Musing on the Middle Kingdom: Why I Went to China and What I Learned There
Background on the book
I realize that I’ve been sending Substacks at a brisker pace than I’d originally envisioned. This will change, truly—but a friend observed that having me talk about China without explaining SVB’s demise was as if I had a chicken on my head that everyone was politely trying to ignore despite their desperate curiosity about such odd headgear. Hence, the four newsletters I sent between Oct. 23 and Nov. 14 explaining my best understanding of the sad events of March 2023. Now, finally, I can get back on track with China, and the Thanksgiving (U.S.) holiday week coming up positions me to return to my anticipated bi-weekly schedule. I wish all of you who celebrate a Happy Thanksgiving, and those of you who don’t, a happy and productive week!
Part I
Just last week, I published a book on doing business in China—it’s called The China Business Conundrum and available from booksellers near you! My book is directed at anyone who is contemplating doing business there, or who is simply interested in what it’s like to do business there. What I describe in this book is based on my personal experience, as well as my observations of the experiences of others. While I cannot claim to be “all-knowing,” I firmly believe that what I personally experienced is typical, not unique. Many others have had similar experiences. My book is intended to help others prepare. Those who venture forth will find that doing business in China is totally different from anything they have ever experienced before. I’m not saying, don’t go. But I am saying, be prepared. And learn to see China as it is, not as you wish it were.
I worked at Silicon Valley Bank (SVB) from 1990 through 2019, three months short of 30 years. As you may know, SVB disappeared in 2023, but that’s another story.
Prior to SVB, I worked at Bank of New England, and before that Shawmut Bank. In all three cases, I worked in the technology lending group, focusing on providing debt (and other banking services) to venture capital-backed technology companies, most of which were startups.
When I became CEO of SVB in 2001 we changed our business model. Prior to 2001, we focused not only on technology startups, but also on real estate developers and what we called “Main Street,” meaning everything else. Approximately 1/3 of our activity involved tech, 1/3 real estate, and 1/3 Main Street. Under my direction, we focused exclusively on tech. In addition, we invested, over time, hundreds of millions of dollars in products so that we could continue serving our technology startups as they grew—in some cases into very large companies. Previously we had let them wander off into the portfolios of larger banks. Finally, we embarked on a globalization path, meaning that we established beachheads in Israel, India, Canada, the UK, Germany, and ultimately China. We did this for a specific reason: technology is one of the very few businesses to be inherently global. Whether we want them to or not, advanced countries all share the same global knowledge base. Technology knows no borders.
Our fear was that if we weren’t everywhere that technology flourished, other banks would eventually try to be, and to the extent that they were successful, our client base would gradually migrate to them even here in the U.S., which would over time result in our demise. Ironically, SVB’s demise ended up coming from a totally different direction. Our business model worked spectacularly. What killed us was something totally unrelated to our business model. But, again, that’s a different story. My book is about China, not what killed us.
The title of my book was going to be “One Bed, Two Dreams.” I borrowed this phrase from a Chinese idiom. The meaning probably doesn’t require explanation. Since Mao died in 1976, and Deng began “opening” China in the 1980s, the Chinese government has typically required foreign businesses to enter joint ventures with Chinese companies. This requirement is allegedly for the benefit of the foreign company. Most joint ventures, though, do not last as long nor become as profitable as their western parents envisioned. The problem: “one bed, two dreams.”
And most of the time the Chinese dream prevails. The dream of the foreign company appears to be realized, to a limited extent and at least at the beginning. But, over time, reality prevails. The “win-win” ends up being a “double win” for the Chinese, and a loss for the foreigner.
Hence the new title: The Chinese Business Conundrum: Ensure That Win-Win Doesn’t Mean Western Companies Lose Twice.
How and why does this happen? The foreigner has difficulty understanding China. First, there is the language barrier. Mandarin, the most common Chinese language, is very difficult for a Westerner to learn, all the more so in adulthood. Second, there is the cultural barrier. Chinese culture is radically different from most western cultures. On the one hand, that’s part of what makes doing business in China so fascinating. And on the other hand, so darned difficult. And third, there is the difference in motivation. The Chinese partner dreams of learning from the foreigner: technology, business model, art. The westerner dreams of profit. The Chinese handlers understand this and use it to their advantage. They will apply various methods to give the foreigner the illusion of success on their terms: government subsidies, personal bonuses and benefits, and—perhaps most persuasively—compliments. These range from referring to you as an “old friend,” to telling you that you are the smartest westerner they have ever met and literally the only one who truly understands Chinese culture. Often, these same handlers will attempt to put the foreigner in compromising situations, involving them in entertainments of the sort that would not look good at home.
Our own egos work against us. We don’t like to admit that we have been duped. Accordingly, we will hide it from ourselves, not just from others.
In the end, what was described to us as a “win-win” really meant that we lost twice. Our business in China ultimately failed, and our “secret sauce” lost its secrecy.
Over the course of 20+ years, I have been not just dealing with China, but studying it as well, in much the same way that we studied the content of our courses as undergraduates. I have come to learn that Chinese beliefs are sufficiently different from our own that none of us should try to do business in China without becoming more familiar with them, first. Like us, Chinese beliefs inform the way they do business.
And what are those beliefs? In general, China believes that it was once the most advanced and as a result the most powerful culture on earth. As a result of a number of things, they lost that dominance about 200 years ago. China is not prone to taking responsibility for its own fate; it is much more inclined to look outside itself for forces to blame. Hence, the belief in the Century of Humiliation at the hands of the West. Rather than accepting that centuries of dynastic rule and isolationism had suffocated the country’s vitality and innovation, China blames the West for the successful invasions during the Opium Wars and the subsequent exploitation that ran from 1839 to 1945—the so-called Century of Humiliation. The Chinese Communist Party (CCP), founded in 1921, has been in control since 1949, the year of China’s “liberation” from the influence of the evil Western powers.
The CCP is the sole authority in China today. As Mao said, and as Xi reminds us: “Government, the military, society and schools, north, south, east and west—the party leads them all.” That includes business. Most Westerners subconsciously assume that business and government are two different things, because that is what we are used to. That’s not true in China.
If the Party leads everything, including business, it is important to know what the Party believes and what it is trying to accomplish. Scholars of Chinese intellectual history agree: Chinese thought is informed by both Leninism and the ancient volume The Art of War. From Leninism, the Party derives the belief that the Party’s first obligation is self-perpetuation (of the Party, and, as a result, of China). From The Art of War, the Party derives the belief that “might makes right” and that “the ends justify the means.” Finally, China has always subscribed to the belief that it should attempt to regain its one-time position as the dominant power on earth. The country’s name for itself (“Zhongguo”), which means the center of the universe, says it all.
The Party’s goal in encouraging Western companies to “invest” in China is clear: acquisition of knowledge. If you possess knowledge that China wants, you are welcome; when that is no longer the case, you will no longer be needed.
The Party has developed a whole assortment of techniques that motivate you to share your knowledge. The list is myriad. My book acquaints you with many, and provides examples of each. It also suggests how you can deal with China, and—hopefully—realize your dream as well. Or, at the very least, make the best of what will ultimately prove to be a very difficult, although fascinating, journey.
Part II
So, in what way is my book unique? I was the CEO of a major U.S. bank—Silicon Valley Bank, at that time the world’s largest lender to the technology and venture capital industries—for the decade ending in 2011. I then spent four years living in China, establishing a technology bank as a joint-venture between SVB and the Shanghai government. My book is an unvarnished account of what actually happened.
And I am neither a “China apologist” nor a “China hawk.” I believe I am a realist, and that I see the CCP and its motives and methods for what they are. I am willing to describe them as I have experienced them, even in those cases where I look foolish for having been duped.
That said, establishing a joint venture bank is just the starting point for my book. It’s not primarily a banking book, nor is it about international relations or government policy. It is about the business ethics and practices as you will encounter them in China, as well as the role that the CCP plays in business today.
Certainly, the relationship between the U.S. and China has deteriorated since Xi Jinping came to power in 2012. However, our challenge in business is not only Xi, but the way the game is played in the People’s Republic of China (PRC), and has been since the beginning of the “opening” in the 1980s. Our challenge is also our own unwillingness to accept that China does not operate as we do in the West, nor does it want to.
As China has become stronger and more influential on the global level, its economy has become more intertwined with ours and many others around the world. However, its business practices have not changed. Nor has the role that the CCCP plays in business diminished.
At the same time, the world is atomizing into an ever-larger number of groupings, engendered by ever shifting economic, ideological, political, and military affiliations. The world has not split into two simple “teams.”
Even as the context has changed, Chinese business ethics and practices have remained, in my opinion, relatively constant. Further, although seemingly mysterious, I believe that these practices are “hiding in plain sight.”
The other thing that hasn’t changed much, I think, is the Western approach to China, our hunger for profit, our naivete, our optimism, and our ability to delude ourselves into thinking that we are making progress, and that China is changing in a way that will make things better for us. We’re a lot like Charlie Brown, telling ourselves time after time that Lucy won’t pull the ball away at the last minute, leaving us to fall on our butts.
My book explores what Western businesses and, more broadly, Westerners who interact with China on any level, whether as travelers or as politicians, need to grasp to work constructively with this country. We can talk about “decoupling,” but to do so would be extremely difficult, if not impossible. At most, we can “de-risk,” but even that is immensely complicated and difficult.
Further, even if negotiation with the CCP is futile, which I believe true, we still have to engage. At the very least, to deal effectively with a “strategic competitor,” it is of utmost importance to understand that entity as best you can, and the only hope to do that is through engagement.
Our choices are limited. We cannot stop investments in either direction. We can’t stop purchases—of products, assets, or even entire companies—in either direction. We can try, but I doubt that we can succeed. There are many reasons why, but in the end, part of it is the opacity for which China has always been famous. We often can’t even tell with whom we are dealing. Chinse business practices may be “hiding in plain sight,” but the identities of Chinese companies are not. Instead, we often find ourselves confused by agents, proxies, shell companies, and pseudonyms.
As a result, we have no choice when it comes to interacting with China. China will not change to make it easy for Westerners to work with them. China is succeeding by following a playbook based on 5,000 years of history. It is the West that must change its approach. And we must do this by understanding the business practices, ethics, motivations, myths, beliefs, and goals of the Chinese people themselves. This book seeks to understand these, and to convey to its readers the answers to the following questions:
· Who are the people with whom we are dealing?
· What role is the CCP playing in the background?
· What are the various players seeking to accomplish?
· What are we doing well?
· And how could we become more effective?
· And how can you, if you choose to do business in China, avoid “losing twice?”