A week or so ago, John Garnaut wrote a piece for the Sydney Morning Herald, entitled, “Learning the art of greasing the wheels.” In that article, Garnaut sets out how to build guanxi through bribery, among other things, and be good at it:

The art of building “guanxi” and the rituals of giving and soliciting bribes are not always the same thing in China, but they often are.

One reason Rio Tinto’s Stern Hu is in jail is because he was no good at it. Only an amateur would receive a bag of cash and store it in his household safe.

The wheels of Chinese business and officialdom are usually greased by more experienced players. They know how to embed their favours within intricate, personalised guanxi performances, which break down the barriers to bribery, and also minimise the risks of being caught. They channel transactions through multiple layers and stretch them out over years.

The article then discusses “Hu Gang, who ran an auction house in Changsha” and the two “instruction manuals” he has written on how to bribe effectively, though Hu himself was eventually caught when a judge confessed to having taken bribes from Hu. Hu writes “fiction” but in one of his books, he talks of an auctioneer having cemented his relationship with a judge by “quietly arranging” for a famous calligrapher to tutor the judge’s son and then the auctioneer would auction off the judge’s son’s calligraphy at grossly inflated prices by having a friend bid for it. The auctioneer would then pay the judge in cash from the auction proceeds, with a suitable auction commission subtracted out. 

The article also discusses the research of Li Ling, a law lecturer at Northwest University in Xian and researcher at New York University, who has investigated dozens of first-person accounts:

The thing is half done once the gift is accepted’,” writes Li in the article ”Performing Bribery in China”, in the current edition of the Journal of Contemporary China.

Gifts need to demonstrate personalised care and ”sincerity” and this usually requires careful investigation of the target’s golfing, artistic, gambling or extra-marital hobbies. So China’s art auctions are hugely inflated by bribers paying officials for art works at multiples of the market price, its luxury golf courses are full of members who did not pay for membership, shopping centres are full of official’s relatives using shopping cards that were gifted to them and Macau is full of officials who do not pay for their gambling chips.

Choice of language is important, with a whole lexicon of euphemisms such as “doing guanxi” available in place of vulgar words such as “bribe”. Li writes that the art of guanxi can function as an “alternative operating mechanism” to break down the legal, moral and cognitive barriers to corrupt transactions. “Guanxi-practise is not only fuelling corruption, but it is a necessary and integral part of corruption in China,” she writes.

If at this point you actually foolishly belive that you, as a foreigner, are capable of pulling all of this off, I suggest you promptly read the post, “Private Suit Alleges China Bribes” at the FCPA Blog.

That post talks of a civil complaint recently filed in Indiana against Allison Transmission. The central claim in that case is that Allison executives paid bribes in China to win work there. Interestingly, the case is being brought by Stephen Lowe, an American who worked for Allison in Shanghai and is now claiming to have “witnessed cash payments, gifts of jewelry, and lavish parties for customers.” The post describes Allison’s main business in China as “selling bus transmissions to government-owned companies.” Lowe is suing under an Indiana state law that protects whistleblowers, alleging he was fired soon after complaining of Allison’s practices in China:

A few days after Lowe was fired, according to an account in the Indianaoplis Business Journal, he sent a letter to his former boss saying “you want to terminate me because I told you about one employee’s FCPA violations in China. You want to protect this employee and yourself.”

Lowe hired a Washington, D.C. labor-law firm to bring his suit in Indiana state court. The Indianapolis Business Journal said Lowe’s lawyer wouldn’t “say whether he lodged a complaint with the Justice Department. The federal agency would not confirm nor deny an investigation.”

Allison, the paper said, hasn’t yet filed an answer to the complaint. “We’re looking into the allegations but we can’t comment on the specifics of pending litigation,” a spokesperson said.

In my experience, the most likely person to turn your company in for wrong-doing is an ex-employer and the second most likely is an existing employee. Of the foreign companies that I have seen shut down in China for illegal activities (including operating in China without having a Chinese entity), I believe (though cannot prove) that in every single case, the government was alerted either by a former or an existing employee.

Former employees inform on their old companies because they are angry at them. Existing employees inform on their companies either because they are angry at them or because they want them shut down as they presently exist so that they can step in and turn them into a Chinese domestic business and start snaring the profits for themselves. 

All I can say is what I always say, which is that the bribery game in China is just not worth it.   

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.”

 

 

Our mission statement (which has been around since January, 2006) makes clear we will not shy away from controversy:

We will be challenging various misconceptions the West has about law in China, including that the law in China does not really matter or that guanxi can supplant it. We will help you figure out how you can use the law as both a shield and a sword. We will give insights to achieve practical solutions, while doing our best to entertain. We know lawyers are not popular, and though we are ourselves really quite likeable, we recognize the need to avoid those things that incite lawyer hatred. We will strive to avoid legal jargon and namby-pamby language that attempts to camouflage our views or to avoid controversy.

We want our blog to be a place for both conversation and controversy. We expect many of you will disagree with us much of the time and we are fine with that. We will always strive to avoid boring you or being unwilling to take a stand. We are not going to be afraid of being wrong—in fact, we want you to tell us when and how we are wrong. If you want “legalese” or long strings of caveats, you are going to have to pay exorbitant legal fees to get that elsewhere.

We have taken many strong positions over the years, but in some cases those positions have been at least somewhat misunderstood and this new (and irregular) series will aim to clean up misconceptions, starting with our position on Guanxi, on which we have done the following posts:

Our position is essentially that for the overwhelming majority of foreign companies doing business in China, guanxi is no substitute for needing to scrupulously abide by China’s laws.

A few years ago, co-blogger Steve Dickinson, wrote an article for China Business International, entitled, Debunking the Guanxi Myth, setting out the following reasons why relying on guanxi will almost invariably be a mistake for foreign businesses in or involved with China:

No foreigner can recreate a Chinese-style guanxi network. In China, guanxi refers to a vast network of connections arising from party, family and work connections that may go back several generations. No guanxi network relies on a single individual. The elimination of one member of the network is therefore not fatal. Foreigners almost always rely on only one or two individuals for their supposed connection. This kind of network is too fragile to be of enduring value. Foreign investors who think they have created a guanxi network in China are usually simply deluding themselves.

Connections with local government officials are short-term and can be abruptly terminated. Many foreign investors do not realize that government officials in China are regularly moved from office to office and from region to region. As a result, the connection with a local official is unlikely to be a long-term connection. It is quite common to negotiate a project for several years and then learn that the official in charge has been transferred to a new post. Where the project is not in compliance with the law, their replacements will often refuse to sign the documents that have already been negotiated.

The Chinese provider of guanxi may suddenly disappear. If the project depends on the protection of a single individual, what will happen if that person dies, is demoted, or prosecuted for corruption? This change in fortune can be a particular disaster where the foreign investor has already contributed funds, because the project can be cancelled with no refund on the investment.

A project based on guanxi gives too much power to the Chinese side of the deal. In many cases, the provider of guanxi will make use of the fact that the project is not in compliance with the law to ask for additional benefits. Since the foreign side has no legal recourse, the foreign side must accede to what is in effect a blackmail request or risk the collapse of the project. When the foreign investor comes to a lawyer for help, there is nothing that can be done, since the project itself is either illegal or poorly documented.

So what is the misconception? Well the other day I received an email that started out saying “I know you do not believe in Guanxi.” This is not correct. We do believe in Guanxi, it just depends on how Guanxi is defined and about whom we are talking. Frankly, it would be downright silly to dispute the existence of Guanxi and we have never done that. For example, in Steve’s China Business International article, he makes clear Guanxi has its place:

I do not mean to say that having good guanxi is of no value in China. It is of course beneficial in China, as in any country, to cultivate good government relations. Connections with the wealthy and powerful are also an advantage when working in a difficult investment environment.

However, these kinds of connections should never be seen as a replacement for carefully structured investment projects. All investments should be designed to comply with mandatory laws and regulations. The investment must be documented so that the foreign investor can defend its interests in the event of a dispute or changing conditions. Failure to follow this careful approach is the source of many self-inflicted foreign investment disasters that we see all too often in China.

Today, John Garnaut of the Sydney Morning Herald has out an amazing article, entitled, “Macquarie’s getting well connected in China,” describing in great detail how guanxi is playing a crucial role in investment bank hiring and business. This is real guanxi and it clearly does matter for the investment banking business.

Richard Burger (of Peking Duck fame) has a new, more business oriented blog, entitled, Good Guanxi: A Blog About China and Communications.” In his first post, Richard explained/justified his using Guanxi in his blog name:

I’m sure some of my friends in China will be scratching their heads wondering why I named this blog “Good Guanxi.”

Expats in China believe fairly monolithically that the term guanxi is overused, and that the importance of guanxi is over-rated. Every amateur trying to impress others with their knowledge of China rattles on and on about guanxi, so yes, in this sense it is overused. The fact remains, however, that there is no way you can do business in China without understanding what guanxi is and what you need to do to win it and sustain it.

Burger then talks about the importance of “building good guanxi’:

I would counter, however, that as soon as you arrive, building good guanxi is important; it has to start somewhere, and you have to keep the development of good guanxi a goal whenever you deal with Chinese business partners, officials, and, of course, the domestic media. Now, that applies to your business relationships in any country, not just China, of course. But I can cite from personal experience the fabulous results a good PR person with good guanxi with Chinese reporters can accomplish. And, as I say in the video, I know how guanxi can open doors for companies in China, in a way it can’t in many other countries.

He then quotes me from a recent interview I gave for Beijinger Magazine

China Law Blog, which may be the single best resource for companies venturing into China, recently decried the whole notion of guanxi, and when asked how big a role guanxi plays in doing business there replied:

Shockingly little. I have met many people who have real power in China but virtually none of them really do rely on their relationships with people to take care of business. Our lead China lawyer, Steve Dickinson, has been living in China and doing business there about half his life. His spoken and written Mandarin are better than your average educated Chinese person. Steve knows a ton of people in China, yet he would never claim to have pull there nor would he ever advocate taking a shortcut because of pull. I cannot tell you how many times I have heard of or seen a Western company believe it did not need to follow the rules because it had sufficient pull to get away with doing things outside of the lines, only to face major issues for having operated outside of the law. The problem with guanxi is that there is always going to be someone higher up than your contact and that person higher up may at some point call you to account for your failure to follow the laws to the letter.

Richard also quotes from a Chinese Negotiation post by Andrew Hupert on the proper role of guanxi in China:

As a skeleton key that will magically unlock doors, it is problematic. Yes, guanxi can open doors, but there are three problems: 1 – it won’t necessarily open the door you need unlocked. 2- When all you have is a key, all problems look like locked doors. You may end up rewriting your business plan because your guanxi connection leads you to a single type of resource or decision maker. And 3 – that door may lock behind you. Westerners who encounter problems in China are rarely suffering losses at the hands of complete strangers. The people gutting you of your investment, assets and IP are the very same ones who lured you in with promises of powerful connections and influential friends.

In short, guanxi can play a role in your Chinese negotiating, but you will have to monitor and decide what that role will be. Guanxi networks are great as information and networking resources. However, if you plan on using connections to open doors – or knock down walls – then you are going to encounter some major difficulties down the line. When you use guanxi as a shortcut in China commerce, the destination is usually business failure.

As much as I would love to generate controversy over this issue, I fear there is really done. I will go out on a limb here (with the full expectation and hope that Richard and Andrew will correct me if I am wrong) and state that all three of us can probably agree on the following points regarding Guanxi:

  1. It takes time to cultivate.
  2. It is not a substitute for good business sense.
  3. It does not make a bad business deal a good one.
  4. It should not be used as a way to skirt the law.
  5. It makes sense to have good relationships with people in China, just as it makes sense to have good relationships with people everywhere.
  6. Guanxi does sometimes make things go more smoothly.
  7. None of us have any real clue as to whether guanxi should or should not be capitalized when written in English.
  8. Most who claim to have serious guanxi do not.
  9. An even greater percentage of foreigners who claim to have serious guanxi do not.
  10. The value of guanxi varies from industry to industry. For instance, I understand that guanxi is critical to the media business in China and to securing government contracts; it is of virtually no importance in getting your trademark or WFOE registered in China.

I conclude with some pithy quotes and a link regarding guanxi:

Richard Burger: “Guanxi, despite the term being cliched and over-used, is for real and it does matter – within limits. Know what it is, and cultivate it as much as you can.”

Me:  “Bottom Line: Be very skeptical of a China service provider who spends time talking about his or her China connections. Those who tout their connections/guanxi are almost always doing so because they have so little to say about their expertise and experience.”

Richard Brubaker, of All Roads Lead to China: “Guanxi either retires or goes to jail.

For those interested in reading more on this, I urge you to check out Hupert’s recent post, “Americans Negotiating in China: Guanxi Relationships and Foreigners Part II – 10 Caveats.

Lastly, I will note that I have set up a discussion on Guanxi on the Linkedin China Law Blog Group, where I ask “What exactly is guanxi?” and “How does it help foreigners doing business in or with China?”

 

Co-blogger, Steve Dickinson, just wrote an article for China International Business Magazine entitled, “Debunking the Guanxi Myth.” [link no longer exists] (if you are not reading this magazine, you should be) (h/t to Travis Hodgkins over at the Transnational Law Blog). Steve starts out talking about how so often after he has informed a client that a proposed transaction is illegal, the client tells Steve they do not care because “they are working with a powerful political or military figure who will ensure that the normal legal rules and documentation do not apply.” Steve sees this as a mistake for the following reasons:
No foreigner can recreate a Chinese-style guanxi network. In China, guanxi refers to a vast network of connections arising from party, family and work connections that may go back several generations. No guanxi network relies on a single individual. The elimination of one member of the network is therefore not fatal. Foreigners almost always rely on only one or two individuals for their supposed connection. This kind of network is too fragile to be of enduring value. Foreign investors who think they have created a guanxi network in China are usually simply deluding themselves.
Connections with local government officials are short-term and can be abruptly terminated. Many foreign investors do not realize that government officials in China are regularly moved from office to office and from region to region. As a result, the connection with a local official is unlikely to be a long-term connection. It is quite common to negotiate a project for several years and then learn that the official in charge has been transferred to a new post. Where the project is not in compliance with the law, their replacements will often refuse to sign the documents that have already been negotiated.
The Chinese provider of guanxi may suddenly disappear. If the project depends on the protection of a single individual, what will happen if that person dies, is demoted, or prosecuted for corruption? This change in fortune can be a particular disaster where the foreign investor has already contributed funds, because the project can be cancelled with no refund on the investment.
A project based on guanxi gives too much power to the Chinese side of the deal. In many cases, the provider of guanxi will make use of the fact that the project is not in compliance with the law to ask for additional benefits. Since the foreign side has no legal recourse, the foreign side must accede to what is in effect a blackmail request or risk the collapse of the project. When the foreign investor comes to a lawyer for help, there is nothing that can be done, since the project itself is either illegal or poorly documented.
Steve recognizes the value of Guanxi, but not as a substitute for a soundly structured deal:

I do not mean to say that having good guanxi is of no value in China. It is of course beneficial in China, as in any country, to cultivate good government relations. Connections with the wealthy and powerful are also an advantage when working in a difficult investment environment.
However, these kinds of connections should never be seen as a replacement for carefully structured investment projects. All investments should be designed to comply with mandatory laws and regulations. The investment must be documented so that the foreign investor can defend its interests in the event of a dispute or changing conditions. Failure to follow this careful approach is the source of many self-inflicted foreign investment disasters that we see all too often in China.

Bottom Line: Be very skeptical of a China service provider who spends time talking about his or her China connections. Those who tout their connections/guanxi are almost always doing so because they have so little to say about their expertise and experience.