The Top 10 Ways of Losing Face

Unfortunately, in the same way that certain things will give face to your Chinese counterpart, many things will also cause them (and you) to lose face.  The following are some of the most common face-losing mistakes that Westerners make.

Pressing for an answer - To a Western ear, Chinese answers often sound maddeningly vague and noncommittal and with good reason: they are MEANT TO BE vague and noncommittal.  Giving an answer to a question or requests requires a commitment and commitments may put the answer's giver in a face-losing position.  What if the answer given is wrong?  What if it is not the answer the boss wants to be given?  What if it requires a commitment that cannot be fulfilled?  Pressing a Chinese person to give an answer may cause them to lose face and, following the reciprocal nature of face, cause you to lose face as well.  Don't press for an answer if you can avoid it; the answer will come out over time.

Discussing controversial topics - To a greater or lesser extent, Westerners believe everyone is entitled to their own opinion, and disagreements about non-personal topics are not taken amiss.  Even so, there are topics like religion, politics and sex which are usually avoided except among very close friends.  However, for the Chinese, and especially when they're speaking with foreigners, the list of problematic themes is often longer.  Controversial topics include Taiwan, Tibet, Tiananmen Square, the Communist Party, Mao and US foreign policy.  Brining up such topics can be deeply embarrassing to Chinese people, and will strain even the friendliest business relationship.

Speaking too directly - The Chinese speak in an indirect way that is alien to most Westerners, and speaking too directly is often a source of problems.  For instance, in the thousands of business conversations I've had with Chinese colleagues, I have only once been told that I was wrong or had made a mistake (about a relatively minor issue, as it turned out).  Every other time, objections to what I'd done was registered as an observation, often about someone ELSE'S performance or idea.  Saying, "I disagree" or "that's wrong" is often considered to be quite rude.  Speaking too directly, especially in registering disagreement or disapprobation, will frequently embarrass the Chinese and is considered face-losing.

Ignoring the details - Part of the indirect style of communication used by the Chinese is that it often relies more on noticing details and non-verbal clues than Western communication styles do.  For example, a Chinese person may not ask if they can have a ride to the grocery store, but instead comment on how far away the grocery store is.  Concerns are often repeated in the form of questions or innocuous sounding observations, but anything which has been mentioned more than once is likely to be a significant issue for your Chinese colleague.  Failing to notice these details can make your Chinese colleague feel that he must speak directly (thereby giving offense) or let the concern go unacknowledged (thereby causing resentment), both of which can be face losing.

Pointing out mistakes - No one especially likes having a mistake pointed out, but the Chinese are VERY sensitive to this and it is considered extremely face-losing to do so in public.  In fact, publicly pointing out a mistake is often considered a significant punishment in Chinese companies.

Showing impatience - Chinese people allow an incredible range of behavior in meetings that would strike a Westerner as very rude; taking phone calls, openly working on an unrelated project, answering emails, ignoring the speaker, holding side meetings.  I have personally witnessed executives playing computer games and shopping online during meetings that they themselves called.  However, it is considered very rude and face-losing to show impatience.  The meeting will go on as long as it needs to go on.  You are expected to sit and listen (or play computer games) until the topic has been thoroughly discussed and everyone's opinion has been heard.  This rule is somewhat relaxed if it is your meeting - the chairperson can hurry people along.  Otherwise, showing impatience is face losing.

Ignoring the hierarchy - The Chinese tend to be much more formal about hierarchies than Westerners, and failing to acknowledge and take account of the relative rank of people can be seen as insulting.

Leaving no way out - One of the cardinal rules of face, is that all participants must have a face-saving way to change their mind.  Creating a situation whereby a Chinese colleague has no choice but to admit to a mistake or reverse themselves in public is almost guaranteed to end badly.  The situation may be so stressful, that they would rather suffer whatever consequence follows from sticking to a bad position, rather than suffer the loss of face that comes with being forced to publicly admit a mistake.  Additionally, every Chinese person involved in the situation will understand that you created such a situation, which will result in a significant loss of face for you, as well.

Disagreeing in public - Openly disagreeing with your colleague, boss or host is the height of bad manners and face-losing behavior.  A much better strategy is to do as the Chinese do and speak indirectly, e.g. "That's a good idea, but I need to think of the best way for us to implement it."

Getting angry - Showing anger in public is considered very face-losing for everyone involved. It also plays into one of the negative stereotypes Chinese people have about Westerners, namely that they will fly off the handle without warning.  Westerners often cannot believe that the long meetings, frequent distractions, half-answers and unclear statements that characterize meetings and negotiations and meetings with the Chinese aren't DESIGNED to make them angry.  Certainly, it often seems that way.  But that's almost never the case.  So don't lose your temper.  It almost never helps.

The number of ways you can lose face when dealing with the Chinese often seems endless.  It can all be very  frustrating.  But avoiding these common mistakes will help smooth things with your Chinese colleagues, and that pays dividends when you are doing business with the Chinese.

Itchy Feet Video

http://youtu.be/uFRLKGU8N1Y

Itchy Feet

Why the Chinese have dramatically increased their overseas investments
Seven point one billion dollars has a way of catching people's attention.  When it comes from a developing country for the purpose of buying a pig farm, it has a way of making people question their assumptions.

And so it has proved with the $7.1B acquisition of American Smithfield Foods by China's Shuanghui International.  Besides the eye-popping spectacle of someone paying billions for what amounts to a farm/butcher shop (who knew there was so much money in pig farming?), the deal has drawn attention to the recent run-up in Chinese overseas investments.  Suddenly it's not just the Middle Kingdom's giant state-run oil bureaucracies that are making big-money deals in far-away places, it's movie theater operators (Wanda's $2.7B acquisition of AMC), battery makers (Wanxiang's $257M acquisition of A123), car makers (Geely's $1.5B purchase of Volvo) and, yes, pork producers.  The Rhodium Group, which tracks Chinese overseas direct investment, shows investments in the US alone increasing from $500M in Q2 2009 to $2.5B in Q3 2013.

After years of conservative, domestically focused corporate growth, the Chinese have developed a significant appetite for foreign assets.

Although the fact of China's growing overseas investment is clear, the drivers behind it are less so.  These drivers are complex and varied, but they generally fall into business and non-business categories.

Taking Care Of Business
There are six main business reasons why the Chinese have recently begun to accelerate their acquisition of overseas assets:
The old China, Inc. business-model is losing power
A critical mass has been reached in terms of deal-making infrastructure
Buying assets and expertise has become less expensive than building it
Increased wealth accumulation is driving a greater need for diversification
The need to climb the value chain has increased
Greater maturity has driven a desire for greater vertical or horizontal integration
The first factor drives all others, and the second has lowered the cost of Chinese firms going abroad, whatever the motivation.

Since 1992, when Deng reaffirmed the country's commitment to economic reform, the business model that created China, Inc. has been based on cheap labor, imitation (sometimes theft) of existing technologies, easy credit and frenetic entrepreneurialism.  Although still present, these factors have largely diminished or run their course:  the average yearly wage in China has risen from approximately 2,400 RMB ($200) in 1992 to 46,769 RMB ($7,667) in 2013; the technology gap in most manufacturing disciplines has all but vanished; today interest rates in the West are routinely 3.0% to 5.0% lower than in China; the country's domestic startups of twenty years ago (Huawei, Vanke, ZoomLion) are now global giants and cannot afford to be frenetic.  All this has left Chinese businesses looking for a new growth model.

During this same 20 year period, an army of business majors have graduated from university (China currently graduates more than 6 million students per year, compared to 2.7 million the US) and a generation of business consultants, lawyers and accountants has matured.   When Lenovo acquired IBM's PC division in 2005, even routine deal support tasks had to be handled by foreign consultants.  Now, domestically grown bankers, lawyers and accountants carry much more of the load.  While these specialists are still far rarer in China than in the West, they at least exist as a body of professionals today, which was not the case before.  This talent pool, small as it is, makes it far easier for Chinese companies to do cross border investments and acquisitions.

Chinese businesses have long had an appetite for things that are hard to find in China - management experience, technology, access to Western markets - but they've only recently accrued the confidence and money needed to buy those things on a large scale.  Geely's purchases of Volvo and Manganese Bronze were both for the express purpose of getting access to technology and design capabilities that Geely lacked.  Lenovo was making computers long before it purchased IBM's PC division, but IBM's brand and technology turned the Chinese company into a global player.  Whereas Chinese business previously had to settle for organic development of technology, brand, and management expertise, many are now in a position to buy them wholesale.

As Chinese enterprises have grown and the limits of China's domestic market have been reached, diversification of risk has become a priority.  The drive to diversify geographically is exemplified by China Vanke, the country's largest property developer; the company began making investments in the US as a way of balancing its high-risk, high-return Chinese portfolio with lower-risk, lower-return assets in a developed market.  In part, this is just common sense, a way of not putting all your eggs in one basket.  In part, however, this is a nod to the realities of operating in China - the legal system is arbitrary, political winds shift, and social stability is questionable.   The need to diversify into a new line of business drove Lenovo's abortive attempt to acquire Canada's Research In Motion; the computer company wanted to accelerate its entry into the cell phone market by purchasing the maker of Blackberry.  This trend towards diversification overseas has begun to pervade Chinese businesses in a range of industries.

Looking to the example of Taiwan, Korea and especially Japan, a goal of the Chinese government is to climb the value chain.  This has already happened within the borders of the People's Republic, as a country once known only for making clothes and plastic toys has become a serious player in industries from telecoms to shipbuilding.  However, as Chinese businesses have matured, they have also started making strategic investments overseas to accelerate their progress up the value curve.  In 2010, when Tenzhong Heavy Industries, an obscure Sichuan manufacturer, made a bid for the iconic American Hummer brand, it was for the express purpose of moving out of a low-margin construction equipment business and into a higher-margin vehicles one.  Climbing the value chain has now gone global for the Chinese.

The final business reason for the growth of China's overseas investments is vertical and horizontal integration.  Buying related businesses plays to the strengths of the Chinese, who are by nature conservative.  The practice of buying minority stakes in existing successful businesses is a typically Chinese integration strategy, and one that has come to dominate some sectors (e.g. Chinese oil companies' fracking operations).  Chinese companies prefer to start with a small ownership percentage, and then increase it over time as they learn more about the new business.  Integration is usually less about gaining efficiencies (as is often the case with Western companies making such acquisitions) and more about increasing footprint and capturing a larger proportion of the customer's pocket.

Not Just A Matter Of Dollars And Cents
Non-business reasons have also played a role in pushing Chinese firms to invest in cross-border transactions.  The PRC's government has pushed this concept for years, as part of a larger campaign to increase the prestige and competency of Chinese industry.  Although Chinese government's direct influence over Chinese businesses tends to be overplayed in the West, companies everywhere are sensitive to the wants of their political leadership.  Chinese companies are no different and almost all at least give lip service to an ambition to operate and sell outside the PRC.  To some extent, this explains why the Chinese oil bureaucracies have concentrated on acquiring second-rate operations abroad, rather than developing oilfields off China's coast.

Perhaps even more powerful is the drive to enhance 'face.'  Culturally, the Chinese tend to be concerned with outward appearances, both on a personal and organizational level.  In a way, for the Chinese foreign operations are like football teams; whether they make or lose money, their very existence confers cache on their owner.  Cross border investments and acquisitions instantly raise the profile and stature of the Chinese company doing the deal.  Though intangible, this is an important consideration for Chinese companies and their management.

Whether any of these motivations, business or non-business, justifies China's new outward bound investment focus remains to be seen.  The Japanese lost hundreds of billions of dollars learning that success in one hemisphere doesn't guarantee success in another.  The Koreans have largely opted for organic growth and a "steady as she goes" approach.  Even Western companies, with their advanced management structures and deep expertise, regularly destroy more value than they create when making overseas acquisitions.  Managing assets and operations in a foreign country is tough, and the Chinese, with only 30 years of capitalism under their belt, may not be ready for the intensity of the competition they will face.  But $7.1B says that they are serious about playing the game.

The Rules Of Face Video

http://youtu.be/DytYRqVWT-Y

The Rules of Face

In August 2012, China was swept by a wave of anti-Japanese protests that saw people from all walks of life marching through the streets, destroying cars and demanding that the government "smash Japanese imperialism."  The cause of this nationwide outrage was the Japanese government's nationalization of the Diaoyu Islands (Senkaku Islands in Japanese), a collection of tiny, uninhabitable rocks off the coast of Taiwan.  The Economist speculated about the two countries going to war over over the Diaoyus, which have no human population or proven resources.  The most common explanations given by the Western media for these outbursts and China's tremendous sensitivity to the islands' sovereignty were (a) oil (the East China Sea is thought to hold significant petroleum reserves and ownership of the islands would enhance claims to the adjacent seabeds) and (b) national defense (the Diaoyus are part of the "first island chain," a group of islands China has designated as militarily important).  In fact, the real issue was face.

For the Chinese, the Diaoyu Islands (which are geographically much closer to China but have been controlled by Japan since 1895) are a powerful symbol of China's "Century of Humiliation."  This period, which started with the First Opium War in 1839 and ended with the establishment of the People's Republic of China in 1949, was a time when Chinese was too weak to resist foreign invasions, or otherwise exert its influence in the world.  To have Japan, China's longstanding nemesis and a frequent invader, pronounce on the disposition of what China regards as sovereign territory, was a serious insult to the country's national pride. Many Chinese people believe that's why Japan did it - just to humiliate China on the world stage.  Oil reserves and military bases mattered hardly at all - the man on the street burning his own Toyota was doing it because of face.

Face is central to Chinese culture and, therefore, a critical part of doing business with the Chinese.  Face reflects certain Confucian values, especially the idea that respect is owed to the senior party in any relationship.  Because of that, it is intrinsic to guanxi, the network of relationships and mutual obligations within which all Chinese people live.  Face is governed by a simple set of rules, which are nevertheless tricky to apply in the real world.  Knowing what face is, how to give it, how to protect it, and how to use it to get what you want, are critical in dealing successfully with the Chinese.

As a concept, face seems like it ought not be that hard.  After all, the same word exists in English, and is used in approximately the same way, describing a "loss of face" or a "face saving gesture."  This leads most Westerners to the erroneous conclusion that face is the same for the Chinese as it is for Westerners.  However, the idea in Chinese is somewhat more complex, and a significant body of academic literature is devoted to explaining it.

The modern concept of face is actually a combination of two earlier concepts, known as lian and mianzi.  According to Hsien Chin Hu, lian is "...the respect of the group for a man with a good moral reputations," whereas mianzi is "...a reputation achieved through getting on in life, through success and ostentation."  In current usage, both meanings have been subsumed within mianzi.  Hu-Ching Chang and G. Richard Holt define the modern concept of face as "...a form of respect which interactants assume towards each other in the course of their interaction."  For our purposes, face can be defined as "a person's pride, respect and dignity."

Face is connected to the Confucian idea of the Five Basic Relationships, which states that there are five fundamental associations in life, each with its own set of mutual obligations:

Confucius' Five Basic Relationships
Relationship                                         Obligation
Father & Son                                        Loving/Reverent
Older Brother & Younger Brother       Gentle/Respectful
Husband & Wife                                  Kind/Obedient
Older Friend & Younger Friend          Considerate/Deferential
Ruler & Subject                                   Benevolent/Loyal

The core obligation of the junior party in each of these relationships is to give respect to the senior party.  The outward expression of this respect is face.  For this reason, face is also closely related to guanxi, in that it is the currency by which mutual obligations are acknowledged and tracked.  Without face, guanxi would be impossible.

The Chinese concept of face is subject to a set of unspoken but nonetheless widely-understood rules.  The first rule is that in all situations, face is critically important.  This is true for ALL social interactions, from parents interacting with their children to diplomacy between nations.  For the Chinese, all are seen through the lens of face.  This does not mean that face outweighs every other concern, or that it's the dominant consideration in every social transaction.  It DOES mean that, for the Chinese, face is ALWAYS a significant consideration, it's always one of the factors vying for acknowledgement.

The second rule of face is that it must be protected.  In particular, this means that there must be a face-saving way out of every interaction for all the parties involved.  Backing a Chinese person into a corner where they have no way to protect their face almost always ends badly.  To some extent, the need to protect face and the inability to find a face-saving way out of a bad situation explains the disastrous (from the Chinese viewpoint) outcome of the Opium Wars, which started China's "Century of Humiliation." In 1839, alarmed by the impact of rising opium imports, the Chinese government banned the drug and began confiscating it from European (mostly British) traders.  The British government attempted dialogue with the relevant officials, but was rebuffed and told to deal with the imperial trade representative (a powerful but low ranking official) and work through the restrictive (and degrading) Canton Trade laws.  The British, infuriated by what they saw as Chinese arrogance and intransigence, promptly dispatched an expeditionary force supported by gunships.  The British, with advanced weaponry, crushed the Chinese opposition and imposed the punitive and humiliating Treaty of Naking on the Qing court.

As John Quincy Adams commented, "...the cause of the war is the kowtow - the arrogant and insupportable pretensions of China that she will hold commercial intercourse with the rest of mankind not upon terms of equal reciprocity, but upon the insulting and degrading forms of the relations between lord and vassal."  Face would not allow the Chinese emperor, the Son of Heaven, or his senior officials, to negotiate with foreigners (barbarians) and merchants (a low class occupation).  Having no face-saving way out of the conflict with Britain, the Chinese fought on until they were utterly defeated, losing important pieces of territory, control over the destructive opium trade, and a significant part of its sovereignty in the process.  All because they could not find a way to save face.

The third rule of face is that it is hierarchical.  Hierarchy is a central tenet of Confucianism and is embodied in the Five Basic Relationships.  The face hierarchy says that NO interactions are done on an equal basis, that one party is always higher (and therefore more deserving of face) than the other.  This does not mean that face is a "winner take all" concept, where the dominant party is wholly deserving of respect and dignity and the other party gets none.  Quite the contrary, almost every situation demands that BOTH parties receive face.  An obligation of the dominant party is to protect the face of the less powerful party, to ensure they don't lose face.  Nonetheless, there is a kind of "face scale" where various factors are weighed to see who is deserving of the most face.  In general, the factors look like this:

Factors on the "Face Scale"
Age (older = more face)
Success (more success = more face)
Rank (higher rank = more face)
Education (more education = more face)
Obligation (being owed a favor or obligation = more face)

Other factors, such as gender (men are traditionally given higher status than women, but this is less true now than before), sometimes come into play, but much less regularly.  Trying to take account for all of these factors is often dauntingly complex.

The fourth rule of face is "an eye for an eye."  This applies to giving someone face (that's usually a good way to get face in return), but it REALLY applies to making someone lose face.  To Westerners, this often makes the Chinese appear prickly and thin-skinned - a seemingly small infraction can result in a significant backlash from a Chinese colleague.

A famous and vivid example of the quid pro quo aspect of face occurred during Chinese President Hu Jintao's visit to the White House in 2006.  The visit was marred by four incidents, all reported as inconsequential by the Western media, but which infuriated Hu and the Chinese.  First, there was wrangling over the official tone of the meeting - the Chinese wanted a full diplomatic "state" visit with a 21-gun salute and dinner in the State Dining Room; the Americans wanted a lesser "official visit" with a 19-gun salute and lunch in the East Room.  In the end, it was a mix of both, with the two sides describing it differently.  When the ceremony started and the Chinese national anthem was played, it was announced as the "national anthem of the Republic of China."  The Republic of China is the official name of Taiwan; the People's Republic of China is the official name of China.  Then, Hu's speech was interrupted by a reporter/demonstrator who was a member of the Falun Gong, a religious group outlawed in China.  The woman screamed at the two world leaders for three full minutes before being removed by the Secret Service.  Finally, after the speeches were concluded and the presidents were walking down off the podium, President Bush attempted to pull President Hu toward a different staircase by physically yanking on his jacket.  As the Washington Post said of the incident, "Hu looked down at his sleeve to see the president of the United States tugging at it as if redirecting an errant child."  The entire business was so face-losing that Chinese state media gave it less coverage than it did to Hu's visit to Bill Gates' house.

In response, Hu gave the US nothing in the negotiations that followed - no concessions on helping the US reign in nuclear threats from North Korea and Iran, no concessions on the value of the Chinese renminbi and no concessions on the trade deficit with China.  The US administration, which had billed the meeting as a working session on these issues, was unable to report progress on even a single issue during the visit.  Instead, that day's White House press release was entitled "MEDICARE CHECK-UP: Prescription Drug Benefit Enrollment Hits 30 Million."  Ouch.

The incidents with Hu at the White House also point to the fifth rule of face, namely that it is very publicity-sensitive.  Things done in public carry a much greater weight, and a much greater risk, than things done in private.  This is one reason why the Chinese are so reluctant to disagree in public - they are afraid that a refusal will cause a loss of face to them or the other party.  In relation to face, "public" includes anyone not immediately concerned with the issue being discussed or the action being taken.  So, a dispute among family members may still be very threatening to the face of the parties involved, even if it is only other members of the family who are aware of the dispute.  Chang and Holt provide a good example of this in a story about a woman who called her aunt after 30 years of estrangement over a matter concerning a stolen cucumber:
"When her aunt received this phone call, on the other side of the phone line, she heard her aunt cry right at that moment.  She told her aunt, 'Years ago, I did not steal your cucumber."  Her aunt said, "I know.  Because I found out who really stole the cucumber."
Rather than suffer a loss of face in front of other family members, the aunt maintained her side of the grudge for 30 years, despite knowing she was, in fact, wrong.  As this story demonstrates, face is very sensitive to publicity.

The sixth and final rule of face is that it extends to those who are connected to you.  Thus, a loss of face for one family member is a loss of face for all.  A common parental admonition in China is for children to study hard so as to not cause the parents to lose face.  The same is true for universities, companies and other organizations - an accomplishment by a graduate, an employee or a member brings face to everyone associated with those institutions.  Students bring (or lose) face for their teachers depending on their accomplishments.  Broadly speaking, face is reflected on everyone with whom you are associated, which gives it a communal aspect.

While these six rules are by no means comprehensive, they provide a good guide to understanding and navigating the Chinese concept of face.

The Top 10 Ways Of Building Guanxi Video

http://youtu.be/ol2MhCOye9U

Top 10 Ways of Building Guanxi

Creating and managing guānxí is enormously important for anyone doing business with the Chinese, but given the complexity of doing so, it’s small wonder that most Westerners find the entire concept immensely frustrating.  Knowing what guānxí is in an academic way is one thing; knowing what to do about it in the real world is quite another.  Luckily, the basics are fairly easy to master, and the Chinese tend to give great credit to foreigners for trying. 

The basics of good guānxí are dependability, trustworthiness and respect.  The emphasis on dependability is related to China’s fast-changing environment (it’s hard to depend on things that change every day) and Chinese people’s feelings about the rule of law (they’re not sure it actually works in their world).  Creating certainty in an uncertain world is worth a lot to Chinese people. On the other hand, this is exactly the aspect of guānxí that takes the most time to establish.  The value of trustworthiness is also related to the rule of law – when you can’t rely on courts or the law to protect you from getting cheated, being able to trust someone becomes enormously important.  This is an area where Westerners actually have an advantage over other Chinese people, because Chinese people tend to believe that Westerners follow the rules.  Clearly that’s not always the case, but the Chinese recognize that rule-following is more of a cultural norm in the West than in China, and consequently it usually takes less time for them to establish that a Westerner is trustworthy than that a Chinese person is.  Respect is related to the incredibly  important Chinese concept of face.  Although face can be complicated, people usually know when you respect them and when you don’t, so it doesn’t take special skills or a long time to demonstrate appropriate respect to a Chinese partner.  Being dependable, trustworthy and respectful will go a long way towards establishing good guānxí with your Chinese counterpart.

As a practical matter, the following are ten of the top ways for establishing, managing and improving guānxí.

10.  Playing golf.  Chinese people LOVE to play golf and view it as a great time to get to know one another.  It also carries an air of sophistication and exotic luxury, which goes down well with most Chinese business people.

9.  Doing favors.  Probably the most basic and universal way of forging relationships, doing favors is nevertheless often underappreciated as a method of building guānxí.  With Chinese people doing business outside of China or with foreigners in China, the opportunities to do favors and provide help are usually significant.

8.  Paying compliments.  Especially in public, paying compliments to a Chinese counterpart is a powerful way of demonstrating respect and giving face.  No one likes insincerity, but honest compliments openly given build a lot of goodwill with Chinese people.

7.  Making introductions.  Like doing favors, making introductions is usually an easy and deeply appreciated way of helping a Chinese colleague.  In the same way that most Westerners don’t know many people in China, Chinese people usually don’t have deep contacts in the West.  Pointing them in the direction of the right contact can win big points.

6.  Being aware of who’s who.  Knowing who’s who works on two levels.  First, although lots of people struggle to distinguish individuals within a different racial group (they all look alike to me), nothing is more insulting than NOT being able to tell one person from another.  Most Chinese people have an English name that they use with foreigners.  At least learn to distinguish among your Chinese colleagues.  Second, knowing who’s friends with whom will make it easier to navigate the guānxí network you’re trying to build.  Second order relationships matter a lot in the context of guānxí.

5.  Inviting them to your home.  In almost any culture, inviting someone to your home is a sign of trust and intimacy.  Doing so with the Chinese helps give them a better idea of who you really are (establishing trustworthiness) and shows them respect.  In addition, Chinese people often don’t have many Western friends and they are curious about the details of Western people’s lives.  Inviting someone to your home helps answer a lot of questions for the Chinese.

4.  Accepting an invitation.  You should always accept invitations by Chinese people, as this serves many of the same purposes as inviting them to your house.  Declining such an invitation is at least wasting an opportunity to build guānxí and can sometimes be seen as rude or standoffish. 

3.  Giving gifts.  As with doing favors, giving gifts is an age-old way of building and strengthening guānxí.  In Chinese culture, there are rules around gift giving that should be observed, but in general, Chinese people appreciate gifts in the spirit in which they are given, and gift giving is often a key way of improving ties with someone.

2.  Drinking together.  For Chinese people, drinking together carries more importance than in the West, where it is most often used as a way of showing hospitality and of lubricating social interactions.  Additionally for the Chinese, an important aspect is the lowering of inhibitions and the insight it gives them into what people are “really thinking.”  For them, the unguarded comments people make while drinking are important clues about how those people really feel and how they are likely to act under pressure.  In vino veritas isn’t just a catchy aphorism for the Chinese, it’s an important tool in vetting people and developing guānxí.

1.  Spending time.  The great inescapable requirement of building guānxí is spending time.  Long meetings, golf games and nights spent drinking together over a period of weeks, months or years is the price to be paid for creating strong and lasting relationships with your Chinese colleagues.  It cannot be done over a few dinners together in the course of a one week trip to Beijing.  It takes time.  Lots of time.

While following these steps won’t solve all your guānxí-related problems, they’re a good start.  Investing the time and energy needed to build guānxí pays huge dividends when doing business with the Chinese.

The Rules of Guanxi Video

http://youtu.be/aQcJqrAuFZU

What is Guanxi Video

http://youtu.be/ICyaG53r49k

The Rules of Guanxi

Guānxí, the web of personal connections and relationships that every Chinese person maintains, is governed by a set of unspoken but nonetheless rigidly enforced rules.  Knowing these rules is key to creating and maintaining the guānxí needed to be successful in doing business with the Chinese.

The first rule, related to the Confucian notion of the Five Basic Relationships, is hierarchy.  The guānxí hierarchy says that NO two relationships are equal and that all connections are ranked.  This does not mean that a person’s relationship with a ne’er do well cousin is more valuable than their relationship with the president of the company where they work, only that, all other things being equal, obligations to the cousin take precedence.  In general, the ranking system goes like this:

Guānxí Hierarchy

Family first

Friends second Tribe/village third

Acquaintances fourth

Second order acquaintances fifth

Strangers nowhere

An interesting feature of guānxí is friends of friends, what might be called second order relationships or guānxí².  Knowing someone who knows someone is not as good as knowing the person directly, but it’s much better than not knowing them at all.  In general, second order relationships stand one level lower than direct relationships.  Thus, a friend’s friend ranks about the same as someone from your village, but a friend’s family member ranks about the same as the friend herself.  Unfortunately, the flip side of this is also true – negative associations (i.e. befriending someone’s enemy) also impact guānxí.  Application of these hierarchical rules tends to result in extremely complex relationships among the various parties.  Grasping and navigating these relationships can be a challenge for Westerners.

Another important rule that applies to guānxí is reciprocity.  When someone does you a favor, they fully expect that you will do them a favor of similar value, either now or in the future.  Equally, when someone asks for a favor, they do so in full knowledge of the fact that they’re incurring a debt to you that must be repaid.  The accounting for these favors is strict – Chinese people don’t forget the deposits and withdrawals made at the Bank of Guānxí.  This is an area where Westerners frequently get into trouble, as they are often unaware of the reciprocity that is expected in relationships.  Chinese people, on the other hand, are intensely aware of these debts, both owing and owed, and are always on the lookout for ways to square the account.

I experienced this first hand once when I attended a friend’s wedding in Ningbo.  Ningbo is a small city with far fewer foreigners than places like Beijing or Shanghai, so my attendance, along with my blonde wife and two blonde children, was something of a novelty.  This brought a certain status to my friend.  Late one evening a few weeks after the wedding, I got a call from my friend’s cousin, who was in town and wanted to deliver a gift to me that night.  I suggested she bring it by the next day, as it was getting late and surely she didn’t want to be out delivering gifts at 10:30 at night.  She insisted on dropping by right then and I reluctantly agreed.  When she arrived, she handed me a container of fresh bayberries that had been picked by my friend in Ningbo that same day.  The cousin explained that these bayberries were famous in her province, and had a very short season, so my friend had picked them and had the cousin carry them 1500 miles south to Shenzhen, to hand deliver to me.  I only later realized that my friend was trying to say thank you for coming to her wedding.  She was obeying the law of reciprocity as it applies to guānxí.

The final and most important rule of guānxí is time.  Building guānxí takes time, usually a LOT of time.  This is true both in terms of intensity (how much time you have to spend each week, month, year to build guānxí) and duration (how many weeks, months, years you have to keep at it to build the level of guānxí you want).  One reason why Chinese meetings are so much more frequent, and go for so much longer than in the West, is that this gives the participants more time to build relationships, get to know people and understand what they really think.   One reason why Chinese businesspeople constantly talk about building “long term relationships” is that such relationships have a huge value to them in terms of guānxí.  For foreigners, this aspect of guānxí is one of the most frustrating and baffling aspects of working with the Chinese, just the incredible amount of time that has to be devoted to building and maintaining it.

One of the most interesting examples of the time required to build guānxí occurs whenever a person changes jobs in a Chinese company.  Whether they are a new person hired from the outside or an insider who transferred between departments, no matter their expertise or experience they are likely to sit for a long time with nothing to do.  The reason is that no one in the department knows them and, therefore, no one has guānxí with them: without guānxí there is no trust, which makes it impossible to invest the new person with responsibility or authority.  Thus, in a Chinese company a new attorney won’t be given details of a legal proceeding, a new engineer won’t be told about the development roadmap for a project he’s working on, and a new salesman won’t be told the price of the product he’s supposed to be selling.  Until time has passed and they’ve developed guānxí, the new person is likely to just sit around and wait for people to get to know them.

While these rules may seem onerous to a Westerner, they form the basis of the basis of the guānxí that all Chinese people use to get things done.  Understanding these rules and adhering to them will allow you to build your own network of personal relationships, which will be invaluable in any business you do with the Chinese.

What is Guanxi?

One of the most overused and least understood words in relation to doing business with the Chinese is “guānxí.”  Although it’s usually translated into English as “connections” or “relationships,” in Chinese the word has a broader meaning, carrying overtones of influence and mutual obligation.  Given the central importance of guānxí in Chinese business, it’s worth knowing what it actually is.

At its most basic level, guānxí IS about relationships.  Everyone finds it easier to deal with people they know than with people they don’t.  As in the West, having some history with a person counts for a lot.  What’s substantially different from the Western view is that the Chinese see relationships as imbued with a heavy dose of reciprocal obligation – not only is it good to do favors for your friends and family, you OWE it to them to do those favors.  And they, in turn, owe you.  This obligation is quite apart from any quid pro quo for help actually given or received, it’s just an expectation that comes with the relationship.  That’s one reason why corruption is such an insidious problem in China – people are expected to help their friends and family, even when doing so conflicts with the rules.  Guānxí also shares the Western meaning of “connections” or “pull.”  This is especially true in business and politics (which are often linked in China), where knowing the right people can significantly influence whether or not something gets done.  So the Chinese idea of guānxí is both more complex and more powerful than the Western idea of relationships.

One reason for guānxí’s significant cultural weight is that it’s connected to the Confucian idea of the Five Basic Relationships, which states that there are five fundamental associations in life, each with its own set of mutual obligations:

Confucius' Five Basic Relationships
Relationship                                         Obligation
Father & Son                                        Loving/Reverent
Older Brother & Younger Brother       Gentle/Respectful
Husband & Wife                                  Kind/Obedient
Older Friend & Younger Friend          Considerate/Deferential
Ruler & Subject                                   Benevolent/Loyal

These relationships emphasize the importance of people who are close to you (as opposed to the importance of rules) and the idea of mutual obligations.

Guānxí is also very much about people's proximity to power.  In this regard, it has the same sense as the English word "connections."  As the gap between the haves and have nots has grown in China, the importance of connections - to government officials, to captains of industry, to people with overseas contacts, to ANYONE who can help you get things done - has grown tremendously.  To a large extent, this is now what Chinese people mean when they talk about guānxí in a business context - they are asking whether you have the right contacts to get something done.  

The importance and pervasiveness of guānxí in the lives of Chinese people cannot be overstated.  The Chinese live in a world of guānxí, it surrounds them and fills every part of their lives.  Guānxí is much more far reaching than anything you would see in America or Europe.  For example, in the West, it’s not uncommon for relationships to determine where a person buys a car or who sells them a house; in China it would also not be uncommon for guānxí to determine where a person buys their vegetables or who sells them their shoelaces.  Guānxí is far more important than rules or laws, and to some extent forms the basic guidelines for how Chinese people order their lives and behavior.  Guānxí can also influence surprisingly remote considerations in a Chinese person’s life, or cause Chinese people to change their position on an issue for no apparent reason.  For instance, when a Chinese person gets promoted, everyone who has guānxí with that person will calculate the impact on them and their other relationships.  Maybe these connected people will feel the need to restrain their own actions more, to help protect the reputation of the newly promoted person.  Or maybe they'll feel their guanxi with the newly promoted person protects them, and they can act with less restraint.  As a third party, you may be totally unaware that these calculations are happening, even if they end up having a big impact on you.  To Western eyes, this often makes the Chinese look changeable, as if they don’t know their own minds from one minute to the next.  In fact, it’s just that things are happening within their web of connections that aren’t visible to an outsider.  Western people dealing with the Chinese consistently underestimate the subtlety and power of guānxí.

Understanding that guānxí isn’t just about relationships, but about mutual obligations and the influence people have, is an important step in developing the guānxí needed to be successful in doing business with the Chinese.

Doing Business With The Chinese Video

http://youtu.be/Ifg7vP90uCo

Doing Business With The Chinese

The 2008 global financial crisis was a turning point for Chinese business.  Despite breathless headlines to the contrary, 2008 did not ring in the collapse of Western laissez faire capitalism or the ascendancy of China’s state directed business model.  In fact, the value of state owned entities worldwide has been in retreat since Q2 2009.  However, 2008 did see the emergence of three tectonic shifts in Chinese business that are transforming the Chinese economy in ways great and small.  For the West, these shifts mark an ongoing transformation from doing business in China to doing business with the Chinese.  

The first major change has been an acceleration of Chinese enterprises moving up the value chain.  While this process has been under way for years, the pace since 2008 has been much faster.  This can be seen on both a macroeconomic and individual corporate basis.  Economy-wide, China’s 12th Five Year Plan is explicit about developing high-value industries like IT, biotech and aerospace.  The relative importance of these areas, and the Plan’s de-emphasis of agriculture, textiles and low-end manufacturing, demonstrates the government’s preoccupation with raising living standards in the face of rising labor costs.  The degree to which this message has been absorbed by China’s businesses can be seen in the country’s yearly R&D spend, which more than doubled between 2008 and 2012:

Gross National R&D Expenditures (billion RMB)
2008	2009	2010	2011	2012
462	595	708	869	1000

At a company level, the pattern is repeated, with Alibaba moving from online marketing to financial services, Huawei growing from a PBX vendor to the world’s largest telecom equipment maker, andTsingtao beer transforming from a local producer to a global brand.  In each case, the trend has been away from low-value and towards high.

The second major change has been the shift from production to services in the Chinese economy.  Again, the 12th Five Year Plan is explicit:

“…service systems innovation will be promoted, the service policy system will be improved, and the developmental environment for services will be optimised.”

At a speech delivered to a Beijing trade organization in May 2013, Premier Li Keqiang reemphasized this point, calling attention to the government’s expectation that services would lead the country’s shift toward a more consumer-driven economy:

“Increasing services and improving service qualities will help unleash huge potential in domestic demand, and thus offer firm support for stable economic growth and structural optimization.”

This change is already under way.  According to a McKinsey report, services was the largest employer in China in 2012, accounting for 36% of the workforce (vs. 31% in 2005), ahead of both agriculture (34%) and production (30%).  Taken together, the picture is one of significant movement in the Chinese business world towards the services sector.

The third major shift is in going abroad.  While this has been part of government policy for more than 10 years, with the notable exception of state-owned giants in the extraction industries, Chinese companies have largely confined their activities to the domestic market.  In the wake of the 2008 global financial crisis, Chinese companies began to expand their overseas operations, marketing and investment.  In 2008, Chinese foreign direct investment (FDI) into the US and the EU were approximately $50 million each; by 2012, FDI into the US had reached $6.5 billion, with EU-bound FDI exceeding $10 billion.  High profile deals, such as Shuanghui Group’s $7 billion acquisition of American pork producer Smithfield Foods and Dalian Wanda’s $456 million purchase of Britishyachtmaker Sunseeker, have become increasingly commonplace.  As China has matured, and as Chinese companies seek expertise in new areas and access to new markets, Chinese businesses have begun to more aggressively engage abroad.

All of which has led to a change in the way the West interacts with Chinese businesses.  While the emphasis since the late 70s has been on things happening in China (production, marketing to Chinese consumers), since 2008 the focus has increasingly been on things happening with Chinese companies outside of China (construction contracts in Africa, acquisitions in the US).  This significant alteration to the previous pattern has caused new challenges.  It’s not only large multinationals that have a footprint in China, it’s small businesses from every corner of the globe who have Chinese partners, Chinese owners, Chinese employees and Chinese customers.  The Chinese perspective on time or table manners doesn’t only affect businesspeople traveling to Beijing, it’s vitally important to people sitting in Brasilia, Bath and Boston.  Given the proliferation of commercial, cultural and political ties between China and the rest of the world, this is a pattern that’s likely to persist and intensify.  Increasingly, the focus will move away from doing business in China, to doing business with the Chinese.