Doing Business in China (Part 1)

1. Doing Business in China (Part 1) Hong Liu, PhD Director, China Business Centre

2. Learning Objectives • Chinese business facts • Chinese history and culture • Chinese business structure • Strategic paradigms in doing business in China

3. China Business: Recent economic changes… • Since 2002, FDI to China has overtaken the USA as the world’s top investment destination • Since 2002, A.T. Kearney’s survey has shown that China has surpassed the USA as the top FDI destination (Confidence Index) • Over 400 of Global 500 have invested in China, and many have set up their regional headquarters there • China has been the world’s fastest growing economy for the past 20 years, and the momentum of growth continues to be unabated

4. China - Basic Facts • The written record indicates about 5000 years history • The area of China is next to ex-USSR and Canada and as large as the whole continent of Europe. • China's population is about 1.28 bn, accounting for 22% of the world's population. • 93% of population is Han; there are 56 minority groups

5. Language and Chinese Thinking • Chinese (Mandarin) is the national language • There are four principal dialects: Cantonese, Wu (Shanghai), Fukienese, and Hakka • The language is ideographic, unlike Western language which is phonetic • Historically, the language has had a major impact on the thinking of Chinese people

10. Impact of culture … • ‘Confucian’ has had a profound influence on the life and thought of Chinese people, as a transmitter, teacher and creative interpreter of the ancient culture and literature, and as a moulder of the Chinese mind and character for the past two thousand years • Confucian philosophy still lays the foundation of Chinese cultural tradition and values • Zhang Remin, CEO of the Haier Group, one of the Financial Times’ “30 most respected global business leaders in 1999”, acknowledges that his business philosophies and practices are deeply rooted in the philosophies of Lao Tzu, Confucius, and Sun Tzu. • Chen Feng, chairman of Hainan Airlines, one of the China’s most profitable airlines, is a devoted Buddhist and Confucianist .

11. The middle way: Holism • The Western way of thinking is characterised by its analytic approach, and it considers fragments of reality as independent objects of study (the Greek roots of the word analysis, denote ‘loosening’ or ‘breaking apart’) • Chinese though, by contrast, adopts an ‘integrative’ point of view, and it considers all things in terms their relationships be they social, economic, or biological. • “In Asian cultures, there’s no division between business, spirituality, personal relationships, the art of war. Every aspect of life is interconnected (Chu 1999)” • “If you pull out one hair, you must rebalance the whole body”

12. Holism: examples • Winston Chen, the owner of Solectron, rated by Business Week as No. 3 among global IT firms, attributes his success to his application of Sun Tzu’s philosophies of balance to the management. For Chen • tao (the right way): employee relationships and common objectives • tien (Heaven or harmony): timely adaptation to the changing environment • di (surrounding) as strategic positioning • jiang (leaders or leadership): seeking the best possible managers • fa ( law or method)implementing well-defined policies and managerial systems. • Chen’s translation stresses the interrelationships of all parts of the business and the need for a dynamic balance among these parts

13. The middle way: embracing paradox • “The extreme of yin is yang, and the extreme of yang is yin; the combination of one yin and one yang is the way of nature and the seed of change, or ‘I’. (Confucius, The I Ching, or the book of changes) • The Chinese see opposites containing within them the seed of the other and together forming a dynamic unity. • For the Westerner interested in understanding the Chinese frame of mind, it is important to exchange an “either-or” framework for a paradoxical, or “and-and” framework (relating to Chinese’s indecisive). • “Though all creatures under heaven are the products of Being, Being itself is the product of non-Being (Lao Tzu)”. His notion of “wu-wei” (yielding) goes together with its opposite, wu-bu-wei (do it all).

15. In summary • The ‘middle way’ of philosophy is the search for a balance between the self and the other. The two are not diabetrically opposed but are elements that combine to form a greater whole • When dealing with globalisation and East-west relations, one should have a deep appreciation of one’s own culture and tradition, whether it is 200 or 5000 years old, before he/she can fully appreciate and respect another culture

16. Some Social Cultural Differences • The concept of 'privacy' • Being courteous • Showing concern • Giving presents • The use of 'thank you'

17. Chinese History: An Overview • Ancient periods, c. 3300-2600BC. Huangdi (Yellow emperor) first united China, and is considered as the founding father of Chinese civilisation. Characters and digitals, music, medicine, arithmetic, animal taming, and horse- drawn chariots were introduced. Rao and Shun were recorded ‘exemplary’ emperors. • Xia dynasty, c. 2070–1600 BC. The first Chinese state of note. The throne inheriting system was introduced. Emperor Yu controlled flood • Shang dynasty, c. 1600-1046 BC. Bronze working and chinaware were introduced, and inscriptions on bones/tortoise shell were developed • Western Zhou dynasty, c. 1046 -771 BC. This period laid a foundation for much of later Chinese culture and society

18. Chinese History: An Overview (Cont’) • Spring and Autumn period, 770-476 BC. This period saw China politically divided but culturally rich, with Confucius, Mencius, Lao Tzu and Guan Tzu being active. Many classics of Chinese literature date from this time • Warring States period, 475-221 BC. The rich and powerful states of north China fought each other for supremacy for almost two centuries. The master strategist Sun Tzu was active in this period • Qin dynasty, 221-206 BC. Qin Shi Huangdi, China’s first true emperor, reunited China, and integrated the monetary system and measurement systems and Chinese characters from previous six countries. He started the Great Wall project, which took 10 years to complete • Western Han dynasty, 206 BC – 25 AD. This was a period of economic prosperity and cultural greatness. The paper making technique and earthquake recording device were invented (which accurately recorded an earthquake 6 years later)

19. Chinese History: An Overview (Cont’) • Eastern Han dynasty, 25-220. Wang Mang usurped the throne, and his reform measures made the empire slide into chaos and break apart • Three Kingdom period, 220-265. It was a warring period, and the country was fragmented and several states fought each other for control. Chinese scientist worked out the p accurately – 1000 year earlier than Europe • Jin dynasty, 265-420. China was briefly reunited under the dynasty of Western Jin (265-317) before break apart again under Eastern Jin dynasty • Southern and Northern dynasties, 420-589. Several emperors built their dynasties, but could not last. China was fragmented, with much conflict and many smaller states attempting to break away • Sui dynasty, 581-618. Emperor Yang Jiang reunited China, and developed a centralised ‘government’ structure (three ‘councils’ and six ‘ministries’) that laid a foundation for the following regimes. The system of appointing officials based on examinations was introduced for the first time

20. Chinese History: An Overview (Cont’) • Tang dynasty, 618-907. Emperor Li Shiming (Tang Taizhong) restored order and expanded China’s power and prestige.This is one of the most developed period, politically, economically, and culturally, in China (‘Tang’ is still used to represent ‘Chinese’ or China in Western countries) • Five dynasties and Ten Kingdoms, 907-979. When the Tang dynasty collapsed, China fragmented into more warring states. Foreign invaders, mainly Turkish and Mongol tribes from north, increased the pressure • Song dynasty, 960-1279. The Song reunited China for a time, but the Yuan army attacked the Song and built the Yuan dynasty. In the period, China developed ‘printing’ (400 years earlier than German’s) and ‘paper’ banknotes. Advertising was widely used. A printed advertisement by a needle making shop was found on a square paper, with a logo (white rabbit): on the top: “Jinan Liu’ Family Strong Needle Making Shop”; below: “We buy high quality steel rods and make strong fine needles, and they can be used at home in no time”; left and right: “White Rabbit is the Symbol and please remember ‘White Rabbit’”.

21. Chinese History: An Overview (Cont’) • Yuan dynasty, 1271-1368. Hubilie Khan’s Mongols conquered all of China and united it. There was a time of some prosperity, and China opened up to foreign trade • Ming dynasty, 1368-1644. China enjoyed another period of economic and cultural prosperities. Beijing was then chosen as the capital, and with 720,000 square kilometres, the Forbidden City was the largest and best maintained ancient architectural group. Zhen He (1405-1433) sailed seven times up to Eastern Africa, and passed through 40 countries. He led a team of 27800 people, including soldiers, sailors, interpreters, technicians, doctors, with 62 large ships. • Qing dynasty, 1644-1911. The Ming dynasty was replaced by the Manchu tribe from the northeast. The first emperor was Shun Zhi. Kang Xi and Qiang were great figures. Between them, they ruled China for 135 years (1661-1796).

22. Chinese History: An Overview (Cont’) • Republic of China, 1912-1949. Established by Sun Yat-Sun, it quickly collapsed into feuding provinces ruled by warlords, until Chaing Kai-Shek was able to impose a form of unity in the late 1920s. After the success of the Communist Revolution in 1949, the government of the Republic of China went into exile in Taiwan • People’s Republic of China, 1949-. Established by Mao Zedong and the victorious Communists in 1949, the PRC has undergone many changes, including the Great Leap Forward of 1950s, the Cultural Revolution of the 1960s and 70s, and the economic reform process initiated in 1978.

23. Sun Tzu • A general, who served the State of Wu towards the end of the Spring and Autumn period (770-476 BC), and the author of one of the most influential books on strategy every written, The Art of War (The Bing-fa in Chinese). • The book’s thesis centres on one basic principle: how to accomplish the most by doing the least • “To win without fighting is best,” says Sun Tzu, and to this end he tellingly underplays the role of weaponry in warfare. Instead, the tools he stresses are psychological: how to outwit and deceive opponents, how to turn weakness into strength, how to maintain the cohesion and loyalty of the group. • The pass to success he recommends is indirect: it is the path that is least predictable (intelligence, deception) and most adaptable to the ever changing environment of the battlefield (surprise, speed, and flexibility). In summary, militarists must maintain an ‘invisible’ profile, knowing others without being known themselves

24. Business Structure in China • State-owned enterprises (25%) • Private businesses/firms (17%) • Collectively-owned enterprises (urban & township) (21%) • Shareholding (19%) • Foreign funded enterprises (joint venture and/or foreign wholly-owned enterprises) (18%)