1. Get your top management team to take a week off to go to experience China. In China, take them outside the usual experience of Audi limousines and luxury hotels and arrange for exposure to experiences relevant to your business – for example, do store checks or visit private homes of average citizens. Take the team to a fourth-tier city and to the countryside for a more holistic picture.
2. Beware of industrial dynamics
A common cause of losses in China is that foreign firms are so focused on market growth rates that they neglect the basics of competitive analysis. In the beer industry, for instance, more than 20 foreign brewers entered in the mid-1990s, each of them planning to capture on average 15 percent of their market segment. In a market lacking clear differentiation, they also found themselves competing with around 600 local brewers, many of them subsidised by local governments. Some expected these issues to disappear over time, but almost twenty years later, the fundamental situation has changed little. Many industries in China resemble the beer industry, with overcapacity, high levels of fragmentation, subsidised local competition, and foreigners willing to absorb losses from their “strategic” investments.
3. Take your time
Many companies want to get on the ground quickly. In one case, the CEO told his head of strategy to get China operations going within six months. Time pressure of this sort can create problems later on. It tends to result in sloppy planning and analysis. It shifts the attention from finding the right partner to finding any partner, regardless of partner fit. Moreover, it weakens your hand in negotiations. Your Chinese counterpart will know how to use your time constraints against you, and you will walk away with a worse deal.
4. Chinese society is collectivist
Conventional wisdom and cross-cultural management studies, such as Geert Hofstede’s seminal work, emphasise the collectivist nature of Chinese society. However, visitors to China often remark how individualist they find behaviour to be. This seeming contradiction is the result of a conflation of collectivism with widespread cooperation. Chinese society is collectivist in that individuals identify with an “in-group” consisting of family, clan, and friends. Within this, cooperation is the norm. Outside it, zero-sum competition is common.
As a result, self-organised, as opposed to hierarchically imposed, cooperation can be difficult to achieve—an issue epitomised in Sun Yat-sen’s famous observation that China is a “tray of loose sand.” In addition, zero-sum competition means that your Chinese counterpart may not believe in win-win solutions. One can observe this, for instance, in the tendency to re-open negotiations just as everything seems settled, especially if one seemed too ready to agree with the negotiated terms; one’s counterpart may interpret this as an indication that s/he has not bargained hard enough.
5. Mistrust and opportunism are endemic
There are two opposite ways of extending trust. One is to trust until given reason not to; the other is not to trust until there is enough evidence of trustworthiness. China takes the latter approach. The zero-sum competition already noted creates an incentive to take advantage of people outside the in-group. China still lacks reliable and impartial mechanisms to check such behavior, such as a well-functioning legal system. This opens the door for opportunistic behaviour.
As a consequence, the Chinese tend not to trust people outside their in-group. Take your cue from them. The absence of a reliable system to ensure fair outcomes means that you can encounter difficulty in enforcing contracts to the letter, and you should take suitable countermeasures, such as cash on delivery.
6. Trust is interpersonal and takes time to build
A common safeguard against opportunism is to build relationships of trust with persons who matter for your business. Unlike in the West, the creation of personal friendship is a prerequisite of doing business. Building friendship takes time, which is another reason to avoid rushing into things. Besides numerous invitations to sports and other events, one key element in building trust is long dinners during which everything but business is discussed. In these, alcohol plays an important role. Learn to drink intelligently. Seasoned negotiators dispose of the alcohol into their water glasses or into the wet towels most good restaurants make available.
7. Notions of “out-of-bounds” behaviour do not necessarily match.
Chinese negotiators occasionally push beyond what their Western counterparts consider appropriate bounds. For example, the representatives of a large Western firm were negotiating the distribution rights for one of their products. Their Chinese counterparts closed their initial pitch by threatening to use their political connections to prevent distribution of their products if they did not receive the rights. In another case, the Chinese party got their Western guests drunk to prevent them from being effective in negotiations the following morning (which, on the Chinese side, involved a completely different set of people).
Be alert and prepare suitable countermeasures. For instance, negotiation teams should learn how to drink without getting drunk, include women (as they are not expected to get drunk), and know that the heavy drinking can be delegated to one of the team members.
8. Chinese society is hierarchical
Company decisions are typically reached in a top-down manner, with only the very top of the pyramid involved in decision-making. Mistrust puts limits on delegation, and supervisory control at each level is high. Mid-level managers typically have little power to make decisions of consequence, and their main role is to pass on orders from the top and ensure execution.