How to do business in China: The art of 'Guanxi'
In the second part of its new series, The Drum examines how to do business in China, by exploring the art of the business deal.
When it comes to doing business in China, no does not always mean no and likewise yes, does not always mean yes.
Navigating this marketplace can be confusing and disorientating and understanding the nuances of negotiations, the cultural importance of hierarchy and the power of 'Guanxi' (relationships), are crucial to business success in China.
The Chinese are known for their entrepreneurial spirit, as well as a positive and opportunistic approach to business. This endeavouring mindset is never more apparent than when doing business deals, particularly with westerners.
“The Chinese are super optimistic,” says Rene Chen, partner at JKR Shanghai. “They have very strong opportunistic minds that they believe things can always be better. When in negotiations, if the deal is not closed, there is always a chance to turn things around. Whoever stays longest towards the end will win.”
“When doing business, the Chinese can be very bold. Sometimes so bold that they make big decisions that would scare you off. It’s important to remember, they are opportunistic and pragmatic combined.”
The art of the deal, therefore, is a completely different process in China than in western countries such as the UK, US or Australia. China’s complex business customs can seem laborious to foreigners but they are crucial for establishing good relationships and laying the groundwork for positive ‘win/win’ business relationships. So, what are the important steps to building business relationships in China?
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Humphrey Ho, the managing director of the LA office of Hylink, China’s largest independent digital agency says understanding cultural norms is a major factor for business success.
“Titles, where you sit, two hands for business cards, the height of your cup when drinking, the order where people sit - for dinner or a meeting- , who gets in the car when and who gets to sit at the right rear side of the car (that's the boss) all must be thought out. In business, Chinese culture is one that commands respect.”
He continues: “Face to face culture, a great personal report, your reputation and the reputation of the other side, be ready to throw in free work from time to time, and understand that "everything can be discussed.”
When it comes to doing business in China, culture and customs are front and centre and it is important that these elements are respected and acknowledged by westerners.
Typical business practices in China might include; gift-giving (not bribes), greeting rituals, time perceptions (Chinese are less formal about meeting start and finish times) and relations between guests and hosts.
A key element of Chinese culture which is also important in business deals is food and China’s love of dining means it business meals are not only a key method for building strong Guanxi, but it’s also normal for important business decisions to be made outside of the office.
“While corporate strategies are debated, discussed and decided in boardrooms in the west, for most Chinese companies, final decisions are still made over dinners or banquets,” says Yukun Bi, head of planning at Hylink. “This is very cultural as food plays a major role in Chinese diplomacy and is often seen as a form to enhanced intimacy between business associates.”
Building Guanxi, is a hugely important element of doing business in China and unlike the more professional working relationships business deals may facilitate in western countries, the Chinese define trust as the most important element of any deal, and that requires time to get to know each other.
“It’s important for Westerners to understand that Guanxi, or relationships, can make a huge difference in doing business in China,” says Kevin Mann, general manager – marketing and new business at OMD China. “The Chinese prefer doing business with people they are familiar with, whom they trust. But be prepared to invest for the long term. It’s hard to build real Guanxi overnight.”
“It takes time. You need to be prepared to invest time to build a relationship. And then build trust,” he continues.
“Be ready for wining, dining and karaoke. When building Guanxi, it’s really important to invest in long-term relationships and trust-building activities. You can, of course, try to find shared interest and activities beyond the clichés, however, it is inevitable that invitations for banquet dinners and singalong sessions will arise. But avoid direct business talk at the dinner table. This is for relationship building, not talking trade.”
Building relationships and trust can take time and a lot of energy, but the outcomes are usually worth it. According to experts, the most important thing is for westerners to show they have respect for the process and the people, and avoid disrespecting anyone.
“Respect is important in China as in other markets, as it provides the foundation for understanding structures, decision making matrices, and builds trust,” says MediaCom China chief executive officer Rupert McPetrie.
“Generally, hierarchy is more important in China than in many Western countries, but the importance varies significantly by industry or business type, and by geography. Some businesses in China operate in more traditional structures and hierarchies, especially some of the SOEs, whereas some companies operate more Western-style flat structures.”
Mann agrees: “When it comes to hierarchy, senior management tend to be more receptive to those of the same level or higher. So, if you’re trying to set up a meeting with a senior person at a prospect, or with the government, leveraging this insight can be extremely helpful. When I was setting up my own business, I had my global CEO and investment lead from the UK on a regular monthly visit and literally planned all business development meetings around this.”
It is not just respecting protocols and hierarchy, says Tim Cullinane, vice president and client partner at Critical Mass Hong Kong, it is also understanding how the Chinese operate.
“The Chinese have a concept of Mianzi, which roughly translates to ‘saving face’. What this means for people doing business in China is that the Chinese will go out of their way to avoid creating conflict or causing embarrassment in business meetings. The result of which is that what is said is sometimes not what is meant. Yes, can mean No, Right can mean Wrong. Communication will be indirect so it is important to understand the intention rather than just the words.
“Prestige and honour also hold more significance to a person’s sense of identity in Chinese culture, which is encapsulated in the concept of Mianzi. Critically, social and business interactions can either add to or take away from Mianzi. As such, it is important not to enter into an outright disagreement or cause embarrassment for people which could cause them to lose face and do irreversible damage to a relationship.”
When it comes to negotiations, the Chinese have a great reputation for this process and thrive on the situation, what are the best tips and advice for undertaking contract and deal negotiations in China?
Ho believes the negotiation process is similar to western negotiations except for one key factor: value.
“Negotiate from a value standpoint, because the Chinese negotiate from a cheap standpoint. In the US or UK we negotiate in value, in China, it's negotiated to zero. So, there's a little bit of the other side doesn't win, from a cost perspective. Also, beware of punitive terms, it's cultural and widely accepted in China to penalise one another for non-delivery.”
McPetrie agrees: “Flexibility and mutual benefit for both parties are essential. Always know what you can give up on your side in order to ensure a “win/win” situation before negotiations begin.”
According to Mann, ensure you have Chinese negotiators in your team to navigate the cultural protocols. “Have a plan and stick to it, because the party you’re negotiating with certainly will. Things never happen as quickly as you’d like them to in China. There are times when the process can extend or be delayed."
"You must be patient, and invest in meaningful long-term relationship building. Ensure you have a good team, who are from China, to assist in the negotiation. They will know before you how things are progressing.”
And finally, expect the unexpected, says Cullinane.
“Don’t be surprised if the tea lady at the back of the room during your pitch meeting is actually the CEO’s wife doing some covert reconnaissance on you - true story.”