One Billion Customers

While the author certainly aims to give a broad Western view of what life's like for outsiders doing business in China, his observations and experiences may even be different from those of other Western cultures.

Bearing in mind his specific national perspective, McGregor is extremely well-qualified to guide us through China's blind alleys and gold-paved oads. He's a fluent Mandarin speaker who worked for ten years as China bureau chief for the Wall Street Journal. And he doesn't just write about doing business in China, he also does it. After his stint as a journalist, he worked as chief executive of China operations at a major media company, and is now a top-level consultant to the Chinese government. In short, the author has viewed Asia's largest, fiercest tiger through a variety of lenses, and he describes what he has seen with great skill.

Having said that, readers should not look to this vividly written book for a coherent strategy for succeeding in China. As the subtitle states, this is a book of "lessons" – it uses case studies and conversations with highly placed Western business sources to give us an idea of what it's like to do business in the world's newest major market economy. But One Billion Customers doesn't exactly follow a logical progression. Instead, it reads like a series of magazine articles delivering a frank, sometimes humorous view of business life in China.

If the book does have a central thesis, it's that China is at once "a turnaround and a startup." It's a turnaround story because, according to the author, decades of Communist rule, after centuries of Imperial decline, had turned the world's most populous nation into a vast economic backwater.

Since the late 1970s, the country's leaders have been trying to turn the economy around, introducing broad pro-market reform even as they keep a tight grip on political power. And it's a startup because, like many newly hatched tech companies in recent years, China's industrial resurgence has been driven by exuberance and a broad-based itch to get rich.

The author raises the "turnaround and startup" idea in the first chapter, and then doesn't address it explicitly in the rest of the book. Nevertheless, many chapters are consistent with that theme.

And while the book may lack a strong narrative line linking the chapters, it takes great pains to be reader-friendly. Every chapter contains a section called "What This Means for You," in which the author spells out the takehome message of his anecdotes. And the chapters end with a box called "the Little Red Book of Business," full of pithy, one-sentence tips on how to avoid the pitfalls and enjoy the advantages of doing business in China.

The book's opening chapter, titled "The Grand Bargain," attempts to put Chinese business culture in an historical perspective. The author maintains that even among well-educated Chinese business elites, there is an ingrained tendency to view Westerners with suspicion, as outsiders who have come to plunder the country's resources and labor markets. He writes that Chinese school children learn that their nation was the world's most advanced until the eighteenth century, when ill-intentioned foreigners arrived to poison the people with opium and steal the country's resources.

The author acknowledges that many historical grievances held by the Chinese are grounded in fact. For example, it's hard to justify British trade policy in the nineteenth century. At that time, China was supplying England with tea, but refusing to buy English products in return. In essence, it demanded silver for tea. Not to be stymied by this drain on its silver reserves, the British Empire aggressively pushed opium grown in England's colonies into China, infuriating its leaders and turning many of its people into addicts. he situation gave rise to what would become known as the Opium Wars, which ended badly for the Chinese. Britain and other great European powers managed to gain control of key Chinese ports such as Hong Kong in the ensuing treaties, leaving the Chinese with a bitter historical memory. More recently, Japan invaded China and controlled much of it during World War Two, adding to the Chinese view of outsiders as untrustworthy thieves. Westerners tend to think of these events as ancient history that have little bearing on today, but the author warns against this mindset. China's sense of historical grievance looms large in the way its business leaders negotiate. They tend to behave as if they're owed something. According to the author, Chinese negotiators openly take the view that they're poor and you, the Western businessman, is rich – and their poverty is your fault. Westerners new to doing business in the country find themselves accepting this view – and ceding far too much in negotiations, in the author's view. These attitudes are changing, especially in the private sector, but they remain stubbornly strong among government bureaucrats, who still hold significant power over economic life.

The next chapter, "Same Bed, Different Dreams," illustrates the clash of business cultures between East and West, with an inside look at a joint venture between the American investment bank Morgan Stanley and astate-owned Chinese bank. The year was 1995, just when the Chinese economy was really starting to roar.

Morgan Stanley's venture was potentially very lucrative. At the time, no foreign investment bank operated independently in China and all investment deals were made under the watchful eye of the government. The new project, the China International Capital Corporation, would thus be the primary financer for China's emerging industrial transformation. Potential fees were enormous.

But the project didn't proceed as Morgan Stanley had planned. Even though Morgan Stanley won the right to appoint the new bank's CEO, it quickly became clear that the real power belonged to the Chinese nationals involved in the project. And they behaved quite independently of Morgan Stanley's interests, partnering with other Western investment banks on high-profile deals. Humbled, Morgan Stanley eventually ended its active participation in the China International Capital Corporation, simply retaining a role as silent partner in the project.

According to the author, the lesson here is that partnerships with Chinese government entities must be approached with caution. Too often, the government isn't seeking a genuine partnership, but rather, access to foreign capital, technology, and know-how – while retaining Chinese control.

Moving on, the next chapter is called "Eating the Emperor's Grain." This chapter teases out a theme the author emphasizes throughout the book: Chinese businessmen are often dishonest. "The sad fact is that the Chinese system today is almost incompatible with honesty," the author writes.

The reason, he argues, is that political and economic power in China has tended for thousands of years to be concentrated – whether in the hands of the Emperor or those of Communist Party chiefs. To gain a measure of power and wealth, people have learned to play fast and loose with the rules, because the rules are rigged to favor the powerful. "Eating the Emperor's grain" is an old Chinese phrase for quietly stealing what one cannot legally obtain.

As a result, since China introduced free-market reforms in the1970s, it has always had trouble getting its new entrepreneurs to follow basic anticorruption laws. The whole pattern of business relationships is different there than in the West. Your network of family and personal relationships are more important than the rules of the road. Since people see the system as rigged against them, they look to their personal relationships for stability. According to the author, the economic transformation of the last 25 five years has essentially been a story of fast fortunes built on bribing government officials.

The "Eating the Emperor's Grain" chapter focuses on one such fortune, that of a former peasant who managed to scrape together enough cash to start a small industrial parts company in nineteen-seventy-nine, at the dawn of market reforms.

Generously bribing officials, the man managed to build his small company into a roaring success, but his real business shifted. Rather than producing bolts, he made his money smuggling in high-priced products like foreign produced cars and processed gasoline – things that would otherwise carry heavy duties. The former peasant built the life of a tycoon with mansions and a private jet. Soon enough, though, the Chinese government came looking for someone to prosecute to slow down what had become a smuggling epidemic – and it settled on our hero, sending him hurtling down the economic ladder even faster than he ascended it.

The man fled to Canada, where he remains a fugitive from justice. Here's the twist, though: He argued convincingly enough that his smuggling business merely reflected de facto government policy. When the government wanted to increase domestic consumption of foreign goods, it didn't merely lower tariffs. Instead, it allowed, and even encouraged, smuggling operations to bring in the products at lower costs. When it decided to put the brakes on domestic consumption, it chose to prosecute those same smuggling operations.

For the author, the takeaway message is that individual guilt is difficult to assign in a corrupt system. Criminal behavior becomes officially sanctioned, and thus the government behaves hypocritically when it attempts to impose justice. For American businesses operating in China, the lessons are twofold.

First, beware the Chinese tendency to "eat the Emperor's grain." Make sure your Chinese employees know that following the rules brings rewards – and that breaking them has consequences.

The second lesson is, avoid the temptation to "eat the Emperor's grain" yourself. Bribery holds the promise of short-term benefits, but in the long term only brings trouble. Not all Chinese officials are corrupt, and the trick is to identify ones seeking to promote Western values of transparency and the rule of law.

The next few chapters focus on the problems faced by specific industries. "Dancing with the Dinosaurs" and "The Truth is not Absolute" focus on the struggles of Western media conglomerates to gain a foothold in a country that tightly controls the flow of information. And "Caught in the Crossfire" recounts the plight of American aerospace firms trying to make money selling weapons and aircraft to the Chinese even as domestic critics accuse them of abetting the enemy.

These highly detailed chapters are packed with wisdom for anyone operating in these industries, and contain all manner of insights that can be applied generally to doing business in China. For example, "Dancing with the Dinosaurs" contains this nugget: "Understand that most Chinese government officials live in fear of being criticized for not upholding China's interests." The implications here are profound. During negotiations with authorities, always remember to spin conversations to emphasize how your projects will boost China's fortunes. That emphasis will give Chinese negotiators something to bring back to their superiors.

In the chapter titled "The Best-Laid Plans," the author underlines the

importance of well-executed negotiations with government officials. As you heard earlier, China built a powerful investment bank by luring in a prestigious foreign firm, utilizing its technology and know-how, and then leaving it holding the short end of a joint venture, which was still lucrative. Something quite similar happened in the telecommunications sector.

Talk about a great leap forward! China's telecoms industry went from Third World standards to world class in just a few short decades. According to the author, China achieved that feat largely by luring in foreign technology firms, learning their processes, and buying their hardware at expertly negotiated prices, and then building enterprises that excluded foreign ownership.

The author lays out ingenious strategies for avoiding that fate. Foreign telecoms suppliers got smart after watching their know-how and technology walk out the door and into the hands of government-backed competitors. They began holding back key components, and even designing products that isolated and withheld the most valued technology. This made it hard for Chinese companies to "reverse engineer" foreign technologies, and forced them to surrender some ownership to foreign enterprises. Today, the author says, many telecom initiatives are foreign-owned.

In the final chapter, "Managing the Future," the author paints a broad-brush portrait of Chinese business culture. According to his generalizations, the

Chinese are energetic, capable workers yet almost completely devoid of creativity. They learn by rote memorization in school, and are excellent at mastering and refining processes. But they're nearly completely hopeless at creating their own processes. They learn in school to be great followers, but aren't taught to be leaders.

As a result, Chinese business culture is strictly top down. Most employees don't innovate, and aren't expected to. Direction comes from the top. The author claims that the most often heard phrase in a Chinese workplace is the Mandarin equivalent of "It's up to you, boss!"

Yet while that attitude prevails within companies, the tune changes when >dealing with outsiders or protecting individual interests. Then, the Chinese are hypercompetitive. The author goes so far as to call them the "world's most individualistic and selfish people." This makes them among the world's most feared negotiators. Again and again, the author emphasizes that the Chinese are fully capable of taking naïve foreigners for a ride in negotiations.

The Chinese also tend to be impatient. Forming a queue would be as alien to them as flying a spacecraft. Rather than form an orderly queue, a crowd waiting for service at a bank lapses into a free-for-all, with everyone elbowing their way to the front. In business, this quality makes Chinese executives ready to jump into new enterprises rather than focus on core competencies.

They're also quite cliquish. Chinese managers look to that iconic Chinese dish, the dumpling, as a management model. The manager is the meat in the middle, surrounded by a carefully chosen protective wrapping of close associates. This keeps the manager insulated from criticism – and often from reality, according to the author.

In the author's eyes, the Chinese are a fascinating and contradictory people: Well educated but uncreative, fiercely competitive in the negotiating room, but as meek as sheep in the workplace. In short, the author breathes new life into the old Western notion of the "inscrutable" Asian, an idea he endorses in the opening chapter.

How, then, should Western companies deal with the Chinese as they set up joint enterprises there? The author suggests layering them throughout the organization, separating them from their cronies and putting them in work groups with foreigners. He also urges a hands-on mentoring program to help them understand the ways of Western business culture.

By the end of the book, the reader may be left feeling that China might not be an especially pleasant place to do business, but we don't believe that this is either the author's intention or his personal experience of working in the country. The whole purpose of this book is to focus on the most extreme differences between the Chinese way of doing business and the Western way – in particular, the American way – so that readers can learn from the mistakes of others. For many, China today is clearly an exhilarating and rewarding place to work that's bursting with opportunities and energy.

Like China itself, this book has a slightly chaotic feel – it's packed to the point of bursting with ideas and insights, without ever quite achieving a central argument. Even so, no one should venture forth to China and its one billion potential customers without giving it a careful read.

"One Billion Customers" by James McGregor is published in hardback by Wall Street Journal Books.

That's the end of this episode of Book Insights.