Last week, I spoke at Brigham Young University’s annual China Conference, which is now in its eighth year under BYU professor Peter Chan. This year the conference’s theme was Peace Together: Continuing a Culture of Collaboration. Professor Chan has become a good friend over the past few years since I started attending the conference. He is a brilliant person and also very kind and pragmatic, which came through in the conference title and the way the conference was carried out. This text below contains excerpts from my presentation:
Introduction
I am honored and humbled by this opportunity to speak with you today. When I arrived at BYU for my first semester in the fall of 2000, I was amazed and overwhelmed by its size and the intensity of a university education. Growing up as a religious minority in a small town in southwest Wisconsin, I was so happy to finally be among my people. I came to BYU hoping to understand who I was and my life’s mission.
I generally found what I was looking for at BYU, but I didn’t find all of my answers. Some of those required years of subsequent experience, which has given me perspective. Perspective is not something you can artificially accelerate by thinking harder about what might happen. You need to get out and live it.
My Professional Background
I am an international business lawyer with an emphasis on the China market, or as we are calling it now, the “China +1” market. I specialize in business transactions. That means I help companies move their goods and provide services across international borders. I generally do this from the comfort of my home while wearing sweatpants and a t-shirt. (Don’t get too excited. It took me 10 years to get to the point where I could do that!)
But a few times each year I travel internationally to speak at conferences, meet clients, and build my professional network. And sometimes I get dressed up to speak to groups of bright young people and business owners who are trying to learn how to better succeed in the international marketplace.
Building Business Relationships
I am an expert in business relationships. It may surprise you to think of a business lawyer as being an expert in relationships, but my type of lawyering is at least as much about understanding people as understanding facts and the law. Understanding people is key to understanding their motivations in business.
In my session, I will focus on the art of building good international business relationships. All businesses depend on relationships. These relationships start with a company and move in any number of directions.
We will discuss the importance of relationships in the Chinese culture, China’s growth over the past 20 years, and how Chinese manufacturer’s relationships with the outside world have been changing over the past few years.
I will provide two case studies from my clients, one a Chinese entrepreneur and the other a US entrepreneur establishing a new type of business relationship with his Chinese manufacturing partner.
Types of Business Relationships
It is helpful for me to think about these business relationships as being internal or external. Internal relationships deal with cofounders, joint venture partners, financing partners, investors, employees, independent contractors, and advisors. I think of these internal relationships as residing on the horizontal plane.
Then we have external relationships with suppliers, manufacturers, distributors, and customers. I think of these relationships as residing on the vertical plane because they track the movement of business inputs and outputs, as well as money.
This is not a comprehensive relationship framework, but I think that it is helpful for you to know how a business lawyer thinks about the world of business relationships.
Relationships Lead to Contracts
In this interconnected web of business relationships, my professional work begins and ends with contracts. Contracts may not sound very exciting, but they are similar to natural laws. Even if you do not believe in them, they are there, and they impact you whether you like it or not.
If I can use a simple analogy, I think of the business relationship as the body and the contract as the exoskeleton. If I draft my contracts in the best way possible, then they will protect my client’s interests and key relationships while also providing a certain amount of flexibility in the relationship, usually around points of vulnerability in the relationship.
Guanxi in the Chinese Culture
If you know anything about China and Chinese culture, then you know that guanxi (关系) is a paramount concept. It might be the most talked-about term. When we use the term “relationship” in English, it does not carry the same cultural weight as guanxi does in Chinese.
Let me give you an example. A few weeks ago, I was at a small Lunar New Year celebration at a friend’s house. My friend and I have known each other professionally for a couple of years, but I had never met his wife. She is from Mainland China and a successful self-made entrepreneur in Utah. My friend introduced me to her as a business lawyer who speaks Chinese, and her eyes immediately lit up. She asked me some questions about my work and then exclaimed, “We need to do business together! And I definitely have some friends who will be interested in meeting you!” So, we immediately connected on WeChat, and we now have a preliminary guanxi bond. This experience happens rarely in Western cultures to this degree, but it happens frequently in Chinese business circles.
I Start to Learn About Guanxi and China
During the early 2000s, I first lived in Hong Kong as a missionary for The Church of Jesus Christ of Latter-day Saints and then in Sichuan Province as an English teacher, for a total of three years. I went there with only the goals of trying to help people in Hong Kong and to learn Mandarin in Sichuan.
I was barely out of high school and did not have much context for what I was seeing. But as I found myself immersed in Chinese culture, I started to understand how important relationships were for them and in my own life. I was extremely far out of my comfort zone, but I quickly learned that I liked people, and people seemed to like me. I didn’t know whether that was because I was making the effort to learn their languages or because I had an open mind about the food and culture. Either way, I felt like I was slowly building up a significant asset in my life – my network of people who I knew, liked, and trusted.
China’s Business Rise
My exposure to China closely tracked China’s rise as to become a global superpower. China joined the World Trade Organization in 2001, which was the same year I arrived in Hong Kong. I was not aware that this was the start of China’s rise to become the world’s manufacturing powerhouse. By 2009, China had become the world’s largest exporter of goods. That market share continued to increase, and China now makes up over 28% of total global manufacturing. But in the past four quarters, China’s manufacturing activity has continued to shrink. There are globally significant reasons for this shift.
COVID Impacts China and the World
We all lived through COVID-19, but you may not have been aware at the time how much the pandemic shocked the global supply chain. Normally, it takes about 40 days for goods to arrive from China by ship, but during the pandemic it was closer to 70 days. And on top of that, shipping costs per container increased from about $1,300 per container in 2020 to over $20,000 per container.
These systemic shocks and effects were extremely difficult for businesses to deal with, but the emotional impact on business owners was probably more significant than the financial impact. As businesses all over the world watched how quickly and thoroughly the Chinese government could lock down a port, a neighborhood, or an entire city, they started to worry. This worry was not the worry from the Trump Era tariffs that many businesses had been dealing with for years. This worry was more foundational because businesses could not ignore the risks associated with Chinese government decisions. Many decided that the world’s supply chain was too dependent on China.
Chinese Manufacturers Start to Look Abroad
In the 2000s and early 2010s, China was the land of low cost labor and minimal regulatory enforcement. By the late 2010s and early 2020s, China had become a land of increased labor costs (now 1/3 higher than Mexico), significant regulatory oversight, increased risk, and diminishing profit margins.
Consequently, the relationship between Chinese manufacturers and their buyers has been changing over the past few years. These manufacturers previously found it very easy to make and sell products. Many didn’t think beyond just optimizing their production lines. They didn’t worry about branding or building international sales channels. Make and sell, copy, and paste. But manufacturing demand has declined as companies seek to retool their supply chains. This changing environment requires different tactics from these manufacturers.
In the middle of this global chaos the past few years, I have noticed that some Chinese manufacturers are coming into their own. For instance, some extremely innovative products are being produced in China, built on decades of increasing manufacturing expertise. And I have encountered some very experienced and smart Chinese entrepreneurs who really understand how to thrive in international markets.
Two Case Studies
Chinese Manufacturer of Electronics
Our client initially contacted my firm because he had a business opportunity with a Chinese manufacturer. His company began by setting up display infrastructure for large event venues. From there, the company grew into managing live events, from providing crew management, stagehands, technicians, and lift operators. Then the company moved into providing the media and entertainment infrastructure for large venues, such as hotels, churches, and casinos. This involves designing the entire audiovisual system and then purchasing and installing all audiovisual equipment for those mega venues.
Our client and his team have an expert eye for quality materials and quality products. While they were at a trade show, they came across a Chinese manufacturer. This manufacturer had developed the technology to provide an LED overlay onto any existing piece of glass to turn it into a display screen, for which they won an award at a prominent industry expo. Our client and his team immediately understood two things.
First, they understood the potential commercial scale for such an amazing product. Second, they understood that the manufacturer would need help to really perform well in the US market. Our client had never really dealt with Chinese manufacturers, and he knew that he needed to get this business relationship right. The client reached out to our firm so that we could help them deal with cultural, legal, and linguistic differences that had already started to manifest themselves. The manufacturer’s leadership is smart enough to know that they can’t just sell this product via ecommerce. They need local market help to differentiate their product from other potential competitors and to really build its sales channels, providing a world class offering to the US market and beyond.
Both sides of this equation understand that they need each other locked into a symbiotic relationship. A simple arm’s length transactional relationship is not going to be enough for them to succeed with this innovative product in a new marketplace.
Fractionalized Asset Ownership
Our Chinese client is an online marketplace for sports and Pokémon trading cards, much like eBay. The owner started collecting basketball cards in 1996 as the NBA started to get more exposure in China. He began his career in China with a US multinational firm, and then he opened a restaurant, which grew to a chain of 80 restaurants. After selling that venture, our client established this new venture.
Our client is an entrepreneur at heart. He has an expansive vision for where he wants his company to go. He has seen websites in the US and abroad that offer fractional investment opportunities in various collectible assets. And he wants to build a world-class investment platform for trading cards and other assets.
He has assembled a team, including the Chinese manufacturer that produces sports cards for some European soccer clubs. And he has decided that he wants to comply with all of the applicable US regulations as he establishes his new marketplace. He visited the US last year, and as I sat across the table from him, I was impressed more with him than any other Chinese business owner that I had dealt with. I have every confidence that he will succeed again as he has already done.
Our client is ambitious and experienced enough to know that that, other than hiring good US legal counsel, he does not necessarily need a US partner to succeed in this new venture. But he has already set his sights on Europe, as well, which will require additional partnerships. He is initiating all of these relationships, and I think that potential partners will appreciate his drive and vision. And he has the flexibility to know when he needs to bring in outside partners to succeed.
Conclusion
I think about this concept of guanxi a lot, including business relationships. The question is what does this world of changing relationships mean for your life, and what will you do with your relationships? I want to close with some simple and obvious facts that were initially taught to me on the streets of Hong Kong over 20 years ago. These are simple and may be obvious, but I believe they are also profound.
First, you should be learning Chinese because it opens up the door for you to speak to over a billion people. You should make sure that you encourage others to learn Chinese. This is even more important today because English language instruction in China is not being taught at the levels it was in the early 2000s when I was teaching there (see here).
As China retrenches and reinforces its Great Wall, we need to move more than halfway toward China in building these bridges of friendship and understanding over any barriers. Those people who learn Chinese now will be those guiding foreign policy, international relations, and international business in future generations.
Second, you should be building meaningful relationships with people wherever you go. You should trust that in your life you will meet people who will enrich your experience and help you in important and amazing ways. And you should trust that for some people, you will be the one who will enrich their lives and help them in important and amazing ways.
I hope that our time together today has been meaningful for you. I believe that our relationships can be one of our greatest gifts and opportunities in this life. Thank you.
