Doing business in China is complex. It requires more than simply a global understanding of business and a need. Rather, it’s a combination of numerous factors — economic, cultural, geographic and political. So it should come as little surprise that those who understand it best are, themselves, complex.
Dr. Robert Lawrence Kuhn is one of those complex individuals. He’s authored or edited more than 30 books, including the first biography of a living Chinese leader published on the Chinese mainland. He’s been an investment banker and led a top M&A firm. He’s provided consulting services to Fortune 100 CEOs and entrepreneurs. And he’s also a well-known television producer who created and serves as host of the popular PBS “Closer To Truth” series.
For more than 20 years, Kuhn has worked with China’s senior leaders, advising them on economic policy, technology and science, culture and media, Sino-U.S. relations, and international communications. Simply put, he’s one of the world’s foremost authorities on doing business with China.
“Every company has a China strategy whether they know it or not because of China’s impact on the world,” says Kuhn, whose past business expertise includes time as co-owner and president of The Geneva Cos., an M&A firm that represented privately owned, middle-market companies and between 1991 and 2001 initiated and closed more than 1,200 transactions and conducted thousands of corporate evaluations. In 2000, Kuhn sold The Geneva Cos. to Citigroup and subsequently became senior adviser to Citigroup Global Investment Banking.
In 2005, Kuhn wrote “The Man Who Changed China: The Life and Legacy of Jiang Zemin,” which was China’s best-selling book that year. In 2009, he penned “How China’s Leaders Think: The Inside Story of China’s Reform and What It Means for the Future,” which featured Kuhn’s discussions with more than 100 Chinese leaders and officials.
Kuhn, also founder and CEO of The Kuhn Foundation, was a keynote speaker at Ernst & Young’s Strategic Growth Forum in November 2010. After his presentation, Smart Business sat down with him to discuss what executives should know if they want to better engage with the fastest-growing economic power in the world.
Dr. Kuhn, what should American business leaders be thinking about with regard to China?
It’s the second-largest economy, approximately 30 percent of the size of the U.S. But on purchasing power parity, it’s more than half the size of the U.S. Within 20 years, China will be the largest economy in the world.
There are a lot of issues in China in terms of imbalances and needs, and that’s causing a great industrial transformation. But there are a lot of opportunities. Senior leaders tell me — the leaders of the country — that there are some things that have changed in China, reform-related, some things that have not changed, and some things that will never change. What will never change is the need for economic growth and the need to serve the people.
As you look at the issues that China has, and the imbalances, you look at certain industries that will have huge opportunities — social services, health care and education, as well as energy. For smaller companies, particularly for entrepreneurs, there are great growth opportunities in China.
China is a market that has its own characteristics, its own cultural characteristics, its own way of doing business, and the fallacy is that this is only good for big business. China is actually trying to compete more with the big businesses and people over there are looking for more entrepreneurial businesses to partner with. So for American entrepreneurs to associate with Chinese entrepreneurs as they mutually fight the big companies in both countries, that is something that’s supported by Chinese leadership. So the opportunity is definitely there.
How should CEOs and entrepreneurs begin to identify those opportunities?
This is complex. The first rule I have is that you have to like doing business in China. If it’s something that you don’t like and don’t want to do, you really shouldn’t do it. The investment is more in time and your commitment than in financial resources. You have to meet people. You have to see a diverse number of people in your area.
One way to think about it is in terms of your industrial area. Another way is geographically, if you have certain geographic areas that you explore. You will need to have introductions with leaders and potential business partners in several different cities. Then you will see diversity. You will see diversity geographically, you will see it in your industry, whatever industry you are in, and you will begin to get familiar with talking to and getting to know the right people.
Obviously, you should have good advisers — people who know the ground. There are a dozen or so major accounting firms. Of course, (Ernst & Young LLP) is my favorite. I work with them. But all the big accounting firms and consulting companies have different facilities that can be utilized. There are many different ways to go about it, but you shouldn’t be blind.
Another principle is that you should be important. Whatever you do, whoever you are going to work with, you should be important to that individual. If you are an entrepreneur, you get somebody who is going to introduce you to the mayor of a big city. Suppose you get the meeting and you say, ‘Wow, that’s terrific.’ Really, it’s not, because you are not important to that mayor if you are only a small company. They may do it as favor to whomever introduced you to them. I could get you lots of meetings with a lot of people at high levels because they’ll do me a favor. But it’s really of no benefit because where does it go from there if you’re not important? So you always try to be important to whoever you are going to meet. If it’s another company, if it’s an official, you want to be able to bring something that’s important so that they really pay attention to you on a long-term basis.
So what makes you important to them? How do you know?
You have to have advisers, so that you know what the individual is looking for and a certain size company they’re looking to partner with. It’s not something that can be answered in generalities. Rather, it has to be in the specifics of the individual company. Look at it this way: What does that company have? What is its competitive edge? How big is it? And what does it do?
If it’s a business that is generating revenue — $20 million, $100 million, $1 billion — keep in mind that some people in China are paying to get connections with companies of a certain size.
Then, you have to find the people on the other side where what your company does and what you have to offer is important to them. You have to target the content for people interested in the content, and then the size for that project that is appropriate. If you are building a factory or providing a service, you have to know what people want and what would make you important to them.
Because of my background in corporate strategy and mergers and acquisitions and now substantially in China, very quickly I could look at a company and say, ‘Here’s what you should be doing.’
There are people who can sense that, and they’re the ones you need to be working with as advisers in order to do it the right way.
Does it take a lot of self-analysis by the entrepreneur or CEO to get it right? What I mean by that is when companies think about their market strategy — the niche market they serve, the problems they solve, the solutions they bring to the table and how they can position themselves to compete here — does that translate well to how you should approach your business strategy in China?
Everything you do that’s good business in the U.S., you should do in China. Then you have other things layered on top of it. Everything is applicable because that’s just good business sense — strategy, environmental analysis, strengths, weaknesses, opportunities, threats. You’ll see where you’ve got it right and what works for you. Then in China, you have an additional factor — government.
But it’s more granular than that — it’s geographies, it’s companies that are competing, it’s the marketplace. When you are doing business in the U.S., the other companies are your competition and you analyze the competition. But in China, especially for a smaller company, most likely whoever you end up working with will want to do some sort of a partnership.
It may not be an equity joint venture; it may be licensing or joint marketing. There are a lot of structural opportunities, and with those, you are going to form relationships with other Chinese companies. Those relationships are very different than the relationships you would form in the U.S., so in addition to the analysis that you’ll do about why you should be doing in business in China, you must realize that, unless you are leading a large company, you are going to be partnering with someone.
What happens if you don’t find a good partner?
Finding that right partner is critical, and it’s your biggest decision. There are a lot of good stories and a lot of horror stories. Sometimes, people make a decision to partner with one company and give them exclusive rights to all of China. That may turn out to be a good decision. Or, it may turn out that the industry you’re involved with is a very regional industry and that decisions are made regionally.
So if your partner is a company from Guangzhou or Xiamen or Guangdong province and you want to do business down with Shanghai, forget it. The Shanghai people are not going to want to do business with a company that has a partner from Guangzhou and is considered a regional player. So you really have to be very sensitive about what you’re doing and who you’re working with before you make your decisions.
So you really need to spend a lot of time on the front end, analyzing all the factors involved, correct?
Certainly a lot of front-end work is necessary in terms of meeting people, getting familiar with the companies, governments and regions, and understanding how it works. I always advocate taking multiple paths before you begin to even think about making your decision. You should be looking at three or four different approaches — that can be different potential partners, different geographies. I like to work with different geographies, and again, it has to be something where you’re considered important.
If you work in a province, unless your company is doing $700 million or more, you’re not going to meet with senior leaders of that province. You may be working on a municipal level. It depends on who the entrepreneur is. And, there are different associations in China that promote entrepreneurship as opposed to fostering government, state-owned enterprises.
There are a lot of different ways you can do this; you’ve just got to get a feel for it before you really start to make decisions. You shouldn’t marry the first girl you date.
Talk about the importance of understanding the cultural differences. I’ve heard stories about how treating business deals the way we would in America can be a deal killer.
There are some natural business instincts that we all have, and those are all good. But in China, you can’t expect to immediately get down to business. There has to be trust and loyalty built first.
Here’s an example of what doesn’t work: One venture that I was involved with took a long time to put together. The people from the U.S. side had an old-school superiority attitude toward China. They would dictate that they were going to be coming to the city, landing at 1 p.m., expecting a meeting at 2:30 p.m., then at 6 p.m. they had a plane out. They expected that meeting to happen.
But it doesn’t matter whether you’re dealing with a government monopoly or a regional government that is powerful, doing things like that doesn’t sit well. That is really impolite in China — coming in and only expecting to have a meeting. Maybe (the potential partners) expect a dinner afterward, where you get to know each other. So that’s a little bit more of that cultural finesse that’s necessary so people feel good about building a relationship. You need to do that with several different groups as you go forward. It’s not something that once you do it, and then you do your deal, that you can forget about. It’s a commitment. And you need to keep coming back.
The most successful people in China from big companies are the ones where the CEO will come here multiple times a year. That’s the commitment you make.
China is very rigorous in terms of its matching of people that you do business with. If you are working in a city and you have the mayor of a small city — if your business is that size — the mayor will only meet with the CEO of the company. He can’t meet with the No. 2 guy. The No. 2 guy will meet with the vice mayor or someone of that stature. In China, it’s planned in a very socially appropriate way.
You mentioned trust. What does it take to build trust in a country like China, and how big a role does it really play?
It’s becoming more rule-of-law-oriented, but contracts do not mean the same thing here as they mean in the U.S. If a company doesn’t want to honor a contract for whatever reason, they can always find reasons to do so, and your choice is to sue. Suing actually has become more effective now. You can sue. It can be enforced that you can collect. Ten years ago, you couldn’t do any of that. But now you can.
That doesn’t mean it’s good to sue. You don’t want to get to that point. Still, you have to recognize that contracts are not meant to mean what they do in the U.S., and memorandums of understanding, MOU, don’t mean that either.
If you sign an MOU, we’ll say, ‘Wow, we’re going to get that deal done.’ But no, it really means that we had a nice meeting. That’s all it means. It’s a formalization that they can show to their boss, just like a call report — I met with this company, and I can report it to my superior
In that sense, there are different cultural aspects, though those differences are getting less distinct as China becomes more sophisticated. But some of those characteristics will remain a long time. Just as it takes awhile to build that trust, that trust is an entry barrier to others. If somebody else comes along and offers a tiny bit better price, if that trust is there, that won’t matter. Even that’s becoming less true in today’s China. Nonetheless, there is that benefit so that trust is something that can move a company’s ability to do business in China forward.
Everyone agrees that China is the next great superpower, but what does that really mean and what’s next in terms of the country’s evolution?
In every area of human endeavor — economics, business, finance, culture, science, technology, sports, media and military — China intends for its efforts to be among the best in the world. There isn’t a sector that they are not focusing on improving. In every industry of importance, any industry at all, China is going to be developing its companies.
Now, those companies are going to compete with each other, so there are opportunities to ally with some of those companies at whatever level you are working at, in order to help them on their rise. My favorite word in dealing with China is “alignment.” If you try to do exactly what you are doing in the U.S. just to compete and make your company as big as possible and as successful as possible, that ultimately won’t lead to true success in China. You have to think about alignment with government policy, the leaders with whom you do what is in their interest, so that you can align with that.
Sometimes, what seems to be suboptimal from an alignment point of view is actually far better. There are many situations in which getting a smaller percentage of the company will actually turn out to be a greater wealth builder for you, for your company, than if you had a higher percentage, because it incentivizes the other side. You always want to be a resource that that other company uses.
People have stereotypes. They say, ‘Well, how can you trust the Chinese?’ They come at it from the viewpoint that the Chinese were all one entity that gets up in the morning and has a conference call about how to fool the foreigners and get all of their money. That’s, of course, ludicrous. What in fact is happening is that the different Chinese companies within fiercely competitive markets will try to use you as a vehicle, not to cheat you in any way. They don’t care about that. What they care about is competing with their other mortal enemies in that industry.
So if you can help them compete with the other people in their industry, that’s what they are interested in. Even on a provincial or city basis, they compete with each other — cities within provinces, within provinces. All of that is much fiercer in China that it is in the U.S. There’s some competition between states, but nothing like there is in China. So the idea is that you want to be a resource in the right way to one of those main competitors so that they see you as a resource. Then you become valuable, maybe even more valuable than you would in the U.S. And in those situations, even if you have a smaller percentage of the deal, structured properly that can be worth a lot more.
How to reach: The Kuhn Foundation, www.closertotruth.com