Contemporary Business and Management Challenges in China

By David De Cremer and Jess Zhang

In today’s global context, Chinese companies face significant challenges in internationalising their services – not least that posed by contrasting styles of leadership. However, Chinese companies and government are responding to these challenges and changes are happening fast, putting China well on the way to becoming a global giant.

China is like no other country when it comes down to understanding business and management challenges in light of their economic development. At present, the country still has to be seen as a transition economy shifting focus from manufacturing to service. Together with this change, investments in infrastructure and real estate are diminishing – too many ghost towns and property bubbles have come to the surface – and a further urbanisation wave of rural migrants moving to the cities is predicted. These shifts impact the local economy by significantly increasing domestic spending. At the same time, these changes also bear consequences on the international dimension of China’s economy. Being an open economy it is important to present oneself as an attractive but also trustworthy business partner. As a result, China has left behind their obsession with double-digit growth and is trying to portray an image of its economy as slowing down – as decided in the new 5-year plan approved by the China’s National People’s Congress in March 2013 – to make it appear sustainable and at the same time still good enough to invest in. Current efforts by the Chinese government to borrow from the bond market signal that they indeed want to move away from their model in which (state-owned) banks finance their own stimulus programs – a strategy seen as manipulative and unsustainable by the rest of the world.

It is imperative for every international business to pay attention to what is happening in China, not only because many of those changes are still surrounded with a high degree of uncertainty, but primarily because something has changed in the relationship between the West and China. It is not the case any more of Western business moving into China. The opposite is becoming truer every day. This is not to say that Western companies have successfully penetrated the Chinese market and now the time has simply arrived for Chinese companies to do the same in Western markets. No such coordination of the market game exists! Many foreign companies in China still have to deal with local protectionism, still face the disadvantage of lacking the speed and flexibility of their local competitors, and still need to localise their products and services to a very high degree. What is happening is that Chinese companies are becoming more successful every day in competing at global levels. One important driver of China’s successful business approach so far is a strong motive for strategic asset seeking. Such cases are many: Fosun took over IDERA, Phoenix Media over the US PIL, Haier over Fisher & Paykel, TCL over Alcatel-Lucent, Geely over Volvo Cars, etc. First, they wish to accelerate their learning experience on how to compete at the global level. Second, acquiring companies at the global level will help them to strengthen their reputation back home. After all, for most of these companies the biggest market worldwide is still the local Chinese market. Of course, despite all these contemporary successes Chinese companies are constantly evolving in how they do business, and from that perspective they also have to consider their own unique business and management challenges in order to continue to grow. As a senior HR manager at Haier puts it: in terms of internationalisation, the gap between where we are now and where we want to be is still huge.

Management Challenges

One important challenge in managing international teams is that the Chinese can run into difficulties in establishing strategic alliances across different relationship circles. An important reason for this is that most Chinese managers lack experience for international coordination and as such are not attuned to deal effectively with diverse work forces. As a result, in the mergers and acquisitions (M&A) efforts of Chinese companies many global functions are not taken up by Chinese but by foreign managers. This situation makes clear that the West has to enhance their understanding of why the Chinese act the way they do, and for Chinese companies to analyse more carefully how they can improve in their dealings with diverse and international business opportunities. As such, training on the ground – preferably built on evidence-based management practices – becomes a strong and essential business asset. It involves getting a better understanding of the function of leadership in how to build trust and manage human resources to facilitate innovative business efforts.In China trust is not a given and can only be built up very slowly. This idea is indeed reflected in their common leadership style.

At the management level, buying foreign companies introduces the challenge of leadership. It is exactly this challenge that is responsible for Chinese companies appointing foreign managers to supervise the acquired foreign work forces and integrate them – to the extent possible – with the habits of the Chinese teams back home. A key notion of effective leadership in the West is that leaders empower their people to foster intrinsic motivation. This type of motivation is the foundation that creates a more participative, equal and forward-looking company culture in which leaders should primarily be coaches and employees the players. The Chinese view of leadership is inspired largely by the writings of Confucius and Mencius and the philosophy of zhong yong (the golden means; the middle way), which does not include the notion of empowerment. To build balance and harmony it is essential that hierarchy is respected. As a consequence, the leader in the Chinese system is the powerful father of the company, and even remains in that position after he or she retires. This kind of culture limits employees actively speaking up or voluntarily taking initiatives. Rather, they remain cautious and embrace the path of duty. So, delegation is usually not part of the repertoire of a Chinese leader, which makes them more players than coaches.

The Chinese view of leadership is inspired largely by the writings of Confucius and Mencius and the philosophy of zhong yong (the golden means; the middle way), which does not include the notion of empowerment.

Related to the challenge of leadership is the challenge of building trust. Without trust it is impossible to lead as no one will comply with your vision and be a follower. Trust is a key ingredient for collaboration to emerge within and across networks and thus directly challenges the skills of Chinese managers to build the necessary global alliances. Contrary to the common belief that China is a collectivistic culture, it is better portrayed as a relational culture. Indeed, when it comes down to understanding the notion of trust in China the concept of guanxi is essential. Guanxi refers to the networks that people in Chinese society live by and which make them successful or not. Almost automatic trust exists between people in the same gunaxi but never outside of it. Chinese culture is thus characterised by an ingroup-outgroup thinking, which hinders the development of building cross-network alliances. It is also responsible – to some extent – for the low trust that exists within Chinese society. This sense of low trust fits well with the popular Chinese saying that “brave birds get shot”. In a way, distrust is the default in China, which is thus in conflict with Western approaches whereby trust is preferably given until proven otherwise. In China trust is not a given and can only be built up very slowly. Indeed, this idea is reflected in their common leadership style, which, as indicated earlier, is characterised by delegating very little and ensuring you are not vulnerable to the actions of others.

Putting these insights together suggests that Chinese companies may face difficulties in being competitive by means of innovation. As noted earlier, the idea of a planned economy is increasingly being left behind as successful businesses have to be able to respond more quickly to ever changing market dynamics. At the same time, however, the leadership used internally significantly limits Chinese companies from breeding the fertile ground needed to successfully respond to these changes, although many companies are placing emphasis on a ‘customer first’ and ‘market demand driven’ approach. Interestingly, this internal leadership problem is starting to be recognised – international business education has done a tremendous job in establishing awareness about these topics – and efforts are being devoted in creative ways to create a more transformational and empowering leadership style combined with Chinese values on the next thing to do. Nevertheless, the awareness is also there that delay in this area needs to be avoided. Indeed, looking only at the statistics available, one could say that when it comes down to innovation there is no problem. China is referred to as the global R&D hub and companies spend more money in R&D than any other country. The problem, however, is that the relationship between how much is spent in R&D and how successful innovation is is almost non-existent. Innovation in China may still be overly characterised by a focus on incremental improvements, a trial and error mindset and too little adherence to the highest levels of quality standards. China has ambitious plans to be an “innovative society” by 2020. To truly succeed in this ambition, not only is financial and institutional support needed but also a change in mindset, whereby decision-making may have to become less centralised. Decision-making and leadership will have to be more focused on creating working cultures in which individual creativity comes to the surface more quickly and is translated into the competence of the company.

In China trust is not a given and can only be built up very slowly. This idea is indeed reflected in their common leadership style.

It is clear from the above that effective management of your human resources is one of the key factors that can bring economic and competitive success. Although this may be clear, the primary concern of Human Resource Management (HRM) in China deals with finding and retaining talent. Quickly identifying such talent is essential in order to be successful in the war of innovation. However, this practice can only be achieved if companies devote attention to creating work climates that facilitate participation, promote voice opportunities and enhance the feeling among employees that they are respected and full-fledged members of the company. In light of this observation, companies in China are already responding to this challenge with HRM procedures aimed to promote belongingness among their workforce (e.g. providing career paths). In fact, the 2014 MRIC survey noted an interesting trend that in the past three years, China-based professionals considering a job move are increasingly giving greater importance to a potential employer’s ‘leadership and strategic direction’.

 

Business Challenges

In light of the observation that even successful Chinese multinationals compete at the global level to maintain or increase their market share back home, an important business challenge is to be aware of the concerns that Chinese society is faced with today. These concerns, for obvious reasons, will have an immense impact on whether your business will be tolerated, picked up and, ultimately, competitive.

First, since Xi Jinping became President of China, the Chinese government has declared a war on corruption. The rise of social media has enabled many scandals involving Chinese officials or corporate and entrepreneurial ethical failures to more easily come to the surface. Due to these high profile scandals, Chinese society has little trust in entrepreneurs and governments taking care of their welfare. The recurring milk scandals, for example, make people believe that for a quick profit Chinese entrepreneurs are willing to poison their own people. Despite the fact that the Chinese president frequently announces his intention to fight and punish corruption, it is important to realise that in China the centre proposes and the provinces and counties dispose. As such, the war on corruption promises to be a long one – as recently illustrated, again, by the lengthy jail sentences that three anti-corruption activists, who asked for officials to disclose their wealth, received.

In a related vein, the problem of corruption also seems to bring to the fore the need for entrepreneurs in China to ask the question of why their company exists. In other words, Chinese society is increasingly addressing the question of corporate social responsibility (CSR). To date, CSR in China has been more interpreted as an instance of “philanthropy” – donating to charities and other welfare organisations rather than including CSR as an essential element of their company’s strategy. CSR in China today is more in line with a separation thesis approach where “how” you do business (the process of using values and principles) is independent of “what” (the results) you achieve. To achieve a truly value-driven state of business, the how and the what must converge.

China has approved the route to give businesses greater support if they promote the local economy via green initiatives.

Having been the factory of the world for the last 40 years, Chinese society is now also becoming increasingly aware of the health hazards that its economic decisions have revealed – although this sense of awareness is most prominent in the big cities and less so in the rural areas. The philosophy of “grow first, clean up later” is not advocated publicly anymore and the Chinese government has in the last year announced efforts to clean up air, water and agriculture resources. Indeed, although China is the world’s worst polluter, statistics also show that it is the world’s largest investor in green energy. Although these efforts signal that China is taking this war on pollution seriously, coordination among the different cleaning projects still needs to improve. For example, if rivers are being cleaned but the rules for polluting companies are not made stricter at the same time, it will undermine the effectiveness of the announced interventions. One thing is clear, however: China has approved the route to give businesses greater support if they promote the local economy via green initiatives. The acceptance of this route at the same time also points out that China’s war on environmental pollution will primarily be based on internal economic needs rather than on external (international) morally laden pressures. In other words, only economic indicators seem to be predictive in accurately understanding the steps China will take in cleaning up the country.

The good thing about reviewing all of these challenges is that at this moment, Chinese companies and society are developing successful interventions and, as can be expected, changes are happening fast. Indeed, as we pointed out at the beginning of this article, China has a unique position in the business world, which has enabled it to accumulate a wealth of knowledge and experience that can reveal unique management styles. This, in combination with a commitment to change and innovation, promises that the next steps to becoming a global giant are not that far away.

About the Authors

David De Cremer is the KPMG chair of management studies at the Judge Business School, University of Cambridge and a visiting professor at China Europe International Business School (Shanghai). Email: [email protected]

Jess Zhang is the Associate Director of Corporate Relations (Asia) at HULT International Business School and formerly the Centre Manager of Centre on China Innovation at China Europe International Business School (CEIBS). Email: [email protected]