Getting Guanxi Up To Date

Related entries: Business Issues, General, Strategy

“Guanxi” (connections), is an especially mystical Chinese word that, for a long time, has been used by suppliers, officials, pundits (not to forget “chundits”), and others to impress, scare or confuse the hapless foreign businessperson in China. It has been getting quite a lot of press recently, so I thought I would put my oar in and comment.

Literally “guanxi” is a Mandarin Chinese term that describes the complex, inter-dependent relationships that exist between two or more parties. “Guan” means “close together,” and “Xi” means “relationship.” In practice, of course it is a bit more complex. Diligence China provides a good introduction:

    “Guanxi. Technically, it means connections. In mainland China where monetary profit was not always feasible, people developed a semi-formal means of supporting allies and building up a “bank” of obligations owed. It is not always subtle or sublime, though Chinese are so familiar with the idea that there is less need to discuss it directly.”

But I also like this one, from James McGregor, author of “One Billion Customers”, which I have quoted before:

    “Guanxi, the oft-cited Chinese word for relationships or connections, is overrated, temporary, nontransferable, and resides in the hands of the individual who has it. Never, ever put your business in the position where you are dependent on one individual for access to government officials.”

In the 15 years I have been doing business in China, the “Guanxi factor” has changed a great deal, just as China and its overall business environment have done – there are no longer carts of cabbages to be found round the back of the China World Hotel in Beijing, there seem to be more cars than bikes, the airports are all new and shiny, hotel rooms have internet connections, government departments have phones that actually get answered, and government policy, regulation and process are all largely transparent.

Back in the day, when I was involved in selling industrial machinery to large, mainly state-owned, Chinese firms a company party secretary, local mayor, or even provincial governor, would often get involved to support one possible supplier or another – all based on guanxi. Guanxi also helped with little, practical things like setting up offices and getting phone lines installed, sorting out a visa on arrival for an incoming guest…or having police outriders help cut through the Beijing traffic. It was also good for some big, strategic, headline-grabbing things too – like getting the only license for a foreign company to sell insurance products (as AIG did) or to sell foreign-branded computers (like AST Research did before anyone else).

Now, while guanxi is generally less important to the average businessperson, it is certainly still an important issue to understand and manage. Relationships are important in business everywhere, but they are relatively more important (and complex) in China’s group-based culture.

Andrew Hupert at Diligence China makes the point (borne out by the eventual experience of AIG and AST above) that:

    “from a business perspective, guanxi may provide a temporary advantage but is unlikely to provide a sustainable competitive advantage, and may in fact be restrictive in terms of potential for expanding into new markets”.

I recall one case where a foreign company signed a deal (based on guanxi) with people related to the provincial office of a ministry only to find that they were not in the good books of the ministry’s leaders in Beijing. Expansion beyond that first province was almost impossible.

Danwei reports, with reference to an interview with Shaun Rein of China Market Research Group, that:

    “Shaun believes that the end is near for the strategic consulting companies that depend on the Henry Kissinger model of using personal relationship networks to ease clients through the ins and outs of the system. He believes rather, that only the firms that provide the best data and analysis will succeed.”

I certainly agree that more than guanxi is needed, and most firms now seem to recognise (and some have restructured accordingly) that they need a professional offering that is based on more than just being able to arrange breakfast with the Minister of XYZ. However some well-targeted guanxi on top of quality data and analysis is still likely to help, especially in “sensitive” areas. (And Boeing may still have been quite happy to use the above-mentioned consulting model last year in order to get President Hu to visit them in the US – and buy lots of planes).

China Law Blog has also posted on the issue:

    “Of my law firm’s clients, it seems that those who never use the word guanxi have a China success rate of about ten times those who do. This is not because having good relationships in China is not important — it most emphatically is. Rather, it is because having good business relationships is important everywhere, not just in China, and those who use the word guanxi seem to use it as an excuse for abandoning common business sense. As in, “why did you send them $500,000 without a written contract?” Answer: “guanxi.” “

Oh, the things that people do!

As I have noted in another forum, “Guanxi is difficult to obtain, and requires sensitivity and skill when deployed. It is not something that can be developed overnight, and it will not allow instant access to powerful people or big contracts. However, by starting with small steps, being patient, and by building on established networks, foreign businesspeople can start to understand, and benefit from, this ancient Chinese system”.

So, when doing business in China, what you know and who you know both play a part in achieving results. And while the former has gained on, or even overtaken the latter in some ways, I would suggest that old habits die hard, and that old friends have more luck – and more fun. So don’t abandon all that guanxi just yet…

6 Responses to “Getting Guanxi Up To Date”

  1. From China With Love » The Importance of Guanxi Says:

    […] ter to reference other people’s excellent work than to re-invent the wheel.  I saw this post on the China Business Blog explaining Guanxi as it relates to modern C […]

  2. serge Says:

    It’s interesting how in China and U.S. many regular words soon become marketing/key terms. It just shows the acceptance of well-structured marketing practices both here and in U.S..

    Our company was doing recruiting at Tsinghua the other day, and while about I made a stop at Tsinghua’s marketing department – “What, a marketing department?” I thought to myself! This is what makes a country reliable for business and investment. Then again, I’ve made a trip to Russia a few months ago for out IT operations there, and what did I see there? Same old story: Brillian Professors teaching for a few cents a day. Marketing Department – how about a simple secretary to check university’s emails…

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    […] s interesting in that much of the wealth has derived from listing companies (and not a few connections) rather than inheriting money, the people are relatively young (12 are under 40 year […]

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    […] IPO, after which Steve Schwarzman, Blackstone’s co-founder, led the discussions.” So guanxi is not dead, big bets can pay off, and China is going to be a Player as the “go global […]

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    […] (line) Connections Related entries: General, Corporate News, Services “Guanxi” is a special sort of relationship, that reaches the parts other mere “connections […]

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