The Great Wall: A Philosophy
September 20, 2010
By: Zachary E. Allen

Since the 5th century BC, China has been building walls to protect itself from invaders. As the empire's territory expanded and contracted with successive empirical reigns, so did the size and scope of the wall to protect it's frontiers from the threats of the times. What was originally envisioned to block the advance of spears and arrows from hostile invaders has evolved into an invisible, yet potent, blockade that effectively isolates foreign enterprises from gaining valuable knowledge about domestic markets and practices.

Recent press releases have been dominated by frustrated reactions by some of the worlds largest companies to the situation they find in today's most sought after market. Multinational telecoms, manufacturing titans, financial behemoths, and resource giants have left China in recent months, with a hefty balance sheet but little to smile about. Although they did gain short term profits, in some cases quite a bit, they still walked away with little future potential in what most agree to be the largest potential consumer market the world has ever known.

It is not due to a lack of effort. In fact, far from it. In many cases, it is due to a cultural barrier that is inherent in Chinese business practices. One of secrecy, guardedness, and a simple lack of trust for one's principals. Typical business models that have proved very successful in other regions of the world, have encountered barriers that have proved very difficult to cross by foreign companies looking to dig deeper into the alluring darkness that is the Chinese market.

Many of the foreign principals that seek success in the middle kingdom often come with their quiver of best practices, ready to deliver impressive results to demanding boardrooms in New York or London. It is this naïvety that frustrates upper management around the world when their Chinese units fail to produce the results they expected.

Success in this special market can be quite misleading, however. Markets across most, if not all, industries are in continuous growth mode as the per capita wealth of the population steadily increases. Although sales revenue and volumes may grow between quarters, sometimes at impressive rates, market share may be slowly slipping away as the macro situation continues to expand and further competition from domestic Chinese companies continues to develop.

It is often difficult for western management teams to notice these trends until it is too late, giving an ambitious domestic startup the time and space necessary to establish themselves as a player. Never in modern times have the world's market leaders, of industries both large and small, been so isolated from their ambitions. Especially during a time of economic crises in the US, Europe, and elsewhere, companies are looking with greater emphasis towards the East as a potential bright spot on their balance sheets. However, with a written language that is incomprehensible to most non-Chinese, and a spoken language that is fundamentally different than the lingua franca of the last century, and a Chinese workforce that has little to no talent for spoken English, it is understandable that foreign managers often have great trouble to get in touch with the real situation in the market.

However, beyond the obvious language barrier, there exists a cultural one that is little known by outsiders and poses a far greater challenge than most will ever realize. It is the one that is deeply seated in the early years of China's history and has seen accelerated development since Chairman Mao's cultural revolution against the pressures of capitalism ended in defeat with his death in 1976, and the subsequent rise of Deng Xiaoping and the capitalist influence that, today, is stronger than ever. This rise of capitalism from within the communist party itself has, for obvious reasons, bred a culture of secrecy and opaqueness that is central to business practices throughout the country.

Even the growing number of publicly traded companies, most of them quasi-state-owned enterprises, have not displayed the level of transparency that is typically demanded by shareholders in stock markets elsewhere in the world. Few are familiar with their management strategies and even fewer know just how much a phone call from party leaders can affect the macro mission of the firm.

On the other end of the spectrum, small to medium sized companies who wish to do business in the country are often intimidated to enter the market directly, or simply lack the funds to do so, opting for a partnership with a local firm to act as a distributor of their products. The frequent stories of bad partnerships far outweigh the good, and even the good ones typically leave the principal in the dark about how the local markets actually work, what the motivators are, and how the deals are made. Most corporate leaders are not simply satisfied with a steady income from a far off land without knowing where its coming from, how to stimulate it further, and what the underlying trends are.

There are, however, successful cases that lend a feeling of hope to those ready to throw in the towel and enroll their children in Mandarin lessons. Those companies whom have committed the time, effort, and investment to starting up their own companies inside of China, whether it be a simple representative office (RO) with several staff or a wholly foreign owned enterprise (WFOE) with an entire team, have shown promise for long term success if they can find a balance between the western management styles they bring with them and those they can learn from the local Chinese talent.

They key ingredients, it seems, is to demand open and often communication be an integral part of any relationship, especially between outside sales staff and foreign management teams. Leave no stone unturned, no question unasked. Also important is to learn about the cultural and historical situation (from both domestic and foreign perspectives), as the entire society is built upon these very things. The past 60 years of Chinese history, as written by the Chinese, has done much to mold the hearts and minds of it's citizens in ways that required much patience from western managers if they wish to realize their companies true potential in this vast, and interesting, market.