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CEO Magazine - Uncommon Wisdom Columns - R. L

CEO Magazine - Uncommon Wisdom Columns - R. L

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Published by api-3741202
R. L. Kuhn Columns on Business and Finance in Chief Executive Magazine
R. L. Kuhn Columns on Business and Finance in Chief Executive Magazine

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24www.chiefexecutive.net December 2005
AGENDA 2006
Mastering the Art of Doing
Business in China
Not enough CEOs know how to play the
game to their advantage.BY ROBERT L. KUHN

Robert L.
Kuhn, author
and Citigroup
China adviser

f all the challenges facing chief execu- tives, getting C hina right is one of the most important. But many CEOs assume they can do

business in China the way they do busi- ness in other countries. They cannot. If most business is local, most business in C hina is also political.

C hina says it is evolving into a \u201csocial- ist market economy with Chinese charac- teristics.\u201d While critics consider

that a tortuous way of har-
monizing capitalistic
practice with Com-
munist ideology, it

reflects a long and complex transi- tion from a plan- ned economy to

more of a mar-
ket econ omy. Figuring out how to navi-
gate this transition is obviously complex.

Foreign executives are usually naive. Few are even aware of the relevance of politics, much less know how to play it. When they envision the \u201cChinese govern- ment,\u201d they see a monolith, displaying an idealism that\u2019s laughable to the C hinese. Foreigners are often not aware of compet- ing interests among central, provincial and municipal levels of government, and

O
P
CEO Magazine December 200525

on each level among diverse commissions, ministries, agencies, departments and bureaus with overlapping interests of turf and power.

On the personal level, lack of awareness is often worse. Foreign executives imagine that if they have a pleasant meeting with the CEO of a state-owned company, or surely if they are encouraged by a govern- ment official responsible for that industri- al sector, then they have a high likelihood of achieving their goals. They do not appre- ciate the disparate personal loyalties that thread through most Chinese organiza- tions, or customary mechanisms of deci- sion-making that usually require agreement at multiple levels. In many organizations, someone quite low in the power structure, someone surely unknown to the foreigners, may maintain effective veto power.

In one case, the CEO of a Chinese state- owned partner in a joint venture was, unbe- knownst to the foreign partner, locked in a long-standing political struggle with his government boss, a personal battle that was common gossip around the organization. When the CEO was ousted, the govern- ment cut its support for the venture. The foreign partner never had a clue about what was obvious to everyone else.

Using Powerful Tools
olitics, used properly, can be a
powerful tool for getting deals

done and keeping joint ventures on track. In structuring one very large joint venture in China, a European man- ufacturing multinational found itself at a standstill after protracted negotiations. It decided to take a risk by inviting the most senior provincial leader\u2014the Party secre- tary\u2014to participate in the discussions. Involving the senior leader directly could be ill-advised because there\u2019s typically no appeal of whatever decision he makes. However, the foreign company had done

QConduct (quietly) analyses of
those you\u2019re dealing with. Assess polit-

ical factions and alliances between indi- viduals within government agencies, partners, suppliers, customers and com- petitors who can affect your business.

QBuild relationships with key peo-
ple, personal as well as professional.

Discern their real objectives and under- stand their background\u2014education, hometown, family, prior jobs, relationships and aspirations.

QWatch retirement ages.Do not rely

on executives or officials approaching mandatory retirement (the age differs by rank and sector). Successors are likely to distance themselves from predecessors\u2019 friends and partners.

QCater to the most senior executive
or official in every meeting.C h i n e s e

organizations are still built on strict hier- archies, and foreign executives must be sensitive to that.

QAlign your interests with those of
your Chinese partners and managers.

Structure and organize your business to be as self-regulating as possible (as if there are neither legal contracts nor inter- nal controls).

QAwareness is critical.Once politics

are understood, companies can utilize rep- utable advisers\u2014professionals with long experience in China whose track record and relationships can be independently assessed. Beware of charlatans claiming to be related to a government official.

QSeek natural allies.Identify institu-

tions and individuals who will benefit from your success and seek to engage them. Similarly, identify any who will benefit from your failure and seek to neutralize them.

QDon\u2019t neglect any level of govern-
ment\u2014central, provincial, local. All but

the very largest businesses depend on the support of local and provincial government, and that support (or lack of hindrance) is often instrumental in corporate success.

QDon\u2019t underestimate the impor-
tance of personal relationships.China

is changing, but personal relationships (guanxi) continue to play a role in gener- ating trust and assuring loyalty.

QDon\u2019t overestimate the importance
of personal relationships.In other

words, don\u2019t rely on any one person in a Chinese institution, government agency or state-owned business\u2014not even the top person. People get promoted, demot- ed or transferred, sometimes suddenly.

QDon\u2019t think that if the boss agrees,
the deal is done. Organizations, particu-

larly government agencies and state-owned enterprises, often have multiple lines of alle- giances that even CEOs cannot overrule.

QDon\u2019t assume that all Chinese are
on the same side.Chinese people, like

all people, are interested in their own pri- vate careers, opportunities and financial benefits.

QDon\u2019t forget Chinese history, partic-
ularly as it may affect the attitudes and sen-
sitivity of people who affect your business.
QDon\u2019t depend on a change in law or
regulations. Politics are complicated, mired
in competing interests. Time estimates
for government action can mean little.
QDon\u2019t assume that a contract will
protect you. China is serious about oper-

ating according to rule of law, but it is not there yet. Personal relationships and busi- ness importance come first; contracts come second.

Kuhn on the Do\u2019s and Don\u2019ts
BEST PRACTICES
AGENDA 2006
26www.chiefexecutive.net December 2005

its homework and knew that in the Party secretary\u2019s previous position (in Guang- dong province), he had shown great innovation.

The gamble worked. To this day, the Party secretary speaks of this high-profile, successful deal as a source of personal pride.

In a case that highlights the impor- tance of personal relationships, a Japan- ese multinational sought entry into an industry requiring a special license by engaging a large state-owned conglom- erate in a similar industry as its partner. After months of futility, the Japanese executives realized that although their C hinese partner was in their same indus- try, it was less powerful than the C hinese partner chosen by the Japanese compa- ny\u2019s chief international rival. As a result their license application was being blocked.

After doing sensitive political analy- sis (using politically savvy consultants), they were introduced to a much small- er Chinese company in a different indus- try, but one whose executives had deep personal relationships, going back to col- lege, with key regulators. The Japanese then got the license.

Obviously, foreigners cannot discern all the politics swirling around and within Chinese organizations, and indeed most foreign executives do business in C hina without ever appreciating it. What hap- pens, though, is that the politically naive never understand why their deal is delayed or aborted\u2014or how negotiations can be facilitated, problems averted and issues resolved.L

Robert Lawrence Kuhn, a senior adviser to
Citigroup China, is the author of The Man
Who Changed China: The Life and Legacy
of Jiang Zemin (Random House, 2005), the
best-selling book of the year in China.

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