It seems that everyday, more and more people are making the trek to Asia in search of the next big thing.
Every course I have been to on doing business there expounds the importance of 'GuanXi'. Despite this, I find that guanxi is still regarded as one of the most complicated and confusing aspects of Chinese business. In fact, a good number of businesses fail when they first go to China simply because they have no GuanXi.
GuanXi is considered by the Chinese to be one of the most important aspects of business and something they do not let go of easily. The reason is simple. GuanXi is the Chinese term to describe the nature and strength of relationships between people. The Chinese live the phrase "it is not what you know, but who you know".
The reason why so many Westerners don't get the Chinese relationship system is that GuanXi is the Western concept of relationship building on steroids. In the west, we see our business connections as people we can buy and sell from and essentially get our feet in the door when we have something to do. To the Chinese, often the relationship is more important than the actual business being conducted. In China, it is not uncommon for profitable deals to be turned down in favor of less profitable ones on the strength of GuanXi. Many Chinese will only deal with people they have close GuanXi relationships with and won't consider business from looser connections.
To understand this behavior, one needs to put themselves in the Chinese mind set when doing a deal. While the system is improving everyday, the legal system in China is still very difficult, time consuming and costly to manage. In many cases, contracts that would be iron clad in the Western World, often become unenforceable for a range of political, technical, legal and other issues. The Chinese know the law is there, but in order to secure their business interests, their society and culture is structured in such a way as to minimize the risk involved in doing business, even without a legally binding contract.
As a Westerner, imagine that you want to enter into a new businesses relationship with a company you have never dealt with before. The two most important things to do are due diligence on the company's capabilities and to form a legally binding contract that ensures that they will perform or suffer some repercussion for non-performance.
In China it is worth imagining that there is no contract (though we do not recommend you actually do business without proper contracts anywhere) and working out what your worst case scenario is when it is taken away. In many cases, it is akin to walking down the streets of New York and giving your money to the first person you meet who says they will invest it wisely for you without signing a thing.
GuanXi is the Chinese way of managing this risk. Through their wide networks of family, friends and associates business is conducted on the strength of the relationship. If a close family member or friend wants to do business, it is well known how they have behaved in the past when trusted with things, and that is used to gauge the level of risk involved in doing business with them. Likewise, a friend of a friend knows that he is introduced to deal on the strength of his friend's relationship and anything that he does to spoil the deal will not only damage his new relationship, but also that of his friend and also his name will become known in his close circles as someone who can't be trusted with one's reputation.
In essence, by misbehaving in a deal where your partner knows many of the people in your network, it is easy for your partner to spread word that you are untrustworthy in business and for you to find that there is nowhere to turn when you want to build your next deal. By behaving well, your GuanXi network expands and in turn increases your prosperity, by behaving badly, your GuanXi network will turn against you and lock you out of deals and make it very difficult to move forward in business.
The problem that foreigners face when they first enter China is that they do not know anyone. This is a two-fold problem. Firstly, when foreigners meet their Chinese partners, they are not connected to the GuanXi network in order to receive any red flags as to the trustworthiness of their partners. Unless the Chinese they are meeting volunteer information on past debacles, it is very unlikely that the foreigners would have any idea as to whom they are dealing until it is too late. Secondly, by not being connected to the GuanXi network deals are more at risk of going sour than if one was connected and dealing with the same people. This is because the repercussions for cheating a business partner who has no GuanXi network are very minimal. Even if they behave in the most treacherous way, the unconnected foreigner has no way to disrupt or even know about any of their other business arrangements. For this reason, foreigners can become targets of the most dangerous business people in China as they seek to swindle the easiest prey.
For the new company entering China it is often a 'Catch 22' situation, they have no network and in starting to building one they expose themselves to unnecessary levels of risk. The safest way to enter the market is to partner with another foreign company that knows the industry, the regulations and the right people to talk to to get things done. This way at least when they arrive they have some GuanXi credentials and are less likely to find trouble quickly.