Table of Contents
Lessons from the Front Lines of Doing Business in
China Copyright ©
2005 by James McGregor
Table of Contents
Introduction: A Startup and a Turnaround
With one foot firmly in the past,
and the other stepping into the future, China is simultaneously
the world’s largest startup and turnaround.
1: The Grand Bargain
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.
2: Same Bed, Different Dreams
Avoid joint ventures with Chinese
government partners. The clash of civilizations in Morgan
Stanley’s joint-venture investment bank shows why and
offers hard-learned lessons on how to cope.
3: Eating the Emperor’s Grain
system is often incompatible with honesty. This peasant tycoon’s
journey into the dark heart of China’s endemic corruption
shows how it works and outlines your options.
4: Dancing with the Dinosaurs
Powerful bureaucratic opponents
can be beat if you have China’s interests at heart.
Dow Jones and Reuters demonstrate how using China’s
own tactics can be useful.
5: Caught in the Crossfire
Government lobbying must be a
key part of your China business plan, especially for technology
companies that might be squeezed between hot competition
and the Cold War.
6: The Truth Is Not Absolute
The Communist Party believes it
must control information to stay in power, but China needs
an informed citizenry to compete in a global economy. This
leaves the media, from Rupert Murdoch to a crusading Chinese
journalist, searching for the size of their cages.
7: The Best-Laid Plans
Government planning and manipulation
of foreign companies fueled China’s construction of
the world’s largest telecom system. But this saga shows
how entrepreneurship and the market can beat the planners.
8: Managing the Future
China is a nation always cramming
for final exams, but it will take innovation, not prescribed
solutions, to pass the global business test.
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
Finally we began our descent. The lush green countryside,
populated by farm huts and pigpens, loomed closer and closer.
As the aircraft swung around to line up on the rapidly approaching
runway, two of the flight attendants stood behind the pilot
and copilot as if surfing the plane onto the runway. Then,
with barely fifty feet between us and the rubber-scarred runway,
the pilot suddenly jammed the throttles forward. Engines screaming,
we began an abrupt climb. Amazingly, neither of the flight
attendants toppled over, but they did stumble back to their
seats with a look of fright. Up and around we went, once again
lining up on the runway. Then I heard the distinctive eerrrrrrrr
of the landing gear being lowered and felt the shuddering
as the wheels entered the airstream. I hadn't noticed any
of that on our first approach. So that's why we did the sudden
I was thinking about how sensible it was to travel by train
as I walked into the terminal. 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. Like our novice flight crew, China
has spent that past twenty-five years alternately stumbling
and soaring through a massive trial-and-error reform process,
and so far most of the landings have been smooth.
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. Measured by purchasing power parity, China's current
per-capita GDP is $5,000 and rising steadily each year. It
has surpassed Britain as the world's fourth-largest economy.
China consumes 25 percent of global steel, 30 percent of cement,
and is the world's largest market for electrical appliances.
Foreign companies are flocking here, both to sell and to buy.
Contracted foreign investment in China now averages $420 million
This book is intended to show rather than
tell what it is like to do business in China. There are no simple
formulas or magic solutions. Only by showing the sometimes complex
details of how certain deals came together or fell apart, how
the people involved viewed and treated each other, how politics
and prejudices tainted expectations and outcomes, will I be
able to convey to you the nuances that have made China such
a frustrating yet rewarding place for so many foreign businesses.
Each chapter begins with a simple introduction of the characters
and situation. Next, in an overview section, I put the characters
and situation in their proper context. The story then unfolds
as a straightforward narrative. At the end, in a section entitled
"What This Means for You," I explain how what happened
in this chapter can affect how you do business in China. Finally,
I summarize -- pithily, I hope -- many of my own observations
in a takeoff on Mao's Little Red Book.
Since 1978, when Premier Deng Xiaoping launched a set of economic
reforms that included using foreign companies and their capital,
technology, and management skills, China has become a manufacturing
powerhouse, combining technologically sophisticated factories
with energetic, intelligent, and low-cost labor. 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. Corruption is frequently the lubricant
that greases the wheels of commerce. Business in China has
always been conducted behind multiple curtains and amid much
subterfuge, and that hasn't changed. Foreign companies rightly
fear that Chinese partners, customers, or suppliers will steal
their technology or trade secrets or simply pick their pockets.
Testy relations between China's Communist leaders and the
United States and other democracies requires that politics
be an integral part of business plans. 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. The more business in
China changes, the more it stays the same. As a journalist,
I have traveled the entire country and enjoyed a front-row
seat for this historic drama. As a businessman, I've been
involved in the power plays, the complex negotiations, and
the political intrigues that are a routine part of doing business
in the country.
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.
The title is my tribute to another American journalist-turned-businessman,
Carl Crow, who lived in Shanghai for twenty-six years and in
1937 wrote 400 Million Customers, a rich trove of anecdotes
and insights about the Chinese people and doing business in
China, much of which still holds true today. I share Crow's
deep respect and admiration for, as he put it, "the interesting,
exasperating, puzzling, and, almost always, lovable Chinese
people." My goal for this book is to also share Crow's
ability to convey timeless insights and commonsense lessons
about Chinese business practices, and the deeply ingrained thinking
and behavior patterns of Chinese people, through a combination
of scholarship, grassroots experience, lively narrative, and
good humor that transports the reader deep into the China business
Please enjoy the journey.
Fatigue, food and drink are negotiating tools.
If your Chinese counterpart wants to finalize a deal after
Mao-tai-soaked banquet, it is better to throw up on the contract
than sign it.
Foreign business people who come to China often
have too much goodwill, too much trust and too little patience.
Never joint-venture with government entities
unless you have no choice. Then understand that this partnership
is about China obtaining your technology, know-how and capital
while maintaining control.
If China requires that you joint-venture, get
a majority stake, control the board and install your own CEO,
CFO and HR director. If you don’t trust your CFO like
your mother, give your mother the job.
Don’t mistake language ability with business
or management competence. The savviest and smartest Chinese
managers often don’t speak English or have a Western
China is all checks and no balances. Chinese
government anti-corruption drives are not cynical exercises.
But the effect is minimal because the overall system is almost
incompatible with honesty.
China has returned to its traditional symbiotic
relationship between the merchants and mandarins. Officials
clear the way for business. The business people pave the way
for officials to accumulate assets.
If you decide to sell your soul and succumb
to China’s corruption, get a good price and focus on
charity work in your old age.
China’s modernization is aiming at “rule
by law” not the “rule of law,” so relationships
and personal power reign supreme.
Don’t rely exclusively on the law in
China. You will lose. Use laws and regulations to enhance
political and business arguments in favor of your position.
Avoid the “slobbering CEO syndrome.”
Don’t fall for China’s brilliant use of its huge
size and 2,000-year tradition of manipulative political pageantry
to intimidate foreigners into accepting unwise deals.
Education is China’s greatest strength
and greatest weakness. The Chinese are great memorizers, mathematicians
and scientists who run tedious routines. But the rote education
system leaves many weak on powers of analysis and leadership.
China’s rush to get rich is accompanied
by deep distrust of the system, and anyone outside one’s
immediate family or circle of close friends. This has created
a business environment that is steeped in dishonesty and in
dire need of transparency and fair dispute resolution systems.
China’s greatest management challenges
are to create organizations that are not dictatorships, to
treat others as equals, to accept responsibility and to share
information, all behaviors that have been almost absent.
China is modernizing, not Westernizing. The
country’s goal is to modernize but retain the Chinese
“essence,” which it is still struggling to define.