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  • mark goldstone

China Due Diligence - China Business - Why History Matters

Updated: May 21, 2020

Chinese history is unique in terms of the same ethnic group (China is 92% Han Chinese) that have lived continuously in the same place for 5000 years and more. For sure there has been a wide range of internecine strife and struggle, notably the warring states period (227-221 BC) and as each successive dynasty has usurped power from the last.

For most of that time China has been rich, prosperous and technologically sophisticated, a fact of which the Chinese are extraordinarily proud. As such, it has continually been the object of invaders keen to gain some of this power.

The Great Wall was of course built to withstand raiders from the steppes and throughout history China has repelled attacks from the north and the west. It should be noted that every time China is in any way weak it is the subject of foreign invasion.

Kublai Khan’s Mongols finally successfully invaded China 1271 and the Yuan dynasty reigned for 100 years before being finally expelled by the Ming and retreating back to Mongolia.

During the 19th century Europe and America keen to force trade (however nefarious) established treaty ports up and down the east coast and at its worse this descended into the 1st and 2nd Opium Wars with Britain.

Known as the century of humiliation (the term that is always used) China was exploited by foreign powers throughout but was eventually invaded by the Japanese twice between 1931 and 1937 with corresponding atrocities and war crimes, most notably the “Rape of Nanking,” (now called Nanjing)

All children in China are taught about this at school from an early age and modern Chinese nationalism emphasises the importance of sovereignty and territorial integrity.

Recently as China has grown richer it has extended the concepts of sovereignty and territorial integrity to its rapidly growing economy.

So what does this mean for business ?

Well first and most obvious as a foreigner as you get off the plane your defacto perceived role is as a potential exploiter, and as such people are not going to feel sorry for you if in your ignorance you fall victim to one scam or other.

This can only be circumvented by spending time in China and understanding and respecting as much of the culture as you can - wanna fly in do the deal and fly out - forget that.

Second, it means you have to consider your business proposal and model.

There are exceptions but in a vast majority of cases both the proposal and model of business must benefit China. Yes that’s right, no it’s not a free market, and no it's not fair in free market terms.

So although there are official rules that govern foreign investment in China. These can be simplified as things that are encouraged (think healthcare or technology partnerships), things that are banned (ownership of essential infrastructure anything to do with gambling or pornography), and everything else in a neutral category.

Clearly you will at some stage need to look at the rules but as a general principle the more your business proposal “helps” China the more chance of success it has.

Next is business model. A simple, “sell goods and services to China” model is nearly always unsuccessful – why, because culturally, politically and legally unless the Chinese are benefitting from the deal it is unlikely to happen.

Let’s look at some well known western brands that tried to go it alone in China

· Google - banned in favour of the domestic search engine Baidu.

· Facebook / Whatsapp - banned in favour of WeChat owned by the domestic tech company Tencent.

· Amazon - withdrew from China after being unable to compete with Alibaba’s Tao Bao and, both domestic.

· The story of Uber is particularly interesting and controversial suffice to say that Uber is no longer in China and that the domestic player Didi has a vast market share of taxi rides.

None of this is a coincidence. Let’s contrast with brands that are doing well. KFC was opening 6 stores a day in China at one point. It has established a joint venture with powerful partners in the Bank of China no less, as well as the Beijing Tourist Board.

All the luxury brands that have succeeded in China are joint ventures with similarly well connected partners.

So in general if Chinese people are not making a lot, if not most, of the money from the deal it is likely to either not happen or the market space will be challenged by domestic competition that has key advantages.

This is of course a bit of an oversimplification of what is in fact a dynamic shifting Chinese business landscape but remember to generalise from history and its mindset - that it is exactly the job of the Chinese government and its business people to prevent the exploitation of the new Chinese wealth and it is only for the very brave to go against 5000 years of history.

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