Anyone who has experienced China will be able to tell you that China is very different to what we expect in the West. The business traditions are equally different and if you want to succeed in business in China, it is vitally important that you understand some of the common business practices. In the West we often have the attitude that negotiating is purely a task orientated endeavour: primarily based upon price and product. How much am I prepared to pay to buy your product, and how much are you prepared to accept in order to sell me your product? Now obviously these discussions surrounding price and product will always play a part in any negotiation, but in China it is not always the primary concern. There are very good reasons why this is the case in China, and also why we in the west should not be inconsiderate of these reasons.....we should remember that China is a civilisation that stretches back thousands of years.
Academic studies and many airline business books on China have long acknowledged the importance of Guanxi or ‘Social Capital’. Guanxi is a confusing term to many business people in the West, but it is important to take time to understand how it works and why it works. Guanxi is essentially the level of status or respect that is accorded to a person based upon their level of social capital or personal connection which they hold within a given group of people. It is related to trust and trustworthiness, but it is much more. In the West we tend to not worry so much about this aspect of the business deal because we use legally binding contracts to ensure the other partner is kept to the agreed bargain (and in some cases even this is not sufficient to ensure ethical behaviour). In China, written contracts are legally binding, but in practice can be a legal nightmare, however, Just because you have legal standing, doesn't mean that your case will be resolved quickly or satisfactorily. Sometimes it is just better to have built up the trust or Guanxi through other means..... In a business setting Guanxi is about managing your professional network and also maintaining a strong and solid reputation within that network. As your reputation and level of trust increases, the more likely you will be invited to participate in new deals, and the faster deals will be resolved.
Guanxi can take years to establish, and is hard won and treasured in China. Think of Guanxi as a bank account that you hold, and the more money you have, the more money the bank will be prepared to lend you. Once you can build your Guanxi bank balance to a high level, your ability to succeed in business in China will be enhanced. Building your Guanxi and social capital is critical. However, unfortunately it is not possible to instantly create Guanxi, which poses a problem if you are new to the business game in China. But the Chinese have a way of navigating around this issue of building Guanxi. It is best to think of Guanxi in terms of a bank deposit, and we all know the adage that you need money to make money.....well we can probably say the same thing for Guanxi: you need Guanxi to make Guanxi. So how do you build Guanxi if you need Guanxi in the first place?
Just as in a normal business setting, you can go to the bank and borrow some money to invest, and eventually make more money. With Guanxi it is the same.....essentially you can borrow someone else's Guanxi in the short and medium term until your own Guanxi has had time to become established. Instead of borrowing from the Guanxi from a bank, you will borrow the Guanxi from the Zhongjian Ren or 'the Intermediary'. There is a strong and traditional importance of the Zhongjian Ren or ‘The Intermediary’ in the Chinese business context, and this is a tried and tested method of transferring Guanxi and social capital from one person to another. In a practical sense using Zhongjian Ren is the principle of guaranteeing the quality of a business partner, and putting one’s own Guanxi up as a guarantee of their good standing. The Zhongjian Ren in many cases will continue to play a part in the deal as a formal partner, until a sufficient level of Guanxi has been established. Why does this work? and why Guanxi be transferrable if it is so important?
The answer to these questions are quite simple. When the Zhongjian Ren or Intermediary provides an introduction of one person or business to another person or business, there is a lot of risk involved. If the new party that is introduced behaves poorly, unethically or fails to respect the relationship then this poor behaviour will reflect upon the Zhongjian Ren. This poor reflection is essentially a negative on your level of Guanxi of the Zhongjian Ren. The person or business acting as the Zhongjian Ren loses social capital, if the offence is serious enough the Zhongjian Ren could lose a substantial amount of social capital which will impact severely on their standing and status within the network. This risk that the Zhongjian Ren holds is the reason why they will often be part of the formal deal. If the Zhongjian Ren is not part of the formal deal, there could be another way they can be compensated for the risk they are taking.
This is why Guanxi is transferrable, and how it works. It is the equivalent of a bank guarantee, but instead related to respect, trust and social capital. So if you need to build your Guanxi in order to get a deal done in China, then look for someone to act as the Zhongjian Ren.....Just remember that your behaviour and the deal you strike will reflect upon on the person who has made the introduction. Respect Guanxi and the Zhongjian Ren and you will be well on your way to business success in China.
Dr Nathan Gray is Managing Partner of AsiaAustralis – a strategic management advisory firm that specialises in markets throughout Asia. Over the past three decades our consultants have assisted companies achieve their market objectives in Asia.