For Western companies eager to break in to the Chinese market, or to work with Chinese companies, an understanding of Chinese business practices is crucial. Below Phil Rosenzweig explains how understanding China’s cultural history can help Western businesses overcome preconceptions and prejudices, and lead to a deeper understanding of today’s business environment.
Recent events in the business world have put China firmly in the headlines.
In September 2014 the internet commerce giant, Alibaba, launched an Initial Public Offering (IPO) raising more than $25 billion on the New York Stock Exchange and gaining a higher market value than Facebook, IBM, or Samsung. Led by founder Jack Ma, Alibaba’s IPO was a landmark event that signalled the arrival of Chinese companies that are able to prosper on the world stage.[ppw id=”93927495″ description=”Price” price=”0.70″]
That same month, a very different story was in the news: UK pharmaceutical giant GlaxoSmithKline was fined $490m (£297m) after a Chinese court found it guilty of bribery for making illegal payments to doctors and hospitals.1 The ruling, issued after a one-day trial, came just weeks after German automaker Daimler was accused of violating anti-trust price rules regarding the sale of spare parts.2 Earlier, Microsoft’s offices were raided by Chinese authorities conducting what they said was an anti-trust probe.
These stories take on even greater significance when viewed against the backdrop of another news item, this one proclaiming China to be the largest economy in the world based on GDP measured by purchasing power parity.3 The growth of Chinese companies abroad, and the difficulties encountered by foreign firms in China, are not stories of passing importance, but indicative of important trends with ever-increasing stakes.
At one level, the stories about Alibaba, GSK, and Daimler can be viewed through conventional lenses and can confirm our preconceptions and prejudices about China. At another level, however, they provide us with something even more valuable: an opportunity to challenge existing mindsets, and to think afresh about China in the business world.
Old Lenses: China as Market, China as Dragon
Western thinking about Chinese business has been shaped by two basic views. The first of which sees China as a lucrative market to be exploited, and can be traced to the visit of British emissary Lord Macartney to Peking in 1793 when Western powers sought commerce with China as a road to vast wealth. Although these initial demands for trade were rebuffed by the Chinese Emperor, the Opium Wars of the 1840s, and the resulting Treaty of Nanking, established Hong Kong as a free trading port and opened China for purposes of commercial gain. Today visions of colonial domination no longer hold sway, but the sheer size of the Chinese market continues to dazzle. Companies in a wide range of industries, from luxury products to pharmaceuticals to automobiles, dream of prospering in the Chinese market – a desire that becomes all the more urgent as their home markets are already mature and growing slowly. Yet success in China has not been easy at the best of times, with cultural and linguistic barriers compounded by arcane government policies. Difficulties in protecting intellectual property, requirements to take on joint venture partners, and the opaque nature of the Chinese legal system combine to pose daunting obstacles for Western firms.
A second view sees China as a powerful force that may come to dominate the world. This notion traces its roots at least as far back as Napoleon’s famous dictum – “When China awakes, the world will tremble” – but has become a reality only in the last decades, since Deng Xiaoping set China on a course of economic liberalisation. At first China’s economic power was expressed mostly in exports, but in the last few years, its firms have been expanding abroad through acquisitions as well as greenfield investments.
Recent books, such as China’s Silent Army (by Juan Pablo Cardenal and Heriberto Araújo), document the many and often controversial activities of Chinese companies and entrepreneurs around the world, controlling natural resources and devouring agricultural lands, as well as undermining local industries.4 Other titles, such as When China Rules the World (Martin Jacques) raise the spectre of global ambition and the decline of the Western world.5 A popular image depicts China as a dragon – a mythical creature with auspicious powers in Chinese culture, but often perceived in the West as a fierce beast with a voracious appetite.
Recent events can be understood according to both of these lenses. The experiences of GSK, Daimler and other multinational corporations in China not only confirm their desire to expand in China, but also highlight the many obstacles in their way. Meanwhile, Alibaba’s expansion – like that of telecom giant Huawei, appliance maker Haier, automaker Geely, and others – provides evidence that Chinese firms are rapidly growing worldwide. They may play according to the rules of global commerce, following accepted principles of accounting and financial disclosure, and their stock may indeed be fruitful investment, but according to the above views their ambitions may obscure less benign motives.
While there may be an element of truth to both of these views, neither is necessarily the most accurate nor most insightful. Both reflect a tendency on the part of Western observers to interpret Chinese actions according to motives that make sense to the West. As such, they are projections of our own motives and behaviours. Holding such views distracts us from posing more incisive questions.
Instead of interpreting current events according to conventional thinking about China, we should refrain from making rapid judgments, whether positive or negative, and think afresh.
A View of China: Markets, Laws, and Strategy
Nation states in Western Europe and North America share a common foundation of philosophy going back to Ancient Greece and Rome, and expressed in Judeo-Christian values. China, rather than a nation state, may be better understood as a civilisation, with roots that are both Confucian and Taoist. These different points of departure lead to fundamentally different outcomes.
For starters, most Westerners take for granted the basic principles of free market economics, made explicit by the economist Adam Smith but very much rooted in older ideals. The basic unit of the market is the individual, whether a consumer or firm or investor, who acts according to his or her enlightened self-interest. The free market is the sum of these individual preferences and actions.
Such a view may seem natural to Westerners but is not universal. The starting point in China is not of people as individuals acting freely, but of people as inherently rooted in a network of relationships and obligations. Important concepts include duty, hierarchy, responsibility, and deference. Individuals are subordinate to the collective and, ultimately, to the emperor.
Such views also give rise to different notions of law and order in society. Notions of representative democracy and universal suffrage, with checks and balances on the power of rulers, can be traced back to the Magna Carta in 1215 and before that to Ancient Greece. In the West, equal protection under the law, due process, and the impartial administration of justice are fundamental tenets. Individual rights – of speech, of property, of association – are explicit and strenuously defended. Not so in a Chinese context, where the emphasis on order and avoidance of chaos take precedence. Under Xi Jinping reforms are afoot toward greater transparency of the judicial system, however in an authoritarian regime there is unlikely to be the sort of judicial independence or impartiality that Western business would come to expect elsewhere.6
These contrasting assumptions about individuals and society hold important implications for business. Foreign companies seeking to operate in China are long used to not only intense competition from domestic players but also often vexing relations with joint venture partners. The recent wave of anti-trust and bribery cases raises the prospect of criminal prosecution for violation of laws that are not well understood by foreign companies, and these cases will be adjudicated in a legal system that remains opaque. This adds a very serious dimension indeed. Far from an arena where laws are administered impartially, the Chinese legal system introduces further uncertainty.
Differences between Western and Chinese thinking extend to the field of corporate strategy as well. In the West, strategy is often depicted as a game of chess. However appealing it may be, connoting deep thought and careful anticipation, chess implies a specific competitive context. All the pieces are on the board at the start of the game, and are then deployed to attack the opponent. As the game progresses, each player tries to remove the other’s pieces and capture the king. In China, by contrast, a popular game of strategy is wei-chi, sometimes known as go. Players start with an empty board and add pieces with the goal of encircling and surrounding their opponent. Wei-chi is a game of slowly evolving positional advantage, not of direct confrontation with clear outcomes. Indeed, when glancing at a game in progress, it is not always easy to tell who is ahead. By extension, strategic thinking by Western companies tends to focus on immediate and quantifiable gains as well as direct attack, whereas Chinese strategists often take a longer perspective, building up competitive advantage through the patient accumulation of position. Accordingly, even if Chinese companies seem to adopt the form of Western firms, with similar governance structure and accounting practices, their approach to competition and the decisions they make in pursuit of their aims may be very different.
New Realities, New Thinking
The rise of China is one of the great stories of our age, with far-reaching implications in everything from geopolitics to environmental affairs. In business, the importance of China can hardly be under-estimated. For executives around the world gaining a clearer understanding of China is essential.
Such understanding calls for more than reliance on conventional notions of China either as a market to be entered or as a power to be feared. The place to begin is by setting aside simplistic assumptions and trying to view a great civilisation in a more coherent and comprehensive manner. That means moving beyond the tendency to impute motives and make judgments based on preconceptions, whether regarding markets or legal systems or strategy. Although requiring more effort in the short term, the result in the longer term will be far greater understanding.
About the Author
Phil Rosenzweig is Professor of Strategy and International Management at IMD Business School. He co-directs the IMD-CKGSB Dual Executive MBA, which is designed for high-potential, internationally minded executives who are committed to pursuing a career that leads the way between China and the world.
1. “GlaxoSmithKline fined $490m by China for bribery, BBC News,” September 19, 2014. At http://www.bbc.co.uk/news/business-29274822.
2. Buckley, Chris. “China Says Mercedes-Benz Violated Anti-trust Rules in Pricing.” The New York Times, August 18, 2014.
3. “China surpasses US as world’s largest economy based on key measure,” October 8, 2014. At http://rt.com/business/194264-china-surpass-us-gdp/.
4. Cardenal, Juan Pablo, and Heriberto Aruajo, China’s Silent Army: The Pioneers, Traders, Fixers and Workers Who Are Remaking the World in Beijing’s Image (London: Allen Lane, 2013).
5. Jacques, Martin. When China Rules the World: The Rise of the Middle Kingdom and the End of the Western World (London: Allen Lane, 2009).
6. Gewirtz, Paul. “What China Means by ‘Rule of Law,’” The New York Times, October 19, 2014.