Dr Colin Hawes, Faculty of Law University of Technology, Sydney

Slide 1. Thankyou for coming. I should start with a brief explanation of the title, or at least the "sage insights" bit. I'm not the "sage" here, in case you were wondering why I'm not wearing Buddhist robes or something. No, the real sage, or sages, are the CEOs of China's most successful companies. They've succeeded despite a frustrating and contradictory business environment. They can give us all insights about doing business in China that may be very useful. Even if not useful, they may be very entertaining. That's important after a hard day's work.

Slide 2. China is certainly a country full of contradictions. There may not be that many gentlemen in China who wear skirts, but there are certainly lots of other contradictory concepts. What exactly is a 'socialist market economy'? It really doesn't make much sense when you think about it. And how can the Communist Party be encouraging capitalist CEOs to make as much money as possible, and not give all of it back to the State? It sounds like a load of nonsense. But that's what seems to be happening in China. What are some of the compromises that these CEOs have to make? That's one thing I'm going to talk about today.

Slide 3: This is a summary of my talk: What are the negative company cultures that prevented Chinese companies from becoming efficient and profitable? What is a Chinese company anyway? And, the most interesting part: How have successful Chinese CEOs transformed those negative cultures to create national and international market leaders? If this is not what you were expecting tonight, I'm sure UTS will be happy to give you a full refund. (As long as you give back any wine that you've drunk.)

Slide 4: I'm talking mainly about Chinese companies, though one or two big foreign companies will come up later. Why are Chinese companies relevant for foreign businesses? Well often you have to go into business in China in a partnership or joint venture, or you may buy up a Chinese company with its own fixed ways of doing things – its culture. So to paraphrase Sun Tzu's Art of War: "If you know yourself and know your business partner, hopefully you can avoid having any battles."
Even if you don't work with a Chinese business partner — you set up a wholly foreign owned company in China — it still helps to get some tips from Chinese CEO sages to help you adapt to a different environment.
You might even find yourself working as an employee of a Chinese company. Many foreign professionals are being hired in China, and more and more Chinese companies are expanding internationally, just like Japanese companies did 20 years ago. You need to know what to expect!

Slide 5: This is just the briefest of sketches, otherwise we'll be here all night. You probably know that all businesses were nationalized after 1949 under the Communist government. This was to get rid of private shareholders, those evil capitalist parasites!
The state owned enterprises had great benefits for employees: health, housing, lifetime jobs, you name it. But by the 1970s, most of them were falling apart due to bad central planning and political chaos. Their product quality was poor, employees were inefficient, political factions constantly struggled with each other, and they didn't make any money.

Slide 6: After Deng Xiaoping came to power in the late 70s, the government tried various experiments to get business enterprises to perform more efficiently. These included incentive contracts for managers, and collective enterprises where employees owned the shares equally, and everyone shared in the profits. You also see foreign enterprises entering China for the first time since 1949.
The good thing about these experiments is they made companies more aware of the market. They diversified quickly to fill market needs and make more money for themselves. When run properly, they also gave employees incentives to be more productive.
The problem was that managers gained too much power, and that led to lots of corruption. They skimmed off the firm's money, and employees often ended up with no regular salaries, or they were laid off. Even today, the Chinese government estimates around AUD$7 billion is spirited out of the country every year due to management fraud in Chinese business enterprises.

Slide 7: To deal with these various negative cultures, in 1993, the government decided to transform enterprises into Western-style companies. Now boards of directors and majority shareholders were supposed to keep managers in check and demand better performance from them. Just like they do in Australia?
Under the present system, there are state-controlled companies, where the government has kept majority ownership. These include most of China's largest companies and corporate groups. And there are privately managed companies, where entrepreneurs bought up majority shareholdings in former state enterprises, or they set up a completely new company. Many privately managed companies have grown extremely large and successful. In 2005, the privately managed economy produced around 49% of China's industrial output, which is a massive change from 20 years ago.
But there's plenty of successful state-controlled companies too. Whatever their ownership structure, they have succeeded by overcoming negative company cultures that they inherited from the past.
Many other companies failed despite their new legal structures, because they couldn't adapt their cultures. They just carried on ignoring their customers and making no money; or their managers carried on looting the company until it collapsed.

Slide 8: I'm not going to talk about the failures, because it's too depressing. I'll focus on some of the most successful Chinese companies. I'll show how their CEOs have created positive cultures in four main areas: quality & productivity; encouraging innovation; cultivating employees; and political culture.

Slide 9: This is where we get into the thrilling case studies. I'll start with quality and productivity in two companies: Haier Group, and Huawei Technologies.

Slide 10: Haier Group was a pioneer in raising the bar of quality for Chinese businesses. It is one of the few Chinese companies that has international name recognition. It's a state-controlled conglomerate that makes white goods like washing machines and fridges.
Haier's CEO is Zhang Ruimin (see picture), and back in 1985, when the company was a failing fridge factory in Qingdao, Zhang found many of the company's fridges were defective. You can see one of their top selling models from that era in the picture! The company would just sell these faulty products to employees or second-hand stores at knockdown prices. No effort was made to produce better fridges. But Zhang got 76 of these defective fridges together, and forced the employees who made them to smash them with sledgehammers.
This was a symbolic act to set the tone for a new era of quality. Many employees complained it was a waste of good spare parts, but they soon realized it was in their own interest to produce better fridges in the first place. Why was that?

Slide 11: It was because Zhang developed a frighteningly strict quality control system to track the performance of every single employee in the company. It was given the fake English name OEC to make it sound foreign and impressive. How does the system work?
Every single process and every task required to make the company's products and maintain its facilities is listed in great detail in a database, and the name of the responsible employee is listed beside each task. If it's something that can be labeled – like a machine that the employee maintains
– then a sign is also stuck on it saying who is responsible. So when managers walk through the factory and see something not working properly, they immediately know the name of the employee who has screwed up. And they will dock that employee's pay.
But that's not all. Every employee has to try and improve their work quality and productivity by 1% each day if they want to increase their salary. If they don't meet their daily targets they will have their pay docked. The company sends supervisors round every two hours to make sure employees are getting on with their work, and they write any problems up on a big bulletin board on the factory floor, with the names of the responsible employees to be punished.
So it's a mixture of strict supervision by management, public shaming, and self-supervision by employees (with immediate financial incentives).
The picture here is a Haier employee's impression of the daily improvement staircase. You keep going up until you fall off into the void.
This system seems pretty draconian; kind of like working in a forced labour camp. But it creates a very clear set of incentives for employees, based on easily measurable tasks. It's also fair because it's transparent: everyone knows exactly what everyone else is doing and how they are rewarded. It was probably the only way to reverse the bad habits of employees under the state-controlled enterprise culture.

Slide 12: This system was really important as Haier grew, because the government expected it to take over dozens of failing state enterprises and turn them around. Zhang Ruimin called these enterprises "stunned fish" that needed "revitalizing". The way to do this was to change the mindset or culture of their employees using Haier's OEC system.
Zhang also uses an ancient Daoist idea to explain what he's doing: the most important creative force in a company is not the outward objects like machines and equipment; it's the 'formless' things that matter most, especially employees' inner motivation. If you can change that, everything else will flow, including profits. Wow!

Slide 13: Huawei Technologies is another successful company that uses a slightly different employee-brainwashing technique. Huawei produces communications technologies like internet switches used by telecom companies all over the world. I don't understand all the technical mumbo-jumbo, but they certainly make a lot of money from it. The picture shows their shiny new research centre in Shenzhen.
What's interesting is that Huawei uses Communist-style indoctrination techniques to constantly push employees to higher standards. But they are not trying to create a perfect society where everyone loves each other and shares everything in common – as per Marx and Lenin. No, their aim is to make the company more profitable. So they're taking the most effective techniques of Communism and applying them for capitalist ends.
How does Huawei's system work? Well, it's based on self criticism.

Slide 14: If there are any diehard old lefties here, you'll immediately think of Chairman Mao's "Little Red Book" – this was the collection of Mao's sayings that millions of hysterical Chinese teenagers waved about during the Cultural Revolution in the 60s. Chairman Mao was their version of the Beatles I guess. The big characters under this picture say "Chairman Mao forever!"
The "Little Red Book" has a whole chapter praising Self-Criticism, and it was a central method of thought control in the '50s and '60s. Whenever the government started a new mass campaign, everyone had to write self-criticisms confessing their faults. If you confessed your faults you would be dealt with leniently; but if you claimed you had nothing to confess, that was a sure sign you were up to no good. Everyone would then accuse you of all sorts of evil crimes to shift the blame from themselves.
This doesn't sound like a very promising technique for a company to use today.

Slide 15: But Huawei uses a controlled 'gentle' version of self-criticism. The company's CEO calls it hitting employees a hundred times with a soft pillow. Even if the blows are soft, they will remind employees to keep improving their work. So how is this self-criticism done?
Every three months, Huawei's different departments have a "democratic meeting", and every employee must do a self-criticism in front of all the other workers – in other words, admit mistakes they have made and ways they might improve. Doesn't sound very 'gentle' to me!
Democratic meetings also include a session where the company criticizes "itself". This is a general brainstorming, and everyone is meant to propose ways to improve the company's performance. This recognizes that the best ideas often come from the bottom up, if employees know that management will listen to them.
One key point is that managers are included in the process. They all have to do self-criticism in front of their workers too. Ren says this process attacks the Chinese idea of giving 'face'. In most companies, to criticize a manager would cause serious loss of face. Even a CEO wouldn't normally criticize a manager in front of other employees.
But this is useless for finding out who is an effective manager. Only employees really know that. And if managers don't take public criticism, they won't have an incentive to improve their skills. So Ren reinvented the Communist technique of public self-criticism. The managers must criticize themselves (or they will be demoted). The idea seems to be that if we all lose face together, everybody will benefit.
The slogan on this picture is from a Huawei commercial: it says "Potential can be ignited by one spark: Realize your potential" (and in brackets it says, "otherwise you will be demoted").

Slide 16: Moving onto Innovation Culture. I mentioned both Haier and Huawei reward constant improvements in productivity. Now once you cut down on long lunch breaks and trips to the washroom, the only way to keep improving productivity is to innovate. Both companies give other incentives for employees to innovate as well.
In Haier's factories, any worker who invents a component or tool to speed up the production process or make products work better will have the component named after them. So the factories are full of components with names like Auntie Wang's drill bit, Fat Zhou's rubber seal, and so on.
Huawei helps workers apply for patents on their inventions. It's made over 19,000 patent applications in the last ten years. Huawei also publicizes employee inventors in its corporate magazine, to inspire others to get their brains in gear.
This picture by a Haier employee shows an innovative use of an eggshell as a chick's umbrella. Not sure if they applied for a patent on this one?

Slide 17: Haier's employees are also rewarded if they modify existing products to fill a new market niche. The company's Sichuan branch found farmers who bought Haier's washing machines complained they were getting blocked and breaking down. Turned out the farmers were using washing machines to "wash" the dirt off their sweet potatoes, or yams. So Haier's employees modified a washing machine into a yam washing machine. It could also be used for washing regular potatoes.
In Tibet, the company found customers using their washing machines to churn butter for yak butter tea. So employees invented a butter-churning machine to do the job much better.
I'm not sure if these modified washing machines could continue to wash clothes as well as doing potatoes and butter churning, but that would certainly be a plus.
The nifty looking red number that you see in this picture is Haier's latest model: it can wash clothes perfectly without the need for washing powder. That's what it says on their Chinese website anyway.
>You can see that with proper incentives in place, even if they seem a bit scary, these two companies have managed to drastically improve their quality and productivity, and encourage innovation. By doing this, they've gone from nothing to become highly profitable international conglomerates.

Slide 18: What else do you have to do to have a successful company in China, apart from 'revitalizing stunned fish' and bashing employees with 'soft pillows'? There are two other major categories that I'll talk about today: Employee cultivation, and Political culture.

Slide 19: Cultivating employees is a broad term that includes three main areas: techniques for building group solidarity and loyalty to the company; providing educational opportunities for employee self-improvement; and publishing online company magazines. The general idea is that Chinese companies must not only look after their employees' material needs but also help them develop as human beings. In case you can't read the sign above these company toilets, the English version says, "Be graceful, be civil." This is a mistranslation of the original Chinese. It actually says, "The closer you stand to pee,/ The more civilized you will be." That's a slightly 'crude' example of employee cultivation.

Slide 20: What do I mean by building group solidarity? Well, most of the big Chinese companies have slogans and mission statements that employees are expected to recite religiously, or songs that they have to sing or listen to every day. The words praise the company's values, its wonderful family atmosphere, and the joys and privileges of working there. Often they have very moralistic content: it's no good just being efficient and reliable – you have to be a good person too and a patriotic Chinese citizen.
To give you a sense of how this works, the weblink shows a video of a Company Declaration being recited by employees of Tengen (or Tianzheng) Group, one of China's largest privately managed companies. [play video link]. This reminds me a lot of being back in high school and having to recite the Lord's Prayer. The Tengen Group even has company uniforms.
Some of the phrases in Tengen's Declaration include: 'Each new day is full of hope;/… We must not waste any precious time in our lives,…/Let us use our industrious sweat to create a glorious future.'
After you say these things a few times, you can't get them out of your head. The company songs are even more catchy. They are often set to revolutionary tunes and sung by massed corporate choirs, to get the employees whipped up into a frenzy of enthusiasm. The speaker icon links to a short clip of the company song of Guanghui Group, a privately-managed company based in the Western province of Xinjiang. Their company choir is shown in the picture: [play clip].

Slide 21: Apart from songs and slogans, many companies develop employee discipline and group identity through competitions and group activities of all shapes and sizes.
Here's just a small selection of group events organized by Guanghui Group in the last year: The 'I belong to Guanghui' speech contest'; the 'healthy seniors' variety show (pictured on the right: if you enlarge this picture, you will see all the performers are distinctly advanced in age: in other words, the seniors are the stars).

Slide 22: The Company Day employee sports meet. The picture shows the 'group running event' where a team of 10 people link arms and run together to beat the clock. You either build great group solidarity doing this, or you end up dislocating your shoulders. And finally, the dazzling annual employee talent show. Look at those dance moves. Bet you wish you worked for this company!

Slide 23: A lot of these large companies have grown from nothing in a couple of decades. They've recruited thousands of new employees, and most of them are young and come from other parts of the country, and they live in company dormitories or apartments. So the company becomes their new home, and they expect the company to arrange all these activities so they can get to know their colleagues and feel they are more than just production-line robots.
Many employees are not well educated either. They may have left school early for various reasons. So most big companies set up employee education programs, which they usually call 'universities' to make them sound more fancy. They offer basic education, practical skills, management training, and more airy fairy cultural subjects. <
Company magazines often contain inspirational stories about the benefits of these programs. One report on a monthly cultural class held by Huawei Technologies lists these texts studied in the past year: [The Sayings of Confucius; Chapters from Peter Drucker's The Frontiers of Management; a video called Europe and the Modern Age; Sun Tzu's Art of War; selections from The Bible; and most recently: Zen: The Chinese Transformation of Buddhism.] Quite an eclectic mix there.
Employees found studying these texts worthwhile because they (quote): opened up new perspectives, helped them control their impulsive tendencies, gave them ideas to apply in their work, and allowed them to have spiritual exchanges with their workmates.
How did they apply Zen Buddhism to their work, you must be wondering?

Slide 24: The report gives a good example. The text was a short Buddhist parable about four monks who decide to meditate for seven days in a row. During that time, none of them is allowed to talk. No-one makes a sound for the whole first day, but during the night the only lamp in the room sputters and goes out. The first monk can't help himself, and shouts: 'Oh no! The light's gone out!' The second monk replies: 'Be quiet: we're not supposed to say anything!' The third monk says: 'Well if we're not supposed to talk, what are you doing?' And the fourth monk laughs and says: 'Ho ho ho! I'm the only one who hasn't talked yet: ooops!'
There are two possible readings of this text, according to Huawei's employees. One interpretation is that, if we blame other people, it's very likely that we are also to blame ourselves. Profound, eh? The other interpretation is that if the company culture is one where nobody talks to anyone else, it won't be a successful company. Got to have those democratic meetings!

Slide 25: The final way that companies cultivate their employees is through their online magazines. At least half of the 125 companies that I have looked at have in-house magazines on their websites. Every employee is expected to read the latest issue to stay up to date. They contain the typical corporate magazine fodder that you'd expect. But most of them also include creative writing by employees, and sometimes other kinds of art works, like photography, paintings, calligraphy, even poetry. This seems to be a very Chinese approach to a company magazine.

Slide 26: Here are some examples of employees' work. From the website of Shanghai Electric Group. Employees' traditional-style painting and calligraphy. Note that this is a train manufacturer, not the first place you'd expect employees to be exhibiting their calligraphy.

Slide 27: And here are two prizewinners from the Huawei Technologies annual photography contest. Very tasteful. As we saw with education, companies are clearly trying to encourage employees to develop themselves fully by reading these magazines and contributing to them.

Slide 28: This is explained in the first issue of 'Tengen People', the magazine of the Tengen Group. The cover is pictured on the right. Quote: "Tengen People … brings variety to our work lives. It is a spiritual harbour, a fragrant meadow of ideas, and a stage to display our talents and wisdom."
You're probably keen to hear more of this spiritual wisdom, so I'll give one more example from the "Chicken Soup for the Soul" section of the China Datang Corporation website. This story is by an employee from the company's thermal power plant division.
A man was leading his donkey during the night when the donkey slipped down a deep hole and couldn't get out. After trying for some time to pull it up, the man gave up and decided to fill in the hole so nobody else would fall down. He started shoveling earth down the hole onto the donkey. But when the donkey felt the earth on its back, it decided it was too young to die, and shook off the earth, and trampled it under foot. After doing this many many times, the donkey gradually got higher and higher, and finally it managed to climb out of the hole.
According to the writer, this story teaches us that when things go wrong and people seem to be throwing dirt at you, you should just treat it as a learning experience: just shake off the dirt and trample it under your feet. Every little defeat will be a small stepping stone to ultimate victory.
Either that, or you will end up standing on a pile of dirt.

Slide 29: So that was employee cultivation. The last area I want to talk about tonight is companies' political culture, or if you prefer, government relations. This area is crucial for all businesses in China, but it's one where you can't escape from contradictions.
Zong Qinghou is the founder of an extremely successful Chinese drinks company with the jolly name of Wahaha Group. He said this about Chinese companies and government relations: "If you don't understand politics in China, then you can't do well in business. If the government doesn't support you, you can hardly move one step. Your company has to help solve the country's problems."
Even if a company wanted to avoid the government, it wouldn't be able to, because every company with more than a handful of employees has to allow the Communist Party to set up a cell within the company.

Slide 30: Often in state-controlled companies, the CEO is also the company's Communist Party Secretary, and the company chair is the vice Party Secretary. The Party cell is responsible for 'ideological and moral indoctrination' of company employees and for promoting the Party's policies within the company. Sounds a bit sinister, doesn't it?

Slide 31: But actually the Communist Party has changed a lot since the days of Chairman Mao. One of its major policies now is to encourage companies to be profitable and create more employment, so China can become rich and Chinese people can raise their standard of living. But the government still gets worried whenever it sees large groups of people organizing themselves. Especially when they have enough power and money to challenge the Party's authority. So it gets its own loyal Party members in there to make sure there is no monkey business. The problem is companies then have to spend a lot of their own resources trying to prove that they are promoting the government's policies.
This includes privately managed companies. They also have to set up Communist Party cells just like state-controlled companies. In fact they have to promote the Party's policies even more enthusiastically to show they are above suspicion.

Slide 32: Here's an example from the privately-managed Zhengtai Group (English name CHINT), which has around 15,000 employees. Quoting from their website: "Zhengtai's employees are warmly welcomed to attend meetings every Saturday morning where the Party Committee, Spiritual Civilization Committee, and Workers' Union leaders will help them … iron out the contradictions between capital and labour." … The company also holds regular activities to promote the three 'isms': patriotism, collectivism, and socialism." Lots of Communist symbols are displayed on the company's website as well, to hammer the point home.
If you think this is not relevant for foreign companies, you'd be wrong.

Slide 33: Last year, President Hu Jintao urged the Party to set up more Communist Party organizations in foreign companies in China. Even Walmart, the greatest union-hating company in the world, has been forced to allow workers unions in all its 60-odd Chinese superstores. And last December, a Communist Party branch was set up in Walmart's Chinese headquarters. The Party plans to infiltrate 80% of foreign companies in China by the end of this year.
Motorola has had Party branches in its Chinese offices for many years. [The picture shows Hu Jintao on the screen of a Motorola phone. This model is only sold to top Communist leaders].
Why would such powerful capitalist multinationals like Walmart and Motorola allow this to happen? Because they have no choice if they want to succeed in China. If you don't cooperate with the government, you might not get your business licences, building permits, and all sorts of other government approvals. You might even find your company's electricity being cut off, and your employees going on strike.

Slide 34: Apart from welcoming the Communist Party with open arms, there are other ways that companies use to get on the good side of the government. I'll wrap up this talk with a few brief examples, under three headings: Social Responsibility, Environmental Sustainability, and Promoting Innovation.

Slide 35: In China, social responsibility means: the company CEO goes to ask local government officials how the company should be socially responsible. The officials will normally say things like: Build and fund primary schools in poor regions, because we can't afford to. The two pictures show happy primary school children funded by Walmart and Motorola. Secondly, help to develop the poorer regions of China. The other picture shows a Tibetan guy pretending to talk on the phone, from Huawei's website. Huawei cooperated with the Tibetan provincial government to set up a mobile phone network in this remote region. Third, look after your employees so they won't cause any trouble. There's enough social tension in China already. Companies shouldn't add to it by exploiting their workers. Finally, give money and practical support when natural disasters strike.

Slide 36: Here are pictures of Haier washer driers being donated to the army in 2003. The army was helping to evacuate people from terrible floods on the Yangtze River. But they couldn't get their uniforms dry, and their clothes were going moldy. Haier's driers solved the problem, and the company got great publicity and political capital from it.

Slide 37: Some kinds of 'social responsibility' are slightly ridiculous. China's biggest cigarette manufacturer has these links on its website. Under healthy eating and drinking for smokers it says: 'The most responsible thing would be for you to give up smoking completely. But we know how hard that is. So if you can't manage it, make sure you drink lots of green tea, orange juice and milk while you're smoking. The vitamins and antioxidants will remove the nicotine from your bloodstream more quickly.'

Slide 38: Environmental sustainability. [Picture: for those of you at the back, the blue bin says 'recycling'; the green bin says 'unrecycling.'] The Chinese government now expects all companies to reduce emissions, waste and pollution. Many Chinese companies seem to think being green means getting employees to go and plant trees every now and then. But this is going to change as China signs on to a new international climate change agreement and gets more strict with companies. Foreign companies like Motorola have won major brownie points by organizing collections of old mobile phones and batteries for recycling in 153 cities and towns across the country.

Slide 39: Finally, promoting innovation is an area where companies' interests and government interests really do coincide. The government wants China to go from being the factory of the world to a hi-tech innovation society. This is one way to make China more prosperous and raise peoples' living standards. The government also gets embarrassed when China is called an intellectual property thief. It wants to encourage more home-grown inventions, so China doesn't have to rely so much on pirated technology.
Successful Chinese companies promote innovation among their employees. We already talked about that. But they also give generously to Chinese universities to fund research centres relevant to their businesses. Foreign companies have also helped promote innovation in China. Microsoft and Google have spent huge amounts on IT research and development centres. Walmart recently donated US$1 million to set up a retail research centre at Tsinghua University. And Motorola has worked with the government to train staff from over 1000 state-controlled enterprises in innovative management methods.

Slide 40: This whole area of government relations is not cheap at all. Even the smallest companies in China devote a surprisingly large chunk of their budgets to entertaining government officials. But these kinds of activities are absolutely necessary. They are the only way to deal with one of the biggest contradictions in Chinese society: the inseparable nature of business and politics. If you can learn to work with the government and Party like these companies, and be socially responsible in all these politically correct ways, your business will get an excellent reputation, good publicity and a smoother ride in China.

Slide 41: You might even manage to avoid feeling like you're banging your head against a brick wall.

On that note, I'd better stop. If you have any questions or comments, I'll be happy to hear them.