I climbed out of my figurative Hermit’s Cave today and attended an American Chamber of Commerce in China meeting on “US China Relations: The View from Washington”. The speakers were Michael E. Brown, Dean of the Elliott School of International Affairs and Professor of Political Science and International Affairs; and Doug Guthrie, Dean of the School of Business and Professor of Management and International Business, The George Washington University. While the talk was interesting, its not what this blog post is about. During the Q & A that inevitably follows such an event, the subject of Chinese investment in the U.S. was raised. It is, for a number of reasons, common knowledge in China, at least amongst Chinese, that the U.S. is inhospitable to Chinese direct investment in America. Of course, the American view is quite the opposite -- and the data bears this out. Nevertheless, think Huawei Technologies Co. Ltd. and it’s cold reception both by Congress and the Washington punditry. You can also look at CNOOC and its abortive run at acquiring UNOCAL in 2005. At the time, CNOOC CEO Fu Chengyu was originally very confident that they would succeed because they "were following a system that was set up by Western leading companies”. I’m not sure what that means -- because they hired Goldman Sachs? Because they thought the had the system wired? Who knows. One of the audience mentioned that there are actually an increasing number of Chinese direct investment transactions being consummated in the U.S. and it was mentioned that the failures often can be blamed on Chinese investors going about things in the wrong way. I’m not sure what the speaker meant by this and didn’t have a chance to ask, but I’ve certainly seen these missteps in action. That is the topic of the moment here at Beijing Eye.
There is a basic contradiction in both style and custom in how many U.S. business people approach the Chinese market and how their Chinese counterparts approach the U.S. market. Of course, the first thing western business people do is to try to figure out whether there is a strategic reason to come to China. As the answer is, many times, a resounding “Yes!”, they take the next steps. The “next steps”, for opening China as much as opening a new branch in Cleveland, is to find out what the laws and regulations are. That means, inevitably, that they must hire lawyers and accountants. Once armed with the legal and financial structure, they do their “due diligence”, meaning that gather facts and try to anticipate what business risks they’ll face. If it works at home this way, it should be doubly important in a place like China, wouldn’t you think? Its certainly the way we’re taught to do things in B-School!
On the other hand, Chinese business people coming to the U.S. take a different tack. It should be no surprise that they act as they would at home in Beijing, Shanghai, Houhot, or Chengdu. First off, they’ll try to find a fixer, someone whom they trust who can take them around to meet people. Then they meet people, most especially they long to meet the local mayor, the governor, or any suitable (and available) public official -- the higher, the better! Often, they jump into deals before doing any substantial due diligence and without giving too much thought to how to structure a deal. They’ll hire advisory firms with big names, not because they are the right advisors or because of past successes with similar deals, but largely due to the Face such an association brings them. Sort of like buying a BMW because it has a famous logo and a high price tag.
I’m not suggesting that success in China is all about who you have a relationship with, altho it’s extremely important (and Guanxi doesn’t come from a few dinners with a visiting CEO, either). You have to also structure things properly and due all the requisite due diligence. But if you ignore relationship building, power alliances, and related issues, you will suffer eventually. By the same token, in the U.S., if you rely on relationships with Big Names in government (or big names generally, for that matter) without having a business model and a business plan that are well thought out and carefully crafted, you’re inviting an eventual shipwreck. No amount of pictures of your CEO and Governor What’s-His-Name will help at all.
And so it goes (with apologies to Kurt Vonnegut).
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