How Western Companies Fail in China— What Leaders Need to Know

I perceive three major themes in Silicon Valley Bank’s experience that explain why Western companies fail in China. They’re pretty obvious, but since I was caught in the bear trap, I didn’t see them. In short, China succeeds by:

1. Deceit, manipulation, and leverage: These approaches stem directly from both The Art of War, China’s Bible for negotiation, and the nuanced understanding of guanxi. The Art of War recommends deceit and manipulation rather than outright confrontation as a strategy to win any “battle,” whether it be military or economic competition. Guanxi emphasizes the importance of doing business with people whom you know and have leverage with. If that leverage shifts, the balance of power shifts too and the relationship will immediately be rebalanced. You see this dynamic even in marriages— the sense of which partner is more important will shift depending on who earns more or needs more support.
2. Engineering the human soul: In a powerful and insightful essay, John Garnaut traced the influence of Stalin on Mao and then Xi. Stalin’s goal was to engineer the human soul, recreating citizens to be the perfect servants of the state. Stalin failed in this effort because he lacked absolute control of the populace— samizdat literature, underground projects, and fundamental human idealism and altruism were too powerful. But Xi has artificial intelligence at his disposal, along with his social credit system. How long can someone resist if they and their family become homeless, jobless, penniless, and barred from educational opportunities? Until the recent pro- tests against the Zero COVID policy, I had thought Xi was well on his way to achieving his goal, especially given his recent elevation as “President for Life” surrounded by a politburo of yes-men.
3. Through the looking glass: There is a quality of reality distortion in dealing with China. First, the language is impenetrable, adding an inevitable layer of uncertainty in any interchange. Second, the basic cultural assumptions are fundamentally different between the United States and China, even with respect to business. That the duties and day-to-day involvement denoted by the titles “CEO” and “chairman” would be completely inverted is stunning. Both parties to the JV bank were completely delighted with what turned out to be a hellish misunderstanding that was so fundamental that neither of us thought to check that our assumptions were shared. Nor was this the only such entanglement: William misunderstood how company cars should be used; ostensible agreements disappear into thin air; counterparties with whom one has established a good working relationship get reassigned; rules are waived and new ones imposed. Reality is a concept that gets redefined on a daily basis and the ground is forever shifting under one’s feet.

As I reflected, I started wondering whether these three themes were cunningly used to exhaust the Western business leader. After discovering that a point you’d thought had been resolved comes out for renegotiation again, it’s tempting to just give up in hopes of moving on. Don’t. You won’t move on and you will have lost guanxi.

I’ve come to believe that good people can become members of organizations that do not have virtuous goals. A malevolent organization can manipulate good people into doing things that betray their own personal value systems, and if that happens often enough, those same good individuals can slowly become inured to the malevolent nature of what they’re doing in the context of the organization.

How does China transport an organization like the one I represented from the wide end of the funnel to the narrow end and then out the bottom, rendering it almost unrecognizable?

At the organizational level, it depends largely on three mechanisms:

1. A confusing plethora of regulations and laws, applied selectively to achieve certain ends.
2. A license for every activity and no activity without a license.
3. More recently, the mandatory installation of a Party Committee.

As much as I would like to withdraw, disengage, and lick my wounds, I don’t believe that total disengagement is either possible or wise. I am sure that we could learn to live without importing so many of our consumer products from China. But, as we all know at this point, the issue is much more complicated than that glib statement would make it appear.

Like it or not, the world has become much more interdependent than it was when I was born. Supply chains are extremely complex, and all countries, regardless of their political systems, are much more dependent on each other than has ever been true in the history of mankind. And, given the rapid advancements in our technological knowhow in the past 75 years, the ability of almost all countries to interfere in each other’s affairs, coupled with the ever-present temptation to do so, has reached a point of no return.

Finally, many of our largest and most threatening problems, such as environmental degradation and pandemic diseases, are inherently global in nature. They cannot be localized.

Sadly, there is no turning back. Total disengagement is impossible. We have no choice. Engage we must.

In short, the continued existence of a rules- based international order depends on a better relationship with China. Ironically (or, perhaps, not so ironically), this heightened level of dependence appears just as China is appearing to behave ever more truculently. The need for cooperation has never been greater, and China appears to be less willing to cooperate than ever before.

If anything, China appears to be going in the opposite direction. Instead of trying to mend fences, China is burning them down. Put succinctly, China is hinting at divorce and— worse yet— refusing marriage counseling.

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Written by  Ken Wilcox. Excerpted with permission from the publisher, Wiley, from The China Business Conundrum by Ken Wilcox.
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