One Billion Customers

Lessons from the Front Lines of Doing Business in China

James McGregor

• Editore: Free Press
• Anno: 2005
• ISBN:
  9780743282451
• Argomento: Business
• Categoria: Business General

It is well known that with a population of 1.3 billion people, China's market is moving quickly toward surpassing those of North America and Europe combined. Companies from the United States and around the globe are flocking there to buy, sell, manufacture, and create new products. But as former Wall Street Journal China bureau chief turned successful corporate executive James McGregor explains, business in China is conducted with a lot of subterfuge -- nothing is as it seems and nothing about doing business in China is easy.
Destined to become the bible for business people in China, One Billion Customers shows how to navigate the often treacherous waters of Chinese deal-making. Brilliantly written by an author who has lived in China for nearly two decades, the book reveals indispensable, street-smart strategies, tactics, and lessons for succeeding in the world's fastest growing consumer market.
Foreign companies rightly fear that Chinese partners, customers, or suppliers will steal their technology or trade secrets or simply pick their pockets. Testy relations between China's Communist leaders and the United States and other democracies can trap foreign companies in a political crossfire. McGregor has seen or experienced it all, and now he shares his insights into how China really works.
One Billion Customers maximizes the expansive knowledge of a respected journalist, well-known businessman, and ultimate China insider, offering compelling narratives of personalities, business deals, and lessons learned -- from Morgan Stanley's creation of a joint-venture Chinese investment bank to the pleasure dome of a smuggler whose $6 billion operation demonstrates how corruption greases the wheels of Chinese commerce. With nearly 100 strategies for conducting business in China, this unprecedented account combines practical lessons with the story of China's remarkable rise to power.

1

The Grand Bargain

Two hundred years of foreign domination and duplicity have left a residue of suspicion and distrust. Understanding that history is essential to doing business with the Chinese.

THE NEGOTIATIONS THAT BROUGHT China into the World Trade Organization in 2001 began in 1793 when Lord George Macartney landed his fleet of British ships on the north China coast. One of King George III’s most experienced diplomats, Macartney was intent on opening China’s vast market to British business. It was a simple matter of fairness. China exported such exotica as silk, tea, furniture and porcelain, yet bought little or nothing from outside its own shores. Money flowed into China—some twenty million ounces of silver each year—but none flowed out. So Macartney brought along the best that Britain produced. It took ninety horses and three thousand coolies to transport Macartney’s gifts for the emperor. There were rifles, cannons, telescopes, horse carriages, a twenty-five-foot-tall clock, mountains of the finest woolens, and a hot air balloon complete with pilot.

But Macartney failed to grasp China’s profound indifference to the rest of the world. China was the world’s most prosperous and populous nation. Although he was old and his reign was nearing its end, Emperor Qianlong had during his years on the Dragon Throne effectively doubled China’s landmass. Chinese maps of the day covered five scrolls hung side-by-side displaying a huge landmass labeled the “Middle Kingdom,” surrounded by tiny islands labeled “England,” “Germany,” “France,” “America,” “Russia,” and “Africa.” China was the center of the world and everyone else was a barbarian, the degree of barbarity determined by the distance from China.

The negotiations between Macartney and the mandarins representing the emperor became a prolonged dance. At one banquet after another Macartney demanded to see the emperor to present his gifts and to request greater access to China’s markets. The mandarins praised the gifts and explained that it would take time to set up a meeting with the emperor. Diaries and letters from both sides reveal startlingly different perceptions of what happened at these banquets. Macartney and his subordinates would congratulate themselves on having won the mandarins’ confidence and prepare to depart for Beijing. The mandarins would send reports to the emperor explaining how they had massaged the barbarians’ egos while placing more barriers in their way. They predicted the foreigners would soon tire and sail away.

Macartney persisted and finally won an informal courtesy call with the emperor, but only after an intense struggle over protocol. Anyone meeting the emperor was required to kowtow by dropping to their knees and touching their forehead to the ground three times, a gesture that was to be repeated eight more times. But a proper Englishman kowtowed to no one, and only went down on both knees for God. The Chinese suggested a face-saving solution. When Macartney entered the emperor’s presence, there would be a curtain hanging behind the emperor, and behind that curtain would be a portrait of King George III. Macartney could make his kowtow to the king’s unseen portrait. Macartney refused, and he was finally granted an informal courtesy call with the emperor just so they could finally be rid of him and his vexing entourage.

The meeting was amicable and Macartney headed home confident that Qianlong would satisfy some of Britain’s modest requests. The Chinese once again saw things differently. Macartney was sent on his way with a letter to King George that said China had no need for British goods. The letter cautioned: “You, O King, should simply act in conformity with our wishes by strengthening your loyalty and swearing perpetual obedience so as to ensure that your country may share the blessings of peace.” That was the beginning. The end—China’s full-fledged admission to the global trading community—would come 206 years later.

Overview

I suspect that most Westerners doubt that the two hundred years between Lord Macartney’s trip to China and China’s eventual admission into the world trading community have much bearing on how you do business in China. Ancient history, you might call it. But foreigners doing business in China must understand that there’s nothing ancient about the last two hundred years and the humiliations they have held for the Chinese. The belief that foreigners strong-armed their way into China in the past two hundred years in order to plunder the country’s wealth is deeply ingrained in the Chinese psyche. They are taught from childhood that China was the world’s mightiest empire, the best at everything, until the foreigners came knocking at the end of the eighteenth century to ruthlessly exploit a people who had done them no harm. So even today many Chinese are quick to anger when discussing the role of foreign powers in China. Indeed, it is impossible for anyone to put a positive spin on the opium trade and the disastrous epidemic of addiction that the British foisted on China or on Japan’s occupation of much of China, and the accompanying ruthless slaughter of millions of Chinese, in the 1930s and early 1940s.

An examination of the interactions between China and various foreign nations that have wanted to do business there over the past two hundred years demonstrates why the Chinese today still harbor suspicions about foreigners. It also illustrates how the Chinese have adapted that suspicion to their advantage in negotiating tactics and strategies, both in government and industry. The Chinese genius for playing foreigners against each other is certainly present in modern business dealings, as is the Chinese art of brinksmanship and creative practicality of the sort that almost parked King George’s portrait behind the emperor’s curtain. As the story unfolds, China’s commercial transformation increasingly depends upon what amounts to a rocky marriage of necessity between China and America. The political relationship is volatile due to ideological differences, domestic political proclivities, and the natural friction of a superpower bumping against a could-be superpower. But China has also placed an amazing reliance on the United States in the past three decades as an influential adviser and a model commercial system.

China today is a strange hybrid. In many ways it resembles the United States. It has a continental-size domestic market that sets businesspeople worldwide salivating, a population of ambitious, risk-taking entrepreneurs who can use the country’s massive domestic market to build world-class products and businesses, and, by virtue of its size and stature, can force others to deal with it on terms it dictates. But, unlike the United States and almost all other nations that have become successful global commercial powers, China has an authoritarian and often paranoid political system that crushes dissent, controls information, and injects itself into every facet of business. There is constant experimenting with new political slogans, but the country really has no leading ideology other than enriching itself. The relentless drive of international trade and commerce that has shaken China out of its imperial stupor has now become an end unto itself. As a result, commercial negotiations in China often carry the weight of national aspirations, focused government planning, and, often just below the surface, the belief that you as a barbarian owe China something for past transgressions.

Commerce in China is all about making money, just as anywhere in the world, but business is also intertwined with China’s struggle to change and adopt the ways of the West while retaining its Chinese “essence,” as reformers in the final dynasty termed it. Foreigners have always sought not just commerce with China, but to change China, as well. Richard Nixon explained that desire in a 1967 Foreign Affairs article in which he said, “the world cannot be safe until China changes. Thus, our aim, to the extent we can influence events, should be to induce change.”

Those who do business in China need to remember that this struggle sets a backdrop for the business environment.

The Barbarian Handler

A nation that eschews relationships with other nations doesn’t need a foreign minister and China had none when Lord Macartney so rudely imposed himself on China. Macartney left China empty-handed, but his trade mission to China set the stage for many more. As the West industrialized, it sought new markets and raw materials. The Portuguese, Germans, French, Japanese, Dutch, and Americans were as eager as the British to open China for trade. The increasing presence of foreigners demanded that someone try to control them. For years the task of “barbarian handler” fell to Li Hongzhang, a commercially minded Confucian Renaissance man. To foreigners, Li cut an odd figure. A small man with a wispy beard, he was always clad in traditional gowns. Li hobnobbed with the foreign merchants and diplomats, attending their Christmas parties and other celebrations, but he was more respected than liked. Western diplomatic wives were thoroughly disgusted by Li’s oft-used pocket spittoon and his habit of blowing his nose into a teacup.

But from 1860 until the turn of the century, Li was the most important man in China’s dealings with the outside world. While accepting that China had fallen behind in science and commerce, Li believed that China’s governing system based on morality and the Confucian “superior man” was the best in the world. China could survive by learning science and technology from the West and grafting those elements onto Chinese culture and the country’s Confucian governing systems: modernizing while retaining the “essence” of China.

Li was a child when China underwent its first military humiliation. Eager to recoup some of the massive amounts of silver its traders were paying for Chinese tea, silk, and porcelain, the British began shipping opium from India to China. The drug found instant appeal. So strong was the taste among Chinese for the “foreign mud” that by 1830, opium amounted to half the total trade that Britain did with China. Britain’s success prompted other nations to jump into the opium trade, as well, including Americans who brought opium from Turkey. Although repeated imperial edicts banned opium smuggling and imposed death by strangulation for violators, foreign traders found Chinese officials more than eager to facilitate the illegal trade in exchange for generous bribes.

In 1839, the Qing court sent Commissioner Lin Zexu to Canton to eradicate the opium trade. He burned twenty thousand chests of opium and threatened to behead anyone who smuggled the drug. The British government demanded compensation for the destroyed opium and deployed warships along China’s southern coast. The First Opium War started when armed Chinese junks skirmished with the warships, giving British commanders an excuse to shell coastal cities. When British ships sailed up the Yangtze River into the heart of China, the Qing court realized that the Western barbarians with their superior weaponry were positioned to take over the country’s most prosperous southern provinces.

Chinese efforts to preserve its isolation formally ended in August 1842 when China signed the first of what became known in China as the “unequal treaties.” The Treaty of Nanjing allowed Western traders to begin carving out their first pieces of China. Hong Kong was ceded to Britain. Five Chinese ports—Canton (now Guangzhou), Amoy (Xiamen), Foochow (Fuzhou), Ningpo (Ningbo), and Shanghai—were opened to foreign residents and trade. A year later, Britain forced China to sign another treaty promising “most favored nation” status so that if any other country got better trade concessions from China, Britain would automatically receive the same treatment. A year after that, the Americans forced China to grant American residents (and eventually all foreigners) extrater-ritoriality, giving them immunity from prosecution in Chinese courts.

Tensions in the treaty ports, the murder of a French missionary, and more attempts to stop the opium trade led to the Second Opium War. It ended when twenty-thousand French and British troops captured Beijing and then torched and looted the emperor’s opulent two hundred-building Summer Palace. Treaties to end the Second Opium War, signed in Tianjin in 1858 and Beijing in 1860, granted further concessions. The opium trade was legalized and foreign embassies were established in Beijing.

Along with the merchants who invaded the coastal cities came missionaries who headed into the countryside to bring salvation. While the missionaries built churches, hospitals, schools, and orphanages, they also brought close behind terrifying technology and machinery that the peasants blamed for upsetting the rhythm of life and causing widespread drought and famine. Railroads steamed along like angry dragons, telegraph lines whistled in the wind like spirits, and deep mines dug into the earth upset the buried bones of their ancestors from which the Chinese peasant’s fate and fortune had always emanated. The Empress Dowager herself stoked peasant hatred of foreigners with stories of how Chinese orphans taken in by the missionaries had their eyes plucked out for medicines and their bodies eaten.

Li Hongzhang carefully noted how the West’s weapons and methods decimated the Chinese military. As he rose in stature among the bureaucrats and mandarins in the imperial court, he was constantly asked to negotiate settlements when Chinese peasants killed missionaries or ripped up train tracks and telegraph lines. The foreigners always wanted new trading or territorial rights in compensation. In the negotiations, Li was usually playing with an empty hand. Foreign military power was simply too powerful for China to resist. Li’s strategy was to offer expanded business opportunities instead of ceding territorial control to foreigners. When foreign powers did carve out land, Li directed local officials to make their life miserable in myriad bureaucratic ways.

Rebellion

Not everyone resented the missionaries. A failed imperial scholar named Hong Xiuquan was so smitten with the message of Protestant missionaries that he founded the Society of Godworshippers and titled himself the “Younger Brother of Jesus Christ.” Widespread poverty and the obvious corruption of the imperial court allowed Hong to recruit some five hundred thousand peasants to stage a revolt in 1851, known as the Taiping Rebellion. For a dozen years, he ruled much of southern China from his capital in Nanjing. Hong’s Taiping Tianguo, or Heavenly Kingdom of Great Peace, attracted the dispossessed and disgruntled from all over China. Land and private property were taken from landlords and distributed to peasants, foreshadowing the policies of Mao a century later.

Hong’s constant hostile presence in southern China threatened both the Empress Dowager and the Western merchants. To end that threat, Li helped organize an army of imperial troops and mercenaries under the leadership of British Major Charles George “Chinese” Gordon to end the Taiping Rebellion. In 1864 Gordon led his “Ever Victorious Army” out to crush Hong’s kingdom. On the way to Nanjing, Gordon was brought into negotiations between the Taiping officials ruling the city of Suzhou and the commander of imperial troops, General Ching. Through General Ching, Li had told the Taiping rebels that their lives would be spared if they surrendered without fighting. Gordon spoke almost no Chinese and didn’t understand what was being said during the negotiations, but he left the talks confident that his presence guaranteed that Li would abide by his promise to spare the rebels’ lives.

When Li himself met with the princes, their swaggering insolence enraged him. Li immediately ordered them beheaded and their heads hung on the city gates.

Gordon was astounded that a promise could so easily be broken. His word of honor had been violated. He grabbed a pistol and went into the city to kill Li. When he couldn’t find Li, a disconsolate Gordon took the head of one rebel from the city gate to his home where he talked to it, asking forgiveness. Gordon then ordered the Ever Victorious Army to retreat.

Gordon was persuaded to rejoin the Taiping campaign after Li declared publicly that Gordon had nothing to do with the broken promise. The Qing troops soon conquered Nanjing. Hong Xiuquan died from eating wild herbs to ward off starvation, and imperial Chinese troops slaughtered the remaining one hundred thousand Taiping followers who didn’t commit suicide.

Barbarian Rule

Li handled the barbarians as skillfully as anyone could have expected, yet he was often blamed for China’s problems at the hands of foreigners. Indeed, he was labeled a traitor after a Japanese army in 1895 decimated Chinese troops in a five-month conflict. Li ended the war when he signed the Treaty of Shimonoseki that forced China to cede influence over Korea and Taiwan to Japan and to open more of China to Japanese trade. Li was vilified at least in part because Japan’s victory so stunned China. Here was an island nation that had adopted its culture and civilization from China. The difference was that when Westerners came calling on Japan, in the form of Commodore Matthew Perry’s expedition in 1854, Japan’s Meiji government had rapidly adopted Western technology and methods instead of resisting as China had.

The Japanese victory was the last gasp of the Qing dynasty. As the century ended, Britain, Russia, Japan, Germany, and France all had pieces of China. The country was becoming another Africa, with separate colonies carved out by the West, when U.S. Secretary of State John Hay proposed an “open door” agreement among the countries that had “spheres of influence” in China. The agreement secured equal commercial opportunity for all throughout China. While the open door agreement kept the West from colonizing China, it also served the self-interest of the United States, which had fallen behind the other nations in China while preoccupied with developing the American West.

The foreign encroachments helped spawn a secret sect called the Society of Righteous and Harmonious Fists. The Boxers, as they were known to the West, combined martial arts, animistic rituals, and superstitions into a messianic movement aimed at toppling the government and chasing all foreigners out of China. As the movement grew in numbers, it became increasingly violent. Thousands of Boxers roamed China killing foreign missionaries, merchants, and their children. They also killed tens of thousands of Chinese Christian converts (many of them “rice Christians,” who prayed because they got free food) by skinning them alive or hacking them to pieces. Fearful for her life, the Empress Dowager co-opted the Boxers, urging them to rid China of the “foreign devils.” Soon some fifteen hundred foreign diplomats and businesspeople and their families were barricaded in the foreign legation districts in Beijing and Tianjin. The rebellion and siege generated global headlines and cemented an international image of the Chinese as fanatical savages.

Li counseled the Empress Dowager against aligning with the Boxers. He distrusted and disliked the foreigners in China as much as a...