It’s not about Guanxi. It’s about your Business Model and Due Diligence

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Op-Ed Commentary: Chris Devonshire-Ellis

Oct. 8 – There’s been a certain amount of blog chatter about “guanxi” in China – the role of relationships when doing business in or with China. Dressed up as an almost mystical intangible that needs to be put in place in order to succeed, a lot of the debate has been about defining it, attempting to determine its usefulness or otherwise, and much providing of hocus pocus over who has it and who doesn’t.

The ability to even determine what guanxi is or isn’t seems to mark you out as a China expert. Its utter nonsense and much of it is rather dull. In fact, guanxi doesn’t help you in any particular way in doing business in China. Instead it can be painful if relationships are used purely as a “you scratch my back and I’ll scratch yours” type of mentality. That’s not business. That’s the selectively tribal granting of favor. It’s sleazy in the extreme, and can lead to issues with corruption and ultimately into trouble with legislation such as the FCPA.

Rather than write guanxi into the Chinese business manual, then, it’s much better to concentrate on your business fundamentals and common sense. While businesses vary, following a business model that made you successful elsewhere is almost certainly, perhaps with a few adjustments, going to work in China. I mentioned some of these in my article “In China, White Goods Become Red.” If you have your business model worked out, it won’t need any adjustment for “guanxi.”

Of more importance in China is conducting your due diligence when buying from China (ensuring what you pay for is what you get, that QC structures are in place, and that letters of credit are authorized only when the goods are verified), selling to China (making sure you get paid), and of course when establishing a business in China. We’ve written a lot about the subject, with some of the more detailed pieces here:

Examining a Chinese Company Business License

Verifying Chinese Registered Capital Amounts

Conducting Due Diligence on Chinese Financial Statements

Financial Due Diligence When Assessing Chinese Partners

Legal Due Diligence When Assessing Chinese Partners

Not once do we mention “guanxi,” and the more serious minded businessman won’t need to either. A successful business involved with China is about conducting your due diligence, about the integrity of your business model, and it’s about working hard and with the right people. It’s definitely not about mysterious relationships with any inscrutable Chinese gentlemen.

Chris Devonshire-Ellis is the principal and founding partner of Dezan Shira & Associates, establishing the firm’s China practice in 1992. The firm now has 10 offices in China. For advice over China strategy, trade, investment, legal and tax matters please contact the firm at info@dezshira.com. The firm’s brochure may be downloaded here. Chris also contributes to India Briefing , Vietnam Briefing , Asia Briefing and 2point6billion

Related Reading

Supplier Due Diligence in China
Operational Due Diligence in China

13 thoughts on “It’s not about Guanxi. It’s about your Business Model and Due Diligence

    Renaud says:

    For whatever reason, most “experts” like to show how cultural considerations make China totally unique… When the danger is precisely to be overwhelmed by apparent differences and to forget one’s common sense.
    Thanks for the refreshing view.

    Chris Devonshire-Ellis says:

    For more on “Guanxi” and the FCPA dangers – just see the next article “FCPA open office in San Francisco”.

    Chris Devonshire-Ellis says:

    @Renaud – thanks for your comments. Yes, a lot of people try and “mystify” China. It’s unnecessary. Stick to the basics, common sense, don’t get sidetracked, treat your staff well and you won’t either need guanxi or be much affected by the negative implications or it. I enjoy your QC blog incidentally. (Click on Renauds name to access his site). Thanks – Chris

    Richard Ford says:

    Good article. As one of the recent instigators of the chatter on the topic. I must confess a small bias. I have a deep mis trust and not fond opinion of many of the experts. I see that I am not alone in most long term expats think the same.

    As David Wolf said when referring to the LinkedIn chat that he added to after myself on advice for a new startup in China….

    “…all was running well in the discussion until someone dropped in with a one liner about needing to get good guanxi..”

    I’m paraphrasing, but the topic completely killed and side tracked an otherwise informative discussion.

    :-s

    Chris Devonshire-Ellis says:

    Thanks Richard. I’m well aware of the guanxi issue – and although my firm is of course a professional services practice – I also have to run it. Guanxi is not an issue, we’re doing very well without it, have done for 18 years, and will continue to do so.

    For readers interested in David Wolf’s erudite explanation of what guanxi is (if you’re not bored with the subject yet) his piece on it is here: http://siliconhutong.com/2010/10/07/a-few-notes-on-guanxi/

    As for phoney China “experts” – they can usually be spotted by (a) not actually being based in China; (b) using other peoples China comments to additionally comment on and then pass off as their own; and (c) being rather full of hot air and hocus pocus China jingoism.

    I’m a businessman, an investor in China, and I have to get it right or we go broke. Guanxi won’t help under any circumstances. Hard work, effort, common sense and some learning by mistakes (experience) is what really counts.

    I appreciate your comments. Thanks – Chris

    Renaud says:

    Chris,
    Thanks a lot for the nice comment!

    Chris Devonshire-Ellis says:

    You’re welcome Renaud. And be diligent out there! Stick with China commentary from people actually based in and invested in China. As Richard allued to – the China blogs written externally from China are largely just empty vessels. Thanks – Chris

    Lynda Dumais says:

    Your paper is interesting and probably very appealing to most of Western business people. Although I agree with part of what you say, I feel it omits from explaining that quality personal relationships (not bribery) where and still are very important for succeeding in China in the long run. As a Westerner, I may say that I do not need guanxi, but very soon, I will end-up being near people (Chinese) that work by these networks of relationships created and maintained over years (guanxi). Saying that a good business model and doing due diligence suffices is simply ignoring the China specifics and one of its very important components: People and the way they are tied with each other. I tend to agree with those who say that to succeed anywhere else than in America, it takes the capacity to create good relationships and, of course good products, a business model, and well performed due diligence.

    Michael Yu says:

    I agree with Chris on the part that business model, due intelligence, and hard work are the bedrock for success in China. However, his statements that “The serious minded businessman wont’ need guanxi”or some “mysterious relationships with any inscrutable Chinese gentlemen.” need to be clarified. If guanxi is just “You scratch my back and I’ll scratch yours.”, then Chris’s point is well taken. However, guanxi is much more than just that. There are all kinds of guanxi, the healthy ones and the unhealthy ones. While unhealthy guanxi can ultimately lead to business failure, healthy guanxi can help you in many ways too. Case in point, given the same technology and same pricing, a company that has established good relationships with its Chinese counterpart will certainly have a competitive edge in gaining a contract over a competitor who has no relationship with the Chinese. Guanxi is neither magical nor evil. It all boils down to human relationships. The Chinese are much more people oriented in doing business.
    Having a successful business model, do your own due intelligence, work hard, AND have good strong relationships with the Chinese, government officials, business partners, and your own Chinese employees, will certainly guarantee a business success.

    Edmund says:

    An interesting viewpoint, for sure , with common sense prevailing at its core, however , to state that you have managed without recourse to guanxi in 18 years seems to me rather a bold statement.

    Are the readers to believe that in 18 years not once have you ever seen a need for, or been the recipient of, your own ‘network of local relationships’, or that of someone else’s? Maybe you were just simply unaware of its presence , as does happen to many at the start of a business venture in China?

    I have lived and worked in China for over 10 years, run a successful business, and been fortunate enough to have had awards conferred upon me by local Govts ( I only mention this to convey my level of experience, and not to boast) , and in that time I can honestly say that it would be nigh on IMPOSSIBLE to do business here without some involvement of guanxi ( and lest we forget, what business around the world doesn’t involve personal favours/relationships? Hello Wall Street! IMF World Bank etc etc..).

    The comments as to the definition of guanxi are more to the point. Once you are clear as to what is actually is, rather than the ‘mystical’ and the ‘mythical’, then it can be properly studied , fully understood, and professionally utilised.

    To be so dismissive as to its place, and importance, is nothing short of irresponsible when you are offering guidance, or, more worryingly, charging a client in search of advice.

    The ideal would be a balance of your view and that of the irrefutable presence of guanxi, and from there a more fully rounded discussion could take place.

    Yes, the way of doing business in China is evolving all the time, and the old style of ‘guanxi or nothing’ has been in rapid decline for a while, but the culture itself has not. The core of a relationship/trust based culture doesn’t decline, it simply becomes more refined, more intuitive, in its interaction with foreigners. The attitude of ‘forget about it and simply impose your imported standards’ is sheer folly.

    Find a balance that suits your needs. You won’t go far wrong.

    Chris Devonshire-Ellis says:

    We’re not really referring to the relationship model here – which in fact exists everywhere else too and isn’t specifically Chinese. The “Old Boy network” springs to mind. I’m referring more to the relationships that invoke non-compliant overtones, and I do not endorse them. Concerning people along the life of our business who have been / could be useful – we’ve employed them and they work for us. Thanks – Chris

    Edmund says:

    Thank you for the clarification, Chris.

    Of course one should never compromise the fundamentals in the face of illegality masquerading as friendship or favour, as that only leads to ruin. And who would ever make comment on any form of cultural ‘friendship/favour networks’ in any business plan/proposal and wish to be taken seriously? Fair comment, indeed.

    But that is not to say that it should not be acknowledged, and thus factored in off plan, as it can, and does, directly and indirectly, impact on any business (model) and its speed of progress.

    Guanxi is not a substitute for any fundamentals. That’s a fact. But it is an integral element of the business environment into which you will launch your ‘integrity intact’ business, and therefore cannot be fully detached from the process ‘in play’.

    Quote: “It’s definitely not about mysterious relationships with any inscrutable Chinese gentlemen.”

    I’d argue that it is about exactly that once you start. Though to what degree depends on the nature of your business. But once you are well established it becomes less of an issue as true friendships have been developed with trust at their core.
    To exclude its importance at any stage, as it seems from the article, is not an accurate reflection in my opinion.

    But it’s just an opinion.

    On another note…….Having only come across this site the other day I must say how impressively informative it is. Sterling work, sir.

    Also, I especially enjoyed your reading list on your blog, as well as the photos of North Berwick , East Lothian – a golfer’s paradise, and the ski resort at Yabuli, as they brought back some good memories.

    Many thanks.

    Chris Devonshire-Ellis says:

    Glad you like the site Edmund.

    For other readers, my personal blog he refers to is http://www.chrisdevonshire-ellis.com/blog
    Best wishes
    Chris

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