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A
MERICANS
N
EGOTIATING IN
C
HINA
G
UANXI RELATIONSHIPS AND FOREIGNERS
 –
DOORBELL OR SKELETON KEY
?
Part 1: Is guanxi a real thing? What is it? 
 
China Law Blog recently posted on the basics of how to do business in China
,and raised the issue of ‘guanxi’
relationships. It is a controversial point among the international community in China. Dan Harris and SteveDickinson of CLB are not believers
 –
 
warning that it doesn’t help all that much and may cause problems. On the
other hand, every conversation I have with a Mainlander eventually focuses on the power and importance of theirnetwork of guanxi connections.
What’s really going on here? 
 
Let’s start with a quick definition. ‘Guanxi’ literally translates as ‘connection’ though it is often used to mean‘relationship’ and ‘network’. When Mainlanders use
the phrase among themselves, they are referring to a fluidnetwork of cordial business obligations and debts
 –
 
sort of an institutionalized version of ‘you scratch my back, I’llscratch yours’. A person with a wide range of well
-placed relationships, all of whom acknowledge theirindebtedness and willingness to reciprocate, is clearly in a very advantageous position. Conversely, a person wholacks connections and is not in a position to do favors for new counter-parties is in a relatively weak situation. Theworst position of all is one who owes valuable favors to a wide range of highly placed connections.When Chinese associates talk to Westerners about guanxi, it takes on a slightly different meaning. Here theemphasis is on the ability to influence members of his network
 –
 
to ‘make things happen’ and expedite profitable
transactions or bureaucratic approvals. A common Chinese business aphorism
 –
 
“Everything is possible but nothingis simple” –
underscores the importance of guanxi in the Mainland. For a long time, guanxi was synonymous with
“local knowledge” –
but carried a strong implication of corruption and under-the-table inducements.
When the China economy was first opening to the world (up until the mid 2000’s), commercial laws were still
haphazard,
contradictory and opaque. In such a chaotic environment, a local ‘fixer’ was often required to prod
bureaucrats and state managers to make a decision
 –
and a certain amount of persuasion helped to ensure thatthe decision was a favorable one. There was a time when no one
 –
Westerner, Asian, Overseas Chinese orMainlander
 –
disputed the need for guanxi. The only issue was locating someone who really had the connections
to facilitate basic business transactions. China’s central government, however, was busily
constructing what ithoped would be a strong legal system and a (relatively) transparent regulatory framework
 –
and objected to theclose connection between guanxi and corruption, bribery & misuse of state assets.That is why Westerners in China often find themselves caught between two opposing views on the guanxi issue.On the one hand, locals still maintain it is the only way to get things done in Mainland China
 –
and that without itforeigners will never overcome their status as rich but clueless outsiders. However, a growing community of experienced, knowledgeable international experts maintains that guanxi is an ineffective, expensive and ultimately
 
counter-
productive throwback to the ‘bad old days’ of a lawless, chaotic China where personal influence
trumpedlaws and regulations.So which view represents the reality in China? Is guanxi a real force that all business-people in China need to have,or is it a shortcut to scammers, cheats and regulatory hot water?
The Truth About Guanxi 
Guanxi is extremely useful and powerful
 –
as an information network. A broad, active web of plugged-inconnections can alert you to people who are willing and able to help
 –
but who have no idea how to find you andno other way of being found by you. A good guanxi network is like a combination road map and address book
 –
 that will enable help you engage exactly the right resource or decision maker. As a research tool, a good guanxinetwork is extremely effective and powerful.As a skeleton key that will magically unlock doors, it is problematic. Yes, guanxi can open doors, but there are threeproblems: 1
 –
 
it won’t necessarily open the door you need unlocked. 2
- When all you have is a key, all problemslook like locked doors. You may end up rewriting your business plan because your guanxi connection leads you to asingle type of resource or decision maker. And 3
 –
that door may lock behind you. Westerners who encounterproblems in China are rarely suffering losses at the hands of complete strangers. The people gutting you of yourinvestment, assets and IP are the very same ones who lured you in with promises of powerful connections andinfluential friends.In short, guanxi can play a role in your Chinese negotiating, but you will have to monitor and decide what that rolewill be. Guanxi networks are great as information and networking resources. However, if you plan on usingconnections to open doors
 –
or knock down walls
 –
then you are going to encounter some major difficulties downthe line. When you use guanxi as a shortcut in China commerce, the destination is usually business failure.Part II: Guanxi for Foreigners
 –
10 CaveatsAfter our last discussion of foreigners and relationships in China,you may be tempted to dismiss
‘guanxi 
‘ asanother word for ‘corruption’ –
or at least a quick road to disaster. Unfortunately, nothing involving internationalbusiness in China is ever quite so black & white. While it is a bad idea for westerners to rely too much on guanxi,remember that your Chinese partner or counter-party may be a firm believer in it.
When the literature talks about ‘cultural barriers’ between China and
the West, be aware that the key differences
are not “fork & knife vs. chop sticks” superficialities –
they are deep-seated core beliefs like guanxi vs. duediligence. When you tell your Chinese associate that guanxi is an archaic custom, it is like
HIM
telling
YOU
thatchecking references and analyzing financial reports are silly wastes of time.
If you plan on working with Chinese, the issue of guanxi is certainly going to come up.
Here are 10 rules for dealing with Chinese partners who believe in guanxi:
 
Caveat #1: Do not be overly dismissive
.
 
 Guanxi may or may not have real benefits
 –
but what really matters is that the Chinese people you are speaking togenuinely believe in it. When I am doing business with Chinese counter-parties who are too quick to disregard myadvice about performing due-diligence or market research, it sends me the wrong messages about their generalcompetence and respect for American methods. Likewise, when you dismiss their advice about guanxi, you may becorrect
 –
but in the wrong
way. You may mean, “I don’t want to engage in corruption or shortcuts” but they mayhear “I don’t understand Chinese methods and don’t have much respect for your opinion”. The first conversation
you have with a Chinese counter-party about guanxi is the perfect time to discuss the approval process of yourdeal or business. It is also an appropriate time to take the moral and ethical temperature of your counter-party,industry, and general practices in your new business.
Caveat #2: Chinese really believe, not only in guanxi, but also in its uniquelyChinese characteristics.
 
The only thing worse than saying ‘guanxi doesn’t exist’ is to say, ‘every business culture has some form of networking and relationship building’. Many Chinese –
particularly those not experienced with internationalbusiness
 –
find this insulting. (A later post will deal with the issue of Face
 –
not to be confused with westernnotions of pride, status or reputation). Westerners tend to look for common ground, but Chinese may consider it aswipe at the integrity of the Chinese culture.
Caveat #3: If your new partner’s only contribution is guanxi connections, you
had best be on your guard.
Chinese consultants and counter-parties know that you have read that guanxi is vital to business in China. In otherwords, your counter-parties may believe that building guanxi is a short-term goal of yours. When I was in Beijing inthe early 90s, it was a sure bet that every foreigner gathering or junket had at least one guy who offered toconnect you with the right people. In those days, it was a real job because doing business in China was so opaqueand convoluted. Nowadays the rules are much more straightforward
 –
for good or ill. You should not need specialconnections to get most approvals
 –
and if you do then you should take it as an indicator that your business planhas flaws. In 2010 China, most experienced Chinese managers should either have the necessary connections orknow how to develop them as needed.
Caveat #4: Guanxi is a rental, not a purchase.
Guanxi does not transfer. When your guanxi guy goes, so does the relationship.As ChinaLawBlog points out, your guanxi relationship is with a person at the organization
—
not the organizationitself. When your special relationship at the ministry, regulator, supplier or distributor moves on you have to startall over.
Caveat #5: Guanxi cuts both ways.
It places obligations upon you
 –
and you do not always control how you will pay back a guanxi debt. Examples have
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