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One Billion Customers

Lessons from the Front Lines of Doing Business in China

by James McGregor

Free Press © 2005

336 pages

• 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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“When Deng

launched reforms

fi fteen years

earlier, I said,

there was only

one place in

the world with

a signifi cant

population of poor

Chinese people

– China.”

“Given their

cultural

proclivities, I’m not

surprised that I

have never met a

real Communist in

China, somebody

who believes in

the abolition of

private property

or the philosophy

of ‘from each

according to his

ability, to each

according to

his need’.”

Relevance

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.

Recommendation

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.

Abstract

Caveat Emptor

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

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“If the business

community is the

‘old boy’s network’

in the West, the

Communist Party

is the ‘old boy’s

network’ in China.”

“A couple of

decades of

averaging 9%

annual growth

has transformed

China in terms of

material goods.”

“China is all about

‘I live, you die,’

‘you win, I lose’

a vicious cycle

of conquest

and revenge.”

“Two hundred

years of foreign

domination and

duplicity have

left a residue

of suspicion

and distrust.”

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.

Communist Control

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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“Dealing with

China’s pervasive

corruption is a

vexing problem for

foreign businesses

in China.”

“The sad fact

is that the

Chinese system

today is almost

incompatible

with honesty.”

“For the Chinese,

outcomes are

more important

than truth.”

“The Chinese

in their hearts

believe that their

system is so

nuanced and

complex and

inscrutable that

foreigners cannot

fathom how it

really works, so

use that to your

advantage.”

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.

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“Just as a foreign

businessperson

needs to

understand the

thinking and

motivations of

their Chinese

counterparts, a

company must

understand what

China as a country

needs and wants.”

“The successful

people in China

are the ones

who can attract,

train, and

retain Chinese

employees.”

“Kiss the cadres,

but embrace the

customer, as

Boeing did.”

• 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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