Cross-cultural risks in business

By Rob Goodfellow

WOLLONGONG, Australia (JP): A quick round of cappuccinos recently cost some Australian businessmen the equivalent of A$1 million. The experience demonstrated that Australian businesspeople still have a lot to learn about dealing with Australia's major regional trading partners -- Japan, China and Indonesia.

The situation indirectly arose from a high level Australian business delegation to the People's Republic of China (PRC). The host, managing director of the PRC's fifth largest diversified conglomerate, lavished five-star hospitality on the visitors.

The itinerary included introductions to senior trade, industry and political figures. This was complemented by a series of intimate "get to know you" sightseeing excursions with executives of a newly privatized state-owned enterprise, hungry for Australian expertise and materials.

A reciprocal visit was organized. What followed was an unmitigated disaster. The Australian directors picked up the Chinese delegation at the airport, stopped for "a quick coffee" and rushed to make the important 9 a.m. meeting.

This was so that they could "get right get down to business". This proved to be the most expensive round of cappuccinos in history.

The Chinese delegation were polite. They agreed with everything. Then they left on the first available flight. On arriving home the Chinese side immediately exercised their option to withdraw their A$1,000,000 in venture capital.

In private, the following explanation was conveyed to me. The managing director, who I will call "Mr. Li", had lost face in front of his subordinates. He had boasted to them before leaving China of the good character of the Australians. He was in fact eagerly anticipating the opportunity to get to know his new partners and to enjoy some Australian hospitality -- go fishing, play golf and get his picture taken with a kangaroo.

Not a tall order. So what went wrong?

First, Australian businesspeople generally do not recognize culture as a risk factor. We are not the same, and yes, it does matter. Failure to recognize our considerable differences has lead to the breakdown of many cross-cultural businesses. In the most part the explanation for not proceeding to the operational phase is given as "misunderstandings".

Australia, like all Western societies, places an emphasis on individualism. Our regional trading partners, despite their considerable diversity, are communal societies where the appearance of "equality of outcome" is more important than individual rights.

We are linear in our thinking. We are obsessed with goals, targets and ends. The nations to our north do not have a liner view of time but are rather preoccupied with networking, relationship-building and the way things are done.

The latter and not the former was the real purpose of Mr Li's visit. While our desire to "do business" may be something we have in common, there were two problem areas that led to the breakdown.

The first is that many Australians believe that the way we think is the way everyone thinks. The second is that we have this strange notion that "business is business" and cultural perspectives are unimportant.

Mr Li, would beg to differ. "Form" and "face" were prominent in his decision to withdraw from the project.

What are they and how can they be managed?

In Asia, form comes before substance. Form is the reflection of a person's power and reputation. Reputation must be established before substantive discussions may proceed. For the Chinese, this is in fact a type of risk management, even risk insurance, based on the "rule of man", or codes of behavior, rather than the written "rule of law" (although international convention is causing rapid convergence in the field of formal business law in places like the PRC and Indonesia).

The Chinese delegation's visit to Australia was as much about "codes of hierarchy" as it was about business opportunities. It was intended to demonstrate that Mr Li was a person worthy of our reciprocal hospitality.

It had little to do with hospitality per se. Mr Li is a very wealthy man who could well afford to do anything he liked. The purpose of his visit was to improve his standing in the eyes of his own delegation, to fortify his decision to proceed with the joint venture and to get to know the character of the people he was planning to do business with.

Against these imperatives "the big 9 a.m. meeting" was of little consequence. Failure to appreciate this resulted in Mr Li losing face and ultimately to the disintegration of the entire project.

"Face" is a concept that is not uniquely held by Chinese people alone. It has universal applicability. The reason that it is most often identified as an Asian value, is that it is more important to the cohesion of a collective society, like China.

There is a two-fold meaning in the concept of "face".

When something affects the relationship between people, one side wants to protect his or her own personal standing. Simultaneously he or she will also want to protect the prestige of others involved in the relationship network.

The consequence of social carelessness is usually "loss of face". In this case the person feels "shame", a powerful collective emotion (as opposed to individually minded Westerners who internalize these feelings as "guilt").

What Mr Li felt was a sense of shame at the careless treatment he received on his first morning in Australia. It left him with no alternative but to immediately move to reestablish his position in the hierarchy by placing his reputation above short- term material benefit.

Clearly this was not appreciated by the Australians who did not understand the imperative of making Mr Li look good in front of his delegation -- before discussions took place.

This was in fact the most important first objective to be established before proceeding towards a successful commercial outcome.

This unfortunate situation could have been completely avoided by the same sort of intelligence gathering and strategic planning that Australians apply to other dealings.

Cultural differences are real and need to be anticipated and managed.

This requires the insight that comes with careful preparation. Grounding should include both nation and regional-specific knowledge of the decision-makers involved. Likewise, insight into the relationship building process, a firm grip on protocol and a well-rehearsed and confident grasp of appropriate, and effective negotiating strategies, is a premium.

If business is a contest with rules, and Australia's survival in the region as a prosperous trading nation depends on mastery of the game, understanding the importance of managing cultural risk must rise to the top of our list of priorities.

The writer (sujoko@ozemail.com.au) teaches cross-cultural business studies at Mt. Eliza Business School and at the University of Wollongong Graduate School of Business. His books include Investing in Australia: A Cultural and Practical Guide (Allen and Unwin: 2001).