Archive for Chinese Business Culture

China needs home-grown entrepreneurs.

Posted in Business Culture in China, Macroeconomics with tags , , , , on February 10, 2015 by Ben Brown
Chongqing at night

Chongqing at night

The changing economy of the People’s Republic fascinates me.

I remember about five years ago I told a friend of mine I that China’s government would soon be forced to create policy enforcing IP laws and creating an environment more conducive to small businesses, entrepreneurial endeavors, creativity and innovation. I told him my suspicion was that we could look to Chinese banking systems to see when these types of changes were most likely to take effect. I said that in a few years China’s export manufacturing industry would mature. Its growth rate would slow. The booming real estate industry would also outpace the rate of qualified buyers entering the city. Furthermore, a lot of China’s real estate boom has been helped by subsidies in the form of instant property value: unlike the rest of the world, many Chinese in their 50s and above were given houses by the government. When the developer comes to negotiate with the homeowner they offer either cash or a new home. A successful family that had already turned their old communist-era apartment into a rental property and bought their own place could take the cash and buy a car, invest in stocks, buy a home for their children, etc. Nobody had to pay back home loans.

Just by looking around Chongqing, I would guess that the majority of those old apartment blocks have now been torn down. There are still people who own loan-free property but the apartments are fairly new and offers to buy a whole complex by a prospective developer are becoming increasingly sparse. Unsurprisingly, the lack of loan-free equity lying around that supplemented the construction boom has successfully slowed prices even in a city like Chongqing, whose GDP grew at 13% in 2013, making it the fastest-growing city in China.

Export manufacturing has also slowed. This was to be expected. As costs along the accessible coast have risen, low-cost manufacturing jobs have either moved inland or to other neighboring countries like Vietnam.

China still needs growth. The leadership generally looks at GDP, which is not always the best indicator of a stable economy. However, I still think it’s reasonable to argue that in order to have an economy large enough to support a population 5 times the size of the US, China needs a national GDP equal to at least 3 times the size of ours.

In order to grow that large with export manufacturing and real estate both slowing down, China will need to support a more entrepreneurial domestic economy. I currently teach English to the children of China’s wealthy. I regularly ask them to pretend they are a member of the standing committee and tell me what changes to policy they would enact in order to create a more innovative and creative economy that eventually will be able to compete on an even playing field with the west. It takes them awhile, but generally they come down to entrepreneurialism without too much prodding or hinting.

Five years ago I said we’d see Chinese banks start offering more small business loans to Chinese general population as a start of the development of a more open, even playing field that would then lead to IP law enforcement. Instead we’re seeing policy changes opening up certain areas (Shanghai has a district like this) to low or tax-free zones for more and more businesses. The higher-ups are lowering regulations. But without access to funds, a private credit rating system, and assurances that Mr. Wang’s new invention won’t be stolen by the more connected Mr. Chen, we will not see the type of growth this country needs to beef up its domestic economy. Without that strengthening, I worry about how this country will continue to grow to a size and scope capable of supporting a solid middle class. But I remain hopeful I’ll see these things soon.

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Changing Dynamics of Chinese Acquisitions.

Posted in Uncategorized with tags , , , on January 17, 2015 by Ben Brown

Over the past 20 years I’ve been in and out of China as a student, a teacher, a business employee and soon the spouse of a business owner.

I’ve had some interesting experiences along the way. Today I want to discuss the importance of building mutual respect when merging two companies.

I found myself uniquely positioned a few years ago as the employee of a Chinese company that had purchased an American company. I attended high level meetings and watched as the company we bought struggled to respectfully listen to its new Chinese boss. The Chinese side of the table didn’t do much better. They felt they weren’t being respected enough (true) but also treated the purchased company as an asset whose management advice they could ignore because said management failed and had to sell. Had that management been respectful enough, I am confident this still would have happened.

Issues like this will continue to arise, as Chinese companies have made many acquisitions since the global recession in 2008:

China M&A Chart 20140117

Source: WSJ

There were many times in these meetings when the Chinese boss said “let’s be straightforward”. This was usually followed by a lot of very direct criticisms of the foreign company’s decisions. This only managed to ruffle foreign management’s feathers. Their responses were often reactionary. Not at first, mind you, but as time went on. Both sides spoke less and less as time passed. This is the opposite of what should have been happening.

Additionally, “straightforward” and “open” were two different things. I understand sometimes it’s best to keep some information private. But there were plans being executed in China that directly affected the foreign company that the foreign management wasn’t aware of. These plans were going to hinder the foreign company’s operations and bottom line if top management didn’t have an opportunity to form a game plan and give their input.

I know this also happens when companies from the same country merge, but the layers of cultural complexity make it even more challenging. Add to this a young Chinese company that has been very successful in its own market (in one protected industry with no foreign competition, in a booming economy) trying to go international in a different industry without the right experience or consultants, and you end up with one over-confident company handing down swagger-filled orders and ignoring feedback trying to manage a company that has a lot of experience but is no longer in control. It took very little time before both sides were spending time arguing over problems rather than trying to come up with solutions.

As a western-educated American working for a Chinese company, a lot of these problems quickly became clear to me. But my attempts to explain them to all but a few people on both sides of the table failed because by the time I figured out what was going on, things were beyond repair unless someone at a much higher level than me took action. One other man at my company, who was nearer to the top, attempted on multiple occasions to influence this issue and regularly recruited my assistance, but neither of us were ultimately successful.

When acquiring or being acquired by Chinese company, think carefully about this. Every other synergy on earth could exist, but if neither side understands how the other sees them, it won’t matter.

It’s a Culture Thing.

Posted in Business Culture in China, Cultural Observations. with tags , , , , on December 16, 2013 by Ben Brown

One of my colleagues awhile back noted that the biggest factor differentiating China and North America is immigration. My Chinese friends will often tell me they live in a multicultural society due to all the minority groups that live scattered across the country.

While there are sometimes large cultural differences between minority groups in China, I disagree that this puts my Chinese friends in a similar situation to the US or Canada, where over 90% of the people hail from ancestry tracing back to other parts of the world.

In order to have sanity in the US, we need to work hard on a daily basis to eliminate cultural favoritism in our laws and our society. American culture is in itself an oxymoron of sorts. Almost all of our culture and heritage hail from other parts of the world. New York Style pizza vs. Chicago Deep Dish? These both originate from Italy if you go back far enough. And going back doesn’t take long. Just three centuries ago there wasn’t much in America once you got a few hundred miles west of the Atlantic.

China has spent 5000 years developing an intricate, complex culture filled with minute details that everyone is expected to know. It’s much less forgiving than the US, where for the most part the culture is an amalgamation of every other country. Our general culture in business and politics is focused for the most part on eliminating cultural norms. When we negotiate, we do it on the table with paper and pen. Hash out the terms, do a SWOT analysis, discuss synergies and potential issues. Talk about a price for services rendered, have a bunch of lawyers look at the agreement terms and draw up a contract. We’re blunt and impersonal.

In China it’s much more important to understand the cultural complexities that surround you. The culture is such that I can lose face in a business meeting by simply failing to respond appropriately to a comment. A perfect example happened in Toronto a few months back. I was with my boss at a meeting between him and the head of a Chinese bank branch in Toronto. As we were heading down to the lobby in the elevator, I complemented the branch manager on having a very nice office. He immediately replied that the walls were too bare, the office too cold and undecorated. I told him it was unnecessary to have lots of decor in an office that had such a great view of downtown Toronto from every window. Everybody laughed and complemented me on my grasp of the culture and language. But had I said nothing, I would have left the bank branch manager with a sour taste in his mouth because I complemented him on his office, then he downplayed the complement by stating one of the office’s major weaknesses. Had I not responded with a reason for my initial complement that countered his self-criticism, my boss or somebody else would have either had to step in with something nice to say or they would have to apologize for the foreigner who didn’t understand.

This type of back-and-forth etiquette does not exist in the North American work place, unless you happen to be doing business with a Chinese owner who still adheres to those norms. You can get through these cultural differences and get things done, but it’s much harder to develop trust.

I’ve been studying this culture for two decades and spent around four years completely immersed in it, rarely speaking anything but Chinese. I am still learning. I will be for the rest of my life. But it’s a fun, interesting, sometimes horribly embarrassing challenge that I constantly learn from. And I am not just learning about Chinese culture. I’m learning about myself. I’m learning how to look at problems from multiple perspectives. I’m learning to understand what the real challenges are in a business transaction rather than what my own cultural background tells me.

The Power Struggle and Patriotism.

Posted in Business Culture in China, Cultural Observations., Doing Business with tags , , , , , on December 13, 2013 by Ben Brown

There is a constant theme that runs through acquisitions and joint venture projects, both successful and failed.

Mutual distrust / disrespect.

Beyond cultural differences, this can put a serious twist into your plans for a new business.

Many, many times, I’ve heard people say “We’re all interested in making a profit. Nothing else beyond that should matter. The bottom line is the bottom line. They are just as interested in making a profit as we are!”

This is all true, but it is inaccurate and too broad.

Everyone wants to make a profit, but how to go about doing that is often the challenge.

I’ve seen it over and over again with western acquisitions of Chinese companies, Chinese acquisitions of western companies, and joint venture agreements.

I don’t respect your opinion, and you don’t respect mine.

Both sides feel they know the best way of doing things, and both sides feel the other side is throwing a wrench directly into their plans. Both sides feel the other side doesn’t understand “how things are done here / in the world / at my company / in our corporate culture.

The biggest challenge, I think, right from the beginning of any merger, cooperative agreement, acquisition or even manufacturing contract, is to sort this out as clearly as possible. It is of utmost importance to get communication lines as open and blunt as humanly possible so that all parties can be clear on where they stand. In international environments, buy-in becomes even more important. Finding ways to develop mutual respect, an understanding of all the complexities the other side sees that you don’t, and a level of trust in your counterpart that they have something to contribute to this whole plan is vital, and regularly ignored.

Before you enter China, or go into a manufacturing agreement, or get in any other way involved in global business, do yourself a favor and learn as much as you can about that country’s business culture. Talk to not just me, but to a few people. Talk to anyone who is willing to give you their opinions. And like medical advice, get two opinions. At least. I’ve had people tell me it is impossible to open a business in China without bribing, gifts, and hazy books. I’ve had people tell me they’ve done just fine here cleanly. And I’ve heard every story in between.

But before you even get that far, make sure you can get your partner to agree with you, respect you, and trust you. And while you’re doing it, take a little time to realize you need to do the exact same thing. A perfect example would be this:

As Americans, most of us are very opinionated about the subject of politics. We are also very passionate about our country and the freedoms it affords us. We love the USA. Sometimes our version of love is constant, scathing criticism, but it is still a form of love. Possibly the deepest form of love.

We come to a country like China, with a completely different political alignment, and many of us naturally assume the businessmen and women we’re here to work with are oppressed and suffering under the thumb of their overbearing government, OR that they’re a part of that government and just looking for another handout.

In 99% of all cases, this is not true. This is a stereotype created in part by the news (liberal and conservative alike). It’s not a conspiracy. It’s just that news reports in the US will focus on what we as Americans consider valuable.

China’s value systems are different from our own. Every time somebody goes nuts in the US and guns down people, I hear about it from confused but patriotic taxi drivers. It took me a number of years (and international incidents between our two countries) before it finally dawned on me that most of the Chinese people I deal with on a daily basis love their government. Look where their grandparents were 4 decades ago. Now look where this country is now. Complaining about the social construct and government structure in China to someone who now owns their own home and car and has a good job will sound ludicrous to most of them. Sure, some of them would like more freedoms, but so would most of my American friends. And so would I. That doesn’t mean we’re not patriotic.

I am a passionate, blue-blooded (whatever that means) American. I love my country. I am somewhat conservative fiscally but very liberal socially. I love middle-of-the-road politics where we all reach across the isle and get along. I am bound to have some sort of divisive opinion no matter which social clan I find myself interacting with. But I love my country.

Start your conversations with a Chinese businessperson assuming the same is true for them and it’ll come across in your conversations and your actions. They will notice it. They will respect the gesture, and they will in most cases reciprocate.

The Meeting Dynamic.

Posted in Business Culture in China, Cultural Observations., Doing Business with tags , , , , , , , on December 13, 2013 by Ben Brown

There is an interesting phenomenon in Chinese business meetings that always ruffles the feathers of my background in operations management, specifically as it relates to efficiency.

China has more of one thing than anywhere else in the world: People. It has always been a large country.

China likes to show off its people. Over the years I’ve been party to many meetings in China.

In the West, a high-level business meeting between two parties will include, generally, people who need to be there. Maybe there will be one person who is there to learn, but everyone else has some sort of role.

Chinese meetings are different. There will often be five, six or more people representing each company at a meeting where really, only three or at most four people will do any talking. Some of the others at the meeting may be there to advise the leaders afterwards. Generally though, there are a lot of people there who are really just ‘filler’. Sometimes I’ve gotten to be there as an adviser. Occasionally I’ve been one of the guys doing the talking. Most of the time, I take notes nobody will ever ask me about and discreetly look up the occasional Chinese word or phrase I didn’t understand. It’s a good opportunity to write down tasks I might need to take care of by the end of the day.

It’s important to show a lot of people at these meetings to either display that you are powerful, or to show respect to a government organization that might be unhappy to be greeted with only two or three people representing the business.

It’s just another example of how many cultural differences there are between doing business here and conducting the same transaction in the west.

In North America specifically, we strive to eliminate cultural aspects of doing business and make everything about the agreement on the table. People can say any crazy thing they want in a meeting, as long as it ends with a clearly-stated contract that delineates every last item of business loophole free.

In China, I get many compliments on how much I’ve learned about Chinese culture and how well I handle situations. Still, I make about two cultural mistakes during a good week. I’m usually given a bit of leeway because I’m a foreigner, which I appreciate greatly. This culture is very complex. I’ve seen locals that make more mistakes than I do. Sea Turtles returning from ten or more years abroad bring a refreshing sense of openness to a lot of meetings, but many also find themselves stumbling to re-balance after being gone for so long. There are simply a lot of rules to remember.

Awhile back, at a previous company, I had the privilege of attending a meeting between a Chinese company and an American company. They had formed a joint venture. The Americans were visiting Chongqing. One of them noted to me that when the Chinese had come to the US, they brought six people over. The Americans on this trip consisted of the Managing Director and the project manager.

The Chinese side had 10 people.

But the real difference was the power dynamic. On the Chinese side, the guy that did 99% of the talking was the leader. Everyone else sat quietly for the most part. The organization on a whole was obviously very top-down. On the US side, there were lots of side-bar discussions going on between the two lonely guys sitting there and they would interrupt each other as they tried to clarify points to the Chinese counterparts.

This reflects a difference not just in presentation but in cultural approach, collective vs. individual decision-making processes, and separation of authority. I’m an American. Personally, I prefer the collective approach to doing business. I like to be able to make my input in meetings. I like to speak up without being asked to. It takes a great deal of restraint for me to remain silent as complicated discussions take place. In fact, I’ve made it a habit since arriving in China to make sure I’ve saved up enough free cash from any new job so that I can afford six months of unemployment before I start saying much in meetings. This usually also forces me to get established somewhere so that my comments don’t come off as abrasive. It also takes a lot of effort to not be overbearing. As Americans, one of our favorite pastimes in a business environment is to tell people what we think. Especially if we completely disagree with an approach being taken by leadership. In China, it’s not possible to raise your voice and express opinions without being first asked to do so. It’s even more inappropriate to say something contradictory to the leadership.

The irony, of course, is that western businessmen coming to China to conduct business may think everything is going just fine at first. This is because it’s also generally not considered appropriate to tell anyone that they’re stepping on cultural toes.

A few years ago when I was living in the States, I regularly heard businessmen coming back from some of their first trips to China say “I don’t know why everyone talks about the culture being so different over there. I went over and had no problems. Business is business. Just get the deal done and you’ll be fine.”

When I would bump into them again a year later, the story would be different. It would be a lot of “My Chinese counterpart is destroying our business because he’s not listening to me, he’s not doing what I told him to do, blah blah…” If I’m feeling like having an argument, I tell the person that maybe, just maybe, they should learn to communicate a little better from a culturally-competent perspective so that they can actually move forward instead of simply barking orders and complaining that everything is being done improperly. Most of the time, though, I wait for the other shoe to drop. I ask them how their last trip to China was aside from the meeting. Their responses are usually negative. They complain about a lot of things being different. Basically, they’re starting to notice that the culture is totally different from their own, and they’re trying to change things.

That’s absolutely impossible.

The only thing that can be changed is you. Changing the way you deliver the message can make the message itself more digestible to the guy sitting across form you with nine silent subordinates. When I’m in China, I have the benefit of seeing the differences between the culture I’m in and the culture I came from. I’ve lived here long enough to have my eyes opened a bit. It’s my responsibility to see those differences and adapt my approach to everything so that it fits into my counterpart’s cultural comfort zone.

Entering China’s Domestic Market.

Posted in Business Culture in China, Doing Business with tags , , , , , , on December 11, 2013 by Ben Brown

Yesterday I posted a section on when to enter China’s market. Today I’m going to post an overview on how to do it.

There are a number of ways one can get into this market. You can form a partnership with someone over here who will help you set up shop and sell your wares, you can find a local PR company to help you display your brand appropriately, you can start your own independent shop and go it alone, you can find a distributor and simply export your product to someone who will put it on shelves for you, you can find an exporter in your home country who has experience sending products similar to yours over to China, or you can even find some people who will start out just selling your stuff on taobao.com (picture the giant child of ebay and amazon).

The steps to market entry in China are similar to what they would be in any other market:

1. Market research. Know what the market looks like. Is there competition locally? Is there competition from abroad already? Is there a demand for your product? What is the potential size of your customer base here? What do the demographics of your customer base look like? (Chengdu is famous for people relaxing with a hot beverage. Starbucks, to a foreigner, looked like an easy slam dunk in this market). Does another product different from yours exist that replaces the need for your product? (Chengdu has a lot of tea houses. It’s famous for it. I’m pretty sure the number of Starbucks drinkers is affected by this). Does the customer have any need for your product? (Nobody in China, except for the few “Sea Turtles” who got their degrees in the west, feels a dire need to start their day with a cup of joe). Will customers need to be taught to use your product? (The only way to increase dairy sales in China is to actually convince people to start eating western food at home from time to time).

2. Market entry vehicle. How are you going to get here? Should you go it alone and open your shop? Should you find a professional retailer? Should you go with a distributor? An exporter from your home territory?

3. Branding strategy. How are you going to present your brand in this market? Should you do things largely the same? (McDonald’s) Or should you completely change around your product design and presentation to meet the needs of your new market demographic? (KFC’s menu is at least 50% different from its menu selections in the States). Are you a luxury item in China where you’re a commodity in the US? (Harley Davidson) How are you going to market yourself? Traditionally? Online? Guerrilla? What will hit your target market most effectively?

4. Pricing. You may be manufacturing your goods in China already. This doesn’t mean you need to pass the savings on to your customer. If you price your goods too low it is possible they will be perceived as “for the lower-income buyer” when you’re targeting your product to a higher, more visible and savvy customer. The customer you’re chasing may not pay $50USD for a pair of shoes if the other shoes targeting your customers are selling for $250USD, even if you could easily make a profit at that level. Ironically, if you hit the luxury market or semi-luxury market here you’ll sell more of your product than you could at a much lower price, because at $50USD per

5. Find the process. How are you going to enter? What steps do you need to take? How much are you willing to risk up front?

6. Find the people. Who are you going to partner with? How will you develop a relationship and monitor progression of your business?

7. Pull the trigger.

Depending on your business, these may not be all of the steps. Different actions needd to be taken for different businesses. I also haven’t gotten into the regulatory side of things, since that varies drastically by what you’re selling and how you’re selling it. But basically, the structure and process are similar to anywhere else. Is there a market? What does it look like? How do I get in? How do I sell? Can I make a profit? Who do I work with? What are the taxes? Are there any major road blocks that will prevent this from happening?

The next post will be on high level business meetings in Private Chinese corporations.

When should you enter China’s domestic market? (NOW! You might already be too late…)

Posted in Business Culture in China, Doing Business, Macroeconomics with tags , , , , on December 10, 2013 by Ben Brown

Natooke

Here’s what’s going on in China in one quick list of 11 items:

1. New guy in charge.
2. Export manufacturing cycle ending (they already make everything).
3. Need to develop stronger middle class.
4. Production costs increasing.
5. RMB steadily revaluing.
6. Service industry growing fast.
7. Consumers increasingly more savvy.
8. Local brands are weak.
9. Government hungry to add jobs and keep growth steady.
10. Economy still too small to support new graduates at stable, 2% GDP growth.
11. Major policy changes required (and being implemented) to attempt item 3.

Deng Xiaoping once said (I paraphrase heavily here): Poverty is not socialism, to be rich is glorious, some people will get rich first.

The rest of the country has been waiting, increasingly impatiently, to get rich second. China’s next phase of development needs to happen between now and 2024 to continue growing as fast as possible, which will keep the populous satisfied. It will need to focus on a new growth cycle.

In the 80s China worked on bringing farmers and the rural class out of abject poverty. They succeeded to a large scale. In the 90s and the past decade the country focused on FDI, and bringing technology and industry in. In the next decade they will start the painful, complicated process of staying away from the middle income trap. If they are successful, we will see a stable rise in middle-class incomes along with an increasingly higher-value RMB. Suddenly, foreign brands will be available to a higher percentage of people, and anyone who has either established brand recognition or is able to create a great marketing campaign will be able to take advantage of a rapidly growing market.

Developing markets are a lot like blue-ocean strategy opportunities. If you can get a brand in the door and make it popular, you’ll be able to enjoy a quickly-increasing market size. In China, all the conditions are primed. Especially as the interior continues to develop and play catch-up with the coastal cities. To a certain extent, this is what the US has been waiting for. For decades we’ve been buying things imported from China. In the next decade, we may finally be able to start exporting products to China, or to an increasing extent begin manufacturing them there for domestic sale in addition to shipping them back across the Pacific. There are plenty of investors here waiting for the chance to promote US brands in China, and that number too will grow.

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