David Wolf over at The Silicon Hutong blog is just out with a post riffing on the meaning of guanxi. It’s superb. The post is entitled, A Few Notes on Guanxi, and what it does better than anything I have seen to date, is accurately and concisely define guanxi. It is so good and so important, I feel I have no choice but to post it wholesale and suggest you read it at least twice:

First, to translate “guaxi” as simply “relationships” is a dangerous oversimplification, particularly when proffered to someone unfamiliar with Chinese culture. First, guanxi are tiered, based on a Confucian hierarchy: familial relationships, long-term friends, classmates, and schoolmates are the nearest ranks, and to those no stranger — Chinese or foreign — will ever have access. At best we [foreigners] are relegated to outer rings like colleague, in-law, business partner, or acquaintance. There are exceptions, like Sidney Rittenberg, but he is the rara avis that proves the rule.

Second, guanxi are personal and non-transferable, they are not enterprise. There is no way to hire someone and have him hand over his guanxi to the company. You want the guanxi, you keep the employee. That’s why China’s princelings, the offspring of senior Party cadres, have sinecure. Consultants who hawk guanxi are simply renting their relationships, they know it, and from such realities are retainers made.

Third, guanxi involve mutual obligation. If you use someone in your company with guanxi to get assistance from an official, there is an implicit quid pro-quo, hence … concerns about the coziness of guanxi and corruption. Further, few westerners understand that there are complex social obligations involved in such relationships, your average Chinese executive would sooner burn his employer than his close connections.

Fourth, guanxi die. Or get sacked. Or retire. Or get transferred. Or quit and go into business. They are ethereal, fleeting, and in constant need of regeneration, repair, and re-creation. They are not forever.

Fifth is the hammer-nail problem: the people your employee or partner knows may not be the exact right people to get things done, but that’s who they know, so that’s who they use. When that happens, watch the oversold connection drop the ball, or get smacked. I have watched it happen, and it is not pretty.

Or they may just limit you. I know of a western media company with no special unique advantage in the market that is doing well in exactly one province: the place they have guanxi. They’re happy with how they’re doing in that one province, but they have been utterly unable to scale their business: they’ve been hemmed in by their relationships.

Finally, it is worthwhile noting that guanxi today are of declining importance for most businesses. The scope of industries in which it is necessary to cultivate exclusive ties at a high level is declining over time.

Business fundamentals first, second, and third. Special relationships only to the extent necessary.

This is not a comprehensive discussion of guanxi, and I’ve simplified it with the sole goal of underscoring how misunderstood the concept is in the west. But it gives you an idea of why misunderstandings around guanxi are so common as to make the whole issue a litmus test of an individual’s level of understanding of Chinese business.

One nota bene that must be emphasized. While guanxi is taking a back seat to market fundamentals in many industries, and policy changes are drawing away the value even the best connections in others, there are some businesses in which it is absolutely essential to hire, retain, or otherwise acquire high-level influence. On that list I would include banking, investment banking, and infrastructure.

What do you think? 

UPDATE: China quality control guru, Renaud Anjoran, over at his Quality Inspection blog, has done a post on the value (or lack therof) of guanxi in the sourcing and QC arena. The post is entitled, “Why you should ignore guanxi in China,” and, according to Anjoran, those sourcing from China should focus more on “face” than guanxi. I agree.

UPDATE: China product sourcing guru, David Dayton, has joined the discussion with his post, “Guanxi, Tradeshows, Free Stuff and the China Law Blog. Dayton posits there being three types of guanxi and all are fine, so unless “used in a context where the legality of relationship comes into question.”

 

 

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Dan Harris

I am a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

I was named as one of only three Washington State Amazing Lawyers in International Law, I am AV rated by Martindale-Hubbell Law Directory (its highest rating), I am rated 10.0 by AVVO.com (its highest rating), and I am a SuperLawyer.

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog (www.chinalawblog.com). Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed me regarding various aspects of my international law practice.

I am licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at my firm, I focus on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.