Honest Chinese Companies
There are many well managed Chinese companies out there. Yet by virtue of the enormous amount of Chinese companies competing amongst each other, there are bound to be some bad apples in the bunch.
Some ‘companies’ in China don’t exist
Hence it is a reality that shady businesses and scams abound in China. Cases of people who paid for a shipment of goods from China only to receive a box of rocks that weighed the same as what they paid for, or the Chinese company that never existed or closed shop right after receiving payment for a case of ICs. Such things are by no means unheard of in China.
Yet more common than this are the Chinese companies that bend the rules and cheat others, but only when it is in their best short term interests. How many little companies in China operate in this way is an unknown, but there are plenty.
For better or worse, however, many of these shady Chinese companies will not survive. Although the belief in China among a large number of people is that some degree of dishonesty or breaking the rules is necessary to succeed in the vast Chinese market, the truth is that business in China is like business in the rest of the world. In the long run, playing by the rules is the path to success
Honest companies succeed in China
There is often a lack of direct discussion on this topic within China, so I was pleased to see an article about honest Chinese companies succeeding in China from last week’s Modern Weekly. It is a perspective from a Chinese writer about how Chinese companies live or die based upon their quality, and is reasonably well reasoned out.
This was translated from the October 14th, 2006 edition of Modern Weekly, and was written by Zhao Xiao, a professor at Beijing Technology University (note: about half of the original article is left out, in order to stay on topic and avoid confusing metaphors translated from Chinese):
Character Determines the Success or Failure [of Chinese Companies]
From a long term perspective, what is the determining factor in the success or failure of a Chinese business? Is it the details, direction of the company, or organization and systems of the company? Actually it’s none of these. The most important thing for a Chinese company to possess is is character.
Is character really this important? I estimate that most Chinese businessmen and businesses really don’t think so. Most Chinese businesses stubbornly believe that in China’s unregulated environment, if businesses don’t bend the rules they won’t survive, if they don’t take the corrupt route they won’t develop, and that having character ties up a business’ hands, damaging its competitive ability in the Chinese business world.
Then is character just an expensive burden or pipe dream? My friend Mr. Mu firmly disagrees. He maintains that in comparison with technology and management, character is the number one factor that determines whether a Chinese business succeeds or fails. From a long term perspective, it’s importance far outweighs that of management expertise or technology.
According to him, the importance of character to a Chinese company’s long term development is just as important as the thumbs on your hands, probably accounting for 80% of a company’s long term development prospects in China.
The importance of character to a Chinese company is that it determines whether the company is walking on the right path. The technology and management of a Chinese company only determine how fast it walks on its chosen path.
Another explanation why character is so important is that character determines the “risk cost” of a Chinese business. Suppose there are two companies with the exact same current profit margins, yet the character of each of the two Chinese companies is not the same. The risks of the Chinese companies will not be the same because of this. The Chinese company with weaker character faces a greater risk of litigation. Hence one should subtract a risk premium from the profit margin of the company with a weaker character, or discount this company’s profits. At some key juncture in time, the risk premium of the morally weak Chinese company may become so great that the company could immediately go out of business if the risk manifested.
Average Chinese business only lasts 3 1/2 years
The average lifespan of a Chinese business is only three and a half years. The short length has many different causes, although once well known Chinese companies have gone under from damaging the interests of smaller Chinese shareholders, accounting shenanigans, avoiding taxes or customs duties, and/or bribing Chinese officials.
In contrast, in the twenty plus year “non regulated era” after the opening up and reform of China, the most successful Chinese businesses (such as Lenovo, Haier, Wanke, etc) all had their characters tested in one way or another.
So what do you think? How much of a factor is the character of a Chinese company in its long term success within China’s modern wild-west market environment?