Doing the China Tango: How to Dance Around Common Pitfalls in Chinese Business Relationships

By Scott Cray and Alan Refkin

Winning in China requires time, commitment, and knowledge. Conducting business as usual is not how to accomplish objectives.

Authors Alan Refkin and Scott D. Cray enjoy success conducting business in China because they know that the rules there are different. Now, they open up their playbooks so you can succeed where others fail.

This guidebook can help you under-stand Chinese businesspeople, gain acceptance among Chinese with influence, cultivate and maintain meaningful relationships, and navigate the connections between business and government. Most Chinese businesspeople want to know the type of person they are dealing with. Learn how to convey your business knowledge, character, and outlook on key topics in order to forge valuable connectionsoften over a dinner table or at karaoke rather than in a boardroom.

China is unlike any other business environment that youll encounter, but it is filled with opportunities. Arm yourself with the tools you need to negotiate and succeed, and start Doing the China Tango.

• Language: English
• Publisher: iUniverse
• Release date: May 17, 2012
• ISBN: 9781475916775

Scott Cray

Alan Refkin is the chairman and CEO of Thornhill Capital, a global consulting firm. He is an internationally recognized expert on China and has worked on numerous projects throughout China for more than ten years. Visit him online at www.alanrefkin.com and www.thornhillcapital.net. Scott Cray has served as the CEO and founder of many US companies. Since 2004, he has provided managerial and operational advisory services to Chinese companies. He is a member of Thornhill Capital.

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Copyright © 2012 by Alan Refkin and Scott Cray

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ISBN: 978-1-4759-1679-9 (sc)

ISBN: 978-1-4759-1678-2 (hc)

ISBN: 978-1-4759-1677-5 (e)

Library of Congress Control Number: 2012907390

iUniverse rev. date: 5/14/2012

Contents

Preface

Acknowledgments

Introduction

CHAPTER 1       Why Relationships Count

CHAPTER 2       Golf, Outings, and Gifts

CHAPTER 3       The Importance of Face and Guanxi

CHAPTER 4       The Shark-Infested Waters of Chinese Business

CHAPTER 5       Navigating the Manufacturing Minefield

CHAPTER 6       Understanding the Mysterious Chinese CEO

CHAPTER 7       The CFO Is the Glue Within the Company

CHAPTER 8       Why Is a Chinese Board of Directors So Powerless?

CHAPTER 9       The Odd Couple: US and Chinese Business Partners

CHAPTER 10       Due Diligence: Look Before You Leap

CHAPTER 11       The Chinese Business Plan: A Twilight Zone

CHAPTER 12       Corporate Transparency: Behind the Silk Screen

CHAPTER 13       Shadow Banking

CHAPTER 14       The Government Calls the Shots

CHAPTER 15       What Makes Chinese Contracts Different?

CHAPTER 16       Putting It Together and Conducting Business in China

Appendix A: Blogger’s E-Mail Regarding Due Diligence Report and Response

Appendix B: A Typical Chinese Business Plan

Appendix C: A Typical US Business Plan for a Chinese Company

Appendix D: The Ceremonial Contract

Endnotes

Bibliography

Alan Refkin and Scott Cray

PREVIOUS BOOK BY ALAN REFKIN

The Wild Wild East: Lessons for Success in Business in Contemporary Capitalist China

By Alan Refkin and Daniel Borgia, PhD

Alan Refkin: I would like to dedicate this book to my wife, Kerry Refkin, the angel sitting on my shoulder. And to Zhang Jingjie (Maria), David Dodge, Kevin Hunter, and Nancy Molloy, good friends whose unselfish efforts in helping me with this book have touched this author deeply.

Scott Cray: I would like to dedicate this book first to Jesus, my Lord and Savior, and then to Peke Lina, my beautiful bride of twenty years—Jesus for being the center of my life and her for introducing Him to me. I am eternally grateful to both.

Preface

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way—in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.¹

Charles Dickens, in this quote from A Tale of Two Cities, might have been speaking about modern-day China rather than the prerevolutionary period in eighteenth-century France. For a businessperson, China offers the potential for enormous growth, as well as the possibility of the total failure of your business venture. How you handle your relations, contracts, negotiations, and other facets necessary for conducting business in China will largely determine the success or failure of your efforts. In Doing the China Tango, we hope to show you how to effectively conduct business in China, make money, and reduce your risk of financial loss and/or legal liability.

Winning in China is not easy, and it’s not for the uncommitted. Many have thought that they could conduct business and win in China with the same set of rules that allowed them to be successful in other countries. They can’t. China is a standalone. It’s unlike any other business environment that you’re likely to encounter. China scares a great many businesspeople. And it should. It’s dynamic and not static; it’s opportunistic and rarely fundamental. The Chinese are monetarists and not altruistic.

What we provide in this book is an understanding of what it takes to be successful and win in China. We cover the basic principles of understanding the Chinese businessperson, how he or she negotiates, the role of the government in a Chinese company, and other facets of the Chinese business world that will allow you to have the knowledge necessary to be successful in China.

Don’t expect quick results in China—it doesn’t work that way. Winning in China is first about establishing relationships, and then about conducting business. The Chinese will spend more time with you socially than on the actual transaction. To them, it’s all about whom they’re dealing with: your character, commitment, knowledge, honesty, and a host of other intangibles that comprise their perception of you. Establish that relationship, and you’ll have a partner, rather than a transaction, in China.

In addition to having a business relationship, you’ll also need the tools that will allow you to be successful in China. This includes: an understanding of how to negotiate, how to establish effective internal controls to protect your investment, what to look for when examining a company or potential business partner, how to detect fraudulent activity, and other relevant tools that will prove useful for successfully implementing your business goals.

We’ve both worked together in China and, for many years, spoken about our businesses there. Usually these discussions happened at our favorite Starbucks early in the morning, since we’re both early risers. While sipping our Venti Café Americano, we’d talk about our latest Chinese experiences and business scars incurred, as well as things we might have done differently and how we’d work with our Chinese counterparts if we were new to China and had the experience we now possess. It was during our coffee therapy sessions that we decided to write Doing the China Tango. We wanted to give the reader the benefit of our knowledge as businessmen in China.

We’re both avid sinologists, who have devoted most of the past decade to working with Chinese companies. Between us, we’ve spoken at the National People’s Congress in Beijing, as well as a great many Chinese government and US securities industry functions, throughout both the United States and China. We’ve also acted as the chief executive officer, chief operations officer, and member of the board of directors for publicly listed Chinese companies. This field knowledge has enabled us to gain a great deal of insight on how business is conducted in China.

Quite often we’re approached by entrepreneurs, corporate managers, importers/exporters, and other businesspeople who want to enter the Chinese market, but don’t know where to begin. The first question they most often ask us is: what does it take to be successful in China? Frankly, this question covers such a wide area that we don’t know where to begin. Usually we end up providing them so much information that we see them going into sensory overload, overwhelmed by the data provided in such a brief time. We don’t intend to overwhelm them, but we inevitably do. There’s so much that the average person should know before conducting business in China that we both try to give them the benefit of our experience in one sitting. After a great many of these conversations, we invariably agree that we should just write a book on how to successfully conduct business in China and simply hand the book to the individual asking us these questions.

We titled this book Doing the China Tango: How to Dance Around Common Pitfalls in Chinese Business Relationships after a great deal of thought, because we believe this book will provide the reader with the understanding necessary to be successful in China. There are libraries filled with books on how to conduct business in China. They’re useful and impart a great deal of knowledge. However, in our opinion, we haven’t found a book for businesspeople that’s easy to understand and to the point. This one is. Whether you’re new to China or travel there frequently, we believe this book will make you more successful in conducting business in the Middle Kingdom.²

Alan Refkin and Scott Cray

Acknowledgments

Heartfelt thanks to Zhang Jingjie (Maria) for her tireless efforts in conducting the research necessary to write this book. Her advice on Chinese culture and philosophy is greatly appreciated. During the eight years she’s worked with us, she’s been the model of professionalism and patience. Well done, Maria!

We’d also like to thank David Dodge for his patience in schooling us on the intricacies of Chinese accounting, US generally accepted accounting principles, and a host of other financially related topics too numerous to list. Dave has been the chief financial officer of a number of US and Chinese companies and a good friend for the past fifteen years. His guidance is greatly appreciated. Dave is clearly in a league of his own.

We’d also like to thank our editor, Sarah Disbrow, whose insights, guiding hand, and patience are well appreciated by these authors. She, and her fellow professionals at iUniverse, have been a joy to work with.

We also can’t say enough good things about our wives. Had it not been for their encouragement and prodding, we’d likely still be talking—over a Venti Café Americano—about publishing this book. We both married way over our heads.

Introduction

Understanding the Chinese businessperson has never been easy. M. Jean-Luc Chereau, President of Carrefour China, sums it up well: We are in another world. If you come to China with preconceived ideas after having been successful in Europe or the United States, you make mistake after mistake.³

In fact, foreigners have always had difficulty understanding the Chinese thought process. In his writings, Lord Macartney, on the first British trade mission to China from India over two hundred years ago, noted:

What does anyone here know of China? Even those Europeans who have been in that Empire are almost as ignorant of it as the rest of us. Everything is covered by a veil, through which a glimpse of what is within may occasionally be caught, a glimpse just sufficient to set the imagination to work and more likely to mislead than to inform. (Lord Macartney, c. 1790)⁴

Two hundred years later, nothing has changed, as noted by Sir Percy Craddock:

This is a big canvas, much of it still dark. Personal impressions are sometimes vivid, always incontestable; but they illuminate only part of the scene, and from one angle only. They are also outsiders’ impressions. We each construct our vision of China from the limited materials available to us, from our direct experience and reading, our memories of certain conversations and scenes; and we cling tenaciously to it. But it remains China through a foreigner’s distorting glass. The real China, whatever that may be, eludes us. (Sir Percy Craddock, 1994)

One of the reasons that an understanding of the Chinese businessperson has been so difficult is that the business culture in China has been formed over thousands of years. The social, economic, and cultural aspects of China have interacted over time to produce a business environment unlike that in other parts of the world. It’s an environment governed by insiders who expect to be cheated and taken advantage of by outsiders, or anyone who is not a part of an inner circle of family and friends. Therefore, the Chinese businessperson believes, to a great extent, that the end justifies the means. That it’s acceptable to cheat, or lie to, anyone outside your inner circle. You expect an outsider to take advantage of you, and they should expect the same from you.

In the years 10,000 BC and 5,000 BC, the Chinese lived by hunting and gathering plants. Then, about 5,000 BC, the Chinese began farming, becoming one of the first civilizations to do so. Initially, they cultivated rice and millet and domesticated pigs. By 3,000 BC, sheep and cattle were domesticated, followed by the domestication of horses between 3,000 BC and 2,300 BC. Also, around 5,000 BC, Chinese farmers learned to make pottery and lacquer, and later, with the domestication of sheep, began to weave cloth. Approximately 2,500 BC, the Chinese invented the wheel.

During this time, as individual farmers became richer, warfare between neighboring farmers became more commonplace as one group of farmers would try and steal the goods of another. Prior to these advancements, farmers were content growing crops for themselves and their families, and trying to survive. However, with new inventions came an increase and disparity in wealth as differing classes of society began to emerge.

By 2,000 BC, with the advent of bronze, a combination of copper and tin, the warfare between farmers intensified. Bronze allowed farmers to create potent weapons, as well as harden the earthen walls around their settlements, giving them some protection against outside attacks.⁵

During these early days, with the intensifying lawlessness as well as varying climates and natural disasters, the Chinese started to form communes, villages where they could pool their resources and increase their chances of survival. In these communes, they developed a collectivist way of thinking, where the good of the village superseded the welfare of an individual and all members of the village were considered insiders.

Insiders primarily conducted business within their group, for fear of being cheated by outsiders, who often didn’t share the group’s values. As such, insiders primarily trusted only those who lived within their village. Those who lived beyond those boundaries were considered outsiders and were looked upon with suspicion. This collectivist way of thinking spread throughout China over succeeding generations. Today collectivism, with its inherent distrust of outsiders, is still a prominent force within Chinese society.

There are a number of reasons why collectivism still exists in present-day China. Collectivism focuses on the group, rather than an individual. Members of the group are bound socially to each other, and an individual’s identity is determined by one’s membership in a group. In addition, the goals of the group take precedence over individual goals. Most Chinese believe that group membership maintains harmony through interdependence and cooperation, thereby avoiding conflicts within the group. They also believe that, functioning as individuals, they would have less of a support network and a less synergistic relationship with other members of society. This way of thinking has been passed down from generation to generation, and it’s still a part of the current Chinese culture.⁶

A collective group may be any size and encompass any level of society. It may, for example, consist of employees of a company, members of an organization, or an entire ethnic group. It also may encompass all of China, or a single city, such as Shanghai, where residents speak a dialect not found, for instance, in Hangzhou or Suzhou, where a different dialect is spoken.

Collectivism is still strong in China, but it’s becoming slightly less prevalent. One of the biggest impacts on collectivism has been the globalization of China. As China has become less isolated and its inhabitants more affluent, there’s been a trend toward individualism. In a 1993 study by Katz, Juni, and Shope, two groups of Chinese students were examined. One group lived in China, while the second group lived in the United States for over one year. Each group was then given a Rokeach value scale test. The results indicated that those individuals coming from a more-privileged class place a higher value on individualism and a capitalistic system, while those coming from a lower and less-privileged class value collectivism and a more socialistic system.

In addition to collectivism, the teachings of Confucius are important to the average Chinese. Confucius emphasized the group over the individual, as well as espousing the hierarchical and socially harmonious nature of the group. He also taught that one’s first duty was to honor the family, then friends, then saving face, and then the law.⁷

Confucianism dominated China for two thousand years, until the end of Imperial China in 1911, when Sun Yat Sen overthrew the Qing dynasty and became president of China. Sun Yat Sen was later followed by Chiang Kai Shek, and eventually by Mao Zedong after the revolution.

When the Communists came to power in 1949, business with the West ceased and remained dormant for the next thirty years. All industry was consolidated into inefficient state-owned enterprises (SOEs), and a great deal of the technical, commercial, and industrial expertise was lost, as anyone who had contact with the West was purged. It was a policy that significantly stymied China’s growth.

In 1979, shortly after Mao Zedong’s death, Deng Xiaoping initiated the open-door policy, where China looked outside its own economy for technical expertise and resources. The next thirty