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The Golden Rules

The chief executive of Coca-Cola has given a endorsement for business in China, but FDs should understand the Chinese ways of doing business, writes Junie Tong

THERE IS a certain degree of truth in the comment made by Muhtar Kent, chief executive of Coca-Cola, that the US has become a less friendly business environment than China.

(Citing political gridlock and an antiquated tax structure as reasons why the US has become less competitive and is falling behind its emerging rival in the East, Kent told the Financial Times in September that China is “like a well-managed company. You have a one-stop shop in terms of the Chinese foreign investment agency, and local governments are fighting for investment with each other.”)

However, taking a closer and deeper look into the respective circumstances, doing business in China goes far beyond the issues of taxation. It also means a much higher degree of political involvement than an organisation from the West may have been accustomed to.

The art of communication

Over the years, the respective Chinese local governments have been fighting among themselves for foreign investments in order to boost local economic development and employment. The reputable and better established foreign-owned enterprises have always been their preferred targets. In order to attract such foreign funds, preferential tax benefits have been put in place.

In fact, the tax structure of China is rather complex, and there are approximately 14 kinds of tax, which are currently applicable to foreign enterprises operating in the country.

GDP growth Y O Y percentage changeAlthough subject to the preferential treatment and incentives approved at the provincial governmental level, tax reductions or exemptions are granted to foreign enterprises for a specified period of time. In any event, the tax structure of China is never straightforward, and there are always ways or mechanisms to adopt with regard to tax-saving.

Nevertheless, doing business in China goes well beyond tax-saving. One has to get prepared for an ongoing dealing with bureaucracy from the very first day.

Dealing with Chinese bureaucracy is going to take up a handsome amount of effort and time, since businesses in China are a lot more subject to government involvement. For example, the complicated political structure of the country never leads to a speedy or efficient setup of business, whereas patience is certainly needed for negotiations with Chinese bureaucrats.

Businesses may be caught by surprise by the number of different representatives or officials from the respective government departments with whom they will need to work. Numerous dinners or never-ending entertainment will also be needed to build up a long-term and trusting guanxi – relationship with the Chinese counterparts.

Harnessing guanxi requires the subtle skill of negotiation, an area where western businessmen are not always as proficient as their eastern counterparts.

According to Tao Zhigang, author of Negotiation in China: How Universal?, quoted in Spanish newspaper Expansion: “The best negotiators in the world are the Japanese, because they will spend days trying to get to know their opponents. The worst are the Americans because they think everything works in foreign countries as it does in the US.”

Culture clash

Chinas net foreign direct investment 1982 2015The way in which to communicate and limit culture clash is a subtle art that one must learn and perform well. While negotiations in the West are focused on content, reason, specificity, outcome, ends and legality, negotiations in China emphasise process, generality, means, emotion and trust.

As Ming-Jer Chen, author of Inside Chinese Business, points out, negotiation should lead to a legally binding agreement in the West, whereas a contract is always open to change for the Chinese, taking into account the different circumstances.

Given the very different foundation in values, negotiations between the Chinese and Westerners do result in confrontation and culture clash from time to time. However, for Chinese people, mianzi, or ‘face’ in English, can be defined as status or self-esteem in Chinese social relations, and is a lot more important than financial returns. The Chinese believe that financial rewards will be secured as long as they have the necessary mianzi.

Additionally, according to Chen, “mianzi extends beyond Chinese social circles to Chinese business dealings. Even where strangers are involved, the Chinese consider it important to maintain face, particularly if a future business or social relationship is envisaged.” Therefore, confrontation or direct disagreement will easily cause the Chinese to lose mianzi – which can be very damaging – and unanticipated problems will follow.

Grey areas

Good corporate governance has always been a challenge to operating a business in China. When the government’s involvement is so heavy, the Chinese belief in the importance of attaining and maintaining good guanxi can trigger the violation of corruption and bribery laws. While unprecedented efforts have been made to raise awareness regarding corruption since 1994, the implementation of the UK Bribery Act 2010 and the US Foreign Corrupt Practices Act further prohibits corrupt payments to obtain or keep business transactions.

However, in order to attain and help preserve the guanxi and mianzi of their Chinese counterparts, Western organisations may, from time to time, find themselves trapped in the grey area of violating respective anti-bribery laws, which will jeopardise public confidence in the integrity of the firms.

Moreover, since the Chinese have long been rooted in the culture of favouritism and nepotism, offering equal opportunities in employment can also be a challenge. It is not particularly surprising that various local government officials, bankers and senior staff members will always try to help their family members, relatives or friends become employees of the company. This is also another way of gaining and securing one’s mianzi.

Considering the fact that China is a far more collective society than the West, as well as the growing wealth disparity and the increasing socio-political and socio-economic pressure and challenges of the society, doing business in China also requires the manifestation and creation of economic and environmental balance, integrated with social harmony. From the Chinese perspective, the interests of stakeholders include but are not limited to local employment, welfare of the employees and government policies, and Chinese national interests must also be well considered and taken care of.

Bridging the gap

It may be difficult to push Chinese staff members to comply with achieving and maintaining the high-quality standards demanded at home or internationally since the Chinese employees are likely to take the approach of Zhong Yong: the Doctrine of the Mean.

The doctrine is described in Finance and Society in 21st Century China: Chinese Culture Western Markets as “a basic concept of Confucian philosophy that means centrality and commonality”. In fact, Zhong Yong “embodies the idea of equilibrium and represents the highest state of human development. The gentleman aims at moderation and harmony; the little person is opposed to moderation and harmony.”

As a result, Chinese employees will be reluctant to upset the overall harmonious environment for the sake of insisting on attaining high-quality standards, especially if such an insistence is likely to cause a direct disagreement or confrontation with other colleagues or business associates.

Last, but not least: while China is certainly an attractive and rapidly growing market, being successful in this highly populated country requires a deep understanding and general acceptance of its long-established cultural roots.

Unfortunately, the attractive tax benefits offered by the Chinese government will be unlikely to fully compensate for other business and its related costs, since there are undoubtedly many contrasts between the Chinese and Western socio-political, socio-economic and cultural values. A long-term company commitment to bridge the gap and to establish a truly harmonious relationship between the East and West must, therefore, be the foundation of attaining a successful and rewarding business in China.

Doing business in China goes well beyond the topsoil level, which is the innocent sphere of economic pragmatism. To do business, one must delve deeper into the subsoil level, which is the utilitarian sphere of rationalism, and into the bedrock level, which is the moral sphere of holism, and into the core level, the transcendental sphere of humanism.

These levels are equally essential for learning, knowing, accepting, embracing and transforming the Chinese way of doing business. ?


Dr Junie Tong is director of studies and a lecturer in finance at the Centre for Teaching in Management, and is the author of Finance and Society in 21st Century China: Chinese Culture versus Western Markets

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