A Big Australian makes its Presence felt in China

The China Daily of 18 December 09 reports about concerns that a Big Australian is too big! In its magazine China Metallurgical News, the China Iron and Steel Association (CISA) expressed  concerns about the "monopolistic" JV between BHP Billiton and Rio Tinto. CISA views the JV as detrimental to China's economic interests. Although the Australian miners stated that the JV would cover only the cost and not the sales side, CIAS remains unconvinced by the assurances offered, suggesting the relationship would reduce competition and increase the price of iron ore globally. In fact, CISA felt that "customers across the whole world should oppose it as one". The underlying concern, however, remains one of self-interest - to ensure China gets an equitable result when it negotiates its price. While China is the biggest market for each of the JV partners, the China Daily also reports that Beijing faces an up hill battle to ''gain any price concessions from Rio Tinto, BHP Billiton or Brazil's Vale''. In fact, CISA wants that the Chinese government to use its anti-monopoly legislation to kill the deal. The Chinese Daily, however, reports this strategy would be difficult because of China's untested laws in the area.

Snippits from the Business News in China

The China Daily of 18 December 09 reports that FDI has soared to its highest level in 16 months. The rationale offered for this increase is confidence by foreign investors in China's economic recovery. However, the Mandarins of China's banking regulators have cautioned banks against lending to favoured inductries. The regulators warned that ''bad loans'' could ''return to haunt Chinese banks'' in the coming period. This warning has particular implications for people who participated in the boom in FDI since mid to late 2008. Nevertheless, there is a Catch 22 here. Banks will need to continue the ''relatively rapid lending pace'' in 2010 just to keep the economy moving. A warning that should be listened to comes from Charlene Chu, Head of the China bank ratings at Fitch Ratings (Beijing) Ltd. Ms Hu implies that current and potential investors should consider risk factors and pay close attention to the the ''aggregated exposure'' of banks'. This is especially the case as ''Chinese banks tend to have pretty similar profiles and the concentration in their loan portfolio is bigger than people had realized". Ms Hu suggests correlations exist between the bouyant property development market and the under utilized and/or empty commercial office space in many Chinese cities - Caveat emptor in the current climate.

Worries about Chinese Business Expansion

The recent investment by the Chinese state-owned Wuhan Iron and Steel Company in a South Australian miner has prompted some people to express concerns about China taking over Australia's resources. However, doing business with China and maintining good business relations is important for Australia's economy. Australia has its Foreign Investment Review Board to review overseas investment in Australia while China's National Development Reform Committee performs a similar function for Chinese companies investing abroad. It is anticipated that such mechanisms will protect the interests of both countries when it come to investments. China certainly has money to invest - as its economy becomes further integrated into the global economy, we can expect the level of investment to increase - opportunities for Australia's exporters will also increase. The Chinese economy is expected to achieve a 8.4% growth rate in 2009, revised up from 7.2%. This should be good news for Australia exporters. It seems that relations between Australia and China may now be back on an even keel following the recent tension caused by the Rio Tinto incident.

Doing Business in China

The case of Mr Hu of Rio Tinto in China, detained on ''spying charges'' demonstrates once again that doing business in China is a complex and risk-laden undertaking. I have made several responses in the media to this particular case - some relevant links are indicated below following the text of an interview on crikey.com.au (http://www.crikey.com.au/2009/07/10/the-art-of-doing-business-and-avoiding-trouble-in-china//).

The art of doing business (and avoiding trouble) in China Mike Berrell is a former Professor of Work Organisation at RMIT University and an expert in China and the global economy. He has been working on and off in China for the past 15 years, and currently consults for multinational corporations operating in China. He is co-editor of the book Business Networks and Strategic Alliances in China. He talks about the art of doing business in China and avoiding trouble:How is it different to do business in China than in, say, Australia?The principle thing to keep in mind is that any initiative in China is based mostly on relationships. Personal relationships are of fundamental importance. So you have to make sure those relationships are established before you make any commitments, whether that’s intellectual or capital. The companies that have run into trouble have primarily been those that have gone in without those connections already in place.Do you think that’s been the case with Rio Tinto?Rio Tinto is a very large company, and I’m sure they will have done their homework. But there certainly have been cases where companies have gone in on the assumption that their prominence in the western economy will set them up, and that doesn’t always carry the day in China.Stern Hu has been living in China for many years, so it seems unlikely he would be unaware of the nuances of conducting business in China. Is it possible that Hu has somehow been acting against China’s interests?... it’s possible, but people don’t tend to deliberately act against the interests of China. Just because they don’t understand, they quite often put themselves in that situation. The thing you have to remember is that history is yesterday in China. People are still talking about things that happened 20 or 30 years ago.People talk about China opening up … but you only have to scratch the surface to realise that you’re dealing, in some ways, with a very traditional society with very conservative views.There’s been a lot of speculation that this is about China flexing its international muscle to the rest of the world in its place. What do you make of that theory?That might well be the case. It’s been fifteen years since China has come forward to rattle the sabre, but I think it probably isn’t that. I think there are probably other issues involved. And we may only start to find out about those two or three months down the track. The motivations of the Chinese are really made on the day. Sometimes they may not always think about what the consequences of an action will be one or two years down the track, and that’s something that many western business people find bewildering.Do you think Kevin Rudd’s softly-softly approach is the most appropriate way to handle the Hu situation?It’s the only way to handle the situation. To go full steam ahead, as the western mindset might encourage you to do, that never works in China.How much of Hu’s arrest do you think may have been about saving face?The thing about China is that face is the most important thing. You have to be very cognitive that if a deal falls apart, if the wheels fall of the wagon, it has to happen in a way that everyone comes out saving face.Are westerners working in China aware of the risks — that their phones may be tapped or that their emails may be intercepted?In my view, many western business people are not aware. They don’t have any induction into the way that China works, they just go in and think that because they’ve been living there for one or two years they understand how it works, and they don’t. It’s important to have that maintenance [when dealing with China] – the chief of the company needs to go on regular visits, even if they’re not directly involved, just to show that they’re still interested, and so on. It’s very important to know who your counterpart is, and also to know who the decision-maker is, because it’s not always the director who’s making the decisions.
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ABC RADIO / THE WORLD TODAYMonday, August 10, 2009 12:34:00 reported by Elanor Hall (http://www.abc.net.au/worldtoday/content/2009/s2651310.htm)
RIO TINTO REFUTES CHINA SPY CLAIMSELEANOR HALL: The mining giant, Rio Tinto, is today denying allegations that it's been spying on China for six years, and that its employee, the now-detained Stern Hu, helped extort $122 billion from the industrialising nation. The claims were made in a report by China's National Administration for the Protection of State Secrets which was translated by a Western journalist. Mike Berrell is a business consultant to an engineering firm that operates in China. He's been travelling there in recent days and says the allegations are a smokescreen. He joined me on the phone from Abu Dhabi a short time ago. Mike Berrell, how worrying is the use of the term 'spying' in terms of the Stern Hu case on semi-official Chinese websites? MB: Well I think that it has to be taken in context in that what is classified as a state secret in China is quite different from what is classified in Australia and other Western countries as state secrets. We would normally tend to think of anyone that's involved in the stealing of state secrets as being involved in traditional types of espionage. Where in China, the state security bureau has a very broad definition of what constitutes a state secret. And for all intents and purposes, it is really anything that is going to be significantly disadvantageous to the Chinese Government.EH: Are the Chinese authorities though trying to send a message here, by using this term 'spying' on their websites?MB: I think they probably are. They're trying to hit home very clearly the case that when you operate in China you have to operate by Chinese laws and they have tended to be a little bit heavy-handed in this case I think. It's been at least 15 years since we've had a similar type of event. So perhaps there is a message here in business, but again this is what came to our knowledge on the 5th July. So it's been only a couple of weeks into the process. I'm hoping, from my point of view, that it should be resolved in the next two to three months.EH: And what do you make of this figure of a $122 billion, more than Rio's total iron ore trade with China over the period.MB: I think that's again a message that this is Chinese view of the perceived damage that this has caused the industry over a period of time, a projected period of time. But you've also got to remember that this is a strategic industry for the Chinese and so they're going to of course be a little bit more creative with the figures that they're offering about the damage that this case has caused. And it also helps them, that it perhaps saves a little bit of face on the Chinese side to justify the actual course of action that they took.EH: So is this a case of Stern Hu just doing his job too well, or has he been caught in a wider espionage crackdown? I mean we've seen China cracking down on corruption in recent years.MB: Yes, look, this is something that of course being on the outside, looking in, you wouldn't know. But the way that you do business in China and of course there are a lot of people who don't really understand doing business in China, but it does involve network, relationships, it does involved understanding in part of what the other side's thinking and of course the most important thing for negotiating with the Chinese is that both sides maintain face during negotiations. So I suspect that something else has come adrift in these negotiations and it may well be that the Chinese Government have been looking at the people who Stern Hu's been dealing with, quite separately from Mr Hu. So again, being on the outside looking in, it's very difficult to know what's going on. But a way of doing business in China is working with all your network partners and gathering intelligence and you could be right that Mr Hu has done his job very well.EH: If this is China cracking down on corruption, is that ultimately a good thing for trade with the West and for Western companies, or is it scaring off foreigners?MB: No, I think in the long term it's got to be in the best interests of China to bring its index rating down as a corrupt country. Over a number of years, especially in intellectual property rights, it's been very keen to increase its perception in the West as a legitimate country in which to do business. So I think in the longer term, leaving aside the particularities of Mr Hu's case and Rio Tinto, in the longer term, this type of move against corruption will be welcomed by Westerners doing business in China.EH: In the interim, the businessmen that you're speaking to, are they watching this case with fear?MB: I wouldn't say with fear, with a bit of trepidation, I've had a number of calls from my clients who have asked me to review their current negotiation stances in China. In many cases I think people are just stepping back a little bit and waiting to see how this case is going to be resolved. Because it's in the best interests of all parties concerned for this to be resolved in a way that is open and a way that it's legitimate, but also a way that both the Chinese and Australians come out feeling yes, the best thing has been done. So I think in the longer term, yes, that people will move back into China again, perhaps with renewed confidence, but in the short-term they're sitting back and just saying, let's just wait for a minute and see what's going to happen over the next eight to 10 weeks.EH: Mike Berrell, thank very much for joining us.MB: Thank you, bye, bye.
EH: That's a China business analyst Mike Berrell.http://mpegmedia.abc.net.au/newsradio/audio/20090710-chinam.mp3

What not to do in Management Development

Even the best-laid plans go astray. This was certainly the case in management development programs, where an icebreaker and closing activity were not all they could have been. During a development session with Malays in a rural region early in my career, my colleague and I had included a sealed envelope in each workshop kit with the clear instructions "DO NOT OPEN'' until asked to do so by the facilitators at the first session. We had several packs of playing cards with us - these cards were distributed among the 40 participants but only royal cards were used (eg. eight Aces, eight Kings, eight Queens, etc). We had planned to conduct the first morning session using five groups of eight following our brief introduction. The cards had been distributed based on the profiles of the participants – our aim was to make sure that membership of the groups were evenly distributed to account for seniority, gender, age, job type, etc. At the opening, my colleague and I asked the participants to open their envelopes, take out the card and get together with the people who had a card of the same royal value as their card. Following the anticipated introductions and small talk, we expected the groups to begin bonding and form the basis of the morning's activities. Alas, we watched as the activity descended quickly into chaos. Some participants had absolutely no working knowledge of cards and had no idea of what to do, others did not like colour of the their cards and one male participant though that his Queen of Hearts was not appropriate – he asked if he could change – some changed and did not ask. Others, on seeing the chaos, simply formed their own groups. Good humor eventually prevailed and groups formed - the 2-day workshop was rated as very good overall by all participant but we cannot help but wonder if they understood about playing cards, would we have received a higher or lower rating.

The closing activity was revealed by a colleague who conducted a management development program in China, where a translator was used as very few participants had even the most rudimentary grasp of English. The theme of the program was something like leadership and engagement, where ''getting involved'' was an underlying theme. In other words, if you ''get off your chair'', become engaged, things will start to happen for you. To demonstrate this adage in practical terms, my colleague had taped a RMB100 note to the underside of each of the 30 or so chairs in the seminar room. At the conclusion, and with the help of the translator, the activity was supposed to go something like this. "Now, I want everyone to stand up and look at the underside of your chair''. As the participants retrieved the RMB note, the question was posed, ''What have you learned from this activity?'' The reply anticipated was something like the colloquialism ''If you off your #$@#!!, you'll make some money''. Before he could ask through the translator that the notes be returned, the participants quickly dispersed, with the notes in hand. I have visions of my colleague running after the participant trying to retrieve the notes. I think he gave up in the end. I've also wondered if the translator had a cut of the final action.

Management Issues in China

The cultural architecture of China is complex - in some instances, the architecture is homogeneous while in other cases, it is heterogeneous. Early studies portrayed Chinese managers as uniquely homogeneous and collective bunch, keeping in line with frameworks supplied by Hofstede et al. Their management practices and values seemed similar across China and much early research occurred within this dominant paradigm.

Recently, significant differences among the values of Chinese manager was observed by Ralston et al; younger managers appeared more individualistic, independent, profit-oriented and placed less value and reliance on patron-client relationships. In this setting, higher levels of individualism promoted a search for monetary rather than in-kind rewards. Uneven reforms in rural and urban areas, influence speed of adoptions of new policies, technology and practices within China. Instrumental attachments to work among the vast numbers of internal migrant workers also affected workplace practices.
In the above context, there are probably several Chinas - the neglected West, the old industrial belt of the northeast and the heartland around Wuhan, the south-west and the economic powerhouses of the coastal areas that stretch in a crescent shape from Beijing to Guangzhou. This economic architecture also brings with it another form of cultural diversity because distinct patterns of investment in China originate in Old China. There are favoured Economic Zones for overseas Chinese – those from Hong Kong and Macau tend to invest in Pearl River delta while those in Taiwan (Minnan) invest in Minnan River delta. The Chinese from East China invest in Yangtze River delta and the Eastern regions. With the WTO came a reaffirmation of agreements, a move to create and maintain a level playing field, more transparency, less regulation and an improved infrastructure. In the new environment, the entry of foreign firms was made comparatively easier. Foreign firms could also manufacture and distribute independently. Even the Chinese government agreed not to use its considerable power to benefit or assist local firms.
The implications of these developments for Chinese manager were considerable. A rapid transition from JVs to WOFEs as preferred entry mechanism occurred (although recently, the JV made a comeback). There were changes to foreign value chains in China and more direct negotiations occurred between foreign representatives and Chinese officials. In turn, this subtly affected the reliance of both foreign and Chinese managers on the networks of social capital in China. In addition, a sustained move from an outputs-based mindset to a performance-for-profit mindset gained currency.
Against this background and wondering if these changes had affected the way Chinese managers thought about managing, I executed a small research project during several consultancies in China. Experienced senior Chinese managers of IJVs were asked to identify management areas that they thought would be important for them in doing their jobs and getting results for their organizations in the next ten years. Five focus groups (12 managers in each) used a nominal group technique (NGT) to identify and prioritize important issues in management (completed in early 2005). An additional Q-Sort technique with the same groups (minus a few people who had ''gone elsewhere'') fine-tuned the data. While nearly all management issues gained a place in the initial identification, the NGT and Q-Sort produced the following five areas (in original order with no weightings attached), these were: 1. Performance management; 2. Innovation management and R&D; 3. Strategic HRM; 4. Risk management (including non-financial risk); and 5. Remuneration and rewards. After these issues, the others tapered off noticeably.
Borrowing from Tom Saaty’s AHP methodology, a further 191 managers (representing a cross-section of Chinese managers) from 15 organizations participated in a mini-AHP (accessed in-house via the internet). These managers were asked to rate the relative importance of each factors in the context of a series of stem questions that drive the AHP. The stem questions were of the type: In gaining better results for your organization, do you think that knowledge about innovation management and R&D is more important that knowledge about Performance management. These pairwise judgements allow for respondents to estimate how much more important one factor is over the other in the context of the question at hand. Judgements were made for the five priority management areas identified by the NGT. The AHP produced the following weightings for the priority management areas: Remuneration and rewards (.275); Performance management (.271); Strategic HRM (.190); Risk management (.149); and Innovation management and R&D (.115).
In the above context, there are probably several Chinas - the neglected West, the old industrial belt of the northeast and the heartland around Wuhan, the south-west and the economic powerhouses of the coastal areas that stretch in a crescent shape from Beijing to Guangzhou. This economic architecture also brings with it another form of cultural diversity because distinct patterns of investment in China originate in Old China. There are favoured Economic Zones for overseas Chinese – those from Hong Kong and Macau tend to invest in Pearl River delta while those in Taiwan (Minnan) invest in Minnan River delta. The Chinese from East China invest in Yangtze River delta and the Eastern regions. With the WTO came a reaffirmation of agreements, a move to create and maintain a level playing field, more transparency, less regulation and an improved infrastructure. In the new environment, the entry of foreign firms was made comparatively easier. Foreign firms could also manufacture and distribute independently. Even the Chinese government agreed not to use its considerable power to benefit or assist local firms.
The implications of these developments for Chinese manager were considerable. A rapid transition from JVs to WOFEs as preferred entry mechanism occurred (although recently, the JV made a comeback). There were changes to foreign value chains in China and more direct negotiations occurred between foreign representatives and Chinese officials. In turn, this subtly affected the reliance of both foreign and Chinese managers on the networks of social capital in China. In addition, a sustained move from an outputs-based mindset to a performance-for-profit mindset gained currency.
Against this background and wondering if these changes had affected the way Chinese managers thought about managing, I executed a small research project during several consultancies in China. Experienced senior Chinese managers of IJVs were asked to identify management areas that they thought would be important for them in doing their jobs and getting results for their organizations in the next ten years. Five focus groups (12 managers in each) used a nominal group technique (NGT) to identify and prioritize important issues in management (completed in early 2005). An additional Q-Sort technique with the same groups (minus a few people who had ''gone elsewhere'') fine-tuned the data. While nearly all management issues gained a place in the initial identification, the NGT and Q-Sort produced the following five areas (in original order with no weightings attached), these were: 1. Performance management; 2. Innovation management and R&D; 3. Strategic HRM; 4. Risk management (including non-financial risk); and 5. Remuneration and rewards. After these issues, the others tapered off noticeably.
Borrowing from Tom Saaty’s AHP methodology, a further 191 managers (representing a cross-section of Chinese managers) from 15 organizations participated in a mini-AHP (accessed in-house via the internet). These managers were asked to rate the relative importance of each factors in the context of a series of stem questions that drive the AHP. The stem questions were of the type: In gaining better results for your organization, do you think that knowledge about innovation management and R&D is more important that knowledge about Performance management. These pairwise judgements allow for respondents to estimate how much more important one factor is over the other in the context of the question at hand. Judgements were made for the five priority management areas identified by the NGT. The AHP produced the following weightings for the priority management areas: Remuneration and rewards (.275); Performance management (.271); Strategic HRM (.190); Risk management (.149); and Innovation management and R&D (.115).