The China Rules: A Practical Guide for Multinational Leadership

Context and Challenges of Executive Leadership in China

• The Chinese Proverb Perspective: A Yuan Dynasty proverb states, “An army of a thousand is easy to find, but, ah, how difficult to find a general.” This sentiment reflects the current struggle of CEOs and human resource managers to find effective leadership for their China operations.

• Economic Context: China is the world’s third-largest economy as of the time of the study (2010), described as "red-hot" and "pulsating with opportunity."

• Expatriate Failure Rates:

  • China is ranked as one of the most challenging destinations for expatriates.

  • Anecdotal evidence suggests the failure rate (underperformance and early departures) for expats in China is twice that for expats in other countries.

• Conventional vs. Deeper Explanations for Failure:

  • Conventional Wisdom: Attributes failure to a lack of cultural fit, family issues, and inadequate support from headquarters.

  • Deeper Explanation: Lynn S. Paine argues that executives are ill-equipped to handle unique challenges because leading in China requires a repertoire of skills that often conflict with standard Western business teaching and practice.

The Research Study by Lynn S. Paine

• Methodology: Paine interviewed the China business heads of approximately 24 large American, European, and Asian (non-mainland) companies over a three-year period.

• Subject Demographics: All interviewees were male. Half were from North America and Europe; the other half were from Asia. Two were mainland Chinese (one of whom had worked overseas for over a decade).

• Essential Foundations for Success: The study confirms that success requires:

  • Cultural understanding and adaptability.

  • Market knowledge.

  • The ability to sense and respond to rapid change.

  • Support from headquarters.

• Contradictory Traits Required for Success: Effective leaders must be able to play roles that Westerners often view as contradictory:

  • Strategic yet hands-on.

  • Disciplined yet entrepreneurial.

  • Process-oriented yet sensitive to people.

  • Authoritative yet nurturing.

  • Firm yet flexible.

  • Action-driven yet circumspect.

Lesson 1: Understanding the Market via Government Collaboration

• Misconceptions: Many executives arrive with a narrow focus on sales and an ideology of limited government, underestimating the state’s role.

• Time Allocation: More than half of the CEOs interviewed spend $20\%$ to $50\%$ of their time dealing with policy issues and Chinese authorities.

• The Necessity of State Support: In most industries, it is impossible to succeed without the government's backing. Success requires aligning corporate strategy with the Chinese government’s goals.

• Strategic Approaches to Government:

  • Beyond Connections: While "high-level connections" are useful, leaders must demonstrate how their project contributes to China's development.

  • Example: Diesel Technology: American companies failed to open China to diesel tech by citing their $5\,\text{billion}$ investment; they succeeded only when they argued that diesel helped China address energy efficiency, national security, and environmental issues.

  • The Risk of Bribery: Lining pockets is perilous; companies like Lucent, Siemens, and Daimler have recently faced settlements for bribery charges.

  • Case Study: HSBC China: CEO Richard Yorke (or deputies) visits authorities in every city where the bank operates or plans to operate. This builds common understanding and aids strategy execution, leading to HSBC having more branches in China than any other foreign bank.

• Corporate Citizenship: The Chinese government and public expect multinational companies to be "good corporate citizens" to a higher degree than in the U.S. or Europe.

  • Active Investment Examples:

    • Ericsson: Installing mobile tech in rural China.

    • Samsung: Building ties between operating companies and remote farming villages.

    • GE: Involvement in training China's senior leaders.

Lesson 2: Adapting Locally while Maintaining Global Standards

• Higher Expectations: The Chinese public is more critical of foreign companies than local ones and expects higher ethics from them.

• The "When in China" Trap: Taking a loose approach to ethics leads to accusations of double standards.

• Compliance Challenges: Conduct guidelines often clash with local traditions:

  • Safety: Communist Era beliefs sometimes viewed dying on the job as a "heroic sacrifice."

  • Gifts: Strict limits conflict with ingrained traditions of showing respect through gift-giving.

  • Loyalty: Rules against conflicts of interest compete with personal loyalties to family or social networks.

• Managing Conduct:

  • Physical Infrastructure: Companies must invest in physical changes (reconfiguring roads, pedestrian walkways, safety equipment) to enforce standards.

  • Communication: Use clear, non-negotiable standards. For example, knowing a company won't tolerate bribery is useless if the employee doesn't know how to refuse one in practice.

  • Monitoring: Many CEOs appoint business practices officers, internal auditors, or health/safety personnel and set up "corporate integrity committees."

  • The Power of Deeds: Paine cites a CEO of an unprofitable multinational who donated to a local hospital. Though workers initially balked ("How can the company feed others if it couldn't feed itself?"), the gesture established societal commitment as a cultural hallmark.

Lesson 3: Building a People-Centric, Performance-Driven Workplace

• Demographics and Talent: Talent supply is limited and quality varies by region and age. talent loss is a major concern for nearly half of the CEOs.

• The Workplace as Social Community: Chinese employees often view the company as a social network and want a "caring" boss rather than just a professional manager.

• Soft Skills as Performance Drivers:

  • Executives socialize after hours, host frequent lunches, and occasionally officiate at weddings.

  • Case Study: Cyrille Ragoucy (Lafarge and Shui On): Ragoucy found workers in a cement-making venture in southwestern China who were unwilling to boost productivity (some even slept on the job). By focusing strictly on workplace safety, he proved the company cared about the workers and their families, which ultimately drove performance improvements.

• HR System Modifications:

  • Japanese companies have moved away from seniority-based pay to performance-based approaches.

  • Hitachi: Notifies managers three years in advance if they have been designated to head a China business.

• Guidance vs. Micromanagement: While Western schools deride micromanagement, Chinese employees often desire detailed instructions and guidance on how to reach goals.

Lesson 4: Driving Costs Down while Maintaining Quality

• The Competitive Threat: Foreign firms now face low-cost, fast-paced, and sophisticated local rivals.

• Segmentation Strategies:

  • Otis Elevator: Discarded its one-brand strategy in favor of four brands and four operating entities to serve different segments. This resulted in a sixfold revenue boost (2000–2009) and a market share increase from less than $10\%$ to more than $20\%$.

• Reengineering Infrastructure: Some CEOs are reducing turnaround times for decisions and building local research capabilities.

• The "Fitness for Purpose" Shift:

  • Traditional B-school teaching says companies must choose between low cost and high quality.

  • Honeywell China (Shane Tedjarati): Shifted focus from "technological sophistication" to "fitness for purpose." This allowed them to develop a low-cost turbocharger that captured significant local market share by 2008.

Lesson 5: Managing Complexity and Personal Sustainability

• Environment of Tensions: China balances communist fealty with wealth disparity, and long-term development plans with "cowboy capitalism" short-termism.

• Flexibility vs. Discipline: While flexibility is needed, executives must have the courage to turn down opportunities that do not make strategic sense. In a world of "gray," effective leaders take a "black-and-white" approach to priorities.

• The Emotional Toll:

  • Frank Braeken (Unilever): Likens leading in China to "walking on ice," where every muscle is constantly tense.

  • Time Compression: "Here you have three months to accomplish what would take two years in most other places."

• Burnout Prevention: The fusion of personal and professional life leaves little time for reflection. Successful leaders need:

  • Support systems (family, friends).

  • Self-discipline to respect their own needs.

  • Sources of renewal (exploring history, culture, or natural wonders).

  • Clinton Dines (Former BHP Billiton China Head): Notes the key is to "shift the prism a little so you see things differently."

Questions for Assessing Readiness to Lead in China

According to the "Ready to Lead in China?" sidebars, executives should ask themselves several key questions:

• Dealing with Government: How aligned is your strategy with the government's development plans? How much are you prepared to give up (IP, principles, resources) for approval?

• Managing Business Conduct: Do employees/partners accept your standards? Do you give practical guidance on areas like bribery or conflicts of interest?

• Developing the Workforce: Are your leadership programs tailored to high-potential Chinese employees? Are you sufficiently involved in directing work?

• Competing for Customers: How closely do your offerings meet expectations for low cost and high quality? Is your organization suited for a fast-paced environment?

• Coping with Complexity: What are your sources of renewal when the going gets tough? Does your personal network include Chinese friends with whom you can relax?