How And Why Western Companies Fail In China

I perceive three major themes in Silicon Valley Bank’s experience that explain why Western companies fail in China. Looking back, 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 protests 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 feel that we were enticed into the wide end of a funnel like pigs in a slaughterhouse and then guided, greased up, and shoved slowly down that funnel into the narrow end, the outcome of which was both predetermined and predictable.

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: The ends are determined by the Party leadership, and the selection and application of the laws and regulations are left to the secret team. The secret team is motivated by the desire for promotion, money and power, coupled with a fear of ostracism and/or reprisal. In other words, be they tigers or flies (well-known or insignificant), none wants to become the victim of an anti-corruption campaign.

2. A license for every activity and no activity without a license: The secret team, acting in accordance with the goals set for it by the Party leadership, will choose to either grant or deny licenses in a way that helps to ensure a result consistent with the leadership’s intention. Thus, we were denied a license for the most critical element of our business model—lending to VC firms—because having to rent it from SPDB allowed them to control us.

3. More recently, the mandatory installation of a Party Committee: Since Xi came to power, every foreign and “private” company is required to have a Party Committee. To the extent that the secret team falls short or needs assistance, the Party Committee can provide a “belt and suspenders”-style backstop by issuing “recommendations” that the Chinese portion of the board insists on implementing.

As an aside, in discussion with a friend who’s a partner in one of the Big Four U.S. accounting firms, I learned that since Xi has been in power, Party Committees have begun to have influence in the United States, not just in China. At this particular accounting firm (and I assume at the other big three as well), the Party Committee has stipulated the following: if an American partner is meeting with an American client to discuss the possibility of doing business in China, even if the meeting takes place on American soil, a member of the CCP must be in the room to help portray a positive view of China. This was shared with me on condition of anonymity.

How to protect yourself in bullets (none of which are silver):

• Don’t assume that things in China are as they are in the U.S. For example, our definition of a “private” company is not the same as theirs. Language sometimes clarifies; and sometimes obfuscates.

• Don’t assume that your conversation partner always says what he means or means what he says.

• Do assume that if your business entails something that the CCP deems important, they will seek to control it, through myriad “laws” and “regulations.”

• Don’t assume that things are as they appear.

• Beware of phrases like “you are/seem like an old friend.”  You aren’t.

Excerpted with permission from the publisher, Wiley, from The China Business Conundrum: Ensure That “Win-Win” Doesn’t Mean Western Companies Lose Twice by Ken Wilcox. Copyright © 2024 by Ken Wilcox. All rights reserved. This book is available wherever books and eBooks are sold.