strategy4china: Guanxi and Proactive Strategy

"Marketing Communications and Corporate Relations in China 2000"
A two-day seminar organized by IBC www.ibc-asia.com
The following text is a slightly modified version of the original presentation (slides).

Who are you? How do you see yourself?

1. You have a direct input in the company's strategy
2. You have a limited input in the final decisions
1. You look at China as "on the other side"
2. You feel at home in China "as much as a Chinese"
3. For you the "Chinese Government is sitting on a mountain shrouded by clouds"
4. The Chinese decision-makers are just a phone call away

Decision making

Still too often, decisions are made without taking into account local input
Strategic decisions are taken far away and ignoring the rich expertise available from the local staff and (local) service companies
Some large Multinationals still regard China as a distant subsidiary that should follow the traditional way of working in the home country
Local but also expatriate staff should be selected and managed according to the requirements of the Chinese business society

One should do business in China as in all other countries,
adapted to the Chinese environment and realities

"Business is a big cake with many pieces, guarded by different parties, each with its particular sphere of influence. You can't have them all." (Chinese comment)
China is not an open and transparent market.
China is a complex society with many groups of people, forming protected networks of interest.
It is a large minefield. Without inside knowledge you can trip a mine and, before you know, you are "out". And you even never know what hit you.

We need to identify the parties that watch over the piece of cake.

We need guides to take us safely through the minefield.

We need tools for survival: GUANXI and PROACTIVE STRATEGY

"GUANXI":

You hear it everywhere - it's controversial
Everybody (in particular "China Specialists") has his own interpretation:

No Guanxi - no business
A thing of the past, glorified by consultants
Evokes "lobbying, sumptuous expenses, corruption, shady deals, middlemen acting as secret agents"

Definition - Le Figaro September 1997:
"Guanxi: literally "locked system" or "relations". Personal and friendly relations, without it nothing is possible in China. Indispensable, either for the administration, customers or suppliers. They take time to build and require constant attention. They allow to navigate the labyrinths of an extraordinary complex administration"

Our "definition" with comments

A network of relations - "networking"
Too often China is considered as an exotic country where everything is different and complicated. But:

IN FRANCE: LES ENARQUES - LES GRANDES ECOLES

IN THE UK: THE OLD BOYS NETWORK

WASHINGTON: THE LOBBYISTS

So, what's different in China?
Guangxi is not = corruption
In China personal relations are more important than written contracts
China is a society of consensus

Implications

In China GUANXI is an art, embedded in the culture. It is the clever use of the network of personal relations
GUANXI is not only for foreigners - it is even more important between Chinese

BUT!!!

Let's remain pragmatic and realistic
Some exaggerate and burn money for the "good cause". At the end of the day we want to do business and make a profit
Unfortunately corruption does exist and the "rule of law" is a often a term for public consumption. Honest (naïve?) intentions can end in failure.

CHINA IS STILL A DIFFICULT COUNTRY (KNOW AN EASIER ONE?)
WE HAVE TO LIMIT OUR RISKS

* WISELY BUILDING AND USING GUANXI ENABLES US TO HAVE BETTER INFORMATION, TO HAVE MORE FRIENDS THEN ENEMIES.

Where do we build our GUANXI?

In our enterprise - in our office - with our partners
Chinese administration - customers
Service companies

In the enterprise

EMPLOYEES ARE THE MOST VALUED ASSET

companies that need a certain level of GUANXI (or call it lobby), should find the local equivalent of "ENARQUES" - individuals who feel at ease contacting the top-level administration and who know how to write them a letter
it is not because the employee speaks fluently English and he understands your business that he has the right "savoir-faire"
In a climate of trust the employee will gradually put to good use his network and solve the daily small obstacles - but also help you to be successful, to chose the right partners, to cement relations with customers and the administration
Expats (= non-PRC nationals) should be chosen carefully to fit into the environment Cross-cultural training is not only for "locals"!

So don't …"

Employees should be more than "translators". No glass ceiling. Room for initiative
Major reasons for local employee turnover: 1. insufficient career perspectives 2. poor internal relations 3. salary

IN CHINA PERSONAL CONTACT IS VERY IMPORTANT
CHINESE DISCUSS WITH PEOPLE - LESS WITH COMPANIES

Foreign companies change too often their expats and their negotiators, making it difficult for them to understand and build relations. Chinese discuss rather with Mr. X than with company Y.

A world of consensus

Even top people will tend not to take important decisions without making sure the necessary consensus exists
It is necessary to investigate what parties are involved in the business - vertically and horizontally - to avoid running into a hidden obstacle, like a Chinese "danwei" you never heard of.

Equally dangerous and excellent sources of disaster:

Go and look the "big boss" (a minister, a mayor, a managing director…) and come to a quick fix. And suppose the rest will simply have to follow.
Only stick with the "local" bosses and set up everything without checking at a higher level

Some examples

A JV to be set up in a province is "agreed" in Beijing without duly discussing with the local partner. A "good start" with the partner who feels "ignored"
Singapore sets up an industrial zone in Suzhou, making a deal with Chinese top leaders. Suzhou sets up its own zone and Singapore suffers serious losses despite intervention from Mr. Jiang Zemin
JV discusses everything with their partner and local government, trying not to involve the central authorities. After production starts, one JV has to stop selling in China, the other cannot increase its activities and investment.
The foreign seller uses its lobby at the central government to force the customer to buy its equipment. After signing the contract the seller gets into a long road of everyday misery.

THIS IS GUANXI!

TO UNDERSTAND HOW AND WITH WHOM TO WORK
HOW TO SOLVE YOUR (SO MANY) UNPLEASANT PROBLEMS
TO UNDERSTAND HOW THE MECHANISM WORKS - AND WHO TURNS THE WHEELS
TO GO AND EXPLAIN TO THE RIGHT PEOPLE THE RIGHT MESSAGE

OK, agreed. All too complicated and time-consuming.
And it is boring to go around and talk to so many Chinese, repeating the same message over and over again.
Of course, one can go to some magician, who promises to quickly solve all your problems, obviously for a fat fee.
Up to you!

But for the patient ones who really want to be successful in China (and remember, MAKE MONEY!), it is not so hopeless and complicated as it seems.
In recent years many "service companies" have made tremendous progress and can offer their experience, some examples:

Legal advisors, accountants (foreign and local firms)
Firms specialized in IPR
Banks and financial institutions
Companies in marketing, PR, publicity, press surveys
Commercial offices of embassies and consulates ((free of charge!)
Consultants in HR, logistics, sourcing of suppliers
Management consultants, also to (re)define and implement strategies

This is also GUANXI! Getting to know them, networking with them. And not rushing in at the last minute asking for miracles. And letting overseas specialist work with them.

PROACTIVE STRATEGY

[The main activity of China Strategy Ltd.]
What is it? What's the connection with GUANXI?

In short:

FORGET ALL PAST STRATEGIES AND ASSUMPTIONS
BE CRITICAL AND INNOVATIVE - AHEAD OF THE COMPETITION
CONSULT AS MANY SOURCES AS POSSIBLE
REVIEW WHAT THE COMPANY IS AND WANTS TO ACHIEVE
REVIEW WHAT CHINA WANTS TODAY AND WHY IT HAS NOT SAID YES - YET
WHAT ARE THE OBSTACLES, WHY DO THEY EXIST - HOW TO REMOVE
IS THE COMPANY READY TO CHANGE ITS STRATEGY TO OVERCOME THE OBSTACLES AND WHAT IS NEEDED TO MAKE IT WORTHWHILE

CASE STUDY: SHANGHAI METRO LINE 3 ("PEARL LINE"):

FRANCE LOST ALL PREVIOUS MAJOR METRO PROJECTS IN CHINA
THE INVINCIBLE GERMANS IN "FORTRESS EAST CHINA"
NO METRO PROJECTS ALLOWED, AT LEAST BEFORE 2000
NO LOCAL ASSEMBLY IN SHANGHAI
PROJECT "LINE 3" DOES NOT EXIST - AND WILL NOT BE APPROVED
OTHER CITIES SEEM MORE "OPEN" TO START PROJECTS
FRANCE IS NOT TOO HOT TO JUMP INTO A MAJOR SOFTLOAN

(The rest is history)

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