China Guanxi: You Don't Have It
The value of guanxi for foreign companies doing business in China is overrated. Why?
I am instantly skeptical of China service providers who talk about their China connections. Those who tout their China connections/guanxi nearly always do so because they have little to say about their expertise or experience. More importantly, the value of guanxi for foreign companies doing business in China is overrated, for the following reasons:
No foreigner can create a Chinese-style guanxi network. Guanxi refers to a vast network of connections arising from party, family, and work connections that may go back several generations. No guanxi network relies on a single individual. The elimination of one member of the network is therefore not fatal. Foreigners almost always rely on only one or two individuals for their supposed connection. This kind of network is too fragile to be of enduring value. Foreign investors who think they have created a guanxi network in China are usually deluding themselves.
Connections with local government officials are short-term and can be abruptly terminated. Government officials in China are regularly moved from office to office and from region to region. As a result, any connection you build with a local government official is unlikely to be long-term…
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It is common to negotiate a project for several years and then learn that the official in charge has been transferred to a new post. If the project is not in compliance with the law, the replacement government officials often will refuse to sign the documents that have already been negotiated. Even worse, we have seen replacement government officials shut down previously approved and already started projects. If your project depends on the protection of a single individual, you need to be asking what will happen if that person dies, is demoted, or prosecuted for corruption.
A project based on guanxi gives too much power to the Chinese side of the deal. In many cases, the provider of guanxi will use the fact that the project is not in compliance with the law to ask for additional benefits. If the foreign investor seeks help from a lawyer, the lawyer can do little since the project itself is either illegal or poorly documented.
Many years ago, I gave the following answer to a Beijinger Magazine reporter who asked me how important guanxi is for foreign companies doing business in China:
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Shockingly little. I have met many people who have real power in China but virtually none of them really do rely on their relationships with people to take care of business. Our lead China lawyer, Steve Dickinson, has been living in China and doing business there about half his life. His spoken and written Mandarin are better than your average educated Chinese person. Steve knows a ton of people in China, yet he would never claim to have pull there nor would he ever advocate taking a shortcut because of pull. I cannot tell you how many times I have heard of or seen a Western company believe it did not need to follow the rules because it had sufficient pull to get away with doing things outside of the lines, only to face major issues for having operated outside of the law. The problem with guanxi is that there is always going to be someone higher up than your contact and that person higher up may at some point call you to account for your failure to follow the laws to the letter.
In Guanxi relationships and foreigners – doorbell or skeleton key? China business and negotiation expert Andrew Hupert explains why relying on guanxi for business success usually results in business failure:
Yes, guanxi can open doors, but there are three problems: 1 – it won’t necessarily open the door you need unlocked. 2- When all you have is a key, all problems look like locked doors. You may end up rewriting your business plan because your guanxi connection leads you to a single type of resource or decision maker. And 3 – that door may lock behind you. Westerners who encounter problems in China are rarely suffering losses at the hands of complete strangers. The people gutting you of your investment, assets and IP are the very same ones who lured you in with promises of powerful connections and influential friends.
In short, guanxi can play a role in your Chinese negotiating, but you will have to monitor and decide what that role will be. Guanxi networks are great as information and networking resources. However, if you plan on using connections to open doors – or knock down walls – then you are going to encounter some major difficulties down the line. When you use guanxi as a shortcut in China commerce, the destination is usually business failure.
Of course good relations with Chinese government officials can be beneficial — even for foreigners. And of course, it virtually always makes sense to try to cultivate good government relations. However, these kinds of connections should never be seen as a replacement for carefully structured investment projects that abide by Chinese laws. Your China investments should be designed to comply with mandatory laws and regulations and documented so that you can defend your interests in the event of a dispute or changing conditions.
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Dan Harris is a founding member of Harris Moure, an international law firm with lawyers in Seattle, Chicago, Beijing, and Qingdao. He is also a co-editor of the China Law Blog. You can reach him by email at firm@harrismoure.com.
