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Lessons from the front lines: Developing a business in China

China General Interest

Mike Bennetts, a Kiwi veteran of doing business in Asia, shares some real world lessons for developing a business in China.

Fuelled by the global financial crisis, a recently signed free trade agreement and a substantial Chinese economic stimulus package, many NZ businesses are facing a plethora of threats and opportunities in their commercial activities with China. Now business leaders to be more considered about how they can be successful in China.

For over five years I was CEO of BP’s supply and trading business in Asia Pacific and the Middle East, a multi billion dollar business competing in the world’s fastest growing energy markets. By virtue of who I worked for and the role energy plays in the world’s economy, I had access to and relationships with government officials, regulators, NGO’s, state owned enterprises, producers, logistics providers, and most importantly consumers, from large multi-national corporations to smaller domestic companies, both public and private.

I have learnt many lessons in that role as well as the decade of experience from working in China in other roles. Three key lessons come to the fore – the importance of personal relationships, balancing my Western business thinking with the sometimes opposing Chinese approach, and proactively managing the evolution of business models over time.

The most important lesson I learned was that relationships really matter in China. This is much more than what we would describe as networking in our Western business culture. Our most critical business relationships in China need to have an adequate amount of personal relationship.

The Chinese describe this in the Mandarin word “guanxi” which literally means "relationships". Guanxi is like being friends, and friends can count on each other in good and tough times. The Chinese prefer to deal with people they know and trust. On the surface, this does not seem to be too much different from doing business in the West but this relationship is not simply between companies but also between individuals at a personal level. Frequent contacts with each other foster understanding and emotional bonds and the Chinese often feel obligated to do business with their friends first. For example, those dinners after a hard day’s work mean a great deal to your Chinese counterparts and should not just be treated as optional social interactions. They are important opportunity to build a deep business relationship and connecting with someone at a personal level.

In recent years I have had experiences where disagreements between my company and our counterparties were surprisingly set aside by their senior managers. In some cases we were advantaged in our commercial interactions because of the guidance given by senior management to those deeper in the organisation as their staff negotiated contractual terms and conditions with my staff. In each case we were treated favourably because of actions we had taken in previous years.

In one particular case continuing to provide credit terms to a customer during the Asian financial crisis in 1998 had meant so much to a junior member of staff at that time that he was willing to intervene in a dispute ten years later and direct his staff to settle in our favour. By that time he had risen to be one of the most senior executives in his company. The point was that he did not forget how we had stood by him in tough times. As a result he was willing to look beyond his financial loss in the dispute we had and take the unusual step to overrule his subordinate even though he knew that would result in a loss of face for the person concerned.

So a great question to ask yourself is, as you look at your Chinese customers and partners in these tough times, where can you do something for them that really matters for the relationship, especially where the cost to you is far outweighed by the benefit to them.

For over a decade now I have taken the time to learn as much as I can about how to be commercially successful in China. I’ve attended seminars, read books, watched videos, spoken with experienced westerners and Chinese nationals who have worked in both the East and the West. I’ve heard lots of stories and accumulated many lessons and best practices.

However when I reflect on these I realise that they were often contradictory. What worked for one company did not work for another. Not all joint venture agreements contained the same contractual rights and responsibilities. Incredible levels of success in the first three years of business did not necessarily endure for the next three years. The insight for me is that there is no one right way to do business in China. So I have learnt to read, discuss and reflect on lessons learned by others, but not to be bound by them and instead do what is appropriate for the actual circumstances that I am in at that time.

Another critical insight for me has been that the Chinese have as much to teach about business as they do to learn from foreign practices. In taking the perspective that I need to learn from how the Chinese do it and apply that in their domestic market, I have generally been more successful than sticking with the traditional western formula. I have always been very clear where my boundaries are, like my ethics and values at both a personal and company level. However I have worked at being more flexible on the less critical issues, especially when these issues are simply based on how I have grown up commercially. It is somewhat arrogant to presume that the way I know is the one right way and success in foreign markets requires me to properly respect local customs, traditions and business practices. This is articulated in an old Chinese proverb – do not open a shop unless you are prepared to smile.

Clearly New Zealand has the potential to drive meaningful benefits from signing the Free Trade Agreement with China last year. One of the possibilities which arises from this agreement is that NZ exporters and investors should consider managing their early market entry actions as a collective sector or industry group rather than as individual companies. Probably because of the large level of state ownership in Chinese business, much of their international market entry activities are managed and co-ordinated in groups, often with a governmental leadership or, at the very least, visible government sponsorship.

With NZ companies acting in a similar way we can occur to the Chinese in the way that they like to conduct business. A good example of this in action was the recent visit to China by John Key. He took with him key business leaders and used political meetings to advance commercial issues. He included business leaders in conversations they would have struggled to have without the significant political leadership that John Key’s presence brought.

There are plenty of stories about how foreign companies in China have changed their business model for their in country activities. Many of these stories are usually negative in the sense that foreign companies have “been forced” to adapt their business models due to actions by their partners, whether these partnerships are limited to just informal business connections through to the more formal joint venture arrangements. A commonly quoted example is the leaking of intellectual property where foreign companies move their manufacturing to low cost Chinese operations only to find that their “partner” has leaked the intellectual property into another company that sets up competing manufacturing facilities under a Chinese brand.

This does not need to be the inevitable outcome of outsourcing manufacturing to China. However companies should spend more time proactively and regularly planning the evolution of their business model rather than being continually wedded their first construct. In such a dynamic and competitive market as China it is highly unlikely that commercial success in ten years time will be grounded in the business model that underpins success today. Instead business leaders should spend time considering the milestones or achievements which would be the catalyst for a measured evolution of the business model in order that you and your “partner” can develop mutual benefits.

China is a wonderfully challenging and rewarding place to do business. My experience tells me that those challenges and rewards are greatly enhanced when there is tangible commitment to developing personal relationships with the Chinese, balancing Western business thinking with the local Chinese approach, and managing business models over time. It is all about our own individual perspective and that is something we need to continually review to assure our success in China.

Michael left his role with BP at the end of 2008 to return to New Zealand for family reasons. He is currently an independent consultant and can be contacted on mikebennetts@orcon.net.nz