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The Job of the China CEO

Working with the government is a vital skill in doing business in China; but not easy to acquire

By Rajesh Dalal , Neelima Mahajan-Bansal

Published: Apr 27, 2010 06:58:54 AM IST

There are only a few multinationals that can claim to have figured out China. Carrefour would stake a claim to be one of them. The French retailer, and the world’s second largest, started off in a small way in 1995. Today, it runs a chain of 79 stores. Experts reckon Carrefour has found the right formula to win in China. But the successful run hasn’t come without its share of mistakes.

In February 2001, in the midst of a strong roll-out, Carrefour got a severe rap on its knuckles. It had opened stores without the Central government’s permission, the State Trade and Economic Commission said. So over the next two years, the company had to stop expansion and restructure its existing 27 stores to meet the Central government’s requirements. That was a severe blow to Carrefour’s growth plans. Says Laurie Underwood, co-author of ‘China CEO’ (with Juan A. Fernandez), “Through the late 1990s, retail joint ventures (like Carrefour’s) started side-stepping the slow Central government approval process by working directly with local governments — who were eagerly welcoming the foreign players in. Carrefour was especially ambitious and fast in this process. Because of its expansion speed, [it] became a target of the Central government. When that happened, [it was] forced to halt everything until [it] had appeased the Central government.”

Carrefour’s experience, as Underwood puts it, has become a warning post for all companies that entered or expanded in China since then. In some cases, the regulation changed overnight. In some other cases, the government has chosen to interpret the existing rules differently across the country. And in quite a few cases, the government has suddenly adopted a protectionist attitude in a bid to guard local companies from competition from multi-national corporations (MNC).

Now, it isn’t as if foreign companies aren’t well-versed with the idea of government relations in other countries. Yet, in China, this invariably tends to be a steep learning curve for expat chief executive officers (CEOs). For most companies, the effort behind government relations in China is far more intense compared to the other countries they are present in. It is not uncommon for CEOs in China to spend 60-65 percent of their time on cultivating government relations.

A foreigner needs a new lens to understand the role of the Chinese government in business. The clues lie in the way locals perceive the mandarins. There is a widespread acceptance that the government will exercise its “will” and it is better to be on its right side. There are no discussions, no arguments — just plain acceptance.

MNCs come to China with baggage from their home country — assumptions that the government functions around a mandate of the people. Says Jonathan Story, Emeritus Professor of International Political Economy, INSEAD, and author of ‘China Uncovered: What you need to know to do business in China’, “You have to be able to work the government very effectively. Since it is a party and a state in parallel, there are multiple veto points. If you alienate someone, you can find your project stopped or delayed.”

Experts say there is really no right versus wrong while dealing with government in China. The prevailing wisdom tends to be: The government knows best. And, if you are on the right side of the government, solutions could be found to correct the wrongs and make them right.
So is there a D-I-Y recipe for building government relations in China? Not really. However, some fundamental principles could be the guiding force.

Geographic Coverage
There are many levels of governance in China — central, state and local. This has huge implications for companies. Depending on size and scale, one can choose to start at one level and expand coverage to others progressively. “The government controls all the big key entities so developing government relations is absolutely critical. It’s important to do it in Beijing — that’s where a lot of big decisions are made. But it’s equally important to do it in the city levels and the provincial levels,” says General Electric (GE) China’s president and CEO, Mark Norbom.

GE, for instance, operates a couple of joint ventures in China. Take Shenyang Blower Works, a joint venture they operate in oil, gas and pipeline compression equipment in Shenyang in Liaoning Province in the north east of China. To get into a joint venture like this of course, the Central government approval is required — but “you are not going to get that unless you are hand-in-hand with the government of Shenyang and Liaoning province and they are helping you,” adds Norbom.

The majority of Chinese companies graduate from building relationships with local government to finally interacting closely with the major cities like Shanghai and the Central government. MNCs, on the other hand, start with higher levels and expand into state or local levels as they penetrate the Chinese market.

Most MNCs have specialist teams who handle government relations. GE, for example, has a highly evolved process of mapping out the government, agencies and identifying important officials in the bureaucratic machinery. “We match up the government levels with GE levels. When Jeff Immelt [chairman and executive director of GE] comes, we target to meet with a few people and match up with the seniority within the government. We then make sure that we are rigorous about our follow-ups,” says Norbom. This is a lot like diplomacy in government-to-government relationships; there is a hierarchy. Says Jonathan Story: “You need someone who calls himself the president of China for the company — even if he is not a president in the normal hierarchy of the company. If he was called a vice-president, doors will not open for him.”

Companies typically make the mistake of underestimating the rigour required in government relations. So while a lot of energy and effort goes into building the manufacturing facilities, government relations tends to get only two people. What they don’t realise is that government-relations people have a big role to play: They have to be, and they meet, decision makers.

Companies must also be consistent in what they communicate. Says Story, “The company must talk to the party [and] state with one message.”

Degrees of Engagement
T he regulatory framework is still evolving in China. The country is trying its best to catch up. The government tried initially to implement regulation by “cherry picking” the best regulations of other governments. This resulted in making Chinese regulations among the most stringent in the world. The government quickly realised that it is one thing to have “best of the best” regulations, and another to implement it overnight without severely hampering industry.

Smart corporations are evolving their own strategies based on the principle of engagement. It starts with collaborating with the government. The second degree calls for participating with the government in evolving the regulation. Finally, the third degree aspires to shape and influence government regulation.

Take Kodak. Some years back, Kodak bought quite a few factories and owned a significant amount of film production facilities in China. Therefore, everyone thought that when the next tranche of capacity would be sold, Fuji — and not Kodak — would get the right to buy it. “But Kodak got the right to buy it again because they did such a good job of living up to their commitments — putting more technology, training people, paying taxes, being a good corporate citizens,” says a China expert. “If you make commitments to the government that are aligned with your strategy and their strategy, the government rewards you — solely because they have certain objectives and you have proved to be a good partner.”

The key is to figure out a win-win relationship. There are things you need to know and things the government wants you to know — you need to be strategic about learning it. It progresses to the next level where the government facilitates a larger participation in the business community, because they believe that what you are trying to do is good for their agenda. Increasingly, more and more of this is happening at the city and provincial levels.

Food packaging is one of the major product lines of Sealed Air Corporation, a New Jersey-headquartered packaging solutions company. And today, food supply and safety are important priorities for the Chinese government. “There are many things that Sealed Air does, that are of interest to the Chinese government. China has a population of 1.3 billion people and ensuring food supply and making sure everyone is fed — and well fed — is no small task. Ensuring a stable supply and improving food quality, developing inland regions and sustainable growth are among the highest priorities of the Chinese government today,” says Li Xin, president, Sealed Air China. Sealed Air communicates frequently with the government and industrial associations in the area of packaging and food safety. It aligned its business strategy with the agenda of government agencies and trade associations such as China Packaging Federation and China Meat Association. This works well for Sealed Air. “The government agency in China sees the MNC as part of the solution rather than as part of the problem,” says Anil Gupta.

Mandarin Moves
Some tips to dealing with the Chinese Government

Pay attention to hierarchy. Match government hierarchy with company hierarchy.
Convey one message to all levels of the government. No conflicting signals.
Cultivate local party people; keep them informed; ask them for co-operation — right up to the Central government level.
Align your goals with that of the government.

(This story appears in the 30 April, 2010 issue of Forbes India. To visit our Archives, click here.)

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