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Can your firm make it in Asia?

Can your firm make it in Asia? Why is Asia important? Let's look at the numbers. In 1950, the United States contributed 45 percent of the world's GNP; Asia was responsible for only 8 percent. But, by 1989, Asia contributed 25 percent of the world's GNP--equal to that from the U.S. Similarly, Asia increased its portion of world trade from about 7 percent in 1950 to 40 percent in 1989.

Asia has major new centers of capital. In Taiwan alone, a population of 20 million has $75 billion in foreign currency reserves and 14 million ounces of gold.

Asia has arrived.

This meteoric growth developed slowly at first, beginning after World War II when the U.S. sent foreign aid into the region to build up Taiwan, Japan, South Korea, and the Philippines. The next step that pushed Asian economic development was the investment in the 1960s by Western companies who sought to take advantage of the low value-added production, orderly governments, cheap labor, and educated citizens available in Asian countries. The next step, in the late 1960s, was the Vietnam War, in which many countries in Asia participated, in economic terms, and propered. Another significant development occurred during this period when many Asian countries--and companies--decided to commit themselves to quality rather than to compete with America in production. And finally, in the 1980s, many Asian countries have moved into high value-added production, such as software and aerospace.

Asia is a new marketplace, a new capital source, a new place for investment. To be competitive, the American multinational can no longer focus only on Europe. Asia is simply too big and too productive to be ignored. But with its culture and languages so dramatically different from our own, Asian offers unique challenges to the American business executive. Any executive who plans to do business in this area must explore the unconscious world of its values, attitudes, and mores, where words, assumptions, expectations, and even institutions have meanings and purposes quite different from our own.

Asia is a vast and diverse region of the world, encompassing a number of countries, cultures, and languages. The astute businessperson will study the specific patterns of each country or people before making a business decision. But he or she should understand the underlying values that cross national borders.

Two behavioral philosophies are accepted in every Asian country: first, the group is more important than the individual, and, second, courtesy is valued over directness. The American businessperson is often in a quandary. Does "yes" really mean "yes"? Or does it mean, "I'm being courteous and am therefore obliged to say 'yes'"? Only experience will enable the executive to tell one from another.

Seven ways to go astray

When it comes to business practices, the U.S. and Asia often differ dramatically in key areas.


In developing its strategic plan, the U.S. corporation typically focuses on return on investment (ROI) over a comparatively short period of time, usually three to five years. But the Asian company's strategic plan is concerned with market share, not with ROI.

The difference in approach to strategic planning is well exemplified by the games of chess and Go. In the Western game of chess the board begins filled with players. The goal for each player is to maneuver forward and to take his or her opponent's pieces, until the opponent's king is vulnerable--checkmate.

Go, on the other hand, begins with an empty board. The objective of each player is to occupy territory rather than to capture individual pieces. There are six times more positions on the Go board than on the chess board, so the game is much more complex and much more protracted. During a game, there are many small victories and small defeats that do not indicate the outcome of the game. In Go, one learns to take tactical defeats to gain strategic victory.

Fujitsu Ltd. demonstrated clearly the Asian concept of strategic planning when, in 1989, it contracted to develop new software for the water system in Hiroshima for the equivalent of one cent. Why, the Western mind wonders, would Fujitsu give away such an extensive project? Because Fujitsu Ltd. knew that Japan will spend millions improving its infrastructure in the next 10 years, and that, if it could develop the prototype system for Hiroshima, it would be so far ahead of other companies offering a similar service that it was worth giving the software to Hiroshima.


In the U.S., the corporation exists for the shareholders, which increasingly are larger institutional investors who sometimes use the power of their votes to gain access to boards of directors and even to select top executives. But the Asian corporation exists first for the employees and second for the general benefit of society. Shareholders, even very large ones--as T. Boone Pickens found out the hard way--finish a very low third. Shareholders' meetings are held to announce policy, not to challenge management or discuss social philosophy, as often is the case in the U.S.


In the West, competition is constant challenge. But competition in Asia is often called "harmonious competition." What, a Westerner may well ask, is that?

Because the Asian corporation is dedicated to the benefit of society, it derives its stature from doing the greatest good for the greatest number of people. Thus, when a company makes dramatic improvements in the quality of production, it will often share those improvements in seminars throughout the country. This means, of course, that it may share these improvements with its direct competitors.

In the Asian corporation, there is also the concept of interlocking ownership, by which a company owns 10 to 25 percent of another company with which it has some form of relationship. A good example occurred recently when the Japanese subsidiary of a large American corporation wanted to use some of its profits to buy a 10-percent share of one of its vendor's stock. To the Japanese, owning the stock would cement the relationship with the vendor and guarantee future harmonious relations. But the American parent did not understand the relationship and insisted on repatriating the profits to the U.S. to improve its bottom line.

To the Asian, ownership of a relatively small percentage of another company's shares demonstrates trust and commitment, but 51-percent ownership implies distrust. The Japanese, for example, frequently evidence their distrust of foreigners by insisting that they claim 51-percent ownership of joint ventures.


In Asia, sales begin with a relationship--with what the Chinese call "guanxi" (pronounced quon-shee). The salesperson's first goal is not to sell the product, its technical capabilities, or its price; rather, it is to have his or her company recognized as producing a viable product. Executives in asia spend a great deal of their early months building guanxi. Without it, people can look you in the eye, but you do not exist.

After you have built a relationship, you then build trust. The process requires a great deal of patient, but it is well worth the effort. A relationship can often overcome technical specifications--and even price.

An Asian executive once advised an ambitious young American regional manager not to arrive in the office before 10:00 and to leave by 3:00. "You go out and build guanxi. You play golf with the ministers in government. You build guanxi with other corporate executives. Guanxi is the basis for business. If you, the regional manager, show up at the office at 7:00 in the morning, the word will go out that your company is in trouble."


Building guanxi is the basis of doing business in Asia. But in some Asian countries one has to do business with government institutions because they have become part of the business structure. Five years ago, for example, plastic was imported into Indonesia through only one company in Hong Kong that happened to have connections with the son of the president. But when the price of oil collapsed from $36 to $10, Indonesia needed to be competitive, so the government opened up the market, and the price of imported plastic dropped.

The Asian system of ethics is very hard for a Westner to understand. In the Western ethical system, ethics are based upon specific ideas; an action is either right or it's wrong. But in Asia, what is right or wrong depends on the situation.


In the U.S., we consider compromise to be an appropriate outcome of negotiation. But in Asia, compromise is often considered defeat. So a U.S. executive will negotiate with an executive of an Asia company, agree on terms, draw up the contract, and send it off to his attorneys for the final touches. But, to the Asian, the contract is only the final sign that guanxi--relationship--has been established. Once the contract is signed--and guanxi is established--the Asian will be ready to reexamine the clauses concerned with doing business.

Further, because of the need for consensus, the person in charge of the negotiations often is not a technical expert and does not have the authority to make decisions. He or she will have to get final approval from a superior before agreement is finally reached. One should always remember that Asians are long to decide, but quick to implement.

One American company saved over a million dollars by knowing what to expect in negotiating with the People's Republic of China. The company decided to adapt its strategy to the Chinese way of negotiating. Instead of coming in to sign a contract in three days, they tried to build guanxi. They did not expect to have a final signed contract at the end of this negotiation. They were just going to let it develop.

The Chinese couldn't believe it. What was wrong with these Americans, who were not driving for a final contract in three days? After two hours, the head of the Chinese delegation said: "Excuse me. Friday at noon we have to have a final signed, sealed contract." The Americans surprised the Chinese by approaching the negotiations in the "Asian" way. As a result, the Chinese tipped their hand--and the American company saved a bundle.


Asians, especially the Chinese, are used to orthodoxy. Whether it's Singapore, Taiwan, or the People's Republic, the principle of sharing ideas--the pluralism so cherished in the West-implies chaos, a lack of order, weakness, and suffering. It is very hard for us in the West to understand that a leader of government would shoot the youth of his country. Deng Xiaoping's means were deplorable, of course, but his purpose in the shootings in Tiananmen Square was no doubt to avoid the weakness, the chaos, the disorder that he remembers when China had no orthodoxy, when millions of people died of starvation, when everyone kicked China around the block in the 1920s and 1930s.

It is interesting to note, however, that Deng Xiaoping chose to replace premier Zhao Ziyang with the mayor of Shanghai, a man who is fluent in English and Russian, a man who has dealt with the West and who had kept order in Shanghai without the gun. With this action, Deng Xiaoping said: "Yes, we're going to crack down on our students to maintain order, but I have chosen a man who can talk to you. This is a sign that we want to continue economic development with you.?

Does Asia face problems in world trade?

Many Asian countries have a tradition of being introverted--of caring only about what happens inside their own countries. For example, the Japanese did not send help to Armenia following the major earthquake there in 1989, even though they have well-trained earthquake teams. Why? There are no Japanese in Armenia. Only after a great deal of criticism in the world community did the Japanese finally send help. (They apparently learned their lesson well, however. Japan was one of the first countries to send aid to Iran during the earthquake there this summer.)

In business terms, the natural introversion of Asian society may result in its losing sight of the need to stay competitive, focusing instead on improving its own lifestyle. In South Korea, the workers' demand for 20-percent annual salary increases may soon cause Korea to lose its position in world trade. And Singapore's 1985 attempt to change its tax and wage policy resulted in a recession; the country had lost its wage competitiveness. The government hastily retreated to a policy of decreasing taxes and allowing each company to set its own wages.

A second problem is that the growth many Asian countries have experienced results from the fact that they have controlled economies. The Japanese stock market has traded at high P/E ratios in part because the government has imposed strict restrictions on land use. From 1950 to 1990, the Japanese have transferred the same property back and forth, with an increase in price with each transfer. Much of that money has been funneled into the equity market, allowing the market to have no relationship to "normal" economics. One of the demands of the Bush Administration is that the Japanese release the controls on land use. The question is, of course, will the Japanese market hold up if controls on land use are removed.

The same question applies to all countries with controlled economies. Can they sustain the pattern of growth when their economies are opened up?

A third problem is what we would describe as a lack of creativity. Creativity in Asia means to accomplish a slight variation of mastered techniques. R&D, while not impossible, becomes difficult. Theirs is a world of incremental change, of practical application of invented products.

Herein lies the challenge: those Western companies that successfully combine their creativity and innovation with their Eastern partners' pursuit of perfection in practice will find themselves with an unbeatable combination to compete successfully in world trade. But it is guanxi that will make that combination possible.
COPYRIGHT 1990 Financial Executives International
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Special Report: International
Author:Miner, Noel R.
Publication:Financial Executive
Date:Sep 1, 1990
Previous Article:The promise of the Pacific Rim: a look at the countries.
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