Western style v. Chinese style
We have often described due diligence as an independent fact finding process to determine who is the fox and who is the rabbit, with the result often being a surprise.
In the West, the information needed for the exercise of due diligence is readily available: Who owns what; where people have gone to school; what idea or patent or copyright belongs to whom. We are able to search public databases, public courts corporate filings, licensing bodies, et cetera. In the West we have an open culture of sharing information not only among ourselves, but with anyone who is willing to read or do the research. There are books on how to do competitive intelligence. There are seminars on how to research your competitor. There are books, courses, and legal requirements for companies to conduct some type of due diligence before investing or making representations to investors.
Until 20 or so years ago, China was a closed society deeply embracing Communist values, societal roles, and norms. The information needed for the exercise of due diligence was not available. Information was centralized and tightly controlled, if not classified. It was proprietary, and a source of power. (Information has always been a source of power). Nor had such information ever been available in that fractured country. China began opening to the world just as WWI and WWII raged. The internal factions during this time subsided just long enough to fend off the Japanese and then closed again in the late 50s. Centralized information was the property of the state, not of commerce, because the state was the engine of all commerce.
The Chinese are a highly developed culture and deeply engrossed with internal commerce, so this did not mean that the Chinese were blind and faithfully trusting one another. Rather, the Chinese developed a strong desire to do business and trade with those people they knew and with whom they were friends. People, for the most part, are by nature not going to take advantage of those with whom they are close. Nor are they going to mistreat or behave poorly in a closed community. If they were to do so, the information grapevine would broadcast their misdeeds and that would be the end of that person’s reputation. In this best of all possible worlds, friends don’t cheat friends and family doesn’t cheat family.
This process of socialization also allows prospective participants to gage one another’s abilities. It is a process of sizing up one’s business partner, or opponent that is as old as the ages and to a keen person is finer than all of the fancy due diligence documents prepared by the likes of us. But it takes time and its takes a commitment to the process.
Lacking a formalized public information structure, the Chinese method of due diligence was to share with the other party information about your family, about your method of doing business, and a correct impression of your abilities and values. This ritualistic process has its rules and etiquette. And you need to learn more about them to avoid making the big mistakes.
As a foreigner, one of the biggest mistakes is thinking that you are the more knowledgeable, or somehow superior. You are a foreigner in a foreign land – a land that is thousands of years old, has well established rules, and where most foreigners have behaved abominably for the last several hundred years. That is why you may be thought of as a “foreign devil,” for that is what most of us have been until the last 20 years or so.
Another mistake is thinking that you can get done what you need to do in a few days. That will not happen: The Chinese do not work that way. Unless you are looking to waste your commercial time in China avoid the quick trip.
While the Chinese work the social and professional grapevines for past information, their due diligence is very much future driven. It is about forging relationships and working toward developing those relations today, and into the future.
The Western process of due diligence is about historical information. Has this person or company ever done something bad in the past, or have they disclosed all of the required items, and does the third party verification of those items support or contradict the disclosure? It is a process of matching what has been done with what is represented as having been done. It is past and present driven.
For due diligence to work, consumers of the information produced by the exercise of due diligence must – MUST – subordinate their egos to the dicta of the information.
The Chinese know that many Western businessmen get reports and put them in a drawer, and many Chinese have no qualms about skinning another ignorant hard-charging businessman who is arriving with the new “Chinese Strategic Stratagem Strategies” (whatever they may be) to help his company. By some estimates, over 50% of embassy time of Western embassies is spent dealing with failed Chinese Strategic Stratagem Strategies with embassy workers looking at the opportunities that once were. The post mortem is almost always the same with the cause of death listed as “death by misadventure” followed by, “These are well known problems. Why didn’t they do their homework?”