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One Billion Customers
Lessons from the Front Lines of Doing Business in China
by James McGregor
Free Press © 2005
• China is "the world's largest startup" and the "world's largest turnaround."
• The Chinese tolerate an offi cial form of hypocrisy because it preserves their system.
• Chinese society is "shame-based;" a person's condemnation disgraces the family.
• The global backlash to the Tiananmen Square Massacre surprised China's leaders.
• The Chinese want to learn your business, access your technology and capital, and
control all their business dealings with you.
• If your corporation sets up a partnership or joint venture in China, get majority
ownership and management control, especially in hiring and fi nances.
• China's transition from socialism to privatization produced huge amounts of wealth
for people with the right connections.
• The Chinese government estimates that 4,000 of its offi cials are in self-imposed
exile after stealing about $5 billion from the state.
• The Communist Party is still so powerful that many Chinese react to Party directives
as they did to the orders of ancient Chinese emperors: "Tremble and obey."
• Being blamed for an error can cost a Chinese negotiator his or her career.
Rating (10 is best)
Overall Applicability Innovation Style
9 8 6 9
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fi fteen years
earlier, I said,
there was only
one place in
the world with
a signifi cant
population of poor
proclivities, I’m not
surprised that I
have never met a
real Communist in
who believes in
the abolition of
or the philosophy
of ‘from each
according to his
ability, to each
What You Will Learn
In this Abstract, you will learn: 1) Which key historical events continue to make China a
challenging place to conduct business; 2) How to characterize Chinese society; 3) How
to negotiate in China; and 4) What business techniques work best in China.
China has a reputation for vast complexity, but journalist James McGregor demystifi es
many of its modern business practices by placing them in their historical context and
explaining why the Chinese view foreigners with such concern. He is extremely familiar
with his subject, shares great material, and deftly describes his experiences and the
nuances of Chinese society. He enlivens the stories in this well-organized book with great
journalistic detail. Each chapter starts with a case study from history or business, followed
by the author’s synthesis of the chapter’s main ideas. The chapters end with bullet points
that recap crucial points. getAbstract.com fi nds this historically grounded, practical book
essential for anyone doing business in China. If you need to earn the trust of Chinese
business colleagues or if you must determine whether you can trust them, read on.
In recent years, China has become the target of the attention of the world’s largest
corporations, all seeking access to its one billion potential customers. The country was
already in transition in the early 1990s. At the time, its modern awakening posed a
tremendous challenge to author James McGregor, then The Wall Street Journal’s executive
in charge of building a media company in China. Deng Xiaoping, China’s leader from
1978 to 1989, had liberalized some aspects of daily life. Children were getting a better
education, people were becoming wealthier and the country was gaining international
recognition, but the Communist government was still fi rmly in control.
McGregor recognized that things were changing. He told his parent company, Dow
Jones, to get ready because China’s economic reforms would make it the globe’s largest
fi nancial market. China was poised to be both “the world’s largest startup” and its “largest
turnaround.” After 2,000 years of imperial rule followed by a painful experience with
communism, China was absorbing Western technology and know-how at a furious pace.
It raced through economic stages that took decades in the West, charging through the
economic period of the Robber Barons (late-1800s), rampant speculation (the Roaring
‘20s) and urbanization. Citizens of its rapidly developing middle class began buying their
fi rst homes, cars, vacations and college degrees. Deng had created a social situation that
mimicked a classic corporate turnaround strategy. China simultaneously:
• Empowered local reformers, while also appeasing the Old Guard Communists.
• Maintained traditions and the established Party, but pushed for quick reforms.
• Created public backing for changes to increase individual productivity.
• Incubated and tested reforms locally before launching them nationwide.
Like most turnarounds, China needed an infusion of outside talent, technology and capital.
That would come, but in the interim, the Party line was grounded in ascetic slogans
One Billion Customers © Copyright 2006 getAbstract 2 of 5
“If the business
community is the
‘old boy’s network’
in the West, the
is the ‘old boy’s
network’ in China.”
“A couple of
China in terms of
“China is all about
‘I live, you die,’
‘you win, I lose’
a vicious cycle
years of foreign
left a residue
from Mao Zedong. Thus, Chinese leaders praised a basic lifestyle while permitting the
ownership of modern conveniences and private property. Communist offi cials discussed
Mao's ideology at Party sessions and drove home in luxurious foreign cars while talking
on their cell phones. At home, they discussed privatization deals with their Westerneducated
children. How do the Chinese reconcile these two worlds? An old proverb, "Zhi
Lu Wei," sums it up: "Point at a deer and call it a horse." People tolerate offi cial hypocrisy
because it preserves the system.
China's stance shifted after the government's killing of student reformers in Tiananmen
Square in 1989 – a blow to Party conservatives and a win for reformers. After worldwide
condemnation, the Party allowed more privatization and loosened controls to encourage
private businesses. China embarked on a huge program to build the infrastructure needed
to sustain private businesses, but the Communist Party still controlled the reform process.
Party control extends traditional Chinese politics based on a 2,000-year-old aristocracy.
In the Han dynasty, the royal family and its advisors were the wealthy Inner Court, while
high-level bureaucrats comprised the Outer Court. Today, top Party offi cials lead the
Inner Court. This structure provides social order.
China is a “shame-based society.” Exposure and condemnation disgrace an offender’s
family. Chinese people do not base their actions on guilt or fear of God. People can act
badly if they do not get caught. The government enforces social standards and catches
violators, who face Chinese courts. In the courts, judges are not impartial. They hold
public interrogations and report to Party offi cials, adjudicating politically, more than
legally. Given this, people prefer to resolve their differences out of court.
As China bureau chief for The Wall Street Journal in 1990, McGregor met the heads
of global corporations. He learned that they were hesitant to talk about their Chinese
operations because their position was precarious. The government, publicly loyal to
Communism and – even more – to Chinese nationalism, was still deciding how much
capitalism to allow. That helps explain why Westerners and Chinese people who were
not born in China fi nd it diffi cult to do business there. Although some of these “overseas”
Chinese were found to be corrupt, they helped modernize China by building luxury
hotels and new factories. As for Westerners, the Chinese see them as a source of money,
expertise and technology, but little else.
A History of “Profound Indifference”
British Lord George Macartney fi rst discovered China’s attitude toward the West in 1793
when he tried to convince Emperor Qianlong to buy more English goods. Macartney
brought wool, telescopes, guns and a hot air balloon to impress the emperor, who was
unmoved. China saw Europe, Russia and North America as backward civilizations. The
more distant the country was from China, the more primitive the Chinese believed it to
be. After long meetings with the emperor’s representatives and, fi nally, a short meeting
with the emperor, Macartney took a letter from the emperor to King George: the Chinese
wanted nothing from England.
Some 200 years later, the Chinese still believe Westerners only want to exploit China. Yet,
by the 1970s, after a failed attempt to align with the Russian Communists, China was
ready to work with the West again. In 1979, Chinese Premier Deng Xiaoping toured the
U.S., paving the way for American fi rms to enter China. During this fi rst phase, many U.S.,
European and Japanese corporations made money-losing deals just for market entry.
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corruption is a
vexing problem for
“The sad fact
is that the
today is almost
“For the Chinese,
in their hearts
believe that their
system is so
fathom how it
really works, so
use that to your
Tactically, the Chinese bargained for favorable terms by invoking past atrocities, such
as opium addiction or the WWII massacre of Chinese civilians. They cited long-ago
examples of exploitation to pit Western companies against each other and to exploit
rivalries between them. China adopted a policy of building its own export capabilities
before allowing non-Chinese corporations to sell their goods. This involved large foreign
investment, accompanied by training programs. China wanted non-Chinese fi rms to
train Chinese companies in manufacturing and distribution, so they could build Chinese
brands. By 1983, U.S. fi rms were complaining to the State Department about restricted
access to Chinese markets.
After the Tiananmen Square Massacre in June 1989, many Western executives fl ed China.
But President George H.W. Bush did not chastise the Chinese. Bush had managed U.S.-
Chinese affairs from the Oval Offi ce in 1974-1975, and he believed China needed to be
guided into becoming an economic powerhouse. The Chinese government invited non-
Chinese companies into the country only after the now retired leader Deng Xiaoping
encouraged economic expansion.
The Chinese knew that U.S. corporations welcomed their new policies, but President Bill
Clinton linked U.S. trade policy to China’s human rights practices. Confi dent it had the
upper hand, China told U.S. Secretary of State Warren Christopher, “China will never
accept America’s concept of human rights.” Clinton backed down, realizing that U.S.
corporations would be cut out of China if he pushed for improved human rights standards.
By 1993, the Chinese had signed about 85,000 contracts with non-Chinese investors.
After intense intellectual property rights negotiations, China began making inroads toward
admission into the World Trade Organization (WTO). The country’s long road to the WTO
started under the negotiating skill of U.S. Trade Representative Charlene Barshefsky, an
attorney, who negotiated with China on the General Agreement on Tariffs and Trade
(GATT) Treaty. Negotiations centered on how much access U.S. corporations would have
to China’s major industries: insurance, telecommunications, agriculture, banking and retail.
China was admitted to the WTO in 2001. By 2003, about $150 million a day in foreign
investments were pouring into China, and foreign trade totaled $850 billion annually.
How to Negotiate in China
Use these hints, which are derived from previous foreign business negotiations, when
dealing with Chinese fi rms:
• Create a “win-win” environment – Enable your Chinese proponents to sell your stance
to their counterparts by showing how they benefi t. The benefi ts they want, such as
technology transfers and manufacturing know-how, require long involvement.
• Beware of divide-and-conquer strategies – When a CEO fl ies to China, gets a meeting
with a senior minister and makes a vague deal, the results are often disastrous. That’s
because the CEO’s goal is often to go home and report an agreement, leaving the
details for underlings to negotiate. Invariably, the Chinese get huge concessions since
they know the subordinate doesn’t want to be accused of voiding the deal.
• Avoid foreign rivalries – The Chinese often force foreign fi rms to compete with each
other. Even with concessions, they may not offer the winner additional contracts.
• Expect theatrics – The Chinese use any means to gain the upper hand, including
lying and citing nonexistent laws. Chinese negotiators will ask anything just to see if
their Western counterparts are dumb enough to accept it.
One Billion Customers © Copyright 2006 getAbstract 4 of 5
“Just as a foreign
China as a country
needs and wants.”
people in China
are the ones
who can attract,
“Kiss the cadres,
but embrace the
• Don’t feel guilty – Chinese negotiators often blame their poverty on foreigners and
ask for more training or technology to rectify it.
• Use humor, and be tough – The Chinese appreciate humor, especially if self-directed.
Being a tough negotiator is appropriate, but never insult your Chinese counterparts.
• Saving face – Chinese negotiators do not like to make individual decisions. Since
“face saving” is very important, no Chinese negotiators want to be blamed for
errors. That could cost them their careers. Understand this and treat your Chinese
counterparts with respect, even if they do not deserve it. This can keep negotiations
moving ahead. Accept the theatrics, but remain focused on your objectives.
Doing Business in China
Due to its history and distrust of foreigners, doing business in China is based on some
key realities. First, the Chinese want to learn your business, get your technology and gain
access to foreign capital. They want control of any dealings and see foreign partners only as
conduits to get what they want. If you establish a partnership or joint venture in China, get
majority ownership and management control, especially over hiring and fi nances. Equal
partnerships will test your patience and generate huge legal fees. When dealing with the
government, show how your activities benefi t China. Never attack its form of government.
China’s transition from socialism to privatization made certain people wealthy.
Government offi cials and managers at state-run businesses often live well beyond their
salaries. Corruption is so common that most Chinese never ask where money comes
from. For instance, the Chinese military owns a fi ve-star hotel in Beijing. In the 1990s,
smuggling became an epidemic. Even multinationals used smugglers to distribute goods.
Some 1,000 investigators took 20 months to unravel one major smuggling case. China’s
government estimates that 4,000 offi cials are in self-imposed exile after stealing about $5
billion from the state. For foreigners, legal protections that work elsewhere are not always
reliable in China, because the Party’s power can supercede the law. Many Chinese still
react to Party directives as if they are the orders of ancient emperors, which concluded:
“Tremble and obey.”
Conversely, since relations reopened in 1979, U.S. policy toward China also has
been erratic and sometimes hostile. During the Clinton administration, conservative
Republicans painted China as a growing threat. This affected an advanced technology
agreement previously negotiated by McDonnell Douglas and Hughes Electronics.
Republicans claimed that these companies and some Chinese-Americans had passed
secrets and technology to China to gain access to the Clinton administration. The
charges were minor, but McDonnell and Hughes had to confess export control violations
and pay millions in fi nes. After September 11, the Bush administration abandoned its
Cold War mentality and stopped considering China a threat. U.S. technology companies,
meanwhile, still face the possibility of losing out to rivals from other nations, which have
more open export control policies.
About The Author
James McGregor, who speaks Mandarin, was The Wall Street Journal’s China bureau
chief, chief executive of Dow Jones’ China operations in the 1990s, and a venture-capital
investor during China’s dot.com boom. He chaired the American Chamber of Commerce
in China and is the Senior China Advisor to Ogilvy Public Relations Worldwide.
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