With real estate deemed an essential service in many U.S. states, and potential buyers under orders to stay at home, agents are showing properties the only way
Interesting BooksOne Billion Customers by James Mcgregor
It should have been a routine flight from Beijing to the coastal city of Fuzhou. The government-owned airline was new and the airplane was fresh from a foreign factory. But I began to get a sense that this ride wouldn’t be entirely routine when I saw how cheerfully untrained our crew was. The flight attendants sat giggling in the front row, eagerly putting together take-home bags of the best food from the extra meals. The cockpit door was open throughout the flight. The flight engineer came back to snooze in the front row. The flight didn’t land in the first attempt because the crew had forgotten how to do it.
Then I saw a propaganda poster on the wall that has since remained firmly in my mind as the perfect description of the transformation China is undergoing: STRIVE TO FLY NORMAL. That is the essence of what China is trying to do— become a normal country, one that is integrated into the world economy, a place where citizens can concentrate on their prosperity and happiness instead of suffering from political power struggles. ”
It is difficult for anyone in the West to overestimate China’s growing role in the global economy. With 1.3 billion mouths to feed, its consumer market has the potential to be larger than North America and Western Europe combined. Foreign companies are flocking here, both to sell and to buy.
But China has allowed foreigners in only on its own terms, and those terms are often opaque, contradictory, and bewildering. All too often, laws are only the law when they benefit China. Negotiations can take forever and the resulting agreements can be promptly ignored.
China’s entry into the World Trade Organization in 2001 and the country’s desire to transform local companies into global leaders is bringing more international practices into China by the day. But I still see foreign executives confidently breeze into China only to be run over by their Chinese competitors, the Chinese government, or their Chinese partners—or sink themselves through various combinations of unrealistic expectations, impatience, and lack of common sense.
Demographers may quibble with the title: China’s current population is 1.3 billion. But it is the round “billion” that matters, that threshold number that symbolizes the vast and untapped continental-size market, the teeming Chinese masses waiting to be turned into customers, the dream of staggering profits for those who get here first, the hype and hope that has mesmerized foreign merchants and traders for centuries.
I was taking a page from the very effective marketing strategy that China so expertly employs to make the Western world salivate: with empty pockets but big ambitions, sell the China mystique and the dream of one billion customers.
While Chinese leaders still mouthed the slogans of Marx and Lenin, their actions focused on markets and leverage. “What Deng is doing isn’t brain surgery,” I said. “He is letting the Chinese people move beyond their debilitating political struggles and do what comes naturally: focus on education for their children, focus on acquiring individual wealth, focus on building the nation and gaining international respect, and always remember that anyone who openly challenges the government’s authority will be ruthlessly crushed in the name of national stability.”
The country can draw on a two-thousand-year tradition, but it also is inhaling Western business know-how and technology and doing everything at the same time and for the first time.
China is undergoing the raw capitalism of the Robber Baron era of the late 1800s; the speculative financial mania of the 1920s; the rural-to-urban migration of the 1930s; the emergence of the first-car, first-home, first-fashionable clothes, first-college education, first-family vacation, middle-class consumer of the 1950s, and even aspects of social upheaval similar to the 1960s.
All major reforms, from farming to housing to finance and privatization, were tested and refined as local experiments before being spread nationwide and surrounded with regulatory structures.
China needed capital, technology, manufacturing expertise, management know-how, and overseas markets for its products. Like all startups, the Chinese have progressed through frantic trial and error, making it up every day, copying and modifying practices and products of others, always sprinting to capture the market first, always aiming at the next pile of quick profits.
We spoke not a word of Chinese but found ourselves hounded by eager students desperate to practice the English they were learning in school.
I witnessed firsthand the official efficiency and private practicality of the Communist party. Everywhere I went, from dust-blown Qinghai in the northwest, to sweaty and humid Guangdong in the southeast, party and government officials from the top to the bottom would mouth the latest party line.
But once the official political regurgitations were over, the talk always turned to business. I found a country littered with wasted talent—bellboys with economic degrees carried my bags and highly trained engineers drove my taxis—and ravenous to resume progress.
China didn’t yet have an official foreign exchange trading system, so Cao had established a nationwide foreign exchange business out of the massage parlor. Cao had street currency traders working for him in a dozen major cities, where they stood outside hotels and traded the Chinese currency, renminbi (RMB) for dollars with foreign tourists.
His profits came from arbitraging the different street exchange rates in various cities. He and his partners flew around China selling dollars where they got the highest price or buying them where prices were cheap.
While the business models that Cao and Millions had formulated were crude, they were pioneers in China business practices that prevail in much more sophisticated forms to this day— mining the cracks in half-reformed systems and arbitraging between the state and private economy.
The speed at which China went from communism to embracing capitalism should be no surprise. This is a country where the traditional greeting for Chinese New Year, the equivalent of saying “Merry Christmas,” is Gongxi facai, or “Congratulations on getting rich.
Similarly, a central part of funerals in China is the burning of fake paper money to send assets for the departed in the afterlife. In southern China, papier-mâché mansions, luxury cars, and entertainment centers are burned to provide some extra comforts. At weddings, guests line up at a table outside the reception hall where their red gift envelopes of cash are ripped open, counted, and recorded as everybody in line watches.
Given the distrust of the political system resulting from the Cultural Revolution and the corruption and constant change of the reform era, many Chinese place their complete trust only in money.
“Mao Zedong Thought” is still a core part of China’s official ideology, and the “Yan’an Spirit” of self-sacrifice and simple living are still the professed ideal for Chinese officials. The Chinese Communist Party has recently tweaked its liturgy to protect private property and to state that the party is the vanguard of all Chinese people, not just the workers and the peasants. Private enterprise was not only allowed but the newly rich became celebrated as the country’s new model workers—except when they were being jailed for corruption.
If the business community is the “old boys’ network” in the West, the Communist Party is the “old boys’ network” in China. “ The party today operates much like a corporation in the way it makes decisions and deals with people. Like a corporation, there is some democracy at the top of the party and almost none at the bottom.
China is ruled by its deeply ingrained culture more than anything else. For the party, this is manifesting itself in the wealth that the political aristocracy is rapidly accumulating, wealth being a necessity to keep their families on top in a market economy.
Firm control from the top has always been considered the only path to peace and prosperity in China. One reason is that China is a shame-based society, very different from the guilt-based West. In the West, with society’s religious orientation, many controls are internalized. Guilt, which is ultimately the fear of sin and eternal damnation, puts a check on bad behavior. In China, it is the fear of exposure and the accompanying shame that tarnishes the entire extended family. As a result, the Chinese can feel pretty good about doing almost anything as long as they don’t get caught. In that atmosphere, the only efficient form of law and order is a strong and omnipresent government that increases the likelihood of getting caught if you do something wrong.
Foreign businesses are often trapped between profits and politics. From the Chinese side, they fear that trumpeting success will bring platoons of bureaucratic pickpockets to their doors. While Deng welcomed foreign investment in China, nobody in the Chinese government has endorsed foreign companies making large profits. Even today, there is a lingering attitude that foreign profits in China carry the taint of exploiting the Chinese people.
Hong Kong today is the only Chinese city whose best days are behind it, but it is still the best place in the world to live as a millionaire. Indeed, the Hong Kong government and elite seem intent on proving true the Chinese proverb, Fu Bu Guo San Dai, which means, “Wealth can’t last more than three generations.
In Chinese, the word “nation” is guojia, two characters that mean “nation” and “family.
Overseas Chinese have been key to the startup side of China’s economic and business development. Hong Kong and Taiwan factory owners and managers have brought in the manufacturing expertise and modern management that has provided the base for China to become the world’s workshop over the past two decades.
Many have been just incompetent to deal with the messiness and vulgarity of China. Young people from Hong Kong, Taiwan, and Singapore are flooding into China because they see it as the land of opportunity. Singapore instead has focused on importing the best brains from China and packaging this talent with government venture capital money to create cutting-edge research facilities and business startups at home.
The millions of new Chinese auto owners seem to feel that a gas pedal and steering wheel are tools for unleashing their inner aggression and creativity that is otherwise so squelched by political and parental controls. And foreigners in China are often seen as exotic decoration.
Two hundred years of foreign domination and duplicity have left a residue of suspicion and distrust. Understanding that history is essential to doing business with the Chinese.
China has an authoritarian and often paranoid political system that crushes dissent, controls information, and injects itself into every facet of business.
China’s governing system is based on morality and the Confucian “superior man” was the best in the world. China could survive by learning science and technology from the West and grafting those elements onto Chinese culture and the country’s Confucian governing systems: modernizing while retaining the “essence” of China.
Chinese efforts to preserve its isolation formally ended in August 1842 when China signed the first of what became known in China as the “unequal treaties.” The Treaty of Nanjing allowed Western traders to begin carving out their first pieces of China. Tensions in the treaty ports, the murder of a French missionary, and more attempts to stop the opium trade led to the Second Opium War.
Li Hongzhang carefully noted how the West’s weapons and methods decimated the Chinese military. Foreign military power was simply too powerful for China to resist.
When Westerners came calling on Japan, in the form of Commodore Matthew Perry’s expedition in 1854, Japan’s Meiji government had rapidly adopted Western technology and methods instead of resisting as China had.
The foreign encroachments helped spawn a secret sect called the Society of Righteous and Harmonious Fists. The Boxers, as they were known to the West, combined martial arts, animistic rituals, and superstitions into a messianic movement aimed at toppling the government and chasing all foreigners out of China. As the movement grew in numbers, it became increasingly violent. Thousands of Boxers roamed China killing foreign missionaries, merchants, and their children.
They also killed tens of thousands of Chinese Christian converts (many of them “rice Christians,” who prayed because they got free food) by skinning them alive or hacking them to pieces. The rebellion and siege generated global headlines and cemented an international image of the Chinese as fanatical savages.
Western commerce and private business blossomed in China. All the big players piled into China. Standard Oil provided fuel for lamps, Bethlehem Steel built ships for the Chinese navy, British American Tobacco built hundreds of warehouses across China, while Siemens connected the treaty ports by telegraph and IBM installed its business machines in Beijing. Modern Chinese companies emerged, as well, obtaining loans from Japanese banks, employing European and American engineers and accountants, and creating technical schools to train Chinese industrialists.
Young Western men recruited through newspaper advertisements to work in China had the services of some seventy thousand prostitutes in Shanghai’s foreign concession to help fill their idle hours. As Harold Sheridan, a young American working in Shanghai, wrote to his mother in 1913: “I tell you, I can easily understand the fascination of the Far East where living is cheap, and a white man need never lift his little finger unless he cares to.
Mao had always been wary of Stalin. He had no desire to become a Soviet satellite like Eastern Europe. He thwarted a Soviet attempt for joint control of China’s military but did sign a mutual defense treaty. But China needed money and technical assistance to build its industrial base and the Soviet Union was the only place to turn.
The rapid Soviet-backed industrialization of China for most of the 1950s dissolved into the political madness of the Great Leap Forward in 1958 and the decade-long Cultural Revolution that began in 1966. In preserving his own political position, Mao destroyed the country’s economy and tore apart the fabric of Chinese society.
Foreign businessmen spent much of their time “walling and ducking,” a term for the inevitable excursions to the Great Wall and the seemingly endless Beijing duck banquets that gave English-speaking Chinese a chance to pump the foreigners for information about their businesses and sniff out divisions among the foreign negotiators.
The flood of business into China was spurred by the creation of an updated version of the “treaty ports.” The new bases for foreign business—special economic zones—offered tax breaks and simplified permit and licensing regulations. But this time the “unequal treaties” were purposely and proudly all on the Chinese side.
The foreign companies wanted to establish factories in China to tap into that immense market. But China wanted investment that would then be turned toward export production to earn foreign exchange for China and provide jobs for Chinese. Deng wanted to follow the examples of Taiwan, Singapore, Hong Kong, and the other Asian Tigers that had built prosperity on export-driven economies. The special economic zones would serve as study centers for Chinese companies to learn from the foreigners so that they could supply China’s industrial needs and create the country’s own brands and consumer products.
Then came June 4, 1989, and the Tiananmen Square Massacre, followed by a brutal crackdown on the Chinese citizenry. Executives and employees of foreign companies jammed flights out of China, fleeing the danger and disorder. Bush believed it was delusional to try to “contain” China. China was an unstoppable growing power that needed to be befriended and steered in the right direction. His focus was to keep the governments talking and to promote increased business ties.
Chinese companies were becoming increasingly bold in stealing foreign intellectual property and churning out fake, foreign, brand-name products. It was becoming common for a foreign company to send a prototype to a Chinese factory for production only to find that the Chinese company had registered the Chinese product patent and design rights for itself.
Since China’s economy was still very undeveloped by world standards, China was set to enter GATT on the cheap, without having to open its markets widely or offer stringent protections for intellectual property rights (IPR).
The United States began to employ serious threats using Section 301 of a 1974 trade law, under which the United States could impose trade sanctions against countries treating U.S. goods unfairly. Then In 1992, China signed market access and intellectual property protection agreements. Despite that, Chinese entrepreneurs were blatantly copying American software, movies, and music and making counterfeit U.S.-branded consumer products.
Charlene Barshefsky threatened to file a Section 301 action against China that would cost it $1 billion for failing to live up to its 1992 promises. Like the emperors who came before them, top Communist party leaders want foreigners to feel grateful when they are granted an audience.
The prevailing mentality in China is that of the “zero-sum” game. China is all about “I live, you die,” “you win, I lose,” a vicious cycle of conquest and revenge. But Barshefsky convinced China that if it didn’t institute laws and structures protecting intellectual property, then Chinese companies would be hampered in their own development of software, entertainment, and technology products. The result was a stronger structure for intellectual property protection, although enforcement won’t be effective until China’s own industries have built sufficient intellectual property to be worth protecting.
The two hundred years of interaction that have humiliated, infuriated, and ultimately brought China into the world community were almost entirely government-to-government negotiations. While proud of their ancient culture, the Chinese will pander their poverty. They love to convince you that you owe them something. They are poor, you are rich, and their poverty is your fault.
China categorizes foreigners as “friends” or “unfriendly.” As a “friend,” you will be considered an enlightened foreigner who understands the complexities of China. But friendship in China carries heavy obligations. In China, it is considered almost immoral to turn down the request of a true friend. If you don’t give them what they want, the Chinese will quickly label you “unfriendly” to China. Your goal is to be friendly but not foolish. Don’t be afraid to tell your Chinese counterparts that this is business, not friendship, but that you can do friendly business if both sides get a fair deal.
Just below the omnipotent exterior often projected by Chinese bureaucrats and businesspeople, there often lies a reservoir of insecurity and fear of making mistakes that results from a social system ruled by shame. Chinese politics and the country’s commercial system are brutal. In negotiations, this Chinese preoccupation with “face” can be crippling for them. Foreigners who are not fixated with “face” have a tremendous advantage. Treat them with the inflated importance they expect, but look out for your own bottom line. Engage in the theatrics, but don’t let it slide over into substance.
Foreigners are now mostly comfortably accepted as residents in China, and foreign business has become part of the fabric of daily life. Chinese businesspeople can be globe-trotters who carry MBAs and PhDs from the world’s best universities. Products from Chinese factories fill the world’s retail stores, and the Chinese consumer market is the most competitive in the world.
One thing that hasn’t changed at all is Chinese sensibilities. If you are shrewd, you can even use this to your advantage. But many corporations simply look at their company’s internal needs and then apply that to their Chinese plans. That is only step one. Just as a foreign businessperson needs to understand the thinking and motivations of their Chinese counterparts, a company must understand what China as a country needs and wants. Only by blending that into your business model will you be successful.
China is modernizing, not Westernizing. The country’s goal is to modernize but retain the Chinese “essence,” which it is still struggling to define.
Fatigue, food, and drink are negotiating tools. Chinese negotiators are masters of making you feel you need them more than they need you. Foreign businesspeople who come to China often have too much goodwill, too much trust, and too little patience.
To be truly powerful in China is to be able to avoid responsibility for your decisions.
The Chinese now understand the outside world much better than the outside world understands them.
China has a survival culture with a “zero-sum” mentality. For somebody to win, somebody has to lose. The concept of “win-win” is new and not widespread, and will have to be constantly reiterated to be successful.
Avoid joint ventures with Chinese government partners. Like most marriages, joint ventures, even among companies that share a common language and heritage, have their tensions. When the partners come from vastly different cultures, the tensions can be exacerbated. China has always been mysterious to westerners. The language, the customs, the bizarre shifts in politics can be powerful barriers to feeling comfortable about doing business in China. Yet behind those barriers lies a market of more than one billion people, many of them ambitious and energetic, eager to seize opportunity, to learn, and to get ahead.
It’s only logical that many Western businesspeople look for a Chinese partner to help crack that huge market. They figure a joint venture with someone who knows the language and customs, who has contacts and customers, will ease the way. I’ll supply the technology or capital or products, they figure, while my Chinese partner maneuvers through the government red tape, acquires factory or office space, advises on marketing and distribution strategies, and engages Chinese suppliers. It will, they assume, be the perfect “win-win” situation for both players.
Foreign companies were hooked up with government-assigned partners, and their partnerships almost always fell victim to the leftovers of rigid Communist thinking and the country’s lack of modern business practices.
To Edwin Lim, China’s lack of financial infrastructure was glaringly obvious. He knew how primitive and shaky China’s finances were. He had also seen how desperate the entrepreneurial Chinese were to lay their hands on capital, to seize any opportunity to make money. Investment banking, he knew, was the key to China’s emergence onto the world scene.
In Japan, answers to questions weren’t the straightforward “yes” or “no” that Western businesspeople expect. Everything was nuanced and understanding the nuances was the key to dealing with the Japanese. But amid those disappointments Wadsworth kept hearing the same name: Wang Qishan. He taught party leaders that capital markets and stocks were tools for getting money from foreigners without giving up control.
A Chinese investment bank that could help Chinese state companies gather foreign capital was crucial to China’s continued economic growth.
Big things were happening in the United States. Inflation was falling and corporate earnings were rising. Investors were throwing money at the stock market and technology stocks were rapidly becoming the belles of the Wall Street ball. Real-estate prices in New York, Boston, and San Francisco were soaring. The great American bull market of the 1990s was just beginning to run.
In the United States, the CEO of a company was a virtual dictator and the HR director was several levels down on the organization chart. The position of HR chief in China is much more powerful than in the West because those who are hired often feel personally indebted.
Excerpt From: James McGregor. “One Billion Customers”. Apple Books.
When he returned to China, Fang suggested to Wang that his boss champion a joint-venture Chinese investment bank that would focus on restructuring Chinese state industry. He also persuaded his influential father-in-law to write a letter to Zhu Rongji and other top leaders suggesting that they study the U.S. investment banks as models for further Chinese financial reform.
The leaders also became ensnared by cross-cultural differences—
- Wadsworth didn’t mince his words. He always said what he thought, negative or positive. He was a stickler for rules, ethics, and good corporate governance. He was accustomed to getting his way and being respected by his subordinates and colleagues.
- Wang, on the other hand, exhibited the tough exterior characteristic of his generation of Chinese and, given his exalted position in Chinese society, he projected a strong sense of superiority and also carried nagging feelings of inferiority.
In January 1997, in a secret planning meeting at a resort on Hainan Island, Fang, Thornton, and a handful of Goldman Sachs bankers and MPT officials, worked out a plan to create China Telecom (Hong Kong) Ltd. The company would hold the assets of China’s two largest mobile phone operations, Guangdong and Zhejiang provinces, which made up nearly 30 percent of the nation’s mobile subscribers
Behaviour imperatives in Chinese culture are extremely negative and fairness isn’t a hallmark of the society. Parents motivate their children by focusing on their faults and inadequacies. The government rules through control, shame, and a ubiquitous presence. Worries about retribution for making mistakes guide the actions of most employees.
The Communist party in China has an informal policy that the children of top leaders are expected to live in China and work for the government or Chinese companies.
An ancient Chinese proverb captures it perfectly: Tong Chuang Yi Meng. It means, “Two people sleeping in the same bed but having different dreams.” The partners in joint ventures—especially when the Chinese partner is a government entity—all too often exhaust themselves in internal politics instead of focusing on the business. China is not the legalistic society that typifies the West. If the Chinese want to do something, they find a way to skirt rules or laws.
The single most important factor for success is that both sides had a real interest in making it work. The Chinese wanted a template, and they wanted capital into their country. Morgan Stanley wanted access to China.
In many ways, it is a curse to be the son or daughter of a senior Chinese leader. Levin was taught from childhood to be wary of others. Before Levin was in elementary school, his father was purged as a “rightist” in Mao’s campaign to persecute liberal thinkers. The elder Zhu spent most of the next two decades in political disgrace. He didn’t emerge until the end of the Cultural Revolution in the late 1970s.
The Chinese government often isn’t really interested in forging genuine partnerships. It simply wants a vehicle to gain access to foreign technology, capital, and know-how while retaining Chinese control of the venture. This is why Chinese law requires joint ventures in key sectors like finance, insurance, auto production, and telecommunications.
Foreigners use joint ventures to learn how to do business in China and to access the China market. The Chinese will use the joint venture to learn the business. If you take those motivations as inevitable, then you can structure the business for peaceful coexistence. Get a clear majority ownership and management control, especially in personnel and finance. If you must settle on fifty-fifty or a minority stake, prepare for an adventure that will consume enormous amounts of management time and make your attorneys rich.
Chinese people are eager to learn, and they learn very fast. They want to be led, but they will only follow and respect leaders who have the skills and intelligence to deserve it. Show Chinese employees that they have a path to top management. Build systems that put your Chinese and expatriate executives on equal footing.
The real lesson to be drawn from Austin Koenen is that genuine sincerity goes a long way in China. One of his former Morgan Stanley colleagues put it this way: “Austin’s approach was that the way to succeed in China is to submerge your ego, be secure in yourself and your position, be prepared to be a coach rather than a boss.”
In a joint venture you will be bringing the Chinese business system and culture directly into your company. Many of the core characteristics of that system—dictatorial leadership, debilitating politics, personal reward over company gain, an obsession with avoiding risk and decisions, and almost inevitable corruption—will become the management riddles that keep you awake at night.
There were too many ways to profit from China’s booming economy, too many ways to exploit the many cracks between China’s mismatched political and economic systems. There were too many officials to befriend and buy their protection and too many people in his impoverished hometown to whom he felt obligations to provide schools, medical facilities, and even monthly sustenance checks.
Balzac might have been writing about modern China when he said that behind every great fortune stands a great crime. In the past twenty-five years China’s burgeoning economy, driven by legions of entrepreneurs like Lai Changxing and guided by the Communist Party’s economic reforms, has created tens of thousands of great fortunes. Behind most of them are crimes great and small. Aided and abetted by government and Communist Party officials, people like Lai have pocketed vast amounts of state-owned assets and government money.
The sad fact is that the Chinese system today is almost incompatible with honesty. Certainly, there are upright and honorable government officials who try to follow the government’s dictates of maintaining selfless socialist ways. The party wants to root out corruption at the same time that it allows the families of the ruling elite to accumulate assets so they can remain the ruling elite in a country dominated by commerce. The result is an unspoken policy of “don’t ask, don’t tell.”
To do business, one needs a constantly changing array of approvals, licenses, and favors from government officials. To accumulate assets for retirement and provide for the future of their family, government officials cultivate businesspeople who can help them. As a result, the whole pattern of business relationships in China is different than in the West. Your network of family and personal relationships are more important than the rules of the road.
Private enterprises were unacceptable in the early days of reform, Lai housed his businesses under local government agencies, whose officials demanded a percentage of the profits. In return, it was understood they would protect him from tax authorities. But one day, after drinking at a nearby restaurant, two tax officials armed with screwdrivers marched up to the home of one of Lai’s brothers, who was a business partner. They demanded entry, intent on prying open cabinets and drawers in a search for accounting books.
Lai arrived just as Hong Kong’s property market was beginning a spectacular rise. People stood in line all night to snap up apartments that weren’t even under construction yet. For an entrepreneur like Lai, the situation was ripe for huge profits. By 1993 he had turned the $4 million he brought from China into about $40 million.
When Lai returned to China two years later as a foreign investor, he scattered his money around various businesses. He set up a trading firm, bought a factory that made car stereos, and another that assembled personal computers. But he had seen that real estate was at the core of the fortunes of the Hong Kong tycoons. He determined to make himself the property king of Xiamen. Through his company, Yuanhua International, or the Fairwell Trading Corporation, he accumulated land in key locations in Xiamen, which had been a crossroads for smugglers for centuries.
Over time Lai earned a reputation as a sincere and simple person who offered discreet benefits and asked for little in return. Prosecutors tell a different story. They say Lai ran a very aggressive family-managed smuggling operation that partnered with all levels of the Chinese government and military. It was a business that was based on Lai’s great strength as a relationship builder and political gossip monger.
Chinese prosecutors say that most of Yuanhua’s six hundred or so employees were engaged in shipping and smuggling. The company purchased the goods overseas, with the oil, cigarettes, and automobiles coming mostly from the ports of Singapore and Hong Kong. Ship captains received an envelope of cash. The containers on which duty had been paid were moved into the company’s distribution network.
Chinese police have documents called “confiscation certificates” that are issued for smuggled autos that they capture. The certificates allow the police to sell the cars into the market. The smugglers established a network to purchase confiscation certificates from the police for about $12,000 each, about 25 percent of the customs duty that would have been due.
In the late 1990s, China was awash in a smuggling epidemic. The nation’s economy had boomed throughout the 1990s, but Chinese customs revenues remained anemic. Even multinational companies manufacturing consumer products in China used smuggling networks to distribute their products in China because they were faster and cheaper than the domestic state-owned distribution monopolies.
Lai contended that he had been caught in a power struggle and that as a wealthy entrepreneur he is a member of a class of people in China that the government persecutes and discriminates against. He said “Although my company didn’t follow regulations strictly, I didn’t betray my country,” he told them. “I would never steal money from the treasury. I only made money before it went into the treasury. It hadn’t become the country’s money yet.” If he wasn’t executed outright, he told them, he would die a violent and unexplained death in jail.
The Chinese investigators refused to accept his novel argument that he hadn’t damaged China’s finances. They put tremendous pressure on the Canadian government to return Lai to China. Canadian officials say the subject came up in every senior-level meeting. The Chinese could not understand why Canada didn’t simply turn over Lai. A senior Canadian official said, “They simply could not get it that we could not interfere in our own court system.”
Lai’s family is in shambles. His father-in-law and mother-in-law were jailed for sending Lai money for his legal defense. Li Jizhou, Lai’s close friend and vice-minister of the Public Security Bureau, was sentenced to death. The sentence was reduced to jail time because he “showed repentance.” In his written confession, Vice-Minister Li said his major problem was neglecting his political study, “seldom reading the books of Marx, Lenin, and Mao.”
In August 2001, under the orders of Premier Zhu Rongji, Lai’s now-infamous Red Mansion was opened as an anticorruption exhibit. It would, officials said, serve as “an alarm bell that has to keep ringing and ringing.
With the spectacular rise of private Chinese companies, often funded by venture capital or stock market listings, the business environment is more transparent and marginally more law-abiding. But China still doesn’t pay civil servants enough to expect honesty, and the government workforce is so vast that to hike salaries to keep up with the private sector could bankrupt the government. Young people today, both in government and the private sector, are also aware that they are at the tail end of the Chinese gold rush, so many are eager to feast on the “emperor’s grain” while they have the chance.
As a foreign company in China you are in the same boat as Chinese companies: you depend on approvals and favors from officials in order to conduct business, and you sell and distribute your product into a system that is lubricated by graft. The practices I have seen employed by foreign companies in China can be categorized as good, bad, or ugly.
Large multinationals can operate above the muck because their deals are often very large, very visible, and they are interacting with senior government and party officials. Once you get below the level of big multinationals doing large deals, China becomes a swamp. If you are selling your product or services to the Chinese government and state-owned enterprises, you often have to decide how much of your soul you also want to sell. The procurement process in China is usually corrupt at every level.
American companies and executives are forbidden from engaging in any form of bribery by the Foreign Corrupt Practices Act. This is the foreigner’s version of “don’t ask, don’t tell.” Kickbacks or payoffs are never discussed or acknowledged because the foreign executives can’t “knowingly” be engaged in bribery. It is simply acknowledged that certain agents and consultants can be helpful in creating business opportunities.
When you are working at the grassroots level in China, direct bribery is all too often the path to success. I have Taiwanese friends who regularly deliver suitcases of cash to factory purchasing bosses in order to make sales of their manufacturing equipment.
With China’s newspapers, magazines, and television stations all under government control, local advertising agencies engage in a carnival of kickbacks to China’s media managers.
First you get an information source in the company who can tell you who really makes purchasing decisions and how they are made. Then you cultivate that person, or group of people, and wait for the signals. The moment they give you their home phone number, you know you are in.
As China becomes more wealthy and sophisticated, it is getting easier to avoid corruption. There are many foreign companies that have policies of zero tolerance for corruption in China, and still enjoy good business because their products are the best and in demand. The Chinese market recognizes and seeks quality.
China is all checks and no balances. Chinese government anticorruption drives are not cynical exercises, but the effect is minimal because the overall system is almost incompatible with honesty.
The gold rush of privatizing government industries in China is ending and officials and entrepreneurs are focused on snapping up state assets. Young people, sensing the end to easy money, may be more eager than their elders to “feast on the emperor’s grain.”
Don’t bribe. Nobody stays bought and the Chinese know it is against American law. Instead, invest in long-term, mutually beneficial relationships with customers including training, travel, and recreation opportunities. Pay your employees sufficiently well to warrant their honesty, have them sign a code of conduct, and let them know there are real consequences for violations. Choose legitimate agents and consultants to obtain licenses and approvals, and seek as little information as possible about how they obtain them.
Guanxi, the oft-cited Chinese word for relationships or connections, is overrated, temporary, nontransferable, and resides in the hands of the individual who has it. Never, ever put your business in the position where you are dependent on one individual for access to government officials. Senior party members in China seldom engage in direct corruption, preferring nepotism as the means to building family wealth. For the ruling elite, gathering family assets quietly is quietly accepted.
Xinhua was pulling a classic Chinese government power grab. It wanted to force news agencies—specifically financial information providers, such as my company, Dow Jones, and our biggest competitor, the British news agency Reuters—to teach Xinhua our business, hand over our customers and technology, and then stand aside as it pocketed the profits from the $35 million financial news and data businesses that we had created from scratch.
Every so often a Chinese bureaucratic dinosaur would emerge from its regulatory swamp to stomp on a successful foreign or private Chinese enterprise and claim the business territory for itself.
China can be a scary place to do business. The legal concepts that govern Western business practices—the sanctity of contracts, the separation of regulators and competitors, and the protection of intellectual property, for example—simply don’t exist in any dependable way in China.
Despite significant economic reforms that have partially opened China’s economy to foreign companies, the government and the Communist party remain all-powerful. Confronted by an order from the Chinese government, the normal businessperson’s instinct is to accommodate and avoid conflict.
I learned that if your business is doing what is right for China, you can win a battle against the most entrenched and ruthless government foes. You have to be extremely tough, persistent, and patient—and very creative in working both the Chinese and Western political systems.
Your arguments, especially as a foreigner, must be wrapped around what is good for China, not what is wrong with the Chinese government. If you are looking for justice and fairness in China, remember that the Communist Party, like the two thousand years of imperial rulers who came before it, considers the ultimate justice in China to be whatever maintains the system and its stability.
Intel, Broadcom, and other world chip giants recently won a protracted struggle over a completely bogus Chinese wireless communication standard that would have allowed twenty-four designated Chinese companies to gain access to their technology and business secrets.
With some $100 billion in foreign exchange reserves at the time, China was becoming a significant player in world financial markets. Traders in Beijing’s banks needed real-time access to the same market-moving data and news as their competitors in Bonn, Boston, or Bangkok. Dow Jones and Reuters supplied the data and news that were the lifeblood of the markets.
Together the trio dreamed up a plan for Xinhua to use its political clout to gain monopoly control of the Internet in China. The plan was to create the China Wide Web, a separate network walled off from the global Internet’s World Wide Web. The Internet in China would be a closed user group with paid-only access under the control of a Xinhua subsidiary to be called China Internet Corporation, or CIC. CIC would filter any information from the Internet that crossed into China’s border, ridding it of unwanted political and social content, and translating it into Chinese. Given China’s focus on economic development, CIC’s key content would be business information.
Hong Kong’s wealthy businesspeople were desperate to do anything to curry favor with their future sovereign. Yip talked his way right into their pockets, easily raising $25 million to get CIC started. James Chu had prepared a white paper to justify CIC’s efforts to control the internet—“An uncontrolled Internet spreading dangerous viruses would threaten China’s national sovereignty. When new ideas are brought into another culture, it [sic] will sometimes destroy the old existing one and create social unrest.”
Ding Guangen, China’s propaganda czar and one of Deng’s poker pals, loved the idea of protecting China from outside information and ideas. But before the authorities could figure out how to implement the controls, young Chinese entrepreneurs had already set up Internet service providers and Yahoo-like Chinese websites, and the nation’s universities had established a network of international links to the Internet. It was too late to control the Internet.
Typically, China’s bureaucrats bring an industry to heel by dividing and conquering. As a journalist, you see a dark side of China that is usually hidden from foreign businesspeople. We had been forced to live in diplomatic housing compounds where our phones were tapped and our apartments bugged. Our secretaries, translators, drivers, and even our children’s baby-sitters were foreign ministry employees who were required to report on us. In tense times, people we talked to casually on the street were hauled in for questioning. Whenever I took a reporting trip outside Beijing, I was followed by a dozen or more plainclothes agents.
If foreign companies publicly band together in China to challenge the government, it can quickly trigger paranoia and insecurities left over from the 1800s, when foreign powers carved up China. It is best to work these kinds of issues behind the protection of an industry or trade association.
First and foremost, we knew we had to respect China’s sovereignty by acknowledging the government’s right to a “border check” on news. That simply meant that we acknowledged their right to read incoming news stories on our wires. We explicitly denied that they had any right whatsoever to change the stories or to otherwise censor them. The second most important principle, and the one that became our mantra, was that Xinhua could not be both our regulator and our competitor. Unfortunately, that is very often the case in China. What the West routinely views as a conflict of interest, the Chinese simply see as a competitive advantage. As China prepared for entry into the World Trade Organization, however, the government knew that separating regulators from business management was imperative.
Beyond that, we stuck to basic business principles— allow the market to set prices, ensure equal market access for all, no restrictions on developing new customers and launching new products and full protection of our intellectual property.
The legal philosophy in China is opposite of the United States. China has a presumption of government control, so unless something is expressly permitted by law or regulation, you can’t do it legally. In America, the presumption is one of individual freedom, so unless something is expressly restricted, the people have the right to do what they want.
There was nothing in Chinese law that said we could, or couldn’t, conduct this business in China. Operating in such gray areas is quite normal in China, but this isn’t a comfortable place to be when the government decides to target your company. So we made it a goal to get a written clause that explicitly gave us permission to operate as financial news and data providers in China.
The Chinese are very patient negotiators. That isn’t surprising if you know China. The Chinese people grow up enduring nonstop speeches from teachers and lengthy propaganda lectures. They can tolerate endless nonsense. Foreigners, on the other hand, often become impatient, which puts them at a disadvantage.
Decades of social chaos, political purges, and wrenching Maoist manipulation created a government operating culture in which bludgeoning your opponent into submission and then taking the spoils is a way of life. We knew that salespeople from a new Xinhua subsidiary company were already calling on our clients in southern China, telling them to cancel the “illegal” foreign services and subscribe to the new “authorized” Xinhua service.
Smiling, I pointed at each of the four Xinhua officials one by one, asking a question— “Are you our regulator or competitor?” “Regulator,” they each responded.
Then I lifted my briefcase onto the table and slowly pulled out a brochure that the new Xinhua subsidiary was distributing to our clients. I opened it to a photo of smiling Xinhua executives. “Then who are these guys?” I asked. The photo was of the four Xinhua executives sitting across from me. They were the leaders of the company Xinhua had created to take away our business. All four stared down at the photo without saying a word. After fumbling to light another Marlboro, the leader announced that this meeting would end so that they could “conduct further research.”
We looked for different ways to keep Xinhua off our backs. One tactic was to scare them with the complexities of our business.
We found a July 1984 Chinese law that ordered “every entity and individual” with access to foreign information to collect “important scientific and technological intelligence materials” and hand them over to the Chinese military. That was evidence, we said, that Xinhua was basically under orders to steal our technology.
From time to time, both Dow Jones and Reuters had talked about flexing our collective muscle by cutting off China’s news and data feed. Without the constant updating of our screens, Chinese traders would be left with billions of dollars in market positions and no information. It would be like suddenly going blind in a high-stakes poker game.
While the thrust and parry of our negotiations played out, Xinhua learned a more modern way of doing China business from Peter Yip, a model that is now often employed in many variations by Chinese bureaucracies in search of cash: hype and list. Once Yip realized that China Internet Corporation couldn’t control the Internet, he decided to turn CIC into an international business information service for China.
If a Chinese bureaucracy makes a move on your business, the best thing to do at the outset is ask yourself if there is a deal that can be done. Put yourself in the shoes of your new potential competitor. Is there a way to give them what they are seeking and still maintain a reasonable and independent business in China. The key to winning a fight with the bureaucrats is to appeal to the more confident and reasonable side of China. We felt we had little choice but to take our fight to the top and we knew we would find allies there. The premier and president wanted to build accountable and stable domestic financial markets and maintain the country’s ability to gather billions in foreign capital through overseas listings of Chinese companies.
Finally, we took our case to anyone outside China who might be willing to help. Given the constant flood of foreign officials to Beijing and the relentless globe-trotting of Chinese officials, there are abundant opportunities to have your issue come up in conversation.
My advice is that you write letter after letter after letter. China is ruled by the pen, not the sword. You can get away with some pretty outrageous questions and rhetorical hyperbole by playing the role of the dumb foreigner. The Chinese in their hearts believe that their system is so nuanced and complex and inscrutable that foreigners cannot fathom how it really works, so use that to your advantage.
You must rely on the instincts of your most experienced China hands and business executives to decide when and how hard to push. You can’t be too hard, but if you’re too soft you’ll get nowhere. Indeed, you need to exercise caution about which weapons you do use. If we had flexed our muscles by shutting off our information flow to China’s banks and trading firms, plunging them into chaos, we would simply have confirmed that foreigners could have a stranglehold on a vital sector of the Chinese economy. The focus would have shifted instantly from economic development to state security. That’s a battle no foreigner will ever win.
You can be certain that if you are doing business in China, whether your company is big or small, you will run into political problems, large and small. If your regulator is not your competitor, it is likely that your regulator is dedicated to helping your Chinese competitors. Government officials can lie to you, but you must never lie to them. Exclude information, but don’t provide false information.
Richard Nixon, the president of the United States had come to Beijing on this chilly February day in 1972 on a “journey for peace,” seeking rapprochement with America’s die-hard Cold War enemy.
For years China’s aviation industry had been stuck in a time warp, using primitive machinery to build rickety aircraft based on outmoded Russian technology. That was all that was available because of the West’s Cold War restrictions on technology transfer. The only break they had gotten over the years was when a Pakistan Airlines Boeing 707 crashed in western China in 1971. Chinese government engineers carefully dismantled it. Using reverse engineering techniques, they built two copies of the design that they called the Yun-10. Alas, primitive manufacturing techniques, lax quality controls, and a lack of advanced avionics resulted in a plane just as shoddy as the Russian planes China had been building for two decades.
Within weeks of the trip, China’s top leaders, acting on recommendations of their aviation engineers, ordered ten 707 airliners from Boeing, promising to pay for them with U.S. dollars, despite the country’s dearth of foreign currency reserves. That initial order for ten aircraft set in motion a complex series of events. It marked the beginning of China’s desperate and relentless effort to repair and renew its technological and industrial base with advanced Western technology. It touched off a commercial race among the world’s aircraft manufacturers to dominate a potentially huge market. Immediately behind them came the world’s satellite makers and aerospace companies seeking to harvest new profits in a market that grew so quickly that success or failure in China determined a company’s future.
Nixon’s groundbreaking China trip in a Boeing 707 had instantly made Boeing the preferred supplier and market leader for commercial aircraft in China. The proposal that McDonnell Douglas sent to China was mostly a general outline of how McDonnell Douglas made airplanes. It suggested that a China coproduction facility could start by assembling kits of parts that would be sent from Long Beach. The group drafting the proposal knew it had to focus on two realities: China would have to commit to purchase enough airplanes for the deal to make economic sense, and McDonnell Douglas would have to be prepared to license significant technology to China.
Gareth Chang quickly emerged as the company’s China expert. He had left China at the age of six when his father, a Nationalist Party police official in Shanghai, fled with the family to Hong Kong as the Communists seized power. China followed Deng’s trip with a delegation of thirty officials and industrial bureaucrats who toured the United States for a month, looking for business opportunities and studying American capitalism. Chang later emerged as his company’s China expert. Convinced that China was a huge opportunity, Chang headed there to push things along. He found a warm reception. Most of China, especially military bases and factories, was still closed to foreigners, but Chang was escorted to a dozen of the military’s aircraft factories. They were all the same, fashioned from the Soviet industrial cookie-cutter mold in the 1950s.
In sessions that usually went late into the night, Chang would sit in conference rooms adorned with Mao’s photo and brief senior generals on how the Pentagon worked with U.S. defense contractors or answer questions from senior political leaders about the details of American family life. How much was his income? Tax payments? Spending on food, medical care, and other necessities? The officials took copious notes. They were amazed. Decades of anti-American propaganda had left them convinced that in the United States the government controlled everything. Chang was not only making himself a China expert, he was becoming a trusted insider among China’s elite.
Chang suggested that Douglas start small, testing the ability of Chinese workers with a contract to manufacture MD-80 landing gear doors. While far short of what had been envisioned years earlier, the agreement, touted as a $1 billion deal, was the largest commercial deal ever between U.S. and Chineseestablished a pattern that China would follow for decades: in exchange for market access, foreign manufacturers would transfer technology and produce at least some of the product in China. Chang was an instant celebrity. Fortune magazine dubbed him “The Billion-Dollar Man.
Chinese managers gradually took over key positions in the production process. They adapted well to such American manufacturing techniques as “total quality management,” a rigorous system of statistical measurements, problem solving, and continuous quality improvements.
By the late 1980s, the Chinese aviation world was changing fast as China dismantled its Soviet-designed industrial sector. The government monolith with which Chang had arranged the original MD-80 deal was splitting into pieces and dividing up responsibilities. One result was a proliferation of airlines formed by local and provincial governments. Boeing treated the regional airlines like royalty, as without them, the regionals would never have been created. By the end of 1989, Boeing had sold ten 707s, thirty-four 737s, thirty-three 757s, ten 767s, and three 747s to the Chinese airlines.
Bob Hitt had the fortitude and temperament for the job. He loved China and the Chinese loved him. He had traits the Chinese admired: a fierce chain-smoking habit, a constant stream of good-natured profanity, and the ability to guzzle beer and trade shots of mao-tai late into the night with any banquet companion foolish enough to challenge him. And when the Chinese would inevitably launch into an impassioned recitation of China’s problems and how they were all the West’s fault, he would chuckle. “Oh, not the imperialist guilt thing again.
The licensing requirements were part of a long and schizophrenic effort by various U.S. government departments to control the spread of technology around the globe. During the height of the Cold War the restrictions had been extraordinarily tough, with the United States, Europe, and other non-Communist allies cooperating to block advanced technology and weapons from reaching the Soviet bloc and China.
In China, the art of getting licenses and approvals is to tell the government whatever it wants to hear, and then do whatever you want after permission is granted. You can always work around the system in China.
In January 1995, a Chinese Long March rocket launching Hughes’s Apstar 2 satellite exploded fifty seconds after liftoff. Instrumentation showed once again that the nose cone had failed. Great Wall was desperate to cover up any flaws in the Long March rocket for fear that insurance companies would refuse to underwrite future launches. In the end, both sides would blame wind shear for the accident.
Within months of that compromise a Long March rocket launching a Loral Space Systems satellite tipped over as it was being launched. It flew sideways into a nearby hillside, destroying a farm village and killing or injuring more than one hundred peasants. The insurance industry went ballistic. Political compromises and face-saving explanations wouldn’t cut it. If Loral and Great Wall couldn’t pinpoint the cause, and fix it, insurers would not only refuse to pay claims, they would quit backing Chinese launches. The Chinese quickly explained that their investigation had determined that a broken wire in the guidance system had caused the failure, but insurance executives didn’t buy it.
Anti-Chinese sentiment rose in the summer of 1996 when news stories began appearing, alleging that several Chinese-American hustlers had raised significant funds for Clinton’s 1996 reelection campaign from overseas Chinese and Mainland Chinese sources. The implication was clear: the Clinton administration couldn’t protect America’s secrets and had solicited campaign contributions in exchange for giving U.S. and Chinese companies favored treatment.
Since the United States reestablished diplomatic relations with China in 1979, the relationship between the two nations has been schizophrenic. When a Chinese fighter jet collided with an American EP-3 spy plane off the coast of China, I was one of three former chairmen of the American Chamber of Commerce in China asked by the membership to determine the political repercussions of the incident.
Since the Tiananmen Massacre, the Chinese government fostered a spirit of nationalism focused not on China’s many achievements but on the resentment of “foreign elements”—chiefly the United States—who were conspiring to keep China poor and weak. When the U.S. Congress railed about Chinese human rights abuses, opposed China hosting the 2000 Olympics, or threatened trade sanctions, the Chinese press adeptly framed the actions as American attempts to “contain” China.
The May 1999 U.S. bombing strike on the Chinese embassy in Belgrade that killed three Chinese journalists was a tragic gift to Chinese propagandists. The United States blamed it on a CIA targeting mistake, but I have yet to meet one Chinese who believes that. Then came 9/11. The destruction of the World Trade Center towers by Al Qaeda terrorists gave the Bush administration a new public enemy number one and China suddenly became one of America’s best friends.
China understands that technology is the key to its military and commercial modernization. But the ludicrous caricature in the Cox report—of all-powerful Communist leaders organizing Chinese officials, businessmen, scientists, and students to act like an army of robots gathering U.S. secrets as they visit or reside in the United States—reveals more about U.S. thinking than Chinese actions. APage 364sserting as the Cox report did that modernizing China’s military is “the main aim of the civilian economy” is simply stir-fried Kremlinology. China today is not the Soviet Union of yesterday.
Ignore the hyperbole and look at the facts in the Cox report and it’s very clear that any serious effort to “contain” China is a fool’s mission. The China market is simply too voracious, the Chinese economy too powerful, and the political allegiances and alliances of the Cold War that could even attempt such a thing no longer exist. With a similar alliance alive and well in Beijing, American technology businesses will continue to find themselves squeezed and in danger of losing the global competition to companies from countries that don’t view China in the same way.
We can see from the McDonnell Douglas saga why the United States slipped behind in the machine tool industry. I recently visited one of the ultramodern multibillion-dollar silicon chips plants going up in Shanghai. All the equipment was from Japan or Taiwan, the result of US export controls.
The American bureaucracy from top to bottom—and lawmakers who rely on business support—must understand that blocking U.S. technology that is freely available from Europe or Asia undermines the global competitiveness of U.S. companies because China is such a huge market.
There is no doubt that Gareth Chang and tens of thousands of people like him have made great contributions to China’s development. They do so partly out of emotional ties to their homeland. They want to make China a better place, but they mostly do it to make a buck. China is one market where they feel they have a competitive advantage.
The Chinese government offers special deals because you have something they want, not because they want to help build your business. Unless there are clear and competitive commercial underpinnings, you will lose, no matter what the government has promised. Cultivating relationships with Chinese officials is very important, but basing your business on those relationships is a formula for disaster. The market will always win in China.
China is moving fast and changing faster, an environment in which few Western companies are structured to compete. Your China business model must be configured for constant changes in every aspect of business and politics.
Never use the Chinese market as a last resort to save your business. The Chinese can smell desperation and will take advantage of your weakness. Exploit your advantage in China. A country that practices information and thought control stifles innovation. Transfer what knowledge you must, but hold back the rest.
Relations between the United States and China are caught up somewhere between the Cold War and hot competition. Recognize that underlying the diplomatic and business cooperation between the two countries are strong political forces on both sides that see the other as a future enemy.
China constantly erects political or regulatory roadblocks aimed at limiting foreign business opportunities and helping domestic companies. Don’t confuse your administrative victories in these battles with genuine business accomplishments.
Murdoch wasn’t the first foreign executive to make that long march through the Great Hall of the People. It is a routine part of the political pageantry intended to give senior Communist leaders an aura of omnipotence and to remind visitors of China’s dynastic tradition going back two thousand years. The clear message to executives is that they should be grateful to be able to do business in China.
China’s modernization has been guided by Deng’s mantra of “reforming and opening” except for the media, which the government wants to reform, but not open. The unintended byproduct is that foreign companies in China are open targets in a journalistic free-fire zone. Chinese reporters are so restricted in what they can report about China that they sometimes feel fully licensed to say anything they want to about foreign business.
The huge misconception in the West is that China moves forward and changes because all-powerful officials at the top issue orders that everyone follows. It isn’t like that at all. Instead, it is all about networks of like-minded people creating a web of protection for the reform. Deng began the transformation of China in 1979 because he was empowered and protected by thousands of officials who, like him, had suffered personal political persecution under the tight grip of Mao’s feudal politics.
The loudspeakers were never silent. From lampposts in virtually every city, town, and village in the Mao days, the speakers blared out an unceasing line of propaganda, leaving no room for silence, lest that silence be filled by the people’s own ideas. Until Deng cracked open the door to a market economy in 1978, the media in China had been firmly under the heel of the Communist Party. When Deng launched economic reforms at the end of 1978, China had only 186 newspapers and thirty-two television stations, all government owned. Most media content emanated from the Xinhua “news agency,” which distributed government announcements, filtered and refocused all international news, and, most importantly, disseminated a steady barrage of government propaganda.
Virtually no Chinese brand names had survived the decades of communism. It quickly became apparent that Chinese sodas, soaps, and appliances were no match for products from Coca-Cola, Procter & Gamble, and Hitachi. A Gallup poll in the mid-1990s showed that of the ten best-known brands in China, six were Japanese (Hitachi, National, Toshiba, Toyota, Suzuki, and Honda), three were American (Coke, Mickey Mouse, and Marlboro), and one was Chinese (Tsingtao beer).
More than any other consumers in the world, the Chinese equated the quality of a given brand with the quantity of the advertising for it. The reason was simple: when they purchased the products that were advertised, the products turned out to be good. To catch this wave, hundreds of enterprising bureaucrats and businesspeople opened new newspapers, magazines, and television stations. By the early 1990s, China had more than two thousand newspapers, seven thousand periodicals, and some seven hundred fifty local television stations that either produced their own programming or acted as relays for CCTV. The rapid growth alarmed the party. The media was getting out of control. In October 1993, Li Peng signed State Council Proclamation 129 banning the purchase or possession of satellite dishes by ordinary Chinese citizens.
Liu was born in Shanghai in 1951. His parents were government cadres who followed the army there. In 1953, his family moved to Beijing, where his father, an educated and cultured man, eventually worked his way into the upper ranks of the Communist Party Organization. By 1988, Liu was a colonel and in charge of all military news broadcast on Chinese radio. While he loved the broadcast media, Liu wanted to gain more experience as well as make some money. In Singapore, Liu started his own oil trading business with China, investing his oil profits in Beijing real-estate projects. Watching Singapore’s tightly controlled press, Liu began to think about returning to his first love, broadcasting. He realized that it was possible to offer quality entertainment and informative news while also providing sophisticated government propaganda that openly discussed problems, albeit from the viewpoint of an efficient and noble government’s efforts to solve them.
He didn’t know it at the time, but Liu had found the formula for the future of television in China. He also realized that the outside world’s view of China was coming from the Western press. Programs prepared by CCTV for overseas audiences were so blatantly propagandistic that they had no credibility. Like many of his generation, Liu wanted to see China modernize, to catch up to the rest of the world and earn its respect. He plunged into Buddhism, not to practice the religion, but to understand the core of Chinese traditional philosophy and culture.
About the time that Murdoch was taking over STAR TV in 1993, Liu began looking for ways to launch a Chinese-language TV station outside of China. His vision was for a station that would appeal to a global Chinese audience and beam its signal into China by satellite. At the time, the only satellite that could reach his intended audience, AsiaSat 1, was fully booked. In 1994, however, Liu heard that Mongolian state television was giving up its transponder on the satellite. STAR, which dominated the satellite, had the right of first refusal for the transponder.
The partnership breakdown was 45 percent for Murdoch, 45 percent for Liu, and 10 percent for a CCTV company in Hong Kong. Liu also took pains to reassure the state-owned CCTV that he wouldn’t be so much a competitor as a source of new programming. He worked his ties with the bored, discouraged editors and producers at CCTV, promising them lucrative coproduction deals and lots of foreign travel.
The Phoenix Chinese Channel, with its flashy graphics and fast-paced Fox-style format, burst onto the staid Chinese television scene in March 1996 with an amalgam of programming from the STAR TV Chinese and movie channels. While Phoenix didn’t have legal permission to be seen by Chinese viewers, the channel was widely available in cities and even in country villages where illegal satellite dishes were proliferating. CCTV and stations in the Chinese provinces immediately copied the Phoenix shows and broadcast style. Later that year, Liu followed through with his initial promise to propaganda officials by launching the Phoenix Chinese News and Entertainment Channel in Cantonese and Mandarin, designed to appeal to overseas Chinese.
Liu was personally involved in every step of the news output. He instinctively knows which stories are important and what sells to a Chinese audience. He also knows just how far he can push before upsetting Chinese authorities. He created personality-driven talk shows in which stylish and witty commentators discuss current events with each other, a broadcasting innovation in China. Of course, the commentators took only marginally diverse points of view, carefully keeping their discussions within the bounds of what is permissible in China.
Professors taught Shuli and her classmates to be real journalists, drawing lessons from the days before Mao muzzled the press, when Chinese reporters had gathered economic and political information for the leadership during the Chinese civil war. The students and teachers openly discussed what a disaster the Cultural Revolution had been. The students were told that their role was to serve as the voice of the Communist Party, but also to act as critics and watchdogs to help the party maintain its integrity.
In 1994, Shuli won a Knight Fellowship at Stanford University. In California she studied the U.S. financial markets and the American media’s role in policing those markets. She figured it would be only a matter of time before Chinese leaders realized that without the press acting as a watchdog on financial markets, China would become a paradise for stock manipulators who would leave worthless shares in the hands of small investors. The China Business Times took her back as its senior reporter and Shuli found a place to continue her study of financial markets. Shuli set a high standard for her reporting, poring through Euromoney, Institutional Investor, and The Wall Street Journal, not only to keep abreast of international financial markets, but also to study their writing styles and standards.
The Asian financial crisis of 1997–98 showed China’s leaders how crony capitalism could undermine a country’s financial system and erase decades of growth and progress. Shuli and her reporters continued to expose stock market problems and solicited experts to write economic policy analysis that questioned some government policies. China’s business community soon learned to both fear and respect Shuli. She doesn’t play golf and she doesn’t spend much time socializing.
Shuli realized early that the Communist Party officials who scrutinized publications knew little about economics and nothing about finance. She thrives on controversy, and in October 2000, Caijing sent tremors through China’s entire financial industry with the publication of a package of stories on how the managers of China’s new mutual funds were working together to manipulate the market.
A year later, in August 2001, Caijing again roiled the financial industry with a detailed exposé of Yinguangxia, a company with a rocketing stock price that was the darling of stock market investors. The company CEO came to Wang Boming before the article was printed, offering to buy advertising to ward off publication and then offering to buy the magazine. This was a company that had been lauded and visited by President Jiang Zemin and other leaders. Wang summoned Shuli and quizzed her about the story. She convinced him that she had iron-clad evidence that the company’s financial statements were fake.
Caijing reported that Yinguangxia had been filing false financial statements. The stock dropped from 34 to 7. CSRC reported that the company’s financial reports were inflated way beyond what Caijing had reported. The company sued Caijing and lost twice. Also during the SARS outbreak in 2003, the Chinese government ordered the media to not probe the issue and carry the official government line that SARS was an isolated incident. But Caijing jumped onto the story, and Shuli went to the countryside in western China to interview officials and trace the pattern of the disease outbreak.
When I was The Wall Street Journal bureau chief in China in the early 1990s, I was struck by how much Chinese reporters knew about what was really happening in the country and how little of it they could actually report. Journalism in China— “Freedom means knowing how big your cage is.”
Many reporters are corrupt, corpulent, and lazy. They are handcuffed so tightly when it comes to political, government, and social news that they focus on business news. But all too often business news becomes simply a way to make money for themselves by allying with Chinese entrepreneurs to inflate stocks or helping Chinese companies attack foreign and domestic competitors.
As a foreign company in China, your best defense is a good offense. The flip side of Nationalist indignation is that Chinese reporters are also quite compliant if you cultivate them.
Two key business lessons can be drawn from observing the saga of Murdoch and Liu Changle—
- One is that the most talented businesspeople in China are often the great human observers. Analyzing the human elements of a business situation is where the Chinese are brilliant. Just as lawyers in the West can help you navigate a path to success by finding legal loopholes and arguments, Chinese businesspeople navigate their way to success by working many people, from many angles, simultaneously. The best can nudge one group this way, nudge another that way, and nudge another to stay out of the way, all at the same time. Liu Changle is a virtuoso nudger.
- We can also learn from the way Murdoch has handled his partnership with Liu. He didn’t put all his eggs in one basket, and he kept developing his own government relations. This has allowed Murdoch to continue to create his own Chinese entertainment channels, and to develop a sense of personal trust with Chinese leaders. His partnership with Liu is strong because Murdoch has gotten out of the way. He has basically ceded control of Phoenix to Liu, and thereby allowed Liu to pursue his own agenda of news and public affairs. They gradually have moved into the usual formula for success in a joint venture in China— peaceful coexistence between the partners.
The most talented businesspeople in China are great human observers who can analyze the people elements of a business situation. Lawyers in the West find loopholes and use legal reasoning; the Chinese find people who can nudge their interests this way or that way.
In business relationships, the Chinese seek stability and trust more than intimacy. They want to feel comfortable that you will offer no surprises that will hurt them, but they don’t need to be your best friend.
Treat reporters in China with respect, but be very wary. Most Chinese journalists have little or no professional training. Objectivity isn’t part of their playbook. For many, being a reporter is just a stepping-stone to a business career.
Building China’s telecom system, and keeping it under firm government control, had been Wu’s mission in life since he became Communist Party secretary of China’s telecom ministry six years earlier. Dozens of the world’s biggest telephone companies were throwing piles of cash at Unicom to exploit cracks in the regulatory wall Wu had built to keep foreign telecom operators out of China. China’s ferocious entrepreneurial instincts and wads of international money were ripping apart his best-laid plans for orderly competition. The market was taking over, and dragging him along with it. Wu felt trapped, as he was supposed to think like a telecom tycoon and maximize profits. But he also had a government mission to bring universal and affordable phone service to every corner of China.
The Soviet-inspired five-year plans that once coordinated the socialist planned economy have now become a blueprint for China’s global business ambitions. Some plans are aimed at building entire modern industrial and commercial sectors, such as steel, chemicals, silicon chips, and automobiles. Other plans are aimed at building infrastructure, including dozens of modern airports, a string of deep-water ports, and huge expansions of universities, railroads, bridges, and housing estates. The scale is mind-boggling. In the past fifteen years, China has invested $300 billion in building half a million miles of roads, including twenty thousand miles of expressways that crisscross the sprawling country.
Overseeing this expansion has been an elite group of Communist party bureaucrats whose mission is to build businesses and business infrastructure. Their goals are often so capitalistic they might properly be called “bizocrats.”
Watching Wu Jichuan plan and build China’s phone system revealed much about how the Chinese system works. As in many other industries, Wu used the lure of China’s huge market to persuade foreigners to provide technology, capital, and training.
China’s telephone system under Mao had been a vital national security tool. With Deng’s economic reforms, Wu and his colleagues at the MPT were told to build a world-class telephone system while creating China’s telecom technology and manufacturing expertise. China’s telephone system would be aimed at spreading prosperity.
Wu approached his assignment using the basic Chinese economic development model: bring in foreign capital, expertise, and technology, then block the foreigners from owning any key parts of the industry while building a domestic manufacturing base and supply chain. He would test all the new technologies and business models, then carefully choose what was best for China. The goal was Chinese ownership of the whole system, from equipment manufacturing to intellectual property.
As Chinese companies, financed by the government, learned the basics, technology switch prices collapsed. The foreign producers sold mostly to big cities while new Chinese competitors sold to the surrounding rural areas. Price pressures, coupled with local content requirements, persuaded most foreign companies to move telecom equipment manufacturing into China as partners with the new Chinese government companies.
Among the consultants was Chauncey Shey, a recent emigrant from Shanghai who had come to the United States in 1984 to study computer engineering. Shey had no desire to spend his life in research and engineering. He wanted to make money. One day he looked up from his desk at Bell Labs and realized that his most immediate money-making opportunity was surrounding him. Bell Labs needed an outside partner to recruit and screen other “consultant” engineers.
The Chinese students who were flooding into the United States were incredibly diligent and driven, but Wu Ying was in a class by himself. When he had served as an assistant professor at Beijing Polytechnic University, he drove university security crazy, often remaining in his office long after the guards locked the building doors at 11:00 P.M. The guards were forever catching Wu Ying climbing out of the building windows at 1:00 A.M. or 2:00 A.M., heading home for a few hours of sleep before the next day’s classes.
Wu Ying’s brains, diligence, and the fact that he spoke English won him a coveted spot at Stanford University. He opted instead for the New Jersey Institute of Technology, which offered him a teaching assistantship. He arrived in New Jersey in 1985 with thirty dollars in his pocket. He worked in a Chinese restaurant to earn spending money. After graduating in 1987, Wu Ying went to work at Bell Labs, as did his telecom engineer wife. But Wu Ying wasn’t happy being just another research engineer in a big organization. After a couple of stints back home in China, he realised that he loved being an entrepreneur.
Wu was under extreme pressure to open China’s telecom system to induce competition and expand foreign investment. But he convinced senior leaders that the telecom system was a national asset that required his ministry’s complete control. Wu is a product of contemporary China, a patriot who believes in the system. His strongest backer was Premier Li Peng, who like Wu was a committed Nationalist who believed in the need for a government phone monopoly.
A new network was forming around a man who was once one of China’s top five leaders, Hu Qili, a member of the party politburo standing committee who was purged for opposing martial law in Beijing during the 1989 Tiananmen demonstrations. Hu Qili was appointed electronics minister in 1993, and he devised the ambitious “Golden Bridge” initiative to wire China together with huge fiber optic pipes and satellite systems. The objective was to unify customs offices across China to stop corruption and to tie together the country’s banks so the central bank could better control lending and build a credit reporting system for introducing national credit cards.
Regional government officials were soon clamoring to meet with Zhao, eager to establish Unicom branches to build and operate the Unicom phone system in their areas. At the same time foreign telecom executives were tripping over one another to secure a meeting with Zhao. This is what the telecom world had been waiting for: a second major carrier, the first step in Chinese telecom deregulation. This was the chance to get a China telecom equity play. The monopoly would be broken. The foreign telecom operators were giddy with excitement, as were legions of overseas China entrepreneurs from Taiwan, Hong Kong, and Singapore who smelled big money in the making.
Everybody wanted to throw money at Zhao. But he knew that Wu Jichuan would cut his throat in the State Council if Unicom offered equity stakes in a Chinese telephone operating company to foreigners. How to get foreigners to finance this without ceding control? He needed to be creative and move fast before all those foreign telecom companies lost interest.
Zhao persuaded Bell Canada executives to help him create what became known as the “Chinese-Chinese-Foreign” telecom investment structure. The “CCF” structure worked like this: foreign companies would form a joint venture with a Chinese company. That entity, now a Chinese legal person, would then form a joint venture with a local Unicom branch. Under this CCF joint venture, the foreign investor would provide the telecom equipment, build the network, and teach Unicom how to operate it. In return, the foreign entity would collect a share of the revenue. Zhao thought it was a work of genius. Each contract also had a clause saying that if Chinese regulations changed, the foreign investment would transform into equity. Zhao knew that wouldn’t happen, but of course he didn’t say that to anyone.
In its first year, Unicom signed thirty-eight letters of intent with foreign companies, and built initial mobile phone networks in Beijing, Tianjin, Shanghai, and Guangzhou. At the end of October 1997, China Telecom (Hong Kong) Ltd. listed simultaneously on the New York and Hong Kong stock exchanges, raising nearly $4 billion, ten times larger than any previous overseas listing of a Chinese company. Wu now not only controlled the world’s fastest-growing phone network, but he also had wrenched huge piles of money from foreigners without ceding any real control to them.
That put telecom bureaus across China on notice that their independence was limited to creative ways of building, not owning, local telecom networks. Even as foreign investors celebrated what they saw as the first step in privatization of China’s telecom networks, Wu had craftily reasserted his control over the country’s fast-growing mobile networks. The listing increased Wu’s political power. He was the acknowledged master at using money from foreigners to modernize China without ceding any control to them.
In April 1995, he told an international audience at a telecom conference that China was “experimenting” with legal structures that would offer foreigners a return on Chinese phone network operations without offering equity in the systems. The Internet further complicated matters. Wu was hearing about too many illegal phone activities fueled by new technologies, such as the two brothers who had downloaded IP phone software from the Internet and were offering an Internet-based long-distance phone service from their little electronics shop in the coastal city of Fuzhou. He saw China as a market of 650 million phones. He figured that the top 20 percent of Chinese people could afford regular mobile phones, while the bottom 30 percent were simply focusing on getting basic necessities.
Wu Jichuan’s treatment of Unicom had been a masterpiece of bureaucratic passive aggression. But the allure of CCF began fading among foreigners as 1997 wore on. The foreign telecom companies grew wise to Unicom’s ploy of offering the same projects to multiple foreign companies and constantly squeezing them for market studies and business plans while giving nothing in return. Many of them also found that their “near equity” investment money was going to purchase cars, office blocks, and even a few restaurants for their Chinese partners.
Morgan Stanley had missed the China Telecom IPO, the biggest investment banking embarrassment in Asia in decades. Unicom would be the firm’s revenge. Morgan Stanley told Unicom that if the CCF structures were unraveled, the company could raise more money in a global listing than it had ever imagined. This lucrative cleanup scenario wound its way to the top of the Chinese government. In the end, investors had no choice but to accept the return of their initial investment along with a small amount of interest income.
Even as the sheer size of Wu Jichuan’s empire as MII minister earned him the right to be called China’s telecom czar, his real power had begun a precipitous decline. Wu was so busy fighting his telecom turf battles that he failed to notice the growth of the Internet. Suddenly millions of Chinese people were surfing the global Internet, spending hours reading news, playing games, and even arranging dates on Yahoo-style portal sites. China’s Internet was created by young Chinese entrepreneurs funded by Intel, IDG, Rupert Murdoch, Dow Jones, and a growing list of Silicon Valley venture capitalists who saw the Chinese Internet as the next global quick-money bonanza. In September 1999, Wu swung his rubber mallet at this group: foreign investment was forbidden in Chinese Internet companies and MII was determined to clean up any “irregularities.”
Wu had added more than 500 million phones to the Chinese system and fueled the creation of a formidable telecom industry from the leftovers of a rickety Soviet-designed research and production system. China’s four telephone operating companies, which he had successfully fought to keep under his ministry’s control, had annual revenues of $50 billion. He might have been ineffectual at managing the domestic market and domestic competitors, but he got high marks for holding foreign telecom operators at bay, giving China time to develop and refine its own domestic technology standards. Wuhan, a university center in central China, had been transformed into “Optics Valley,” the center of an industry of 120 companies churning out a half million kilometers of fiber optic cable a year and sophisticated optical networking equipment.
UTStarcom got where it is by doing things differently. Its founders had cooperated with one another and focused on their individual strengths to build the company. That is almost unheard of in China, where management is a constant battle for personal power amid a culture that inspires corporate dictators, not cooperation. UTStarcom is laced with Western executives from Bell Labs and AT&T. The company slogan is “Western Innovation, Oriental Diligence,” which is based on the belief that the Americans are very innovative and the Chinese are very disciplined and entrepreneurial. The company believes that innovation requires the willingness to fail.
UTStarcom designed and deployed several telecom products besides Little Smart, but the company has derived the vast majority of its revenue from the Little Smart wireless gear in China. Its biggest sales outside of China have been to Japanese companies owned by UTStarcom’s largest shareholder, Softbank.
Wu Ying believes that China’s large and varied market is the perfect place for such innovation. The company also claims to have the best of both worlds when it comes to engineering. The majority of UTStarcom’s R&D force is in New Jersey, California, and Chicago, where engineers are more culturally attuned to experimenting and creative thinking. But the company also has a couple of thousand engineers in Shenzhen and Hangzhou, where the execution of product refinement is combined with intimate knowledge of every connector and transmitter in the Chinese phone system. There is also five-to-one cost savings with the Chinese engineers compared to the American engineers.
China has built formidable state-owned technology companies by learning from foreigners and filling an endless supply of huge orders from government customers in a protected and vibrant market. But foreign companies still dominate the technology game. Many of the original telecom equipment joint ventures have evolved, with the foreign party buying majority shares or full ownership. The vast majority of China’s technology exports are still coming from foreign-invested companies, the majority of them wholly foreign owned.
As the foreign telecom suppliers saw their know-how and technology walk out the door to Chinese competitors, they got smart. They started holding back key components, and even designing products so that there was a key component that isolated the most valued technology. China built its telecom equipment industry through reverse engineering, which is often an uncomplicated matter of assembling configurations of components, many of which could be purchased from the original company’s suppliers. The key is in the software and how it interfaces with the hardware. That is where the expertise is.
Chinese love to point out that they invented and created porcelain, silk, eyeglasses, paper, the printing press, the umbrella, water-tight compartments in ships, and gunpowder. They were eating with sanitary chopsticks for one thousand years while Europeans were reaching into common bowls with dirty hands. But the crush of politically driven information and thought control, and Confucian traditions, have left China today a place where the people are capable of incremental innovation, but not innovative breakthroughs. Breakthrough ideas come from the West. The Chinese are very good with hardware and gadgets, continually refining existing technology and products. Chinese people are very good at perfect execution. China has created fabulous pianists, violinists, and conductors, but very few original composers. Chinese people are taught to learn and emulate before they try to create.
Individually, Chinese engineers are very good, but working in groups is a challenge. It will take many years for the Chinese to learn to manage streams of work produced by many people to meet the milestones and processes necessary for technology development. The Chinese R&D talent pool is extremely deep. One academic study estimated there were nine thousand Chinese PhDs in Silicon Valley in the late 1990s. Foreign companies are setting up R&D facilities in China at an accelerating rate. Currently, the incentives in China are for copying the products of others. In coming decades, the incentives will reward those who create new technologies and new products. There is little doubt that China will figure that out, too.
China is taking off with the help of the Communist system, not in spite of it. Growth is fueled by the people’s pent-up ambition and entrepreneurship. But government planning often provides necessary direction and focus. China is not one market, but a collection of many local markets, each with its own practices, traditions, and methods of local protectionism. It is often best to start your business at a provincial level where officials are more entrepreneurial and often resent control by Beijing. They can be very loyal and protect you.
While China seeks the latest technology, it is often the most appropriate and affordable technology that wins in the market. Slimming down your price and focusing functionality for China is often the key to success. In China, you only need two companies to have a price war.
China is limited to incremental innovation both by culture and politics. Rote education and a political system with information and thought control don’t create an environment for breakthrough discoveries and inventions. Any tech company doing business in China should assume that its designs and products are being copied. When forced to share your technology in China, isolate various technologies from each other so that your partner doesn’t have the whole picture. Protect your technology crown jewels because China’s tech sector is built on reverse engineering foreign products. One approach is to embed your most valued IPR assets in components built offshore.
Mao’s revolution has turned into an entrepreneurial frenzy that is gripping the country. The classmates and alumni greeting and snapping photographs of one another are China’s new revolutionaries. Some are the top bosses of government enterprises. Others are private entrepreneurs, car dealers, property developers, or factory owners. There also are top executives responsible for the China operations of multinational corporations like General Electric, Siemens, Mitsubishi, Morgan Stanley, and Ericsson.
For thousands of years Chinese society revered two things above all else: family and education. Everyone had a place in the family and, by extension, in the country. Filial piety was the main responsibility of children, which meant absolute obedience to parents. Parents, in turn, had the obligation to obtain for their children the best possible education. For its part, education produced scholars, whose obligation was to serve the state. The country traditionally has been governed by bookworms. The path to status, success, and wealth was the memorization of poetry, history, literature, and Confucian philosophy, all of which was spouted back in an exhausting litany of tests that stretched over a lifetime. The brightest and most diligent rose—often only after decades of study—to high positions serving the emperor.
The country was built on two models. Before Mao’s Communist revolution, business in China was traditionally a family affair that took advantage of the complex network of rights and obligations—and trust—within the family. The other model is the Soviet-style state-owned enterprise, the basis for China’s rapid industrialization in the 1950s. That model failed, allowing Deng to unleash the capitalist hounds in 1978. As China now searches for a third way—global businesses with professional management and a mix of private and state ownership—managers in China face an overriding problem. The sudden transition from Cultural Revolution in the 1960s and 1970s to the scramble for wealth in the 1980s and 1990s has left a deeply scarred society, one that is less Confucian, more confused. The country is not only experiencing an economic and social upheaval, but psychological, spiritual, and ideological upheavals, as well.
But to reach the next step in its economic evolution, China must find ways to go beyond some of the lingering cultural, social, and psychological barriers that will soon impede that progress. The struggle now is to discover the management principles and techniques that will harness and focus the immense energy and intelligence of the Chinese to build efficient, innovative, and responsive companies capable of competing on their own with the best in the world. Much of that groundwork will be done in China’s universities, which have transformed themselves in the past decade from crumbling brick buildings where students were taught leaden course-work into vibrant but behaved centers of learning. Today they are beginning to produce some impressive research projects and startup companies and the pace at which they are forging ahead is accelerating.
Some of China’s most successful scholars and entrepreneurs are searching for the unique blend of Chinese and Western business concepts that might become the foundation for the country’s next step onto the world economic scene.
Another tradition reviving itself was China’s desire to learn business practices and management techniques from the West. There were two kinds of schools in ancient China. One trained students in Confucian philosophy and Chinese culture and history in preparation for the civil service exams. The other taught basic literacy and mathematics to artisans and merchants. Modern schools with liberal arts curriculum were introduced by Western missionaries in the 1800s. They established English-language high schools and universities in major cities as Chinese merchants sought to train their children for doing business with the West.
Western Professors may consider their American MBA students to be ambitious, smart, and energetic, but those students would be no match for Chinese MBA students, among the most aggressive and impatient in the world. No matter how hard the professors worked, they would be the butt of student complaints that they weren’t working hard enough. Yang warned the Western professors to expect telephone calls and knocks on their doors at any time of the day or night from students wanting answers to questions.
Tailoring an American MBA program to fit Chinese students would be an evolutionary process. One of the first lessons that came through clearly was that Chinese students didn’t care how business was done in the West, they wanted to know how to do business in China. They considered the Harvard Business School case studies—the foundation for many Western MBA programs—to be irrelevant. Professors quickly began writing their own Chinese case studies or finding existing studies involving Chinese or at least Asian companies. They used any methods they could to get across key concepts. “Courses with titles like Comparative Legal and Ethical Systems, Cross-cultural Negotiations, and China’s Economic Development and Reform were created to insure that China’s systems and interface with the West were included along with such practical skills as accounting, financial analysis, and administration in a Chinese environment.
The students who had worked in Chinese companies were thoroughly indoctrinated in Chinese management style, which accepts the boss as an overpowering figure who barks orders and issues withering criticism while focusing laserlike vision on the bottom line. The boss analyzes problems and dictates solutions. Employees merely execute orders. A decentralized decision-making process would suggest weakness and a lack of authority at the top. The students who had worked for Western companies, who had some exposure to the more benign and cooperative management philosophies of their Western bosses, were more receptive, but nevertheless confused by the collision of philosophies.
In one revealing exercise, Yang asked his students, “Who among you thinks he or she will become CEO of a company?” Only a few hands went up. Then he asked, “Who wants to be CEO?” All of the students raised their hands. However ambitious, even these hard-charging Chinese managers demonstrated that they don’t believe they can control their own future.
In China you are not passing on pure technical business school knowledge. The Chinese are engaging in a mental, spiritual, ideological, and psychological transformation of themselves. Yang has spent much time thinking about cultural and behavioral issues and identifies two serious problems. One is that the Chinese have two identities: the individual person and the organization person. As a result, people often act one way but think another. The second is that Chinese don’t separate the personal and professional, so power struggles and politics often dominate Chinese corporate behavior.
He illustrates his points by comparing China to Japan and the United States, the other two countries in which he has expertise in corporate organizational behavior—
- In Japan, Yang says, employees have only one identity, the organization man. Even the rituals of drinking and cavorting with prostitutes are considered company activities.
- In the United States, Family life is separate and compartmentalized. Yang says, companies are structured to make decisions based on merit and through predictable depersonalized systems that are designed to ensure cooperation among employees, regardless of their personal relationships.
- In China, Yang says, surface harmony is at the core of the culture, so the organization person will perform the necessary rituals of obedience and conformity and accept orders and decisions from above. As individuals, however, they often disagree and go their own way. This results in the natural tendency to disobey orders, break rules, engage in graft, and violate company policies with which they disagree.
Chinese students are among the best in the world. But they learn under a system decried by Chinese themselves as tianyashi jiaoyu, or “stuffed duck–style education.” It starts with memorizing and writing some five thousand Chinese characters in elementary school. Next, math, science, and history are all committed to memory and followed with prescribed solutions to problems. In college, Chinese students learn a lot about their specialty, but little else. Subjects are taught in isolation and rarely does anyone make a link between two subjects, like statistics and marketing. The scientific method so familiar in the West—observe, hypothesize, test—hasn’t been part of the Chinese educational tradition.
Chinese business is all about short attention spans. I suspect that if someone laced China’s water supply with the attention-deficit drug Ritalin, the nation’s GDP would drop by at least 25 percent. The focus is on getting rich now, fast. That makes some sense because the great privatization boom is well past its midpoint. But in their efforts to grab whatever they can, Chinese companies tend to diversify into anything and everything rather than paying attention to the core business. The consequences are often fatal. Some academics estimate the average life of a Chinese company to be five years or less. Top-down management under a benevolent dictator has been the encoded social order in China for thousands of years, and by far the prevalent business management model in the country. Without professional management systems, few companies can survive beyond the life-span of all-powerful founders.
Most Chinese know the parable of the three monks. One monk goes to the river and gets plenty of water by hanging buckets at each end of his shoulder pole. Two monks get less water because they hang one bucket between them as they carry opposite ends of the pole, each careful not to work harder than the other. When three monks get together, they don’t get any water. Each wants to be boss while the other two carry the pole. The Chinese freely concede that while as individuals they are extremely capable, the more people involved in an endeavor the less effective each person is. To Westerners, China appears to be a collective society. They eat together, travel together, and have fun together. But always simmering just below that collective veneer is a dog-eat-dog competitive spirit that makes the Chinese among the world’s most individualistic and selfish people.
The corollary of getting rich quick is “trust no one.” China hit bottom during the Cultural Revolution and the Chinese psyche still carries the scars. A society that treasured education closed its schools. A society in which students were taught to revere teachers suddenly had student Red Guards beating and sometimes killing their teachers. A society based on filial piety had children denouncing parents at mass rallies. Then Mao died and Deng rose and said, “Go forward and get rich. Don’t talk about the past.” It isn’t surprising that China’s rush to get rich is accompanied by deep distrust of the system, and anyone outside the immediate family or circle of close friends. The result is a business environment steeped in dishonesty and in dire need of transparency and systems of dispute resolution that can be trusted to be fair.
Nobody really knows who owns what because it is often too dangerous to delineate. Typically, when state companies list on stock markets, they float some 15 percent of the company, with the rest held by various state entities. What about the bosses who have built these multibillion-dollar enterprises? In a few cases, enlightened local governments have provided them with significant stakes in the business. But more often than not, company executives quietly open offshore accounts or siphon off shares at the time of listing. Without establishing incentives that are legal and transparent for significant wealth accumulation by top state-enterprise executives, it won’t be easy for these companies to become global competitors. Everybody will be too preoccupied with taking care of themselves. The larger question that looms above this is just how much of the Chinese economy the government will allow private enterprise to control.
The normal Chinese management structure looks like a Chinese dumpling. The boss is the meat in the middle, wrapped in a protective barrier of his dough homeboys. Hong Kong bosses surround themselves with Hong Kong managers, Taiwanese with Taiwanese, Singaporeans with Singaporeans, and so on. The pattern is repeated at many foreign multinationals in China, with a cabal of Americans or Germans or Swedes forming an exclusive management circle. It is a formula for disaster.
Any professional corporate culture is smothered by the inevitable struggles over status and cultural differences and jockeying for position in the pecking order. Employees become demoralized as companies become divided between the rulers and the ruled, the insiders and outsiders. To succeed, companies in China will have to dump the dumplings and create a layer cake that pulls together a diverse mix of ethnic backgrounds and Chinese from various regions. Purposely layer your management from top to bottom with a mix of overseas Chinese, westerners, and mainlanders from various regions. That way companies can build a clear and effective corporate culture and focus on business instead of falling victim to the Chinese pecking order phobia.
When Deng launched his reforms in 1978, China had a primitive state-run command economy, no business culture, and no private businesses. Now, just over twenty-five years later, the country has built almost from scratch every industry and service you can think of, from steel to tourism to technology. And it’s all the result of trial and error. People make up new management techniques and styles every day, blending East and West, weaving a market economy out of a web of state-owned industry overseen by an authoritarian political system.
Finally, we’ll look into the future at the newest business model in China, the global joint venture of IBM’s personal computer division and Chinese computer maker Lenovo, a partnership that, if successful, will become a model followed by many others.
Pan is convinced that Asians are more emotional in their thinking and decision making while Westerners are more analytical and rational. And she is convinced that a company doing business in China should never hire an MBA. She found that she had been trained for a very programmed and predictable environment. China is chaotic and complex, requiring a more dictatorial management structure that doesn’t have room for democracy or discussion. MBAs also have big egos that get in the way of getting things done. Life experience is the best education to be had in China.
Pan is responsible for establishing prices, obtaining government approvals, and managing the sales force. Pan says he has learned to appreciate the value of education and knowledge. The more knowledge one has, the better and more creative decisions can be made. Yet the management system he has devised is simple and brutal: up or out.Of the eighty-five salespeople, the poorest performing ten are let go at the end of each quarter. The incentive to perform well is promotion and more money. Salespeople can earn $40,000 after taxes. Their direct bosses, the four sales directors, earn $120,000. They, too, are subject to Pan’s rigorous weeding-out process. Each quarter, the sales director heading the worst-performing sales team is demoted to salesman. The top salesman among all the salesmen takes over the leadership of the lagging team. Even the office staff falls under Pan’s merciless system. Pay includes bonuses that are determined by ratings. Employees rated A get big bonuses, while B-rated employees get much less. Anyone rated C gets the boot. “You have to set up a system in which people accept responsibility,” Pan says.
Wearing a wrinkled Hugo Boss shirt and chain-smoking Davidoff cigarettes in the nonsmoking lounge, Zong reflects on the management lessons he has learned in the two decades of building his business. His management philosophy is simple. “Care for your employees with strictness and love,” he says. “Use the carrot and the stick. Allow them to constantly improve their living standards. Show them they have a career path. But if somebody makes a mistake, give them good hard punishment.” He helps the government, but doesn’t become directly involved in politics. “As an entrepreneur in China, you need to understand politics, but you cannot participate in politics,” Zong says. “If you don’t understand politics in China, then you can’t do well in business. If the government doesn’t support you, you can hardly move one step. Your company has to help solve the country’s problems.”
In a relatively short time in its history, China has gone from a country ruled by bookworms to one ruled by bumpkins and then by engineers. The bookworms are coming back, but this time they are focused on innovative business management techniques and building a new future for China, not rote lessons in Confucian philosophy. And they aren’t only in the universities. The next generation of Chinese leaders—those now serving as provincial government and party leaders—are highly educated. More than two-thirds of these people have advanced degrees, and more than two dozen of them have PhDs. Right now there are twenty provincial leaders who have been educated in the West.
China has been rebuilding itself with profits from low-cost manufacturing labor, and building large domestic companies through easy access to government money, protected markets, and government procurement. Those companies will now have to become internationally competitive and that will require modern and effective Chinese management systems. It won’t be easy. All the education in the world can’t overcome thousands of years of ingrained behavior.
When I was doing venture capital in China, I was constantly amazed at the educational achievements and raw ambition of the Chinese entrepreneurs I worked with, but what surprised me most was what I came to call the Mao Zedong management model. The entrepreneurs whose companies I came to know all had advanced U.S. degrees, most of them MBAs, and some had many years of working at IBM, HP, and other multinationals. Once they became the boss of their own company in China, however, many of them reverted to replicating the system in which they grew up. They became dictators—outwardly all-knowing, but insecure inside—who hired yes-men and relatives. As their ever-expanding egos grew, they often pursued businesses based on whim rather than planning and market research.
For foreign companies building an effective Chinese executive corps, the single most effective technique is well-planned mentoring. China’s fast-growth atmosphere, and the competition for talent, has resulted in many Chinese rising to top management positions very quickly. While outwardly confident, many are terrified by their responsibilities. They can be helped through serious mentoring programs involving real projects in which they learn how to make decisions by doing research, talking to experts, and gathering different opinions rather than relying on their gut. Such training must be continuous. Foreign companies have found that without periodic reinforcement, Chinese managers will revert to their old habits.
The best laboratory in which to study a blended Chinese and Western management model was formed in December 2004 when IBM agreed to merge its personal computer business into Lenovo, China’s leading PC maker. The combined company has ten thousand people from IBM and nine thousand from Lenovo. It is managed by former IBM executives from New York. IBM owns just 19 percent of the new global Lenovo. Chinese government entities have a 46 percent stake and the rest is owned by Lenovo and its shareholders.
IBM has always been smart in China. The company wired the country with IBM mainframes before the Chinese even knew how to use them. The financial markets and much other key infrastructure were built on the back of IBM technology. When the merger was announced, IBM had 4,200 employees in China, nearly a thousand of them software engineers and some 150 scientists doing research tied into IBM’s global operations.
Chinese entrepreneurs tend to diversify into anything and everything rather than paying attention to the core business. The consequences are often fatal. Deep scars from the Cultural Revolution and the upheaval of a sudden shift to getting rich has created an atmosphere in which nobody trusts anybody. In China business, the expectation is to be cheated. If you ever get depressed by Chinese ill-treatment of foreigners, or foreigners’ ill-treatment of Chinese, take solace in the knowledge that the Chinese are treating one another even worse.