Pay Up OK?

In the wake of the great global recession there has been a “bad debt” explosion in China. It is estimated that the number of debts owed to Chinese exporters by US companies has increased 80% over the last two years. It is estimated that 5%-10% of all of purchase orders placed with Chinese manufacturers end up as unpaid bills/bad debt. Furthermore the China Chamber of International Commerce estimates outstanding debt owed to Chinese exporters at $150 billion with an annual increase of $15 billion. At most, only 5% of this debt is currently being recovered.

So why does so much of this debt get written off, uncollected and forgotten about in China? Why are so many US and European companies getting away with not paying what they owe, with no effect on their credit rating?  Chinese companies tend to keep pushing bad debt off sometimes as long as two or three years, hoping for payment, by which time it is all but unrecoverable. Chinese companies accustomed to doing business by Guanxi (relationships) negotiate with their debtors in person, usually yielding some result, but this does not work internationally.

Collections is a new element of business for many Chinese companies.  Some Chinese companies fear losing “face” if others find out they were not paid. Big State Owned Enterprises tend to push bad debt under the rug because they can, and because no one wants their career ruined by “bad debt” – it’s easier to put it off as “still outstanding”.

Many Chinese exporters do business based on credit, but do not have credit check and ratings regimes in place to make informed decisions. Chinese companies think that debt collection is a racket and that if they hand over their case to a debt collector the collector will keep the money.

Pan Asian Commercial Consulting Group, a US based corporate debt recovery firm and a new client of ours, has entered China to try and change all of this. They believe that there is a great business opportunity but also believe there is an ethical and moral component to helping these Chinese companies.

They are offering a straightforward approach. They have agents and lawyers in all 50 states (because statutes and laws vary by state). Once they receive a file from a Chinese company they will send the appropriate documentation and letters to the debtor company. If this fails the legal process begins. Once the debt is collected, Pan Asian earns its commission and the Chinese company recovers part or all of its money.

It will be interesting to see how this industry develops in China as more and more Chinese companies assert their rights and gain a better understanding. Do you have any experiences in this arena? Positive, negative? Opinions on the business as a whole in China? What are your thoughts?

We are in the middle of a series of conversations with Steve Crandall, Vice President for Implementation Services here at Technomic Asia, based in Shanghai.  We’ve addressed a wide variety of topics, from setting up your company in China to HR issues to dealing with the China Price Syndrome.  In today’s conversation, we are talking about probably the most important topic a company could face in China: building a sales pipeline.  And I start off with a very basic question for Steve …

In our last Podcast, I had a conversation with Steve Crandall, Vice President in charge of Implementation Services here at Technomic Asia.  We talked about how important people are to a winning China strategy … how to look for them, recruit them, train them and keep them.  After we were done recording it, I asked Steve if he thought that maybe we were being too “basic” … that this was stuff that people already know.  He said, “People might know this stuff, but its always good to be reminded of it … knowing and doing are two different things.”

Well, it turns out that Steve was right … because since we posted that Podcast, we have had LOTS of comments on how useful the information was and how important it was to revisit the basics.  So to that end, we are going to go “back to the basics” again in terms of thinking about China and building your China strategy.  This is particularly critical during these times in the corporate business planning cycle … the silly season where bold strategies are considered and aggressive plans developed.  And China – given its centrality to most global business plans – is susceptible to such ridiculous hopes, dreams and schemes.  So let’s go “back to the future”, if you will, and think about our China strategies from the beginning.

Click on the links to listen to today’s Podcast …

Following is part two of my interview with Steve Crandall, VP for Technomic Asia in charge of our small- and mid-sized enterprise (SME) practice.  Today we focus on the importance of hiring and retaining the right people in your China operations.

I’ve been hearing from listeners that our last post cut out in the middle of the Podcast.  Sorry ’bout that!

Here is the re-post.  If you still find trouble, please email me at kkedl@technomicasia.com

Thanks!

Kent

I would like to begin this post with an apology … its been awhile since we checked in here on the China Business Blog and Podcast!  Thankfully, it seems we have not been forgotten as we’ve received many notes from loyal listeners asking how we are doing … if everything is ok.  I can assure you that, yes, things are just fine here in Shanghai, China … in fact, its because things are going so well that I just have not had the time to get these Podcasts recorded and posted.

We’ve been working on a series of discussions on mergers and acquisitions in China with Dr. Kim Woodard, one of the leaders of Technomic Asia’s M&A practice here in China, and we are continuing that today.  It is appropriate that one of the reasons we’ve been so busy lately is that we’ve seen a big upswing in M&A activity for clients here in China … lots of strategy development and target identification, the early stages of an M&A program.

Well, today, we are going to talk about a stage of the M&A process that, we believe, is unique in China – we call it “deal cultivation”.   Remember that we’ve been talking about the relatively “young” market for M&A in China … we are still in our first generation of doing deals here and there is not a lot of experience floating around.  Therefore, it is critical that we help bring the Chinese companies along in the process, helping them feel OK about it while, at the same time, doing what we call “discovery” – finding out as much about the target as we can ahead of the more formal legal and financial due diligence process.

I started today’s conversation with Kim by asking him about deal cultivation and why it is so critical in China…

Well … its been awhile since we’ve posted a Podcast.  Sorry ‘bout that!  I took the week of Chinese New Year off and tried to ignore my computer and email.  That was nice … but then I really paid for it coming back to work afterwards.  Now I have been able to dig out from everything and get back to our series of Podcasts on China M&A.

If you recall, I have been having a series of conversations about China mergers and acquisitions with Kim Woodard – a vice president here at Technomic Asia and one of the leaders of our M&A practice.  The theme we have been orbiting around is “reducing risk” … this is because the failure rate for China M&A deals is quite high.  We estimate that fully three quarters – that ‘s 75% for the CPAs in the crowd – of deals that reach the letter of intent stage fail to close.  So that means, for successful M&A, we need to focus on reducing risk at each stage of the process.

Today, we go back to the beginning and talk about, what we feel, is the most important stage in China M&A … target selection.  Here is a conversation that Kim and I had just this afternoon in our Shanghai office…

We are continuing our series on mergers and acquisitions in China through a conversation I have been having with Kim Woodard, a Vice President here at Technomic Asia and a specialist in China M&A.  In over 30 years of doing business in China, Kim has done deals both from within the corporate environment – with companies like John Deere and AMP – and as an outside advisor.  In the last part of this conversation we talked about the five key risk factors in doing a deal in China:

1. The acquiring company chooses the wrong target for the wrong reasons.

2. Failure to connect well and build trust with the shareholders, management, and other stakeholders of the target company.

3. Inability to bridge the valuation gap

4. The target company fails to meet due diligence expectations on financial documentation or on financial and commercial performance.

5. The C-suite in the acquiring company gets worried about post-acquisition performance.

Let’s get back into the conversation as we now turn to the best way to manage these risks …

I was quoted recently in an article in the New York Times on the growing demand of direct sales in China.  The article is very well done and I highly recommend anything that David Barboza writes on China … the man knows his stuff about China and he really does his homework.  One of our Five themes for China in 2010 and Beyond is “Distribution” and the direct-sales model is a very interesting one for China so I wanted to add a couple more comments here.

For those not familiar with it, “direct sales” is when individuals are recruited by a company to sell their products directly to consumers who are, typically, their friends and family.  There are many well-known companies that have used this model such as Mary Kay, Amway and Avon (those of a certain age will remember the old commercials in the U.S. whose tagline was “Ding-dong, Avon Lady calling!”).  As David’s article notes, direct sales have not always had smooth sailing in China as the government has been wary of allowing individuals to start up their own businesses (because, as we know, once people have money-power they want all sorts of other power).  I think that the combination of entrepreneurial sellers and adventuresome consumers are fertile ground in China for direct selling business models for two main reasons: first, direct-selling can leverage relationship-based sales which have a long history and solid cultural foundation in China; and secondly, direct-selling goes around the modern sales channels in China which, although growing in strength, are still very immature and often very difficult to work with.

One of the main reasons that China’s distribution networks have been so fragmented is that they have been based on guanxi or relationships which are simultaneously personal and professional.  In a traditional distribution model, this guanxi holds you back because you are limited in they amount of personal relationships that you can maintain at any one time.  In other words, if my hometown is in Wuhan, all of my guanxi will likely be from that place because I grew up with many of these people, our families know each other, we went to school together, etc.  However, if I try to expand that guanxi network out to, say, a city like Chengdu (probably over 1,000 km away from Wuhan) it will not be possible to develop the same depth of relationships in that region.

Historically, sales in China have been based on this guanxi … I get the sale, not necessarily because I have the best price or the best quality product, but because I have good guanxi with you.  However, this is rapidly changing in China: while good guanxi is a necessary condition to successful sales, it is by no means a sufficient one — I now have to bring good products to the market at good prices.  And for most industrial and consumer products companies, this is a good thing because it means that they can develop more “professional” distribution channels and get a broader sales footprint in China.

So let’s go back to the direct-sales model … this is a model that leverages (and even celebrates) guanxi-based sales.  Sales most often are made to friends and family (or the friends and family of other friends) and, while these product suppliers are certainly concerned to bring good quality products to market, I would argue that they are relying even more on the strength of their sales teams’ guanxi in their local area.  The strength of the direct-selling model is that it goes with the flow of traditional Chinese culture, not against it, by making each sale personal.  And all you have to do is multiply the large number of people in China by their growing disposable income and you understand why executives at companies such as Mary Kay, Amway and Avon are having a hard time controlling their excessive drooling.

The second reason why I think that the direct sales model will have some legs in China is that it goes around the typical sales channels for consumer products: retail stores.  This is a topic too large for one blog post but suffice it to say that China is in the midst of a sea-change in its retail channels, moving from a “traditional” model — dominated by mom-and-pop stores and small specialty stores — to a “modern” model dominated by the larger hypermarkets, “Big Box” and grocery chains.  If you look at China as a whole, a slight majority of consumer products are sold through traditional channels; however, the growth is in the modern channels and particularly in the so-called “hypermarkets”, chains such as Wal-Mart, Carrefour, Rt-Mart, etc.

Initially, consumer products companies were excited about this change … selling to many thousands of traditional outlets is much more difficult than selling to fewer (and larger) modern chains.  However, what everyone is realizing is that these modern chains, while good looking on the outside, are often very difficult to work with simply because they are so big and wield so much power.  The cost of doing business with them — what consumer products companies call “trading terms” — are often quite high in China compared to the rest of the world so while consumer products companies are often happy with the volume that moves through modern channels, they are not as happy with the margins (and multinational consumer products companies are ALL about the margins!).  These companies are often finding that the hypermarkets are not all that good at merchandising and marketing themselves so consumer products companies often feel that they end up paying a lot in terms of marketing fees and not getting all that much for it.

However, the direct-sales model does an end-run around these channels and goes directly to the consumer.  The only marketing fees are the commissions to the sellers so, theoretically, both the margins and the volumes can be quite high.  Consumer products companies don’t have to deal with the retail stores nor do they have to work with distributors to those stores (a topic for another blogpost). In our work with consumer products companies, some of them — and some big names too — have secretly asked about direct-selling and whether or not they could do it.  To date, none of them have but that doesn’t mean that they are not thinking about it.

Now this direct-selling model is not all beer and skittles and in his New York Times article, David Barboza identifies some of the challenges that companies such as Mary Kay are facing (for one, direct sales companies are required to open their own “brick and mortar” retail stores through which to do they actual distribution of product).  Suffice it to say, there is no magic bullet in China retail … we are in the midst of a mini-revolution in China retail and all players — retailers, product companies, distributors and consumers — are changing faster than we can keep up with them.  However, given the sheer size and potential on the China consumer market, everyone is dumping massive amounts of investment and are exhibiting as much patience as they can.  Keep your eye on the direct-sales model in China … we could see it expand beyond the companies we typically associate it with and move into areas we never thought possible.

In  past interviews here on the China Business Podcast, we’ve talked with business leaders about their approaches to China … why their company came to China, how they are approaching the market, how  things are going, etc.  I am trying to think back, but I don’t think we’ve ever talking to someone about how a country approaches China.  Well, in today’s Podcast, we are going to change all of that by talking with David Thomas, Founder and Managing Director of Think Global Consulting, a firm based in Sydney, Australia.  David and his firm work with Australian businesses and government to make connections to China.  I’ve known David for a couple of years and, in fact, I think we might have even met through his listening to our Podcasts in the early days.  But as we’ve talked and done business together, I learned more about the deep connections between Australia and China and how those ties are becoming even stronger as both countries find a deeper affinity with each other.  Certainly, those deeper ties are not without their conflicts as we’ve been seeing recently with the dust-up around Rio Tinto and mining contracts.  But as we’ll hear from David today, though the road might be a bit rough, there are some good things ahead for both countries.  Attached is part 1 of my interview with David Thomas of Think Global Consulting…

OK … we are on to Part 3 of our interview with the newest addition to the Technomic Asia team, Kim Woodard.  In this section, we get down into the nitty-gritty of doing deals in China.  Enjoy!

We are in the middle of a Podcast interview with Dr. Kim Woodard, the newest addition to the Technomic Asia team here in Shanghai.  Kim’s background includes setting up A.T. Kearney in the early days of China business and running his own boutique M&A consulting firm.  We brought Kim into Technomic to fill out our ability to provide end-to-end services for our clients doing deals in China.  While we saw a bit slow-down in 2009 for M&A in China (and, in fact, around the world), we see that things are really going to pick up in 2010 as companies are looking for aggressive growth opportunities.

In this Podcast, I talk with Kim about the practical do’s and don’ts of doing deals in China …

Say what you want about the Chinese authorities, but when they are determined to build something, it can usually get it done fast.  Go to a rural township one year and it’s a patchwork of dirt roads and asphalt.  Go there the next year, and not only are all the roads paved, but they’re lined by trees of all the same breed, shape, and height.  Ask around, and a peasant points into the distance and says that the government “uprooted all those trees from that mountain over there” (behind that river, across that valley!).  The irony of a lush roadside next to a naked mountainside is not addressed.

Pundits in the U.S. applaud the billions in infrastructure investment in Obama’s stimulus plan, but keep in mind that at 10 to 20 times the wages of those peasant tree-movers, we’re getting a lot less investment bang for our stimulus buck.  This has been the “miracle” of China’s breakneck infrastructure development (wowing first-time travelers to China, serious business people and casual tourists alike) in miniature: cheap labor.  Combine this with the “P&L impact” of the China stimulus plan we blogged about the other day, and it makes for some potentially interesting outcomes.

Given the easy mobilization of unskilled labor in China, to say nothing of China’s lack of pesky checks, balances, and legislative mud-fights, it stands to reason that their $586 billion stimulus plan is getting off the ground much faster and with much greater effect than all of the “shovel-ready” projects in Obama’s stimulus plan.  So, how fast has it been going?

According to the Chinese government, $57 billion (or one-tenth of the total stimulus) has already been spent as of the end of 2008.  Of this…

• about 69 percent ($39 billion) has been spent on rural infrastructure, roads, railroads, and housing construction
• an astonishing $90 billion has been budgeted for next year to more than double China’s rail network over the next decade, adding 25,000km of track
• construction has already started on a $13 billion gas pipeline from Xinjiang to Shanghai, and there are plans to start building at least four nuclear power plants this year.

As a result of these and other mega-projects, Yangtze River cargo throughput of steel, coal, and cement ticked up in January after suffering declines since last August, despite steep declines in manufacturing production.  Clearly, the stimulus is already affecting the real economy.  And, we would venture to say, its effect will be an order of magnitude greater than the $400 million for highway overpasses and upgrades in Kansas, or the proposed $3 billion just for a four-lane tunnel in downtown Seattle (Ed note: not that one might NOT want to be high above Kansas or far below Seattle!).

Aside from basic infrastructure, China’s stimulus will be spent in a variety of other ways, some familiar in the U.S. and others not so familiar.  Ten industries have been designated as stimulus beneficiaries: automobiles, steel, textiles, shipbuilding, petrochemicals, light industry, electronics, nonferrous metals, equipment manufacturing, and logistics.  Some will benefit from consumption subsidies, such as 13% off for peasants to buy mobile phones, computers, and home appliances.  Others, such as textiles and light industry, will get bigger export tax rebates.  Almost all of the industries will benefit from government commitments to invest in innovation and new technology, with multi-billion dollar funds already announced for the auto and steel industries.

The government is also taking industrial policy one step further, guiding consolidation in the fragmented auto and logistics sectors, and getting rid of excess capacity in steel, metals, and equipment manufacturing.  Industrial policy is not always spending per se (and it is important to keep in mind that the Chinese term for the stimulus, 振兴计划 (zhenxing jihua) or “rejuvenation plan,” does not necessarily imply spending), but China is clearly committed to a degree of market guidance that the Obama administration, even with rumors of bank nationalization, would never touch.  The Chinese authorities are thinking of the global crisis as an opportunity to enhance their industrial competitiveness.

So, it’s never surprising that things are built fast in China, and the ambition of government planners has never been in doubt – but how much of what has been announced is really part of the stimulus, and not accounting magic?  We’ve all heard in the Western press that a big item in the stimulus is “earthquake reconstruction,” which clearly would have gone forward regardless of the financial crisis (though at a slower pace).  It’s easy to suspect that some big-ticket projects and industrial policies are “piggy-backing” on the stimulus to give their proponents bureaucratic momentum, thus greatly exaggerating the headline figure of $586 billion.  When the government officially allocates only $23 billion to “industrial restructuring” while sources from within various departments announce stimulus spending whose total far exceeds that amount, we know that something fishy is going on.  Despite the anemic pace of U.S. stimulus spending, there might yet then be something to be said for our own small-bore, yet essentially transparent approach.

However, I don’t think that this Life Lesson is shared by everyone, least of whom the former U.S. Federal Reserve Chairman, Alan Greenspan.  In a recent interview, he said – and I am quoting directly – that “he did not fully understand the scope of the subprime mortgage market until well into 2005 and could not make sense of the complex derivative products created out of mortgages.”  Um … I might not be exactly clear about your job description, Mr. Greenspan, but wasn’t that kind of within your pay grade, to understand such things?  I mean, at the very least, if you didn’t understand it, then maybe you should have found someone you trust who CAN understand it (and maybe even attempt to put it in terms that your measly 160 IQ could understand).

And this is my point (in case you were wondering whether or not I had one) – we get into trouble when we do things we do not fully understand OR when we outsource that understanding to someone who, themselves, is clueless (but has convinced us otherwise).  Pretty deep, huh?  As I pondered this fortune-cookie wisdom I, of course, brought it back to doing business in China and decided that this Life Lesson has been the petard upon which many a foreign company has been hoisted.

First, for the do-it-yourselfers out there – those who invented a product in their garage 40 years ago, created a company around it to bring it to market and built an entire supply chain with their bare hands – you are probably going to be hard-pressed to do that in China, unless you have another 40 years to work on it.  We see many DIYers come to China and, after a week’s trip, decide they have it all figured out.  They start a company, build a factory, hire a staff and then go to work.  But they are not working in familiar territory – they are, to extend the metaphor, in the land of credit swaps, sub-prime mortgages and a raft of other Toto-we-are-not-in-Kansas-anymore issues to bring on a nice starter-ulcer.

To be fair, the hardcore DIYers are few and far between and most everyone knows that they need someone in China with local knowledge.  So for those smart enough to realize that they are not smart enough about China and go looking for someone smarter, follow the immortal words of Hill Street Blues Sergeant Esterhaus: “Hey…let’s be careful out there.”  The number of people lined up to tell you that they understand China will stretch … well … around China (and I am probably going to be one of those standing in line).  So while you will need someone more “local” than yourself, you have to be very careful not to believe their marketing brochures on first reading.

I met with a guy the other day, a potential local partner for a business we are looking to start.  I am trying to be polite here (‘cause my momma done raised me right) but the guy was so utterly full of it that you could smell him coming.  A former boss of mine called these people “all hat, no cattle” – and this guy had a hat that was so big for him that it came down over his eyes, blinding him completely!  He waxed poetically about the “many projects” he had done but, when pressed even a little, crumbled into a pile of none-too-specific specifics and claims of people he knew that could vouch for him.  He did not know it, but we had done some checking on him ahead of time and one of his “good friends” who, he said, could attest to his wonderfulness was, in fact, the first one to alert us to the indirect relationship between his hat and cattle.

But still, we know we need a local partner for this business.  We know that we don’t know enough about it and need an “insider” to work with.  But we know that this is going to take some time to find, so we keep looking (I reference the myriad blogposts and Podcasts we have done in the past on how to find and qualify a partner).  The point is that we are not venturing yet into something we don’t understand, even though the “we” here are both locals and foreigners who have been doing business in China for 20 years.

Deng Xiao ping is famous for his saying that development in China will be difficult and “like crossing the river by feeling for stones” – the way will not always be clear.  However, this is NOT what Mr. Greenspan and the global financial community (including naïve and greedy homeowners) were up against – they did not know enough to find the stones, nor did they really know where the river was because they were not even looking.  Business in China is the same way – it is certainly not easy, but it is impossible to do with your eyes closed.

Despite the global downturn, China still offers an economy that’s growing, with predictions for growth ranging from about 7 percent to 9 percent in 2009, stimulated by significant government investment. As such, China will remain a key market for growth as well as a major supplier to the world. To help management of Western businesses better understand how to tap China’s potential, Technomic Asia has partnered with the producers of “On the Frontlines: Doing Business in China” to create a pragmatic and street-smart business tool useful for China beginners and veterans alike.

A preview from the producers of “On the Frontlines: Doing Business in China”:

The “On the Frontlines: Doing Business in China” series consists of five DVDs full of insights from more than 150 interviews and one CD, sponsored by Technomic Asia, that contains research reports, book excerpts, a China Readiness Assessment and more. The video series is hosted by James Fallows, China correspondent for the Atlantic, who also served as editorial director for this project. Joe Nocera, business columnist for the New York Times, provides commentary and analysis throughout the series, as well.

With “On the Frontlines: Doing Business in China,” business leaders will quickly understand how to:

• overcome the cultural barriers to doing business in China,
• master the fine art of negotiating with the Chinese,
• succeed in making the deals you want to make in China, and
• avoid costly mistakes: business is different in China.

“On the Frontlines: Doing Business in China” is only available online and sells for $199, but the series can be ordered at a 25 percent discount off the retail price at www.chinadoingbusiness.com using the promo code “TechAsia2009.”

“One of our favorite sayings is ‘In China, everything is possible, but nothing is easy,’ and this documentary shines some light on why that’s true,” said Steven Ganster, one of the interviewees for this documentary series and the managing director of Technomic Asia, a China-strategy consultancy and a division of Tompkins International. “Although nothing in China is easy, a well-informed strategy to establishing a business presence is worth the effort. With most of world reeling from economic trouble, China provides opportunities to great to be ignored.”

(Original news release)

He writes:

[T]he most significant part of Supplier Relationship Management (SRM) — the actual Relationship — has either not been fully developed or has been insufficiently nourished in order to thrive. SRM goes to the heart of successful Supply Chain Partnerships, and in China, Guanxi is at the heart of any business, government or personal relationship.

…With suppliers, Guanxi is a general and deep type of understanding between two entities in which both are aware of the other’s needs and always take them into account. It’s an ongoing process and often flows on a more personal level than Westerners would consider a typical business relationship.

Read the full post here.

For more on guanxi, watch this 3:30 video put together by the creators of “On the Frontlines: Doing Business in China,” a DVD series Technomic Asia has helped produce. For more info on that, see here.

We did intensive training for our sales staff on how to sell “solutions” (rather than just schlep software) and we instituted a process to walk prospects through the discovery and solution phases of a sales cycle.  We had a sales pipeline management process where we listed the sales prospects and where they were in the process.  This was all earth-shaking stuff at the time – such things were NEVER done in China where most sales were relationship-based (someone bought your product because you knew them or their families).  To do a “cold call” or sell purely on the basis of how you could help a customer solve their problems was very new in China.

But getting there was tough.  We were coming off of the old way of thinking in China, the “iron rice bowl” (铁饭碗 tie fan wan) where your compensation was not much, but it was guaranteed.  If you showed up to work, kept your head down, you got your three squares a day and government housing, healthcare and schooling for your kids.  Any bonuses were often in the form of a “13th month”, a guaranteed one-month salary at the end of the year in time for Spring Festival.  In running our performance-based comp plan, we had to work through this mentality, that it was not enough to just show up – you actually had to perform as well.  And we got HUGE resistance from our staff who thought that, because they “worked hard”, they should get the bonuses.  The ones that got it succeeded; but there were many that couldn’t hack it and they went back to their comfortable iron rice bowls.

So when I read a story in the news where bankers were being interviewed about their bonuses and why they deserved them, I had a feeling of déjà-vu all over again.  One banker said, “People come here because they want to work hard and get paid a lot for working hard” (my emphasis).  Some of them go on to say that, if they are not paid their bonuses, then that is “just like socialism”.

What???  I would say just the opposite – it is “just like socialism” when you get a bonus just for for showing up and “working hard”, not because of your performance.  I am sure it WAS hard work to sell the magical pixie dust that passed for financial instruments – hey, it was tough enough selling software in China when the same stuff could be bought on the street corner for 5 RMB!  Granted, these bankers rice bowls are made of more precious stuff than iron, but the principle is the same.  If you live by the sales comish, you die by it.  End of story.

After the CNY holiday, I am going to be meeting some of my former software sales staff for lunch.  I am DYING to hear what they have to say about these bonuses and, I am sure, am going to be pushed hard to explain just how this happened.  And, as I often do when I can’t explain, I adopt my best befuddled look (and it IS a good one!) and say, “Hey…what can you do?  They’re foreigners!”

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This podcast on guanxi is transcribed and featured as an “editor’s pick” on PodsInPrint.com. Download, print and take this podcast with you. Read it here.

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Today I chat with Andrew Hill, a good friend and fellow Minnesotan — and one of the founders of the Minnesota Club of Shanghai, of which I’m a board member — about relationships in China and their importance in business. Of particular interest are government relationships, an area in which Andy has decades of experience.

Andy came to China in 1989, a complicated time to be in and around China. Since then, he’s developed true guanxi with many people in China on many different levels. And while there’s certainly no science to guanxi, there is some advice we can share to help you understand this important concept.

Guanxi is a complex term that means a lot in China but doesn’t have a direct translation to English. In terms of government relationships specifically, the complexity of guanxi is magnified. This is due in part to the complexity of the federal-local government arrangement in China and in part because of the importance of strong government relationships in doing business in China.

For more on guanxi in China, see my earlier podcast “Guanxi for foreigners.”

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Many foreigners on their first visit to China learn some Chinese and try to use it whenever they can: xiexie (thank you), pijiu (beer) and xishou jian zai naili (where is the bathroom?) are just a few of the most important. But probably the most used — yet most confusing — Chinese word is guanxi, broadly translated as “relationships.” First off the plane we are told that China is a society built on guanxi, that it is important to have good guanxi, and that, if you are to do business in China, guanxi is the thing that may either make or break your venture.

The foundation of guanxi in China is human relationships. Why is this? Well, let’s try a social experiment: Put a bunch of people on a land mass with arable land too small to support them effectively; send them storms and floods, wars, pestilence and famine; let simmer for five thousand years. Now open the cover and pick out the key ingredient of that society, the unifying theme that seems to run throughout their history. Most likely, it will be “relationships.” How do you get food when there isn’t enough? You know someone with better access to food than you have. How do you protect your family from strong enemies? Band together with others to form a stronger group. Guanxi is the very basic phenomenon of human beings getting access to scare resources and understanding that they are stronger together than they are alone.