4 posts tagged “culture”

Unlike interactions with our Western counterparts, which typically involve straightforward communication and the specific business at hand, the Chinese approach all relationships business and otherwise as a trust issue. This tradition comes from millenniums of relying on the individuals within one's social group--family, town, and/or city. The Chinese word describing this phenomena is guanxi. The English translation of guanxi is relationships, however, the true meaning of the phrase has a much deeper connotation. Guanxi not only encompasses the relationships with a social group but also the corresponding obligations associated with them.

Greg Bissky describes the inter-workings of the guanxi dynamic in the below videos from Youtube.com. The title of Mr. Bissky's book, Wearing Chinese Glasses: How (Not) to Go Broke in Chinese Asia, gives an accurate description of the attitude one must have going into business ventures in China. The western lenses through which Americans and Europeans use to view the Chinese culture create a significant blind spot making it much more likely to "go broke".

http://www.treasuremountain.com/

Building Trust goes on to describe the necessary steps to prevent the common mishaps associated with working with the Chinese and intellectual property. Not only does she cover the same issues of earning and re-earning trust again and again to establish a true guanxi, but she also discusses the fundamental differences the Chinese have about ideas which leads into the next discussion, The Joint Venture Paradox.

Many companies view the joint venture as the only way to enter into the Chinese market. Little do they know how Chinese businessmen and the Chinese government view these supposed 50/50 arrangements. After Deng Xiaoping opened up China's markets in 1978, foreign direct investment (FDI) began to flood into the country. By the 1990's, roughly 60% of FDI was in the form of joint-venture agreements. Today, that number has decreased to 40%. The twenty percent decrease can primarily be attributed to the failure and complexities of many joint-ventures. The Chinese government generally requires just over 50% control in these types of arrangements. According to Western thinking, this translates to approximately equal control of the business, revenues, and control. Quite the opposite is expected for most Chinese partners.

China's aforementioned sense of humiliation contributes heavily to the perceived dynamic of how the joint venture should operate. Although there is a strong desire to work with Western companies in order to acquire needed tech know how, the fear remains. As a result, a power struggle can emerge making the joint-venture difficult to operate. McGregor's example of Morgan Stanley joint venture in China, China International Capital Corporation (CICC), demonstrates the risks a firm takes when entering a foreign market. There is a lack of infrastructure and social institutions in order to properly support and handle the issues that arise. Not to mention, the strive for personal gain, corruption, and politics further muddies the picture. The West's view of China, as the next BIG market and the subsequent potential gains, has created such fervor to enter and enter NOW. Greed, many times, overrules common sense and appropriate due diligence. Morgan Stanley entered with this attitude as it wanted to be the first investment bank in China and gain all the associated first mover advantages. However, the outcome exposed the challenges of being a first mover. It was impossible to learn from others and avoid their mistakes.

The Carrefour article demonstrates the idiosyncrasies involved in working with Chinese partners. Jean-Luc Chereau comments on his experience in entering the Chinese market:

"...I started talking with one of our Chinese partners who had signed those contracts, and nothing seemed to be happening. Finally, my assistant told me, "Just because he signed a 20-year contract 2 years ago with your former boss—a person who is not you—does not mean he will respect the contract." That was a big shock to me; the contract was notarized and everything. But we started to renegotiate article by article. Five years later, during the Asian crisis, I invited this same partner to my office and said, "Just because I signed a contract with you does not mean I will respect it. We are in a crisis." So he said, "Fine," and we started to renegotiate, to reduce the rent."

The US legal system would run the Chinese partner through the ringer for violation of contract and sue until the company acquiesced or went bankrupt. In China, the legal system is not only not adequately prepared to undertake such a battle but also contracts are merely a starting point. As conditions change, everything is negotiable which again reiterates why relationship building is so important. Morgan Stanley learned this lesson in its CICC venture. As McGregor states: "China is not a legalistic society...If the Chinese want to do something, they find a way to skirt rules or laws." This notion refers back to the culture effect discussed earlier. The rules of the game are played differently in a shame-based society. Do whatever to be successful, but do not shame the family name or get caught.

Partnerships provide the necessary "in" into the market. They also give foreign companies a cultural road map and the grease to work within the paradigm of China's government and social institutions. Often the process is so different as well as the expectations on each side that both parties can or are sideswiped by reality. Ultimately, it is the relationship not the contractual piece of paper that holds ventures together.

The government's perceived role as judge, jury, and collaborator complicate business dealings even further. The CCP has two goals: to stay in power and to provide economic success so that it can stay in power. As a result, businesses must realize close relationships with officials are instruments to maintain the status quo. By "welcoming" joint-ventures, China is gaining unprecedented access to technology, know-how, and capital. All of which reinforce the CCP's role as benevolent dictator and economic driving miracle. While this arrangement will likely continue, as the gap between rich and poor and urban and rural widens, the CCP must be weary of their beloved proletariat (or peasants in China's case). Historically, dynasties fall when the power balance is tilted and the peasants become aggravated due to injustices. The unprecedented ability to move through the country and into one of six hundred plus unknown cities of 1 million plus will help to keep grievances at bay. The ability to move into an urban area allows for the possibility to earn well above the average annual peasant income of ~ 8000 yuan or roughly $1000. According to the Chinese Embassy's website (http://www.china-embassy.org/eng/xw/t268200.htm), as of August 2006, China's national per capita income reached $1740 or ~ 14000 yuan which represents an approximate 70% increase income just by moving to the city!

Joint-ventures and other FDI have in some ways fueled this wage increase by creating jobs in various sectors such as electronics, apparel, and other consumer products. A virtuous or not so virtuous circle (depending on one's viewpoint) is, therefore, continued. The government created an economically viable and prosperous environment; FDI continues growth in the environment; living standards are raised for all classes but at varying rates. All three are still forced to work within the guanxi paradigm governed by obligations and fake 50/50 arrangements.

McGregor discusses in "The Best Laid Plans" the power of the Chinese consumer. The czar of China's telecom industry, Wu Jichuan, had the best of intentions in creating a stable and well-planned communciations industry in China. However, even with his detailed plans and 5 year plans, Wu was unable to meet Chinese consumer needs. The inability to service their needs created a legitimate market for UTStarcom to enter and thrive. Wu Jichuan created a fundamentally monopolistic marketplace through his strategic planning of how telecommunications were to operate inside China.

Although it seems that Wu intended to ultimately open up the Chinese market to competition, his real goal was to not only bring communication to the far reaches of China but to do so without the interference of foreign firms. The fear, again, of foreigners using and abusing the Chinese market to their advantage without truly helping the Chinese people still runs deep. Consequently, after several rounds with AT&T, Bell Labs, and others, Wu fundamentally enabled the Chinese to acquire foreign technology without having a foreign "invasion" of their market through China Telecom. Wu Jichuan's success should not be understated. The ambitious goal of the five year plan from 1991-1995 was to increase the phone capacity from 10 million lines to 35.5 million lines. Wu Jichuan, instead, thoroughly exceeded this expectation by increasing the number of lines to 85 millions lines across the whole of China. His increased the communicative ability of 1 billion people by more than eight fold in the course of five years. The one caveat, however, is there is obviously still a wide discrepancy between 85 million and 1 billion.

This is where UTStarcom comes into the picture. UTStarcom was founded by two Chinese expats living in the States, Chauncey Shey and Wu Ying. The obvious massiveness of the Chinese market is/was enough to excite the most stiff CEOs. Shey and Ying realized 915 million Chinese still were without phone access. Wu Jichuan had certainly reached 8.5% of the market, but what about the 91.5% of the market that was blocked due to artificially high prices caused by the monopoly? Shey and Wu sought to create a solution to this obvious problem. Concurrently, the mobile market was begining to grow and take hold in the worldwide marketplace. Wu Jichuan attempted to belay the growth of the mobile network. Zhao Weichen, a longtime friend of Vice-Premier Zhu Rongji, however, worked through Unicom to manipulate the telecom environment to create China's mobile network and initially keep it from Wu Jichuan's uncompetitive domain. Ultimately, Wu Jichuan was named Minister of Information Industry which gave him de facto control over almost all types, forms, etc of communication. While he allowed Unicom to compete with China Mobile, his mobile spin off from China Telecom, the oligopolistic nature continued the artificially high prices and poor customer service in the mobile industry and China Telecom, as a monopoly, continued doing the same in the land line market.

UTStarcom took advantage of these inherent inadequacies and found a solution--the personal handyphone system (PHS) or "Little Smart". ("Little Smart" used a device that extended the parameters of cordless phone system. In the end, the cordless phones were able to shift between devices to create a neighborhood mobile network.) The solution, however, was frowned upon by most as it was an older technology AND it was not successful in Japan. (As a side note, the lack of success in Japan should be noted as one of the primary reasons Wu Jichuan found it undesirable. After the Japanese occupation, China continues to try and out do Japan.) UTStarcom sought to work within the paradigm of Wu Jichuan's machine and target the middle market. Mobile service and land line service was typically too expensive for the poor but feasible for the upper middle and upper classes. China's middle class, meanwhile, was left without an alternative. UTStarcom's PHS was defined as an extension of land line service. Therefore, it neither competed with China Telecom or the mobile industry. Wu Jichuan, therefore, could not necessarily regulate and control Chauncey Shey and Wu Ying's business albeit he tried through a technology review. UTStarcom was able to win over local officials with their value proposition which was hard to beat. It was simple: better, more reliable service at a less expensive rate.

Wu Jichuan, in the end, had to endorse UTStarcom due to its immense popularity despite his formulated plan for China's telecom industry. The Chinese consumer, in effect, won through a democratic process.

"Serving the New Chinese Consumer"

"The Formidable Market"

In a most generic sense, branding to the entire Chinese population is impossible. The illusion of a mass market of 1.5 billion is exactly that an illusion. The disparities between the citizens of major cities, 2nd tier cities, and rural areas create a situation in which firms need to decide which market they want to target. Buick made the mistake of marketing itself as a luxury brand and gained market share amongst the affluent. However, it subsequently lost share in high end and low end markets by manufacturing a less expensive and lesser quality version of the original. The wealthy did not want to be in the poor man's car; the poor man did not want to drive a falling apart vehicle.

"Building Brands In China" by Kevin Lane et al.

"Helping Build Chinese Brands" by Christopher Power

"Marketing to China's Hinterland" by Kevin Lane et al.