Mastering the Art of Doing Business in China Not Enough Ceos Know How to Play the Game to Their Advantage
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AGENDA 2006 I 11/10/05 10:58 AM Page 24 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 f all the challenges ket economy. Figuring out how to navi- facing chief execu- gate this transition is obviously complex. tives, getting China Foreign executives are usually naive. right is one of the Few are even aware of the relevance of most import ant. politics, much less know how to play it. But many CEOs When they envision the “Chinese govern- assume they can do ment,” they see a monolith, displaying an Obusiness in China the way they do busi- idealism that’s laughable to the Chinese. ness in other countries. They cannot. If Foreigners are often not aware of compet- most business is local, most business in ing interests among central, provincial China is also political. and municipal levels of government, and China says it is evolving into a “social- ist market economy with Chinese charac- teristics.” 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- Robert L. Kuhn, author and Citigroup China adviser 24 www.chiefexecutive.net December 2005 AGENDA 2006 I 11/10/05 10:58 AM Page 25 on each level among diverse commissions, BEST PRACTICES ministries, agencies, departments and bureaus with overlapping interests of turf Kuhn on the Do’s and Don’ts and power. Q Q On the personal level, lack of awareness Conduct (quietly) analyses of Don’t neglect any level of govern- is often worse. Foreign executives imagine those you’re dealing with. Assess polit- ment—central, provincial, local. All but ical factions and alliances between indi- the very largest businesses depend on the that if they have a pleasant meeting with viduals within government agencies, support of local and provincial government, the CEO of a state-owned company, or partners, suppliers, customers and com- and that support (or lack of hindrance) is surely if they are encouraged by a govern- petitors who can affect your business. often instrumental in corporate success. ment official responsible for that industri- Q Q al sector, then they have a high likelihood Build relationships with key peo- Don’t underestimate the impor- of achieving their goals. They do not appre- ple, personal as well as professional. tance of personal relationships. China Discern their real objectives and under- is changing, but personal relationships ciate the disparate personal loyalties that stand their background—education, (guanxi) continue to play a role in gener- thread through most Chinese organiza- hometown, family, prior jobs, relationships ating trust and assuring loyalty. tions, or customary mechanisms of deci- and aspirations. Q sion-making that usually require agreement Don’t overestimate the importance Q at multiple levels. In many organizations, Watch retirement ages. Do not rely of personal relationships. In other words, don’t rely on any one person in a someone quite low in the power structure, on executives or officials approaching mandatory retirement (the age differs by Chinese institution, government agency someone surely unknown to the foreigners, rank and sector). Successors are likely to or state-owned business—not even the may maintain effective veto power. distance themselves from predecessors’ top person. People get promoted, demot- In one case, the CEO of a Chinese state- friends and partners. ed or transferred, sometimes suddenly. owned partner in a joint venture was, unbe- Q Q Don’t think that if the boss agrees, knownst to the foreign partner, locked in Cater to the most senior executive the deal is done. Organizations, particu- a long-standing political struggle with his or official in every meeting. Chinese organizations are still built on strict hier- larly government agencies and state-owned government boss, a personal battle that was archies, and foreign executives must be enterprises, often have multiple lines of alle- common gossip around the organization. sensitive to that. giances that even CEOs cannot overrule. When the CEO was ousted, the govern- Q Don’t assume that all Chinese are ment cut its support for the venture. The Q Align your interests with those of on the same side. Chinese people, like foreign partner never had a clue about what your Chinese partners and managers. all people, are interested in their own pri- was obvious to everyone else. Structure and organize your business to be as self-regulating as possible (as if vate careers, opportunities and financial benefits. Using Powerful Tools there are neither legal contracts nor inter- nal controls). Q Don’t forget Chinese history, partic- olitics, used properly, can be a ularly as it may affect the attitudes and sen- powerful tool for getting deals Q Awareness is critical. Once politics sitivity of people who affect your business. done and keeping joint ventures are understood, companies can utilize rep- P Q on track. In structuring one very large utable advisers—professionals with long Don’t depend on a change in law or experience in China whose track record joint venture in China, a European man- regulations. Politics are complicated, mired and relationships can be independently in competing interests. Time estimates ufacturing multinational found itself at a assessed. Beware of charlatans claiming for government action can mean little. standstill after protracted negotiations. It to be related to a government official. decided to take a risk by inviting the most Q Don’t assume that a contract will Q senior provincial leader—the Party secre- Seek natural allies. Identify institu- protect you. China is serious about oper- tary—to participate in the discussions. tions and individuals who will benefit from ating according to rule of law, but it is not your success and seek to engage them. there yet. Personal relationships and busi- Involving the senior leader directly could Similarly, identify any who will benefit from ness importance come first; contracts be ill-advised because there’s typically no your failure and seek to neutralize them. come second. appeal of whatever decision he makes. However, the foreign company had done CEO Magazine December 2005 25 AGENDA 2006 I 11/10/05 10:58 AM Page 26 AGENDA 2006 its homework and knew that in the Party secretary’s 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 Chinese partner was in their same indus- try, it was less powerful than the Chinese partner chosen by the Japanese compa- ny’s 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 China without ever appreciating it. What hap- pens, though, is that the politically naive never understand why their deal is delayed or aborted—or 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. 26 www.chiefexecutive.net December 2005 e CEO Bill Green UNCOMMON WISDOM What M&A Bankers Would Rather I Not Write Methods that manipulate CEOs to pay more BY ROBERT LAWRENCE KUHN f you are a CEO, you were my at the top of our hit lists. market-hardened CEOs to shell out target. For more than 10 years, One business owner complained to top dollar, sometimes paying more I ran a firm whose business me that we had not valued his compa- for the business than it was “really was to sell small- and medi- ny for “more than it was really worth.” worth”? What were our techniques? um-sized companies, and to He wasn’t being funny: My company Our tricks? sell them for the very highest had a reputation—among corporate Though I may face disfellow- BRUNO BUDROVIC/IMAGES.COM Ipossible prices. During that time, buyers not always a good one—of ask- ship from the High Church of we closed over 1,200 M&A transac- ing and often getting high prices for its M&A Bankers, I’m going to reveal tions, and when we sought prime sell-side clients. the M&A secrets of the inner sanc- candidates to pay the most money, How did our M&A dealmakers tum: how top dealmakers manipu- corporate buyers were almost always cajole or coerce tough-minded, late CEOs to get them to pay too 20 www.chiefexecutive.net July/August 2006 much. Here’s what M&A bankers buyers willing to pay an outlier compensation” that the owner may do to you. price. If you come to believe that pay to herself or to her family mem- you can eliminate most of the over- bers.