Doing business in China: practices and strategy

China is described as a collective society. People develop a high level of competence early on in perceiving social situations intuitively, and the factual level is rarely considered independently of the personal level. Three social circles shape behaviour: the family as a community of fate, the circle of friends, colleagues and customers, and the outside world.

In the second circle, harmony, consensus and politeness dominate, and patterns of obligation develop over time. Anyone who violates the norms is sooner or later excluded. There is no comparable obligation towards the outside world.

In addition, there is a culture of shame: shame arises when someone does not conform to the norm of a group to which they belong or wish to belong. Group norms are therefore protected, while questions that cut across groups are given lower priority. Thinking is strongly oriented towards the concrete and brings opposites together.

Institutions form the structure within which economic activity takes place. Douglass North calls them the rules of the game that determine the entire character of the game. They can be formal, such as laws and ministries, or informal, such as norms, values, traditions and precedents. Institutional change is revolutionary or evolutionary. A revolutionary overhaul is difficult to push through in complex economies (North, Rodrik).

The Chinese reform process is described as dynamic-evolutionary and highly experimental: preference is given to reforms that promise great growth potential and fit the respective level of development. As a result, the system and reality are constantly in motion. The understanding and application of law are regarded as context-dependent. A signed contract is often the starting point of a business relationship and is continually adjusted. The stabilising factor is the relationship.

Understanding China as a single market quickly reaches its limits. Economic conditions differ considerably between regions, and this is reflected in local institutions. According to Tarun Khanna, institutional factors influence companies' local room for manoeuvre more strongly than their ability to sell products would suggest. The structure of needs in the highly fragmented overall market also varies greatly: demand for highly developed products and services can be limited relative to the size of the country.

Each market also has its own laws. The need for adaptation depends on the sector and on the activity on the ground, such as distribution or production. Companies that take part in public tenders or produce in China depend much more on good connections with political decision-makers than pure exporters. The boundaries between the private and public sectors are often blurred.

Where formal, risk-reducing institutions are lacking, informal arrangements must fill the gap. Relationship networks, called guanxi in China, are to be understood as informal institutions for reducing risk. Personal networks reduce business uncertainty, for example in property and contract law. Good connections with political decision-makers can serve as an early warning system for regulatory risks. The principle also works between business partners as an implicit guarantee of contract performance.

Networks exist between people; the respective companies are secondary to the relationship. Only those who add value to the network are admitted. Building and maintaining networks is time-consuming and expensive: relationships can only be formed in person, and they require time, money, staying power and a substantial initial investment in trust. Eating and drinking together is among the first steps.

According to Chua, trust arises on two levels. As in Western countries, contacts must be convinced that a partner can meet agreed terms. In addition, there is an interpersonal dimension that requires a deeper understanding of the other side's culture and goes beyond etiquette and rules of conduct.

The cultural model by Trompenaars and Hampden-Turner describes three layers for this. On the outside are artefacts and products as explicit culture, in the middle norms and values, and at the core basic assumptions as historically developed survival strategies. For China, hierarchically structured family and kinship ties from the Confucian understanding of society are named as such a basic assumption.

This results in broad acceptance of relationship networks in business life and a basic scepticism towards innovations outside the collective norm, for example towards new business partners. This becomes visible in rituals such as gifts at the New Year festival, toasting or accepting business cards with both hands.

Close relationships with political and business decision-makers can contain elements of corruption, but they do not have to. Building an effective network partly takes place in a grey area, for example when exchanging gifts or with invitations to celebrations and trips. Gifts are part of the culture. They are considered corrupting when they are clearly disproportionately expensive. Because norms change, this requires ongoing critical reflection.

Anyone who overdoes invitations and gifts may end up being perceived merely as a source of free entertainment and lose the reputation of a serious, competent partner. Once corruption has taken hold in a company's local structures, it is difficult to remove. State anti-corruption campaigns also increase the risk of being publicly held to account for corrupt practices.

In theory, international business practices can be retained unchanged, or local practices could be adopted completely. Neither extreme is successful in the long term. In practice, a viable China strategy almost inevitably consists of a synthesis, that is, of targeted adaptation. Local adaptations should remain compatible with the company's global approach.

This gives rise to principles. The strategy must be coherent and based on realistic expectations of the objectives achievable in China. It must be clear where compromises are possible and where they are not, for example with regard to bribery, quality standards or price. The approach must be communicated clearly and consistently to employees and stakeholders. Because market conditions change rapidly, strategy and operational implementation must be adjusted periodically. This includes a willingness to rethink one's own assumptions and to experiment.

The conceptual framework of a coherent strategy, a further development based on Wielpütz, connects two core dimensions: the definition of the relevant market and the definition of the necessary relationship level. The two depend on each other. Every targeted market size requires a minimum level of relationships, and every relationship level corresponds to a maximum market size.

Adaptation measures must be defined for both dimensions: for products and approaches and for the local business practices that are adopted. The changing economic, social and institutional environment acts as an external variable on the outcome of the strategy through these measures.

Questions to be clarified are the realistic market size, regional differences and whether a uniform or a regional approach makes more sense. For market access, political conditions count, such as requirements on technology transfer, local production or joint ventures. The business model must be adapted to customers' preferences and needs: product design, technology intensity, functionality, quality standards, distribution and payment models. High standards can be a way of establishing oneself as a trendsetter.

There is no universal approach. Solutions arise individually and depending on the situation, and even an approach that works should be critically reviewed from time to time. The basis is a detailed understanding of the target market, including the needs and expectations of local players.

Nevertheless, some approaches apply regardless of the individual situation. Business in China should be approached without preconceptions, supported by an open communication culture that makes learning possible. The experience of sales is a valuable source of information, and local key people belong in strategic and operational deliberations. Permissible and impermissible practices must be clearly defined, with compliance training as well as preventive and disciplinary measures. Strong customer relationships arise from regular contact, and problems should be resolved quickly and generously.

The involvement of top management at headquarters is important. Regular visits by the management board strengthen relationships with political players and important customers, promote a realistic assessment of opportunities and increase acceptance of local adaptations at head office. Backing from the top helps regional management enforce essential standards.