Pitcher Partners Property Breakfast Speech – South East Asia: South Australia’s Largest Export Market

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The Asian Century is often discussed in terms of China and India, as is fair due to the large population size and market capacity. However, far too often our government and business leaders have failed to realise that there are in many cases strong, established and emerging business opportunities in South East Asia, in markets where we have traded successfully for more than a century. With the Asian Century upon us, it is time we returned South East Asia as a market of focus and started to realise the real and tangible opportunities that are rapidly emerging.

Former US Secretary of Defence – Donald Rumsfeld famously said about the search for weapon of mass destruction:

“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.”

I will go so far as to suggest that many of you here this morning are in the latter category of knowledge about Asia, and indeed South East Asia – that is; there are things about South East Asia which you don’t know that you don’t know.

This is not surprising, for our local market has for many years been the primary focus of many businesses in Australia. However, with a modestly growing and tight economy in the non-mining sector, there are now plenty of reasons to broaden our knowledge of our closest Asian Neighbours – South East Asia.

South East Asia has a population of 600 million people, less than half the population of China or India, but more than 25 times larger than Australia. It comprises a dozen or so countries, and is united by ASEAN – The Association of South East Asian Nations. If ASEAN were a country it would be South Australia’s largest export market, with export trade for 2011/12 of $2.3Billion, surpassing export trade to China of $2.2Billion, and well in front of export trade to India of $759 million. This is an important distinction when our governments focus almost exclusively on China and India.

South East Asia is where four of Australia’s seven Free Trade Agreements have been ratified, including; Singapore, South Australia’s 4th largest trading partner; Malaysia, SA’s 3rd largest export destination; and Thailand, SA’s 10th largest export destination. In addition to these bilateral FTA’s, Australia has ratified an FTA with ASEAN, and is currently in formal negotiations with Indonesia to achieve a Comprehensive Economic Partnership Agreement. Should this agreement be achieved as hoped over the next 12 months, it will be Australia’s most outstanding agreement, effectively opening the floodgates to trade and investment between Indonesia and Australia. Indonesia, with a population of over 250 million, provides perhaps the most outstanding growth market for South Australia. It has been a member of the WTO since 1995, and has sustained positive GDP growth trending at greater than 5% over the past 10 years, with 6.3% GDP growth forecast for 2013. This growth figure compares favourably with forecasts for both China (8%) and India (6.2%), and is being sustained by strong domestic demand.

Indonesia is the forgotten market for Australia and South Australia. Export trade from South Australia is coming off a low base but has grown from $132 million export sales in 2009/10 to $603 million export sales in 2011/12. It is now SA’s 6th largest export market. That’s almost a five-fold increase in export sales. Indonesia is the powerhouse market of South East Asia, and with political and economic stability it is rapidly emerging as one of the most import economies in the world. Standard Chartered Bank has predicted the Indonesian economy will surpass the Australian economy in terms of size to become one of the top 10 global economies by 2020, and top 6 by 2030.

There is a rapidly emerging middle and upper class developing across South East Asia, from Indonesia to Vietnam. Jakarta is indicative of this emerging new wealth in South East Asia, characterised by an eclectic mix of street vendors and luxury malls, Maserati’s and Scooters, Mercedes Benz taxis, and motorised rickshaws. An diverse mix of rich and poor, with a rapidly emerging middle class. It’s home to ALL of the big luxury brands. There are 3 Luis Vuitton Stores in Jakarta alone, and they sit side by side with Prada, Mont Blanc, and Cartier. These high-end retail stores are filled with buyers, local Indonesian buyers, paying global prices for genuine luxury clothing and accessories. Indonesian shopping malls are filled with local Indonesian consumers paying global prices for genuine luxury goods. To walk through the shopping malls of Jakarta is to be fully aware of the emergence of the middle class consumer in Indonesia, if not South East Asia.

The Jakarta skyline is replete with high-rise office and residential apartments. The rapid and sustained economic growth in Indonesia has seen the population of Jakarta swell to upwards of 25 million people during the week, and the city sprawl out and absorb the surrounding manufacturing cities of Bogor and Cikarang.

This growth has pushed up the price of quality office and residential accommodation in Jakarta. Colliers International has forecast office vacancy rates in Jakarta of less than 2% for 2013. While Jones Lang Lassalle have forecast residential rental occupancy rates at between 85-90%. This demand for high quality accommodation in Jakarta has seen residential rental agreements requiring between 2-5 years rent upfront to secure an apartment.

This picture of Jakarta, is replicated across South East Asia, in Singapore, where admittedly there is a lack of the ramshackle housing; Kuala Lumpur where the Petronas Towers take centre stage, through to Bangkok, Hanoi and Manila. The middle class is arriving fast across the region and has started to demand products and services, the very products and services that South Australia can supply. I paint this emerging picture of Indonesia and South East Asia to demonstrate that our closest Asian neighbours have developed the capacity to pay, and more and more people are joining the middle class.

The key drivers in the South East Asian economies are based broadly around four core factors:

1. Food Security,
2. Mining, Oil and Gas,
3. Capacity Building and
4. Tourism and Infrastructure

Food Security – There is increasing demand for food, agricultural products, and beverages. This demand has resulted in SA food companies finding new markets in South East Asia. Indonesia for example was South Australia’s largest wheat export market in 2011/12, surpassing even China.

Mining, Oil and Gas – South East Asia is a centre for mining, oil and gas exploration and drilling, benefiting from the same mining boom we have witnessed in Australia. The core minerals being exploited in Indonesia, East Timor, Malaysia and Myanmar include Thermal Coal, Oil, LNG, Coal Seem Gas, Copper, Gold and Silver. The growth in the mining sector in markets such as Indonesia, East Timor, Myanmar and Malaysia, have provided opportunities for Australian engineering, design, and construction companies to help develop the infrastructure needs of these markets. East Timor has for example upwards of $4 Billion in infrastructure projects in the pipeline related to the growth in the oil and gas industry.

Capacity Building – Constraints in terms of skills have seen all governments across the region talk about the need to up-skill their workforce. There is a need for higher educated workforce throughout the region, in both vocational and higher education. Middle class families are looking to education providers in Australia to provide this skilled advantage to their children. As a result, more students from South East Asia, including Indonesia, will be seeking to come to Australia to undertake vocational and higher education studies in the coming years. These students often come from wealthy middle class families and seek accommodation close to the universities in Australia.

Tourism Infrastructure – Tourism is one of the traditional economic opportunities for the region, with resorts from Bali in Indonesia, through to Phuket in Thailand. However, the climactic conditions of the region mean that tourist infrastructure requires constant redevelopment, including hotels, villas, roads, marinas and airports. There are also new tourism sites being developed across South East Asia, from East Timor to Vietnam. South Australian property developers and urban planners are already looking at how they can enter this market.

The key message I would like to impress upon South Australian business is not to ignore the huge market opportunities in South East Asia. Our business leaders should be embracing the many emerging opportunities. Indonesia and South East Asia, provide the greatest opportunity for South Australian businesses to take advantage of the rapidly growing demand for Australian commodities, products, and services. South Australian business should be establishing strategies to leverage these very opportunities.

Finding a Good Agent Is Critical To Navigating Your Way to Business Success in Indonesia

Use the "bridge" to move accross great divides at the negotiation table.

Indonesia is an emerging Asian market which is attracting increasing investment from Australian and other western companies.  Indonesia and its business environment can be confusing, daunting and challenging, but in many cases this is due to a lack of understanding of the Indonesian management behaviours that influence business relationships. If Australian companies want to succeed in this emerging Asian market, then they will need to develop knowledge and awareness of the Indonesian business culture, much the same way as Australian companies have succeeded in China now that there is a growing understanding of the Chinese business culture and etiquette. The latest research from UniSA has identified the use of third party agents as one of the important Indonesian management practices that influence business. These third party agents are referred to in Javanese (an Indonesian dialect commonly used amongst the business and government elite) as Parantara or ‘the bridge’, and acts as a conduit between the negotiating parties behind face to face negotiations, where issues of conflict can be raised without disrupting the harmony of the negotiation.  

 Maintenance of harmonious relationships between negotiation parties is critical to successful business engagements in Indonesia, and is grounded in the Javanese court traditions established prior to Dutch colonial rule. In Indonesia today, there is a renewed focus upon an independent, national identity, free from the western influence of Dutch colonialism. This nationalistic identification has seen many of the Javanese cultural behaviours re-emerge in the postcolonial period in Indonesia, and this has been driven by the political, governmental, and business elites which in many cases identify themselves with the Javanese culture. 

The Parantara is characteristic of a postcolonial Indonesia that has re-discovered the cultural norms of the pre-colonial Javanese court structure that favoured relationships, networks, and a system of favours and rewards. Utilising agents to further business relationships and aid negotiations is not a uniquely Indonesian experience, as it is common experience in other parts of Asia, in particular China with the use of the Zhongjian Ren or the Intermediary.  However, there are distinctive differences between the Zhongjian Ren and the Parantara in their level of involvement in the negotiated deal. The Zhongjian Ren will often be a part of the deal, as a partner, stakeholder or direct benefactor of any business agreement. Whereas the Parantara is bounded by the cultural traditions of the Javanese court system that places importance upon the network. As a consequence the Parantara is more of a broker, who operates in the background, for the betterment of both parties and who is rewarded for success.

Understanding Indonesian management behaviours is vital if Australian companies are to develop successful Indonesian investments in the coming years.  So if your company is looking to invest in the Indonesian market, then you would be best advised to find a good agent who can help navigate a harmonious relationship and build a strong deal. Fore without a good agent, you may find yourself in a sea of conflict, and on the path to investment failure.

Is Indonesia Suffering an Identity Crisis?

Java is underpinned by some of the worlds most important Buddhist and Hindu Cultural Treasures

Indonesia is a potential tourism powerhouse in South East Asia, and yet it does not tell this story successfully to the broader world. A country of contrast, and a “paradise” which has captured the imagination of many foreign visitor in the past 400 years, Indonesia is however not just a land of beaches, palm trees, batik and bintang, it is much, much more. Guide book to Indonesia will tell you of the glorious beaches in Bali, and some of the cultural treasures that exist in small villages in far flung places. Travel Agents will tell you of the fantastic resort accommodation and luxury that can be experienced in Bali and possibly Lombok. Newspapers in the western world will tell you of the imminent threat of terrorism and the extreme fundamentalist Islamic views that are a threat to your safety. The marketing of Indonesia doesn’t add to this impression, with images of Bali beaches, batik shirts and cultural trinkets often at the forefront of the advertising and marketing sales pitch for Indonesia. Indonesia has much more to sell, and in broader locations than the traditional tourist hub of Bali.

Is this the image that Indonesia wants to portray to the world?

The answer to this question is of course yes and no. The importance of tourism to Indonesia cannot be underestimated, but at present it is concentrated upon one area – Bali. In 2010 there will be more than 600,000 Australian Tourists travel to Bali for a holiday which will last for an average 10 days. The number of Australian tourists travelling to Bali are at an all-time high, and this is despite the Australian Government Travel Warnings , which I have discussed in a previous post (The Politics of Travel Warnings: http://wp.me/pS6DN-4h). But despite these huge numbers, Indonesia is missing a great tourism opportunity. Indonesian Culture is heavily influenced by Javanese Culture, and Javanese Culture is probably best exemplified by Yogyakarta. This is Central Javanese heartland and is surrounded by highly significant cultural and archaeological sites, palaces and temples. Yogyakarta is to Indonesia, what Siem Reap and Angkor is to Cambodia in a Cultural sense….but it does not have the same profile, nor does it have the substantial tourist infrastructure to bring in the substantial tourism investment. Yogyakarta has two World Heritage Sites within an hours’ drive from the centre of the city: Borobudur, which is an 8th Century Buddhist temple complex, and Prambanan an 8th Century Hindu and Buddhist temple complex. In addition to these temples are another 3-5 other important Hindu and Buddhist temples in various stages of disrepair, and rebuild. Beyond Yogyakarta to the east of Surakarta (Solo), are the last two Hindu temples of the Majahpit Kingdom in Java: Candi Ceto and Candi Sukuh. These two temples are an easy day trip from Yogyakarta. These temples are significant to the history of south east asia and Indonesia, yet there are relatively few tourists who visit these important sites. How many people outside of Indonesia are truly conscious of these important cultural sites?

Grand Indonesia is one of the many luxury shopping palaces in Jakarta

In addition to the tourism opportunities in Yogyakarta there are great opportunities for expanding eco-tourism in Indonesia, through jungle tours, or scuba diving tourist resorts. Scuba diving resorts in Egypt, Jordan, Malaysia and Thailand all successfully promote scuba diving resorts and subsequently bring in substantial tourist money which is spent in the local economies an especially in remote communities. When was the last time you saw an advertisement for Indonesia’s great coral reefs and the scuba diving opportunities? The final piece in this tourism puzzle is Jakarta. It has a relatively bad reputation compared to other cities in South East Asia, but this reputation is unfounded to a large extent. Jakarta is a happening city that is vibrant, and exclusive and a shopping paradise. Every time I see an advertisement for Malaysia : Truly Asia, It reminds me of Jakarta. Jakarta is a city full of upmarket shopping malls, exclusive hotels, and clean streets. At night the trendy people all come out and go to the best restaurants, people drive around in Mercedes, and wear the latest European designer clothes.

Indonesia is truly a modern emerging economy and Jakarta is the most advanced and modern city in its crown. The Key to Indonesia’s future success is for its identity to be clarified to allow the world to discover the tourism wonder of opportunities that exist beyond Bali, Batik and Bintang. Get the identity right and the economic advantages will flow.

Parantara vs Zhongjian Ren: Use the bridge to successfully negotiate in Indonesia

China and Indonesia both share some similar elements of culture, but dont assume they are the same

 

Indonesia has a long history of interaction with China and although the Ethnic Chinese have been trading in Indonesia for more than 1000 years, most of the present day Chinese Indonesian population started to arrive in Indonesia during the Dutch colonial period during  the 19th Century. Chinese Diaspora communities have brought with them cultures and traditions from China, and as a consequence the styles of behaviour common in China will be transferable to other countries and cultures within the broader Asian region. This assumption is not so straightforward in the Indonesian context due to the recent and historical conflict, criticism and victimisation of the ethnic Chinese-Indonesians by the ethic Indonesians.  Entrenched victimisation and discrimination has even been initiated and conducted by various Indonesian governments over the past 60 years since achieving Independence from Dutch colonial rule. Chinese identity in Indonesia has been eroded over time to the point where it was regulated by law that family names be “Indonesianised” and so it is now not possible to identify a person of Chinese heritage by their name. There has consequently been part assimilation in recent generations of ethnic Chinese Indonesian with the local ethnic Indonesian, and so it is not uncommon to find a person with a Chinese father and an ethnic Indonesian mother, or vice versa. 

The importance of Guanxi or ‘Social Capital’ has long been acknowledged in China, and similar issues of trust and social capital are equally important in other parts of Asia (see my article on Guanxi: http://wp.me/pS6DN-37). This principle is not solely related to managing your professional network, but additionally maintaining a strong and solid reputation within the network. As I wrote in a previous article (Zhongjian Ren: http://wp.me/pS6DN-3e) the importance of Zhongjian Ren or ‘The Intermediary’ in the Chinese business context, is a tried and tested method of transferring Guanxi and social capital from one person to another through introduction to members of a network. In practical sense using Zhongjian Ren is the principle of guaranteeing the quality of business partner, and putting one’s own Guanxi up as a guarantee of their good standing. The Zhongjian Ren in many cases will continue to play a part in the deal as a formal partner, until a sufficient level of Guanxi has been established. 

International business negotiations are a daily occurance in Indonesia today, don't be unprepared

 

Negotiators in Indonesian adopt a similar version of the Zhongjian Ren principle, however in Indonesia it is referred to as the Parantara or ‘The Bridge’. It is very important to utilise Parantara if a business negotiation is to be successful in Indonesia, and has been described as fundamental to conducting business the Indonesian way. The role of the Parantara changes during the many phases of the negotiation process. During the Pre-negotiation phase, the Parantara is used to sound out potential partners and make appropriate approaches and subsequent introductions on behalf one side. The Parantara is unseen during face to face negotiation, and in the early stage builds the bridge (metaphorically speaking of course) over which the negotiating parties can meet. An important distinction between the Chinese Zhongjian Ren, and Indonesian Parantara is that in the Indonesian business context the Parantara acts on behalf of both parties to assist in creating a successful and lasting outcome for both the negotiating parties. 

As the negotiation process progresses from pre-negotiation to face-to-face negotiation there are often issues that need to be resolved in order for the negotiation to continue. During the negotiation process in Indonesia it is imperative to maintain harmony, which often means that issues of conflict are not raised face to face in the formal negotiation. To raise issues that may cause conflict will affect the harmony of the relationship and would not be good for the long-term success of the negotiation or the future partnership. It is therefore necessary to utilise the Parantara to conduct informal negotiations to overcome the problem. The Parantara rarely forms part of the deal or partnership itself, and because of this separation from the negotiated deal the Parantara is able to maintain neutrality between the negotiating parties. Maintaining this neutrality is the key to the success of Parantara in forging successful business negotiations in Indonesia. 

So when you conduct business in Indonesia manage your professional networks by finding yourself a trusted Parantara who can help maintain the harmony in the relationship while you conduct your negotiations.

Building the Relationship is the Key to Business Success in Indonesia

Building a relationship in Indonesia takes time and is built on solid foundations

Those experienced in conducting business in North Asia will tell you that relationship building is paramount to a successful business outcome. Relationship building in Asia is often in direct contrast to standard business practices expected in Anglo-Western cultures such as North America, Australia and the UK.  These business practices will affect the way negotiations are conducted, and so when you are negotiating in Asia it is important to consider the differences from your standard negotiation protocols. The Anglo-Western negotiation protocol is generally more direct and task focussed, ensuring that negotiation discussions are conducted primarily in a formal context, building relationship is not really required outside of the functionality of the deal.  In North Asia, such as China, Japan and South Korea this direct task orientated approach is at odds with the accepted relationship building process which helps to build trust or Guanxi (see my recent post on Guanxi: http://wp.me/pS6DN-37). Without trust, there is no relationship, and consequently no successful negotiation outcome. 

 In Indonesia, you would think that because it is part of “Asia” that it is safe to assume that relationship building would also be of great importance to the successful negotiation outcome.  However past research has found that Indonesia exhibits strong performance focus, suggesting that negotiations are more task orientated and potentially less focussed upon relationship building. Recent research investigating Indonesian negotiation behaviour has however, identified elements of both relationship building and also task orientation which would suggest that both assumptions were correct in an Indonesian context, and that relationship building during the negotiation process in Indonesia is unique in Asia. 

This research describes the negotiation process as starting with a task orientation and moving towards a relationship building orientation, but what does that mean?  Initial negotiation meetings are often conducted with technocrats and lower level managers who discuss the specific technical requirements of the International negotiating partner, so discuss the task at hand ie. Task Orientation. This task orientated negotiation component is similar to the negotiation protocols expected in Anglo-Western cultures, and is equally compatible with the performance orientated findings of past studies. However, this task orientated component of the negotiation does not seem to be vitally important from an Indonesian perspective, and appears to be conducted purely to appease “western” expectations. This may be due to many senior Indonesian managers being university educated in western countries such as US, UK and Australia, and so learning Anglo-Western negotiation norms and expectations. Indonesian negotiators use this initial task orientated discussion as a way to maintain harmony in the negotiations, by giving western negotiators what they want….ie. Functionality and task orientated discussion.  The Indonesian negotiators allow the negotiations to run to this familiar western format, before the negotiations return to familiar and more comfortable ground for the Indonesian negotiator. How is this done? 

Once the initial meetings have been conducted with the technocrats, the senior Indonesian executives and decision makers will then enter the negotiation, and this is when the negotiation atmospherics will ultimately change to reflect more relationship building. The negotiation team on the Indonesian side will then often change its composition and this is when the executives enter the negotiations, with the technocrats either reducing in number or no longer attending the meetings. In addition to the change in the negotiation team composition, there is also often a change in the meeting environment, as the face to face negotiations move to more informal environments such as restaurants and hotel lobbies. If the negotiation is moving towards a successful outcome then it is more likely that the meeting environment will change to further informal environments and possibly result in a meeting with the family. Once you meet the family you are a long way towards reaching your desired goal of achieving a successful business deal. 

So when you do business in Indonesia, remember that you must be concerned with building the relationship, regardless of how technical the meetings originally appear. Ultimately the stronger the inter-personal relationship the stronger your business deal will become.

Zhongjian Ren: How to borrow Guanxi to make Guanxi and generate business success in China

Building Guanxi takes time but the greater your Gaunxi the more you will see

In an earlier article I discussed the importance of Guanxi to your likely business success in China (http://wp.me/pS6DN-37). Building your Guanxi and social capital is critical. However, unfortunately it is not possible to instantly create Guanxi, which poses a problem if you are new to the business game in China. But the Chinese have a way of navigating around this issue of building Guanxi. As I mentioned in the previous article, it is best to think of Guanxi in terms of a bank deposit, and we all know the adage that you need money to make money…..well we can probably say the same thing for Guanxi: you need Guanxi to make Guanxi. So how do you build Guanxi if you need Guanxi in the first place?

Just as in a normal business setting, you can go to the bank and borrow some money to invest, and eventually make more money. With Guanxi it is the same…..essentially you can borrow someone else’s Guanxi in the short and medium term until your own Guanxi has had time to become established. Instead of borrowing from the Guanxi from a bank, you will borrow the Guanxi from the Zhongjian Ren or ‘the Intermediary’. There is a strong and traditional importance of the Zhongjian Ren or ‘The Intermediary’ in the Chinese business context, and this is a tried and tested method of transferring Guanxi and social capital from one person to another. In a practical sense using Zhongjian Ren is the principle of guaranteeing the quality of a business partner, and putting one’s own Guanxi up as a guarantee of their good standing. The Zhongjian Ren in many cases will continue to play a part in the deal as a formal partner, until a sufficient level of Guanxi has been established. Why does this work? and why Guanxi be transferrable if it is so important?

If you find the right Zhongjian Ren you will be able to navigate into the Forbidden City

The answer to these questions are quite simple. When the Zhongjian Ren or Intermediary provides an introduction of one person or business to another person or business, there is a lot of risk involved. If the new party that is introduced behaves poorly, unethically or fails to respect the relationship then this poor behaviour will reflect upon the Zhongjian Ren. This poor reflection is essentially a negative on your level of Guanxi of the Zhongjian Ren. The person or business acting as the Zhongjian Ren loses social capital, if the offence is serious enough the Zhongjian Ren could lose a substantial amount of social capital which will impact severely on their standing and status within the network. This risk that the Zhongjian Ren holds is the reason why they will often be part of the formal deal. If the Zhongjian Ren is not part of the formal deal, there could be another way they can be compensated for the risk they are taking.

This is why Guanxi is transferrable, and how it works. It is the equivalent of a bank guarantee, but instead related to respect, trust and social capital. So if you need to build your Guanxi in order to get a deal done in China, then look for someone to act as the Zhongjian Ren…..Just remember that your behaviour and the deal you strike will reflect upon on the person who has made the introduction. Respect Guanxi and the Zhongjian Ren and you will be well on your way to business success in China.

Preparation is the Key: don’t enter a new international market with your eyes closed

If you dont prepare correctly for new international markets, you could get caught out.

In recent months I have been continually surprised by the lack of preparation of some companies who are looking to invest in overseas markets. These companies are large and small, some have experience in international markets some are newcomers to the international scene, but surprisingly they all seem to be prepared to be “unprepared” when it comes to entering a new international market. What do I mean by being unprepared?

The first and most obvious example of not being prepared for a new international market, is when there is a clear expectation that operating in a foreign market will be easy, quick and not much more complicated than operating in the companies traditional domestic market. I have had honest and frank discussions with some senior executives about their expectations for success in markets such as China and Indonesia. These executives have described to me their expected timeline for getting deals done in relatively short terms: from weeks – 3 months to get new agreements signed and shipments on their way. Now of course this is indeed possible if you are just wanting to go to a new market and purchase an off the shelf product, but it is a different story if you are looking to sell your product into these new international markets. It seems at times that these executives forget or choose to ignore their experiences in their home market. Anyone who has had the experience of promoting a product to one of the big retailers in Australia, US or UK will be able to tell you that it is a longterm proposition to get your product accepted onto the shelves, and it could take years for the product to be accepted permanently. Why would it be any easier in new international markets like China or Indonesia?

The other major lack of preparedness is with understanding the business culture of the new international market you are entering. What works in your home market, will not necessarily work in a new international market, particularly one from a different cultural background such as Asia. If you are to succeed in this new market you need to be aware of the business etiquette. What are the traditions? what is the expectation of time? are there any cultural issues which one should be aware? In Asia, for example it is critical to be aware of the importance of Guanxi, and Face. Relationship building is equally critical and how long will you need to get this relationship built? If as a company you are going to seriously be prepared for a new international market then you need to further consider who you are going send to manage the new investment. Choosing the right type of manager is important, someone who is going to have the cultural awareness to survive the challenges, but it is not just the manager at the coal face who is important. Any company moving into new international markets really needs to build a support team that can help that manager. Do you have team members who have the language skills in these new markets? Cultural skills? Technical skills? and negotiation skills? 

So my tip before you decide to move into a new international market is….Prepare your company, prepare your team and prepare your expectations. If you prepare for the new market then you will be well on the way to achieving not just success but longterm sustainable success.

Guanxi: Build your Guanxi bank balance if you want to succeed in China.

Build your Guanxi.....the Chinese Way

 

Anyone who has experienced China will be able to tell you that China is very different to what we expect in the West. The business traditions are equally different and if you want to succeed in business in China, it is vitally important that you understand some of the common business practices.  In the West we often   have the attitude that negotiating is purely a task orientated endeavour: primarily based upon price and product. How much am I prepared to pay to buy your product, and how much are you prepared to accept in order to sell me your product?  Now obviously these discussions surrounding price and product will always play a part in any negotiation, but in China it is not always the primary concern. There are very good reasons why this is the case in China, and also why we in the west should not be inconsiderate of these reasons…..we should remember that China is a civilization that stretches back thousands of years. 

Symbolism and tradition are found everywhere in China

Academic studies and many airline business books on China have long  acknowledged the importance of Guanxi or ‘Social Capital’. Guanxi is a confusing term to many business people in the West, but it is important to take time to understand how it works and why it works. Guanxi is essentially the level of status or respect that is accorded to a person based upon their level of social capital or personal connection which they hold within a given group of people. It is related to trust and trustworthiness, but it is much more. In the West we tend to not worry so much about this aspect of the business deal because we use legally binding contracts to ensure the other partner is kept to the agreed bargain (and in some cases even this is not sufficient to ensure ethical behaviour). In China, written contracts are technically legally binding, but in practice can be a legal nightmare. I am sure you can think of many published cases of intellectual property theft in China, from coffee shops such as Starbucks, to car manufacturers like General Motors. Just because you have a legal standing, doesn’t mean that your case will be resolved quickly or satisfactorily. Sometimes it is just better to have built up the trust or Guanxi through other means….. In a business setting Guanxi is about  managing your professional network and also maintaining a strong and solid reputation within that network. As your reputation and level of trust increases, the more likely you will be invited to participate in new deals, and the faster deals will be resolved.   

 Guanxi can take years to establish, and is hard-won and treasured in China. Think of Guanxi as a bank account that you hold, and the more money you have, the more money the bank will be prepared to lend you. Once you can build your Guanxi bank balance to a high level, your ability to succeed in business in China will be enhanced.

Prestige and History: How branding and bottling is critical to introducing your wine brand to China

As wine companies worldwide open their eyes to the true potential of China as a fantastic wine market, and in many cases a saviour of the wine industry (see my previous article “Ignore the Chinese wine market at your peril: How china can rescue the Australian Wine Industry” http://wp.me/pS6DN-1z ) it is important to consider the way wine is currently being marketed in China.  A vastly different drinking culture exists in China compared to the western world and as such, any penetration of wine into that drinking culture will require a considered market entry strategy that goes beyond the traditional wine marketing. Such a strategy would invariably require both an education of the Chinese consumer on how and why to drink wine and in addition to this an adaption of the marketing mix to appeal directly to the Chinese consumer. So what are Wine companies and distributors doing now in China to sell wine, and make it appealing to the Chinese Consumer?

Well it’s important to brand the wine appropriately. Most brands especially from Europe emphasise the word “Chateau” in their label, and many Chinese brands do likewise. This is understandable in a culture that is over 4000 years old, tradition and history adds prestige to a wine brand, and the word “Chateau” has an association with history and tradition. Some Chinese wine companies have gone so far as to build replica “Wine Chateaus” in China to capture the prestige and history of European wines and wineries. These Chinese brands also emphasise strong Chinese icons such as the Great Wall or the Silk Road, and this is wholly aimed at appealing to the nationalistic and patriotic feeling in China. However most of these Chinese brands are not really very great to drink…in fact I wouldn’t recommend them at all of I am honest. Of course that doesn’t mean they don’t sell in the Chinese Market, because they do!

Another brand image consideration in China is the bottle and closure device used. Even cheap, low cost wine is generally sold in bottles with a large dimple, and when you meet with wine distributors in China this is one of the first things for which they will look: How deep is the dimple? The bottle doesn’t need to necessarily contain prestigious wine, but it needs to appear that it does.  Using Cork closures is the other strong preference for the Chinese wine consumer, although a synthetic cork will probably suffice. The emotive sound and sensation of the cork being released is still important to the Chinese, and it is not as New Age as a screw cap. Once again this goes back to the desire for age, tradition, history and prestige.

 So what can we read into these branding and presentation preferences? Well wine is about prestige in China, and is more about the image than substance. If you think about my other article on understanding the Chinese wine market (http://wp.me/pS6DN-1G ), where I discuss the “shooting” and Toasting of wine in China, then taste is probably not going to be your primary motivation when buying wine in China. Ultimately creating the “right” image and branding for your wine will open up many more doors in China than the taste of your wine.

Present your wine brand as prestigious and you will find entry to the Chinese wine market much easier….but challenges will always exist, especially if you are from the New World Wine markets.

“Gan Bei”: Business and ritualistic drinking in China

As I have discussed in my previous article on “The subtle art of the formal Chinese banquet”  (https://nathanhgray.wordpress.com/2010/04/14/the-subtle-art-of-the-chinese-banquet/), the importance of relationship building to the Chinese is paramount. Apparent social functions like banquets are held in very high regard by Chinese businessmen and government official due to the ability for one to get to ‘know’ their potential business partners. This knowledge is achieved through watching foreign businessman’s behaviour during the formal and informal drinking and eating rituals that are performed during every formal banquet. It is therefore important to be aware of these rituals, drinking strategies and how to ensure you leave the banquet in higher esteem than when you arrived.

Drinking in China

 There is a definite hierarchy to the formal toasting at a banquet.  Thus the host will toast the most important guest, then the next most important and on and on down the order of importance. This must be remembered, in order for one not to jump the gun and propose a toast before ones allocated turn. It is therefore important for one to observe the banquet environment to determine ones hierarchy at the banquet table. Toasting someone is highly ritualistic and generally requires the toaster to stand and make a toast. It is important at this stage to ensure there is an adequate supply of wine, beer or spirit in the glasses of the toaster and the toastee. The glasses should be filled to the same level, if they are uneven it can imply anything from a lack of respect through to an intent to cause drunkenness. One must then propose a suitable toast, probably to enduring friendships and successful business ventures, while looking at the person receiving the toast. It is at this point that the glasses are clinked to confirm the toast. Even this ritualistic clinking is embedded with importance.

Clinking of glasses should be done in a delicate and considered manner, not smashed together like beer steins in a Bavarian beer hall.  It is important to get the glass as low to the table as possible when clinking glasses. This is much the same principle of bowing in traditional Japanese culture. A lower glass infers respect upon the other person. This can create a competitive environment when in China, as each person strives to outdo the other with the lowest glass.  Ultimately both glasses may be touching the table.  It is at this point that the toast is completed with the refrain of ‘Gam Bei’ which is like cheers, and implies that the glasses will be emptied. Obviously this could pose a problem if the glass is significantly filled, or is filled with a strong spirit, especially if you have already completed a series of ‘Gam Bei’s’. The glass should ideally be grasped with both hands, one hand around the rim and the other at the base of the glass.  Drinking the contents of the glass in a measured fashion, not necessarily throwing them back quickly like shooters in the front bar of you favourite night club. Depending upon the competitiveness of the drinking, you may be required to show the inside of your glass to prove it is empty, or even turn it upside down over your head. Allow for regional variations to determine which is the norm in this regard…when in Rome do as the Romans, when in China do as the Chinese.
At this point its starting to seem like an end of season footy trip or even a stag party…..but it is in fact serious business, and it is vitally important to remain at the top of your game. Potentially business killing mistakes can be made easily under drinking duress, so be careful. To succeed in not playing the fool or blowing the game through inappropriate drunkenness it is important that you have a strategy to deal with a ‘Gam Bei’ attack should one occur. A ‘Gam Bei’ attack is where a series of hosts all toast you one after the other; this is especially dangerous if you are at a numerical disadvantage, and your team members don’t match up evenly with the other side to reciprocate the ‘Gam Bei’s’.  If there is no disadvantage then this is easily remedied by reciprocal ‘Gam Bei’s’ by other members of your contingent, that way evening the drinking balance.  If you are under siege and have a disadvantage then you need to be a seasoned drinker, keep calm and even consider regular trips to the toilet….for a ritual cleansing (I am not joking here).
 Obviously not everyone who ventures to China on Business is a drinker, or a seasoned drinker, however, not accepting a toast is very dangerous and will be looked upon as uncivilized or potentially disrespectful. This does not mean that you will necessarily kill any deal, but it does mean a successful deal is a lot more difficult to achieve. So the moral of the story is to be prepared, be strategic, and try not to drink mystery spirits.

The Subtle Art of the Chinese Banquet

Open the Door to Business Success in China

Conducting business in China can be a confronting affair, with the rules of engagement vastly different from what we would expect in many western countries.  The number one rule when conducting business in China is to take it slow, develop your reputation or Guanxi, and build your relationships with the people you meet, whether they be business or government officials.  Business deals can be, and will be formed in a variety of locations and environments, and the relationships you develop at the Chinese banquet table can be crucial for long term success.

Banquet settings will obviously change depending upon the people you are meeting, the location of the banquet or the food variety on offer. However some things never or rarely change.

The banquet table will in many cases be a round table, large enough to seat up to 14 people. The host of the Banquet is the most important person in the room, and their seat will be at the head of the table…which at a round table may be against the wall, allowing for the host to look into the room and see all the guests easily. The next most important host will be seated directly opposite the host at the foot of the table.  The most important guest will be seated to the right of the Host, with the second most important guest to the left. If Interpreters are required then they will be seated next to the guests, to allow for easier conversation.  The third and fourth most important guests will be seated in a similar formation at the foot of the table. The other important hosts will be seated at the wings of the table. It is always best to wait until you are invited to sit at the table, this will allow you to observe how important you are perceived by the Chinese Host of the banquet.

Is it half full? or just enough?

On the table will be placed wine glasses, and a waiter will come around with a decanted wine (depending upon the company this could be beer, rice wine or barley spirit), and pour approximately two mouthfuls of wine (about 60mls) into each glass on the table.  The head of the table will indicate that he is going to propose a toast, upon which everyone present should stand. The host will then propose a toast to enduring friendship and successful business and glasses should be raised and ‘clinked’ with each member of the banquet in turn, ensuring that the glasses were clinked as low as possible and gently. Once everyone has ‘clinked’ their respective glasses, you must drink the contents of the glass. The glasses will be promptly refilled as before, and the second host will propose a similar toast. The same ritual will then ensue.  The Chinese Banquet is as much about drinking as it is about the food. The drinking is ritualistic and reinforces the hierarchy present at the banquet table.

Following the formal group toast, the host will likely toast the guest to his right, with a speech about friendship and a personal welcome, this will indicate to all that this guest is the

Ritual symbolism is everywhere in China

most important guest at the table. The ritual will then be carried out with the second guest. It is then likely that the host will propose a toast to the second host. This will reinforce that the second host is equally important, and essentially this has passed the baton to him to start his own round of toasts to the guests beside him.  It is at this point that some food may start to appear on the table, for sharing. If you are going to China, learn to use chopsticks, as failure to adequately manage them will confirm to those present that you are indeed a Barbarian…..In essence it is not much different in western cultures to eating with your hands at a fine dining restaurant.

Conversation will be necessarily small talk and informal in most cases, and it is not appropriate generally to talk formally about business. The important thing is to build your relationship, and allow your host to understand who you are and what you stand for as a person.  And this leads us to the final point in the art of the Chinese banquet.  As in many cultures, alcohol is known to loosen the tongue, and so your host may strategically arrange toasts so that you drink more than you should, and then say more than you should. Hold your own, and try not to become too loud or obnoxious. There is no surer way of killing a deal than to be rude and offensive at the Formal Chinese Banquet.

Buying Magic Carpets in Uzbekistan

The Ark, The Mudbricked Fortress at Bukhara

The traditional caravan trading routes through central asia, linking China to Europe and the Middle East, are as exotic as they come, and the Uzbekistani city of Bukhara is first amoungst them when it comes to exotic mudbricked cities, bazaars, mosques and medrasses. In these cities and towns that have been trading with merchants and travellers for millenia, what better way to emmerse yourself in the cultural particulars of the region than to experience the art of buying a traditional handwoven carpet! But in buying a carpet there are many things to consider, such as a strategy that you will need to put in place…..

First of all you need to wander through the bazaars with total indifference to any of the shops, and or their wares. Soon enough a wiley shop keeper will have found out who you are, and will call, unseen from inside his shop “we have very special prices for Australians today”. Then a porty fellow will emerge from his door with an inviting smile stretching from ear to ear saying “please come inside for a quick look”. Having been suitably impressed with the shop keepers opening gambit, one should follow inside and sit on a couch/seat to await a quick showing of carpets until tastes are determined. Now it is important to point out that Uzbekistan is rather undeveloped and unsophisticated when it comes to carpet shops, rarely will you find a large plush showroom, and if you do find a large showroom it undoubtably will be lit by candlelight, making it feel like you are in a cave. So you must be preapred for small display rooms, but this increases the intimacy of the experience.

A Medrassa and the Kalon Tower, Bukhara

It is important at this point, before the carpets are all laid out, for the prospective buyer to announce that he has already bought many rugs from India, and turkey, and that you don’t actually need a carpet…as you’ve already got one! None the less you should be aware of the appropriate dimensions for the carpet that you are definetly not going to buy… This ensures you see the ones you want not some mishapen pieces that are of no interest. Choose the colour that will suit your room and then ask questions of the seller such as “is this sheep or camel wool??” and, “How many knots per square inch are in this carpet?” The more knots the easier the carpet is to bend and subsequently more supple your carpet will be. It also determines quality and as a consequence price. Then you must turn a corner of the carpet to determine the suppleness of the carpet, you may wish to ask for a magnifying glass to see the knots if one is not offered. It is also pertinent to enquire after the knotting method: one knot, one and a half or double knot. One should also walk upon the carpet to determine how nice it feels. This all adds to your credibility as a carpet buyer.

Once a carpet has been chosen, it is recommended that you reconfirm that you definetly don’t need another carpet at the moment. The shopkeeper may then offer to show you his house, and a few more carpets that are similar. One will then get in a car with the shopkeeper to see his house, his carpets, and his carpet making rig. You should ask about the family heritage of the carpet maker if it is a family business. The shopkeeper will tell you his father and grandfather were both carpet makers aswell, and that they are Uzbek/Afghani in heritage (Bukhara is only 250km from Afghanistan).

You should then reconfirm that the carpet in the shop was still your favourite, and that you will need another look. Upon return to the carpet shop you should ask if they can freight the carpet to Australia, should you decide to purchase, of course….even though you are not actually in the market for a carpet just now. “DHL, fedex or Uzbek mail??” will be asked, at which point you can find the price to Australia……after the carpet has been weighed. I would suggest that you ask now for a carpet price, even though you are not going to buy one just now…..you know as a matter of curiosity, given your experience in the carpet industry around the world. One can now suggest that you will go and may come back later after lunch. After you have perused other carpet shops in town and determined market value of carpets, you can return to the original shop for the price negotiation. Remember to factor in freight and taxes for a total cost. Then set your target price but be flexible, however have walkaway point. It is also important to remember that the people are generally poor, and any money you give will be put back into the local community.

It is now that the negotiation begins. The carpet in question will be rolled out once more. It is worthwhile at this point to search out flaws or errors in the carpet. Point these out. Then ask how you will be able to pay for this carpet, and in what currency. Remember that there is an official US dollar exchange and an unofficial rate that is much better. Don’t get caught out. The difference in price is 25%. Once this has been determined, then you should ask for the total price including freight to be negotiated. This will lead to a flurry of phone calls with the DHL agent to cut the external fat out of the price. Once this has been completed, one must announce that “it is still quite expensive” and that you “couldn’t possibly afford to buy the carpet at this price”. You will be told that this is the final price. At this point I would recommend you point out that Australia’s dollar is effectively worthless against the US dollar since the GFC. One should then offer a low price as an alternative. After some umming and arring a slightly cheaper price will be offered. The prospective buyer should then say their thankyous for the seller’s time and get up and leave…… At which point you will be stopped, and a cheaper price reached.

The Kalon Mosque and Tower, Bukhara

Once everything is satisfactory, you can make payment, and take photos of the carpet, this is to ensure that when your carpet arrives by post it is that one you actually bought. Then you will leave with the carpet seller to the Uzbekistan ministry of arts, culture and sport building, and be admitted by armed military guards. Try not to get too flustered by this show of military power…..The buyer will be ushered into a large room with a big desk for the appropriate minister to sit, and a smaller table in front for the buyer to sit. Behind desk are suitable Uzbek military propoganda posters and happy photos of the relavent dictator in both civilian and military attire. In the room will also be various other men, all suitably fitted out in Mafioso looking suits and black leather jackets. You will then be required to produce your passport, visas and residency status, and then be asked to sign at least 6 different forms………….in cyrilic.

Voilà!!! You now own a red camel wool carpet that hopefully will arrive home soon. Great fun buying carpets in Uzbekistan!!

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