One Billion Customers
by James McGregor
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Table of Contents l Preface l Lessons

One Billion Customers: 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
China’s relationship-driven 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.

Preface
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.

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 go-around!

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 a day.

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.

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.

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 world.

Please enjoy the journey.

James McGregor
Beijing, 2005

Lessons

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 university degree.


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.

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