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Three Ways to Connect With China's Profit Pathway


It's so much more than just networking.

During the politically charged period in the late 1980s and early 1990s -- when China believed it really needed friends -- a small number of Western companies ignored the controversies and refused to abandon the market.

Global investors will recognize some of the names: Coca-Cola (KO), Johnson & Johnson (JNJ), and ABB Ltd. (ABB). In the years since, their courage and commitment has been rewarded with hefty market shares, growing profits, and a position of trust that's very tough for an outside firm to obtain.

These firms also have guanxi.

Loosely defined as "connections," guanxi is actually a Chinese word that refers to the very fabric of how relationships work, and how business is conducted in this growing Asian nation. In fact, trying to better describe just how important this concept actually is, some sociologists have actually likened it to social capital -- which means social contacts affect productivity.

While the definition itself may seem a bit hazy, one fact is crystal clear. The best relationships and biggest profits in China are built on the trust and long-term interactions embodied by this deceptively simple term. Global investors who take the time to understand what guanxi means -- and to identify the companies that actually have it -- can expect to reap the biggest windfalls from their China-focused profit plays.

A Different Point of View

Talk about "connections" to a Westerner, and the odds are good you'll get a negative reaction. In the West, a connection can come down to one person owing another a favor. But in China, guanxi is about increasing one's personal standing, about getting respect, and about giving it, too. It literally encapsulates every aspect of Chinese society.

In terms of connections, that's actually an oversimplification. Social capital doesn't even capture all of the nuances that make the Asian culture so fascinating to watch and study.

Contrary to beliefs in the West, guanxi has nothing to do with bribery or corruption -- although there's admittedly a very fine line here, just as there is anywhere in the world where power, money, and profits intersect.

And while some forms of guanxi can be built up immediately -- as my example involving Coke, Johnson & Johnson, and ABB demonstrates -- the most powerful and profitable benefits of guanxi can take considerable periods to amass.

The same is true for individuals, which is why most Chinese seem to spend inordinate amounts of time and money establishing, cultivating, and maintaining their guanxi networks. Needless to say, once these connections are forged, they're nurtured, treasured, and even guarded, for they can last a lifetime.

Guanxi starts with decency and fairness. If a company delivers their products on time -- and honors its promises to the governing authorities and its workers -- that firm is demonstrating trustworthiness. The company is reliable, dependable, and can be counted on. Those qualities all enhance the firm's guanxi.
No positions in stocks mentioned.
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