Implications and recommendations

While an increasing number of western companies have entered the Chinese market, they are way behind firms from Hong Kong, Taiwan and southeast Asian countries. An estimated 80 per cent of all foreign investment came from overseas Chinese in Hong Kong, Taiwan and southeast Asian countries . The simple reason is that overseas Chinese share the common Chinese cultural values and they can either minimize or avoid problems by using their skills in understanding the Chinese cultural codes. In order to reduce these disadvantages, western firms are advised to pay attention to the following while operating in China.

Good personal relationship vs contract

As has been clearly demonstrated, the most important part of a business relationship is the building of personal relationships. Personal relationships often entwine with business relationships in China. Many foreign companies conduct business based on market situations without too much consideration of the personal feelings involved. They treat business impersonally while Chinese do the opposite . Foreigners tend to be contented with the signed contracts while the Chinese look beyond the contract for sincere commitment as in a good personal relationship. This does not mean that the Chinese will not abide by the signed contract without a good personal relationship. It denotes the general tendency of Chinese people to do business with a long- term orientation. When a deal is closed, you can expect the Chinese to perform their part of it. With good personal relationships, you can always rely on your Chinese partner to find a better solution when unexpected circumstances occur. In many cases, one can be better off with goodwill and friendship than one can be with a signed contract.

Guanxi and transaction costs

A well-established guanxi , however, can go beyond just business facilitation. In the Chinese business community, one can often hear people say , 'This is our old client, we should give them special terms' and 'We are old guanxi , therefore we can get better deals'. If someone chooses to ask why he or she is not treated on an equal footing, the answer is very likely, 'you are not our old client'. As a supplier, a good guanxi means that you can stay on the value chain of a manufacturer as long as you do not break the codes of guanxi even if you have competition from other suppliers. As a buyer, an old client can get better terms of payment or take delivery of goods on credit, all of which would be impossible without maintaining a good guanxi . A well-established guanxi is built on the basis of mutual trust, giving face to one another, a good track record of exchanges of favours, long-term non- opportunistic intimacy, obligation or gratitude from past help, etc. It cannot be overused and the favours will have to be reciprocated in one way or another.

Guanxi and consumer/customer loyalty

In a business-to-business relationship, guanxi is usually with individuals who are often the representatives of firms. Apart from consistent quality, timely delivery, attractive price and good after-sales services, a good guanxi should also be built into the business relations.

The obligation that a guanxi carries can be developed into a loyalty that ordinary business relations cannot achieve. Without guanxi , one can easily lose a customer simply because of an unavoidable human error. You will not even have recourse to remedy. With guanxi , you will be excused for future improvement and the business stays.

For a business that is serving the consumer market, guanxi or a relationship with the consumers shall be considered as an alternative perspective in approaching the objectives of brand image and brand loyalty. Many foreign companies are using a number of different ways to get publicity, secure more trials and create trust by consumers. Many of these efforts, although appealing and persuasive, still give people a feeling of distance, not being involved or directly related , and therefore cannot be translated into effective means of reinforcement. This also explains why people prefer, among many other means of promotion, discounts or give-away types of promotion. Obviously, price discount is not the best way to establish brand image and loyalty. But it will certainly help if you establish your image as a friend, communicate with the consumer on a friendly basis, provide favours to the consumer community, offer opportunities for consumer involvement and give consumers a privileged sense of belonging .

Reciprocity and long-term business relationship

In China, any business relationship should be considered from a long-term view. To maintain a long-term business relationship, one must reciprocate. One never knows when one will be in trouble and a friend in need is a friend indeed. This reflects the necessity of reciprocity. The experience of a joint venture in Beijing offers a typical example of reciprocity. In the early 1990s one of the suppliers of cashmere in Inner Mongolia had funding problems when planning its technical transformation. The joint venture, a producer of cashmere knitwear, was approached for help. Considering the long-term relationship, the joint venture decided to provide funding for the supplier. In the mid-1990s, the market for cashmere knitwear heated up and the price of cashmere raw material rocketed and, as a consequence, many cashmere knitwear producers had difficulties in absorbing the price rise and had to reduce production. The joint venture faced the same problem. However, the supplier in Inner Mongolia did not forget the help that the joint venture had given and offered to supply cashmere raw material at below market price. The joint venture not only survived the price rise in raw material, but also captured the market that their competitors left because of the price rise. The implication of this joint venture's experience is that the commitment to a good and long-term business relationship and the obligations arising from such a relationship will survive market changes.

Maintain guanxi when terminating business relationship

If a business is not meant to be long term, the way to end a business relationship should be properly selected. It is inappropriate to end a business relationship when a deal cannot be closed by complaining about the way the Chinese counterparts do things. This may not only cause loss of face by the Chinese counterpart , but also put an end to the guanxi that may otherwise have continued . Some foreigners who know very little about China even threaten to report the business failure to the boss or the supervising authority. This conduct is despised as lacking in ethics and is detrimental to the business relationship not only with the Chinese counterparts but also with the people in the network. As a result, many Chinese companies will avoid doing business with the foreign company.

Network codes and Chinese cultural values require that disputing parties solve problems through amicable means, ie solving the problem without damaging the harmonious business relations. This does not suggest that no litigation is used in setting problems through friendly discussions. It is advisable to exercise care and caution when taking court action. Litigation should be used as a last resort only when the future course of the business relationship has become clearly unpredictable.

Midway and bureaucracy

The Confucian philosophy, 'Doctrine of the Mean', governs the behaviour and mental actions of the Chinese people. The general tendency that Chinese people do not give answers upfront, saying ' yanjiu yanjiu' (we will study it), instead of yes or no is often regarded as a sign of bureaucracy by foreign business people. While bureaucracy does exist in China, in business, however, it may have other implications. In China, when people say yanjiu yanjiu , it might indicate that he or she is not sure, has limited authority, does not see your proposal as viable , but does not want to disappoint you by saying no or that he or she wants to have a collective decision rather than an individual one. What frustrates foreign business people is that the yanjiu yanjiu process could take a matter of weeks to months before they get an answer. If you can have a yes answer in a couple of weeks' time, it may imply that your proposal has been received positively. If it takes a couple of months to get a yes answer, there might have been a lot internal balancing and your proposal has cleared the way. Unfortunately, you will only have your assumptions to rely on when you cannot get either a positive or a negative answer, which may mean that your proposal is not going to work or it is not the right time to do it or there is internal disagreement which your Chinese partners do not want you to know of. To articulate your assumptions, it is recommended that foreigners enquire about the progress at appropriate and graceful intervals, which will help shape a reasonable answer.

Some foreigners who have had some experience in China might have found that negotiation may revert to things discussed and agreed. The reason, in many cases, is that the negotiator has received from his superiors instructions in principle, which often do not cover details which may be revealed in the course of discussion. This is again a reflection of the midway way of doing things and the in-built ambiguity of instructions in principle. This process can be easily observed if the superior happens to be present in the negotiation, during which the negotiator will be stopped , interrupted and corrected from time to time by the superior. The implication here may be that the subject brought up again is likely to be something that has caused internal disagreements or is perceived to have operational difficulties from the higher level of the decision- maker's point of view. Sometimes, it may be more to the benefit of foreigners to help them out than to insist on things agreed that the Chinese partners have or perceive having difficulties in executing.

Accessing business networks via recruiting contact persons

This aspect has a strong implication for foreign firms' recruitment policies. For those companies exploring the Chinese market, the advice is to recruit contacts, who can sometimes be life-saving. The contacts could be local residents having active business or social network or immigrants with business related work experiences or family background. The mistake is that, in many cases, foreign companies tend to employ Chinese in their home country for their operations in China, simply because they look Chinese. Those Chinese may not have the understanding of the market which you would require for making a successful entry.

As has been argued already, operational issues such as volume uncertainty can be best dealt with within a network. It is a well-known fact that foreign firms are usually not sure who the Chinese decision-makers are. These contact persons could not only find the decision- makers without too much difficulty, but can also help build the trust between the Chinese decision- makers and western companies. They can not only save western companies time and money but also future business deals because they have no trouble with cultural barriers, and they are fully aware of the Chinese ritual codes and protocols. The implication here is that foreign companies, while recruiting contacts, can at the same time gain access to a network in the Chinese market or become part of the existing network through the facilitation of those contacts.

However, although hiring a useful contact person is a good accomplishment as a start, retaining the contact person can sometimes be a daunting task. As the demand for contact persons or senior management is much higher than the market can supply, job hopping is becoming more and more a practice in the Chinese job market. One of the reasons is the difference in approach between Chinese and foreigners. As a business network is based on the linkage facilitated by trusted contact persons, this has determined that the way in which contact persons do things will have a distinctively different style from that of foreigners. In some cases, these different styles are not understood and supported by the foreign employers . Another reason could be a result of the general perception by foreigners that the average level of labour cost is low and that contact persons are therefore not properly remunerated in terms of salary package. This issue has to be handled sensibly. Losing them to one's competitors means loss of money and future business contracts. The possible solution to this problem is diversification and development of the new contact person. However, proper training and reward packages may be another alternative. While the importance of contact persons cannot be over-empha- sized , the establishment of good business relationships with all important business clients , government offices and policy makers is a must for any business in the Chinese market to succeed.

To summarize, maintaining harmony is one of the key virtues of social behaviour. That is why in China even if one is in the right one should not treat the other party so harshly as to make him to lose face. Important here is that in doing business in China one should keep all relationships harmonious and long-term oriented whenever it is possible as one does not know when a seemingly useless relationship will one day save one's commercial life or business. Western companies should also have a long-term commitment in the Chinese market. To succeed in the Chinese market, foreign firms are advised to use mentors (contact persons) to start up a business relationship. Understanding of the ways things are done in China can be difficult for foreigners, but will be rewarding as well. Whenever possible, a harmonious relationship should be kept and favours must be reciprocated. A legal solution should be the last option for solving business problems. For readers who are interested in exploring how guanxi can be established and maintained , the chapter on effective public relations may provide some practical guidance.

It can be concluded that the Chinese business network is a 'dynamic organization' which has contributed a great deal to the recent economic transformation in China. This dynamism is embedded in the key Chinese cultural values as network codes overlap with the key Chinese cultural values. Networks are not only efficient but also effective. They can internalize an existing market as well as create a non-existent market.