Doing the China Tango

iUniverse, Inc.

Contents

Preface......................................................................................xiAcknowledgments..............................................................................xvIntroduction.................................................................................xviiChapter 1. Why Relationships Count...........................................................1Chapter 2. Golf, Outings, and Gifts..........................................................11Chapter 3. The Importance of Face and Guanxi.................................................20Chapter 4. The Shark-Infested Waters of Chinese Business.....................................25Chapter 5. Navigating the Manufacturing Minefield............................................36Chapter 6. Understanding the Mysterious Chinese CEO..........................................46Chapter 7. The CFO Is the Glue Within the Company............................................57Chapter 8. Why Is a Chinese Board of Directors So Powerless?.................................63Chapter 9. The Odd Couple: US and Chinese Business Partners..................................73Chapter 10. Due Diligence: Look Before You Leap..............................................85Chapter 11. The Chinese Business Plan: A Twilight Zone.......................................100Chapter 12. Corporate Transparency: Behind the Silk Screen...................................106Chapter 13. Shadow Banking...................................................................113Chapter 14. The Government Calls the Shots...................................................122Chapter 15. What Makes Chinese Contracts Different?..........................................136Chapter 16. Putting It Together and Conducting Business in China.............................143Appendix A: Blogger's E-Mail Regarding Due Diligence Report and Response.....................151Appendix B: A Typical Chinese Business Plan..................................................155Appendix C: A Typical US Business Plan for a Chinese Company.................................161Appendix D: The Ceremonial Contract..........................................................169Endnotes.....................................................................................173Bibliography.................................................................................183

Chapter One

In one form or another, we've been working with Chinese companies since 2003. During that time, we've received more than our fair share of scars, shark attacks, and attempted assassinations (figuratively speaking, of course) from Chinese companies. As we attempted to ascertain the reasons for our near demise, we understood that we had entered the shark-infested waters of Chinese business with a steak attached to our waists. We didn't understand Chinese companies, their culture, their "actual" tax structure, their government relationships, or any of the myriad of social-business complexities that make China the unique business environment it is. Therefore, in most cases, the outcome of our business venture was predetermined before we even entered the water. We were doomed before we got started.

Gradually, though, we learned from our failures. We took the time to better understand Chinese culture, and our efforts soon began to pay lucrative dividends in the form of new business ventures with Chinese companies. The most important thing, we realized, was that being successful in China means being successful at establishing both a business and a personal relationship with your Chinese counterpart and others involved in your business transaction.

First and foremost, the Chinese want a business relationship with you. And they only have one reason to form this business relationship: to make money. If it's going to make them money, they're all for it. But speed dating doesn't work with a Chinese company. If you think you're going to walk in and give the chief executive officer a presentation and then push a contract in front of him for immediate signature, it's not going to happen. Short of writing a check on the spot, which is genetically impossible for any Chinese businessperson to turn down, the Chinese want a relationship. And, moreover, so should you.

Probably the most common reason why deals unravel in China is the lack of a personal relationship with the Chinese CEO. And by relationship, we don't mean the occasional phone call or periodic visit to the company. We mean having frequent interaction with the CEO to the point of where he feels that he has both a personal and a business relationship with you and your company. He isn't going to differentiate between the two. To the Chinese, you and the company are one, and when he's doing business with the company, he's doing business with you.

In the United States, as in many other countries, there's a separation between personal and business. We often feel that, upon leaving the office, we're on personal time. That's not to say that we don't take phone calls at home or may on occasion work from home. But in our minds, when we cross the portal of the front door and enter our house, we've left the office. In China, they never mentally leave the office. To the people you're working with at the Chinese company, business is their life, and they live it 24/7. It's the way they've been brought up. It's the way they've been trained. It's part of their culture. When we've phoned a Chinese businessperson or government official on weekends or late at night, we've never experienced even the slightest bit of irritation on their part. They expect us to contact them at any time if we have an issue. And they'll expect the same of you.

Having a strong working and, by extension, personal relationship with a Chinese businessperson is difficult. It will require effort on your part because, outwardly, he'll give an appearance of friendship and closeness, but that's often a veneer. To establish a personal and business relationship will take both time and understanding.

A Difference in Cultures

In explaining why it's so difficult to establish both a personal and business relationship, you have to first be aware of the cultural differences between Chinese and Americans. The Chinese are a collectivist, rather than an individualist, society. Relationships, harmony, and consensus are extremely important to the Chinese businessperson.

In contrast, Americans are more transactional and less relationship driven. Not that we don't have strong business relationships-we obviously do. But most of our business relationships aren't what the Chinese would consider relationships. They would consider many of our business relationships as affiliations or associations, believing that the only thing that matters to us is the individualistic attainment of success. This is what your counterpart believes when he's sitting across the negotiating table from you.

He also believes that you're under constant pressure to be individually successful or else you'll be replaced by someone equally as driven toward individual achievement. Overcoming this impression of an American businessperson is necessary if you're going to form a lasting business relationship with the Chinese. Your counterpart is looking for a relationship from you that will combine both the individual and the personal. Emphasizing the group or "we," rather than emphasizing the "I," is integral to establishing a relationship and achieving your business goals.

Even though we might say we'll emphasize the "we," the fact is, we're still an individualistic society. It's hard for us to act as members of a collectivist group. Hofstede, in 1991, noted that the United States ranks #1 as the most individualistic society, with a score of 91. The United Kingdom ranked next, with a score of 89. France and Germany had scores of 71 and 67, respectively. China was rated near the bottom, with a Hofstede score of 20. In the United States, we're goal driven and tend to look at the most efficient method for achieving those goals. This sometimes leads to a lack of corporate loyalty and the creation of a nonharmonious environment. Often we see our coworkers as competitors, rather than partners. This abridgement of corporate loyalty can also be seen when employees move between companies to obtain a better job, often for more money. In the United States, we view this as bettering ourselves through hard work and achievement. Our individual efforts are recognized and rewarded. It's individualistic. In China, this is viewed as a lack of loyalty to the common goal, and it creates a nonharmonious atmosphere.

In China, decisions are generally made collectively. Arguments, when they do occur, are made in private and not publically aired. To air an argument in public would be to have a loss of face. One disadvantage of collectivism, and a criticism often leveled at Asian countries, is that collectivism stymies creativity, as no one pushes for innovative solutions. Collectivism is viewed in China as the "safe" approach, where everyone agrees and where a decision can't be credited to an individual group member. The Chinese promote the company over the individual and take collective responsibility for its success or failure.

As an example, in an interview with one of the managers of a construction project in northern China, the manager noted that there were steel plates, nuts, bolts, and other construction materials missing in a project. The contractor apparently omitted these from the design drawing by the architects. However, no one wanted to bring this up during the construction project, because they would then have to find the persons responsible. The manager further explained that the problems would be discovered after the project was complete, when no specific person or group could be found to blame and, consequently, everyone would be blamed. When everyone is blamed, no single person or group is found to be at fault.

That's not to say that a Chinese employee will remain at a company for life, although that's sometimes the case. We've found, especially with younger Chinese, an inclination to be more mobile and individualistic, especially with regard to technology-related companies, where they'll oftentimes go off on their own. Even then, they'll frequently take a cadre of their friends with them. As a collective group making a decision, Chinese coworkers tend to have a closer personal and business relationship than many of their foreign counterparts. This is why it will take time and understanding for you to establish the same type of relationship that your Chinese counterpart experiences daily in his present working environment.

The Chinese tend to be less confrontational and emphasize harmony to a greater degree than their US counterparts. This is to be expected since the Chinese are collectivist and emphasize teamwork. It also means that you'll rarely find a free exchange of ideas, as exists in most US companies, where management and employees will sometimes criticize each other publicly in an attempt to resolve issues. This is not the case with a Chinese company. Any criticism of fellow employees or management team members is done behind closed doors.

Therefore, as a collectivist society, where decisions are arrived at by group consensus and where a public airing of divergent viewpoints is almost unheard of, your corporate counterpart will want to ensure that you both have the same philosophy and can successfully work together in this environment. Also, your counterpart will be looking to see how you react socially with other members of his corporate staff. He'll also observe how working with you will benefit the collective interests of all parties, especially their ability to make money off this collaborative effort.

How you socially interact with your counterpart is very important in setting the tone of your relationship. When you show that you're trying to understand, respect, and be part of their customs and traditions, you've demonstrated to your counterpart that you want a relationship with him and his company. He'll be glad to reciprocate.

Entertainment, Drinking, and Karaoke

If you've been to China on business, you may have already experienced the lavish dinners, the drinking of the fiery Chinese liquor called baijiu (pronounced "bye-joe"), and the infinite number of toasts associated with it. You may have even gone after dinner, as we did, to karaoke. Many companies take foreigners to karaoke after dinner so they can unwind and get to know each other better. Chinese karaoke differs from US karaoke. With US karaoke, there's usually one large room where an individual will get up and sing to anyone present. In contrast, Chinese karaoke is done in individual rooms that can accommodate a few people, to larger rooms that can accommodate very large groups. The rooms are soundproof and have their own sound system, music videos, and dance floor. They also have, in most cases, a hostess who will arrange for any food and beverage you might like, as well as keep the room clean.

Fortunately, most of the music videos are in Chinese. But there are a few English songs mixed in. Our advice is, when your Chinese host asks you to pick a song that you'd like to sing, just do it. Take the microphone and start singing. No one will care what you sound like. We sounded like two frogs that couldn't get in sync. No matter. Everyone will laugh and have a good time. That's what karaoke is about. It will tell your Chinese host that you want a relationship and want to be part of the team.

To the Chinese, business also encompasses the social; it's a symbiotic relationship. If you think you're going to separate the two, you're wrong. That rarely happens. The Chinese refer to this symbiotic relationship as guanxi. We'll discuss guanxi, to a greater extent, in chapter 3.

The Chinese businessperson wants to know the type of person he's dealing with and his or her business knowledge, character, strengths, weaknesses, and outlook on a variety of topics that may have importance to him. This doesn't happen at the business table. It often occurs at the dinner table and with karaoke.

Your Chinese counterpart knows that you want to give him a good impression of both you and your company and that you'll be on your guard to make that happen and not enter into areas that may be controversial. That's normal and understandable. But what he's actually looking for is a glimpse of what's below the surface and what you're really thinking. And he's very good at finding this out. This is normally accomplished at dinner or at a social gathering, where his goal is to get you a little, and possibly more than a little bit, drunk. He knows that people normally tend to be more talkative when they drink. He'll use this to his advantage.

Your Chinese host and his staff will likely be toasting you at a banquet-style dinner, where everyone will usually sit at a round table with a large lazy Susan in the middle. You'll see several glasses on the table in front of you when you sit down. There'll be one or two goblet-style glasses, along with one small, stemmed shot glass. The goblet glasses are for juice, or equivalent nonalcoholic beverages, and for red wine or beer. The small stemmed shot glass is for white wine or baijiu.

On our first visit to China, our host asked us if we'd like white wine with dinner. Scott didn't drink, and so politely declined the offer of wine. I, on the other hand, said white wine would be fine, picturing a nice glass of Chardonnay. Instead, the server brought out a white porcelain container and poured a clear liquid into the shot glass. This clear liquid was called baijiu. Even though we weren't sommeliers, we both figured out this is the Chinese version of moonshine, as we could smell the strong odor of alcohol coming from this small glass.

Alan knew drinking this was going to hurt, and it did. As our host stood, with the interpreter to our right translating, the CEO of the company lifted his glass and said "ganbei," a rough translation of which is "bottoms up." Alan drank the fiery liquid slowly. That was a mistake. If you're going to drink baijiu, slam it down. Sipping baijiu makes it taste twice as bad, as it seems like a cross between paint thinner and rubbing alcohol. That may not be an exact description, but Alan swears it's close. There's nothing good about the taste of baijiu. If you attend a banquet or business dinner in China, you'll probably be drinking it. The Chinese love to serve it to foreigners and observe their reaction. Since most foreigners don't generally like the taste of baijiu, the Chinese frequently have a good time observing us choke down this white lightning.

The Chinese realize that not everyone drinks alcohol and, as such, are not off ended if you decline for a valid reason. Their goal is to be good hosts, and as such, they won't force you to drink if you actually can't. Refusing to drink because you don't like the taste of baijiu or you don't feel like it doesn't work. The social aspect of business is very important to the Chinese. Refusing to drink with your host because you don't feel like it is an insult. However, if you can't drink for medical, religious, or personal reasons, then your host will accept this without being insulted. We've been with people whose medical condition, religion, or health wouldn't permit them to drink anything alcoholic. When this was conveyed by the host to the rest of those in attendance, everyone understood and only toasted the other party with tea or water from that point forward. Normally in this type of situation, the hostess will simply take away your shot glass and ask you what type of juice you'd like.

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Excerpted from Doing the China Tangoby Alan Refkin Scott Cray Copyright © 2012 by Alan Refkin and Scott Cray. Excerpted by permission of iUniverse, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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