China Guanxi: Be Afraid. Be Very Afraid.
Diligence China just did an excellent post, entitled, "Myth Bustin' Friday: What is Guanxi, Really?" listing ten things to know about guanxi. My favorite:
Beware of westerners who over-use the phrase. They may very well be in the process of being screwed over without knowing it. Be careful of partners and job applicants who over-use it, as well. This might be their only strength.
Of my law firm's clients, it seems that those who never use the word guanxi have a China success rate of about ten times those who do. This is not because having good relationships in China is not important -- it most emphatically is. Rather, it is because having good business relationships is important everywhere, not just in China, and those who use the word guanxi seem to use it as an excuse for abandoning common business sense. As in, "why did you send them $500,000 without a written contract?" Answer: "guanxi."
Diligence China concludes his post with the following "verdict" on guanxi:
If you are planning to set up a long-term operation in China, of course you should cultivate important connections and a network of useful connections. (The same is true if you are setting up a long term operation in Amsterdam, Newark, Sydney or anywhere else.) If you are buying a container of stuffed animals or bathroom fixtures, your time would be better spent inspecting the goods and negotiating solid sales agreements. Discussions about guanxi mean a lot more after the right goods are delivered on time at the right price. Too often, though, guanxi-talk is used to keep you from taking appropriate precautions and insisting on adequate protection.
Guanxi still appears in the lexicon of Chinese commerce, but it is on the way down. The more guanxi gets referenced the more careful you should be.
Readit.
Comments (12)
Read through and enter the discussion by using the form at the endRich Brubaker - October 15, 2006 9:35 PM
For more on Guanxi, check out All Roads. A Shameless plug I know, but I have 2 posts up right now and a third coming out Friday that are solely devoted to relationships in China, how to build them, why they are important, and how they are changing.
www.allroadsleadtochina.com
Paul at Modern Management Worldwide - October 16, 2006 12:03 AM
I have had experience of the over-use of quoting guanxi. My staff and I have interviewed many many Chinese entrepreneurs that tell us that they have an investmentment-worthy project not because it has a unique selling point, a highly motivated team or a great market. Rather the entrepreneur has a strong case because he has "good government connections".
None of these entrepreneurs have as yet to my knowledge received venture funding so I guess it doesn't impress invetors too much.
David - October 16, 2006 7:08 AM
Beware, also, of consultancies that promise "public affairs" or "government relations" assistance, but under the hood are really trying to sell you on the value of their guanxi.
This does not merely apply to smaller local operations - there are an embarassing number of white-shoe lobbying/law firms based in Brussels, London, and Washington whose primary value in their China office is a former government official or a princeling.
There is an old saying about the guy who had a hammer, and thus saw every problem as a nail. Anybody pitching guanxi as a cure to your ills or as a bridge into China is definitely selling snake oil.
China Law Blog - October 16, 2006 7:30 AM
Rich --
Thanks for checking in.
China Law Blog - October 16, 2006 7:32 AM
Paul --
Thanks for checking in. Smart investors.
Unfortunately, I have far too often heard small businesses doing business internationally brag about their partner's "connections" to explain a deal that appears to make no sense.
China Law Blog - October 16, 2006 7:38 AM
David --
Thanks for checking in. I have always loved the hammer adage, so much in fact, that my law firm uses it on its website at "THE RIGHT TOOL FOR THE RIGHT JOB. An old adage says that if you were a hammer, you would tend to treat everything like a nail. Unfortunately, that adage applies to some law firms; they develop a reputation for success with one legal tool, be it litigation or mediation or something entirely different. They use that tool for every problem, often at their client's expense."
So I completely agree. I have a good sized client who says that if any of his attorneys ever put a picture on their wall of them shaking hands with any politician, he will fire them. He says at that point he will know they are more interested in making a name for themselves than in serving their clients.
Or, to put it another way, how do you expect your lawyer's releationship with President Hu Jintao to help your mid-sized company sell product in China.
Of course, it is a very different story if your company actually needs governmental lobbying.
Joseph Wang - October 16, 2006 8:39 AM
Guanxi really isn't that different from the relationship building that happens on Wall Street or in Washington DC.
Also there are a lot of times when you don't want to use a relationship (either in Wall Street or in Beijing). If you ask for a favor, you are now in debt, which you will have to find a way of repaying.
There are some people you just do not want to be in debt to.
Kent Kedl - October 16, 2006 2:21 PM
It used to be that guanxi was both a necessary AND a sufficient condition for doing business in China: you often needed ONLY guanxi (and not a good product, service, price, etc.) to get something done.
But things are changing in China. Today, guanxi is a necessary but NOT sufficient condition: you need good guanxi but you ALSO need a product and/or service that is appropriately positioned and priced for the market and is distributed through the right channels. Doing the research and spending time understanding the market YOURSELF is difficult work (particularly in China) and too many westerners would rather (blindly) trust something they call "guanxi" to do it for them. This is not guan-xi...it is stupid-ity!
China Law Blog - October 16, 2006 5:07 PM
Mr. Wang --
Thanks for checking in. There is guanxi and there is guanxi. I completely agree with you regarding guanxi as commonly (and properly) defined in China. Problem is that westerners have tended to re-define it (or mis-define) it so as to add on a patina of corruption to it. Guanxi in China covers a whole lot more than the government, but westerners often seem to ignore that as well.
China Law Blog - October 16, 2006 5:09 PM
Mr. Kedl --
Thanks for checking in. I agree with you completely if by guanxi you mean a good relationship with those with whom you are dealing.
Romain Guerel (French working in Beijing) - November 15, 2006 8:22 PM
I use to read everyday your blog but I missed this post.
Fifteen months, one of the wealthiest French private investor wishing to do some real estate investors came to me for advise. I explained to him that in China everything is possible but nothing is easy. I told him to be careful with the Foreign and Chinese people who pretend that they can help him because they have good connections. Unfortunately, he didn't listen. Now, I heard that he was defrauded of 2 million EUROS by a supposed well introduced Chinese. The guy promised him to help to get governmental approval to buy a big piece of land in a prime location. The Chinese suddenly disappeared with the money.
What annoys me the most is: 1/ he surrounded himself with a bunch of unprofessional Foreigners and Chinese; 2/ he went back to France informing his wealthy friends, he has been cheated and that his friends shall not invest in any case into the Chinese market.
French investors have such a misconception of China that it is somehow more difficult to work with them than with Chinese businessmen.
China Law Blog - November 15, 2006 11:18 PM
Monsieur Guerel --
Merci beaucoup pour venir.
I wish your story were unusual, but we know it is not. Everyone acts as though only Americans can be so naive in China, so to a certain extent it is good to hear the French are no different. I just got back from a seminar at which one of the speakers (Steve Ganster) said that there are so many good written and human resources on China now there is no excuse for going in naively. Your guy had no excuse other than greed, arrogance, and an unwillingness to pay for good advice.