One Billion Customers Lessons from the Front Lines of Doing Business in China
by James McGregor Free Press © 2005 336 pages
Focus Leadership & Mgt. Strategy Sales & Marketing
Take-Aways • China is "the world's largest startup" and the "world's largest turnaround." • The Chinese tolerate an official form of hypocrisy because it preserves their system.
Corporate Finance
• Chinese society is "shame-based;" a person's condemnation disgraces the family.
Human Resources
• The global backlash to the Tiananmen Square Massacre surprised China's leaders.
Technology & Production Small Business Economics & Politics Industries & Regions Career Development Personal Finance Concepts & Trends
• The Chinese want to learn your business, access your technology and capital, and control all their business dealings with you. • If your corporation sets up a partnership or joint venture in China, get majority ownership and management control, especially in hiring and finances. • China's transition from socialism to privatization produced huge amounts of wealth for people with the right connections. • The Chinese government estimates that 4,000 of its officials are in self-imposed exile after stealing about $5 billion from the state. • The Communist Party is still so powerful that many Chinese react to Party directives as they did to the orders of ancient Chinese emperors: "Tremble and obey." • Being blamed for an error can cost a Chinese negotiator his or her career.
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Relevance What You Will Learn In this Abstract, you will learn: 1) Which key historical events continue to make China a challenging place to conduct business; 2) How to characterize Chinese society; 3) How to negotiate in China; and 4) What business techniques work best in China. Recommendation China has a reputation for vast complexity, but journalist James McGregor demystifies many of its modern business practices by placing them in their historical context and explaining why the Chinese view foreigners with such concern. He is extremely familiar with his subject, shares great material, and deftly describes his experiences and the nuances of Chinese society. He enlivens the stories in this well-organized book with great journalistic detail. Each chapter starts with a case study from history or business, followed by the author’s synthesis of the chapter’s main ideas. The chapters end with bullet points that recap crucial points. getAbstract.com finds this historically grounded, practical book essential for anyone doing business in China. If you need to earn the trust of Chinese business colleagues or if you must determine whether you can trust them, read on.
Abstract “When Deng launched reforms fifteen years earlier, I said, there was only one place in the world with a significant population of poor Chinese people – China.”
“Given their cultural proclivities, I’m not surprised that I have never met a real Communist in China, somebody who believes in the abolition of private property or the philosophy of ‘from each according to his ability, to each according to his need’.”
Caveat Emptor In recent years, China has become the target of the attention of the world’s largest corporations, all seeking access to its one billion potential customers. The country was already in transition in the early 1990s. At the time, its modern awakening posed a tremendous challenge to author James McGregor, then The Wall Street Journal’s executive in charge of building a media company in China. Deng Xiaoping, China’s leader from 1978 to 1989, had liberalized some aspects of daily life. Children were getting a better education, people were becoming wealthier and the country was gaining international recognition, but the Communist government was still firmly in control. McGregor recognized that things were changing. He told his parent company, Dow Jones, to get ready because China’s economic reforms would make it the globe’s largest financial market. China was poised to be both “the world’s largest startup” and its “largest turnaround.” After 2,000 years of imperial rule followed by a painful experience with communism, China was absorbing Western technology and know-how at a furious pace. It raced through economic stages that took decades in the West, charging through the economic period of the Robber Barons (late-1800s), rampant speculation (the Roaring ‘20s) and urbanization. Citizens of its rapidly developing middle class began buying their first homes, cars, vacations and college degrees. Deng had created a social situation that mimicked a classic corporate turnaround strategy. China simultaneously: • • • •
Empowered local reformers, while also appeasing the Old Guard Communists. Maintained traditions and the established Party, but pushed for quick reforms. Created public backing for changes to increase individual productivity. Incubated and tested reforms locally before launching them nationwide.
Like most turnarounds, China needed an infusion of outside talent, technology and capital. That would come, but in the interim, the Party line was grounded in ascetic slogans One Billion Customers
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“If the business community is the ‘old boy’s network’ in the West, the Communist Party is the ‘old boy’s network’ in China.”
from Mao Zedong. Thus, Chinese leaders praised a basic lifestyle while permitting the ownership of modern conveniences and private property. Communist officials discussed Mao's ideology at Party sessions and drove home in luxurious foreign cars while talking on their cell phones. At home, they discussed privatization deals with their Westerneducated children. How do the Chinese reconcile these two worlds? An old proverb, "Zhi Lu Wei," sums it up: "Point at a deer and call it a horse." People tolerate official hypocrisy because it preserves the system. China's stance shifted after the government's killing of student reformers in Tiananmen Square in 1989 – a blow to Party conservatives and a win for reformers. After worldwide condemnation, the Party allowed more privatization and loosened controls to encourage private businesses. China embarked on a huge program to build the infrastructure needed to sustain private businesses, but the Communist Party still controlled the reform process.
“A couple of decades of averaging 9% annual growth has transformed China in terms of material goods.”
“China is all about ‘I live, you die,’ ‘you win, I lose’ a vicious cycle of conquest and revenge.”
“Two hundred years of foreign domination and duplicity have left a residue of suspicion and distrust.”
Communist Control Party control extends traditional Chinese politics based on a 2,000-year-old aristocracy. In the Han dynasty, the royal family and its advisors were the wealthy Inner Court, while high-level bureaucrats comprised the Outer Court. Today, top Party officials lead the Inner Court. This structure provides social order. China is a “shame-based society.” Exposure and condemnation disgrace an offender’s family. Chinese people do not base their actions on guilt or fear of God. People can act badly if they do not get caught. The government enforces social standards and catches violators, who face Chinese courts. In the courts, judges are not impartial. They hold public interrogations and report to Party officials, adjudicating politically, more than legally. Given this, people prefer to resolve their differences out of court. As China bureau chief for The Wall Street Journal in 1990, McGregor met the heads of global corporations. He learned that they were hesitant to talk about their Chinese operations because their position was precarious. The government, publicly loyal to Communism and – even more – to Chinese nationalism, was still deciding how much capitalism to allow. That helps explain why Westerners and Chinese people who were not born in China find it difficult to do business there. Although some of these “overseas” Chinese were found to be corrupt, they helped modernize China by building luxury hotels and new factories. As for Westerners, the Chinese see them as a source of money, expertise and technology, but little else.
A History of “Profound Indifference” British Lord George Macartney first discovered China’s attitude toward the West in 1793 when he tried to convince Emperor Qianlong to buy more English goods. Macartney brought wool, telescopes, guns and a hot air balloon to impress the emperor, who was unmoved. China saw Europe, Russia and North America as backward civilizations. The more distant the country was from China, the more primitive the Chinese believed it to be. After long meetings with the emperor’s representatives and, finally, a short meeting with the emperor, Macartney took a letter from the emperor to King George: the Chinese wanted nothing from England. Some 200 years later, the Chinese still believe Westerners only want to exploit China. Yet, by the 1970s, after a failed attempt to align with the Russian Communists, China was ready to work with the West again. In 1979, Chinese Premier Deng Xiaoping toured the U.S., paving the way for American firms to enter China. During this first phase, many U.S., European and Japanese corporations made money-losing deals just for market entry. One Billion Customers
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“Dealing with China’s pervasive corruption is a vexing problem for foreign businesses in China.”
“The sad fact is that the Chinese system today is almost incompatible with honesty.”
“For the Chinese, outcomes are more important than truth.”
Tactically, the Chinese bargained for favorable terms by invoking past atrocities, such as opium addiction or the WWII massacre of Chinese civilians. They cited long-ago examples of exploitation to pit Western companies against each other and to exploit rivalries between them. China adopted a policy of building its own export capabilities before allowing non-Chinese corporations to sell their goods. This involved large foreign investment, accompanied by training programs. China wanted non-Chinese firms to train Chinese companies in manufacturing and distribution, so they could build Chinese brands. By 1983, U.S. firms were complaining to the State Department about restricted access to Chinese markets. After the Tiananmen Square Massacre in June 1989, many Western executives fled China. But President George H.W. Bush did not chastise the Chinese. Bush had managed U.S.Chinese affairs from the Oval Office in 1974-1975, and he believed China needed to be guided into becoming an economic powerhouse. The Chinese government invited nonChinese companies into the country only after the now retired leader Deng Xiaoping encouraged economic expansion. The Chinese knew that U.S. corporations welcomed their new policies, but President Bill Clinton linked U.S. trade policy to China’s human rights practices. Confident it had the upper hand, China told U.S. Secretary of State Warren Christopher, “China will never accept America’s concept of human rights.” Clinton backed down, realizing that U.S. corporations would be cut out of China if he pushed for improved human rights standards. By 1993, the Chinese had signed about 85,000 contracts with non-Chinese investors. After intense intellectual property rights negotiations, China began making inroads toward admission into the World Trade Organization (WTO). The country’s long road to the WTO started under the negotiating skill of U.S. Trade Representative Charlene Barshefsky, an attorney, who negotiated with China on the General Agreement on Tariffs and Trade (GATT) Treaty. Negotiations centered on how much access U.S. corporations would have to China’s major industries: insurance, telecommunications, agriculture, banking and retail. China was admitted to the WTO in 2001. By 2003, about $150 million a day in foreign investments were pouring into China, and foreign trade totaled $850 billion annually.
How to Negotiate in China Use these hints, which are derived from previous foreign business negotiations, when dealing with Chinese firms:
“The Chinese in their hearts believe that their system is so nuanced and complex and inscrutable that foreigners cannot fathom how it really works, so use that to your advantage.”
• Create a “win-win” environment – Enable your Chinese proponents to sell your stance to their counterparts by showing how they benefit. The benefits they want, such as technology transfers and manufacturing know-how, require long involvement. • Beware of divide-and-conquer strategies – When a CEO flies to China, gets a meeting with a senior minister and makes a vague deal, the results are often disastrous. That’s because the CEO’s goal is often to go home and report an agreement, leaving the details for underlings to negotiate. Invariably, the Chinese get huge concessions since they know the subordinate doesn’t want to be accused of voiding the deal. • Avoid foreign rivalries – The Chinese often force foreign firms to compete with each other. Even with concessions, they may not offer the winner additional contracts. • Expect theatrics – The Chinese use any means to gain the upper hand, including lying and citing nonexistent laws. Chinese negotiators will ask anything just to see if their Western counterparts are dumb enough to accept it. One Billion Customers
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“Just as a foreign businessperson needs to understand the thinking and motivations of their Chinese counterparts, a company must understand what China as a country needs and wants.”
“The successful people in China are the ones who can attract, train, and retain Chinese employees.”
“Kiss the cadres, but embrace the customer, as Boeing did.”
• Don’t feel guilty – Chinese negotiators often blame their poverty on foreigners and ask for more training or technology to rectify it. • Use humor, and be tough – The Chinese appreciate humor, especially if self-directed. Being a tough negotiator is appropriate, but never insult your Chinese counterparts. • Saving face – Chinese negotiators do not like to make individual decisions. Since “face saving” is very important, no Chinese negotiators want to be blamed for errors. That could cost them their careers. Understand this and treat your Chinese counterparts with respect, even if they do not deserve it. This can keep negotiations moving ahead. Accept the theatrics, but remain focused on your objectives.
Doing Business in China Due to its history and distrust of foreigners, doing business in China is based on some key realities. First, the Chinese want to learn your business, get your technology and gain access to foreign capital. They want control of any dealings and see foreign partners only as conduits to get what they want. If you establish a partnership or joint venture in China, get majority ownership and management control, especially over hiring and finances. Equal partnerships will test your patience and generate huge legal fees. When dealing with the government, show how your activities benefit China. Never attack its form of government. China’s transition from socialism to privatization made certain people wealthy. Government officials and managers at state-run businesses often live well beyond their salaries. Corruption is so common that most Chinese never ask where money comes from. For instance, the Chinese military owns a five-star hotel in Beijing. In the 1990s, smuggling became an epidemic. Even multinationals used smugglers to distribute goods. Some 1,000 investigators took 20 months to unravel one major smuggling case. China’s government estimates that 4,000 officials are in self-imposed exile after stealing about $5 billion from the state. For foreigners, legal protections that work elsewhere are not always reliable in China, because the Party’s power can supercede the law. Many Chinese still react to Party directives as if they are the orders of ancient emperors, which concluded: “Tremble and obey.” Conversely, since relations reopened in 1979, U.S. policy toward China also has been erratic and sometimes hostile. During the Clinton administration, conservative Republicans painted China as a growing threat. This affected an advanced technology agreement previously negotiated by McDonnell Douglas and Hughes Electronics. Republicans claimed that these companies and some Chinese-Americans had passed secrets and technology to China to gain access to the Clinton administration. The charges were minor, but McDonnell and Hughes had to confess export control violations and pay millions in fines. After September 11, the Bush administration abandoned its Cold War mentality and stopped considering China a threat. U.S. technology companies, meanwhile, still face the possibility of losing out to rivals from other nations, which have more open export control policies.
About The Author James McGregor, who speaks Mandarin, was The Wall Street Journal’s China bureau chief, chief executive of Dow Jones’ China operations in the 1990s, and a venture-capital investor during China’s dot.com boom. He chaired the American Chamber of Commerce in China and is the Senior China Advisor to Ogilvy Public Relations Worldwide. One Billion Customers
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