The Diligence China Blog recently did a helpful post entitled “Look to the Future of China, Not Just Its Past:  Success in China Will Come From Its Future Not Its History.” [link no longer exists]

I agree.

This post says too much ink is devoted to comparing “traditional Chinese methods” with “Western methods” of doing business:

The airport newsstand best-sellers and glossy news weeklies are packed with admonishments to ‘preserve face’ and ‘build relationships’ as though all Western business travelers were Ming-dynasty emissaries waiting for a high-ranking eunuch to take our message to the Inner Court. Local Chinese writers have jumped on the bandwagon, poking fun at the clueless westerners blundering towards failure in China because they don’t understand the local culture.

The post goes on to point out that multinational corporations in China are doing great by doing business there the same way they do business everywhere else:

Western MNCs [Multinational Companies] are doing well here, because this is what they do. They are multinational. They adjust to new cultures and new environments. Their brand power in China has been growing fast and deep. They hire the best local talent, pay the highest salaries, and invest the most. They have no culture, no beliefs, and no predispositions. They are machines.

It then posits that China’s business culture is changing so fast and becoming so dominated by the young that “no one understands it”:

Traditional Chinese culture is changing so fast that NO ONE understands it. I teach marketing in Shanghai, and most of my students tend to be professionals between the ages of 25 and 35. These people are far more sophisticated about brands than I could ever hope to be. Yet each and every one of them considers themselves to be traditional Chinese (or at least Shanghainese). They have very little in common with the previous generation of government employees and bureaucrats who were the models for recent how-to-get-rich-in- China punditry.

Diligence China admits knowing Chinese history can help gauge where China is going, but asserts that a knowledge of emerging market trends is even more valuable.

I agree with Diligence China, though I think it exaggerates a bit to make the point.  Knowing Chinese history and culture can be a definite plus, particularly in negotiating.  I blogged on this issue a few weeks ago in a post “imaginatively” entitled, “Negotiating in China.”  I also think that knowing Chinese history and culture can sometimes aid in predicting China’s government policies, which in turn can impact business.  In the “The Real Deal on China,” I talked of how the Chinese government’s current and historical relationship to its rural citizenry would prevent it from floating the Yuan.

But Diligence China is right to stress the here and now in dealing with China, not its past.  If I were asked to predict who is more likely to succeed in doing business with China between the person who knows China’s history and culture and the person who knows business as it is conducted there today — or even just business in general — I would pick the businessperson every time.  Knowledge of history and culture are a plus, but knowing business is the core.

Indeed, one of the most common mistakes I have seen among western businesspeople is believing that things in China are as they were five or even three years ago.  The following are the four most frequent mistakes I see western businesspeople making in their China business by basing their decisions on what was rather than on what is:

1.  Going into China as a Joint Venture.  Half the calls to my firm about starting up business in China begin with the caller saying “we want your help forming a joint venture in China.”  My stock response to that is always, “why are you interested in going in as a joint venture?”  Nine times out of ten, the response is that some other company did it that way and that company seems to be doing well in China or that they thought going into China as a joint venture was the only way.  China’s laws and ways of doing business have changed markedly in the last few years. Joint ventures are no longer usually required and they seldom make sense.  For more on the benefits of going in to China as a Wholly Foreign Owned Entity (WFOE) instead of as a Joint Venture (JV), check out these previous posts entitled,  “China WFOE v. JV,” “When in China, Don’t Get Screwed — The Movie,” and “The Decentralization Of China For SMEs.”

2.  Forming a Hong Kong Company to go into China.  Old ways die hard here as well and the reasons I am usually given by those who want to form a Hong Kong company is that “so and so did it.”  There are instances where forming a Hong Kong company makes sense, but in most cases, doing so does nothing more than increase your legal fees and your operational costs.

3.  Being enamored with the Chinese government.  In an article I wrote around ten years ago called “Four Essential Principles of Emerging Market Success,”  I listed as Principle One “A Good Partner is the sine qua non of Success. (I apologize for the Latin — I was a lot younger when I wrote this article.):

So what should you look for in a local partner? Political connections? Yes and no. Yes, because you probably will need someone with sufficient dexterity to maneuver around often-suffocating business laws and a bureaucracy that may try to cut in on your business at every turn.

No, if you think that is all you will need. Just as in the West, the politically connected are usually more a “government type” than a business person. Partnering with someone in an emerging country with whom you would never consider partnering back home is a mistake.

Political clout in emerging market countries is often more effective for avoiding legal responsibility for something like a debt than it is in generating business revenues. I have seen countless instances where a foreign company partners with someone because he “is tight with the governor,” only to see the business crushed by the new governor as part of his house cleaning. The best partner is politically connected only to the extent necessary for business success.

My additional years of experience since writing this article have led me to conclude that the best businesspeople tend to seek to rid themselves of governmental interference and those who welcome it do so as a substitute for business skills.  If you want to do business with a hard charging, dynamic, forward thinking business in China, your chances of finding that within the private sector are better than finding it within the government.  I touched on this briefly in “The Real Deal on China” post:

I have had many discussions with Chinese elites (lawyers and MBA graduates) on the issue of China’s state owned companies and, virtually without exception, they would all concur with Maidment.  They view China’s state owned entities as generally inefficient, poorly run, corrupt, and non-competitive.

China’s growth is coming from its private sector.  Its state owned companies (SOEs) are in a state of steady decline.  If you go to a local government and ask them about companies in a particular industry with whom you should be doing business, they will probably refer you to a state owned company.  There are two reasons for this.  The first is that the people doing the referring are in the government. The second is that there is a good chance the state owned entity to which you are being referred is in trouble and you are being referred to that company because it needs business to pay its employees.

4.  Thinking the law in China is irrelevant.  When I hear this statement, it is usually followed by either, so “what’s the point of having a good contract” or “why should I bother registering my intellectual property (IP)?”

China does enforce well drafted contracts written in Chinese.  Will you win your contract case in a Chinese court every time you should win?  Of course not.  But will you be a lot better off if something goes wrong and you have a written contract instead of none at all?  Of course you will.

China also is becoming better at enforcing intellectual property rights, particularly trademarks.  For more on this, see “Qingdao Court Rules In Favor Of Starbucks In Landmark Chinese Trademark Case” and “Qingdao Court Rules In Favor Of Starbucks In Landmark Chinese Trademark Case (Part II),”on the recent court decision finding for Starbucks in a trademark case and yesterday’s post, “China Courts Are Widening Their Intellectual Property (IP) Enforcement Nets,” on a very favorable trademark decision for five western luxury goods makers.

Knowledge of Chinese history and culture is an asset for doing business in China.  However, because circumstances in China change so quickly, staying abreast of China’s current situation is far more important than knowing its past.  Successful businesses in China usually emphasize knowing their own businesses inside and out first, understanding China today second, and China’s history and culture third.

Bottom Line:  Do for your business what makes sense in China today, not what might have made sense for some other company years ago.

  • I agree with most of what you say. I think that knowing about the past of China and having a good perception of the present are both important. China at present is the second largest consumer of fossil fuel and the largest oil importer after the USA. So, the importance of China will grow in the wold market.
    One important thing about China to me is the potential market of rural areas. This is one area we have to observe a lot in the coming years.

  • Mr. Ahmed — I agree with you on the potential of China’s rural markets is huge, particularly in light of the new five year plan’s emphasis on trying to make things better in the villages. I also agree with you that doing business in and with China’s more rural areas will be very different from doing business in the coastal cities. At this point, most foreign companies are understandably reticent about going into the hinterlands.

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  • Doug

    I like how you balance the extremes. Those on one side would argue that localization is everything while those on the MNC side can point to emerging global trends, modernization, and the influx of Western
    “culture” as the chief sign that Chinese culture is itself unimportant. I think there are many roads to success (and failure) and though one must study the current trends, there are interesting ways the Chinese refuse to become American, at least not yet.

  • Doug — Thanks for checking in. I agree with you in that I would never claim that Chinese culture is unimportant to doing business in China or to claim that China will eventually be Westernized or just like the West

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  • homer

    To Mr. Ahmed, Cina law blog
    Peopels Republic of China = Country with 9 million km*2 (a same like european continent (and in mean whole european continent). population around 200-300 millions more as european population.
    nope.. it doesnt shoke or surprise me if China has such big influence in the global economics..

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