The elaborate knot pictured here looks like an intertwined maze of strings, but it is actually only made from a single piece of red rope. The knot has historically (since 960 A.D) been offered to delegations as a token of cooperation, partnership and integration. While I've accepted many knots in the spirit of friendship and cooperation in which they were offered, in retrospect, the Chinese knot could also symbolize the difficulties of doing business in China.

Firstly, a person recognizes the color of the Chinese knot- red. Historically, red signifies good luck and happiness. What the redness of the knot implies is that the Chinese person's heart is totally behind the partnership. They are willing to put themselves lock, stock, and barrel behind the venture. At the same time, even though the color has no direct correlation with China's present government situation, it is a reminder to the American businessman of the system that he will have to deal with while doing business here. Never forget that Communism will be one of the heaviest monkeys on your back while developing your business with the great people of China.

Secondly, even though the knot is made from one piece of rope to symbolize unity, the actuality of any business venture in China is that what you want out of the venture and what the Chinese side wants may be two totally different things. You will actually find a lack of unity on two fronts- your employees and government offices.  First of all, with your employees, Communism has bred a “do as little as possible to collect my paycheck” mentality.  When I was a teenager working as a service clerk (bag boy) at the grocery store, I stayed busy.  If I had no customers, I swept the floor.  If the floor was clean, I re-stocked the bags, and if there was an elderly woman, pregnant woman or a woman with small children, I made sure their groceries were taken out for them.  It was a matter of personal pride.  In a grocery store in China, you will find at least three people working on every aisle and not one of them knows where anything is and you will have to beg them to help you. Probably not the kind of spirited employees you'd like on your team, huh? Redefining “a good employee” and getting your employees to embrace that philosophy is only your first battle for project unity. Your other battle will be fought with the very disunified government offices. The saying “don't let the right hand know what the left hand is doing” seems to be the motto that government offices in China have adopted. The best example I can give you of this just happened while I was writing this article. One of my employees came in to tell me that the bank where he usually goes to pay our quarterly taxes has changed. The person at the government office didn't tell them when they filed their report. They found out by traveling to the usual bank, waiting in line for over an hour, then having the bank teller tell them. The government office that handles taxes for our area changed banks without letting anybody know!

Thirdly, even though the Chinese knot is beautiful at first glance, its complexity is a picture of the kind of maze of issues that businesses have to deal with when trying to establish a successful venture in China. As you start down that one path, pictured with the one piece of rope, you will face a myriad of twists and turns and ups and downs. This complexity correlates with the Chinese mentality. Whereas we Americans have adopted a “straight-line logic”, “give me results”, “I want it yesterday” type of thinking, the Chinese will guide you mentally through all kinds of twists and turns so that you never really see their true intentions.

Finally, FEAR NOT!! Because, while being a foreign businessman in China has been likened to swimming with sharks, ChinaBizSuccess is committed to keeping you shark-proof. For many years, the failure of businesses in China has been mainly caused by unilateralism. Each business has tried to strike out on their own to make sure that nobody else got a piece of the pie. At ChinaBizSuccess, we know that there is plenty of pie to go around.  We are busy building a network of business people, just like you, and an information storehouse to equip you with what you need to gain that elusive, albeit realistic, edge to come away from the table with a profit…and your sanity.

But as in all partnerships, there will be change. We, at ChinaBizSuccess, don't want to give you the necessary information for success in China that is only useful for today. We have the unique ability, with our staff of American and Asian editors and writers, to keep you abreast of the political, cultural, and economic landscape changes in China, as they happen.

So, ChinaBizSuccess offers you, our readers, a Zhong Guo Jie (Chinese Knot), in the truest sense of its meaning.

-Bobby
ChinaBizSuccess.com Co-Editor
President- Top Translation, China

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Twenty Days in China
Introduction

    We scanned the faces of individuals and took in every nuance of the scene as we walked down Chang An Jie, Beijing’s equivalent of Washington, DC’s Pennsylvania Avenue. The crisp fall morning mixed with the fragrances of tens of thousands of freshly potted flowers and the beautifully manicured gardens created a very pleasant atmosphere.
    For the first part of the morning the scene was too massive and overwhelming      to take in individual elements. Gradually we were able to focus in on the faces of the people. At first they all appeared similar, with slightly rounded faces, a different eye shape but not nearly as ‘slanted’ as the prevailing image of the Chinese in Western countries. I don’t know at what point I began to distinguish individual differences. But, as we proceeded on our walk, I gradually began to see that the crowds of people really represented a number of distinct, different ethnic groups. We learned that because of the huge events in coming days that people from all over China were converging on Beijing.
    The majority of the people out this day were young and middle aged.  Mixed among them were aged, senior citizens. The young people were animated but they mostly cast their glance aside as we passed them. Their fresh faces and purposeful walk bespoke individuals with a lot to do in a short period of time. Every young person seemed fit without any excess weight. Some of them may have been Olympic athletes. All of them had cell phones and many were using them as they walked along apparently describing the scene they were witnessing. I imagined that some of them may have been telling their friends about the only American couple they saw as we marched along with them.
    From time to time off to the side sitting beneath a tree or in a quiet corner we saw young lovers entranced in sweet exchanges. Like young lovers everywhere, they were oblivious to their surroundings and had entered a quiet place with room for only two. The strange familiarity of these scenes was comforting.
    Frequently we would come upon two young girls walking along arm in arm. In China this is not an indicator of sexual preference but the normal demonstration of affection shown to one’s closest friend or companion. At first it was unusual but, as we saw this all over China, we began to expect and enjoy seeing such public show of affection. Innocent displays like this are so uncommon in other cultures. Perhaps we are more paranoid because of our distrust for the intentions of others. How sad it is that people cannot feel more at ease with one another.
    One group was clearly unique and I was told that they were from Inner Mongolia. Inner Mongolia is the People’s Republic of China’s oldest autonomous region. These people were, for the most part, shorter in stature from many of the other groups that we saw. They moved in unison as they followed the lead of their group captain. Nothing got in the way of them moving as one giant mass.
    Another group was made of military veterans who, as such groups the world over, appeared confident and in charge as they wove their way through the crowds. They were easily spotted in their red caps, walking along waving their red flags.
    Elderly people were escorted by groups of family members. While these groups were smaller than some previously mentioned, they were clearly protective of one another and watchful to the needs of the older members of the family. I don’t recall seeing any older ones in wheelchairs or using walking canes. Although older ones may have only been in their late 40s or 50s, many had the grizzled look of people used to a difficult past. The really older grandparents were watched over with great respect and attention. But, they all were capable of keeping up with the pace of the group.
    These family groups seemed to take more notice of us than any other. Several times we noticed that they were mesmerized by our every move. But, they didn’t approach us and we were too new to the culture to understand, at this point, the correct courtesies. We just continued to watch and learn. However, we never failed to smile which is, after all, a universal language.
    When we saw platoons of soldiers marching, they all looked as if they had been cloned. They were all taller that the average population and uniformly fit and very trim. Clearly, the soldiers were chosen and trained to be a very elite group. Only occasionally would I catch one glancing at my wife and me but with no expression or emotion evident.
    Endless waves of Chinese tourists, officials, and young people moved along the twenty foot wide sidewalk. The broad boulevard was filled with cars, bicycles and pedestrians. It seemed all of China was heading irresistibly toward a destination that we had only seen on news reports. Policemen, soldiers and security kept an ever watchful eye on the entire scene passing before them. Occasionally, I would catch a glimpse of one gazing our way. Even in this year before the 2008 Olympics, a six foot tall American and a blond wife would stand out. We took pictures and I even got one guard to pose with my wife. It almost looked as if he wanted to smile. Except for that little nagging thought when you know someone is watching you, we were filled with wonder as we continued to walk toward our goal.

-Ron Firmin 
(ChinaBizSuccess.com Contributor)
www.ronfirmin.com

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In China, Meals Take the Place of Meeting Rooms and Whiteboards

Every culture seems to do business around meals. However, the Western idea and the Chinese idea about what makes a successful business dinner could hardly be any different. While a shrewd American businessman will drink cautiously or forego drinking entirely until business is complete, every Chinese person feels that business goes more smoothly if everyone is a little bit tipsy. Sounds pretty incompatible so far, but it gets even more so. While Americans like to sit down and get right to business, thinking that work comes before pleasure, Chinese like to linger over dinner making small talk and complimenting each other- only doing business after everyone is relaxed and (remember what we said above?) just a little bit tipsy. But you don’t have to let different customs intimidate you. By following a few do’s and don’ts, you can make a good impression on your hosts and lay a good foundation for future business endeavors.

Things to avoid: First, do not go immediately to your seat at the dinner table. Wait until someone seats you and then invite the number one guy on the Chinese side- make sure you find out who that is- to sit down beside you. Where people sit is a big deal to the Chinese. The basic rule is that the guest of honor will sit facing the doorway, and then seating will trickle down from there. You don’t have to know the pecking order of everyone present- they will figure that out-but they will make a big deal over it. Just watch it and enjoy.

Second, do not immediately begin to discuss business once the food is ordered. While we put business ahead of pleasure, the Chinese prefer to do business after everyone is relaxed and full. The Chinese might expect a Westerner to go straight to business, but they will be more at ease if you enjoy your meal first.

Third, do not be afraid to ask for a fork or spoon to eat with. Chinese understand that you may not know how to use chopsticks. At the same time, it would bode well for you to practice using chopsticks before you make your trip. Any effort you can make to understand and participate in their culture and customs will be appreciated by them.

Last, do not “make your plate” like you would if you were eating a western meal. Chinese meals consist of many dishes placed in the center of the table (sort of like a western dinner table), but each person takes only the little bit they can hold with their own chopsticks and places it into their bowl. Chopsticks don’t pick up very much so a person has to reach for the serving bowls over and over again. Many Americans will get frustrated trying to use chopsticks or get tired of having to reach into the serving bowls so often. Because of this frustration, many people will then resort to scooping large amounts of food from the available dishes and putting it into their rice bowl. This is considered very rude (akin to gluttony) in the Chinese culture. The best thing to do is to pick and eat as best you can and then, if you don’t get enough to eat, grab a Big Mac or Snickers after the meal when you are alone.

Things to do: First, make sure that you always bring a gift with you to meals and meetings, even if it’s just a bag of fruit or snacks. Just don’t come empty handed.

Second, make sure that you have studied up on the local cuisine and can make some suggestions if you’re asked what you would like to eat. Chinese are very proud of their culture. Your knowledge of their local food will impress them and give them face, but it also helps you to have some control over what is put on the table. Note that each province and sometimes even each town has its own unique dishes that it is known for. Make sure your research is specific to the area you will be visiting. Remember that it’s very important to your Chinese host that you enjoy your meal. If you have a pioneering palate and aren’t afraid to dig into unknown dishes, you’ll put your host at ease and give him face.

Third, make sure that you are ready for the toasting that accompanies a business dinner. I don’t drink alcohol and that’s not a problem with them, but I always fill my cup with something and toast away. Make sure you don’t just lift your glass and listen to their toasts, but be ready with a toast of your own (even if you have to use an interpreter) that praises your host, the meal, the city and the venture you are about to undertake.

Fourth, make sure you don’t get in a hurry. Take your time over the meal. Even the size of the bowls used for dinner and the design of the chopsticks is an indicator of how slowly your host plans for you to eat. Take your time, participate in the conversation, and be genuinely interested in all that your host has to say. Two or three hours to eat dinner might seem like a waste of time to your efficient Western mind, but it is two hours well spent to cement your relationship with your new associates.

Last, make sure that you take care of the bill for some of the meals. Paying the bill can be an event in and of itself. Most of the time, when the bill arrives it will seem that a fight is about to ensue over the privilege of getting to pay. By your second or third meal (but certainly not the first) you should try to join in with this jostling as best you can. However, if jostling doesn’t fit your personality, here’s an inside secret from us guys who live and work in China 

Act like you are going to the restroom, stop by the cashier’s desk, and pay the bill before it ever makes it to the table. If you have an interpreter with you, explain to your interpreter before the meal that you would like to take care of the bill, give them money to cover the cost, and instruct your interpreter to take care of the payment without being noticed. This will surprise your host and give them a good impression of your forethought and resourcefulness. Never let your new partner take care of all the costs of meals, hotels, and travel because this will put you in a place of indebtedness, and, in Chinese culture, that’s the last place you want to be!

-Bobby 4/08
ChinaBizSuccess.com Co-Editor

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Negotiating with the Chinese

My business travels in China allowed me the opportunity to meet many different U.S. buyers from Costco, Wal-Mart, Danaher, GE, and others. The one thing we always had in common was the style of negotiating that we used to optimize the best price from a Chinese supplier. Although there are many books and articles that discuss the art of negotiation and elaborate on what makes a great negotiator, the bottom line is that there are only a few basic negotiation styles: Symbiosis, Predation, and Power Negotiations. The Symbiosis negotiator believes that mutual agreements are reached by being inventive, collaborative, and persistent in searching for substantial joint gains and the creation of value – the win-win game. Predation negotiators believe that the negotiation process is a tough bargaining process in which neither participant cares about the needs of the other - the hardball game. Power Negotiators believe in winning the negotiation but leaving the other person feeling like he or she has won. When dealing with the Chinese, an American that can master the art of Power Negotiation as well as understand the basics about “saving face” in the Chinese culture will close many a lucrative deal. With the help of Roger Dawson’s book The Secrets of Power Negotiations[1], this article will parallel some of the basic elements of Power Negotiations and the Chinese cultural ideal of “saving face”. We want our subscribers at China Biz Success to have the material needed to get the best deals from their Chinese suppliers.

Key Points of Power Negotiations
 
1. Always ask for more than you expect to get 
This is a basic principle for anyone buying or selling. Dawson advises that the less you know about who you are up against, the higher your initial position should be. Dawson calls this your Maximum Plausible Position (MPP), that is, the most you can ask for and still appear credible. The Chinese are all about “wheeling and dealing” prices. Anywhere you go and everything you see is negotiable in China. The Chinese expect to haggle to create value and “save face” against the opposition. Henry Kissinger once said, “Effectiveness at the negotiation table depends upon overstating demands.” Make sure that you overstate your demands.

2. Never say yes to the first offer
This bit of advice is incredibly difficult for first time buyers in China. In most cases the first offer is extremely attractive so the novice negotiator will commit prematurely ending the negotiations. According to Dawson, committing to the first offer triggers two negative thoughts in your counterpart’s mind: (1) “I could have done better”, and (2) “Something must be wrong”. Both of these thoughts will cause your Chinese supplier to “lose face”. Thus, jeopardizing ongoing business relationships. Remember, the Chinese are born to haggle and must “save face” by thinking that they have won the negotiations. If the first offer is too good to refuse, refuse it. Then give the Chinese another chance to quote. This can be done by asking the Chinese supplier if that is the best he can do or by asking him for more time to think about his quote. In my personal experience there were many cases in which I received the first round of quotes and asked the China supplier to give me some time to run the numbers past my superiors to see if the quotes were in line with the budget. By doing this, I caused the supplier to wait (an element of time), introduced the budget (an element of control), and entered a third party, my superiors, to the negotiations (an element of approval). Also the traditional “good cop, bad cop” scenario was set up. I was the good cop and my superiors were the bad cops. When I replied in this fashion I would always receive lower prices on the second round of negotiations.

3. Use the “Vise Technique”
Dawson advices that the best phrase (the Vise) you can learn to use in negotiations is “You’ll have to do better than that”. I use the Vise with Chinese suppliers when I have done my homework and know the Chinese cost of material and labor content. Remember that material pricing is level playing ground on the international markets, so, know your product content. Next, know your content of labor. You can estimate about $0.35 an hour for skilled Chinese labor. Add about 25% on top of labor and material cost for SG&A (Sells, General, and Administrative) expenses and you will have a good target price.

4. Don’t split the difference
When your negotiations drag out and you are ready to split the difference in price just to get things going – Don’t. Let your Chinese counterpart make that suggestion in order for him to “save face” and feel as if he is controlling the negotiation, taking the negotiations out of deadlock. Don’t let pride stand in your way of letting your Chinese supplier win the negotiations. At the end of the day the winner is the one who walks away with most profits. Getting the Chinese supplier to offer the split may take some coaching or nudging on your part. Dawson recommends pointing out how long you have been negotiating and how small an amount is keeping the two parties apart. The Chinese people are stubborn; be prepared to wait, or even to walk away for a short period of time. Nothing baffles the Chinese more than stalling in the middle of a negotiation.

5. Understand Chinese tension and remove it
American tension during negotiations usually begins with body language or facial expressions easily identified as a nervous reaction to a point made or an issue challenged. The Chinese, on the other hand, do not express tension with the same mannerisms. Chinese nervousness is usually made public by giggling or subtle laughter. When your Chinese counterpart starts giggling under pressure on a negotiation point, stop and recognize his discomfort, and use this as an opportunity to “save face” for your Chinese counterpart by relaxing his stress. Change the subject immediately and move away from the touchy issue. Make your change in direction obvious and forthwith. This will communicate your desire to “save face” for your counterpart and avoid his embarrassment while placing you in a favorable position to balance the negotiations. This can result in your Chinese counterpart feeling indebted to you for your kindness.

6. Make time your ally
Dawson reveals what he calls the 80/20 rule in negotiations. That is, 80% of the concessions are made in the last 20% of the time available. If you know that your counterpart is restricted by time, then learn to stall and hold the significant points of negotiation until the last hour. Keep in mind that Chinese are 7,000 miles away, have no time zones, are on average 12 hours ahead, and like to eat lunch on time. As the buyer, schedule your negotiation meetings around 10:00 AM China time. This equates to approximately 9:00 PM EST, 8:00 PM CST, 7:00 PM MST, and 6:00 PM PST. Have a sense of urgency to end your day and push the negotiations through lunch. Just remember that this tactic works best for significant negotiations or first time suppliers. Using this tactic over and over again on the same supplier, however, will result in the Chinese ordering lunch in and a long night of negotiations for you.

7. Develop walk away power 
According to Dawson, being able to walk away is your most powerful weapon in negotiations. When dealing with the Chinese I recommend that you walk away intentionally leaving the negotiation door cracked with a ray of hope shining through. Keep in mind that you want the Chinese to think that he has won the negotiation and has “saved face” with his Chinese superiors and co-workers. Prepare to walk away, intentionally giving your Chinese counterpart time to digest the risk of losing the deal. Then allow your Chinese counterpart to bring you back to the table to continue the negotiations. No matter how bad you want the cost saving from your Chinese counterpart, your Chinese counterpart wants your American dollar even more. Make them sweat; let them think that they are losing the deal; keep them on their toes.

8. Seek out guanxi opportunities 
Another tactic that works well in negotiating with the Chinese is to identify the decision maker in the group and gently ask him to separate and talk one on one. Explain to the decision maker that you needed time to “clear your head”. In Chinese culture this is simply an opportunity to refocus and relax. The decision maker will understand and respect your decision. In addition, you now have the opportunity to build a relationship. I recommend that you avoid discussing the negotiations; such discussion would be considered a rude tactic. Simply take the opportunity to build a relationship that could prove a value in the future.

9. Learn the culture not the language 
Most business man think that learning the language of their foreign counterpart will provide a great advantage in negotiations. Although learning the language may flatter your Chinese counterpart or help you order a meal, it will not help to win at the negotiation table. I recommend that you learn the Chinese culture, behavior, gestures, and body language. Force your counterpart to speak English or better yet use a translator; let the language barrier work to your advantage. During negotiations, I watched the body language of my counterpart as the translator delivered my message and then planned my next point. When the translator delivered my counterpart’s response, I over exaggerated my expressions, setting up my next point for delivery. In many negotiations, my translator delivered the concession that I was looking for but I responded disappointed or frustrated only to receive a lower concession from the Chinese supplier.

-James 4/08
ChinaBizSuccess.com Co-Editor

[1] Roger Dawson’s The Secrets of Power Negotiations is available online at Amazon.com

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Respect in Relation to Face

One tax bureau clerk in China was responsible to supervise different companies’ finances. For this article, we will call them Company A and Company B. Company A’s accountant was highly educated and influenced by the western culture and philosophy during her college years. Because of this, she regarded government officials as public servants. She believed that since she paid taxes that those who worked in the government should naturally provide the best service possible. Because of her Western approach, her relationship with the tax bureau clerk was strained to say the least. The clerk didn’t say much to the accountant, but she informed other clerks that Company A’s accountant was arrogant. So, when Company A’s accountant was going through the daunting procedures required in China, she was only given small bits of information and left to find out the exact details on her own. This worsened the relationship and caused trivial conflicts to often occur.

On the other hand, Company B’s accountant was very cordial to the clerk and showed respect for her position. Every time the clerk finished a procedure for her, she would show gratitude, as if the clerk was doing her a special favor. Company B’s accountant also showed sympathy towards the clerk’s hard work, even though the clerk’s work was not really that hard. This gave the clerk face and left her feeling that she was respected. Because of Company B’s accountant’s approach, the clerk gave her clear instructions, even some inside advice, regarding the procedures the accountant had to go through. 

Later, Company B’s accountant made a serious mistake in her financial report. The tax bureau clerk gave her specific instructions on how to fix the problem and even went to bat for the accountant by contacting other government offices concerning the problems. In the end, Company B had the problem taken care of without any financial loss or penalties.

Company A’s accountant made a similar but much smaller mistake. She went to ask the clerk questions concerning how to fix the problem. The clerk was reluctant and impatient to assist. A quarrel ensued because the accountant believed it was the clerk’s responsibility to help her out. Of course, this made the situation worse. The accountant was now in a bind and had no way to fix the problem without the help of the clerk or someone with influence inside the department. In the end, Company A was levied with a large fine for the small mistake the accountant made.

This example shows that under the same rules, personal feelings, which are based on relationship, can lead to very different results in China.

In the Chinese culture, we consider rules more as a way to bring us benefits and conveniences. We have a saying: “The rules are dead, but man is alive.” This indicates that the execution of the rules is largely based on the executor. In other words, the effects of the same rule on different people vary greatly from one case to another.

How do you gain as much as possible and avoid trouble as much as possible under Chinese law? The answer is to develop a good relationship with the executor(s) of the rule. In China, a moderate and modest attitude, gratitude, and proper respect shown to the executor of rules are the keys to developing good relationships. These strong relationships will lead to smoother business operations in the short and long term.

When we Chinese talk about a rule, it is considered as a general suggestion rather than a specific requirement. In the above example, the tax bureau has a lot of flexibility in examining and “punishing” the two companies because of their tax problems. Here, personal feelings are playing a key role as they almost always do in China. Company A’s accountant might have been arrogant or prideful while dealing with the clerk, and the accountant might not have actually broken any rules at all. But because of her attitude, there was no relationship developed between the two. So, when the time came that Company A’s accountant was in a bind, the clerk was the determining factor regarding the solution between the two companies’ financial problems. Due to Company B’s accountant’s good relationship with her, she helped company B by using rules that favored a quick resolution to the problem. These rules may relieve or even remove the tax problem, within the flexibility of her position. But regarding Company A, the clerk acted as if there was no other solution but to pay the penalties. In some situations, the clerk might even have used some regulations to make the problem worse.

In the Chinese culture, respect is closely related to face. Instead of making a clear line between right or wrong, we emphasize harmony and a delicate balance. Respect shown is most often returned. We look more to the human relationship to solve the problem than the rules concerning the situation. As long as the person we are dealing with thinks that he is given enough face, which he considers respect, he will reward you as much as possible within or even beyond the rules.

-Younger 4/08
ChinaBizSuccess.com Asia Editor

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ChinaBizSuccess Case Study

A large shopping mall was set up in April, 2007 in Beijing, China. It was a joint venture between a foreign owned company that’ll we’ll call Company T and a large Mainland Chinese company that we’ll call Company C. Both companies’ financial background was very strong, and it seemed that the shopping mall’s business would surely take off. But, it was not long before conflicts between Company T and Company C ensued. In August of 07, the president of Company C, who is also president of the shopping mall, claimed that the administrative staff from Company T was embezzling money from capital that was allocated to construct the shopping mall. Later, several Chinese government officials paid a visit to the shopping mall financial department and confiscated all of the contracts and financial records. Actually, one month before this happened, there were some signs that things were starting to go bad. At the company board meeting in July, representatives from Company C required that Company T show all financial records. After reviewing the records, they brought to light “problems” regarding the expense and income shares between the two companies. They especially pointed out that Company T was spending too much money on the construction of the department store. They also hinted that staff from Company T might be involved in embezzlement and bribery. Leaders from Company T only saw that as a misunderstanding and tried to clarify the situation, hoping that more communication would solve the problem. Leaders from Company C did not give a response to Company T’s explanations.

At the same time, the President of Company C sent people to report to the government authority that the general manager of the shopping mall, who worked for Company T, was involved in embezzlement and divulging national secrets. Shortly thereafter, the general manager (from Company T) was temporarily forbidden to return to attend Company T’s meetings in his own country. Other officials in the shopping mall, who were appointed by Company T, were also removed from their positions. Company C appointed new leaders to fill these positions.

This news was reported in Company T’s home country and drew attention from both governments. The Chinese authorities blamed Company T’s general manager for his imprudence in dealing with such a delicate situation. Later, the general manager was allowed to return to his home country.

The shopping mall was formed by Company C and Company T each holding 50% of the company totaling 750 million RMB ($102 million US). The problem was that while Company C was fiscally sound, it was more importantly politically backed. In name, it is a public company, but in actuality, it is tightly controlled and even in some ways financed by some government authorities. In this way, Company C’s president had the upper hand with his very tight relationships within those government offices.

So, this is our case study and predicament. What could have been done to prevent this situation?

First, the 50/50 share agreement was not favorable to Company T or any company when doing business in a foreign country. Second, before it had developed a working knowledge of the situation in China, Company T should have avoided co-operating with such a company as Company C. A little research would have given them insight into who was backing and controlling the company, i.e. the government. In managerial practices and philosophy, there were too many differences between the two companies which endangered their co-operation. The shopping mall was set up in a key city in China where government officials of different levels are involved in the businesses. This complex relationship network was overwhelming to the managerial staff from Company T. It is not surprising that Company C’s President acted the way he did, because he has a close relationship with many authorities who actually had a vested interest in the business. So, whenever there was a conflict, it was impossible for Company T to get a fair shake.

Usually, it is very easy for the Chinese partner to know all the activities of the foreign partner in a joint venture in China. Therefore, once the foreign partner makes a mistake or has a problem, it will be taken advantage of by their Chinese partner. Therefore, in a joint venture, it is always safer for the foreign partner to hold at least 2/3 ownership. In this way, the foreign partner controls the administrative positions in the company.

Because of China’s gigantic market, many foreign companies are willing to invest in China, and they will usually enjoy a lot of privileges or special treatment. For example, in some places, the local police will temporarily block the traffic for potential investors as they travel through the city. At the onset of establishing the shopping mall in Beijing, the local government temporarily set up a special office to handle all of the registration procedures. This impressed Company T, and they had no doubt about Company C’s strong relationships within the local government. But, as they were enjoying this convenience, they forgot that while a strong relationship could bring them benefits, it could also bring them harm as well.

The different managerial and operating philosophies between the two companies made the situation worse. First, the shopping mall’s general manger from Company T was too assertive at the onset of the operation. He adopted the American style that emphasizes efficiency, which is quite opposite to Company C’s “style”. Also, Company T’s general manager’s dominating approach made the President of Company C feel as if he were only playing a minor role and thus making him feel as if he were losing face.

In this example, the foreign partner made a mistake that most foreign investors make. That is, they almost always only focus on the market in mainland China and how they want to strive to promote the business as quickly as possible. They usually pay little attention to the mentality and customs of the Chinese partner and the importance of human relationships among the local people. When there is a conflict, their attention is on the business itself instead of the relationship, so the lack of communication and personal respect accelerates the conflict.

At this time, a temporary compromise has been reached between Company C and Company T. Former leaders from Company T will retake their positions in the shopping mall. Some people believe that if Company T will fight back, they can receive compensation for the difficulties they have been through. But, twenty years of personal Chinese business experience tells me that fighting back isn’t the solution to this situation, and here’s why.

First, there was a meeting scheduled to hash out all of these problems. Company C’s President refused to attend the meeting and sent a subordinate instead. This was obviously humiliating to Company T. Because of this, no one will take Company C seriously. Can Company C’s President and Company T’s general manager co-operate in the future? My answer is NO. In addition, what has happened in the past will also damage Company T’s general manager’s authority in the future operation of the company.

Second, Company C had already removed all of Company T’s managerial staff from the shopping mall, and appointed their own staff to take over these positions. Since the compromise was made allowing Company T’s administrative staff to retake their positions, the people from Company C, who took these positions, will have to “return” them. This will surely influence the working morale on both sides.

Third, the President of Company C hasn’t gone anywhere. He is still there scheming and plotting behind the scenes. The only thing that has changed since the compromise is that Company T’s staff has received their positions again.

Actually, there have been other similar cases in which a foreign investor could do nothing but surrender to this system of doing business. One thing to note is that as long as those investors do not make the case an international sensation, the Chinese authorities will not take it seriously, and usually the case will end without any actual settlement.

Here is my suggestion concerning the investment in the shopping mall in China. If the foreign partner wants to set up a joint venture, he should hold the majority in the company, and it should begin on a small scale so that he can gradually understand the Chinese laws, customs and mentality. If any disagreements arise, the two companies should resort to the arbitration committee. This committee has people from other countries and is relatively open to the public. In this way, the foreign investor can partly avoid there being too much of the Chinese side’s relationship influencing the conflict resolution process.

Actually, investors can now open totally foreign-owned department stores in China, as well as many other kinds of business. This can avoid a lot of unnecessary conflicts. Even if the investor does need to have a Chinese partner, it is suggested that he not find one in the department store field. Otherwise, the managerial and operational differences will result in conflicts. The foreign investor should find his Chinese partner in a field like real estate, which may help in reducing the cost of finding a building, land or even construction.

The way that the above case study will probably end is that Company C will demand 51% of the company or threaten to pull out of the cooperation with Company T. So, the only way this can end good for Company T is to get all of its investment and interest back over the next few years. If they can do that, they should consider themselves lucky.

-Jack  4/08
ChinaBizSuccess.com Asia Editor

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