Tuesday, September 22, 2009

Speed Racer.

Today the Wall Street Journal published an article about Hu Bin, the 20-year-old son of a wealthy Hangzhou resident, who drove his Mitsubishi tuner into Tan Zhuo, a 25-year-old telecom engineer and son of a poor laid-off family from Hunan.

The WSJ reported on not only the accident, but questions it raises about the consequences of China's meteoric rise to economic prowess.

Deng Xiaoping, when he started opening China's doors, still fought for a classless China, but with a wealthy rather than impoverished country where "to get rich is glorious". He mentioned that some would have to get rich first, but that the rest of the country could then follow.

The article notes that there is the potential for growing unrest in China over the division of power and wealth. This is true. There is a lot of corruption in China. The article reports that Tan Zhuo, the victim of the story, got into the very prominent Zhejiang University partly by coming in third in a math Olympiad in high school. I'm not a betting man, but I'd feel my money was pretty safe in wagering fifty bucks that at least one of the first two finishers in the "Olympiad" had wealthy parents who had some pull with the school.

I think what happened to Tan Zhuo in Hangzhou, getting run down by a kid driving a souped up sports coupe at around 80mph while crossing the street, is horrible. I've walked down the quiet streets around West Lake in Hangzhou. Not only are they curvy and slow, but they are tree-lined and littered with crowds of people most times of the day and night. Driving 80mph is nearly psychopathic. To think you WON'T kill someone doing that kind of speed in those quiet little streets speaks to a level of disregard that I doubt exists even in struggling US city centers like Compton.

The reporter points out the high potential for unrest and the level of outrage that immediately arose from this tragedy. While this is true, I also think it's important to put the whole incident in perspective.

First let me say I believe Hu Bin should be crucified for his disregard of human safety. His friends, who stood next to the police car he was sitting in at the accident site, smoking and laughing, should be thrown in a jail in Hongyuan for a few days or made to work on some of the hard-labor farms their parents had to toil through to give them perspective on their callousness. And if the rumors that his family hired a stand-in to serve his slap-on-the-wrist three-year prison sentence are true, the local government is going to be in serious hot water. But I also know that in every developed country's history there was a period of growth: an economic boom when nations like the US and the UK industrialized and grew in wealth and power. There were battles against monopolistic companies. Old-boy networks were created. Corruption ran rampant. I've read The Jungle and worked in a meat-packing plant. I grew up in a small town and got an education at a good school. I had to work harder than some to get where I am now, and not as hard as others. One and a half centuries ago, I probably wouldn't have had the opportunities that existed for me.

China is struggling with massive growth problems. Its interior has grown more slowly and received less attention since the doors opened in the late 70s. Its rural population received little attention after June 4th, 1989. Since the early 90s, China's technocrats have focused on helping the larger state-run corporations grow, while ignoring the entrepreneurs trying to start businesses in the poorer central and western regions.

The country's leaders are trying to change this. They're working to put more social services in place, changing the country's banking system to make financing available to small businesses, building up infrastructure. These things will ultimately lead to a wealthier country. As the interior becomes more stable politically and economically, the rest of the country will benefit.

There is no doubt China suffers from a massive divide between an elite wealthy class and an impoverished working class. Last fall I traveled to China for the first time in eight years. What I saw fascinated me. I went to a Shanghai night club populated mostly with upper-class Chinese. My friends and I arrived at around 9pm. When we left at about 1am the party was going strong, and there were two Ferraris, one Lambrogini, and somewhere between five and ten Porsches parked right out in front.

The next morning I got on a plane to Chongqing to visit my friends there. They were doing well. Their small businesses were going strong, they had bought cars and houses, and they were happy. But they weren't wealthy. I saw no Lambroginis in Chongqing. Although it is a huge city, the streets are not the greatest. A car like that might exist in the city, but it would be tough to drive it there.

I walked around downtown one day and chatted with some locals. I met people running small clothing stores, selling cold drinks on the corners, or noodles in little street-side alcoves. Their future plans were limited.

A friend took me to get a foot massage at a nice little place on the Jailing river, and the masseuse told me she made about $100USD per month. Her husband's income was similar (in China, it's not considered rude to discuss such things). They pay for their daughter to go to private school. Everything they work for is so she will have a better education and a greater chance at a good future....both for her and for them. The money they save goes towards her college education, still 13 years away. This, in effect, is their retirement fund. If she gets killed by a rich kid racing cars in Hangzhou, they have little to support them at the end of their lives.

China needs to sort out its class issues. It needs to build a stronger middle class and bump up its social services. It needs to create greater opportunities for its most impoverished. I believe the country will accomplish these things in the future. There is no other option. What I saw in Shanghai and Chongqing was growth. Massive growth. But in Shanghai the growth was vertical. Literally. There were taller buildings and higher incomes everywhere. I walked by Ferarri stores and Bently stores. I saw people wearing watches that cost more than my annual income and smoking cigarettes more expensive per pack than my daily food expenditures. In Chongqing mostly I saw more people. The city was twice its original size, and there was a little more money in town, but nothing like I saw in Shanghai.

Will this cause problems? Yes. Of course it will. Is it too late for China to turn things around and move in a newer, better direction for its people? No. Look at recent history. In 1977 it was illegal, ILLEGAL, to own a private business. Now China is one of the world's economic powerhouses. They're wealthy enough to have snotty rich kids plow souped-up Mitsubishis into working class success stories. It only took them 30 years to get there. That leads me to believe that the next 30 years will show further growth and development. Tan Zhuo might be one of the terrible tragedies that stirs the powers that be to change their policy, to make a better, stronger country with more equal treatment of its people and more opportunities for its children, no matter what is in their parents' bank accounts.

Friday, July 10, 2009

Copyrights in China.

Last week a friend of mine who spent a few years in Beijing and Chongqing approached me about a business proposition in China. A colleague of his plans to open a rather simple operation in China that involves drawing locals in to an internationally popular trend. The idea found success in the US and in Europe. This colleague has contracts around the developed world doing his business successfully and with minimal competition. His business, though not complex, is well-run and smoothly functions as a source of income for both him and the people with whom he does business.

My friend told me about the proposition because he knows I'm building a career helping businesses understand how to best approach initiating or improving their business in China. As he told me of this great idea that was already a proven, successful model in other free market economies around the world, he had a look of skepticism on his face. He said it was risky, and that China was different than the other countries his colleague mentioned.

I agreed. As he was telling me about the business model I could see one glaring flaw. Intellectual property rights in China don't function with the same level of legal support that they do in, say, France or Germany. Because the model was fairly simple and functioned as a way to bring people into businesses where they would spend money while participating in the colleague's organized association, it would be difficult to protect the idea as unique and copyrighted. What would prevent local entreprenuars from shamelessly copying the model, promoting it themselves at a lower price, and still making a great profit by delving deeper into the market than the original, western-owned business could have gone?

I didn't feel, and neither did my friend, that the colleague had a realistic understanding of the culture and buinsess environment in China. If his business proved successful in, say, Shanghai, it would only be a matter of months or even just weeks before a competitor popped up with a nearly identical, cheaper model that started stealing his business and cut off its expansion. Taking the issue to court would be difficult. Just look at Chery Automotive and GM as an example.

In 2000, Chery, a government-owned auto company from Wuhu, Anhui province, was in discussions to buy struggling Daewoo. The purchase was never made, but a year later Chery began producing the QQ, which looked like a carbon copy of the Daewoo Matiz, which was contracted for production by GM when it acquired part of Daewoo in 2003. In China, the GM Matiz was marketed as the Spark.

GM sued Chery in Chinese courts for copyright infringement. Chery claimed they designed the QQ independently, and the case was decided in favor of Chery even though GM showed that with no modifications, the QQ's doors could be transferred to the Spark with no modifications. Chery's QQ is much cheaper than GM's Spark, and is out selling the Spark by a large margin.

In addition to rip-offs and copyright infringement, there are specifics to Chinese copyright law that differ from US standards. For example, when McDonald's went into China, they copyrighted their logo for the restaurant industry and a few other food and food container related industries. They did not copyright their logo for the jewelry industry. So across the street from McDonald's on the famous and highly visible Wangfujing Street in Beijing, the Jewelry and Jade Garden popped up with its triple-arch logo. Whether they are copying McDonald's and diluting its brand recognition is irrelevent if McDonald's never registered its name and logo with China's jewelry industry.

China also has a vibrant knock-off fashion and pirated DVD industry. The government makes perfunctory displays of force in stopping the pirated DVD and rip-off fashion industries, but they don't make much of a dent. There is a reason for this. In some small towns, removed from the booming economies of Shanghai and Guangzhou, the DVD copying industry or faux Abercrombie rugby shirt industry might be the only production facility in the city. Without a legitimate business available, closing the DVD factory might thrust a large chunk of the population into poverty.

China wants a piece of whatever pie is available domestically. Its legal systems will look favorably on their own domestic businesses when challenged by the big or small international interests. It's important to get everything in writing and copyrighted long before entering the Chinese market. Once a company gets in and takes off, it should be prepared to defend its copyright in cities around the country. It should be ready to accept some dilution of its brand and some copying of its product by small knock-off operations and keep in mind when pursuing legal action may not be worth the expense.

Thursday, July 2, 2009

China's Western Development.

China's government, though extraordinarily stable in comparison to most of its tumultuous history, still faces challenges to its continued legacy.

There are restless people in the provinces of Xinjiang and Tibet. There are small riots over oil rights when small local governments ignore farmers' legally defensible claims because they know Beijing is too far away and too preoccupied. There are safety issues with coal mines. The Yellow River is nearly dry year round in the arid north. Pollution runs rampant. The poor remain exceptionally poor in comparison to wealthy entrepreneurs in chauffeured BMWs. One needs only jump on a train for 45 minutes from Shanghai to Anhui province to witness the stark transition from opulence to squalor.

The greatest challenge for the central government, however, has got to be the lack of infrastructure and stability. Migrant workers, as has been the case since the mid 90s, travel from cities and farms all over western China to work in construction and manufacturing on the coast. These workers move annually to cities around centers like Shanghai and Guangzhou to make quick money at stable jobs and send it home to their families.

As the recession hit, the central government faced a problem that needed immediate attention. Farmers from poorer provinces like Sichuan and Shaanxi returned from Shanghai this past Chinese New Year having been told that their jobs, and the factories they worked in, would no longer be in operation when they returned. This has happened with increasing frequency as the globalized economy that made China the world's manufacturing and assembly center suddenly stopped spending money. In addition to the slowdown and loss of work, the farmers returned to their homes knowing they could not farm their own land, which in many cases they leased out to larger local operators. The money they got from the lease was insufficient to survive on, and they needed work where there was none.

Over the past year or so, Chinese soldiers and police have been at the train stations every day, meeting these immigrants as they returned to their homes with no prospects and little hope, and asked them whether they had plans. If the answer came back "no", they were handed a shovel and told to take a job with the government building roads, upgrading train stations and tracks, helping with airport remodels and construction, or doing other infrastructure-related work.

China has chosen to combat the recession with a USD $586 billion stimulus package that focuses on development of its western and central regions. Moving development inwards has been long overdue. It will prove beneficial to the country for multiple reasons:

  • Locals who moved from cities like Chongqing and Chengdu to Shanghai to work in factories now have jobs closer to home.

  • As the infrastructure of these inner, second tier cities becomes more developed, China's well-educated, stable, land-locked cities will suddenly be less of a logistical nightmare.

  • The lower logistical costs of potential hubs such as Chongqing and Xi'an will make manufacturing for export overseas and domestically a reality.

Right now China's inner, second-tier cities are utilized more for domestic production and services outsourcing than for major export operations. Should China develop its interior to the point where jobs for less-skilled laborers become available closer to home, the country will hopefully see another boom. Opening up the interior and providing job stability and increased incomes for locals should help China's domestic economy shift from upper middle class development along the coast to blue collar across the interior. When this happens, domestic and foreign companies that have already positioned themselves in the west or at least have an entry plan will find themselves ready to reap the benefits of the next stage of China's development. In a USA Today article a few months back, Ting Lu, a Merrill Lynch economist stated:

"If you want to stimulate consumption, and persuade them to buy TVs, washers and fridges, you must provide electricity, running water and TV signals. (China) needs significant infrastructure investment in rural areas."

This stimulus package will be a great start. As cities like Chongqing, Chengdu, Xi'an and Kunming become more developed, the increased domestic wealth within provincial governments should bring infrastructure further out into rural areas

Monday, June 8, 2009

The Chinese Apology and the Chinese Ego.

Chinese culture is often opposite to American culture. Probably the greatest difference lies in the practice of being humble.

In China, people do not boast about themselves. It is considered common courtesy to deny complements and offers of assistance prior to accepting them, and as a result, criticism must be delivered differently than it is in the States.

Examples of Chinese complements and denials of flattery exist everywhere in the country. On my first day in China I picked up simple sentences like "hello, my name is Ben", "thank you", "how much does that cost", etc. Upon uttering these simple sentences I often was told "Wow, your Chinese is very good!" This was decidedly not the case. I was mis-pronouncing words and speaking with a heavy Minnesota accent. I didn't know how to properly use the tones. My Chinese was possibly the worst they had ever heard.

That was in 1994. By 1999 I was pretty much fluent in Chinese. All through the stages of development and learning, I was told my Chinese was excellent. To this day, it is difficult to gauge the sincerity of the complementor.

One thing that changed between 1994 and 1999, however, and continued to change as I learned more about the culture, was my own response to such complements. It is considered normal in China to exchange complements with one another as an ice-breaker. "Your Chinese is very good." "Your wife is very beautiful." "Your son is obviously very smart." The expected response is not, "Yes, I am aware of this, thank you", but rather very humble. One is expected to mention being lucky to have a son, or happy that their wife agreed to marry them, or to say, "No, my Chinese is not very good, I still have a long ways to go".

When I would visit Chinese friends that I did not know well, they would bring out a bowl of fruit or some other snack to eat while we drank tea and talked. They would always ask me to please have an orange or an apple. I would politely decline and state that I was not really hungry for food, but for conversation. They would leave the bowl of fruit on the table anyways. Then we would sit and talk and whether or not I was hungry, I always ate something. It was the right thing to do. The host was happier when I peeled an orange. But I never ate all that was there.

Many Chinese conversations begin with an apology. This is nearly the opposite of American culture. Often times if a conversation begins with an apology, you are about to be told you have made a mistake. The reason for the apology is to soften the blow of the criticism. It's an unspoken warning of what is to come, a way of telling you to prepare yourself. Often times, to smooth things over even further, the recipient of the apology may want to state that there is no need to apologize, and that their input and guidance are valued and as friends we can speak frankly with one another. Once these formalities have been taken care of, the two parties can speak more directly about their concerns and how to resolve issues.

In my most recent job as a residential loan officer, my boss would come into our close-knit department and sit down at the cubical of whomever she needed to discuss something with, and if it was not a private or personal matter, she would just say what was on her mind loud and clear. It was a great way to let the offender know that they needed to keep their client pipeline current, and a great way to make it clear to everyone else that they'd better clean up their own pipelines or they'd be next. It was a highly effected form of management and resulted in quick communication to the staff just what was expected.

This approach would not only be ineffective in China, but it would backfire, cause morale to plummet, and cause the recipient of the criticism to lose face and be publicly embarrassed. Had we been at a Chinese company, my boss would have called me into her office or a private meeting room, then sat down and apologized for having to take my time away, and probably waited a moment for me to say something like "please, do not feel bad, I need to have your guidance in order to better do my job". Then we could get down to business and I would be told my pipeline needed to be cleaned up.

All of this apologizing in no way suggests that the Chinese lack self-confidence. Egos and personalities of all varieties can be found in any country, regardless of political system, wealth and culture. China has five thousand years of history. They are a high-context, indirect society with long-established rules of communication. Direct orders are not given quite so often. Public scoldings are reserved for only the most egregious of errors. Complements, though regularly handed out, are always received with a humble reply of "no, you are much too kind".

It is important from a management perspective to understand how to be gentle when beginning a conversation with a colleague from China who does not understand American culture. One must make them feel comfortable in their environment and at ease before being frank. Otherwise they will close up and be embarrassed, and may start looking around for other employment. Giving direct orders to employees in front of others causes morale to plummet. It creates a working environment that produces less, becomes listless.

Being humble and spending time on Guanxi, or relationships, are two of the most important aspects of Chinese culture to understand before proceeding with a business initiative in China. If you've put in the time to get to know your Chinese employees, colleagues, business partners and official contacts on a personal level through social outings and dinners, you'll be able to more easily address issues paramount to the operation of your business. You will already know each other and be committed to a long term relationship, whether or not you've signed a contract to cooperate. The Chinese are more respectful of a person putting in the time to get to know them than they are of a stack of papers outlining each person's responsibility. That is changing as China delves further into the global marketplace, but one thing that remains the same is the importance of spending time building relationships. Going to China a few days before a big business meeting to meet socially with potential partners might cost a little more and take more time, but it will save thousands in the long run if the relationship is appropriately maintained.

Friday, June 5, 2009

My Teacher: Zhou Enlai.

When entering the Chinese market, be it for export manufacturing, domestic sales, or servicing multinational corporations, any business will face significant hurdles. Chris Berghoff, president of Control Products, mentioned in a presentation recently that the largest of these hurdles is understanding Chinese culture prior to entry.

Language is a useful tool to understanding another culture, and nearly a necessity in order to feel comfortable in a foreign environment during an extended stay. Culture, however, is what makes it possible for one to thrive. One of the biggest differences between US and Chinese business practices is the existence of "guanxi".

Guanxi simply means "relationships" and sometimes "connections". But relationships in China are more complicated and work-intensive than they are in the US. The best way to explain how guanxi effects business is through one of its master practitioners: Zhou Enlai.

The late Chinese Premier rose to prominence under Chairman Mao and stayed in his position without being sent to the farms to work or losing his status through political errors. This wasn't because he did a good job and the Chairman looked objectively at his performance and thought "this man is irreplaceable". It was because Premier Zhou was one of the greatest ever at leveraging relationships to his benefit by tirelessly working to make others look good.

When Richard Nixon came to China, he was not met at the airport by Chairman Mao. The Chairman was ill. Premier Zhou went instead. In all honesty, both men were quite old and ill by 1972. Nixon's visit was Premier Zhou's idea. Chairman Mao wasn't going to risk looking bad to the public if the visit went poorly. Had the visit been Mao's idea he still would have sent Zhou.

The first dinner they had together that evening, Nixon and Zhou toasted one another. In the photo at the beginning of this blog, Zhou holds his glass level with Nixon. This small gesture was photographed, analyzed and commented on all over China. In the US it was just a nice photo.

By holding his glass level with Nixon, Premier Zhou--essentially sharing rank with Kissinger-- is not showing respect to a superior position. At an official Chinese dinner, if a government official wants to toast another government official, he must first know the official's rank so he can hold his glass at a lower level, showing the proper respect. Zhou, by holding his glass at the same level as Nixon, was suggesting that he was on the same level as the US President, and also stating with a simple gesture that Mao was therefore higher. This opened the door for the Chairman to enter meetings with Nixon to develop a relationship with the US while not looking weak to the Chinese bureaucrats that were watching his every move.

Zhou Enlai was a master strategist, expert historian, and unparalleled politician when it came to surviving in China. Businessmen from the US need to take heed of the myriad of ways they can get themselves into trouble. The Chinese will not point out that you are wrong, but they will give you a lot of slack if you show them that you understand just a few simple things.

Simon MacKinnon, former president of Corning Shanghai, spoke a few months ago at Seattle University about encountering sluggish, unresponsive government officials who seemed to be waiting for a handout before they would help with permitting for a new production facility. Mr. MacKinnon set up a meeting with the Chinese official and presented him with reports from US economic publications that had been translated by Corning employees into Chinese. These reports allowed the official to go to his boss with information that would help in his work. The process of obtaining permits to move forwards with production immediately smoothed out.

This is just one small example of the importance of relationships in China. One can form business relationships in China, but they are much more social than they tend to be in the US. In addition, friendships in China generally involve helping each other out. If a business needs permits to operate in China, they're going to have to do two basic things: Build up a relationship through informal meetings with their Chinese counterparts, and find ways to make those counterparts benefit from the relationship that has been formed. The Chinese, though fierce negotiators, believe firmly that all business transactions should be mutually beneficial. They will consider a permit request to be a business transaction. Corning was going to get a production facility out of the permits it needed from the government official. What was he going to get?

The irony of this situation lies in its simplicity. Even though it is a natural part of Chinese culture, it is often misunderstood by US businesses. Once the people at the US company realize the official is holding out or moving slowly, they become suspicious. They wonder if the official is waiting for a bribe. Sometimes they even confront the official face-to-face (this is the worst possible thing one can do) and announce that they are not paying one red cent just to get an official to do his job. Meanwhile, the official sits at his desk wondering why the Corning people can't understand that he needs something, some sort of helpful piece of information or connection, that will make his own life easier. As the two sides fail to connect, both become increasingly suspicious that the other is out to get them and will never cooperate. Move in this direction long enough and you have Isreal and Palestine. Not a good way to do business.

The Chinese can't tell you they need a favor. Sometimes they will suggest it by telling you what seems like a harmless anecdote about their lives at a dinner. In some cases that anecdote was the whole point of the dinner from their perspective, to see whether you can pick up on their needs. But if you don't realize they're telling you what they need in order to proceed with what you want, they can't be more obvious. It would be extraordinarily rude to do so.

One thing that foreigners in China fail to understand is that the Chinese have just as much trouble understanding our culture as we do theirs. They are not going to take steps that would be rude in their society to build bridges to ours. We are in their country, so it is rare that a Chinese official or businessman will be in a position to even attempt looking at the situation from our angle.

The best example of perfect, long-term execution of guanxi is the late Chinese Premier Zhou Enlai. Each businessman that enters China lacks the skills that Zhou built over a lifetime. But there are simple actions that will facilitate successful outcomes. One of them is learning to apologize, something that US businessmen and politicians rarely do. Apologizing for one's ignorance from the start will make the Chinese officials or business partners immediately more sympathetic.

I'll post more on apologizing in the next entry.