With the China Harbour Engineering Company deal still on the table and awaiting the report from KPMG (one of the big four auditors) I thought I would share with you an article I read that contained comments from Janet Carmosky, founder of The China Business Network.

The China Business Network is a resource geared towards international professionals doing business with China. M/s Carmosky advises major corporations on their China strategies; speaks at conferences and writes about China for publications like the Economist and the Harvard Business Review.  So her credentials are high and any advice is worth taking note of.

This is what she said in an interview with “Business Pundit”.

“China is running rings around us [USA] economically. Yet we continue to think they’re suffering from some sort of malnourished form of capitalism. We think they need our business. That’s just not true.” These myths or perceptions, along with several others, are causing Americans trouble, not only in their business dealings with the Chinese, but in a globally competitive economy as well.

Perception #1: Assuming Chinese Do Business the Same Way Americans Do

Though both parties deal in US dollars, Americans and Chinese have vastly different business cultures. While America is transaction-oriented, China is relationship-oriented. There’s a chasm between these two styles of interaction. (ed. The comparison between Chinese, Indian, and American styles of conducting business (below) illustrates the differences between us.)

The United States: Transactions Define Everything
Americans are transaction-oriented. We like to walk in the door, figure out a deal, sign the contract, do the deal, and get out. We then use these transactions as building blocks towards developing some kind of a relationship. The building blocks are the transactions.

The transaction is we’re buying, you’re selling, it’s all very arm’s length.

India: Projects Make Results
Indians are project-oriented. It’s a little bit of a longer view than a transaction, because in a project, there are more details and teamwork involved. A project involves doing the task together—unlike an arm’s-length transaction—but there’s a defined beginning, middle, and end. The Indians are *very* good at this.

China: We Know Where You Live Capitalism
The Chinese are neither transaction-oriented nor project-oriented. They are relationship-oriented.

Chinese only use the people they know, like, and respect. To them, a transaction is not really business. This is part of the reason we have quality problems. To them, shipping a container of widgets for a letter of credit is not a relationship, even if you’ve been doing it for 16 years.

Before they do a transaction or project with you, they want to know who you are. They have to figure out whether they respect you and like you before starting. They’re not comfortable doing a project or transaction first.

Their form of capitalism is “we know where you live” capitalism. Traditionally, they’d lend you money to start your factory because they know everyone in your clan or village. In the modern area, they’ll lend you money because you’re following certain directives. Everyone has to follow government directives. If the state tells lenders that have to lend to wind power, and you have a wind farm, they’ll lend to you. If anything goes wrong, they know where you live.

Perception #2: Assuming a Contract Will Get You Respect from China

Chinese are concerned with being in a business relationship that is based on mutual respect, realism, and flexibility, and that can evolve over time.

From a Chinese point of view, if situations change during the course of your business relationship, naturally you’re not going to be bound to the initial agreement. That would be rigid and unrealistic, so they don’t respect that point of view. They believe that if you’re going to be business partners, it’s not about the rule of law, it’s about the relationship.

For example, if I’m a going to contract a cotton business with you as a supplier, and the price of cotton quintuples during the term of the contract, and I’m losing my shirt abiding by the contract terms, then, from a Chinese point of view, you’re driving me out of business by keeping me bound to the contract.

As a Chinese, I would want a relationship where I go back to you and informally renegotiate the terms of the relationship. For example, I would say “listen, the price of cotton has quintupled. We have to get out of this business completely; we’re going bankrupt here. I know we’re in a relationship with you where we have to supply you cotton for the next five years. So how about I find you some cotton from Turkey and Vietnam, and you and I both take some of that margin that we were initially going to take from the cotton field, and we invest it in a joint venture to process it. Wouldn’t that be better for both of us?”

If you’re impatient and short-term in that kind of situation, you won’t win their respect. They’ll think you’re using them by forcing them to sell products for you at low cost and almost no margin. Then they might say that “if it’s going to be that way, then I’m going to steal your intellectual property.” What’s so one-sided about that? They’re just treating you the same way.

Perception #3: Assuming Chinese are Unethical Because They Don’t Respect Contracts

The misconception about doing business in China is that they don’t respect contracts and that makes them unethical. What it really makes them is, practitioners of “we know where you live” capitalism, which quite frankly they’ve done really well with. China’s been the most powerful, wealthy, and technologically advanced nation in the world a couple of times. And they invented capitalism. They’re not suffering from some sort of malnourished form of capitalism compared to how Americans do it.

Their form of capitalism is entirely relationship-based. Our form of capitalism is so impersonal. It’s “other peoples’ money” (OPM), and it’s all about performance forecasts, transparency, etc. It’s not about realism. The attitude isn’t “Hey honestly, I respect you, you respect me, I’m a good businessman in my part of the world, you’re a good businessman in yours, let’s get together and make sure that this works for both of us.” It’s more about “I’m sorry, you missed your numbers, you’re screwed.” If you think about it that way, you see why respecting contracts makes more sense in a transaction-based economy.

Perception #4: Thinking Chinese Need American Business

A major misconception Americans operate on is the assumption that the Chinese need something we have. This is decreasingly true. Americans know it in their guts, but they do not want to say it.

They will hire me to go in and be a corporate trainer. I will say: “What are your objectives?” They will answer that “We don’t want to inadvertently offend the Chinese.” Well, in that case, I think you better start figuring out how the make them respect you.

Right now, we think that being a big American brand, like Johnson & Johnson, will make them move heaven and earth for you. They won’t. They’ll take your purchase order if they need it, but American clients typically are not the #1 account for Chinese firms.

Even if you’re a big American company, they haven’t necessarily heard of you. If they have, they don’t necessarily have any innate desire to do business with you. Your purchase volumes might be smaller than what they really want. Your demands for diversifying the product line (we’re a mature economy with a lot of customisation) might be a serious pain in the butt for them. We think they’re going to want our business, and it’s just often not the case.

The Chinese can do business with the British, the Dutch, the French, the Japanese, the Italians, the Taiwanese, the South Africans, the Yemeni, and 20,000 Chinese companies who are doing something similar to you. Back home, you’re probably dealing with, at most, a couple hundred competitors. In China, you’re dealing with global competition, a couple thousand competitors.

Perception #5: Treating Chinese Our Way, and Assuming They Will Adapt

The dollar is in the can right now. As a businessperson, you have to really figure out the laws that the Chinese are in. Treat them as a valued customer. Sell them on the idea that you are an asset that they should be doing business with. If we want to play the game, we need to focus less on what we want from them, and more on what we have to offer, what we have that will add value to their professional lives.

Right now, the mindset is more aloof. We assume they want to have our business. That really needs to change. We need to start with an open approach that acknowledges that these people don’t have to do business with us. They don’t need us.

Past that point, you can be as American as you want. We’re always going to want contracts to be respected, and the Chinese know that. They are working very hard at moving their whole economy and society to something that’s more respectful of the rule of law. We’re doing a great service to the Chinese nation as a whole by showing an example of how the rule of law is implemented. We need to keep doing that. We can be ourselves, just a little more open-minded and respectful.

Instead, Learn About “We Know Where You Live” Capitalism

Know that Chinese are not going to respect me unless you spend some time showing them who you are and who your company is. They’re perfectly happy to shoot you a container of widgets or a letter of credit, but if you want a real relationship, you need to show them who you are, as an individual.

The Chinese do not separate their personal and professional lives, because it’s “we know where you live” capitalism. How would they know where you live if they’ve never eaten at your house for dinner? My Chinese friends and I will call each other and talk about business anytime of day or night, literally at 2 o’clock in the morning. The time of day doesn’t matter. You could call and say hey, I’m out at the disco, let’s talk about this business aspect.

Being in a relationship means sharing more information with them, involving them in product development, giving them better terms, helping them finance their raw materials, and who knows what else. If you’re their real partner, and give them what they need to grow their business, they will stick with you.

Perception #6: Thinking All You Need is One China Guy

Another important misconception is that if you have a China guy, you’re fine. This is why it won’t work: Picture a bridge. At one end of the bridge, you have a really effective local guide to New York City. At the other end you have a really effective local guide to Shanghai. Each guide is really good at his or her locality, but going across the bridge, they might get lost.

Then there are people like me, who stand in the middle. I can kind of reach both ends, but I’m not an expert guide to either place.

If you’re serious about doing business in China, you don’t just need a single China guy, or a single expert who stands in the middle of the bridge. You need a whole team. I’m talking about legal, tax, and commercial due diligence people, marketing strategists, HR specialists, Chinese local counsel (foreign lawyers are not allowed to practice law in China), and good government affairs people.

It takes a whole network. If you underestimate the role of the Chinese government in creating demand and fostering enterprise growth, you are dead in the water. If you underestimate the importance of the regulatory regime in China, for example, getting your permits, licenses, and operating documents in order, you are dead in the water. I don’t think corporate America really knows that yet.

Perception #7: Thinking We Don’t Have to Worry About China Yet

Many corporate headquarters don’t seem to realize that there is such a thing as Chinese business culture, but individuals are bumping up against it every day. A lot of employees in corporate America have realized how important success in working with Chinese colleagues is for their professional development. If you work for Proctor & Gamble, Motorola, Johnson & Johnson, or Black & Decker, chances are, some percentage of headquarters personnel are carrying out communications with China every day.

There is growing awareness on an individual and executional level in America that Chinese are different from us, they are worthy of our respect, and we’re not dancing in the way they’re dancing, so we have to try to get along.

Parting Words

If you want to do business with China, you have to earn their respect. Do this by being open, flexible, realistic, having a sense of humor, and being a human being rather than a corporate functionary. Be someone they want to have a relationship with, not just the mercenary of a transaction. You have to prove to them that there’s some advantage in working with you. Don’t just take for granted that there’s some built-in incentive.

That’s all it takes, the mindset of acknowledging that they’re really important to us. We need to put in a little effort to try and meet them. Maybe we’re not capable of meeting them halfway right now, but they’re all speaking English. They’re all doing business in US dollars. If you think about it, they’re meeting us more than halfway.

So, McKeeva and Ellio, I hope you read this. Especially about their interpretation of contracts.