Learn to Expect the Unexpected in Global Retail Expansion

Taking a proven retail model and exporting it to a new country, often with a new set of competitors, a different language and culture, and unique shopper expectations requires more than just market research before entry.

[powerpress: http://gsbm-med.pepperdine.edu/gbr/audio/fall2011/KenFox_Article.mp3]


Walmart-China

Photo: Ken Fox


Global retail expansion has attracted many followers. These include small to medium-sized companies, some new to international expansion, and others in more mature organizations. The success of newer, specialty retailers in the international market, such as Zara (Spain), H&M (Sweden), and Shanghai Tang (Hong Kong) have paved the way for others to follow. Perhaps surprisingly, a number of well-known retailers have failed to succeed in certain global markets due to a variety of reasons. These include regulatory, legal and cultural challenges, competition, and trying to change shopping behavior. The purpose of this article is to analyze the successes and failures of retailers who, seeking future growth, have entered global markets, and to offer lessons learned for future global enterprises to maximize their chances of success.

Even the Biggest Retailers Can Falter

Walmart, considered the world’s largest retailer, did not have success in its global expansion into the retail markets of Germany and South Korea.[1][2][3] Walmart entered Germany in 1988 and, after opening 88 stores, left in July 2006 with a $1 billion write-off.[4] There were multiple reasons for leaving including tough competition, loyal country patronage (local customers may have preferred to shop at familiar and German-owned retailers, like Metro), and cultural differences.[5] Shoppers in this country thought smiling and friendly female sales clerks were flirtatious and unacceptable.[6] Sam Walton’s morning cheer (W-A-L-M-A-R-T), long store hours, and often resistant labor unions also contributed to their eventual departure.[7][8][9]

Similarly, Walmart entered South Korea in 1988 and left in May 2006 after opening 16 stores. Although competition was tough, Walmart also failed to anticipate problems with applying U.S. standards to stores in South Korea, such as using store shelves that were too high for short South Korean female shoppers, and wrapping fish in clear cellophane, despite the custom in South Korea of always buying fresh fish, alive in fish tanks at retail.[10]

Carrefour, from France, the world’s second largest retailer, also had problems and left specific international markets including South Korea.[11][12] It left Thailand in 2010 after opening 31 stores and may leave Malaysia in the near future. In late 2009, Carrefour pulled out of Russia four months after opening two stores. The company justified the closing citing,“…the absence of sufficient organic growth prospects and acquisition opportunities in the short and medium term that would have allowed Carrefour to attain a position of leadership.” However, the company was also concerned about pending Russian legislation that would limit the share of retailers with annual sales of 1 billion Russian rubles (approximately $32.6 million U.S. dollars).[13]

Carrefour created the hypermarket (from French hypermarche) concept in 1962.[14][15][16][17] It represents a gigantic retail store, which combines a full-service supermarket with a department or discount store. The average size of Carrefour’s hypermarkets is 215,000 square feet. Some of the original units in France have 95 checkout stations, 2 floors, and oversized shopping carts that interlock onto escalators for consumers traveling between floors. Other global retailers, such as Tesco, also operate hypermarkets. Walmart has utilized this hypermarket concept in creating their Supercenter stores in U.S.[18][19][20]

Carrefour once opened a hypermarket in the United States (Philadelphia, Pennsylvania) in 1976. It used a format straight from France, with no adaption to the U.S. market. Soon after opening, it faced a labor union strike, along with consumer resistance that eventually drove them to leave the market. Carrefour’s huge hypermarkets are difficult to keep profitable in markets with increasing competition, where consumer shopping behavior may need to change, and when shoppers are very price-sensitive.

Asia Represents New Challenges

Another recent example of a global expansion that faltered is Best Buy, which closed 11 stores in China during the first quarter of 2011. Electronics such as PCs and laptops are typically sold in major Chinese electronic retail stores where each manufacturer has a counter with an employee working as a sales agent.[21] Stores with names like Gome and Suming are often crowded, dirty, and noisy, but offer low prices. Best Buy tried to bring its U.S.-concept stores to China, offering cleaner stores, wider aisles, and non-commissioned sales people who were knowledgeable across multiple brands. However, Best Buy’s China endeavor required Chinese shoppers to change their shopping and buying behavior and expectations when buying electronic goods. Furthermore, Chinese electronic store competition offered lower prices than Best Buy. Though all of the stores carrying their name are gone, Best Buy still maintains a presence in China after acquiring a chain of electronic retail stores called Jiangsu Five Star Appliance, keeping the local store name and format.

India, with a population of 1.1 billion people, poses the greatest challenge to large international retailers. The Indian government has refused to allow big retailers to enter their market.[22][23] The rationale is to protect the thousands of small mom-and-pop stores, which dominate the market and currently supply daily foodstuffs and other products to their local populations.[24] These local small stores build personal relationships with customers, often offering home delivery, easy credit, and gifts and discounts to loyal customers.[25] Indian regulations for foreign retailers are complicated. Big-box stores such as Walmart or Carrefour are only allowed to partner with Indian companies in the wholesale sector, rather than selling directly to customers.[26] However, single brand retailers like Levi Strauss that primarily sell one manufacturer’s product are allowed to sell directly to consumers, but they must also have a (local) joint-venture partner. Global retailers such as IKEA, Walmart, Carrefour, and others are standing by to see if the government may ease these restrictions and let large retailers enter the market.[27] Walmart has entered India through the back door by forming a joint venture with the largest Indian cell phone operator, Bharti Enterprises. The Walmart store name cannot be seen in India; the joint venture store is called Best Price Modern Wholesale.[28][29]

Another U.S. retailer, Starbucks, has found a way to enter India. Starbucks recently formed a joint venture with India-based Tata Group to help them enter India by sourcing and buying coffee with Tata’s Coffee Division, which owns and operates coffee plantations.[30] Coffee has more popularity in Southern India but has gained a broader acceptance across the country in the past decade. New coffee chains appeal to young Indians who have more disposable income than their parents did when they were young. Along with being one of the fastest growing countries, India is also one of the youngest with about one-half of the population under 25 years old. Additionally, The Tata Group is allowing Starbuck’s to set up retail stores in their very upscale Taj hotels.

Global Expansion in the U.S. is Neither Fresh nor Easy

Tesco, the U.K. grocery chain and third largest retailer in the world, entered the United States with a healthier convenience store chain called Fresh & Easy. They studied the market for one year, sending more than 50 U.K. executives to live with California families, and then only opened stores in the West coast in California, Nevada, and Arizona.  Unfortunately, Tesco opened these stores in 2007, just before the recent financial crisis, and in general, sales have been disappointing.[31][32][33][34] Even with their extensive market research, they may not have obtained all there is to know about the U.S. food retail market. They did not hire a U.S. country manager or partner with an existing U.S. retailer or company that could offer insight into the very competitive U.S. market. Tesco’s initial long-term goal was to open 1,000 Fresh & Easy stores in the U.S. However, three years after opening their first store, they still only have 175 stores. The company lost $300 million in their most recent fiscal year ending February 26, 2011. A number of initial judgment errors may also have contributed to Tesco’s disappointing debut in the U.S. market including:[35]

  1. Offering fresh fruit and vegetables pre-wrapped in plastic, where U.S. shoppers generally prefer to select these items individually.[36]
  2. Selecting a number of the store sites that were retrofits, where previous supermarkets or food stores failed.
  3. Selecting some store sites that were located on the wrong side of the street, more accessible to inbound rather than outbound commuters who would be more likely to be thinking about what to buy for dinner.
  4. Selecting stores located in geographic areas with the highest rates of (real estate) foreclosures in the nation.
  5. Initially not accepting manufacturer cents off coupons.[37]
  6. Initially designing stores with concrete floors and a “stark” look.
  7. Using private-label, Fresh & Easy-branded products for about 50 percent of the products offered, where U.S. shoppers prefer recognizable and better known brand names.[38]

After initial store sales slowed, Tesco executives halted expansion plans, and made adjustments to the merchandise mix, accepted store coupons, and expanded store hours.[39] It seems Tesco’s original rollout plan may have been too ambitious.[40] The decision to continue expansion or pull-out of the United States has been postponed until 2013. Tesco has the resources to continue, but whether they will adapt and use innovative approaches necessary to maximize consumer acceptance and meet their financial goals remains to be seen.

Success Stories

McDonalds-IndiaMcDonald’s and YUM! Brands’ stores can claim major success stories in far away places. McDonald’s does their homework before entering a market. For example, India is the only country in the world where they do not serve beef hamburgers.[41] They determined over 80 percent of the Indian population is Hindu, who believe the cow is sacred and would be offended if offered as an eating choice. Hindus respect and honor cows because they are the main animal that provides for their family. They can make many different foods (from a live cow) such as milk and yogurt and can use the milk for other Indian foods. Cows can also be used for transportation and farming. Therefore, the McDonald’s menu in India consists of many vegetarian dishes with names such as: McVeggie Sandwich, McAloo Tikki, Paneer Salsa Wrap, and Pizza McPuff. They also offer some traditional items found in the U.S. such as Filet-O-Fish, but a variety of country-specific chicken dishes such as: McChicken on a bun, Chicken McGrill and McCurry Pan.[42]

YUM! Brands, which owns KFC, Pizza Hut, and Taco Bell, has been a phenomenal success in China.[43][44][45] The country alone accounted for 54 percent of YUM!’s overall $264 million profit during the first quarter of 2011.[46] KFC had a first-mover advantage, entering China in 1987, followed by Pizza Hut in 1990.[47] Their international restaurants are different from their stores in the U.S. For example, Pizza Hut offers an expanded Italian menu. is closer to a family/fine-dining restaurant, and caters to Chinese eating tastes with seafood and shrimp pizzas. In both India and China, patrons can order beer or wine with their meals.[48] KFC has adapted offerings to appeal to the tastes of the Chinese family including a breakfast menu. It features Chinese staples such as youtiado (a donut on a stick) and bowls of Chinese congee.[49] In 2010, KFC China introduced rice to the menu for the first time.[50] They even added hamburgers and french fries, which are not offered in the United States.

YUM! now has approximately 3,665 restaurants in China, and is growing.[51] The company has intentionally not launched Taco Bell in China, knowing Mexican-type food may be a challenge in China. According to their 2010 annual report, YUM! has created their own quick-service restaurant chain in China called East Dawning, which is tailored to the local favorite cooking styles. They also own 27 percent of Little Sheep, the leading brand in the “hot pot” category, which has about 500 units and is the largest casual dining category in China.[52]

Zara also exemplifies a global retailer success story. A division of Spanish parent Inditex SA, Zara operates more than 1,500 stores in 81 countries. Zara generated annual sales revenue of 7.1 billion Euros in 2009 (approximately $9.6 billion U.S. dollars). Zara offers high-quality fashions at reasonable prices. Zara’s management resisted an industry trend of manufacturing in low-cost countries. Instead, most of its manufacturing is completed in Europe. They never use advertising to promote their stores. Their unique ability to dispatch designs twice a week to their stores has won a loyal following. Zara has been described by Louis Vuitton Fashion Director Daniel Piette as “possibly the most innovative and devastating retailer in the world.”[53]

Zara’s success has been innovation, vertical integration, and consumer centricity.[54] Their Spanish headquarters responds quickly to local tastes and trends and depends on their store staff as lookouts for trends that enable Zara to quickly design, produce, and deliver fashion items in limited quantities to markets that want them. An item seen one week may not be in that store the next week whether sold or not. Their in-store design and range of fashionable and affordable merchandise has been a hit around the world.

Lessons Learned

Based on the various retail companies discussed, and their global expansion efforts of varying effectiveness, below are some key takeaway points:

  1. Do your homework carefully before entering a new international market.
  2. Study the buying behaviors in the market. This includes shopping and buyer behavior, consumer attitudes, expectations, and price sensitivity.
  3. Recruit someone familiar with the local culture, not a transplant from a successful store chain thousands of miles away. Tesco’s Fresh & Easy initially hired British expatriates instead of hiring locally.[55]
  4. Get the merchandise mix correct, or at least identify what not to offer. Walmart offered golf clubs in Brazil where that sport was not popular. They also initially sold ice skates in Mexico where there are no ice skating rinks.[56]
  5. Adapt and be willing to make changes to local market preferences. Pizza Hut in China offers a full Italian-based menu.
  6. Atmospherics may be more important in some developed countries than in others.
  7. Identify growing trends in targeted countries and appeal to those trends.
  8. Consider a paradigm change on how to enter the market, such as Starbucks in India.[57]
  9. Be willing to adopt a different retail brand name if needed to attract customers. Walmart learned this lesson as they expanded globally by not always using or needing the Walmart brand name. Walmart operates in the U.K. under the ASDA and George brand names.[58]
  10. Non-traditional merchandising may be needed to accommodate and attract international shoppers to gain their loyalty. Coupons may not work in parts of Asia but selling live seafood does.

Conclusion

Taking a proven retail model and exporting it to a new country, often with a new set of competitors, a different language and culture, and unique shopper expectations, requires more than just market research before entry. International expansion is a common next step for large retailers having achieved success at home. Retailers that seek future international growth need to avoid repeating prior mistakes from others who came before them. Even the most successful and largest global retailers have encountered unanticipated problems in global markets that could have been identified and prevented prior to their launch.



[1]Boyle, Matthew. “Wal-Mart vs. the World.” CNNMoney.com. December 19, 2005. http://money.cnn.com/2005/12/19/news/fortune500/walmart_fortune_1219/.

[2]Olsen, Kelly. “Wal-Mart Pulls out of South Korea, Sells 16 Stores.” USA Today, May 22, 2006. http://www.usatoday.com/money/industries/retail/2006-05-22-walmart-korea_x.htm.

[3]Butler, Sarah, and Tom Bawden. “Wal-Mart-Pulls out of Germany at Cost of $1bn.” The Times (London, England), July 29, 2006.

[4]Landler, Mark, and Michael Barbaro. “Wal-Mart’s Overseas Push Can Be Lost in Translation.” The New York Times/International Herald Tribune, August 2, 2006. http://www.nytimes.com/2006/08/02/business/worldbusiness/02iht-walmart.2363495.html?pagewanted=all.

[5]Datamonitor Research. “Premium Company Profile: Metro AG,” February 2008.

[6]Landler and Barbaro, loc. cit.

[7]Ibid.

[8]Butler and Bawden, loc. cit.

[9]Naughton, Keith. “The Great Wal-Mart Of China.” Newsweek Magazine, October 29, 2006. http://www.thedailybeast.com/newsweek/2006/10/29/the-great-wal-mart-of-china.html.

[10]Ibid.

[11]”Company Profile for CARREFOUR.” Yahoo! Finance. August 2, 2009.

[12]Supermarket News. “SN’s Top 25 Worldwide Food Retailers for 2009.” http://supermarketnews.com/profiles/top25-2009/top-25/.

[13]Barinova, Alla. “Carrefour Pulls out of Russia After Just Four Months.” Bord Bia – Irish Food Board. Accessed October 30, 2009. http://www.bordbia.ie/industryservices/information/alerts/Pages/CarrefourpullsoutofRussia.aspx?year=2009.

[14]2009 Annual Activity and Sustainability Report. Report. Carrefour Group, 2009. http://www.carrefour.com/docroot/groupe/C4com/Pieces_jointes/RA/RA_Carrefour_PDF_WEB_2009VE.pdf.

[15]The Customer at Heart: 2008 Annual Report. Report. Group Carrefour, 2008. http://www.carrefour.com/docroot/groupe/C4com/Finance/Publications_et_presentations/Les%20rapports%20annuels/CARREFOUR_RA_2009_UK_01-56_V2.pdf.

[16]Supermarket News, loc. cit.

[17]”Carrefour with New Hypermarket Concept.” News release, September 20, 2010. Retail Digital. http://www.retail-digital.com/sectors/carrefour-new-hypermarket-concept.

[18]Carrefour Group, 2009, loc cit.

[19]Group Carrefour, 2008, loc cit.

[20]Rohwedder, Cecilie, “A New Chief Seeks to Make French Retailing Giant Nimbler, The Wall Street Journal, November 30, 2006.

[21]”Changes Are in Store for China’s Electronics Retailers: Which Model Will Win?” Knowledge@Wharton-China. May 13, 2009. http://www.knowledgeatwharton.com.cn/index.cfm?fa=viewArticle&articleID=2038&languageid=1.

[22]Srivastava, Mehul. “Big Retailers Still Struggle in India.” Businessweek, October 16, 2009. http://www.businessweek.com/globalbiz/content/oct2009/gb20091016_385819.htm.

[23]Bajaj, Vikas. “A Starbuck’s Venture in Tea-Drinking,” The New York Times, January 13, 2011.

[24]Singh, Madhur. “A Backlash for Big Retail in India.” TIME.com, October 17, 2007. http://www.time.com/time/business/article/0,8599,1672425,00.html.

[25]Srivastava, Mehul. loc cit.

[26]”Wal-Mart India’s Raj Jain: The Biggest Challenge Is There Is No Organized Supply Chain.” India Knowledge@Wharton. July 10, 2008. http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4305.

[27]Singh, Madhur. loc cit.

[28]Bellman, Eric, and Kris Hudson. “Wal-Mart to Enter India in Venture.” The Wall Street Journal, November 28, 2006, A3 sec.

[29]India Knowledge@Wharton. July 10, 2008, loc cit.

[30]Bajaj, Vikas, loc cit.

[31]Sonne, Paul. “Tesco Unfolds Map for Global Expansion.” MarketWatch – The Wall Street Journal. June 9, 2009. http://www.marketwatch.com/story/tesco-unfolds-map-for-global-expansion-2010-06-08.

[32]Silverthorne, Sean. Tesco’s Stumble into the U.S. Market. Harvard Business School. Case Study. October 25, 2010.

[33]Gordon, Kathy. “Not So Fresh & Easy for Tesco in the U.S.” The Wall Street Journal, January 12, 2010, The Source sec. http://blogs.wsj.com/source/2010/01/12/not-so-fresh-easy-for-tesco-in-the-us/.

[34]Baertlein, Lisa. “Tesco’s Fresh & Easy Evolving in Tough U.S. Market.” Reuters.com, May 20, 2009. http://www.reuters.com/article/2009/05/20/us-tesco-idUSTRE54J44S20090520.

[35]Silverthorne, Sean, loc. cit.

[36]Gunthrie, Jonathan. “Case Strengthens for Tesco to ditch Fresh & Easy,” FT.com, April 19, 2011.

[37]Silverthorne, Sean, loc. cit.

[38]Ibid.

[39]Ibid.

[40]Baertlein, Lisa, loc cit.

[41]Livermore, Rebecca. “McDonald’s India: Where’s the Beef,” Travel, January 8, 2008.

[42]Ibid.

[43]”Yum! Brands (US) Builds on International Success.” WFA – World Franchise Associates, October 7, 2010. http://www.worldfranchiseassociates.com/franchise-news-article.php?nid=656.

[44]La Monica, Paul R. “Colonel Sanders: China’s Favorite Import.” CNNMoney.com. January 19, 2011. http://money.cnn.com/2011/01/19/news/companies/thebuzz/index.htm.

[45]”Yum! Brands 2010 Annual Customer Mania Report.” Yum! Brands. 2010. http://www.yum.com/annualreport/.

[46]Burchett, Andrew. “Yum! Brands Set To Dominate The Global Fast Food Market.” Elite Inside Trader. May 10, 2011. http://eliteinsidetrader.com/2011/05/10/yum-brands-set-to-dominate-the-global-fast-food-market/.

[47]Ibid.

[48]Ibid.

[49]Ibid.

[50]Ibid.

[51]La Monica, Paul R. loc. cit.

[52]Yum! Brands. 2010, loc. cit.

[53]“Zara.” Wikipedia. 2010.

[54]Hume, Marion, “The Secrets of Zara’s Success,” The Telegraph, June 22, 2011.

[55]Naughton, Keith. loc cit.

[56]Landler and Barbaro, loc cit.

[57]Bajaj, Vikas. loc cit.

[58]Landler and Barbaro, loc cit.

Additional Resources:

Lague, David. “Unions Triumphant at Wal-Mart in China.” International Herald Tribune – The New York Times, October 12, 2006. http://www.nytimes.com/2006/10/12/business/worldbusiness/12iht-unions.3134329.html?scp=2.

Saltmarsh, Matthew. “Carrefour Chief Pursues Strategy to Strengthen Home Market.” The New York Times, June 3, 2010. http://www.nytimes.com/2010/06/04/business/global/04retail.html.

“Wal-Mart 2009 Annual Report – Now More Than Ever.” Walmartstores.com. 2009. http://walmartstores.com/sites/AnnualReport/2009/.

“Walmart Annual Report 2010.” Walmartstores.com. 2010. http://walmartstores.com/sites/annualreport/2010/.

2014 Volume 17 Issue 2

2014 Volume 17 Issue 1

2013 Volume 16 Issue 3

2013 Volume 16 Issue 2

2013 Volume 16 Issue 1

2012 Volume 15 Issue 3

2012 Volume 15 Issue 2

2012 Volume 15 Issue 1

2011 Volume 14 Issue 4

2011 Volume 14 Issue 3

2011 Volume 14 Issue 2

2011 Volume 14 Issue 1

2010 Volume 13 Issue 4

2010 Volume 13 Issue 3

2010 Volume 13 Issue 2

2010 Volume 13 Issue 1

2009 Volume 12 Issue 4

2009 Volume 12 Issue 3

2009 Volume 12 Issue 2

2009 Volume 12 Issue 1

2008 Volume 11 Issue 4

2008 Volume 11 Issue 3

2008 Volume 11 Issue 2

2008 Volume 11 Issue 1

2007 Volume 10 Issue 4

2007 Volume 10 Issue 3

2007 Volume 10 Issue 2

2007 Volume 10 Issue 1

2006 Volume 9 Issue 4

2006 Volume 9 Issue 3

2006 Volume 9 Issue 2

2006 Volume 9 Issue 1

2005 Volume 8 Issue 4

2005 Volume 8 Issue 3

2005 Volume 8 Issue 2

2005 Volume 8 Issue 1

2004 Volume 7 Issue 3

2004 Volume 7 Issue 2

2004 Volume 7 Issue 1

2003 Volume 6 Issue 4

2003 Volume 6 Issue 3

2003 Volume 6 Issue 2

2003 Volume 6 Issue 1

2002 Volume 5 Issue 4

2002 Volume 5 Issue 3

2002 Volume 5 Issue 2

2002 Volume 5 Issue 1

2001 Volume 4 Issue 4

2001 Volume 4 Issue 3

2001 Volume 4 Issue 2

2001 Volume 4 Issue 1

2000 Volume 3 Issue 4

2000 Volume 3 Issue 3

2000 Volume 3 Issue 2

2000 Volume 3 Issue 1

1999 Volume 2 Issue 4

1999 Volume 2 Issue 3

1999 Volume 2 Issue 2

1999 Volume 2 Issue 1

1998 Volume 1 Issue 3

1998 Volume 1 Issue 2

1998 Volume 1 Issue 1

The Successful Expatriate Leader in China

With cheap labor, the world’s largest work force, and the United States as one of its principal trading partners, China offers boundless opportunities to global corporations.[1] The economic advantages of operating in China are great; however, the foreign business community faces unique challenges there, as qualified Chinese business leaders are virtually non-existent within the country’s corporate world.[2]





Image: Kativ





Given the dearth of national leadership experience in China, companies are turning to expatriates to fill critical leadership roles, and promoting these leaders very quickly.[3] Consider the story of Wilson, a 35-year-old manager who was pressured to accept a promotion only one week after taking a position with a major company. The lack of national leadership was directly related to Wilson’s immediate promotion.

This pressure to ascend and lead larger divisions can be difficult for an expatriate manager who does not understand the cultural nuances of operating in China. Expatriates who are unable to adapt to the country’s different cultural values and interpersonal relationships suffer immediately. In fact, interpersonal relationships are often cited as a major reason for leaving a company.[4]

The cultural dimensions of leadership developed by Hofstede help provide a foundation for business leaders operating in foreign territories.[5] These dimensions of leadership include power distance, individualism, uncertainty avoidance, and masculinity.[6] For an expatriate leading a national team in China, it is essential to understand the cultural dimensions of leadership to improve productivity, increase company profits, and improve interpersonal relationships.

Power Distance

Power distance, the extent to which a society accepts that power is distributed unequally, is established through subordinates and superiors.[7] In societies with high power distance, such as China, individuals with power enjoy greater status and privilege than those without power, and subordinates are less likely to challenge or express disagreement with superiors.[8] In other words, the rank structure is clearly delineated between management and subordinates, and disagreement with management is frowned upon.

In low power distance cultures, the prevalent belief is that power corrupts and those without power have no remedy for those with power thus the belief in communal leadership.[9] In a low power distance society, communal leadership and subordinates offering greater input into decisions is a normal and accepted practice.

A leader’s decision-making style varies based on several external factors that determine the amount of power distance in an organization. They include: organizational structure, culture, external threats, relationships with subordinates, and the degree of formality of the situation.[10] In high power distance relationships, there is virtually no rapport between the leader and subordinate, and a formal contract is used to achieve goals.[11] As members of a high power distance society, Chinese managers demand unquestionable respect and loyalty, and rank structure is formalized and clearly delineated between employees and management.

China has many of the tenets of the high power distance relationships listed above, although superiors are expected to develop relationships with subordinates. This is known as “Guanxi.”[12] This principle, based deeply on Confucianism, allows for a weaker member to call on a superior for favors; the superior is then obligated to respond.[13] In other words, Chinese managers are expected to operate within clearly defined lines establishing their authority, while at the same time building a rapport with workers wherein workers can ask, and expect to receive, favors. This principle allows managers to help those in weaker positions by offering support. Managers operating in China must establish clear managerial power, while concurrently developing relationships that allow subordinates to request and receive assistance when the need arises.

Consider the example of Tim, an operations manager working for a U.S. corporation in China. Tim nearly quit his lucrative position for one reason: he could not garner the respect of his employees or superiors. He was attempting to lead based on his managerial experience in the United States, a lower-middle power distance culture.[14] Tim did not understand that as a manager he needed to convey a strong presence, and that stating “I don’t know” was not an acceptable answer to his subordinates who demanded leadership from him. His Chinese workers considered him the company authority with all of the answers; when Tim could not provide all of the answers, he immediately lost their respect. In addition, Tim did not understand the principle of Guanxi. By refusing requests for assistance, Tim was not able to earn the trust and respect of his employees or gain the assistance of management.

Tim was not prepared for the cultural facets of managing in China, and his lack of knowledge regarding the country’s cultural nuances prevented him from achieving immediate success. If Tim had understood the principles of power distance and Guanxi, he could have established a relationship of trust and respect with his employees and with management.

Individualism

Individualism describes the relationship between the individual and the immediate community.[15] In organizations, individualism has been linked to a preference for individual decision-making; in contrast, in societies with collective values, such as China, interpersonal relationships and group affiliation are the focus.[16] In individualistic cultures, members view themselves as autonomous from the organization, whereas in collective cultures, the organization comprises part of the member’s identity.[17] Studies have found that collective organizational cultures possess stronger reward systems than similar individualistic organizational cultures, and in collective cultures, managers typically give higher performance evaluations and rewards.[18]

Leadership has been linked to individualism and collectivism and varies across cultures; for example, autonomy is linked positively to leadership in some cultures and negatively in others.[19] In China, a collectivistic culture, individuals are willing to sacrifice personal goals for the good of the group. This loyalty is promoted across all aspects of Chinese culture, including the workplace. For example, a Chinese worker that has developed strong ties to the team will often not abandon the team in the midst of a project to pursue individual goals. In fact, a Chinese worker may forgo a promotion to continue work on a project, a concept that is foreign to many Western expatriates working in China. The motto of the Chinese worker is often that the needs of the many outweigh personal desires. American expatriates operating in China need to be cognizant of this principle and understand the ramifications of pursing personal agendas over those of the team.





Photo: blueclue





Uncertainty Avoidance

Uncertainty avoidance is the degree to which members in a society feel uncomfortable with ambiguous situations and take steps to avoid them.[20] Uncertainty avoidance occurs at various levels of an organization. For example, senior management may refuse to pursue a project with uncertain outcomes.[21] Uncertainty avoidance has many implications for leadership characteristics and leadership traits such as habitual, formal, cautious, and orderly is perceived as an outstanding form of leadership in some countries while a negative form in others.[22]

In China, a country with high uncertainty avoidance, managers are more controlling, less approachable, and less likely to delegate to subordinates than their low-avoidance counterparts.[23] In other words, managers in China do not place as much trust in their employees as managers in other countries, such as the United States, France, or Sweden.

Heather, an expatriate human resource manager for a U.S. company operating in China, experienced this. She reported to a Chinese manager, Mr. Liu, who epitomized the characteristics of high uncertainty avoidance. Mr. Liu was unwilling to relinquish control of projects that were Heather’s responsibility. Because Mr. Lui did not know Heather and her abilities, he felt that by relinquishing control, he was placing the company in jeopardy. Heather knew that if she confronted Mr. Lui, she would have received a response along the lines of; “The only way that I will be confident that the project will not fail is if I am in control.” Instead of facing a difficult confrontation with Mr. Lui, Heather asked headquarters to clearly explain their roles and to make the power-sharing requirement clear to all parties.

Prior to headquarters’ taking an active role in the situation, the high degree of uncertainty avoidance created a very difficult work environment for Heather as she did not understand the cultural influences guiding Mr. Lui’s behavior. With an understanding of Mr. Lui’s cultural influences, Heather might have been able to avoid an unpleasant work environment and persuade Mr. Lui to relinquish some control. Heather would have understood Mr. Lui’s cultural frame of reference and would have asked headquarters to clarify their role differences. Understanding the cultural dimensions of leadership, specifically uncertainty avoidance, would have served Heather well in this situation.

Masculinity

Masculinity is the extent to which the dominant values in a society are assertiveness, money, and material possessions; caring for others and quality of life tend to be subordinate in such societies.[24] In masculine cultures, such as China, the “heroic” manager is decisive, assertive, and aggressive.[25] The manager makes decisions with confidence and directness and does not allow employees to question authority.

Although certain feminine characteristics, such as being indirect and evasive and using intuitive reasoning, are often valued in leadership, they are rejected in masculine cultures like China’s.[26] However, it is important to note that honor and saving face are extremely important concepts to Chinese business people, and a direct style may be viewed as insulting and can harm employee/manager relationships.[27]

As a U.S. expatriate, Justin quickly realized that he needed to approach his employees in a different manner than he would back home. Justin knew that China, a highly masculine culture, demanded decisive action and aggressive behavior toward employees. As such, Justin was extremely direct with all of his employees and with management, despite his natural tendency to evade conflict. This approach allowed him to garner respect from his employees in a way that would not have been possible otherwise. Additionally, Justin knew that saving face was extremely important to his employees, and he knew that when he showed aggressiveness and directness, he had to do so in a way that did not insult the individual. In one situation, after a Chinese worker had installed an incorrect part on the assembly line, Justin took the blame for the incorrect part, but still demanded that the employee fix the mistake. By taking this approach, Justin allowed the worker to save face without compromising his authority. Justin’s knowledge of Chinese culture allowed him to develop a strong rapport with his workers.

Conclusion

As studies have shown, there is a strong correlation between cultural dimensions and successful performance in organizations in different societies, which makes it extremely important to consider and perhaps modify one’s management style to fit the societal norms and culture of the foreign country.[28] The cultural dimensions of leadership—power distance, individualism, uncertainty avoidance, and masculinity—are important for the U.S. businessperson to recognize and apply while operating in China. Expatriate managers should be able to identify the different cultural nuances between China and their homeland and adjust their management styles to fit cultural and business situations. Sensitivity to different cultures is also necessary to successfully establish relationships with employees and management. Imagine life as an expatriate operating in China, where employees treat you as a member of the family and are willing to do anything to ensure your success and the success of the company. A multinational company’s success hinges on managers’ abilities to be cognizant of different cultural values; understanding Hofstede’s cultural dimensions is just the beginning.


[1] Ed Frauenheim, “Closing China’s Leadership Gap: A dearth of experienced leaders has led many organizations in China’s booming economy to hastily promote young, unseasoned employees—a practice that jeopardizes business strategy and global succession plan. Can a stronger focus on development and corporate culture help meet the nation’s critical need for skilled managers?” Workforce Management, 86, no.5 (2007): 16-27.

[2] F. Gandolfi, and C. Bekker, “Guanzi: The Art of Finesse and Relationship Building When Conducting Business in China,” Regent Global Business Review, 2, no. 1, (2008): 513.

[3] Frauenheim, “Closing China’s Leadership Gap.”

[4] S. Cote, L. Morgan, “A Longitudinal Analysis of the Association Between Emotion Regulation, Job Satisfaction and Intentions to Quit,” Journal of Organizational Behavior,23, no. 8, (2002): 947-962.

[5] Philip Harris, Robert Moran, and Sarah Moran, Managing Cultural Differences: Global Leadership Strategies for the Twenty-First Century, (6th ed.), (Boston, MA: Elsevier, 2004). (link no longer accessible).

[6] G. Hofstede, “National Cultures in Four Dimensions: A Research-Based Theory of Cultural Differences among Nations,” International Studies of Management and Organizations, 13, no. 1/2, (1983): 4674.

[7] Ibid.

[8] Robert House, Paul J. Hanges, Mansour Javidan, Peter Dorfman, and Vipin Gupta, Culture, Leadership and Organizations: The GLOBE Study of 62 Societies, (Thousand Oaks, CA: Sage Publications, 2004).

[9] Ibid.

[10] Ibid.

[11] Ibid.

[12] J. P. Alston, “Wa, Guanxi, and Inhwa: Managerial Principles in Japan, China and Korea,” Business Horizons, 32 no. 2, (1989), 2631.

[13] J. L. Farh, R. D. Hackett, and J. Liang, “Individual-Level Cultural Values as Moderators of Perceived Organizational Support-Employee Outcome Relationships in China: Comparing the Effects of Power Distance and Traditionality,” Academy of Management Journal, 50, no. 3, (2007): 715729.

[14] House, Hanges, Javidan, Dorfman, and Gupta, Culture, Leadership and Organizations: The GLOBE Study of 62 Societies.

[15] Amal R. Karunaratna, Lester W. Johnson, and C.P. Rao, “The Exporter-Import Agent Contract and the Influence of Cultural Dimensions,” Journal of Marketing Management, 17, nos. 1-2, (2001): 137158.

[16] M. Geletkanycz, “The Salience of Culture’s Consequences: The Effects of Cultural Values on Top Executive Commitment to the Status Quo,” Strategic Management Journal, 18, no. 8, (1997): 615623.

[17] House, Hanges, Javidan, Dorfman, and Gupta, Culture, Leadership and Organizations: The GLOBE Study of 62 Societies.

[18] Carolina Gomez, Bradley L. Kirkman, and Debra L. Shapiro, “The Impact of Collectivism and In-Group/Out-Group Membership on the Evaluation Generosity of Team Members,” Academy of Management Journal 43, no. 6, (2000): 10971106.

[19] House, Hanges, Javidan, Dorfman, and Gupta, Culture, Leadership and Organizations: The GLOBE Study of 62 Societies.

[20] Marcus W. Dickson, Deanne N. Den Hartog, and Jacqueline K. Mitchelson, “Research on Leadership in a Cross-Cultural Context: Making Progress, and Raising New Questions,” Leadership Quarterly, 14, no. 6, (2003):729768.

[21] House, Hanges, Javidan, Dorfman, and Gupta, Culture, Leadership and Organizations: The GLOBE Study of 62 Societies.

[22] Deanne N. Den Hartog, Robert J. House, Paul J. Hanges, S. Antonio Ruiz-Quintanilla, and Peter W. Dorfman, “Culture Specific and Cross-Culturally Generalizable Implicit Leadership Theories: Are Attributes of Charismatic/Transformational Leadership Universally Endorsed?” Leadership Quarterly, 10, no. 2, (1999): 219.

[23] House, Hanges, Javidan, Dorfman, and Gupta, Culture, Leadership and Organizations: The GLOBE Study of 62 Societies.

[24] Harris, Moran, and Moran, Managing Cultural Differences: Global Leadership Strategies for the Twenty-First Century. (link no longer accessible).

[25] Marcus W. Dickson, Deanne N. Den Hartog, and Jacqueline K. Mitchelson, “Research on Leadership in a Cross-Cultural Context: Making Progress, and Raising New Questions,” Leadership Quarterly, 14, no. 6, (2003): 729768.

[26] Ibid.

[27] House, Hanges, Javidan, Dorfman, and Gupta, Culture, Leadership and Organizations: The GLOBE Study of 62 Societies.

[28] G. Hofstede, “National Cultures in Four Dimensions: A Research-Based Theory of Cultural Differences Among Nations,” International Studies of Management and Organizations, 13, no. 1/2, (1983): 4674.

2014 Volume 17 Issue 2

2014 Volume 17 Issue 1

2013 Volume 16 Issue 3

2013 Volume 16 Issue 2

2013 Volume 16 Issue 1

2012 Volume 15 Issue 3

2012 Volume 15 Issue 2

2012 Volume 15 Issue 1

2011 Volume 14 Issue 4

2011 Volume 14 Issue 3

2011 Volume 14 Issue 2

2011 Volume 14 Issue 1

2010 Volume 13 Issue 4

2010 Volume 13 Issue 3

2010 Volume 13 Issue 2

2010 Volume 13 Issue 1

2009 Volume 12 Issue 4

2009 Volume 12 Issue 3

2009 Volume 12 Issue 2

2009 Volume 12 Issue 1

2008 Volume 11 Issue 4

2008 Volume 11 Issue 3

2008 Volume 11 Issue 2

2008 Volume 11 Issue 1

2007 Volume 10 Issue 4

2007 Volume 10 Issue 3

2007 Volume 10 Issue 2

2007 Volume 10 Issue 1

2006 Volume 9 Issue 4

2006 Volume 9 Issue 3

2006 Volume 9 Issue 2

2006 Volume 9 Issue 1

2005 Volume 8 Issue 4

2005 Volume 8 Issue 3

2005 Volume 8 Issue 2

2005 Volume 8 Issue 1

2004 Volume 7 Issue 3

2004 Volume 7 Issue 2

2004 Volume 7 Issue 1

2003 Volume 6 Issue 4

2003 Volume 6 Issue 3

2003 Volume 6 Issue 2

2003 Volume 6 Issue 1

2002 Volume 5 Issue 4

2002 Volume 5 Issue 3

2002 Volume 5 Issue 2

2002 Volume 5 Issue 1

2001 Volume 4 Issue 4

2001 Volume 4 Issue 3

2001 Volume 4 Issue 2

2001 Volume 4 Issue 1

2000 Volume 3 Issue 4

2000 Volume 3 Issue 3

2000 Volume 3 Issue 2

2000 Volume 3 Issue 1

1999 Volume 2 Issue 4

1999 Volume 2 Issue 3

1999 Volume 2 Issue 2

1999 Volume 2 Issue 1

1998 Volume 1 Issue 3

1998 Volume 1 Issue 2

1998 Volume 1 Issue 1

Corporate Governance, SOX, and the Business Judgment Rule

John Rehfeld is a seasoned marketing-driven CEO with 30 years of software, content, and hardware experience in the PC, digital imaging, and multimedia industries. He has a strong track record of commercializing technical innovations through third party distribution channels into the business and consumer markets. He also has significant international strategic relationship experience with Asian companies, especially at the senior executive level, and has been a Federal Trade Commission monitor overseeing and reporting on the sale of a software division to EDS. In 1988, he was named one of the top 25 computer industry executives by Computer Reseller News.

GBR readers may find these additional audio and video interviews from the Graziadio School of Business and Management and Pepperdine University interesting.









John Rehfeld, MBA









John Rehfeld is currently working as a CEO coach for six CEOs in California and is serving as an outside board of director member of three software and hardware companies. He is also the Chairman of the Forum for Corporate Directors in OC and an adjunct professor of marketing and strategy for the Executive MBA Program at the Graziadio School of Business and Management of Pepperdine University. He is also a member of the GBR Editorial Review Board.

He has published several articles on the role of the board in CEO transition, and in 1994 he authored Alchemy of a Leader. Mr. Rehfeld received a Bachelor of Science in Chemical Engineering from the University of Minnesota. He completed his MBA at Harvard University.

Audio Files

Full Interview [powerpress http://gsbm-med.pepperdine.edu/gbr/audio/rehfeld/rehfeldinterview.mp3] or read transcript
SOX mostly for the better [powerpress http://gsbm-med.pepperdine.edu/gbr/audio/rehfeld/rehfeldsox.mp3]
Be global, be self aware, and network [powerpress http://gsbm-med.pepperdine.edu/gbr/audio/rehfled/rehfeldglobal.mp3]

Note: If the file does not download automatically, right click on the download icon and click “Save Target As…”

Questions for Mr. Rehfeld:

  1. What is the role of an outside board of directors member?
  2. What are the various positions board members can hold?
  3. What is the role of the advisory board, particularly in new start-ups?
  4. How does the board evaluate CEO effectiveness? How do they decide compensation?
  5. What are the arguments for and against keeping the CEO and board chairman positions independent?
  6. How do you think the upcoming presidential election could impact corporations? Do you think further regulation and scrutiny may be in store?
  7. In a 2005 GBR article, you wrote that with Sarbanes-Oxley (SOX) now in place at most publicly held companies, many boards of directors are shifting attention to issues that are more likely to grow revenues and profits. What are the most significant ways in which SOX has changed the way boards operate… for better or for worse?
  8. Has the Act achieved its goal of restoring public confidence in the nation’s capital markets and strengthening corporate accounting controls?
  9. What was your career path? As an engineer, what led you to pursue an MBA?
  10. What are some of your proudest professional achievements?
  11. What about some of the mistakes you have made along the way? What have you learned from them?
  12. Given the current economic downturn,* what advice you give to the CEOs you coach and your students in the executive MBA program?
  13. What advice would you give to those interested in serving on corporate boards?
  14. What advice do you have for current and recently graduated MBA students? What did you wish you knew then as a new graduate?

*Editor’s Note: This interview was held in August 2008.


The “GBR Jingle” was composed by Kyle Rotolo, who was born and raised in northern New Jersey. There he played in a number of rock bands and aspired to become a songwriter before moving to Malibu. At Pepperdine he is a music composition major studying with N. Lincoln Hanks.

2014 Volume 17 Issue 2

2014 Volume 17 Issue 1

2013 Volume 16 Issue 3

2013 Volume 16 Issue 2

2013 Volume 16 Issue 1

2012 Volume 15 Issue 3

2012 Volume 15 Issue 2

2012 Volume 15 Issue 1

2011 Volume 14 Issue 4

2011 Volume 14 Issue 3

2011 Volume 14 Issue 2

2011 Volume 14 Issue 1

2010 Volume 13 Issue 4

2010 Volume 13 Issue 3

2010 Volume 13 Issue 2

2010 Volume 13 Issue 1

2009 Volume 12 Issue 4

2009 Volume 12 Issue 3

2009 Volume 12 Issue 2

2009 Volume 12 Issue 1

2008 Volume 11 Issue 4

2008 Volume 11 Issue 3

2008 Volume 11 Issue 2

2008 Volume 11 Issue 1

2007 Volume 10 Issue 4

2007 Volume 10 Issue 3

2007 Volume 10 Issue 2

2007 Volume 10 Issue 1

2006 Volume 9 Issue 4

2006 Volume 9 Issue 3

2006 Volume 9 Issue 2

2006 Volume 9 Issue 1

2005 Volume 8 Issue 4

2005 Volume 8 Issue 3

2005 Volume 8 Issue 2

2005 Volume 8 Issue 1

2004 Volume 7 Issue 3

2004 Volume 7 Issue 2

2004 Volume 7 Issue 1

2003 Volume 6 Issue 4

2003 Volume 6 Issue 3

2003 Volume 6 Issue 2

2003 Volume 6 Issue 1

2002 Volume 5 Issue 4

2002 Volume 5 Issue 3

2002 Volume 5 Issue 2

2002 Volume 5 Issue 1

2001 Volume 4 Issue 4

2001 Volume 4 Issue 3

2001 Volume 4 Issue 2

2001 Volume 4 Issue 1

2000 Volume 3 Issue 4

2000 Volume 3 Issue 3

2000 Volume 3 Issue 2

2000 Volume 3 Issue 1

1999 Volume 2 Issue 4

1999 Volume 2 Issue 3

1999 Volume 2 Issue 2

1999 Volume 2 Issue 1

1998 Volume 1 Issue 3

1998 Volume 1 Issue 2

1998 Volume 1 Issue 1

Fair Trade or Strategic Concern: The Unocal War

The noise has quieted down at least for the moment. On August 2, 2005, China National Offshore Oil Corporation (CNOOC) announced it was withdrawing its bid to buy Unocal. This news followed the July 20 Unocal Board recommendation that its shareholders accept the bid submitted by Chevron and the August 1 statement by Institutional Shareholders Services, an influential shareholder advisory firm, that the CNOOC bid was not high enough to offset the political uncertainties associated with the purchase.[1] However, during approximately four weeks between the CNOOC offer and its withdrawal, the story dominated the headlines and newscasts.







Photo: Dawn Allynn






Why the uproar?


This was not the first time a Chinese firm had expressed interest in buying a U.S. firm. China’s acquisition activities began in earnest in 2002 with the purchase of the Asian subsidiary of Global Crossing by China Netcom Communications Group and continued through the purchase of IBM’s PC unit in December 2004 by China’s Lenovo Group. This is also not China’s first foray into the energy sector. During Spring 2005, CNOOC purchased a 17 percent stake in MEG Energy in Canada, and Sinopec acquired a 40 percent interest in the Canadian oil sands project. Local officials and the steel workers union applauded when China’s Laiwu Steel Group joined with Cleveland-Cliffs Inc., a U.S. mining company, to reopen an iron ore mine in northern Minnesota. Rep. James L. Oberstar (D-Minn.) even helped broker the deal.[2]

Nevertheless, applause was not the reception the Unocal offer received. On June 25, 2005, immediately following CNOOC’s bid, 41 members of Congress sent a letter to Secretary of the Treasury John Snow asking the Committee on Foreign Investments in the United States to “perform a thorough review” of the offer to determine whether CNOOC was using government funds or purchasing sensitive technology.[3] The House of Representatives passed two bills in late June that would block the proposed takeover because it “could threaten to impair the national security of the United States.”[4] Then during hearings on July 13, 2005, Rep. Duncan Hunter (R-Ca.), chairman of the House Armed Services Committee, said that Chinese ownership of Unocal would compromise U.S. national security and that he would try to stop the acquisition if Unocal shareholders or President Bush didn’t. Other witnesses at the hearing, including former CIA Director James Woolsey and Frank Gaffney, president of the Center for Security Policy, emphasized the strategic value of oil and the failure of China to follow international economic rules.[5]

So, why the uproar? And, more importantly, what are the implications of the failed bid to future business relationships between the U.S. and China? Is the political involvement in the proposed transaction a fluke, or the next step in defining the economic and political relationship between the U.S. and China? Will U.S. firms face government-created roadblocks or retaliation when seeking to establish or extend relationships with Chinese firms? These are the questions this paper will address.

Why is China interested in acquiring foreign assets?

China has intensified its overseas acquisitions for several reasons. These include an abundance of cash, the desire for international brands, and the need for energy sources.

China has amassed foreign reserves estimated at approximately $771 billion. The buildup has accelerated in recent months as China’s trade surplus continues to grow and foreign investment continues to flow into China. The inflow of speculative capital has also picked up as investors bet on the revaluation of the Chinese currency, the yuan.[6] Flush with cash, the Chinese are shopping shopping for real, physical U.S. assets.

China views purchases of well-known brands as a way to attain immediate status and respect. The bid submitted for purchase of Maytag by Haier Group, a large Chinese manufacturer, followed the push by the Chinese government to convert large companies into multinationals with recognized, global brands. Had the acquisition been successful (the bid was withdrawn after Whirlpool submitted a competing, higher bid), Haier would have been instantly transformed into one of the world’s most powerful appliance manufacturers with a large presence in the U.S. and Europe.[7]

China has become the number two global consumer of energy after the U.S. To support its growing need for energy, China’s largest oil companies PetroChina, Sinopec, and CNOOC have been seeking growth opportunities. However, their victories have been few and small and their losses often. The three companies have been able to commit only $15 billion over the last decade in their quest for equity stakes in oil and gas fields outside China. They are known to often pay top dollar for less than desirable projects. In addition, they have lost large projects such as part of the Kazakhstan field, which went to Western companies operating the fields and now Unocal. The Chinese energy companies are determined to increase their holdings and thus gain power and respect in the industry.[8]

China the Japan of the 2000s?

The increasing tensions between China and the U.S. over trade issues seem like déjà vu to many market watchers. Two decades ago, when Japanese companies were snapping up U.S. iconic entities such as Rockefeller Center and Columbia Pictures, many people worried about the ability of the U.S. to compete with a low-cost competitor, and Japan was accused of keeping its currency artificially low to increase its exports. During this period, the U.S. faced a spiraling trade deficit and the loss of high-paying manufacturing jobs. Sound familiar?

However, critical differences exist between the two experiences. Unlike Japan 20 years ago, China has the potential (and some think the desire) to become a military as well as an economic rival of the U.S.[9] The U.S. Department of Defense prepared a report in July 2005 stating that the increasingly powerful Chinese military poses a potential threat to other Asian countries. Although the Chinese government denounced the report and called it a misrepresentation of its “peaceful defense policy and reasonable military development,” many people remained unconvinced, especially when a senior Chinese military official called for the use of nuclear weapons against the U.S. if it interfered in a conflict between China and Taiwan.[10] While few think that nuclear war is imminent or inevitable, such events as these feed fear, uncertainty, and suspicion in both China and the U.S.

Additionally, globalization has tied the U.S. economy much closer to its trade partners than in the past. Ties between China and the U.S. are far more extensive than those that existed with Japan. Trade between China and the U.S. has grown dramatically in the last decade. China has become a top destination for U.S. funds and the fastest-growing market for many U.S. industries. Low cost goods from China have kept the U.S. inflation rate low, and Chinese purchases of U.S. Treasury securities have kept interest rates including mortgage rates low.[11]

Strategic Concern or Roadblock to Fair Trade:

Was the Unocal bid a strategic concern?

The chair of CNOOC emphasized that the proposed purchase was a business transaction that would be good for both China and the U.S. and that it was not a political move. But even William Reinsch, president of the National Foreign Trade Council, an organization established to promote global free trade, was uneasy about the Unocal deal. He supported a thorough national security review of the deal that focused not just on weapons technology, but also on energy security.[12]

The idea of a globally traded commodity becoming a strategic concern is new. Many economists and oil specialists believe that owning oil is not vital to national security as long as there is a sufficient supply of oil on the global market. Yet the U.S. dependence on imported oil for approximately half its daily consumption (much from the volatile Gulf region) and growing demand for energy from countries such as China and India have caused some people to question whether adequate supply will be available.[13] China has the potential to become a U.S. rival for limited energy sources in the future.

However, others note that foreign purchases of U.S. energy resources is not new and that deals approved in the past may be more worrisome than the Unocal bid. Over the last two decades, Saudi Arabia, Venezuela, Russia, France, Norway, and Brazil, among others, have acquired a wide range of U.S. energy assets all without roadblocks erected by U.S. politicians. Some experts have noted that Saudi and Venezuelan ownership of U.S. refining capacity and Russian ownership of gasoline stations could pose a greater threat to adequate U.S. energy supplies at a market based cost than would ownership of exploration and production assets.[14] This may be particularly true of Unocal, which has few strategic oil assets left in the U.S. and pumps only 57,000 of the 7.3 million barrels pumped daily in the U.S.[15] CNOOC’s real interest was in Unocal’s rich Asian gas reserves, particularly those in Thailand and Indonesia, and the company had considered spinning off U.S. assets to reduce opposition to the deal.






Photo: Andre Habermann






Was the Unocal bid fair trade?

The outcome of the CNOOC proposal sheds light not only on China’s ability to “close a deal,” but also on Wall Street’s clout. Large U.S. investment banking firms have made numerous trips to China in recent years to establish relationships and create deals going both ways U.S. firms buying Chinese firms and vice versa. While still setting the terms, China is encouraging more foreign ownership of Chinese firms as well as overseas acquisitions. Wall Street representatives in Washington have actively promoted the merits of doing business with China and the importance of strong economic ties with the country. Many fear that since the Unocal acquisition was decided on political rather than financial grounds, cross-border transactions will be set back.[16] Others fear that since the bid was withdrawn because of political pressure, China will retaliate.[17]

What are the rules for transactions between a U.S. and a Chinese firm? Does government ownership with its promise of low- or no-interest loans impact competition and fair play? CNOOC’s parent company is fully owned by the Chinese government, and the parent was providing its subsidiary with a combination of no-interest and below-market interest loans to finance the acquisition. Critics of the proposal say this explained the ability of CNOOC to offer a higher price than did Chevron. Chevron, with a market capitalization of $115 billion, is much larger than CNOOC at $22 billion, but could Chevron reasonably match the price offered by CNOOC? Others familiar with the structure of the loan agreement say its terms were not overly beneficial to CNOOC. The interest-free loans had to be repaid within two years by selling new stock, and the state-owned Chinese bank was charging market rates on its loans. The transaction would have left CNOOC with piles of debt that had to be repaid and with limited ability to make other acquisitions.[18] Experts disagree on whether this was a cause of concern, but they do agree that given China’s large stockpile of cash, this Chinese bid is not the last such bid for a U.S. firm.[19]

Conclusion

The war over Unocal has underlined the tense relationship between the U.S. and China. Issues of fairness and trust are being discussed by both sides. China has taken important steps to ease restrictions on foreign ownership of its firms. U.S. corporations are responding by pouring billions of dollars into the purchase of shares or outright control of Chinese firms. Nonetheless, the strong political opposition to CNOOC’s bid for Unocal has brought protest from the Chinese government. In the statement withdrawing the bid, Fu Chengyu, chairman of CNOOC, placed full blame on the “regrettable and unjustified” political opposition.[20]

How will this recent impasse impact the future relationship between firms in the U.S. and China? The rejected bid marks a setback. How much of a setback will depend on talks scheduled for late September between President Bush and President Hu Jintao of China. It will depend on how the leaders of China and the U.S. come to view each other as strategic allies or competitive foes, opportunity or threat. Many business leaders in the U.S. and China see economic ties not only as a win/win situation, but also as a necessity for future economic growth and stability. Will these views prevail or the views of those who see only one dominant economic and military power? The curtain has fallen on Act 1, but future acts in this drama are still to be played.


[1] Douglas, Elizabeth. “Chevron’s Unocal Bid Supported,” The Los Angeles Times, 2 August 2005: C-1.

[2] Iritani, Evelyn. “China Showing Bigger Interest in U.S.” The Los Angeles Times, 22 June 2005: C-1.

[3] Iritani, Evelyn. “Chinese Bid for Unocal Stirs Up Issues,” The Los Angeles Times, 25 June 2005: C-1.

[4] Reynolds, Maura. “House Says No to China Oil Deal,” The Los Angeles Times, 1 July 2005: C-1.

[5] Havemann, Joel. “Lawmakers Seek to Stop CNOOC Bid,” The Los Angeles Times,14 July 2005: C-1.

[6] For a complete discussion of the impact of the Chinese currency policy, see Crawford and Young. “The Yuan Floats!” Graziadio Business Review, Volume 8, Issue 2.

[7] Barboza, David. “From China, A New Bid For Maytag and Status,” The New York Times, 22 June 2005: C-1.

[8] Bradsher, Keith and Maouwad, Jad. “China Oil Giants Crave Respectability and Power,” The New York Times, 9 July 2005: B-1.

[9] Douglas, Elizabeth. “Familiar Trade Fears, but Bigger Risks,” The Los Angeles Times, 18 July 2005: C-1.

[10] Dickie, Mure and Sevastopulo, Demetri. “China hits at US claim of military threat,” The Financial Times, 21 July 2005: 2.

[11] For a complete discussion of the impact of Chinese policies on the U.S. trade and budget deficits see Crawford and Young. “The Twin Deficits: a Looming Crisis?” Graziadio Business Review, Volume 7, Issue 2.

[12] Lohr, Steve. “Who’s Afraid of China Inc.?” The New York Times, 24 July 2005: B-1.

[13] Lohr, Stephen. “Unocal Bid Opens Up New Issues of Security,” The New York Times, 13 July 2005: 61.

[14] Barrionuevo, Alexei. “Foreign Suitors Nothing New in U.S. Oil Patch,” The New York Times, 1 July 2005: C-1.

[15] Samuelson, Robert. “Let’s Stay Out Of This Fight,” Newsweek, 11 July 2005: 43.

[16] Wells, David. “CNOOC bid is acid test for US free trade,” The Financial Times, 9-10 July 2005:12.

[17] Lee, Don. “Unocal Bid Tests U.S.’ China Ties,” The Los Angeles Times, 11 July 2005: C-1.

[18] “Napoleon of the Oil Patch,” Business Week, 20 June 2005: 56.

[19] Brownstein, Ronald. “Fair Play at Issue in Unocal Bid,” The Los Angeles Times, 20 July 2005: C-1.

[20] Lee, Don and Douglas, Elizabeth. “Chinese Drop Takeover Bid for Unocal,” The Los Angeles Times, 3 August 2005: A-1.

2014 Volume 17 Issue 2

2014 Volume 17 Issue 1

2013 Volume 16 Issue 3

2013 Volume 16 Issue 2

2013 Volume 16 Issue 1

2012 Volume 15 Issue 3

2012 Volume 15 Issue 2

2012 Volume 15 Issue 1

2011 Volume 14 Issue 4

2011 Volume 14 Issue 3

2011 Volume 14 Issue 2

2011 Volume 14 Issue 1

2010 Volume 13 Issue 4

2010 Volume 13 Issue 3

2010 Volume 13 Issue 2

2010 Volume 13 Issue 1

2009 Volume 12 Issue 4

2009 Volume 12 Issue 3

2009 Volume 12 Issue 2

2009 Volume 12 Issue 1

2008 Volume 11 Issue 4

2008 Volume 11 Issue 3

2008 Volume 11 Issue 2

2008 Volume 11 Issue 1

2007 Volume 10 Issue 4

2007 Volume 10 Issue 3

2007 Volume 10 Issue 2

2007 Volume 10 Issue 1

2006 Volume 9 Issue 4

2006 Volume 9 Issue 3

2006 Volume 9 Issue 2

2006 Volume 9 Issue 1

2005 Volume 8 Issue 4

2005 Volume 8 Issue 3

2005 Volume 8 Issue 2

2005 Volume 8 Issue 1

2004 Volume 7 Issue 3

2004 Volume 7 Issue 2

2004 Volume 7 Issue 1

2003 Volume 6 Issue 4

2003 Volume 6 Issue 3

2003 Volume 6 Issue 2

2003 Volume 6 Issue 1

2002 Volume 5 Issue 4

2002 Volume 5 Issue 3

2002 Volume 5 Issue 2

2002 Volume 5 Issue 1

2001 Volume 4 Issue 4

2001 Volume 4 Issue 3

2001 Volume 4 Issue 2

2001 Volume 4 Issue 1

2000 Volume 3 Issue 4

2000 Volume 3 Issue 3

2000 Volume 3 Issue 2

2000 Volume 3 Issue 1

1999 Volume 2 Issue 4

1999 Volume 2 Issue 3

1999 Volume 2 Issue 2

1999 Volume 2 Issue 1

1998 Volume 1 Issue 3

1998 Volume 1 Issue 2

1998 Volume 1 Issue 1

Cultural Insights on Doing Business in China

You have heard the siren call of business in China. The President’s recent trip, with all the associated stories, raised your awareness of opportunities there. The photographs show modern cities with high-rise buildings, busy airports, golf courses, and beautiful scenery. There are logos of well-known American companies juxtaposed with just enough of the ancient and “different” to lend some sense of the exotic. There are even lists of Chinese companies that have projects for which they are seeking outside partners.

So you begin your homework. You investigate the availability of land and buildings and the possibility of special enterprise zones. Then you check on the necessary infrastructure to support your needs — energy, transportation, and communication. You learn about the tax and accounting laws; determine whether your business is one of those favored by the government with special rates on property use and taxes; decide whether you would be better off doing a joint venture or owning your own business there. You investigate the labor supply, labor laws, even the health care system. You even evaluate the likely impact of the financial crisis in Asia on your project, and figure out how to repatriate your profits.

Everything points to a good investment opportunity. The numbers are positive. The reactions to your initial inquiries are promising. But if you stop your homework there, you may be headed for trouble. For an American investigating a joint venture with a Canadian company, this amount of “due diligence” might be sufficient; but for doing business in China, it may not. The hidden obstacles of tradition, social structure, and thought patterns require extensive, time-consuming experience to overcome.

Understanding the Culture

Culture might be described as the complex pattern of living that humans develop and pass on from one generation to the next. It encompasses the norms and values of a society, including appropriate ways to treat one another. It defines the natural world and human nature. It establishes our assumptions and creates the world “taken for granted.”

The more similar one’s own culture is to another in history, language, religion, and even geography, the less difficult it is to work in that society. Even within a single nation there are regional, class, ethnic, and religious differences that may lead to misunderstandings. But when societies differ on most of these characteristics and have had minimal contact with each other, the potential for misunderstanding grows exponentially. For most Americans doing business in China, this potential is very high. In fact, you can be certain that there will be innumerable, unforeseen challenges, even when there is an honest effort to learn about and understand China and its people.

An American goes to China to arrange a business deal. The scenario is all too common. A Sino-American transaction is contemplated, negotiated, and, seemingly, consummated. Everything seems to be going well. Then suddenly the unanticipated comes “out of the blue.” The Chinese partner negates his promise or fails to do what he said he would do when he said he would do it. Trust, now shattered, is replaced by the downward spiral of a lost opportunity. This disappointment is repeated myriad times every business day. It is usually not expected; it should be. At the conception of each stillborn failure is an American’s ignorance of Chinese culture and the multiplex of paradigms that control and direct all behavior in the land of Confucius and Tian’an men Square.

Ideally, someone contemplating a significant venture in China should spend time there to learn their approach to life and business. Reading about the country, watching films and videos, talking with other Americans who have spent time doing business there, spending time with Chinese nationals who are visiting or have moved to this country, are all helpful activities, but they cannot replicate the benefit that comes from on-site immersion. Explaining a culture to the uninitiated in words alone is very difficult. It is rather like explaining what an avocado tastes like to someone who has never eaten one. You can use analogies and adjectives, but your effort will be fruitless. Similarly, you need to experience a culture to understand it.

By way of example, consider the concept of “saving face.” Most Americans are aware of its importance, but ignorant of its meaning. They assume that it connotes not embarrassing their counterparts in public situations. But this is merely simple courtesy. And unfailing courtesy is appropriate behavior in every social setting; it is not unique to China.

In China, face is a complex reality that incorporates the concept of trust. In the West, trust suggests that “I can rely on what you say.” But in the Chinese culture, if you are someone I can trust, it means that you will protect my feelings with my family and friends whom you will never even meet. You will enhance my pride when I return home. You will not do, say, or be something that would cause embarrassment to me, or indirectly, to them. How can you protect someone’s feelings with people whom you don’t even know? Learning about the culture helps. It is the first step in anticipating the problems and challenges of doing business in China.

Five Insights

Having absorbed the meaning and importance of “face” and “trust,” it will help you understand the complexity of Chinese behavior if you consider that their decisions are guided by five concurrent, seemingly contradictory, realities. Keep them ever in your mind. The Chinese do.

  1. First, China is a Confucian society. Dating back to 500 BC, this pragmatic set of social rules permeates their every behavior. It seems, at times, that it must surely be genetic. Filial loyalty, courtesy, and diligence are values not dissimilar to Western culture. Indeed, the “Golden Rule” was first proposed by Confucius as the concept of “Li.” Similarly, the value placed on education, on hard work, integrity, modesty, patience, and perseverance are similar to what Max Weber described as the Protestant Ethic, values which resonate in American culture today.

    It is very easy, therefore, for Americans to infer from this commonality of values that the two cultures share a worldview. Not so. The fact that some values and norms are shared does not mean that they are based on the same rationale, or that they will dominate behavior in every case.

    Indeed, some Confucian teachings are at odds with western values. Confucius taught that stability in society is based on unequal relations between people, while Americans hold equality to be a virtue. Where Americans stress individualism, the Confucian teachings stress the importance of the family as prototypical of how society should be organized, a family in which children are taught to restrain their individuality so as to maintain harmony in the family, at least on the surface.

  2. Second, China is also a Stalinist-Leninist-Maoist society. It is a unique brand of socialism. While they have a history of entrepreneurial activity and may speak of market principles, it should not be assumed that their view of the market is the same as that of western capitalism.

    This Chinese socialist philosophy is completely alien to Confucianism, and yet the Chinese people live with this dumbfounding contradiction. In fact, not only do they hold these two major philosophies in tension, about 80 percent also claim to be Buddhist and 75 percent would additionally consider themselves Taoists. Given their ability to synthesize, or at least concurrently hold, such incompatible philosophies, the Chinese find it difficult to understand how ideological differences can be so divisive in other societies. It makes no sense to them, for instance, that Protestants and Catholics should feud when both practice the same religion.

  3. Chinese foreign policy is driven by real politik. Asia, and especially Southeast Asia, is their sphere of influence. It is a view similar to the 19th century U.S. commitment to Manifest Destiny in the American West. It is their destiny to dominate this area, and they do not take kindly, or lightly, to outsiders telling them how to behave within their sphere of influence. To them, human rights of their citizens, the plight of Tibetans, and the use of prison labor, are, simply, none of our business.
  4. China is a developing economy that requires enormous change. The Chinese society is in the process of a dramatic and painful metamorphous. They have the daunting task of feeding over a billion people every day, and this must be the first priority. Given this short-run reality, the long-run and simultaneous need to grow the economy and visibly increase the standard of living is an overwhelming challenge by any standard. They cannot afford the luxury of failed economic experiments. Their focus must be at once on survival and growth. It requires a mindset fundamentally different than ours.
  5. To confuse the untutored mind even more, is the often — and officially — ignored fact that China is not a single linguistic or cultural society. The People’s Republic represents more than 15 language and cultural groups that have somehow, often by force, learned to live with each other far more cohesively than the similarly diverse cultures of Europe. While most of the language groups can read written Chinese, they cannot necessarily understand each other’s spoken languages. Because the written language is ideographic rather than phonetic, non-Mandarin Chinese can understand a character’s meaning without having a clue as to how it may be spoken 100 miles away. These are not dialects of the same language, although each of the different languages may have dialects within it. They are different languages that are as remote from each other as French and German. Since culture is primarily linguistically based and transmitted, each language group has a somewhat different cultural bias, adding further to the confusion. An American planning to do business in China should take note of these differences, giving special attention to the area where he or she plans to operate.

In summary, remember that a trustworthy, personal relationship must precede any successful Sino-American transaction. Focus on protecting your counterpart’s feelings with the family and friends that you will never meet. Read. Speak with at least three Americans who have done business in China. Ask what mistakes they have made and how they resolved them.

By the way, before you visit China, investigate what your Chinese associates would consider appropriate gifts and keep an inventory of them to continually express your appreciation. Then, “be square.” (It’s an attitude.) Finally, there is no alternative to unfailing courtesy.

2014 Volume 17 Issue 2

2014 Volume 17 Issue 1

2013 Volume 16 Issue 3

2013 Volume 16 Issue 2

2013 Volume 16 Issue 1

2012 Volume 15 Issue 3

2012 Volume 15 Issue 2

2012 Volume 15 Issue 1

2011 Volume 14 Issue 4

2011 Volume 14 Issue 3

2011 Volume 14 Issue 2

2011 Volume 14 Issue 1

2010 Volume 13 Issue 4

2010 Volume 13 Issue 3

2010 Volume 13 Issue 2

2010 Volume 13 Issue 1

2009 Volume 12 Issue 4

2009 Volume 12 Issue 3

2009 Volume 12 Issue 2

2009 Volume 12 Issue 1

2008 Volume 11 Issue 4

2008 Volume 11 Issue 3

2008 Volume 11 Issue 2

2008 Volume 11 Issue 1

2007 Volume 10 Issue 4

2007 Volume 10 Issue 3

2007 Volume 10 Issue 2

2007 Volume 10 Issue 1

2006 Volume 9 Issue 4

2006 Volume 9 Issue 3

2006 Volume 9 Issue 2

2006 Volume 9 Issue 1

2005 Volume 8 Issue 4

2005 Volume 8 Issue 3

2005 Volume 8 Issue 2

2005 Volume 8 Issue 1

2004 Volume 7 Issue 3

2004 Volume 7 Issue 2

2004 Volume 7 Issue 1

2003 Volume 6 Issue 4

2003 Volume 6 Issue 3

2003 Volume 6 Issue 2

2003 Volume 6 Issue 1

2002 Volume 5 Issue 4

2002 Volume 5 Issue 3

2002 Volume 5 Issue 2

2002 Volume 5 Issue 1

2001 Volume 4 Issue 4

2001 Volume 4 Issue 3

2001 Volume 4 Issue 2

2001 Volume 4 Issue 1

2000 Volume 3 Issue 4

2000 Volume 3 Issue 3

2000 Volume 3 Issue 2

2000 Volume 3 Issue 1

1999 Volume 2 Issue 4

1999 Volume 2 Issue 3

1999 Volume 2 Issue 2

1999 Volume 2 Issue 1

1998 Volume 1 Issue 3

1998 Volume 1 Issue 2

1998 Volume 1 Issue 1