Part 3: Understand Your Partner
“If you know neither the enemy nor yourself, you will succumb in every battle“
- The Art of War by Sun Tzu
While it isn’t fair to call your partner in China an “enemy,” the overarching philosophy from this old Chinese saying also applies to the M&A world. The importance of developing a detailed understanding of your Chinese partner cannot be overemphasized.
It is essential for multinational companies (MNCs) to recognize that local players have a different approach to partnership models than their non-Chinese counterparts. I summarize the differences of business practices between Chinese companies and western multinationals in the table below. Although it is hard to make a generalization, there are a few patterns to draw; for example, the different perspectives on “trust.”
Many MNCs have realized that the speedy post-merger integration approach applied in developed markets would not work well in China because of drastic differences in corporate cultures, management styles, and employees’ understanding of career. For example, many MNCs do not understand the root cause of why employees in Chinese SOEs don’t always have strong motivation for job rotation and geographic relocation.
This is actually due to the deeply ingrained “bianzhi” system in China. Basically, bianzhi refers to the staff quota that is linked to an organization’s budget and is determined by the central planning authorities. If a company employs extra workers above the level set by bianzhi, it will not receive funding for these positions, nor for the other benefits provided to employees. The bianzhi system makes it difficult for a company to recruit staff outside of formal mechanisms, adding another obstacle to labor mobility and strengthening the bureaucratic links that bind individuals to their company.
Experienced multinationals recognize that a successful joint venture requires credible, high-performing executives supported by strong local teams. Therefore, MNCs should not allow its local partner to run the company locally because this results in the foreign company gradually losing any visibility into the business operation. As one of my clients, a CFO from a chemical MNC puts it, “finding the right partner is more important than timing in China – if both fall in place, then you’re lucky.”
Read Shailene’s full report on Partnership Models in China here.