The Role Of Guanxi In Wine Distribution In Shanghai
By just-drinks.com editorial team | 23 November 1999
Many businessmen have long acknowledgedthat guanxi is indispensable part of Chinese business and can often determine the scale ofa business' performance in that market. Now as the Chinese market opportunities in thearea of wine are attracting foreign investment and a market presence of foreign winecompanies, this business characteristic of China needs to be understood and utilised. Thiscomprehension must also include an appreciation of the changing role for guanxi in bothsociety and business as Shanghai transforms itself from a planned to a market economy.
This article is based on research carriedout over the course of a six month period in Shanghai, last year. This research looked atmany areas of wine distribution in Shanghai including guanxi. Loosely translated, guanximeans 'relationships'. However this translation is somewhat simplistic and toogeneralised. A more direct translation of the Chinese characters themselves is"joined chains", which is more like relationship networks or a series ofconnections. Guanxi however, deals with more than just information and is a network whereyou can access resources and information. An element of personal trust is conveyed throughthis network so other people's resources and information can be accessed. This systemhas evolved in China against an economic background of a shortage of products or servicesor in dealings with the state. In the context of today's market and economy in Shanghai,these connections are still of paramount importance to businessmen and to people in theirprivate lives. Many of the interviewees referred to these relationships as ongoing, basedon trust, being reciprocal, being valuable, gaining priority treatment, in need ofconstant maintenance and can develop into a network of relationships.
Many of the respondent's replieshighlighted the benefits of "good guanxi". This characteristic can benefit abusinessman in terms of meeting the right people and gaining a favourable deal (most feltthis meant a good price) and ensuring your business has a "smooth passage". Thissmooth passage refers to a passage through bureaucratic red tape. There was also agreementby the respondents that guanxi had declined in importance in times of over supply or lowdemand.
The experience of collecting research inShanghai, proved very quickly, the importance of guanxi in establishing contact with theright person and conveying an element of trust. At the start, it was guanxi that put me intouch with a local research assistant/translator. However even though appointments weremade to speak to people involved in the distribution of wine, respondents were initiallyso suspicious of my intentions and worried about the implications of speaking out, thatinterviews ended abruptly or didn't even start at all. This situation was completelychanged when Chinese friends were approached to set up contacts and appointments, andinterviews were suddenly very productive and much longer.
Developing guanxi is difficult and theeffort required can warrant extensive maintenance to prevent its loss. The Chinese bothsocially and in business can harbour deep suspicions of new contacts (unless introducedthrough guanxi) and therefore establishing guanxi is a delicate process. Theserelationships, once developed are carefully guarded and generally are cultivated for selfgain.
As already mentioned, guanxi is importantfor the Chinese in both business in social activities. Guanxi is important in distributionchannels, not only for developing relationships within the channels themselves but also indealings with industry organisations and government officials. For the salesman, guanxi isessential as it finds the right person for you to do business with, "it is the keythat unlocks the door," one salesman remarked. Having good guanxi with the buyer orthe decision maker of the business doesn't guarantee success and guanxi with the rest ofthe staff was also recommended to smooth the passage of business. Guanxi will create theright environment for negotiation. Socially good guanxi can be beneficial in terms ofhousing or again in smoothing the passage in terms of other social benefits. This ofcourse releases the spectre of corruption and explains the reticence of the respondents totalk about this subject in depth and the absence of any Chinese academic or governmentinformation on the subject.
The information gained from theseinterviews did however paint a complicated picture of the importance of guanxi in themarket and the current influences that are being exerted on that importance. From theresearch, it appears that different guanxi activities are effected in different ways bythe changing environment, and therefore it is possible to hypothesise that they aredifferent categories or styles of guanxi. These, the research suggested, are social guanxi(personal relationships in a social context), business to business guanxi (personalconnections in a business context), employment guanxi (connections that can lead to careeradvancement), guanxi with industry organisations (connections that can benefit business)and guanxi with government organisations (contacts that can 'smooth the path' orfacilitate quick decisions). The reciprocal nature of these relationships is though stillextremely important. The research also suggested several influences exerted on thesedifferent types of connections. These were, western business influences, the degree ofmaintenance of the guanxi, the degree of competition, the economic conditions, the westerninfluences on culture and government policy (see fig 1).
Many of the business managers interviewed,felt that now and in the future, the importance of guanxi would decline in Chinesebusiness. It was often stated that as the market moves from a planned economy to a marketeconomy, guanxi's importance for small and medium sized business is declining. Money andwealth can now be the catalyst to open doors in business situations. However, mostrespondents agreed that for large organisations, guanxi is still beneficial for creatingbusiness, enabling fast growth and "smoothing the path".
So what are the implications of thisresearch for wine distribution in Shanghai. Companies setting up in China, growing,producing and marketing will be well aware of some of the frustrations of business andlocal practices. Good guanxi currently benefits strategies to access new markets, developthese markets and grow in these markets. Many companies contemplating business in Chinafind initial attempts at building guanxi very difficult. Quite often they will encountermany people offering access to such chains of contacts, who either on further examinationeither appear unwilling to deliver or appear unable to deliver. In these situations usinga foreign constancy company or head-hunting partners/staff with proven track records maybe the best strategy.
Attracting staff with proven track recordsin local markets can often be a quick and successful way of smoothing this path. Goodrelations with officialdom and industry organisations is also essential and must bemaintained. For distribution and agency work, sales staff with the right connections arebecoming as valuable in the market of Shanghai as they are in our more mature winemarkets. However in attracting these experienced staff attention must be paid to some oftheir methods of guanxi maintenance, which can appear a little more mercenary than what weare used to. These methods naturally have to be kept within the boundaries of the law, butthere is great importance and expectation attached to certain incentives and commissionsto trade customers and their staff. This process is essential in establishing ormaintaining good faith with the client. Care must also be taken with the management ofstaff with good guanxi as they will consider this an exclusively personal characteristic.
Many of the joint venture specialist winemerchants and agents use both local and foreign executives to gain new business and tomaintain existing relationships. Many of the respondents commentated on this strategy,saying that strategy was viewed very positively by the clients as they liked to meet andassociate with foreigners and appreciated their product expertise. However, this strategystill relied on local guanxi, as it was the Chinese executive who facilitated the meetingwith the foreigner and many of diverse cultural behaviours between the foreigner and theclient would not facilitate a 'guanxi type' relationship. Consequently, it is still ofgreat importance to employ local staff with good connections. Many of the respondents alsofelt that as the economy opened up and contact with foreigners became common and thedistribution channels employed local representatives with good levels of productknowledge, this strategy to use foreign executives would become less successful.
Whether these characteristics of Chinesebusiness will continue to be so important in the future is debatable. The researchproduced no consensus of opinion on this question. However most respondents felt its rolewould start to diminish as Shanghai adopted a market orientation. Certainly differenttypes of guanxi will diminish in importance faster than others. This is illustrated by afew new employment practices in Shanghai, where many state owned media companies areemploying staff based on their qualifications as opposed to their connections. However,success in distribution can still depend on the quality and quantity of the relationshipsof your staff. This may well appear to be common sense, but some of the foreign firmswithin Shanghai are using foreigners in these positions.
In light of this information, it isimportant for wine companies who are considering investing in Shanghai, to understand therelevance of employing local executives with 'good guanxi'. For companies entering intojoint ventures, these are characteristics that the prospective Chinese partners mustpossess. For companies considering entering the market as a wholly foreign ownedbusinesses, employees with good guanxi are essential. In response to questioning on how tofind staff with these characteristics in the wine business, many respondents recommendednot confining the search to just the wine sector, but looking at any related sector thatdistributed products to the desired target markets. Also the emergence of head-huntingcompanies and Western business style poaching, indicated the recognition of the valueplaced on workers in the marketplace with 'good guanxi'.
Rupert Dean specialises in wine marketingand business issues in China and has recently undertaken six months research there. Rupertcurrently writes for, Wine and Spirit International Magazine and contributes to AsiaPacific Drinks Buyer, The Australian and New Zealand Wine Industry Journal, InternationalWine Magazine, Vin Magazine and La Revue Vinicole Internationale.
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