Letter From China - What Fish Think

Opportunities exist in China for foreign enterprises to join hands with local enterprises eager to form business alliances. Domestic enterprises in China recognise the need to focus their management efforts in improving technology, finding a competitive edge, creating a pan-China brand, getting quality approval with international seals and attaining a critical size. This they can do by merging with other Chinese companies or by joining foreign companies, either by way getting acquired or through alliances.

Foreign enterprises entering China, on the other hand, realise that their focus will need to be on understanding consumers, communication, differentiation, engaging in innovative but locally appropriate marketing efforts, getting raw materials locally even while maintaining quality and image, getting to know the channel and forming alliances or acquiring local companies.

The stage is clearly set for alliances which can benefit both, as the suitor can bring the expertise the potential partner wants and in turn get the benefit of the partner’s local knowledge. It is, however, entering into meaningful alliances and then making them work that is the real challenge. Alliances work if the foreign partner is clear on investment returns in the China context and if the core businesses are synergistic. Some decisions will have to be based on incomplete and sometimes inaccurate information. Local companies are not always able to provide complete information — commercial due diligence is the only way.

Trust is the single most influencing factor and communication is the key to a successful relationship. Developing trust with a potential partner is a time consuming exercise and this aspect of development of relationships needs to be respected with the necessary commitment. Managing relationship before and after the deal with all stakeholders is extremely crucial. Cultural integration is extremely important and for this to happen successfully, every relationship and cultural issue has to be understood in detail, carefully and with sensitivity. Competencies have to be respected and for them to work in a beneficial manner they need to be combined in a team-work fashion. A good understanding of the operating environment is essential for any alliance to succeed and it is best if the decision makers of the foreign suitor are on the ground as it is always beneficial and respected in the Chinese context.

Of course, many negotiations fail. While failures are due to very situation specific reasons, some of them happen because of the gaps in valuation expectations between the parties; perception of accounting, and legal compliance requirements and realities; attention by senior management and promoters. The failure rate of projects without the personal involvement of the promoters from both sides is high, while those with the chairmen of both parties involved usually succeed.

It is not without reason that most people agree that while China offers great opportunities, it also fraught with risks. There are also some other softer aspects of negotiations and business culture that need to be recognised. First of all, relationship with a person represents the relationship with the entire company and these relationships are built over a lot of wining and dining. In China, age brings increased respect and status. Certain aspects of the deal will be necessarily nebulous as this is a part of a business culture which respects relationship more than it does the rigour of a black and white deal. Negotiations can be tough, time consuming and physically trying especially since English is better spoken than understood. A good translation is essential for good negotiations. And lastly, the pace of negotiations may appear slow initially but fast action is expected once a decision is taken.

In the light of the fact that most small to medium-level business enterprises, desirous of joining hands with a MNC, wish to do it to get an exposure to the discipline of professional and international management, there is acceptance of the relevance of detailed due diligence and anticipation of the changes in the way business will be conducted post alliance. Problems crop up when the diligence reports throw up issues which are difficult to resolve and need a platform of complete trust to progress the negotiation. Problems also arise because expectations and post alliance arrangements are not clearly spelt out. Suitors will do well to follow a Man Man Lai quote which says ‘Halve your expectations, double your time and budget’.

Whenever one writes about China, one is acutely aware of the intricate play of perceptions, knowledge and reality. There is an interesting conversation between two historical figures in the book ‘Warring States Period’ which goes like this:

Zhuang Zi: See how contentedly the carp drift through the water. That is what makes the fish happy.
Hui Zi: How do you know what the fish think? You’re not a fish.
Zhuang Zi: How do you know what I do not know? You’re not me.
Hui Zi: I’m not you. But you’re not a fish either.
Zhuang Zi: Well why are you asking me, then? They look happy enough to me.

The author supervises the Berger Group’s subsidiaries in China and Hong Kong.

By Jagdish Acharya
The Economic Times - Times News Network
Friday, June 1st 2007

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