U.S./China Differences and Their Impacts on Business Behaviors
By Guanming Fang, Partner, Womble Carlyle Sandridge & Rice, PLLC
Business and commercial exchanges between China and the United States have been increasing by leaps and bounds in the last two or three decades, and there is no sight of these exchanges slowing down. The Wall Street Journal has at least several articles daily that concern China in some way. According to the U.S. Census Bureau’s Foreign Trade Statistics, China is now the second largest trading partner of the U.S., after Canada. [i] Yet, if one looks at these business and commercial exchanges closely, one will notice that this increasingly tightened relationship has not been easy. There are many more failures and struggles in these cross-border business interactions than successes. Although this is probably true in the business world as a whole, the vast differences between the U.S. and China certainly play a major role in these struggles and failures. Understanding and adapting to these differences, while not a guarantee of one’s success, can make the venture a little easier and more likely to be successful.
Until about five years ago, most of the U.S./China cross-border transactions involved U.S. direct investment in China, sourcing from China, and outsourcing manufacturing to China. Other than Haier Group, which established a manufacturing facility in South Carolina in 1999, there was practically no noticeable investment activity from China into the U.S. Even Haier was not a recognizable name to most Americans. That changed in 2005 when Lenovo, a Beijing-based personal computer maker, made its historical acquisition of IBM’s personal computers division. In 2006, the State of Georgia saw its first direct investment from a Chinese manufacturer. Ningbo Lehui Food Machinery Co. Ltd., a Chinese company headquartered in Ningbo, Zhejiang Province, formed a joint venture with New Jersey-based W.Y. Industries, Inc. in Newnan, Georgia, to manufacture soy sauce and other condiments. In 2007, two more Chinese companies call Georgia home – Wenzhou, Zhejiang Province-based General Protecht Group announced it would build an assembly and distribution facility for electrical products in Barnesville, Georgia, and Changsha, Hunan Province-based Sany Heavy Industry Co., Ltd. announced it would build an assembly plant for construction machinery and its North American headquarters in Peachtree City, Georgia. With this new wave of cross-border transactions coming from China to the U.S., the differences between these two countries now affect not just those who choose to do business in China. They affect a much larger group of people, including U.S. government officials, companies that do business or are looking to do business with the investing Chinese companies, the communities in which the Chinese employees and executives live, the people employed by the Chinese companies, the people who are neighbors to the Chinese, and many more. These differences also impact the investing Chinese companies and the people they bring from China.
It is obvious that the U.S. and China are different. But what are the differences? What are some of the causes of these differences, other than the fact that these two countries are located on opposite sides of the globe? And how do they affect a company or a person’s business behaviors? This article attempts to explore answers to these questions, with the belief that understanding the differences would make it easier to adapt to them and will result in more successful business relationships.
While China, under communist ruling, has always had a judicial/prosecutorial system that deals with criminal matters, China’s civil legal system has a history of less than 30 years. Modern China did not have any law program in universities until the late 1970s. China did not have any trained lawyers until the early 1980s when this first class of law students graduated. [ii] Judges with formal legal training came even later. Without the protection of a functional legal system, traditionally, Chinese people relied on relationships, trust and gut instincts to protect their personal interests. In connection with China’s accession to the World Trade Organization, China started a major reform of its legal system in the 1990s. According to the All China Lawyers Association, a self-disciplined professional association of all Chinese lawyers, China has about 110,000 lawyers today. [iii] Although this number is insignificant compared to the number of lawyers in the U.S., particularly given the population disparity, this is a significant jump from the 5,500 lawyers that China had in 1998. [iv] Also, according to an article recently published on BusinessWeek online[v], in the five years between 2001 and 2004, China promulgated more than 94,000 laws and regulations, almost tripling the new laws and regulations promulgated in the previous five years.
Despite these significant improvements, compared to the U.S. legal system, the legal system in China is still at its toddler stage. Many laws have not had an opportunity to be applied, interpreted and enforced. Many of them lack meaningful mechanism for implementation and enforcement. Many of them conflict with each other. Compared to the size of the population and the economic growth of the country, the number of lawyers is severely inadequate, making it unlikely that the law will mature at an accelerated rate. Moreover, China’s judicial systems have not caught up with the demands of the country’s rapid economic development or the development of the written laws. There are still many judges who do not have formal legal training. Relying on the legal system to protect one’s personal and business rights is still a new concept to many in China. As a result, handshakes, trust and gut feelings continue to play a major role in forming business relationships.
Perception of what a legal contract creates is different for the Chinese than for the Americans. For the Chinese, a contract creates a platform upon which a relationship will be built, rather than setting the boundaries of the relationship. U.S. companies and governments often get requests from their Chinese counterparts to enter into memoranda of understanding, which are usually non-binding. While the Chinese attach great significance to these memoranda of understanding, viewing them as an announcement of a formal relationship, their U.S. counterparts usually view them as goodwill, ceremonial documents. There have been many complaints that Chinese companies do not respect binding contracts. There is no doubt that dishonesty and unethical business behaviors are part of the blame for the problem, but another part of the cause is a different understanding of the role a contract plays.
Cultural differences often reflect on business behaviors. China has a history of over five thousand years. Many modern day ideas of morale and virtues have their roots going back thousands of years. Schools of philosophy originating in ancient times continue to have their influence today. For example, Confucianism, which was developed by Confucius between 500 BC and 400 BC, teaches that people live their lives within parameters firmly established by heaven, a purposeful supreme being, and its fixed cycles and patterns. In other words, every person has his “proper position” in this world and this society. Confucianism emphasizes personal and governmental morality, correctness of social relationships, justice and sincerity. This philosophy explains, at least partially, why there is usually a strong sense of hierarchy within a Chinese entity or organization. Authorities are clearly delineated internally, and proper respect appropriate for each position is expected.
Here is an example of how this culture affects the business behavior of a Chinese company. Recently, a Chinese company had an opportunity to be showcased in some photographs that were to appear on a conference brochure. The conference would be attended by hundreds of prominent business, political and community leaders from the community where the Chinese company had recently moved. This brochure would have been a great opportunity for the company to gain significant publicity and recognition among an influential group of people. However, the company turned down the opportunity. The reason is simple, and perhaps incomprehensible to Americans - the president of the company was unavailable during the time of the photo shoot, and the vice president did not think it would be appropriate for him, instead of the president, to appear on the photos representing the company.
In most Chinese privately owned companies, ownership of the company is usually highly concentrated on one person or a handful of people. These super majority owners have total decision making power. But they are not always involved in transaction negotiations, which are usually handled by their delegates, lower level officers. As a result, decisions may be made with incomplete or mis-interpreted information. As more information is obtained, these decisions may be modified. For the U.S. parties involved in the negotiation, because they do not directly interact with the decision makers of the Chinese company, their Chinese counterparts may appear indecisive and unreliable – they do not know whether an issue discussed and thought be to agreed on at the negotiation table will later be changed.
From a Chinese company’s perspective, entering the U.S. market involves more than hiring a team of competent employees, building up a sales network, and establishing sales channels. It also means adjusting to a different culture. Executive officers who are used to being addressed properly by their titles now hear themselves called by their first names by their American business partners and customers, and even employees. They will no longer have a personal driver, which is a standard perk for many executives in China. Companies who are used to enjoying dominant positions back home will often find that they are now just one of many companies like them in the U.S. And more importantly, they will be learning a new way of building relationships with less wining and dining and more exchanging of information; the workings of a different political and legal system; and how to use the U.S. legal system to protect their rights.
Because of decades of isolation between China and the United States, there are many misconceptions about Chinese cultures. A common misconception is the role of women in the business world. U.S. companies often wonder whether it is appropriate to send their female executives to the negotiation table and whether hiring qualified Chinese women for management positions would hurt their chances of success in China.
According to the Confucius teaching, a girl should defer to her father, a wife to her husband, and a widow to her son. On the other hand, Confucianism also teaches filial piety toward one’s parents, including the mother. As a result of these seemingly contradicting teachings, in ancient China, women had little, if any, decision making power, even though they were highly respected and even worshipped by their children, and their desires were usually followed by their sons. Women’s roles in society have evolved significantly since Confucius’ days. When the Communist Party took over China in 1949, Mao Zedong, the party’s chairman, proclaimed that “women hold up half the sky.” Women’s equal rights are protected by the Chinese constitution. Women stopped taking their husbands’ name when Dr. Sun Yet-sen overturned the Qing Dynasty in 1911, long before the Communist takeover. Women started working outside their homes in large numbers in the 1920s. Today, women work in most, if not all, professions and occupations in China. Many high ranking political leaders and well-known successful entrepreneurs are women. However, Chinese women face the same glass ceiling that U.S. women face. The number of women in top leadership positions is extremely low given the size of the population. Habits from thousands of years ago die hard. There is still an unspoken, and sometime unintended, belief that at a certain level, women are inferior and less intelligent, and that being naďve is a virtue for women.
However, this does not mean that Chinese business men would not respect a female counterpart. Because of this unspoken belief that women are inferior, Chinese men usually do not expect much of women, perhaps unknowingly. However, when a woman succeeds in what she does, she gains greater respect from men, as compared to other men in her position. For example, while it is unnoticeable if a man is a lawyer, a woman lawyer would be considered outstanding and would earn added respect from men. One may call this a disguised form of discrimination. This would be a subject for discussion in another forum. In a context of business dealings, one who understands this perception can use it to one’s advantage.
There is no question that China will continue to be a major player in the world economy. China has a population of over 1.3 billion. Although its gross domestic product (GDP) has been enjoying continuous fast growth that no other country has ever experienced, its per capita GDP is far below that of the U.S. and many developed countries. [vi] China possesses such market potential that few other countries can compete. On the other hand, the U.S. is undeniably a superpower in terms of economy, technology, financial sophistication, and many other aspects. The U.S. needs the consumer market that China has the potential to offer, and China needs the capital, technology and other intangibles that the U.S. has to offer. Despite the many difficulties that people have encountered, business interactions between China and the U.S. will continue. To a certain extent, they depend on each other to continue their economic growth (or survival). Business people on both sides of the ocean will have no choice but to try to adapt to the differences of the other country if they want to stay competitive and be part of this inevitable bilateral cooperation.
Part of the adaptation will occur naturally over time as business exchanges across the ocean increase. But those who are proactive in this process will have competitive advantage over the others. Adaptation starts with understanding.
Law programs are undergraduate programs in China.
“China’s Legal System: A Bum Rap?” by Randall Peerenboom
“Debunking Myths about China’s Legal System” by Steven Dickinson
The World Factbook of the Central Intelligence Agency indicates that China’s per capita GDP for 2006 was estimated to be around $7,800, while the U.S. per capita GDP for 2006 was estimated to be $43,800.
Guanming Fang, a Member at the law firm of Womble, Carlyle, Sandridge & Rice, PLLC in the Atlanta, Georgia office, is an experienced business attorney who advises companies of all sizes in their mergers and acquisitions, strategic alliances, private equity transactions, technology licensing and other transactions. She has represented clients across a broad range of industries, including manufacturing, distribution, business service, life science, and information technology, and routinely counsels U.S. and international companies on issues relating to their company structure, equity holder relationships, and U.S. operations. One unique resource that Guanming brings to the service of her clients is her bi-cultural and bi-lingual background. Guanming was born and raised in China and is fluent in Chinese Mandarin and Cantonese, in addition to English. Her innate understanding of the Chinese culture enables her to explain complex U.S. legal principles and business issues in a language and manner that is easy for her Chinese clients to understand. She also uses this unique background to help U.S. companies navigate the intricate political, legal, economic and relationship web in China. Guanming is a frequent speaker on China’s contract law and company law.
Guanming actively works with organizations that help U.S. companies do business in China and Chinese businesses enter the U.S. market. In 2004, Guanming co-founded the Georgia-China Alliance, Inc., a non-profit organization devoted to promoting business exchanges between the United States and China.
Guanming was named to "Georgia Rising Stars" by Atlanta magazine in 2005, "Who’s Who in Law & Accounting" by the Atlanta Business Chronicle in 2005, and “Who’s Who in Asian American Communities” by the WWAAC Committee in 2007.
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