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Inside Chinese Business
A Guide for Managers Worldwide

Summary of Ming-Jer Chen's Book

Note: The following text is a summary of part of Ming-Jer Chen's book. We recommend that you purchase the book in order to benefit from the full depth of the author's own words.

Chapter 1.      Introduction: Who (and Where) are the Chinese?

Many non-Chinese find the behavior of Chinese business people to be difficult to understand. To understand it, one must understand Chinese culture.

While China is a diverse country, it also has a large degree of unity. While there are 200 dialects, there is a common written language. 90% of the population belongs to a single ethnic group called the Han. Perhaps the most important source of unity is Confucianism, which has endured for more than 2500 years. Confucianism governs every relationship, including business ones.

Even when the Chinese emigrate from China and become citizens of other countries, most still consider themselves to be Chinese, even after several generations. Many of those who left China before the 1949 revolution consider themselves more Chinese than those in China today because the emigrants did not experience the communist assaults on their traditional values.

Chinese culture and institutions seem vastly different to Westerners, but Western culture seems vastly different to the Chinese. By understanding these differences, we better can develop a global perspective.

Chapter 2.      Family Businesses, Business Families

According to a famous saying, when a Chinese individual is honored, his whole family is honored. When he is condemned, his whole family is condemned.

The family had a practical use in China's agrarian society, but Confucius added a moral dimension and broadened it to mutually dependent societal relationships. Every person has an important role as a link in the network of society.

The family is the foundation of Chinese organizations, including business ones. In the West, one often refers to "family businesses". For the Chinese, the term "business families" may be more appropriate since the family comes first and the business comes second. Rather than creating wealth, the Chinese tend to see their business duties more as responsibilities to the family.

For Chinese living outside the PRC, the family-based business model is strong. In mainland China, the family-based model of business diminished as communist rulers attempted to replace family loyalty with loyalty to the party. More recently, the increase in the number of non-state businesses, many of which are family-run, has helped the family model of business to reappear.

Four features of Chinese business families are that they are family-directed, there is a dominant family head, it has enduring roles and family obligations, and it is family-financed and family accountable.

  • Family-Directed Operation

    As a family directed operation, the typical Chinese business family is headed by a patriarchal or matriarchal figure, often who is the founder of the business. The other family members have key positions. The extended family may have its own companies that are linked together to form a complex network. Cross-holdings are common but are not always apparent since knowledge of such holdings often is kept private.

    Even when a Chinese business is a publicly held corporation, it often is family controlled. The family members generally take a hands-on approach in the affairs of the business. Decision-making is informal and often occur at events such as family dinners.

    The organizational chart does not necessarily provide information about who actually holds the power; often a person with an influential-sounding title may be only a figurehead. Business deals may be based on family reasons, which sometimes may cause a financially attractive deal to be rejected.

  • Dominant Family Head

    Chinese business families usually are controlled by a dominant family head who has the final word on important decisions. This person may have advisors who are family members or close friends. Such relationships are more important than what the organizational chart may imply. Often a lower level manager will go straight to the head without going up through the chain of command. Western companies dealing with the Chinese will benefit if they take the time to find out who really holds the positions of power and influence in the Chinese firm.

  • Enduring Roles and Family Obligations

    The heads of Chinese family businesses usually are succeeded by family members who carry the business tradition to the next generation. Even if nobody in the family has the skill to run the business, family members are preferred over outside professional managers.

    Often, Chinese assets are divided among all of the sons, who may branch off into different industries. This has the effect of adding a higher degree of diversification to the business.

  • Family-Financed, Family-Accountable Corporation

    The formal accounting in a Chinese business family tends to be for tax purposes, with the real books kept in the heads of family members. People are evaluated informally and personal reputation is more important than achievements. Decisions are made quickly, often based on personal recommendations.

The following table contrasts some of the key differences between traditional Chinese business practices and those of Western companies.

Western vs. Traditional Chinese Business Practices

Business Practice How It Is Done
Western Chinese
Main Company Purpose Maximize shareholder value Serve family interests
Financial Openness Public financial reports Financial information is kept secret
Financing Sources Public sale of securities Family and friends of family
Transfer of Ownership Mergers & unfriendly acquisitions Companies are not sold due to family obligations
Advertising Brand is promoted by advertising Without advertising, sales are made via the family network
Management Professional management, recruited on qualifications Senior managers are recruited from within the family
Time Horizon Short-term emphasis on bottom-line profits and shareholder value Long-term family prestige is emphasized

The Chinese Business Family in Transition

While the traditional aspects of the Chinese business family are observed today, as markets become more global the traditional model is changing. Business families are beginning to adopt business practices that are more consistent with other companies around the world. For example, in addition to personal character, managers are being valued on other attributes such as industry knowledge.

Traditionally, passing a business to the next generation was a means of maintaining family heritage. Now, it is beginning to be seen as an opportunity for reorganization. Many new-generation family members receive Western education and are beginning to break away from the family network and conservatism.

Despite these changes, the sense of the family remains strong and it is likely that the family first, business second attitude will continue into the future.

Chapter 3.      Networking and Guanxi

Whereas Western business culture is transaction-based, Chinese business culture is relationship-based. In the West, a successful business person is described as wealthy. The successful Chinese business person would be described as well-connected.

The conventional translation of the word guanxi is "connections", but there is more meaning to the word than that translation conveys. A more complete translation is connections with mutual obligation, goodwill, and personal affection with emphasis on family and shared experiences (such as college and military service).

Guanxi networks are a valuable source of information on issues for which the official channels are inadequate. In a society in which laws are not enforced uniformly, guanxi networks help businesses deal with one another. Overseas Chinese often rely on these networks when they are citizens in a society that treats them with suspicion.

The closest relationships are those of the immediate family. After that, the next closest are the extended family and very close friends who are treated as family. Such close friends do not have to be Chinese to be considered an insider. The next level of relationship is that between people with shared experiences, such as being former classmates. The final level of relationship is that with strangers, who often are looked upon with suspicion until they are known better. Even if one falls in this category, it still is possible to do business with the Chinese, though on a shorter-term basis unless the relationship evolves to something closer. Outsiders can reach more exclusive parts of the network through other people.

Guanxi relationships often result in favors that are expected to be returned, but by no specific date. Sometimes indebtedness from such favors lasts for generations, and the Chinese will remember for a long time a favor that was given to them when it especially was needed. When a favor is returned, it often is in greater measure. This swinging of the balance strengthens the guanxi relationship and carries it into the future.

Even if you are an outsider in a guanxi network you still are an insider in your own network. Rather than focusing on accessing another network, guanxi is more about cultivating your own network.

Overseas Chinese often can serve as a bridge for Westerners to access companies in China. If you are traveling to China, such as third parties may be able to provide you with contacts. They often will have you convey a greeting, and the more elaborate the greeting, the closer the contact is expected to consider you. A written letter would represent one of the more serious introductions as the foundation for a strong relationship. Be aware, however, that the Chinese sometimes resent Western-educated Chinese and question their commitment to China. While it may help, being of Chinese origin does not necessarily unlock doors.

When meeting people, Westerners tend to ask someone about their profession. The Chinese tend to ask where you are from and then may ask if you know somebody thay they may know there. Such questions are intended to determine if there is perhaps a preexisting connection. Much goodwill can be generated if a close friend or relative of yours lived in the hometown of the person you are getting to know. While such commonalities are enjoyed by Westerners, for the Chinese they can be the basis of a very close guanxi relationship. If you do not have such commonalities, simply showing interest in the background of your acquaintance can show you care and can help develop the relationship.

One should be careful not to make your acquaintances think that you are trying to rush the development of the relationship. Knowing the Chinese appreciation of good food, many American business people pay for large banquets thinking that such generosity will establish strong connections. But goodwill must go deeper than simply picking up the tab, and such people often are referred to as a "meat and wine friend." While throwing dinners can help, showing sincerity and commitment to the relationship is more important.

It is important to note that guanxi networks are among individuals and not companies. When a person leaves a position, his replacement does not inherit the network. Sometimes companies will appoint the replacement far in advance so that he can be introduced to the network. If you are dealing with a Chinese company, it is worthwhile to extend your network beyond one person in the company. If that person were to leave, your account probably would be assumed by a replacement, but you might not have the same standing that you had before the departure.

Before establishing a guanxi relationship, it is a good idea to verify the person's reputation. Test them with something small first. Keep in mind that a guanxi relationship with somebody who has a bad reputation can lock you out of other guanxi.

For the Chinese, the giving of symbolic gifts can help to strengthen the relationship. The gift should be something that either considers the recipient's interests or that is a symbol of your own background, such as something from your own hometown. The gift should not be expensive, as it would be difficult to reciprocate and could embarrass the recipient.

Guanxi relationships should be maintained through a steady exchange of communication and favors. Favors should be repaid with slightly larger ones, but not too much larger or it will not represent a natural strengthening of the relationship.

A failed business deal does not mean the end of a guanxi relationship. Rather, it often strengthens it since surviving difficult times helps to bring people closer. The Chinese consider adversity to be the best test of a relationship.

Interest in the family of your guanxi partner helps to build and maintain the relationship. While Westerners often consider their family lives to be separate from their business ones, the Chinese do not draw this distinction. As such, the Chinese frequently exhibit family-like behavior in business settings. Asking about their parents, remembering their children's birthdays, and sending gifts to them help to build and maintain the relationship.

It is important to realize that the Chinese consider the impact of a decision not only on the transaction, but on the network, since maintaining relationships is more important than a single deal. For example, a firm may be overcharged by its supplier, but that same supplier may provide the firm with a larger profit on the next deal, or later may introduce the firm to new lucrative opportunities.

Since relationships are the central focus of Chinese business, a firm seeking to do business in China should make guanxi a part of its strategy, not just as an incidental, but as a strategic starting point.

The following table summarizes some of the differences between Western and Chinese networking.

Western vs. Chinese Networking

Networking Attribute How It Is Done
Western Chinese
Motivation Economic Economic and social
Formality Formal and defined roles Informal and flexible roles
Individual & Organization Separate Impact one another
Networked Organizations Independence Mutual dependence
Governing Authority Contracts Personal trust

This summary ends here. It has covered portions of only the first three chapters. The following is a list of the remaining chapters of the book:

Ch. 4      Roles and Rules of the Social Fabric

Ch. 5      The Middle Way: A Holistic Perspective on Time and Performance

Ch. 6      Putting Values into Practice: Competing Indirectly

Ch. 7      Never Say "No": Communicating with the Chinese

Ch. 8      Negotiating from Start to Finish ... and Beyond

Ch. 9      Tradition in Transition: Doing Business in the PRC

Epilogue:      Toward the Globe as a Whole

Appendix 1      Definition of Geographic Terms

Appendix 2      Migration Patterns of Ethnic Chinese Billionaires

Appendix 3      Main Events in the History of Mainland China, Taiwan, and Hong Kong

Appendix 4      Three Chinese Thinkers

Appendix 5      Major Events in the People's Republic of China, 1979-1999

Appendix 6      Suggested Readings

Appendix 7      Relevant Web Sites for Global Chinese Business Issues

Appendix 8      Glossary of Chinese Terms and Their Pronunciation

Recommended Reading

Ming-Jer Chen, Inside Chinese Business: A Guide for Managers Worldwide

The book on which this article is based. Westerners who first begin to do business with the Chinese often are intrigued but perplexed. Inside Chinese Business makes sense of many observed practices and illuminates a light bulb of understanding about many situations. Keep in mind that this book is only a basic introduction and is not intended for those seeking a more advanced study of Chinese business culture. But for the newcomer, Inside Chinese Business is well worth reading.

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