The Art Of War
With an economic rise that has become impossible to ignore, more and more companies are dipping their toes into the business environment in China. A large percentage fail, but a few succeed in an outstanding fashion. BHP Billiton recently posted a record $6.5 billion dollars on the back of its China
operations and claims that demand is currently outstripping its ability to supply, in which case the profit may have been substantially higher. Like every success or failure in China there is a human story and invariably a story based on how the western company came to terms with the business
environment in China. BHP has an interesting story behind it and if not for the persistence and insight of one man the result may have been very different. When you enter the dragon’s lair you enter on the dragon’s terms. Trying to force China to adhere to your own cultural and business norms is a task that not even the largest empire in the history of the planet was able to do. While the Mongols under Kublai Khan were able to militarily impose their will for a short time (in Chinese dynastic terms the Yuan or Mongol dynasty lasted a very short time—less than 100 years) they were unable to impose a cultural change on the Chinese way of doing things and instead adopted the Chinese administration and way of life. Therefore, to be successful in China, no matter how compelling your argument to do
otherwise, depends on your ability to adapt yourself and your company culture to be aligned with a Chinese way of doing business. An ideal starting point is to realise that business in China follows military strategy. Every Chinese child is immersed in the philosophies that have emerged from ancient writings on the arts of war. While Sun Zi’s ‘The Art of War’ is the most famous there are many treatises also termed Arts of War and writing these was considered the culmination of a famous general’s career. Given that Sun Zi never lost a battle, his assessment of tactics and strategy is given prominence both in western business study and also in China. In addition to the Arts of War there are the 36 Strategies. A distillation of military wisdom codified into different scenarios and different assessments of the inequalities of forces. There are strategies when you hold superior forces, strategies when your forces are far less than the opposing army, strategies for when you are equal. These strategies and combinations of them form a large part of a business person’s actions when doing business in China, and even a cursory knowledge of the strategies and how they operate in business makes the going much easier. Consider Strategy 10— “knife hidden behind smiling face”—next time you are sitting at a banquet and are surrounded by a sea of smiling faces. And as if all of this isn’t enough, there are 5000 years of proverbs and aphorisms to consider, all of which create a depth of historical wisdom within the mind of the person sitting across the table from you when you enter into business in China.
Before you consider that it is “in the too hard basket” there are some general rules of battle that make the experience easier and far more likely to succeed. There are huge numbers of successes in China, successes generally created because the directors of the company decided to take some time and adapt their current business practice into a more culturally aligned Chinese style business practice. Astron Ltd, a listed company on the Australian Stock Exchange, is on target this year for a turnover of $139 million dollars and a profit of $24 million dollars. Everhot Water Heaters, originally based in Melbourne, is China’s largest manufacturer and supplier of hot water heaters and in the booming property market that is a great place to be. The name Clipsal has almost become synonymous with electrical fittings in China, with an almost ubiquitous presence in every town in China. Using the battlefield analogy, the following 5 points are perhaps the most critical if you truly want to be a success in China.
Scout the Battlefield
One of the biggest mistakes companies make in China is to spend insufficient time getting to know the marketplace. It is simply impossible to learn what you need to learn to be successful by taking quick trips for a few days or even a week.
Despite Japan having a rocky relationship with China, Japanese companies are among the most successful in doing business in China. While most people would conclude that both countries are Asian and therefore understand each other this is a completely false assumption. Japanese companies are successful because of the extreme lengths they go to, to identify suitable partners and research the market before entering into any formal discussions; 9–12 months would be considered the normal length of time for two people to spend in China before making any decisions about where to start.
Research has to been undertaken in a variety of areas:
- Coming to terms with the Chinese way of life—what makes China tick? How do people view the world? What do consumers want? Where is China consumerism heading?
- Learning about the macro-business environment—what is happening in your particular marketplace in China—who are the main players? Who is successful, who is being propped up by the government? Which geographical area is best for your product?
- Learning about individual companies and the government structure that supports those companies—know the structure of the companies you would like to do business with—who is the leader, who is second-in-charge, what is its history, who does it report to in the government. Make a list of as many questions as you can think of and answer them—there is no such thing as too much information when you do business in China. Jumping in after talking to a couple of companies and going ahead with a business plan is almost guaranteed to fail if you do not know the facts behind the industry.
Generally, the first people you will meet if you jump in without conducting the research will be the ones the government wants to divest of its books because they are losing money. Having local government officials smiling at you and feting you at elaborate dinners will beguile and entrap you if you do not know the inner workings of these companies long before you make any approach.
Put two people on the ground for a year with no other brief than to research, research and research. Find out which government departments oversee your industry. Who are the real power brokers—who can help or hinder you?
Who needs to be on your side for your cooperation to succeed? Which individuals can help you most?
Remember Sun Zi’s prime instruction—Know your enemy, know yourself and you will be victorious every time you take the battlefield. Knowing your enemy means you need to know everything about their marketplace, their business environment, their company, their strengths and weaknesses before you even make contact with them. And if all of this seems too much remember that doing business in China is not a sprint—it is a marathon. Business in China is not for the short-term thinker. Remember BHP Billiton? For 10 years BHP had one person in China who was forced to apply every year for the funding to carry on the office in Beijing—10 years of persistence from one person who understood what it was going to take to be successful in China. As a director of a company, which category would you fall in to —the person of persistence or the directors who forced that person to apply every year for funding to carry on? BHP’s balance sheet should answer that question.
Choose Strong Allies—Develop the Right Relationships
While nearly the first word a businessman going to China learns is ‘guanxi’ (gwan shee)—relationships— nearly every western businessman misunderstands what it truly means. I don’t know how many times I have seen companies claiming to have great guanxi—excellent relationships—fall over because they misunderstand what this word signifies and how a relationship actually works.
Firstly, if you think that because the provincial governor attends the dinner at which you and your aspiring partner tie the knot that this governor is your good “guanxi”, you are totally wrong. The governor is your partner’s “guanxi” and is there to give face to your partner—and not to oversee and protect your interests. It is the age-old Chinese custom to line up the strongest people from their array of relationships to show the other side how powerful they truly are — “my provincial governor trumps your municipal Party secretary” type of behaviour. A type of civilised and deadly serious “mine’s bigger than yours” contest. If you want business protection and security you have to develop your own array of powerful connections that you have taken the time to develop and turn into allies that you take to the banquet.
Another compelling reason why you need a couple of people on the ground for a period before you jump into a business deal. When a partner knows that you have powerful friends behind you they will behave impeccably and if there is a problem they will think very seriously about what to do if they know that you have people who will intercede on your behalf that they don’t control. A relationship is a two-way street. Not only do you need to develop the right relationships with the right Chinese partners, you have to be the right relationship for the Chinese partner to develop a cooperation with you.
This means the people you send to China have to have the right mindset— you need pioneering type people—people who do not consider it necessary to live in a five-star hotel – people who are interested to socialise and mix with local Chinese people. People who have a genuine interest in China and are prepared to learn the history, customs, understand the system, and pick up a smattering of the language. And having an in depth understanding of the 36 Strategies and Arts of War isn’t a bad idea as well when you will be confronted with multiple combinations of these when you finally enter into business environment. Being the right partner also means that you bring something to the table that your partner wants or needs.
Initiate a Skirmish before Committing your Full Forces.
Do not commit your entire forces and resources until you have tested the market. Not only do you need to test the viability of the business idea, but also you have to test the suitability of your partners. Many ideas that work brilliantly in a western business environment won’t necessarily work brilliantly in China. Sometimes the idea is working, but needs fine-tuning. When KFC entered the Sichuan market (Sichuan is a southwestern province renowned for its spicy food) they were moderately successful, but return custom was poor until they started giving packets of dried chilli powder with each pack of chicken, and then they soared—11 new stores in 6 months in one city.
While starting small and skirmishing with the marketplace is great also be ready to commit your full-scale forces if the idea takes off and your partners prove reliable.
A note on partners: Partners don’t necessarily mean just a business partner—whatever business structure you put on the ground you will be dealing with “partners” in the broadest sense of the word—your management and staff are your partners, customers are your partners, distribution networks are your partners. Each and every area you need to work with has to be considered your partner. No-one will move/buy/make your goods even if they are the best on the market if they do not have a solid relationship with you or your company. China is an amazing place at times— while it seemingly takes forever to establish something once it is established solidly it moves with a pace that will astound you. While negotiations can seem to drag on forever implementation seems to fly. In fact, it is perhaps 90 per cent true that if implementation of a cooperation is not flying ahead, then there is a problem somewhere.
Always have an alternative strategy in place—be flexible.
While everyone always hopes that a cooperation is a marriage made in heaven, like normal marriages things can go wrong. Things can go spectacularly wrong— ask Lion Nathan when they sold their brewery business in Suzhou after trying to make money in China for seven years, but ended with around 200 million dollars’ book losses over that period despite increasing turnover and the volume of beer produced.
A prudent company having researched the marketplace properly, having established strong external relationships, having tested the market carefully initially will also have an alternative strategy in place in case the first plan doesn’t work. Sometimes a regionalised strategy is appropriate—not attacking the market in the main centres initially, sometimes a plan for strategic alignment with a competitor who finds themselves in the same situation is appropriate. But there must always be a clearly thought out secondary plan for the company when the first plan doesn’t succeed as it should. While not wishing to comment on the Lion Nathan failure because I am not privy to the internal workings of what was the reason for the failure, I do know that the great beer wars in the latter part of the 90s in China saw nearly every major brewer in the world enter the Chinese market and all tried to compete in a cut-throat manner among themselves. Inevitably there were going to be casualties and having a strategy in place to combine with some of the other companies who were experiencing similar difficulty in China may have allowed the creation of an entity of critical mass that may have been able to compete with the larger players.
Alternatively, by starting out in a regional area where there was less attention from the bigger players, may have also allowed the smaller player time to learn how to market in China and build up a war chest from profit before taking on Shanghai, Beijing and Guangzhou.
Fight the battle as if it is Part of a War—Not the War Itself.
Like an army you may fail in a few battles—if you have a plan only for one battle then you shouldn’t come to China. Doing business in China should be the result of a long-term plan and determination to succeed—no matter how long it takes. Risk and rewards—the risk is making sure you have resources for a long war and the rewards for success in China are huge—and these rewards will only grow as the economy develops and the majority of the people start to enjoy a middle class existence.
You may fail on the first dip in the water. You may fail on the second and third time as well—but if you are committed to succeeding and have not committed everything on one deal or one partnership then the chances of success are enormously increased. Having said that, you must fight the battles exactly
for what the analogy says—they are battles—battles for market share, battles for resources, and battles for the right partners. While there is a highly polished veneer of courtesy and politeness there is also intense and bitter competition to succeed in China and only the clever survive and grow.
Like any army, there are no bad soldiers—only bad generals—and success or failure in China is a direct result of the leaders of the company coming to terms with the fact that China is a different business environment and will remain a different business environment, regardless of China’s accession to the WTO. The Chinese simply do business in a different way to western business people, and acknowledging that fact and taking the time to learn the nuances of the system can bring massive rewards in the medium term, and who knows what rewards in the long term? China will dominate the economy of the world over the coming decades and being part of that is ensuring your company’s place among that success.
Categories: Business Advice in the Raw