After our last discussion of foreigners and relationships in China, you may be tempted to dismiss ‘guanxi‘ as another word for ‘corruption’ – or at least a quick road to disaster. Unfortunately, nothing involving international business in China is ever quite so black & white. While it is a bad idea for westerners to rely too much on guanxi, remember that your Chinese partner or counter-party may be a firm believer in it.

When the literature talks about ‘cultural barriers’ between China and the West, be aware that the key differences are not “fork & knife vs. chop sticks” superficialities – they are deep-seated core beliefs like guanxi vs. due diligence. When you tell your Chinese associate that guanxi is an archaic custom, it is like HIM telling YOU that checking references and analyzing financial reports are silly wastes of time.
If you plan on working with Chinese, the issue of guanxi is certainly going to come up.

Here are 10 rules for dealing with Chinese partners who believe in guanxi:

Caveat #1: Do not be overly dismissive.
Guanxi may or may not have real benefits – but what really matters is that the Chinese people you are speaking to genuinely believe in it. When I am doing business with Chinese counter-parties who are too quick to disregard my advice about performing due-diligence or market research, it sends me the wrong messages about their general competence and respect for American methods. Likewise, when you dismiss their advice about guanxi, you may be correct – but in the wrong way. You may mean, “I don’t want to engage in corruption or shortcuts” but they may hear “I don’t understand Chinese methods and don’t have much respect for your opinion”. The first conversation you have with a Chinese counter-party about guanxi is the perfect time to discuss the approval process of your deal or business. It is also an appropriate time to take the moral and ethical temperature of your counter-party, industry, and general practices in your new business.

Caveat #2: Chinese really believe, not only in guanxi, but also in its uniquely Chinese characteristics.
The only thing worse than saying ‘guanxi doesn’t exist’ is to say, ‘every business culture has some form of networking and relationship building’. Many Chinese – particularly those not experienced with international business – find this insulting. (A later post will deal with the issue of Face – not to be confused with western notions of pride, status or reputation). Westerners tend to look for common ground, but Chinese may consider it a swipe at the integrity of the Chinese culture.

Caveat #3: If your new partner’s only contribution is guanxi connections, you had best be on your guard.
Chinese consultants and counter-parties know that you have read that guanxi is vital to business in China. In other words, your counter-parties may believe that building guanxi is a short-term goal of yours. When I was in Beijing in the early 90s, it was a sure bet that every foreigner gathering or junket had at least one guy who offered to connect you with the right people. In those days, it was a real job because doing business in China was so opaque and convoluted. Nowadays the rules are much more straightforward – for good or ill. You should not need special connections to get most approvals – and if you do then you should take it as an indicator that your business plan has flaws. In 2010 China, most experienced Chinese managers should either have the necessary connections or know how to develop them as needed.

Caveat #4: Guanxi is a rental, not a purchase.
Guanxi does not transfer. When your guanxi guy goes, so does the relationship.
As ChinaLawBlog points out, your guanxi relationship is with a person at the organization — not the organization itself. When your special relationship at the ministry, regulator, supplier or distributor moves on you have to start all over.

Caveat #5: Guanxi cuts both ways.
It places obligations upon you – and you do not always control how you will pay back a guanxi debt. Examples have included pressure to accept low quality production, delays, inferior materials, IP theft, material theft, corruption, nepotism, etc. Remember – guanxi is a series of favors, and you have to give to get. The problem is that you have only the most limited control over what you will be asked to do, and how it will be valued. That is the side of guanxi that people do not talk about with Westerners much, but Chinese understand well.

Caveat #6: It is not the same as corruption, but it can be close.
The regulatory standards are higher for Westerners in China – both among Mainland bureaucrats and those back home. Even the appearance of corruption can come back to haunt Western dealmakers – and it is definitely your responsibility to monitor and control the activities of your employees, partners and agents. ‘Business as usual’ for local Chinese is too weak a standard for foreigners. You need to have rule & procedures and prepare for different contingencies. If a Chinese businessperson appeared in a US court and said, “but someone I just met told me that everybody ignores that local zoning regulation”, he might appear dishonest, arrogant and/or clueless – but extremely liable. Well, you’ll come off the same in a Chinese court when your new guanxi connection goes awry.

Caveat #7: Foreigners cannot really build it up the same way that locals do.
Consider the difference between a business proposal from your high-school buddy or college roommate and a Chinese businessperson that you’ve had dinner with a few times. Both constitute a connection – but your relationship with your former roommate has completely different characteristics. You can be more honest with him about his ideas, make suggestions and possess a deeper understanding than you ever would with the Chinese counter-party. The danger isn’t necessarily that your Chinese associate will try to cheat you – he may kill you by being overly polite and sensitive to your feelings.

Caveat #8: Distinguish between everyday guanxi and ‘special relationships’.
If your counter-party’s guanxi is rooted in familiarity with ‘standard operating procedure’ at the ministries, regulators, supply chain and distribution channels -then the situation is fine. It is a normal business competence that weighs in his favor – but is more of a basic requirement than a game-changer. But take note of ‘special relationships’ – like a close relative of an official or executive at a customer or supplier. These are the entanglements that get messy quickly.

Caveat #9: China has laws now.
Chinese have a very high regard for bureaucracy, procedures and regulations. Guanxi is not as important as it once was, and low-level transactions and routine approvals should not require special connections. In fact, circumventing basic rules can cause BIG problems later on. Remember that it is much easier for foreigners to get money into China than getting it out. It is easy to find fixers who can speed your investment through – but getting the licenses and permissions to actually sell goods, repatriate profits and move money may be a different story.

Caveat #10: Guanxi may be able open some doors – but it can also close and lock them.
Strangers are not generally ripping off westerners who lose investment, IP and assets in China usually. 9 times out of 10, the very people assured them about the power of their guanxi connections that turn around and use them to lock out the westerner once the assets are transferred.

==============

Stay Connected to ChinaSolved / ChineseNegotiation.com:

ChineseNegotiation.com and ChinaSolved.com invite you to participate the ChinaSolved linkedin group.

ChinaSolved / ChineseNegotiation.com mailing list

Follow on twitter: @chinasolved TWITTER blocked in China

Sometimes Westerners are so eager to ‘do the deal’ that they blur the line between cooperative partner and profit-seeking competitor. Chinese negotiations are famously social & cultural in nature – there are dinners, singing, girls, drinking and long discussions about the importance of trust and mutual cooperation. Many newcomers to Chinese business internalize their desire for a ‘guanxi’ to the point that they start to confuse their business relationship with friendship. Either through misjudgment or oversight, they put valuable assets in the hands of their local partners and then get on a plane back to NY or London. The Chinese party now finds himself with a huge incentive to harm the overseas party – and little in the way of control or oversight to prevent it.

Here are a few red-flags to be aware of when finalizing deals in Mainland China that indicate you are blurring the line between friendly competitor and loyal partner.

• Starting work without a legally binding contract or actionable agreement.
This is particularly relevant to service providers and consultants planning on getting paid by the Chinese counter-party – or anyone who has to transfer funds to get a deal started. As we’ll see, the problem isn’t that a contract in China offers you all that much protection, but that novice Westerners are too quick to assume that you have achieved a ‘meeting of the minds’ about costs and procedures. Many, many Western consultants have ended up working for free after they thought they had achieved a ‘verbal understanding’. Be particularly sensitive to situations where your local counter-party tells you that you have a deal, but the person who signs/stamps the documents is unavailable.

• Making your local counter-party your only source of information.
It is easier than ever to get information and data about the China market, yet many over-scheduled Westerners still end up relying on a local partner for 99% of their China business knowledge. Yes, it’s easy. No, it’s not what ‘everybody does’. Respecting the opinion and expertise of your local partner, supplier or employee is a great idea, but it’s not enough. If you don’t have the time to monitor your China business then you don’t have the time to do business in China. In 1995 it was very hard to get business news on China. Now we are swimming in it.

• Leaving your counter-party as sole controller of valuable assets — including but not limited to your intellectual property, trademarks and product designs.
Invest the money and time in a few hours with a competent international lawyer and find out what you should be protecting. Otherwise intelligent, pragmatic Westerners tend to be incredibly naïve and optimistic when it comes to trademarks, website names, patents and product designs in China. A US-registered trademark doesn’t necessarily mean anything in China. You need to understand your rights and obligations BEFORE you let your Chinese counter-party understand the potential value in this new market. No one likes spending money on lawyers and accountants – but it is much cheaper to do it early then wait until after a problem arises.

• Lack of due diligence, reference checks or legal/accounting support.
Westerners often ignore the most important type of China network – their own professional service providers. If you are doing business in China, you need a legal guy, a finance guy and possibly a consultant guy. These may be professional experts on retainer or part of informal network – but you need access to independent, informed decisions. You need to a network of experienced Old Hands to use as sounding boards. Going to your negotiating counter-party for legal and financial opinions makes even less sense in Shanghai than it does in NY.

• Relying solely on contracts and written agreements that can’t be readily enforced.
Contracts are vital everywhere but they function a bit differently here in China. In the US contracts tend to be conclusions and serve to finalize business agreements. In China, contracts often function as the starting point for the REAL final decision. That doesn’t undercut their usefulness, however. A contract articulates the agreement and demonstrates a meeting-of-the-minds at the time of signing – which is all very useful. But a Westerner angrily waving a piece of paper in the face of a Chinese counter-party has become the familiar emblem of a failed deal. Chinese courts are rarely good remedies for Western business people.

Chinese have a reputation among Americans as being less honest – and it very well may be deserved. But Americans have a reputation among Chinese as being less sharp – and that may very well be deserved as well.

—————————————
—————————————

Stay Connected to ChinaSolved / ChineseNegotiation.com:

Follow on twitter: @chinasolved TWITTER blocked in China

ChineseNegotiation.com and ChinaSolved.com invite you to participate the ChinaSolved linkedin group.
ChinaSolved / ChineseNegotiation.com mailing list

Speaking about Business Communication: “Cultural Differences?”:

Remember: Cultural differences do not kill deals. Bad communication does. Cultural difference makes communication difficult. It is up to both sides to overcome cultural barriers.

If you want to be involved in future international deals, be very careful about using “Cultural Differences” as a reason for a failed negotiation. It is best to simply get the phrase out of your vocabulary. Westerners who hear it may think you are unsophisticated. Your Chinese manager’s response will be to find someone else who can understand other cultures – like a returnee or an overseas Chinese – who will probably be your new boss.

When we choose to do international business, we take on the responsibility of dealing with different cultures and different styles of communication. If you feel that it is too challenging, then you should step aside gracefully and let one of your colleagues take on the international opportunities for your company.