Under Chairman Mao, the People’s Republic of China maintained a supply-driven economy and

marketing was proscribed. Deng Xiaoping ‘opened the door’ to new socialist market-orientated thinking
from 1978 (Ambler et al., 1999, p.75). During the 1980’s the Chinese government, the Communist Party
of China (CCP), created Special Economic Zones (SEZs) in coastal cities, such as Beijing, Shanghai
and Guangzhou, as an experiment based along communist ideas, allowing foreign direct investment
(FDI) into the SEZs. The principle ideas behind the SEZs were to attract FDI in science and technology
to enable China to push for export-driven economic growth (Ge, 1999). Since then China has been
developing into a major economic entity, with a population that constitutes one-fifth of the world’s
consumers (Population Reference Bureau, 2008), a gross domestic product (GDP) of US$3,460 billion
and a predicted GDP annual growth rate of 8% for 2009 (The Economist, 2009a).

A recent study by HSBC and MasterCard (2007) estimated the size of the middle class in China at 87
million (2005 estimates), growing to 317 million in 2015. There has been an emergence of the “affluent”
class in China over the last decade, with 2.9 million people estimated to be earning over US$60,000 in
2005, growing to 8.5 million in 2015. According to the McKinsey report “From Made in China to Sold in
China” (2006), 700 million Chinese will join the international consumer class by 2020 compared with
less than 100 million today. That adds up to a five-fold increase in urban consumer spending over the
next twenty years to US$2.3 trillion a year. The enormous market size, rapidly increasing purchasing
power, and the diversity of consumer segments have tremendous implications for domestic and
international marketers (Wang & Cui, 2008 p.421-423).

Geert Hofstede’s (1980) “Culture’s Consequences” is one of the most prevalent insights into cross-
cultural management and understanding (Fang, 2003). His work surrounds his concept of the four
dimensions of national cultural variability, i.e. power distance, uncertainty avoidance, individualism and
masculinity. The later revised (1991) “Cultures and Organizations” work brings in a new dimension of
Confucian dynamism. This dimension is particularly important when trying to understand the Chinese
culture, and how it differs from that of the UK.

Chinese culture is extremely difficult to quantify. As one of the world’s oldest nations, Chinese culture
has developed over 5,000 years. Confucius teachings have been a central role in Chinese beliefs.
Confucius lived around 500 BC and taught lessons in practical ethics. Under Chairman Mao ruling
collectivism was taught and encouraged, which still plays a huge role in Chinese society, differing from
the individualism expressed in Western society. Primarily a central point to Chinese culture is the
importance of guanxi (Styles & Ambler, 2003).

Guanxi is the lifeblood of the Chinese business community, extending into politics and society. Without
guanxi one simply cannot get anything done (Davies et al., 1995). It can also be broadly translated as
“personal relationship” or “connections”. It necessitates personal interactions and always involves
reciprocal obligation (Brunner & Koh, 1988). It is developed with ingenuity and creativity, supplemented
by the flexibility of cultivating a relationship through a person’s network of connections (Wong & Leung,
2001, p.4).

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Relationship marketing in the Western sense focuses on establishing, developing and maintaining
successful relational exchanges and good customer relationship (Berry & Parasuraman, 1991).
Although some relationship marketing principles are regarded as a key determinant for a successful
business in China, the uniqueness of the Chinese culture makes the direct transfer of Western
relationship marketing principles into China questionable (Wang, 2007). It has been argued that doing
business in China is particularly difficult because of the higher relative importance of personal
relationships, and guanxi, as opposed to the specification and enforcement of contracts in the West
(Davies et al., 1995).

A particular example of a failed UK business venture into China was by Marks & Spencer (M&S), who
did not develop the ideal guanxi networks before market entry, picking the franchisee almost
“haphazardly” and relying on their brand image in the Western world (Burt et al., 2002). Their initial
plans were to develop a chain of retail stores as it has in many other countries – Asia in particular. After
4 years running a representative office the country manager concluded, “The best we might expect
might be some local businesses, two or three regional businesses perhaps.” This was unacceptable to
M&S so it withdrew from China at the end of 1998 (McHardy Reid & Walsh, 2003).

MacInnes (1993) observed that the major contrast between Western and Chinese management
practice is the emphasis on written contracts and procedures in the former, and personal relationships
and trust in the latter. Wong & Leung (2001, p.6) observe that, “one of the major purposes of guanxi is
to generate ganqing (emotional attachment among network members) and become an insider in a
group; then all deals become easy”.

In addition to this contrast, referring to the fifth dynamism of Hofstede’s (1991) dimensions of national
cultural, Confucian dynamism is related to the long-term orientation (LTO) of a country’s culture. A table
in Hofstede’s original work shows the differences faced between China and the UK: of the 23 countries
making up the table, China ranks 1st for LTO whilst the UK ranks 18th behind other Western countries
such as the US and Germany (Hofstede, 1991, p.166). Hollensen (2001, p.175) notes that the high
score for China is because Confucian traditions are prevalent there whereas the low score for the UK is
because they believe in preserving history and continuing past traditions. Guanxi is based on LTO and
Confucian dynamics whereas traditionally UK business is based on a more short-termed contractual
basis approach.

Western relationship marketing and guanxi do share some basic characteristics such as mutual
understanding and cooperative behaviour. However, trust and relational commitment underpin
relationships in the West, whereas renqing, including reciprocity and empathy, is the key to maintaining
guanxi (Wang, 2007). Renqing is a unique term in Chinese cultures, often referring to one’s emotional
responses when confronting various situations of daily life, a resource that one can present to another
person as a gift in the social exchange process, and a set of social norms that one should follow to get
along well with other people (Hwang, 1987).

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The implication of the differences between Western relationship marketing and guanxi in China for a UK
exporter exporting to China for the first time is that they may benefit more from seeking long-term
partnerships through the gradual development of guanxi networks than from relying strictly on the more
familiar contact-based agreements (Standifird & Marshall, 2000). Hence, it is crucial for the UK exporter
to learn how to successfully interact with the Chinese. Partnerships need to be built on guanxi grounds
where a social relationship is a prerequisite for the business relationship and interpersonal relationships
underpin any business deals. For the Chinese, business is not just business, it is also a social
interaction, in which renqing is exchanged. A long-term relation based on ganqing commitment and
friendship within the guanxi network, and returning renqing, will have a sustainable competitive
advantage over outsider competitors.

It is important to note the different modes to exporting, which can be classified as indirect, direct and
cooperative (Hollensen, 2001, p.246). Due to the importance placed on guanxi networks I argue that
indirect exporting will hinder the success of a UK exporter to China, as it will be seen as short-termed
and use low levels of ganqing commitment. A long-termed guanxi network may be established with a
distributor or agent in China as in the direct export mode. A cooperative mode may be more appropriate
to a small or medium enterprise attempting to internationalise as they may be able to make use of the
export marketing groups’ already established guanxi networks.

Although networks and guanxi are believed to be critical for market entry in Confucian societies, they
may also dampen the entrepreneurialism necessary to build a sustainable niche suggesting that under
certain market conditions guanxi may have limitations (Beverland, 2009). This has implications for UK
exporters to China as entry will become more prescriptive under Chinese circumstance, something that
a UK exporter may not have a great deal of experience in and areas of experience known by the UK
exporter may not translate to an exceptional competitive advantage.

Critical to succeeding in international business is the negotiation process. The Chinese have a very
traditional view on negotiation set in traditions dating back 2,300 years ago. A great military leader
named Sun Tze, who lived during the Warring States Period (473-211BC), wrote a military treaty
named the Art of Warfare, consisting of 13 chapters ranging from topics such as “laying a plan” to
“using spies”, outlining the secrets of success on the battlefield (Ho & Choi, 1997). Sun Tze’s teachings
are profound in everyday business in China.

As highlighted above, the Western approach to international strategy involves creating relationships
through marketing and contractual agreements. Sun Tze’s teachings set out a very rigid structure for
Chinese negotiation and competition. Translating this to Hofstede’s (1980) dimension of “uncertainty
avoidance” highlights that China appears to display strong uncertainty avoidance. This contrasts with
Hofstede’s original work placing the UK as a weak uncertainty avoidance culture. This cross-cultural
difference may make the negotiation process for UK exporters much harder, especially if the guanxi
networks are not thoroughly in place at the time of the negotiations.

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Referring back to collectivism, the Chinese have traditionally emphasised that the individual creators
are obliged to share their developments with society. The Chinese proverb “He that shares is to be
rewarded; he that does not, condemned” illustrates the Chinese mentality regarding collectivistic
sharing versus individual ownership. In Chinese tradition, the highest form of flattery is when the
student is able to faithfully reproduce the work of the teacher. In contrast, students in the West are
taught never to plagiarize and encouraged to be original. The individual’s rights over creative
developments are valued (Ang et al., 2001, p.221).

A growing topic in world news has been the boom in “shanzhai” products. Shanzhai literally means
“mountain fortress” but relates to non-branded products developed by domestic Chinese companies.
Shanzhai versions of Apple's iPhone, for example, include the HiPhone and the SciPhone. Once a term
used to suggest something cheap or inferior, shanzhai now suggests to many a certain Chinese
cleverness and ingenuity. Shanzhai culture "is from the grass roots and for the grass roots," says Han
Haoyue, a media critic in Beijing, who sees it as a means of self-expression (Wall Street Journal, 2009).
This stark difference of appreciation for counterfeit goods is a barrier for UK consumer exporters
wishing to internationalise into the Chinese market.

Chinese consumers are showing a tendency to move away from foreign brands in favour of local
offerings in some product categories (Ewing et al., 2002). One reason for this is that the country-of-
origin (COO) effect and perceived symbolic value of foreign brands from the West is deteriorating and
at the same time, the COO effect of Chinese brands is becoming less of an issue (Zhou & Wong, 2008).
Research indicates that foreign brands manifest their impact on consumer preference through two
primary motives – perceived product quality and social status or prestige (Kwok et al., 2006). However,
it is challenged that as an economy evolves to a more developed stage, the perceived advantage of
foreign goods becomes less of an impact on consumer consumption (Zhou & Wong, 2008).

This change in COO preference in China, coupled with the relatively low level of counterfeit disapproval
within society, means that UK exporters originally relying on the quality perception of goods imported
from the UK may need to change their international marketing stance in order to successfully compete
in China. The product needs to be positioned at the target audience focusing on other aspects.
According to the HSBC & MasterCard 2007 study, convenience and green issues were of greater
importance to the affluent class when making a purchase decision, with perceived brand image coming
third. The extent to which this is an issue for UK exporters depends on the type of product being
exported to China.

2007 figures for China show that 22% of all imports are electrical machinery showing that the Chinese
still prefer major electrical machinery from other countries than domestically made (The Economist,
2009a).

An important issue to take into account during an environmental analysis of China lies in the Political

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and Legal aspects of the PESTEL analysis (Hollensen, 2001). Since China emerged as a socialist
system in 1949 it has been deeply troubled by widespread official corruption (Yu, 2008). Corruption, in a
broad sense, is exploitation of entrusted power for private gains (Transparency International, 2009).
However, in China misuse of power is not always treated as crime. Corruption, as a distinctive crime
category in China’s current criminal code, consists of three offences: graft, bribe taking and
embezzlement (Lu & Gunnison, 2003).

Some research highlights that guanxi is a corruption-prone tradition. In their view, personal relationships
often serve as the basis for preferential treatment or access to valued goods, information and
government positions (Zhang, 2001). In examining the failure of reforms in China’s personnel
recruitment, Sun (2008) characterised the current political and economic systems in China as crony
capitalism built on a kinship alliance.

“Doing Business” is a renowned annual publication compiled by the World Bank and International
Finance Corporation comparing regulation in 181 world economies and the ease of doing business in
each country. In 2009 China were 83rd, contrasting with the UK at 6th. China, moving up the table, wants
continuing economic liberalisation and sustainable growth alongside enduring political control (The
Economist, 2009a).

The addition of official corruption highlights the importance of having guanxi networks within the
Chinese government. If the UK exporter does not have close connections with the CCP then they might
receive unfair treatment relative to other competitors with connections.

Another aspect of the PESTEL model forces an analysis of the economy. The Chinese currency, the
Yuan, has been centre to recent debate, with international leaders accusing the CCP of manipulating its
currency, leaving the Yuan undervalued within foreign exchange markets. Tim Geithner, America’s
treasury secretary, and Dominique Strauss-Kahn, the managing director of the International Monetary
Fund, claim that it is “common knowledge” that the Yuan was undervalued so as to give China’s
exporters an unfair advantage (The Economist, 2009b). It also disadvantages UK exporters into China
as domestically produced competitors will be valued at much more favourable local prices, making
foreign imports less attractive to the local consumers.

An underlying factor to the relevance of each environmental difference highlighted above depends
heavily on the product being exported to China. As mentioned above, foreign electrical machinery is still
the largest import into China suggesting that as long as pricing remains competitive to local producers,
a UK exporter will be able to gain market share. As Chinese consumers, in terms of the affluent class,
begin to grow and demand more global products there appears to be a shift from demanding high
priced foreign goods to enjoying shanzhai goods produced locally as cheaper, non-branded
alternatives. The key for a UK exporter targeting the affluent class in China is to target them through
various successful marketing channels. As noted in the HSBC & MasterCard (2007) report, the most
significant channels for sources of information about luxury goods were through fashion magazines,

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business magazines and retail stores.

The importance of strong guanxi networks has been readily discussed above. However, it is noted that
exporting is generally not a good strategy for creating and maintaining guanxi, principally because
Chinese counter-parts perceive it as a short-term venture and require higher levels of Confucian
dynamics as noted in Hofstede’s cultural model. It is important to see in the case of the Uppsala model
(Hollensen, 2001, p.48) how exporting is the initial link into a new foreign market, and a valid starting
point for eventually investing more substantially, through a local partnership or FDI, into the market.
Tying in the Chinese value of business partnerships and long-term mutual exchange in the form of
guanxi, it is extremely important for UK managers to get their longer termed ideas and reasons across
to their Chinese partners early on in the social relationship, even before initial business has taken place.

In conclusion, the key differences in business environment between China and the UK have been
outlined, analysed and commented on as to how these will affect a UK exporter exporting to China for
the first time. It has been determined that strong guanxi networks are essential and that they should
contain a link to the Chinese government for the maximum chance to succeed.

The determining factor for the level of which success is dependent on relates directly to the type of
product being exported to China and the extent to which it will have to compete with domestically
produced goods.

Direct export modes yield the highest levels of guanxi for exporting but should only be seen as an initial
step into the Chinese marketplace. From there on the UK firm should be looking to create substantial
partnerships with a local counterpart, or look at creating a foreign subsidiary in China. The ultimate
competitive advantage will come from sharing the cost advantages of local producers by establishing a
production facility in China.

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