China’s recent ascension to the number two spot in the world’s economies has provided a new metric by which to describe its miraculous development. It seems that few foreign enterprises are choosing to sit out in favor of attempting to reach the world’s largest single market. Still, the mere size of China’s investment potential doesn’t make it a cakewalk; language and cultural barriers challenge large and small companies alike as they strive to capture market share early. Many Chinese business practices that are customary for vendors, suppliers and service providers often make foreign decision makers scratch their heads. This post seeks to identify some of the practices that are most different from their Western-based counterparts, and how to bridge the cultural gaps in business.

Cost, Cost, Cost.
Fierce competition is not only part and parcel of today’s globalised economy, but also of China’s dog-eat-dog economic rise. We will look at problems with innovation in a moment, but the lack thereof often pits rival companies against one another, with little differential in their product other than cost. Suppliers for large brand names and electronics manufacturing concerns are particularly susceptible to downward pressure on their prices to keep or grow their market share. Operating on razor-thin margins means cost-cutting is one of the highest priorities for many businesses here. An embarrassingly true story illustrates this reality: a visiting foreign executive found himself in the bathroom at his company’s electronics factory near Shanghai. When he discovered, much too late, that the Taiwanese General Manager had removed all toilet paper from the stalls to save money, he began calling international numbers in order to eventually reach the factory’s receptionist. Finally, a sheepish employee was sent in to deliver a fresh roll. Needless to say, a tense meeting was later held on the subject of cost-cutting versus sacrifices in quality. This pervasive business practice rears its ugly head in the realms of customer service, quality control, marketing and innovation.  Nearly all of these take a back seat to cost-cutting as companies compete on volume, not on quality.

If It Ain’t Broke, Don’t Fix It
Much has been made of China’s rampant Intellectual Property (IP) violations. The MPAA, luxury brands like Burberry, Gucci, Chanel, Louis Vuitton and Prada, as well as auto manufacturers have all been the source of complaints or lawsuits directed at China in recent years. Such a business environment that does little to crack down on outright piracy obviously leaves little incentive for innovation; why invest in research if the fruits of your labor will most likely be stolen? In addition, most companies find they can make a good profit by replicating other successful businesses, without the need to bring anything new to the market. Indeed, even 30 years after the “door was opened” to the outside world, much of China’s economy is still involved in non-innovative, import substitution manufacturing. As incomes continue to grow, companies are making do by simply offering a higher volume of the same products and services foreign brands have supplied in their home markets for years. Until the average standard of living for Chinese citizens begins to reach the level of those in developed economies, there’s little reason for Chinese companies to do anything other than produce massive quantities of foreign-designed goods; goods that come with a discounted price tag and lower level of quality than their overseas counterparts. 

Supply and Demand
Another business practice that seems dictated by laws of economics is the treatment of workers at Chinese companies. Some might say Confucian hierarchical traditions are to blame, but I tend to think the massive manpower pool forces wages down and working hours up for anyone fortunate enough to have a job. Many foreigners may feel slightly embarrassed upon their first assignment at a local company; they often make exponentially more money than their colleagues, and at times work far fewer hours each week. This tends to be more common in the service industry than in white collar environments; little overtime is asked of non-managerial office workers at multinational corporations. Still, the harsh (to the overseas eye) conditions that the majority of natives work under are indicative of China’s stature as a developing country. The labor law of 2008 has done much to elevate workers’ rights. But until the economic machine is big enough to support the more than 6 million new college graduates that must compete for jobs each year, wages and conditions will improve on businesses’ terms, not employees’. 

In short, working with Chinese businesses can be a culture shock all on its own for foreign businessmen and women. Nearly every negotiation starts out with price, fees and cost figures as opposed to timetables, delivery arrangements and promises of quality. Local businesses place much more emphasis on increasing their sales volume, with little to no care for customer service, quality assurance, after sales support, or innovation. Speaking of innovation, in a business environment where it’s easy to imitate a large foreign or local brand’s strategy and product line in order to grab a sliver of the ever-expanding consumer pie, only the most idealistic of entrepreneurs seem driven to bring something truly fresh to the marketplace.

Finally, in terms of employees, the balance of power between workers and management is clearly tilted towards the ones doing the hiring. Specialized positions such as certain types of manufacturing have seen their fair share of limited strikes in recent months, but on the whole China’s vast ranks of unemployed continue to exert downward pressure on salaries and benefits. In short, working with Chinese businesses is much like learning from a staple of modern Chinese life; pragmatism rules in a playing field leveled by fierce competition, a lack of intellectual property protection and constant growth in consumer spending.
 

Related links
Chinese vs. Foreign Business Practices
Seizing the Moment: Entrepreneurs in China
3 Things to Expect When Starting Your Own Company in China

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