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Survival rules in the Party State

PUBLISHED : Saturday, 03 March, 2012, 12:00am
UPDATED : Saturday, 03 March, 2012, 12:00am

Whether you are entering the Chinese market or have been there for a long time, there can be no let-up in the attention you pay to the government. Government relations will always be significant, must be cultivated continuously and can never be taken for granted.

A good starting point is to remember how ubiquitous the government is in China's markets. The party-state is crucial to just about everything that a business needs to obtain or know about: land, energy, accounting standards, tax regimes, implementation of regulations or bank loans.

It is also the key integrator of China and its market, and is the sole conduit for hearing political demands and settling political differences. It is only a slight exaggeration to say that the five different levels of the party-state control just about everything from the top to the grass roots, and across the huge expanse of China's business system.

The party-state can make or break your business. But with authorities at different levels doing apparently contradictory things, detailed knowledge about the internal bargaining and policy trade-offs that go on is essential, and that knowledge can only be obtained by keeping close to the people that matter.

Rule No 1 for doing business in China is to learn about how the party-state operates in theory and in practice. For instance, given the country's size, local governments are permitted to interpret and implement national laws to suit their own situations.

So corporate operations across China will find typically that conditions at each site will be different, with variations in the many permits, certifications and other bureaucratic instruments necessary to start and maintain operations.

This de facto devolution of power has important implications for how far corporations seek to integrate their activities. It creates huge diversity in the supply chain, and varied distribution costs in transporting goods across provincial borders. The entry of China to the World Trade Organisation was in part intended to reduce these internal barriers, but we would do well to remember what China's WTO negotiator, Long Yongtu, told senior officials at the party school in Beijing in 2001: that the 15 years it took to negotiate China's entry was but 'a blink of the eye in the 5,000-year history of China'.

So Rule No 2 is that you will need to have good relationships with all the officials who could affect your business; you'll need to start building these relationships, national and local, well in advance of establishing your operations. But it is only at the local level that you will be able to refine your calculations sufficiently to determine whether or not your China venture is a viable proposition.

Getting to know the right officials can be a challenge in itself. Business people with long experience in China as often as not continue to rely on a Chinese agent or partner to help avoid the mistakes or pitfalls that are par for the course.

You might still find that doors open if you are a large, well-known company making a big investment. But the rule of thumb must be that as China becomes more like other markets around the world, you are only going to awaken interest if you deliver something that officials are looking for.

That means Rule No 3: knowing your market, and knowing what officials want. For example, one way to get to talk to most local governments is to visit their investment departments to find out what types of foreign investment they are looking for. If you know that, you can go straight to whoever is in charge of those particular projects.

Of course, once you are in the right office, you'll have to be able to distinguish between the people in it. There may be older officials with more rank but less knowledge, and younger officials with less rank but more knowledge. The younger officials may want to speak good English, and thereby make you party to excluding their seniors from the conversation. The rule of thumb here is to know why you are there, to be polite under all circumstances, and listen in preference to talking. As the saying goes, we have two ears and one mouth.

Business relationships in China are built through the exchange of favours and over dinner and other social events, not just in the board room and on the pages of a contract. There is no way round this.

Officials have the power to stop or start a business with no advanced warning, and any company thought to be not playing the game can find itself beset by inspections (there are at least 60 government agencies, who are permitted by law to visit a business at any time) or smothered in red tape.

This is Rule No4: be careful never to step over the line separating normal business relations and corruption. The party-state takes corruption very seriously, and clamps down heavily on whoever has transgressed. If you hail from the US or the European Union, there will also be home country rules that apply to your corporation, and home country expectations about how national companies behave abroad.

The bottom line states that keeping track of who holds political power relevant to your corporate needs is an on-going demand of doing business in China. It is a central plan of your strategy there. Indeed, without a carefully considered government relations programme, you won't have a China strategy.

For this, you need to adopt a multi-pronged approach, through direct relationships with authorities, using Chinese and foreign lobbying and PR firms, and by participating in business associations and other industry activities.

How you develop this element of your strategy will depend on your particular industry sector, the characteristics of its market, your company size, and the personal skills of your managers. You have to get the details right, and remember, there are plenty of them.

Jonathan Story is emeritus professor at INSEAD business school, which has campuses in France, Singapore and Abu Dhabi

1m yuan

The recommended minimum registered capital required for setting up a wholly owned foreign enterprise (WOFE) in the mainland

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