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Chinese Business Culture

Guanxi, An Important Chinese Business Element

“Guanxi” literally means "relationships", stands for any type of

relationship. In the Chinese business world, however, it is also
understood as the network of relationships among various parties that
cooperate together and support one another. The Chinese businessmen
mentality is very much one of "You scratch my back, I’ll scratch yours."
In essence, this boils down to exchanging favors, which are expected to
be done regularly and voluntarily. Therefore, it is an important concept
to understand if one is to function effectively in Chinese society.

The importance of "Guanxi"

Regardless of business experiences in ones home country, in China it is

the right "Guanxi" that makes all the difference in ensuring that business
will be successful. By getting the right "Guanxi", the organization
minimizes the risks, frustrations, and disappointments when doing
business in China. Often it is acquiring the right "Guanxi" with the
relevant authorities that will determine the competitive standing of an
organization in the long run in China. And moreover, the inevitable
risks, barriers, and set-ups you’ll encounter in China will be minimized
when you have the right “Guanxi” network working for you. That is why
the correct "Guanxi" is so vital to any successful business strategy in
China.

Although developing and nurturing the "Guanxi" in China is very

demanding on time and resources, the time and money necessary to
establish a strong network is well worth the investment. What your
business could get in return from the favors for your partners are often
more much more valuable, especially in the long run, and when you’re
in need. Even domestic businesses in China establish wide networks
with their suppliers, retailers, banks, and local government officials. It is
very common for individuals of an organization to visit the residence of
their acquaintances from other organizations, bringing gifts (such as
wine, cigarettes, etc.). While this practice may seem intrusive, as you
spend more time learning the Chinese culture, it will become easier to
understand and take part in this practice that is so central to successful
Chinese commercial activity. 
 To start, pay close attention to your
immediate Chinese network, and try to establish good "Guanxi" with
them. They can indirectly link you to new acquaintances and
information resources, thus helping you to develop other right "Guanxi"
you need.

How business is conducted

The Chinese culture is distinguished from the Western culture in many

ways, including how business is conducted. For example, the Chinese
prefer to deal with people they know and trust. On the surface, this does
not seem to be much different from doing business in the Western world.
But in reality, the heavy reliance on relationship means that western
companies have to make themselves known to the Chinese before any
business can take place. Furthermore, this relationship is not simply
between companies but also between individuals at a personal level. The
relationship is not just before sales take place but it is an ongoing
process. The company has to maintain the relationship if it wants to do
more business with the Chinese.

How relationship is established

First of all, it does not have to be based on money. Treating someone

with decency while others treat him/her unfairly could result in a good
relationship. Second, it starts with and builds on the trustworthiness of
the individual or the company. If a company promised certain things and
delivered as promised, the company is showing trustworthiness and the
Chinese would be more inclined to deal with them again. Third, being
dependable and reliable definitely strengthens the relationship. It is like
being friends, and friends can count on each other in good and tough
times. A good example is related to the 1989 political instability in
China. Companies that stayed found their relationship with the Chinese
strengthened as they were viewed by the Chinese as friends who did not
abandon the Chinese when they needed friends. Fourth, frequent
contacts with each other foster understanding and emotional bonds and
the Chinese often feel obligated to do business with their friends
first.
 "Guanxi" or relationship with high rank officials are still
important for doing business in China, though declining to some extent.
Political and administrative interference in business have declined. More
and more companies have found themselves on their own surviving
without government subsidiaries. If they are not getting any help from
the government they are more reluctant to be influenced by government
officials. So government "Guanxi" may have less influence with these
companies.

Since "Guanxi" and relationship could function as an information

network, companies with wide "Guanxi" and relationship networks often
have much higher performance than companies with little or no
relationship with the Chinese.

Final Words on "Guanxi"

Keep in mind that "Guanxi" can take on many forms. It does not have to
be based on money. It is completely legal in their culture and not
regarded as bribery in any way. So, there is no need to feel
uncomfortable about it. Trustworthiness of both the company and
individual is an important component. Following through on promises is
a good indication of this. Treating someone with courtesy while others
treat him or her unfairly is another aspect. Frequent contact fosters
friendship as well. Chinese feel obligated to do business with their
friends first. There are risks with this system, as well. When something
goes wrong, the relationships are challenged, and friendships quickly
disappear. "Guanxi" can also be very one-sided. When "Guanxi" is
involved, there is a risk of obtaining an invoice of twice the amount that
you bargained forThe King of Guanxi
 
 Sep 23rd 2004 
 From The
Economist

Vincent Lo's career shows what it takes for an outsider to succeed in

China

SIPPING tea in his penthouse office with sweeping views of Hong Kong
harbour, Vincent Lo does not look the sort who spends too much time
roughing it in mainland China. The 56-year-old's impeccably cut Mao-
collared Blanc de Chine suit and designer haircut disguise a man who
spends three days a week dashing between grimy cement plants and
building sites in frantic Chinese cities. Yet over the past two decades,
with a relatively modest outlay of $1.5 billion, the chairman of the Shui
On Group has turned his building-materials and construction firm into
one of the most consistently successful foreign investors in China.

 
 When it comes to parlaying social connections into business
opportunities few can match Mr Lo. His avowed desire is to contribute
to China's success and not just his own profits. This has earned him the
trust of many of China's elite—and a nickname: “the king of guanxi
[connections].'' How he built his empire says much about the realities of
doing business in China.
 
 
 That Mr Lo was the son of a successful
Hong Kong property tycoon helped only indirectly. Unwilling to join the
family firm, he was something of a black sheep. His mother had to beg
her husband to lend their son HK$100,000 ($16,700) to start a company.
Desperate to prove himself, he took risks: going into Shanghai in 1984
when few others dared. Mr Lo built a hotel with the city's Communist
Youth League. It opened as students rioted in Tiananmen Square,
occupancy plunged and the league could not repay its construction loan.
“I helped out,” says Mr Lo. “They've never forgotten. Relationships are
long term here.”
 
 One of those who remembered was Han Zheng, the
Youth League secretary and now mayor of Shanghai. Along with Xu
Kuangdi, a former Shanghai mayor with whom Mr Lo established some
of the first business links between Hong Kong and Shanghai, the pair
helped Mr Lo win his biggest coup. This was the right to develop a piece
of land surrounding the hallowed hall where the Chinese Communist
Party held its first meeting. The $170m Xintiandi project involved
building a two-hectare complex of restaurants, bars and shops in an
elegant low-rise style. Xintiandi is now a prime entertainment spot and
one of Shanghai's—and Shui On's—most important marketing tools.
Foreign heads of state, such as Russia's president, Vladimir Putin, queue
up to dine at the Clubhouse.
 
 Xintiandi has so delighted central
government and Shanghai officials (Wen Jiabao, China's prime minister,
sometimes drops in for tea) that Mr Lo has won permission to develop
an adjoining 50 hectares into luxury townhouses, offices and hotels.
Although the project itself has produced pedestrian profits for Mr Lo, its
halo-effect has enabled him to sell apartments there at high prices. And
Xintiandi is proving a model for other aspiring cities in China. Mr Lo is
building the next one, Xihu Tiandi, in Hangzhou, a city to the south-west
of Shanghai. 
 
 But there is more to Mr Lo than property. Just as he
was an early investor in China, he was also early to move inland from
the prosperous coast. His political antennae told him that the country's
leaders would be forced to develop the poor interior to balance explosive
growth along the coast. And building needs cement. In 1995, five years
before Beijing promulgated its “Go West” campaign, Mr Lo bought his
first cement plant in Chongqing, a huge inland city. The timing was
perfect; cement consumption has grown fast and Shui On is among the
top three producers. Mr Lo believes he is unlikely to fall foul of recent
measures to limit suppliers since he tends to buy up existing cement-
makers rather than build new plants on greenfield sites. And he keeps
local officials happy by promising not to fire workers.
 
 His decision to
invest in Chongqing was encouraged by the appointment of an old friend
from Shanghai as the city's vice-mayor and later a former central-
government minister as its party secretary. Mr Lo well understood that
unless the interests of local and central government are aligned, foreign
investors can get caught in the crossfire: Chongqing's previous mayor
and party secretary had been at loggerheads. Reassured, he is now
planning an urban redevelopment in Chongqing twice the size of
Xintiandi. Wuhan, another inland city, will be next.

 Seek no favours

That Mr Lo seems to have the run of China is partly explained by his

extensive connections. An honorary citizen of Shanghai since 1999, he
is also a member of one of the top advisory bodies consulted by central
government. But he wears this network of guanxi lightly. Of his old
Shanghai friend, Mr Han, Mr Lo says: “I've never asked him for any
favours, that's why he is not afraid to see me.” And he understands that
China expects a lot back. Adrian Ngan, a property analyst at BNP
Paribas Peregrine, says: “No head of a Hong Kong company visits China
as much as Vincent Lo. When China sees the chairman so often, they
believe he is sincere.” Such intimacy built over decades can establish
trust in an unpredictable business climate. Mr Lo's contract for the huge
Xintiandi project was a mere six pages long. “Contracts in China allow
for things to change,” he says, smiling at the legalistic mindset of most
foreign investors who get bogged down in procedural detail. “Other
developers scratch their heads and say ‘How can we cope?’ I see change
as an opportunity, not a threat.”
 
 Yet despite these advantages, it is not
clear whether Mr Lo can consistently make a good return in China.
Cement margins are under pressure and relocating residents to make
way for new developments is getting more expensive. And it is likely to
take years before investments in luxury property in dirt-poor places like
Wuhan and Chongqing pay off. Meanwhile, Mr Lo would be hurt badly
if there were a crash in Shanghai's property prices. But that is the risk he
takes. After 20 tireless years he has the ear of some of China's most
senior policymakers, and that is something many outsiders will find hard
to beat.