In the relentless search for "excellence," the U.S. business community is questioning its ability to compete in foreign markets. The love/hate story of U.S. firms in the China market can offer some valuable, if counter-intuitive, lessons.
Since 1979, hundreds of U.S. companies made the pilgrimage to Peking, and their tales, often resembling the Perils of Pauline, have been codified into a mythology of how to do business in this new and unfathomable place.Common sense dictates a certain sensitivity to the customs and peculiarities of an emerging, exotic market. However, U.S. companies have tended to see the China market as so different from their own that they have made concessions and accepted losses that would be unthinkable elsewhere.
The mystery and glamour of the China trade, moreover, seem to spawn pithy maxims and formulas for success that are repeated endlessly in conference rooms, hotel lobbies and business class sections of China-bound flights. Myths in serious need of debunking include:
Myth No. 1: "The most important thing in dealing with the Chinese is to establish trust." This precept has been repeated so often that it is an accepted cliche. Yet what does it mean? No capable salesperson would deny that trust is vital in a good customer relationship. But it is troubling that so many U.S. firms spend enormous amounts of time, energy and, not incidentally, money trying to gain the "trust" of their Chinese counterparts.
"Trust," as far as it can be recognized or identified, is no more important for Chinese customers than for customers anywhere. Intelligent buyers, regardless of race or ethnicity, demand quality products and competent personnel who deliver on their commitments. To overemphasize trust is to ignore other factors in the China trade equation that are much easier to quantify and much closer to the bottom line.
Myth No. 2. "The Chinese are tough negotiators, but once they sign a contract they will stick to it to the letter." This precept follows closely
from the emphasis on trust, and suggests that once everyone signs a piece of paper, your Chinese counterparts will see to it that you don't lose money.
Technically it may be true that the Chinese don't actually "cancel" many contracts. But even the most casual observer of the business scene in China cannot miss the fact that the Chinese have "postponed" an inordinate number of projects negotiated with foreign firms since 1978.
In the now-famous 1981 foreign exchange crunch (conveniently labeled the ''readjustment" period), China postponed Phase II of a $5 billion steel mill, requiring $1.3 billion in Japanese financing to get the ventures back on track. More recently, the Siemens subsidiary Kraftwerk Union AG invested close to $1 million in China on the strength of a Chinese contract for two turnkey nuclear reactors, only to learn that China had decided to "go it alone" in nuclear power.
In addition to the dangers of contract postponement, many U.S. firms discovered that rather than adhering to a contract per se, the Chinese adhere to their understanding of the terms of that contract. This may differ substantially from the foreign party's interpretation, because the Chinese are reluctant to spell out their interpretation at the outset. They prefer to agree on "general principles" and leave "concrete details" to be worked out in future.
Yes, the Chinese adhere to the terms of their contracts, but U.S. firms had better understand what those terms are. One final point about contracts: overemphasis on getting the contract signed can blind foreign firms to many headaches down the road once the mechanics of the sale or joint venture begin.
As a friend in the China trade business remarked recently, "It's hard to know which is worse in the China business: not getting a contract signed, or getting a contract signed." In other words, look out for what you want - you just might get it.
Myth No. 3. "The only way to succeed is to take the long-term view." This what the Chinese do after all, isn't it? These days any company prepared to take the long term-view of the China market must ask, "How long is long?"
The potential of a limitless Chinese market for foreign goods or services in the undefinable future is heady stuff. It enables the Chinese to sign 7,000 foreign investment contracts with a total pledged foreign investment of $15 billion between 1981 and 1985. China market euphoria also has been the justification for many U.S. firms to stomach the once healthy, now exorbitant amounts required to maintain a presence in Peking.
It's also not cheap. The rent for a small office in the Jianguo or Jinglun Hotel is $25,000 a year, and increasing frequently; a two-bedroom apartment at the Holiday Inn-Lido, not exactly Madison Avenue and 79th Street, goes for $6,000 a month. As the months go by (and the bills pile up), the Chinese become more convinced that a U.S. firm has made a "long-term" commitment and feel even less pressure to consummate a deal or agree to major concessions.
Thus, although everything in China from hailing a taxi to signing a joint venture contract takes twice as long as it does almost anywhere else, a passive, patient acceptance of continuous delays results in more of the same. By the time the U.S. firm begins to question the value of its front-end investment, so much time and money have slipped by that the decision to close the office, cut back staff or withdraw from the market, really hurts.
Myth No. 4. "The Chinese are very rank-conscious, so be sure to send your most senior people to open up the market and conduct negotiations." The Chinese are indeed rank-conscious. In their own society, age and title are still paramount. However, to suggest that one has to be as old as one's Chinese counterparts is to ignore the success of any number of young China entrepreneurs, many only in their 30s, and female to boot.
These company representatives and "China deal makers," for want of a better term, are part of a new breed of China hands. They are energetic, persistent, fluent in Mandarin, and knowledgeable about the Chinese lay of the land. Many of them run rings around their senior col leagues.
When your company opens an office in China or begins production at a joint venture, it is appropriate for a senior company official to be present for the ribbon cutting and other formalities. But for day-to-day business and the nitty gritty of negotiations, don't equate seniority with success.
What should U.S. firms do when approaching the market? First, treat it as a gamble. Decide at the beginning how much you can afford to lose, and pull out when you cross the line.
Second, make sure you understand the terms of the contract the way the Chinese understand them.
Third, focus on competence and knowledge of the market when selecting your China staff, and don't treat a China assignment as a political plum - almost anyone who has spent more than five minutes in Peking knows it's no plum.
Finally, don't suspend your critical faculties just because you're dealing with an exotic country. Use the same good judgment you would in approaching a market in St. Louis, or France or India. Stick to the rules that make good business sense to you, be yourself, and, in the words of a leading authority on Chinese politics, "Don't try to out-Chinese the Chinese."