from EuroBiz Magazine

December 2008

by Bill Dodson

An adage that translates well across cultures is: “It’s not what you know; it’s who you know that matters.” In China, the adage boils down to a simple word – guanxi. At its most rational, guanxi is simply practiced as relationships of mutual obligation: quid pro quo; you scratch my back, I scratch yours. At its most innocent, it’s what one associate calls Favor Trading:” you help me out in this small matter, and I help you out when you need a hand.

Guanxi can also be toxic, even radioactive, in a manner of speaking. Odorless, colorless, without form or substance, guanxi is by nature unstable, breaking down when exposed to the light of day, explosive when unmoderated by common sense. Very much like fissionable material, if not properly contained from the beginning, guanxi can cause great harm to your China interests.

“In China, people for thousands of years had no money, so they traded on relationships,” a Western lawyer with more than ten years practicing in China told me. “Now, actually, guanxi isn’t as important in Shanghai, because people now have money.” Shanghai also has more international standards and models for business interaction than before. But as Western companies push beyond the confines of the Tier-1 cities into the interior of China, operations increasingly see guanxi as the modus operandi of local government officials and businessmen.

An automotive parts producer once took the advice of a local government to hire an environmental consultant from a nearby city to put together the Environmental Impact Assessment (ESA). Manufacturing projects in China require approved EIAs from the local government to get their business licenses. China regulations also require the investor use a local consultant to put their stamp of approval on the EIA. Local government administrators in this project suggested the project would be approved much more quickly and smoothly if the client used the local consultant (read: the consultant had big guanxi with government people locally).

Three months later there was still no EIA and no business approval. It was apparent the local environmental consultant was no more an environmental professional than the members of the Chinese rock band that played at the local expat bar. In fact, the fellow and his assistant were so inept they set the project back several months. The client had to call in a Shanghai environmental consultancy to figuratively clean up the mess. The customer also organized several discussions with local city government representatives across departments to thrash out the approval process and elucidate the responsibilities of local administrators.

So when and how should Western companies doing business in China invoke guanxi?

NEVER take guanxi at face value
One of the presumptions Chinese have about accepting their help through guanxi-channels is that you are not supposed to qualify the services you are being offered. The friend who is helping you by either referring a friend of his or even his offering his own time is providing you a favor. He sees himself as going out of his way to give you access to someone or something that you otherwise wouldn’t have access to, goes the Chinese thinking. And therein lays the rub: the assumption that without the favor you are bereft; you cannot manage without the person; you are locked out of the world of access and power forever without their beneficence.

Of course they are wrong about that thinking; but they are convinced their thinking is correct. Chinese who use their guanxi to grant favors are easily insulted when you question the quality or validity of what they offer. A Chinese “friend” of one Chinese manager once suggested a Chinese service provider with which he was friendly to help a Western company. Company management thanked the recommender for his recommendation, and said it was interviewing several candidates to provide the service. The fellow immediately withdrew the offer of his friend’s help, insulted. The Chinese manager didn’t hear from his friend for a long time after that.

So always take offers of guanxi within the context of a competitive qualification process; and always have a backup should the guanxi-choice go sour. Otherwise, you may find yourself locked into an unsatisfactory relationship that spirals out of your control.

What’s In It For Him (or Her)
Chinese who grant favors are very much like patrons with expectations for remuneration in unexpected ways at unexpected times. Also, the expected compensation is typically inflated when compared with the actual favor. Agree up-front what results the guanxi-favor will provide. Detail the remuneration ahead of time, before activities begin. Also, agree on an exit strategy ahead of time: what is success, what are the warning signs of failure or disaster?

Don’t ever accept responses like: “no problem” or “no charge” or “forget about it”. Extending guanxi is troublesome for Chinese people. So, once they’ve discharged their favor to you, they will call the marker in one day, as they say in poker. The friendliness and easy-going nature with which they offered their help is easily displaced by sulking, a sense of effrontery, rudeness and even sabotage through malign neglect when Chinese call in the favor and you are surprised or unwilling (in their eyes) to reciprocate or do not provide compensation commensurate with their expectations.

ALWAYS be specific up-front about what the guanxi deliverable will be

Use guanxi sparingly. The very use of guanxi seems to necessitate fuzzy parameters, if there are any parameters at all. Chinese believe they are the ones doing you the favor when you accept a grant of their time and effort, or that of one of their friends. Chinese in many instances will take offense when you ask for clarity of what they intend to do for you or are doing when you don’t hear from them for some time. A common refrain is, “What, you don’t trust me?” The effrontery is palpable to them; Chinese will sulk and go silent.

But still, it is important to make deliverables as concrete as possible. In one instance, a company insisted a third-party Chinese government “lobbyist” deliver a decision in writing from the relevant government agency, with final payment of the success fee dependent ultimately on the company receiving the final approval of its application.

After all, guanxi may not kill; but it can maim.

Copyright ©William R. Dodson, 2009