Chapter 13 - Building a better trading relationship and
strengthening ties
We may have made it to the 'front porch to yarn', 'to the
sitting room for serious talking', and to the 'parlour for poker and gin rummy'
but as a country we are yet to go the extra step and actually 'play mah–jong'.[868]
13.1
Trade agreements are a formal, structured and public
way of improving trading relationships. But such arrangements are forged and
operate in an environment that may or may not encourage trade. Trade is not
solely about economics and there are many factors, including cultural
differences and ethical standards, that influence a trading relationship. This
chapter examines some of the less transparent but important factors that shape
a trading relationship. It looks firstly at Australia's
reputation as a trading partner and then specifically at the business culture
and practices in China.
Australia's
reputation as a trading partner
13.2
The Australia China Business Council was of the view
that Australians have a very good reputation in China—it
is 'good to do business with Australians'. Ms Kate
Barnett, from the Council, stated:
...we are well regarded and we do not have baggage that some other
developed nations have when dealing with Chinese businesses and the Chinese
government...It is certainly very well regarded as a destination to travel to...and
for sending kids to for study. That is certainly a very good sign of the future
for those links.[869]
13.3
Some also argued that Australia's
independent identity is a valuable asset.[870]
Hunt and Hunt Lawyers emphasised that one of Australia's
strengths in its trading relations with China
stemmed from its image as 'a friend with its own identity not a messenger
conveying the views of others'. It noted further that Australians 'are prepared
to engage, listen and understand without being judgmental'.[871] Australia
has also established a name as a reliable and dependable trading partner with
the mining sector in particular setting a high standard in this regard (see
paragraph 7.21).
13.4
Australia's
good standing provides a solid platform from which Australian firms can gain
entry to Chinese markets. A trading partnership, however, can be easily damaged
especially if the partners misread or misinterpret the conduct or motives of
their associates. Such misunderstandings are more likely to occur where the
partners come from very different traditions. Mr Reginald Little, a former DFAT
officer, made this point. He warned, that Australian business people are in
'grave danger' if they do not know in detail the social, cultural and economic
background of the Chinese people they are dealing with.[872] The following section considers the
extent to which Australian business people understand China's
culture and whether this assists or hinders them to conduct successful business
relationships with their Chinese counterparts.
Business practices in China
13.5
As a starting point, many witnesses made the point that
Australian business people should have a sound understanding of Chinese culture
and values. It would appear that Australians do not necessarily fully
understand the Chinese way of doing business, and the Chinese do not fully appreciate
the Western way of doing business. Mr Duncan
Calder, KPMG, told the committee:
I think China
is littered with the carcasses of foreign companies that have paid no attention
to the issues of cultural sensitivity, and have tried to sell the Chinese what
they think the Chinese need instead of listening to the Chinese and selling
them what they want.[873]
13.6
Ms Vivienne
Bath noted that Western businesses are generally
focused on making money but in some instances the Chinese enterprise may have a
different agenda. This is particularly so when dealing with state-owned
enterprises that 'may want to do a deal to save jobs, or get a large investment
to pump up their statistics'.[874]
13.7
Clearly, Australian companies need to be able to read
accurately the messages and signals being conveyed to them in their dealings
with Chinese businesses. They also need to know how to respond appropriately
and to their advantage.
13.8
In Chapter 4, the committee examined the legal and
regulatory framework within which people conduct business in China.
It found that since the 1980s China
has introduced a raft of legislation to make the business environment for
foreign companies more attractive. It noted, however, that in some instances practice
was inconsistent with the new laws: that the legacy of the old way of doing
things in China
often prevails over legislated reform.
13.9
The following section looks at some of the special
aspects of the business world in China
and their role in establishing and maintaining successful business links.
Relationships (guanxi) and building
a business in China
13.10
A number of analysts worldwide have commented on the
important function that cultural differences have in influencing trading
relationships with China.[875] The Chinese, like business people
elsewhere, have their unique way of conducting business. Many China
experts refer to a business culture in China
that is 'based on strong family networks or cultural ties secured in guanxi
[interpersonal] connections that are underpinned by strong Confucian ethics'.[876]
13.11
Mr John
Thornton, Director of Global Leadership at Qinghua
University in Beijing,
noted that relationship building in China
is 'absolutely central to success.' In his experience:
...99 percent of westerners don't spend the time necessary to
build these relationships. Senior people in corporations often tend to go to China
once or twice a year, but that's just not enough. You've got to get inside,
which means you've got to spend enough time there, building genuine, honest,
candid relationships with those with whom you'll have to work, as well as with
those who will work for you. Too many western companies are skipping that step,
or they're doing it very badly.[877]
13.12
Mr Jonathan
Woetzel, Director in McKinsey's Shanghai
Office, supported this view by underlining the need to build relationships with
the people who count and have influence.[878]
The International Finance Corporation drew similar conclusions about the importance
of appreciating China's
business culture which is 'largely relationship driven and built on a desire to
avoid conflict'. In its view, 'trying to impose formal structures on an organization
that has traditionally done business in a certain way can lead to insurmountable
culture clash'.[879]
13.13
A number of witnesses appearing before the committee
expanded on this notion of relationship building. Hunt and Hunt Lawyers was of
the view that currently the public and private sectors in Australia 'have a
much greater understanding of what is really meant by the Chinese word 'Guanxi'
which is at the heart of the Asian way of doing business'. It noted:
Relationships and networks are of much greater significance in China
and indeed Asia generally than black letter law or legal
agreements.
Australians have done well in coming to grips with this concept,
indeed we would venture to suggest that Australia
has done better than many other western countries and this explains the
successes achieved and is the key to realising future opportunities. [880]
13.14
Even so, numerous witnesses pointed to the dangers that
can arise from cultural misunderstandings that may damage a business, in
particular the failure to appreciate the significance given to relationships.
13.15
Mr Calder
agreed fully with the viewpoint that relationships are of fundamental
importance not only in China
but in any market. He drew attention, however, to the particular circumstances
in China where the
significance of relationships can override legal agreements. He stated:
You need to have relationships. Relationships can be more
important because of the different importance of legal agreements. I often hear
the phrase: ‘A contract is merely the start of the negotiations.’ When you have
that sort of arrangement in place, I think it is important that you do not take
the approach sometimes taken by Western companies: ‘I have a contract and
therefore, if it is in your interest or not, I am going to hold you to it.’ I
think there is more of an expectation of working to mutual advantage in Chinese
culture. That requires a strong relationship focus throughout the term of that
relationship, and not just falling back on documentation.[881]
13.16
This observation is pertinent in light of problems arising,
as identified in chapter 4, where Australian business people differ in their
understanding of a contract from that of their Chinese business affiliates. Evidence
suggests that a Western reliance on a black letter law interpretation of a
contract may well clash with a broader Chinese construction placed on the arrangement,
particularly the nature of the relationship. The Australian party is likely to
be concerned with the detail of the goods and services to be transacted,
payment, shipment, documentary requirements and procedures in the case of any claim
or dispute. On the other hand, the Chinese party may be more focused on
personal relations and prefer to use the contract as a guide that allows
flexibility for negotiation and for any potential claim.[882] Indeed, the Australia China Business
Council submitted that 'generally, though not always, contractual disputes are
issues of culture rather than bona fides'. It stated:
The historical absence of an independent judicial process in China
allowing parties to enforce written contracts means that Chinese companies place
far more reliance on building relationships than they do on the written word.
Contracts are often seen as evidence of the parties' intentions at the time, a
milestone in an evolving relationship, and therefore subject to renegotiation
at any time.[883]
13.17
Mr Barry White, International Fibre Centre Ltd, made a
similar observation. He told an audience:
It is also worth mentioning that we continue to see cases where
Australians have visited China
and returned with a Letter of Intent or Memorandum of Understanding which are
often misinterpreted as some form of contractual obligation. In reality such
documents mean little more than 'let's speak some more about this matter!'[884]
13.18
Clearly, Australian businesses must be aware of the
importance of relationships in China
and how they influence the understanding and application of law.
13.19
More generally, a survey carried out using a sample of
22 Australian expatriates drawn from a multi-industry background and working
in China
suggested that while interpersonal relationships are important, the matter of
face [mianzi] was a cultural aspect that stood out as distinct from other
cultures. Their message was that face was a serious cultural issue. They found:
In respect to the issue of face, the expatriates interviewed
replied that this was one area in which they generally believed that this
particular cultural characteristic was markedly different from anything
practiced elsewhere in the world. They cited the need to give face, to save
face, and above all to avoid causing loss of face. They highlighted the fact
that in causing loss of face to another then they automatically lost face
themselves, and thus they viewed the saving and maintaining of face of others
as essential to their own ongoing success in China.
[885]
13.20
Trust [xinyong] and reciprocity or favours [renqing]
were also important considerations. The researchers stated that China
has its own culturally-specific version of business relationships and suggested
that:
...the way in which guanxi is interpreted may need to be modified
to take account of the manner in which guanxi plays out differently in large
organisations rather than smaller organisations. While the influential larger
organisation can steadfastly assert its right to engage in no favours beyond
the simple entertaining required in relationship building and maintaining, the
smaller company may find itself in a position that requires much more in
exchange for maintaining its position.[886]
13.21
They were of the view that organisations could work
towards a more successful experience for their expatriates in China
and reduce the amount of time spent on developing relationships and
understanding the associated concepts of face, trust and reciprocity. Their
research suggested that:
...expatriates employed in large companies already have guanxi by
virtue of the international importance of their organisations. Thus, it is the
smaller companies who do not have such assumed influence who really need to be
devoting more energies to preparing their expatriates for working in China
and the pitfalls they may encounter in trying to find the balance between
acquiescing to China's
business practices while maintaining company policy.[887]
13.22
They concluded:
...the importance of being culturally astute needs to be heeded by
the smaller organisations and private businesses. Those individuals who do
invest time in learning Mandarin and becoming aware of the Chinese cultural–specific
and country–specific practices will definitely see dividends in their business
activities.[888]
13.23
This view is supported by Mr
Macmillan who told the committee:
Australian industry has come a very long way in the
sophistication of its understanding of the Chinese market. There was a time
when that knowledge was concentrated very much in a small number of people. I
think that is no longer the case. Obviously, it is important to continue to
develop those resources as the relationship continues to grow, but the
businesses we deal with have a quite sophisticated picture of what is going on
in China as it
extends to their core business interests. That is how we would see it, I
suppose. But they are big companies, as you can see, and they are very well
resourced.[889]
13.24
Professor Goodman,
however, warned of going into China
with a 'mythologised, rarefied notion of a China
which is cutesy and you do not understand that it is a business world first'.
He was of the view that the notion of 'guanxi' had been mythologised. He
stated:
But business relations in China
are pretty much the same as they are—standard—throughout the world. Those
special relationships become important because it is not a legal environment
like everybody else in the world has. Once that comes in—and it is coming in
rapidly now—guanxi becomes much less important. It has always been like that in
every society you can think of; there is nothing mythical about it. But, if you
read the books about it, you would think it was an inherent part of
Chineseness.[890]
13.25
Even so, he told the committee that given the
competitive nature of doing business in China, Australians are not going to be
competitive with other countries 'unless our businesspeople and our
industrialists have that extra cultural knowledge which allows them to come to
grips with China'.[891]
Assisting Australian companies to
understand the Chinese business world
13.26
Undoubtedly, Australian companies, especially the
smaller to medium sized enterprises and those new to the Chinese market, must
give close consideration to, and make the effort to understand, the Chinese
business culture. A number of agencies or organisations give particular
attention to cultivating in Australian business people an awareness of the
peculiarities of the business world in China.
The Australia China Business Council noted that there is 'a huge wave of SMEs'
going into China.
It provides information:
...so that people are not just intoxicated by the huge market that
is China but
going in with adequate preparation and planning. We aim to inform companies
developing a China
market entry strategy on how to manage the pitfalls and navigate the risks so
as to be successful. A number of our members have been in China
for over a decade, and they share their experiences with the newbies going into
China.[892]
13.27
It detailed a number of initiatives to facilitate the
education of the wider business community particularly with regard to two
aspects:
One, China
has its problems with business integrity and corruption. We are very
transparent about that. So they go into that marketplace aware that they need
to do their own due diligence. It is really about managing their own risks with
regards to their relationships with suppliers and other key stakeholders in
that market. Two, under the application of Australian law as it applies to what
companies are doing overseas, they could land themselves in hot water again if
they are not doing the right thing. We see that Australian companies are keen
to be informed. We are sure that they are demonstrating very high ethical
standards.[893]
13.28
Dr Davis
also informed the committee about the programs the ACCI has in place to help
better educate Australian companies on how to conduct business in China:
We do what you would call business culture training on a
commercial basis. We put on, say, half–day events out in our state chambers...where
we say to business people, ‘This is the culture of doing business in these countries.’
The training covers such things as when and how you bow; the pecking order;
which hand you use; and—especially for ladies travelling abroad—when you do and
do not extend your hand and how long your sleeves should be et cetera. These
sessions are for the whole world, not just China,
and they are very popular.[894]
13.29
Dr Morgan went further. He underlined the importance of having a deep
understanding of China:
of studying not only the language but
the culture so that Australians in their dealings with the Chinese are able to
communicate much more effectively. He suggested that education should start at
university level:
I think the solution is that we need to provide better support
for in-country training during the course of a degree. If there were some
provision for special scholarships or partial support—whether it is competitive
or not—that would certainly be an area to which the government could contribute
in terms of raising capacity. Certainly the universities provide study–abroad scholarships,
but nowhere near enough for the number of students who want to study abroad across
the world—not just in China, Indonesia or India.[895]
13.30
The concept of intellectual property provides an
example of why Australians need to have a deeper appreciation of China's
history and culture in order to avoid pitfalls. As chapter 4 explained, China
has promulgated IP laws to be compliant with international standards. Even so,
these laws sit uneasily with traditional and deeply entrenched concepts that
undermine the application and enforcement of such laws. Mr
Ian Heath,
Director General of IP Australia, stressed the point that the IP regime in China
is relatively immature in contrast to most Western countries whose IP laws have
evolved over centuries. In his view, it would be 'harsh and unrealistic' to
expect China to have in place an intellectual property regime that is equal to
those in developed countries such as Australia.[896] He explained:
The traditional Chinese concept of intellectual creation and
protection differs significantly from what modern intellectual property
protection provides. Knowledge, according to Confucian thoughts, cannot be
owned or controlled. It cannot be used as a tool for profits.[897]
13.31
The two examples cited in this section—contract law and
IP law—highlight how important it is for Australian business people to be aware
of the culture and tradition of China and how Chinese values, customs and
beliefs influence the interpretation and application of the law in China.
Recommendation 15
13.32
The committee recommends that, to ensure there is a
pool of highly skilled China experts in Australia ready to advise government
and business leaders on developments in that country, the Australian government:
- actively
endorse and sponsor 'in country' training of students at the tertiary and post
graduate level where Australian students are supported in undertaking studies
in China;
- work with
private enterprises, particularly large firms with established business links
in China, to provide more scholarships for tertiary students which would
include work experience with companies conducting business in China; and
- encourage
Australian tertiary students, through the use of scholarships and sponsorships,
to undertake the study of a Chinese language and/or Chinese culture in combination
with another discipline such as law, economics, commerce, actuarial studies,
architecture or engineering (also see recommendation 21)
Understanding the market in China
13.33
China
is a dynamic and rapidly expanding market. As discussed in chapter 2, it faces
a number of challenges in maintaining its steady course. These include the
difficulties in managing effectively a growing economy, the potential for
social and political unrest as the country opens up to new ideas and
expectations, the disparity between rural and urban areas and between the rich
and poor, China's
growing appetite for energy and environmental degradation. Any foreign business
contemplating or already trading with China
and hopeful of success in their venture must be fully attuned to developments
in China and
the broader region.
13.34
Mr Little and Mr
Flowers were of the view that Australian
business had been constructive and proactive in many areas in China
and had approached the market with few prejudices or inhibitions. Even so, they
found that Australian business often had 'unrealistic expectations and limited
strategic vision'. They stated:
Australia's
success in developing policies which ensure its security, prosperity and
viability seems likely to be largely determined by its capacity to recognize,
understand and adjust to the strength of China's
traditional culture, which remains today unfamiliar, distrusted and threatening
to a large number of Australians.[898]
13.35
Evidence suggests that even those with a sound
understanding of the Chinese business world should be cognisant of the changes
taking place in a rapidly transforming economy. In their discussions on the
importance of understanding China's
culture, Mr Little and Mr Flowers
touched on other key aspects of China's
business world that Australian business should know about. They were convinced
that Australia
needs to appreciate the growing dominance of East Asia
and to understand the cultural underpinnings of this new force. Otherwise, they
argued, few Australians would be:
-
equipped to evaluate accurately developments and
strategies in East Asia;
-
equipped to win respect for their behaviour; and
-
equipped to negotiate in ways likely to deliver
long term benefits in the region.
13.36
In their view, most Australians, and even corporate
interests, due to ignorance would insist on policies and priorities that would
be self–defeating.[899] They argued
that, apart from the institutional constraints, other impediments to trade
would arise from:
-
inadequate information flows;
-
language obstacles;
-
cultural misunderstandings;
-
contrasting value systems;
-
basic incomprehension in products such as food
and medicine; and
-
generally inadequate reliable media interaction.[900]
13.37
This section looks at the information available to
Australian businesses on the Chinese marketplace.
13.38
Professor Goodman
underlined the need to understand the complexity and diversity of the Chinese
market. He argued that if Australia
is going to develop a cultural edge to go alongside its business and
entrepreneurial actives, Australia
must have:
...research being produced in this country which not only
understands that China is not a single culture but delves into it and tells us
things we need to know—that you need to know as government officials and that
businesspeople need to know—about the different Chinas.[901]
13.39
Dr Stephen
Morgan agreed. He added
that Australia needs
to 'know more about what Australian companies do in China'.[902] He noted that it is important for
managing change and managing the development of public policy to facilitate
Australian firms' engagement.[903]
13.40
Mr Charles
Woodard saw a key role for government in
disseminating information on China.
He stressed the importance of having a well directed and coordinated approach
to China:
Because this is a new era, I hope that orderly and daily
exchange of information between people, largely initiated by DFAT, on both the
economic side and the political side, would be taking place. I would like to
feel that every government department in Canberra that has an interest in
China—and a few do not—receives a daily feed of information that they should
know of or at least have at the back of their minds. I do not know about state
governments, except that I was at a meeting recently where the Victorian
representative announced that the Victorian government had a whole-of-government
approach to China.
I hope that all states have something similar. I hope, therefore, that the
processes of consultation between federal and state governments in regard to
China would be greatly facilitated by them all having not only the same technique
but the same philosophy, because it is the will as much as the means which makes
it work.
In 1986, I left government service and made an overt
across-the-board submission to cabinet on our relations with China.
It was my hope at that time that that would be an annual operation. I think China
is of enough importance to us for the government to receive an annual
submission on it so that it can see the state of the relationship across the
board and be able to foresee problems. If a problem is coming up in one area,
such as human rights, what do you do about it? Do you strengthen another link
in the chain at that time to offset the problem you see coming up? I think that
is an obvious and a wise approach for Australia
to have.
The Chinese always say that they prefer the broadest possible
relationship. Of course, in this regard they think of not only governmental
relations but also people-to-people relations and so on. They foresee that
there will be problems and they want to be able to take up the slack when those
problems arise. So the challenge for us, as we felt it first for Japan and then
for China, is to meet the capacity of other major governments to have a
whole-of-government approach and to seek the best possible professional conduct
in our own relations with those countries.[904]
13.41
Mr Little and Mr
Flowers took a similar approach. They
suggested that most Australian business could be assisted greatly by more
proactive government programs designed to assist small and medium scale
operations by facilitating:
-
strategic partnerships among Australian
entities;
-
strategic partnerships with Chinese entities;
-
regular published information offering strategic
insight, cultural know-how and mentoring guidance;
-
language skills support, possibly with
Australians encouraged to make an effort in Chinese language comparable to the
Chinese effort in English over the past 25 years; a transformation of business
culture inspired by Chinese models.[905]
Committee
view
13.42
It is clear that Australian business people and
Australian decision makers must have more than a superficial understanding of
how the Chinese conduct business. They must be sensitive to cultural
differences and be able to convey their ideas and opinions without
misunderstanding or misinterpretation. Furthermore, Australian businesses must be
well equipped to read and predict trends in China.
13.43
The committee recognises that government agencies and
private organisations have taken on board the importance of having
well-informed Australian business people operating in China.
It believes that the government in particular should devote more resources to
ensuring that Australia
has a pool of Australians, proficient in the Chinese language and with a sound
appreciation of the Chinese culture ready to advise business and governments on
business practices in China.
This viewpoint is reinforced in chapter 15. Furthermore, Australia
should have skilled analysts monitoring developments in China,
predicting trends in the market and forewarning of problems. Such a body of
experts would be an invaluable asset for Australian businesses and Australian
leaders. It sees a necessary role for the Australian government to provide the
business community and state and local governments with accurate and up-to-date
information on developments in the Chinese market and likely trends.
13.44
The committee also believes that the federal government
should have an active role in assisting Australian businesses to form strategic
partnerships with Chinese counterparts. Finally, the committee notes the advice
tendered by Mr Woodward
especially on the need for state and the federal governments to have a well
directed and coordinated approach to China
and for them to share the same philosophy. The committee believes that the
Australian government has the responsibility to ensure that there is a
whole-of-government approach to China
and that the states and the federal governments together with their respective
agencies are working co-operatively as partners in pursuing their particular
interests in China.
13.45
These findings align with the committee's view with
regard to the government's role in assisting the manufacturing sector. They
further reinforce the importance of ensuring that there is a
whole-of-government approach to China
where the Australian government assumes a central role in promoting Australian
business in China,
in disseminating market intelligence and facilitating joint ventures.
Recommendation 16 (see also recommendation 3)
13.46
The committee recognises a need for Australian
business, especially small and medium-sized enterprises (SMEs), to be part of
an effective communication network so they can benefit from the experiences of
others conducting business in China, especially those with established business
associations in China. It recommends that the Australian government improve the
dissemination of market intelligence about China
in Australia by:
- providing
a forum whereby Australian businesses can meet and discuss their experiences in
conducting business with the Chinese;
- establishing
a more effective communication network in Australia that will alert Australian
companies intending to conduct business in China, or already doing so, to the
deficiencies in China's legal framework;
- increasing
the focus on facilitating the formation of strategic partnerships between Australian
and Chinese companies; and
- reviewing
the concerns about the poor quality of data available on Australia's trade in
services with a view to identifying ways to improve the current system of
gathering statistics.
Recommendation 17
13.47
The committee recommends that the Australian government
adopt a whole-of-government approach whereby all departments that have an
interest or involvement in matters dealing with China
have China
experts on staff who form part of an Australian-wide departmental and agency
network.
13.48
This chapter underlined the importance of giving close
attention to the various factors that support a trading relationship, in
particular, the need to understand cultural differences and to take account of
them when conducting business in China.
An awareness of cultural differences and respect for these differences does not
mean that a business or trading relationship will not experience discord
arising out of these very differences. Indeed, there is the likelihood that
such differences will create friction in the relationship especially within the
broader political framework. The following chapter examines the potential for disagreements
to develop between China
and Australia at
the political level that, although not directly concerned with trade, impinge
on the trading relationship.
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