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Leadership

How To Avoid Getting Kidnapped In China

Shaun Rein, 07.28.09, 11:15 AM ET

China Law Blog recently ran a chilling post about an executive who found himself held captive in a hotel until his company paid money it owed his kidnappers--even though his firm had declared bankruptcy. The article pointed out that holding executives until their companies pay up is not uncommon in developing countries; it advised that any business expecting to go into default get its foreign personnel out of the country first.

Is that really what happens when you don't pay a Chinese creditor? Americans used to be afraid Chinese businesses would stiff them; now it's the other way around. With thousands of American firms declaring bankruptcy, many companies in China have been left unpaid and angry. How your firm deals with your Chinese partners can make the difference between maintaining a valuable business relationship and losing out on a critical market--or worse.

Doing business in China is not as alien an experience as many consultants would have you believe. There are a lot more similarities than differences between the U.S. and China. But some of the differences are substantial. Here are a few of the biggest that you'd better know about.

First, and paramount, the law plays a different role in everyday business life in China. As in many countries at a similar stage of socioeconomic development, China's businesses operate in a low-trust environment. The legal system has evolved dramatically over the last decade, and the laws on the books are quite good, but enforcement remains spotty at best in more rural areas. Relationships often trump the rule of law.

Americans confronted with business disputes expect to turn to lawyers and courts. That isn't done nearly as often in China. Companies, especially smaller private ones, turn instead to relationships. If they don't have relationships to turn to, they sometimes fall back on threats and physical fighting. But you see many more paper tigers than real ones.

I have been held a few times myself. It is fairly common and not considered kidnapping. People fight all the time. That is, they wave their arms and maybe do a little shoving to prove their seriousness. Then it peters out. It almost never really escalates.

Before entering a partnership with a Chinese company, you should find an "uncle"--a person both parties trust who will be able to mediate differences. This assures each side that issues will be resolved fairly. I have seen too many American businessmen drag out an inch-thick contract with some clause that they think lets them out of a deal. To their Chinese counterparts, it is clear the Americans are cheating. Use relationships rather than legalese whenever possible to solve problems.

As an example, I worked with an American company that was owed more than half a million dollars by a Chinese partner. It had hired high-priced lawyers, threatened legal action and gotten nowhere. My firm was brought in to resolve the situation. During our first encounter, the chief executive of the Chinese company banged his fist on the table and let it be known that he had strong relations with the military.

What did I do? I did not threaten a legal remedy, and I did not get cowed. Rather I found an uncle who the Chinese CEO and I both knew. That made it no longer a dispute between two companies. It was now a personal issue. Within days, the uncle solved the problem. He told the CEO to pay up, and rather than risk his personal relationship with the uncle, the CEO did so right away, and became friendly with me.

The case written up by China Law Blog should have been handled that way. Had the foreign company turned to an uncle to smooth relations before declaring it would not pay, the dispute would never have gotten to hostage-taking.

The second thing to know about doing business in China is that you must build guanxi.

Many Americans have heard of guanxi, but it's often translated wrongly to mean relationships with powerful people. Guanxi means something very different from the American concept of connections. It means being in a social circle where you can let your guard down a little, because there is deep trust, perhaps from generations of coexistence, living in the same neighborhoods or even with interwoven family relations. In the case I was involved in, the CEO didn't want to hurt his relationship with the uncle, and once he knew I, too, was in the uncle's circle, he wanted to create a friendship with me.

Many consultants like to tout that they have good guanxi and can arrange meetings with powerful officials to grease the wheels of commerce. They may be able to get the meetings, but those powerful people don't usually really trust them--especially if the consultants are former officials of foreign governments, as they often are. Building long-term trust is very difficult, especially for those who once sat across negotiating tables representing other countries. Acceptance into a guanxi circle can take years.

Long-term perspective is very important in China. A defaulting borrower should avoid saying he won't pay and instead pay a little right away and explain that he is hurting but will make good in the future. You cannot rely on bankruptcy to absolve debts.

Perspective on money itself is important, too. Never forget how many Chinese live hand-to-mouth. In a country where the gross domestic product per capita is only $1,000, the sum of $50,000 might represent two decades of salary for someone you're negotiating with. Living conditions are deplorable for far too many. Many workers live in company dormitories where eight to 12 people share a small single room with bunk beds three high. Every dollar is worth fighting for because it can mean the difference between eating and going hungry. Staying in a five-star hotel and flying business class while you claim bankruptcy will not sit well with people who have so little. Even the police won't usually be sympathetic if you're temporarily detained by a creditor. As long as no one is physically harming you, they'll see it as part of a business transaction.

Many small and medium-size Chinese businesses are highly leveraged and have to scramble for cash. The country's stimulus program has brought about an enormous surge in bank loans, but most of them have gone to large state-owned enterprises. Smaller private companies tend to rely on underground banks that charge 50% to 75% interest and are backed by people that executives never want to default on.

Some businessmen turn to networks called hui, where money is pooled together among friends, family and neighbors to make loans within the group. Their default rates hover around zero, because the borrowers will do just about anything to pay back their debts. Do you think a Chinese businessman is going to let an American not pay back his debts when doing so will harm his family and his guanxi circle?

You shouldn't be scared to do business in China, but you need to know that relying on the law to avoid making payments to Chinese businesses doesn't usually work. Legal confrontation goes counter to the concepts of guanxi and to relationships that are central to Chinese business culture. To be successful long term, your company must have strong contracts and good legal advice, but it also needs to understand the importance of relationships, and nurture those as well.

Shaun Rein is the founder and managing director of the China Market Research Group, a strategic market intelligence firm. He writes for Forbes on leadership, strategy and marketing. For more from Shaun Rein, click here.