Mr China

When I began studying Chinese almost 20 years ago, my teacher explained to me the meaning of the characters that make up the word xuexi, to learn.

The first character, xue, can be interpreted as a pictograph of a child being handed scrolls -- knowledge passed on from generation to generation. The character xi resembles a bird with its wings open wide. It denotes a different kind of learning: learning by oneself, from personal experience, not from the words of others. 

Tim Clissold's important new book, Mr China (Robinson, London) should help those doing in business in China avoid some pitfalls. That would be xue. But if learning is more xi than xue, they may have to experience the same trials and tribulations. As they do, Mr Clissold's book may help them to avoid growing judgmental and angry at China.

There are often plenty of reasons for Western businessmen to be angry in China: corruption, know-offs, a disrespect for the rule of law, and so on. But much of what is happening in China, both good and bad, needs to be put in context.

This context -- cultural, human, economic -- doesn't excuse some of the opportunistic behaviour one may encounter in China, but it does spring from a different reality.

In this reality, commercial considerations count for less. Emotions, history, morality matter more. When protesting workers at one investment tell Mr Clissold, "the factory belongs to the workers who built it with their bitter tears and blood", we hear emotion, history, and morality all rolled into one.

When foreign investors object to "the petty perks that are the sole consolation for a Chinese official", we wonder whether they are right to dismiss them as corruption.

When foreign investors call on an accident site to inquire about insurance, without regard for the victims, we agree with one Chinese character in the book who says foreigners seem to have no regard for human feelings. Mr Clissold's strength is his ability to understand that the world can appear different from the standpoint of others.

The story of Mr China, based on a true story, is simple. Mr Clissold, a British student of Chinese with a few years of experience at an accounting firm, teams up with an experienced Wall Street banker to invest in China in the early 1990s. Called "Pat" in the book, the figure resembles Jack Perkowski, an ex-PaineWebber banker who founded a private-equity group called ASMICO.

Albeit in a changed form, ASIMCO is still in operation. The partners visit hundreds of mostly state-run factories and, like many other financial investors in China, have difficulties finding targets in which to invest.

Eventually they do so but they quickly run into problems. These problems become more and more acute and a number of them explode into physical confrontations between investors or factory managers, on the one hand, and workers or local partners, on the other.

Exhausted by the stress, Mr Clissold has a heart attack but returns to help overcome these challenges. Eventually, he leaves the partnership with Pat but remains involved in China trying to, as he puts it, "extract value from difficult situations".

Mr China makes several important points. Perhaps the most important is that a lack of experience and understanding leads to disaster. Neither Mr Clissold nor Pat had much knowledge of China when they started. Indeed, enthusiasm about China's "boundless opportunities" is often found more in people with scant knowledge of the place.

Flowing from this point is the insight that China cannot be approached with a Western mindset. (Or, to put it more precisely, it can, but the price is failure.) As the author says at one point: "I knew that I would have to find a Chinese solution to a Chinese problem."

China is a chaotic, diverse, fast-changing place where MBA recipes will have little impact. As one reads Mr China, one hopes to identify, for Mr Clissold's sake, a sense of progress in how he handles one crisis after another.

Although the timeline is not clear (at one point he says events in his three main narratives happened almost in parallel), Mr Clissold does appear to learn from his mistakes. This new-found knowledge pays off, especially a growing empathy towards Chinese people and the adoption of "Chinese" management and negotiating techniques.

The dichotomy between insiders and outsiders cuts through Mr China. Conventional wisdom says insiders (cadres, overseas Chinese, etc) are successful in China while outsiders are not. Mr Clissold's journey is from outsider to insider. The notion that Western capital and expertise can carry the day is gradually dismissed in the book.

At its start, Mr Clissold tells of a meeting with the mayor of an industrial city in China's grim north-east. Pat, the Wall Street banker, and the mayor face each other. Naively, as it will turn out, Mr Clissold writes "it was obvious who held all the cards". He means Pat, but as the book progresses the ignorance behind his statement is revealed.

The starting point of too many foreign investors in China is ignorance, arrogance, or both. The first requirement to successfully do business in China, therefore, is to avoid this mindset -- to unlearn.

Practical traps to be avoided include not entering hurriedly into poorly-structured joint ventures in the hope of "adding value" to a Chinese partner's operations. It is interesting that in recent years foreign financial investors in China have been most successful in a sector which Mr Clissold and Pat initially considered but decided to ignore: the consumer sector.

The logic of their avoidance throws light on the causes of their failure: consumer tastes, they reckoned, are local and hence there would be few opportunities for foreign investors to add value. While most successful private equity investors in China do try to add value, they see their role primarily as one of supporting the Chinese entrepreneur (for they generally avoid the state sector).

I recall one of the few successful venture capitalists in China telling me of a tough choice at one of their investments: the entrepreneur, bold and confident as entrepreneurs are, wanted to develop a new product on a large scale.

A strategic investor, a Western multinational, had doubts -- reasonable doubts. The venture capitalist was caught between the two parties but eventually sided with the entrepreneur. "You cannot be a financial investor in China unless you see your role as backing local people," the venture capitalist told me.

"They run the show, and it's better to understand and acknowledge this." Your doubts may be reasonable but outsiders are ultimately too far removed from China's reality to make proper judgements. Financial investors should avoid being directly involved in operations in China.

ASIMCO, on the other hand, was and is very much an operating company run by financial types who rely on the assistance of operating guys (called "factory rats" by Mr Clissold). Intuitively, this model doesn't make much sense.

Perhaps Mr Clissold and Pat were ahead of their time. They invested mostly in faraway locales in then-still-poor provinces, in products (such as auto parts) where demand was not yet strong.

Today, wholly-owned China operations are more common than joint ventures, avoiding some of the pitfalls Mr Clissold encountered. The auto industry is booming. China, too, has changed: there has been progress in establishing the rule of law. The lessons of Mr China, however, remain: cowboy capitalism in a foreign country is a bad idea.

China attracts much attention nowadays and many foreign businesspeople are new to the country. They can learn from Mr Clissold's book or repeat his, and ASIMCO's, mistakes.

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