ISSUE 4: THE CHALLENGE OF MANAGING YOUR CHINA OPERATIONS
The Good, the Bad & the Ugly Managers
China is constantly changing and international business needs to be able to adapt to the constantly changing environment. Many will need to decide whether their business objectives are still best served by operating a wholly owned subsidiary or whether new arrangements with Chinese partners (i.e. distributor, technology collaboration, JV etc.) will suit them better in 2022 and beyond.
If you intend to continue with your subsidiaries in China then greater local decision-making power seems to be a likely pre-requisite to success.
Indeed, some CEOs were so impressed with China’s dynamism so that they (briefly) proclaim a desire for their Chinese subsidiaries to “act and operate fully locally” or “We need to act and react like Chinese companies” or “Our management by-laws will be modelled on Sun Tze: Art of War”. However,it is difficult for MNCs to mirror the Chinese entrepreneur’s way of doing business as their corporate culture will be so different:
The above disconnect shows why a MNC cannot operate like a Chinese entrepreneur. Business is local but there are limits – although sometimes local managers are reluctant to accept this - but the China operations are part of an overall global group not a unique island. In some cases local management try and run the business in a manner very different from HQ’s practices or even in direct contravention to global practices. This never works - the Chinese operations are part of the global company – if the global company’s name is on the front door of the Chinese operation, then it also must be your company on the inside. Greater local decision-making power needs to be balanced with thoughtful oversight and sensible checks & balances.
In most cases, a Chinese subsidiary’s success will depend on a close connection and high level of interaction with the HQ. Much of this interaction takes place at the management level.
Companies are comprised of people – an advantage for expatriates is they can often build better rapport with head office … to allocate resources … gain support for new plans … get technical support. 30 years ago, expatriates were important to address skill shortages and bring the corporate DNA to the China operations. Today, qualified Chinese local managers have largely addressed the skill shortage issue but liaising with HQ can still be an issue. Chinese managers would likely benefit from a stint in the HQ so they can “feel” rather than “understand” the company culture. In addition, it is important to build rapport and trusted relationships with relevant stakeholders but also colleagues at the working level in the HQ. In my experience, many German companies excel at grooming Chinese managerial talent. Many Mittelstand companies can build a long-term relationship with their Chinese managers (they often walk around in company shirts even in their free time). Larger German companies offer the opportunity for Chinese managers to do stints in other locations – often in non-Chinese roles. This relationship building allows for quicker decision making on the stuff that should be decided locally but also in-built knowledge when HQ needs to be involved.
Management - the Good, the Bad and the Ugly
The Bad GMs often have the following traits:
Difficulty in seeking assistance – Often the manager feels it is a solitary responsibility to interpret China and deal with any difficulties which may arise. The problem is that such interpretation may not be objective (i.e. “fish cannot see the water”) or is more complicated and needs HQ support or is serious and HQ has a legitimate right to know what is happening.
Observe not Do - Observers are more comfortable in reporting difficulties to HQ rather than actually tackling the problems. Typically, these General Managers will blame anything other than themselves for a failure to get things done (e.g. the joint venture contract did not give them sufficient powers; the Chinese partner is being mean/difficult/unreasonable; the approvals have not been obtained, etc.).
The Hero - rather than complain about his situation, he revels in any difficult position he may find himself in. Very much like Hollywood movies the Hero cannot be a team player - having others to share the burden would distract too much from the star of the show. When the Hero does communicate with the head office, it is to (1) convince them that they do not understand; (2) cement a position as “our contact in China”. Heroes can normally only survive in General Manager positions if they have a patron in the head office. The reason being that they intend to infuriate everyone else by always replying “this is China”; “you do not understand”; “I have good guanxi” to any normal question one may pose. The good news is that once the patron falls, the hero will normally soon follow suit.
No matter how irritating bad General Managers are, there is a far worse category – the UGLY. The Ugly GMs come in many varieties but some of these include:
The “Partner” – this will typically impact a medium sized company’s WFOE/sourcing operations and flourishes when the General Manager is left to their own devices in China. This isolation has greatly increased since COVID. However, even in the past a visit by HQ personnel will be stage-managed like a Soviet state visit - no chance encounters with any other company personnel. HQ may feel uneasy as to their lack of knowledge of what is happening in their China outpost but are consoled that the venture is making a small profit unlike the JV horror stories. Responsible HQ personnel may resolve to do … something … to investigate its subsidiary in China as soon as there is more time available … but time never does become available … COVID … other fires to put out … other priorities ... China is far away. While HQ procrastinates the General Manager will slowly evolve at some imperceptible stage from no longer seeing themselves as an employee but rather as a partner in the HQ’s China business. This is a problem.
The Thief - Unfortunately for some General Managers, the title “CEO” is more an acronym for “chief embezzlement officer” rather than “chief executive officer”. Experience is that since COVID there has been a spike in clients concerns in relation to procurement fraud, embezzlement, diverting funds, competing with the business etc. In my experience, such managers are a small minority but they can be local or expatriate. The most common characteristics are that they thrive in an environment that has little corporate culture, limited oversight, poor controls, no checks and balances and the GM has typically been in their position for a long time. Many people think that there is less such behaviour amongst expatriates. I do not think that is true – it is not that the expatriates are more virtuous they just have not been in their role long enough.
The Megalomaniac – my personal favorite Ugly GM is the Megalomaniac. He resembles the Hero but with two very important differences: 1) unlike the Hero, he does not have the company’s interests at heart - he sees everything as being solely for his benefit; and 2) he does not seek any praise from the head office as he believes they are all deluded fools. Megalomaniacs have either no successor (i.e. no deputy general managers) or an abundance of successors (i.e. five or more deputy general managers). The reason is clear. A potential successor would contradict the main tenant of the megalomaniac’s management philosophy - he is irreplaceable.
NEXT ISSUE: DEALING WITH THE UNKNOWN UNKNOWNS IN 2021/2022
In 2021 and 2022 we saw a spike in compliance and fraud cases within foreign invested enterprises. What did they get up to? Did we resolve the issues? Did anyone go to jail? Spoiler alert: yes. Did we recover the money? Spoiler alert: not much yet. Did we learn from these cases? Yes. Can we share these learnings? Maybe.
The next issue will likely be the last on how COVID has impacted management of foreign invested enterprises in China. The next series of articles will be on how we see COVID impacting (or rather not impacting) China as part of the global supply chain.
Would be delighted to receive any feedback or points of view on this or indeed any other topic. You can always contact me by email @ mark.schaub@eu.kwm.com or leave a comment below.
Cheers,
