Comment on The Other Side of the Wall

Einar Tangen is a former Milwaukee business executive who now lives in Beijing, China, where he advises the Heilongjiang Province on its technology valuations and acquisitions. Tangen previously served as the chairman of Wisconsin’s International Trade Council and is a former advisor to KOTRA (the Korean Government’s Direct Foreign Investment Recruitment Agency). I've never met him, but I enjoy reading his columns in the BizTimes.com - the web site of a very good business periodical covering Milwaukee and Southeastern Wisconsin.

His advice below is very valuable, although a bit overly negative I think. Maybe it's my optimism, but I don't sense as much distrust of other business people and disdain for rules as he describes. However, he has much more experience in this regard. Overall it's a very good article and highlights why it's important to have someone on your side that has experience in China.



A view from the other side of the Wall

By Einar Tangen , for SBT

Published December 12, 2008
Dispatch from China

The Chinese domestic market is brutal. Your average Chinese SME is locked in a hand-to-hand, day-by-day battle for survival. Any successes they create risk being copied by their competitors within months, and from there, the number of competitors will grow exponentially until a once lucrative innovation is nothing more than a commodity.

The local competition will do anything and everything to get ahead, reverse engineer products, bribe and/or steal employees, interfere with your credit and government relations.

They will go after their competitors’ IP, suppliers, customers and distribution systems. Or, in other words, it’s just like everywhere else in the world but, due to the number of competitors, a little more so.

The irony is that many Westerners like to point to Chinese business attitudes as flawed, immature and immoral without recognizing the impact that the West has had on Chinese attitudes toward business.

In the West, as our markets matured we created systems which were designed for efficiency. They required more transparency and cooperation between businesses, which were part of the same supply stream, predicated on the idea that “I take care of you and you take care of me.” That philosophy went out the window as companies pursued cheaper sources overseas as a way of adding to the bottom line.

However, what was once a competitive advantage becomes a competitive necessity when a critical mass of your competitors starts using the same sourcing strategy. This process has touched off an ongoing race to develop cheaper sourcing which has jumpstarted economies like China and India.

Still, the consequences for companies who were part of this process in China and India have not been universally beneficial. Initial profit lines for Chinese companies were eroded by stiff competition from other local companies, and those who were not able to see the sourcing tide moving away became casualties.

These companies have learned the hard way that the magical, long-term, mutually beneficial relationship is often a myth. In Shenzhen, more than 10,000 businesses have gone bankrupt this year as lower labor costs and lax environmental enforcement has drawn business elsewhere. Even when these firms were running full tilt, they were pitted against each other in merciless cost wars instigated by foreign corporations. So, while the United States has preached a “win/win” ideology, both at home and abroad, the truth has been that it was always all about the Benjamins.

In addition, in China, due to the rapid political, social and economic changes of the last 60 years, the individual’s sense of stability and faith in the system is still developing, and the future is not certain. At this point, in the midst of an economic meltdown, the only thing that is clear is that the ideological practices of capitalist and socialist systems have blurred and that a clearly defined ideological path has not emerged.

Here is some gratuitous advice if you choose to do business in China:

Trust

When Chinese SMEs deals with other Chinese SMEs, it can be like a cobra approaching a porcupine. Each side endeavors to learn as much about the other’s strengths and weakness without disclosing their own. In the initial conversation between the companies the bosses will hint/brag about powerful connections and performance capabilities. If things progress, the employees take the field and shape the deal points as directed. Like playing Mahjong, each player is out for themselves, even if everyone is smiling while they play. Do not expect to be treated any differently just because you are a foreigner. In fact, you should be aware that they have even less reason to trust you. So do not be surprised that most Chinese businesses and people are highly secretive and distrustful. It’s not you, it’s just standard operating procedure.

Values

In China, to be caught and disgraced is unlucky, stupid or both. Under our Judaea Christian values, right and wrong are based on collective ideals which are enforced though the individual’s sense of guilt and (if religious) ultimate punishment. In China, 5,000 years of culture and philosophy has resulted in a more pragmatic view of human nature which, while it emphasizes family values and obligation, views war and business as competitions with no rules.

Truth

For the Chinese, truth is knowledge, knowledge is power and you do not give power to a stranger who could be a potential enemy nor do you expect them to give it to you. It is an outlook on life right out of Sun Tzu’s the Art of War. Rather than trying to figure out the “truth,” plan on verifying everything every time. You may never know the truth, but you will at least have a good chance of getting what you bargained for.

The law

China’s legal system has been developed over the last 30 years. Marrying capitalist mechanics to socialist controls has been difficult. There are many grey areas, and the legal infrastructure is immature. In addition, Chinese companies lack experience using legal means to solve disputes. In the past, the outcomes of a legal dispute were more about connections than right and wrong, but as judges are faced with stiff penalties for misconduct and the dockets fill up, a judicial economic model is evolving that puts more emphasis on the contracts and documents and a little less on who is involved.

Cooperation

Given the history and the current circumstances, Chinese businesses will probably only embrace those practices that create competitive advantages for them.

Ideology

Western companies should keep in mind that a missionary sense of ideological zeal is less useful than a hard look at the local conditions and norms when developing opportunities.

Conclusion

The difference is less about how we compete than the cultural outlook we espouse and the systems we have developed. The truth is that human nature – good, bad and indifferent – is fairly universal. The difference is how it plays out in different sociopolitical economic situations.

Cultural Stereotyping II

I may have been a little strong in my comments on my last entry. Balancing ones expectations and tactics is probably better than nearly ignoring cultural differences. I do believe most bloggers and advice givers focus too much on cultural stereotypes when suggesting how to work with or negotiate with Chinese people. However, there are some differences to keep in mind.

For example, it is true that decisions happen slowly in China and are more often made by groups. Also, social interaction to build relationships is more important to Chinese business people than to Americans.

There are differences in the perception of some ethical issues (intellectual property piracy is one example), but generally there are good and bad actors in China just like there were in the US at a similar stage of development.

People are people, but cultural background does have an impact on how different people respond to situations. Balancing your understanding and perception is what I suggest.

Cultural Stereotyping

It seems several China-related blogs have recently written about negotiating tactics, interest in quality, or other business-related cultural stereotypes of Chinese people. Maybe the new milk quality issues are triggering this new wave of generaliztions.

Although there are cultural differences between Americans and Chinese people, the stereotypes are almost useless in individual interactions. Chinese people don't act one way in a negotiation or related to product quality any more than Americans. While it may be somewhat helpful to be aware of cultural differences while negotiating, my experience has been that the principles of establishing trust and understanding the other person's position far outweigh any perceived cultural tendancies.

I do sometimes catch myself referring to Chinese factories like they are one entity. Afterwards I usually reflect on how inaccurate my comments were. There are the same range of quality options in China that there are in the USA. There are high quality factories there just like there are here. It is a developing country, so the range of factories may tend to have more low-end factories than we have here, but there is no "Chinese quality" or "Chinese negotiating tactic".

Beware of Americans that claim to know how Chinese people "are" and how you should deal with them. These people likely have a pretty narrow view of the world and business. I advise keeping an open mind and judging people (Americans and Chinese alike) on their actions, not what you have heard about their culture.

Top Ten Pitfalls to Avoid in Chinese Outsourcing - #10 Not Understanding Cultural Differences

I've done a presentation twice on the top ten pitfalls companies make when trying to outsource to China. I'll post this list over the next ten posts.

#10 - Not Understanding Cultural Differences

There are three key phrases to keep in mind when outsourcing to China. They are:

Sure, sure... - This is taken to mean by the US visitors as agreement or commitment that a product or process is available at the factory. In reality it means "I understand", as does a head nod.

No News is Good News... - This is relevant when your order will not ship until a few weeks later than planned and the factory does not let you know. It also is relevant when changes to raw materials are made but not communicated to the buyer.

Good enough... - Chinese companies have a reputation for shipping products that are "good enough" in their opinion, but not at all acceptable when they are received by their US buyers.

In all three cases, good relationships and clear specifications and requirements are key to avoiding this pitfall.

Also keep in mind that "face" is a huge issue in China. Losing and gaining "face" are a big deal. Essentially "face" is your standing in the eyes of others. Embarrassing situations result in loss of face.

Decisions are also made less by individuals and more by groups in China. This often results in slower decision making.

Finally, when negotiating, keep in mind these key phrases from The Art of War by Sun Tzu from 400 B.C.
­"All warfare is based on deception.“
­"Pretend inferiority and encourage his arrogance.“
­"Draw them in with prospect of gain, take them by confusion"

The best advice to avoid this pitfall is to educate yourself by reading as much as possible about Chinese culture and being sensitive to the differences. Also, be friendly, open, and cautious as you learn for yourself how to successfully work with the Chinese. The learning process is a great, fun adventure.