“An army of a thousand is easy to find, but, ah, how difficult to find a general.” So runs a Yuan Dynasty Chinese proverb that has, tellingly, found its way into the parlance of CEOs and human resource managers eager to grow their China businesses today. Achieving growth and profitability in the world’s third-largest economy depends on leadership, but China is tough on top executives. The red-hot economy, pulsating with opportunity, attracts foreigners—both ethnic Chinese and non-Chinese—but HR professionals continue to rank China as one of the most challenging destinations for expatriates. Hard numbers are lacking, but anecdotal evidence suggests that underperformance and early departures add up to a failure rate there that is twice that for expats in other countries.
The difficulties expatriates face are attributed to a lack of cultural fit; familial issues; and inadequate support from headquarters, in that order, according to conventional wisdom. Although these are contributing factors, there’s also a deeper explanation: Many executives sent to lead China operations, I fear, are ill equipped to tackle the country’s unique challenges. Moreover, it’s hard to overcome that handicap, because leading in China calls for a repertoire of skills that goes beyond and in some cases conflicts with standard business teaching and practice.
As a result, foreign executives must be adept at reworking management orthodoxies in real time if they’re to do well in China, as I discovered when I interviewed the China business heads of around two dozen large American, European, and Asian (non-mainland) companies over the past three years. All of my interviewees were male. Half were from North America and Europe; the other half, from Asia. Of the two mainland Chinese, one had worked overseas for more than a decade before moving back home. My study confirms that success in China demands cultural understanding and adaptability, market knowledge, the ability to sense and respond to rapid change, and support from headquarters.
All that isn’t enough, however. The most effective leaders have also picked up the crucial ability to play roles that Westerners often view as contradictory: They are strategic yet hands-on; disciplined yet entrepreneurial; process oriented yet sensitive to people; authoritative yet nurturing; firm yet flexible; and action driven yet circumspect. Above all, they must have the intellectual dexterity to develop new frameworks and capabilities to meet China’s particular circumstances.
In the following pages, I illustrate how CEOs have modified accepted wisdom to tackle the biggest challenges they face in China. Though some of the five lessons here may seem like common sense to experienced China hands, they’re anything but to a freshman expat. As several CEOs told me, most of what they learn in China is neither written in books nor taught in classrooms.
1. Understand the Market, but Work with the State
Many executives, particularly expatriates, approach their China assignment with a narrow focus on driving sales. Imbued with an ideology of limited government, they (and their bosses back home) underestimate the state’s role in the economy. That needs to change if they want to succeed in the marketplace. Despite the opening of the economy to foreign companies over the past three decades, more than half the CEOs I spoke with spend 20% to 50% of their time coping with policy issues and dealing with the authorities in China.
Few executives have had formal training in dealing with government, and approaches picked up in the U.S. or Europe don’t translate well to China. Many CEOs chafe at stalled negotiations and bureaucratic interference when they should be figuring out how to work with Chinese authorities. That’s critical; in most industries, it’s impossible to do well in China without the government’s backing. Successful CEOs ensure alignment between their strategies and the Chinese government’s goals by deciphering the state’s priorities and gaining insight into how the bureaucratic machinery works.
More than half the CEOs interviewed spend 20% to 50% of their time dealing with policy issues and the authorities.
Executives often believe that obtaining government support for big business deals is just a matter of forging high-level connections or lining the right pockets. Connections are no doubt useful, but experienced leaders know that they must also demonstrate their project’s contribution to China’s development. The efforts of American companies to open China to diesel-based technologies, for example, didn’t work until the argument shifted from “You’ve got to help me because I’m investing $5 billion” to “Here’s how diesel can help China address its energy efficiency, national security, and environmental issues.” Lining pockets, moreover, can be perilous, as recent settlements of bribery charges by companies like Lucent, Siemens, and Daimler underscore.
Working with government isn’t a matter of periodically wining and dining the right officials or reacting when policies change; it must be a central part of the strategic-planning process. Every year, HSBC China CEO Richard Yorke or his deputies visit the main authorities in each city where the bank has or would like to have a branch. They ask for feedback on its performance and plans, and learn about impending policy directives. HSBC gains valuable data, provides regulators with information, and builds a common understanding of its priorities. This helps the bank gain support for its strategy execution; unsurprisingly, HSBC has opened more branches in China than has any other foreign bank.
Accustomed to strategy frameworks that regard shareholder value maximization as the main objective and assume the noninvolvement of government, executives don’t naturally consider society’s needs while formulating strategy. Yet in China, people and the government expect multinational companies to be good corporate citizens to a greater degree than in Europe or the United States. Companies can demonstrate their commitment by investing in China’s development. Ericsson’s efforts to install mobile telecommunications technology in rural China; Samsung’s program to build long-term ties between its operating companies and remote farming villages that need a helping hand; and GE’s involvement in training China’s senior leaders are all integral to the businesses’ strategic positioning, not optional extras.
2. Adapt to Local Conditions, but Implement Global Standards
Primed by news reports about China’s problems with pollution, corruption, unsafe products, and intellectual-property theft, many executives assume that business ethics can take a back seat to other concerns. They don’t realize that the Chinese are more critical of foreign companies than of local ones and expect more from them. While B schools may teach that firms should adapt to their surroundings, executives who take a “when in China” approach set themselves up for accusations of double standards from the Chinese people and government.
Meeting global standards of business conduct can be challenging, however. Well over half the executives I talked to said compliance was a top concern. Employees may not understand the practical implications of their company’s conduct guidelines, and some international tenets don’t mesh with long-standing practices in China. For example, Chinese attitudes toward workplace safety tend to reflect the Communist Era belief that dying on the job is a heroic sacrifice that brings honor to the victim’s family. Strict limits on gifts and entertainment run up against ingrained traditions for building relationships and showing respect. Although the Chinese populace increasingly observes norms against bribery, self-dealing, and undisclosed conflicts of interest, these rules do compete with the personal loyalties that bind people to families and social networks.
Executives also have no choice but to invest heavily in physical infrastructure to ensure compliance with global norms. Many companies have reconfigured roads, built pedestrian walkways, and installed new equipment to meet safety standards. Others have invested in equipment and technologies to control emissions levels or adhere to other environmental guidelines. And some have reintroduced processes long discarded in developed markets, such as logging all faxes to reinforce the diligent use of company assets.
Education, formal and informal, is crucial for success. Management may think that “Cross the road safely” implies that employees should use the new pedestrian crosswalks, but people may take it to mean that they need to look both ways when darting through traffic.
Clear communications about nonnegotiable standards—those that employees will lose their jobs for violating—are an essential part of hiring and orientation. Educational materials and real-time instruction should provide employees with practical guidance on dealing with difficult situations. It isn’t helpful, for example, to know that your employer won’t tolerate bribery if you don’t know what to do when someone asks for a bribe. Some companies run seminars to discuss such sticky issues not only with their workers but also with suppliers and distributors.
Many CEOs appoint business practices officers to manage compliance efforts and set up corporate integrity committees to make policy decisions and oversee investigations of misconduct. Some also add extra layers of monitoring. One company requires special committee approvals for certain kinds of sales and marketing expenses to ensure that they don’t run afoul of the organization’s limits on gifts and entertainment. Other corporations have increased the proportion of business practices officers, internal auditors, or health, safety, and environmental personnel. Some leaders have included values-related measures in performance-appraisal systems. Many make a point of investigating even small infractions and taking quick, decisive action to terminate employees who have knowingly violated core standards.
To maintain high standards in the difficult Chinese environment, leaders must embed values in organizations not just through words and processes but also through deeds. When employees of one then-unprofitable multinational learned that the CEO had approved a donation to the local hospital, they balked, asking how the company could “feed others if it couldn’t feed itself.” The leader walked these workers through his logic, pointing out that contributing to the community was as important as paying them and serving customers. The gesture made a lasting impression on employees, who today regard the company’s societal commitments as a hallmark of its culture.
3. Pay for Performance, but Build a People-Centric Workplace
China’s talent supply is limited, as every CEO knows, and its quality varies dramatically across regions, sectors, and age groups. These demographic realities explain why my interviewees credited China with giving them a newfound appreciation for the importance of people—compared with technology, capital, or raw materials—for success. Nearly half said that the loss of talent is a major worry, despite the recent recession, and a quarter felt that personnel decisions were their most difficult.
Attracting and retaining people in China isn’t just about pay or providing opportunities for advancement; it’s also about creating a workplace that engages the whole person. For many Chinese, the company is as much a social community as a place of work, and they want their boss to be more than a taskmaster or a distant professional. To reach people on a more personal level, smart executives make themselves more responsive and their companies more caring. For instance, they increase the sponsorship of worker-organized events and expand employee involvement in community and civic-responsibility programs. They also make themselves more available, hosting frequent lunches and town hall meetings, socializing with groups of employees after hours, and officiating at weddings on occasion. Taking an interest in workers’ families and personal lives may feel like an invasion of privacy to foreigners, but to most Chinese, it’s just part of showing respect and being a good boss.
For many Western executives, time spent on soft issues like these is time lost on hard ones such as achieving performance targets and improving productivity. However, contrary to popular belief, sincere concern for employees’ welfare can be a key factor in driving performance improvement in China. In 2005, for example, when Cyrille Ragoucy arrived to run a newly formed cement-making venture between Lafarge and Shui On in southwestern China, he found that some workers were unwilling to boost productivity to the levels expected by Lafarge. Veterans of state-owned enterprises, many had never been challenged, and a few had made a habit of literally sleeping on the job. After the management team showed its commitment to workplace safety—by investing in new equipment, roads, and walkways; introducing new work processes; providing training; and demonstrating its willingness to shut down the plant for safety reasons—employees became more engaged in efforts to improve performance. “With safety, you’re talking about people, you’re talking about families,” explained Ragoucy. “If you’re strict and focused on safety, it’s a big step toward performance.”
At the same time, CEOs in China strengthen HR systems to make organizations attractive to employees. They create talent management programs, accelerate promotions processes, and modify compensation practices to fit local needs. Japanese companies in particular have had to abandon traditional seniority-based pay systems in favor of the market- and performance-based approaches that Chinese employees prefer. Some multinational companies have increased learning opportunities and appointed local Chinese to top management positions. Hitachi, for instance, turned standard policy on its head by letting managers know three years in advance that they’d been designated to head some of the company’s China businesses.
American B schools teach that people are most motivated when managers set clear goals and allow employees to decide how to achieve them. Getting too involved in subordinates’ work is derided in the West as micromanagement. In China, because of inexperience, employees usually want more guidance on how to reach their goals and are more likely to look to the boss for detailed instructions. That’s why effective leaders there closely oversee subordinates’ work, taking the opportunity to lead by example or intervene when teachable moments arise.
“You can’t be a hands-off manager in China. You can—but you won’t last long.”
One interviewee pointed out: “You can’t be a hands-off manager in China. You can—but you won’t last long.”
4. Drive Costs Down, but Maintain Quality
Even after decades of experience, many multinational companies struggle to find business models that work in China. Intellectual-property theft and purveyors of fake products continue to be concerns, and executives worry about inadvertently offending customers through cultural missteps.
Having reached the limits of selling their home-country products to high-end Chinese buyers, foreign companies are going head-to-head with low-cost, fast-paced, and sophisticated local rivals. Smart ones have modified strategies to take on these competitors. Otis Elevator, for instance, conducted an analysis of other industries’ evolution in China and discarded its customary one-brand strategy. It created four brands and, through partnerships with local companies, four operating entities to serve different segments. From 2000 to 2009, Otis boosted its revenues in China sixfold, and its market share grew from less than 10% to more than 20%.
To develop offerings for China’s vast middle market, CEOs are rethinking their organizations. Some are accelerating decision making by setting limits on turnaround times and reducing the number of participants who must have a say. Others are building local research capabilities and revamping product development processes. The most ambitious are conducting comprehensive reviews of their first-world infrastructure and reengineering it to reduce costs, save time, and improve responsiveness.
To develop offerings for China’s vast middle market, CEOs are reengineering their firms’ first-world infrastructure.
Shifting from eliminating features to make a product that’s 20% cheaper to designing a new product that is a third of the cost raises vexing quality issues—a major concern for nearly half my interviewees. Having learned in B school that companies must choose between low cost and high quality, some CEOs say that loss of quality is inevitable when going down market and fret about the long-term consequences. Effective leaders, though, are looking for ways to crack the conundrum. They realize that developed-country biases often constrain innovation. Honeywell’s China president Shane Tedjarati says that once his R&D teams stopped equating quality with technological sophistication and focused instead on fitness for purpose, new possibilities emerged. Honeywell China was then able to develop a low-cost turbocharger that met Chinese customers’ needs, and by 2008 it had captured a significant share of the local market.
5. Recognize Complexity, but Define Clear Priorities
Everyone knows that China is a land of tensions that can’t be easily reconciled. Long-term plans for the country’s development vie with short-termism that puts quick money before health and safety. Fealty to communism coexists with extreme disparities of wealth, and the country’s socialist market economy at times seems more akin to cowboy capitalism. While some argue that China will evolve into a “normal” (read: “market”) economy, others see it as creating a new form of state capitalism.
In this environment, flexibility is critical for success—but there’s such a thing as going overboard. Executives who are too responsive to the moment’s pressures, too willing to modify critical policies for temporary advantage, and too open to the vast array of opportunities in China run the risk of jeopardizing their ability to accomplish anything of significance. The ability to turn down opportunities that don’t make strategic sense requires an understanding of the company’s business as well as courage and self-discipline. Many interviewees cautioned me about the temptations and dangers of rolling with the system. In a world of so much gray, effective executives adopt a more black-and-white approach. They keep on track by defining clear priorities—strategic, ethical, operational, and personal—and sticking to them.
Leading a business in China is as much a personal challenge as a professional one. Even for CEOs with experience in other cultures, China is uniquely demanding of their energies. Unilever’s Frank Braeken, for example, likens his experience to walking on ice: “All your muscles say, ‘Be careful; you will fall,’” he says. “You are always tense.” Some anxiety comes from not fully understanding the surroundings. Expatriates face cultural and linguistic barriers that cloud perceptions and block access to information. Chinese managers’ seemingly roundabout ways of communicating, sudden changes of plan, unexplained lack of follow-through, and “yeses” that actually mean “no” frustrate Western executives, while Japanese managers are unable to understand the Chinese desire for guidance on what’s tacitly well understood.
The all-consuming nature of leading in China takes an emotional and physical toll on most executives. “Here you have three months to accomplish what would take two years in most other places,” said one leader, echoing a common theme in my interviews. The Chinese culture’s fusion of personal and professional life means that CEOs have little time for family or for personal pursuits, let alone for rest and renewal. Events routinely thwart plans and schedules, and the relentless need for decisions crowds out thought and reflection. “If you stop to think, decisions will pile up behind you,” explained one harried CEO.
Support systems are crucial for warding off burnout. Executives need to be skilled at forging relationships with bosses and colleagues in the global organization and in China. They must have the self-discipline to respect their own needs and those of their families, who may be struggling in an unfamiliar environment. Above all, managers must find sources of energy and self-renewal to sustain their capacity to lead: time with friends and family, community involvement, learning about China’s history and culture, exploring its natural wonders, and so on. Several respondents cited the opportunity to contribute to China’s development as an energizing factor.
Executives who thrive in China treat their stints in the country as opportunities for learning and growth instead of resisting the unfamiliar. According to former BHP Billiton China head Clinton Dines, the key to a positive experience is to “shift the prism a little so you see things differently.” By doing that, expatriate executives can work more effectively and enjoyably with their Chinese colleagues.
Improving the success rate for expats is less about finding rare individuals with the distinctive profile to succeed in China than about developing a larger pool of qualified candidates and increasing the business world’s knowledge about the country. Despite all the lip service paid to these goals, the level of practical understanding about China remains shockingly low in executive suites, and the China-related content in most B school curricula is limited. Perhaps more important, the theories and frameworks that dominate business have not yet been examined for their validity in China. Until lessons from China are written into management books, the success rate for executives there is likely to remain disappointing.