractical.
China's problems are rooted in the tension amongst three major Chinese values: 1) the traditional cultural heritage based on Confucianism; 2) the Chinese central government's socialist ideology, i.e., 'socialism with Chinese characteristics'; and 3) the burning desire of the Chinese for development.12 The first element is becoming weaker,13 and the second and third elements are growing stronger. In order to conduct business successfully in China, an American business needs to have a fairly good understanding of the three major Chinese values - culture, politics and development; in order to do a relatively simple transaction with Chinese, a little understanding of the three values goes a long way. +
1. Bill Nichols & James Cox, Backers Hope China Pact Will Promote Reform, USA Today, September 20, 2000 at 10A.
3. Melinda Brown, Doing Business in China, 73 L. Inst. J. 17, 18 (1999).
4. Chinese have their own 'Chinese god,' of course.
5. Danping Mu, Culture and Business: Interacting Effectively to Achieve Mutual Goals, 17 NO.3 E. Asian Executive Rep. 6 (1995).
6. Sam Loewenberg, Navigating the Maze; For US Companies Doing Business In China, Lobbing Is A Dizzying Puzzle, Legal Times, September 18, 2000 at 23.
8. Roy F. Grow, Resolving Commercial Disputes in China: Foreign Firms and The Role of Contract Law, 14 Nw. J. Int'l L. & Bus. 161, 181 (1993).
10. Ron Smith, Doing Business with China, the Los Angeles Daily J., April 18, 1998 at S10.
11. Frankie Fook-Lun Leung, Doing Business in China: Some Byths and Ground Rules, the Los Angeles Daily J., April 14, 1994 at 7.
12. Suzanne Ogden, China's Unresolved Issues: Politics, Development, and Culture, 13 No.2 Fletcher F. of World Aff. 404,404 (1989).
13. Weaker does not mean it is not powerful. It is rooted in China's thousands years of history and should never be overlooked. +
ABOUT THE AUTHOR
Yan (Jane) Jiang is in her last year at Northwestern School of Law at
Lewis and Clark College. She is a native of the Wuxi area (near Shanghai) in the People's Republic of China and plans to return to Shanghai or Beijing to practice law after graduation here. Prior to coming to Lewis & Clark, she obtained her law degree in China at Xiamen University in Southern China. Her four-year educational stay in the United States has been sponsored by Oregon attorneys Chris Helmer and Joe Bailey, with whom she has lived these past four years. Helmer and Bailey met Yiang when they were teaching at Xiamen's law school for a two-week period in 1995. Helmer is the head of Miller Nash's international practice group. Yan Jiang can be reached at firstname.lastname@example.org.