In China, culture counts. And for U.S. manufacturers seeking success in this 26th year of China's experiment with modern capitalism, no aspect of culture counts more than guanxi, the ages-old practice of continuously cultivating and valuing relationships. The bottom line: U.S. manufacturers that don't create and maintain networks of respect, trust and value-adding interdependence with customers, suppliers and distributors in China, those companies that focus on low-cost labor and fail to embrace China's 5,000-year cultural heritage, are putting their investment dollars at considerable risk. U.S. manufacturing investment in China is about $6 billion or about $12 billion -- depending on who's counting and what's being counted. Although the investment is quite small compared, for example, with U.S. manufacturing investment in Europe, in this Chinese Year of the Monkey it's not exactly chimp change.
"Most people understand that it is difficult to do business in China. What they don't realize is that . . . deep cultural differences are at the root of most problems," bluntly states Jason Sprong, a partner at Vital Sourcing LLC, a Boulder, Colo., company that has two consumer-products plants in China. "Without a thorough understanding of why Eastern and Western differences exist, companies will be at a strategic disadvantage in any China efforts."
He's right -- though occasionally just some simple market research would seem to suffice. Chinese like chocolate, but they don't drink it -- something the producer of a chocolate-based drink discovered after setting up manufacturing operations in China, relates David McHardy Reid, director of the Center for International Business at Rochester Institute of Technology (RIT) in Rochester, N.Y. Nor are most Chinese doubling their pleasure or their fun by chewing gum. Chinese do not chew gum, notes Henry H. Wong, senior venture partner at Crystal Ventures in Palo Alto, Calif. "They smoke a lot, though," he observes. "Terrible."
Cultural differences, the kind that can make a difference between business success and failure, extend beyond matters of taste. For example, when toasting another person at a reception or a dinner, the height at which you hold your glass is important. "Whoever has the highest ranking position should have the glass higher when you click," explains Robert Tramontano, vice president for product management and global marketing at NCR Corp.'s Financial Solutions Division in Dayton, Ohio. A $5.6 billion provider of goods and services for customer transactions and data warehousing, NCR has had a presence in China for more than 100 years. "That [has] enabled us to understand a lot of the culture -- the way people act, the way they think, the way they approach business problems, the way they look to have those problems solved," Tramontano says. "You can have a great product and a great service, but if you screw up some of the small things, you lose your ability to communicate the value that you have."
RIT's Reid tells of the chairman of a major consumer-packaged goods company who was mystified that former joint venture partners in China and now his company's competitors would continue to seek favors and guidance. What the executive did not understand is that from childhood Chinese are taught to do good things for friends, for people with whom they have worked and with whom they have developed social relationships. No person in China exists without a social relationship to another person, emphasizes Ming-Jer Chen, the Bigelow Research Professor of Business Administration at the University of Virginia's Darden School in Charlottesville. "In the Chinese business context, relationships are a form of social capital owned by businesspeople and associated with the companies they run," he explains in "Inside Chinese Business" (2001, Harvard Business School Press). "Whereas in the West a successful businessperson is spoken of as 'wealthy,' in the Chinese context he or she is described as 'well connected.' "
Guanxi (pronounced gwan she), the practice of continuously cultivating and valuing relationships, doesn't exclude American manufacturers from the Chinese market, stresses Reid. But it does produce a new set of costs that companies "are not necessarily accustomed to in other markets," he says. "You have to move slowly on the ground. You're incurring costs getting to know people. And it is not easy."
Crystal Ventures' Wong likens guanxi to the oil industry's "ol' boys network" in Houston. "If you are not an oil tycoon's descendant, and you want to walk into a bar and drink along with the oil tycoons, you're isolated in a corner. You might get a bar stool, but I'm not sure you'd get a table." It's an amusing and accurate analogy. Guanxi is about being at the table, actually being at several tables.
For example, something as simple sounding as getting products out of China can mean working with one layer of people or with as many as five -- or perhaps more, states Vital Sourcing's Sprong. Only the largest companies with millions of dollars invested in China are a single layer from the outside world. "They are the GEs, VWs and Chryslers . . . [and] they form partnerships with large Chinese producers in joint-venture operations," explains Sprong. However, "the vast majority of companies that work with China go through a number of middlemen." Because China lacks a national distribution system and its markets are so fragmented, "we're not talking about B2B; we're truly talking about B2B2B," stresses Darden's Chen. And while that sounds cumbersome, the structure can actually reduce cycle time, he says.
NCR Corp.'s Long-Term Plan
One of the great things about NCR is that we have been in the country so many years that we have naturally acquired [many] relationships," says Tramontano. But there are instances -- new production introductions or new customer pursuit -- when "you may choose to find out who does have relationships with [an] account and find out what type kind of business dealings you could establish to get the right level of introductions and understandings," he states. "If you can't position yourself in front of the right people, you don't have the opportunity to sell."
NCR insists such positioning can't come at a moral or ethical price. "When searching for the right type of partner, we have a high set of moral standards -- business ethics -- that allow us to choose someone who will do business the way we want to do business," explains Tramontano. It's a process that takes time. "We don't try to rush into a market. When we built our [ATM] manufacturing facility in Beijing, we took many years to set it up. It wasn't a one- or two-year phenomenon. It was more like in the four-year timeframe," says Tramontano. In addition to the joint-venture manufacturing plant in Beijing, NCR Financial Solutions has branch office operations in Beijing, Chengdu, Guangzhou, Shanghai, Shenyang, Wuhan and Xian.
Investing time and effort applies to established relationships in China as well -- particularly when something goes wrong. "How [we] respond to that is very important, because in the end we're not there for the one deal; we're there for many deals, for the entire relationship," stresses Tramontano.
"If you have a setback, you do anything and everything possible to resurrect yourself or to fix it. Making sure that all of our people deal in a way that is very upright and [will] stand behind our commitments and claims is very, very important."
Building relationships in China is also about building business comfort among the Chinese. Beginning in 1999, NCR gave its Chinese customers -- banks -- a choice of where their machines would be manufactured. Their ATMs could come from the factory in Beijing or from NCR's facility in Scotland. At first, customers wanted Scottish-built machines. Then it was about half and half. Eventually the banks opted for Chinese-made machines. "In the end, we were able to prove that we have the global capability to replicate the [production] processes and hire the right people . . . so whether [the ATM] was manufactured in Scotland or China you were going to get the same product."
Nordson Corp. Builds Trust
A $667 million Westlake, Ohio-based producer of equipment that applies adhesives and coatings during the manufacture of goods ranging from autos to semiconductors, Nordson Corp. entered China first with distributors and travelers from the U.S. in the early 1980s. Nordson now has a manufacturing plant and its China headquarters office in Shanghai and other offices in Beijing, Guangzhou, Hong Kong, Tsingtao, and Xiamen. Total employment in China is about 100 people "and growing rapidly," says Bradley C. Davis, Nordson's Hong Kong-based vice president for Asia and the Pacific. Nordson has been averaging 20%-plus annual sales growth in China and, says Davis, is "very profitable."
Although Davis says that business relationships are more open now than in the early years -- there's more social activity, and there aren't strict rules governing meeting locations and attendance -- many Chinese social and cultural traditions remain. Even as an entrepreneurial spirit expands and township enterprises producing goods from appliances to textiles thrive in such places as Guandong province in the south and the provinces of Zhejiang and Jiangsu in eastern China, relationships are still critical to business success.
Davis tells the story of a factory manager of a state-owned company, a specialist in adhesives that he got to know in the late 1980s. Nordson was -- and still is -- a producer of precision equipment that applies adhesives during manufacturing. The manager became a customer of Nordson, continued to buy Nordson equipment and actually promoted Nordson equipment. He bought out the shares of his state-owned corporation, has established his own private enterprise, and, says Davis, remains a very good friend of Nordson because its technology helped the man grow his business and his knowledge. "That type of relationship is important because this individual is very well known in the industry in China," says Davis. "He allows us to take customers to his production facilities [to] see our equipment and technology in a real production environment. At the same time, because of his relationship with Nordson, it really gains us a lot of respect in the industry throughout China. They see him as a third-party expert in the industry and if he's that sold on Nordson . . . there must be something right that we're doing."
Building relationships, nurturing them, and taking advantage of relationships "really helps," stresses Davis. "Investing in these intangibles can frankly get you a lot further than tangible investments of throwing a lot of money, a lot of assets, and a lot of outside consultants into the scenario."
Still good will and good manners are not good enough. "When we talk about guanxi we have to remember that guanxi has to come with tangibles also. We do have to prove we have the best value-added services. We do have to perform," stresses Davis. "If we sold [customers] equipment and it didn't perform, and we couldn't provide service, and we couldn't get spare parts to them and kind of washed our hands and walked away, that would really hurt them."
"A big car maker might ask, 'Well, do I really need guanxi?'" says Davis. "There is a very broad and deep meaning in Chinese culture to guanxi that goes beyond just the definitions of relationships or friendships. It really goes deeper into the issue of trust, respect, care and [the] human relationships that relate to business." For example, if a customer's father is in the hospital, go visit the father, Davis advises. "If we base a business relationship on trust and respect and care, in the end it should be a win-win."
Companies sometimes are too quick to assume that they have the best product and the best price and project a take-it or leave-it attitude toward their customers, contends Davis. "We need to be a little bit more humble in terms of respecting people," he says.
"The guanxi that we talk about and the guanxi that we believe is critical is basically a guanxi based on mutual respect [and] trust, and providing value-added services or value-added technology or, frankly, value-added friendship," he says.
Guanxi Losing Relevance?
U.S. manufacturers must develop and nurture relationships with customers, distributors, government and the media to help them raise their profiles and sales in China, agrees James M. Zimmerman, chief representative and a partner in the Beijing office of Squires Sanders & Dempsey LLP, an international law firm.
But he insists political connections or relationships -- and they are Zimmerman's definition of guanxi -- are less relevant in China today and likely to diminish further in relevance during the next decade. Three reasons: The Chinese government's emphasis on the rule of law; procedural safeguards, such as the Administrative Litigation Law and the Licensing Law, designed to curb abuses of power, and the crackdown on corruption.
In the past, the Chinese government -- and low-paid government officials -- were empowered to do such things as authorizing the use of land and resources, granting access to energy and opening the door to business opportunities and government procurement projects, Zimmerman explains. "Today, while the government is still the source of power and allocation of these items, there are laws and established procedures to regulate the allocation and procurement process [as well as] laws to counter the corruption that oftentimes goes hand-in-hand with the personal power that may be abused as a result of the practice of guanxi," he states.
Nevertheless, "having said [that] there are some industries -- telecommunications, oil and gas, mineral extraction, and construction, for example -- for which political connections have more relevance," adds Zimmerman.