A study of the role of guanxi in sino japanese distribution channel relationships in china

In conclusion, this study has lead to a better understanding of issues of communication, conflict, and relationship performance in Sino-Japanese channel relationships, and especially of

Acknowledgement

With a deep sense of gratitude, I would like to express mysincere thanks

to my thesis advisor: Prof Hendik Carl Meyer-Ohle His stimulating comments

and encouragement carried me through the research and the writing of the present

thesis Prof Meyer-Ohle’s guidance was essential in overcoming the most difficult

period, and his suggestions were always constructive and enlightening

Furthermore, research scholarship and tuition wavier were offered after his strong

support This saved me from financial difficulties, reduced my work load and

enabled me to concentrate fully on my research His company and support will be

remembered enduringly

Furthermore, I wish to thank Prof Tsu Yun Hui Timothy and Prof Thang

Leng Leng, respectively the former and the current head of Department of

Japanese Studies (JS), National University of Singapore (NUS) These scholars

have widened my views and inspired the exploration for this research during

classes and meetings Additionally, I am indebted to Prof Andrew Delios (Head of

Department of Business Policy), Dr Lim Beng Choo (JS), and Dr Asato Saito

(JS) Their remarkable classes and acute comments were most valuable

contributions for the writing of this thesis

This thesis was partly supported and funded by the Japan Foundation With

its sponsorship, I was given the opportunity to stay at the Japanese-Language

Institute of Kansai for four months During my stay, both my language proficiency

and research were carried to a higher level

I am greatly indebted to all those who responded to the questionnaire

survey and interviews Their generous participation and kind comments have

enriched my perception of my research topic, the role of guanxi in Sino-Japanese

distribution channels, which has constituted the soul of my thesis

I would like to give special thanks to Tan Ban Chong Joseph (National

University of Singapore), Kwan Wing Ki Koren (University of Hong Kong), and

Sebastien Boret (Oxford Brookes University), who have patiently proofread my

thesis and provided me insightful comments during the past few months

The acknowledgement would not be complete without mentioning my

fellow graduate students at the Department of Japanese Studies Their company

and beatitude helped me enjoy the student life at NUS

Finally, I dedicate this thesis to my family (parents and brother) Without

their support and encouragement, my study would have been impossible

August 2006

Xie Qiaoguang Simon

Table of Contents

Acknowledgement……….i

Table of Contents………iii

Summary………vii

List of Tables……… ix

List of Figures……… x

Chapter One: Introduction………1

1.1 International Channel Relationships……….… 1

1.2 Reasons for Choosing Chinese Distribution……… 2

1.3 Business Relationship in China……… 3

1.4 Chinese Business Practice Guanxi……… 4

1.5 Objectives of the Study……… 7

1.6 Methodology and Organization of the Study……… 9

Chapter Two: Japanese Business in China ……… 12

2.1 Japan’s Entry into China………12

2.2 What Makes China Distinct? ………13

2.3 Complicated Chinese Distribution Channels ……….15

2.4 China and Japan……….17

2.4.1 Japan in China’s Media……… 17

2.4.2 Influence on Japanese Firms……… 19

2.5 Why does Guanxi Matter? ………20

Chapter Three: Literature Review……… 22

3.1 Japanese Distribution Channels……….22

3.2 International Business: Trade in China……….24

3.2.1 Chinese Market: Western View on the Biggest Market……….….24

3.2.2 Japanese International Marketing in China……… ….…26

3.3 Channel Member Relationships………27

3.4 Chinese Business Practice – Guanxi……….…31

Chapter Four: Research Methodology and Findings……… 39

4.1 A Model of Guanxi-Based Channel Relationship……….39

4.2 Hypotheses Development……….…….42

4.3 Process of Data Collection……… ……….45

4.4 Findings and Results……….……49

4.4.1 Profile of Companies……… ….49

4.4.2 Profile of Respondents………51

4.4.3 Profile of Channel Member Relationship……… …… 52

4.4.4 Perception and Operation of Guanxi……… ………….54

4.4.5 Conflict……… …….56

4.4.6 Communication……… …59

4.4.7 Relationship Performance……… ……61

4.4.8 Hypotheses Test……… ……62

Chapter Five: Discussion and Case Studies……… ….65

5.1 Encountering Guanxi……….65

5.2 Why does Guanxi Become the Favorable Choice……….69

5.3 Means of Communication……….70

5.4 Does Guanxi Promote Communication? ……… 71

5.5 Situation of Conflict……….….74

5.5.1 Intervention is not Necessary……….….……74

5.5.2 Contract or Non-Contract ……… ……… ……74

5.5.3 Is Conflict Resolved? ……….……75

5.6 Relationship Performance……… … 80

5.7 What Communication and Conflict have Brought to Relationship Performance? ……… 81

5.8 Implication for Japanese Manufacturers……… …84

5.8.1 Guanxi Establishment……… …84

5.8.2 Guanxi with the Government……… 84

5.8.3 Is Guanxi All? ……… 85

5.8.4 Historical Issues……… …87

5.8.5 Language Issue……… 89

5.8.6 Agreement……… …91

Chapter Six: Conclusion……….……94

6.1 Summary of the Research……….….…94

6.2 Limitations of the Study………99

6.3 Further Research Directions………100

Bibliography……….……102

Appendix 1: List of Profiles for Case Studies……… … …109

Appendix 2: Survey Questionnaire……… ……111

Summary

Among the many strategies of marketing in China, the traditional business

practice guanxi, namely relationship or network, is perceived as a major

instrument for success of foreign corporations Since more MNCs (Multi-National

Companies) come to use Chinese distributors to sell their products after China’s

entry in WTO, this raises the question how and whether guanxi functions in the

distribution channels This thesis looks at this question within the context of

marketing channel relationships of Sino-Japanese businesses

The thesis built on an approach by LaBahm & Harich (1997), who have proposed

the concept of sensitivity to foreign culture in the study of channel relationships

by looking at the effects of sensitivity to national business culture on

communication, conflict, and performance in U.S.-Mexican channel relationships

This thesis adapted this model for the study of Sino-Japanese business

relationships to examine the role of guanxi in distribution channels Hypotheses

were tested through a quantitative survey of forty-eight Japanese manufacturers in

China The results of the quantitative study were complemented with data

collected during five in-depth interviews with Japanese corporations in China and

Japan Besides the main objectives of the study, this thesis also provides

implications for Japanese management in China in regard to guanxi, historical

issues, language, and agreements

In conclusion, this study has lead to a better understanding of issues of

communication, conflict, and relationship performance in Sino-Japanese channel

relationships, and especially of the role that guanxi is playing in the distribution

channels Specifically, guanxi is shown to increase communication and decrease

conflict, both of which in turn influence relationship performance

List of Tables

Table 2-1: Analysis of Focused Topics on Japan………19

Table 2-2: Analysis of Trend of Report Content………19

Table 4-1: Profile of Companies……… ……… ….….50

Table 4-2: Profile of Respondents……… 51

Table 4-3: Channel Member Relationship……… 53

Table 4-4: Evaluation of Guanxi………55

Table 4-5: Evaluation of Conflict……… 57

Table 4-6: Ways of Contacts……… 60

Table 4-7: Evaluation of Communication……… 61

Table 4-8: Evaluation of Relationship Performance……… 62

Table 4-9: Hypothesized Relationships……… 62

Table 4-10: Standard Deviations, Means and Correlations………63

List of Figures

Figure 1-1: Are Negotiations Slower than in Other Developing Countries? 4

Figure 2-1: Three Distribution Solutions Adopted by Japanese Firms in China…16

Figure 4-1: A Model of Cross-National Channel Relationship……… 40

Figure 4-2: Proposed Model of Guanxi-Based Channel Relationship………… 41

Chapter One: Introduction

1.1 International Channel Relationships

The international market is so widespread that few businesses can remain

unaffected, unless they only deal with products restricted to local markets Hence

there has been an increased interest in establishing overseas business, trading with

foreign companies, serving foreign consumers, and selling products to overseas

markets

Distribution systems function as essential channels that facilitate flows of

products from manufacturers to customers Considering the difficulties that many

marketers may experience, the manufacturer-distributor relationship is regarded as

one of the most important issues in international marketing It is observed that there is

a distinct correlation between the long-term profitability of a company and its

relationships with manufacturers, distributors, customers, and even its competitors

(Buttle, 1996) Since the quality of inter-firm relationships is directly linked to the

revenue stream, relationships could be more influential than market share (Hougaard

& Bjerre, 2002) Hence, the way of managing the relationship is a crucial determinant

in establishing a successful business overseas

For international marketing, problems can be handled more effectively when

marketers possess a good understanding of the tradition and characteristics of the

distribution channels in the target country (Kale & Barnes, 1991) The way to

establish a long-term, stable relationship is an important element for both the

manufacturer and the distributor once the cooperation starts Manufacturers have to

take responsibility for effective marketing They cannot expect distributors to respond

favorably to their expectations, and have to motivate and monitor distributors closely

In addition, distributors should be aware of the team relationship that they are

engaged in, and should take responsibility in promoting profits more effectively Once

a domestic business develops into an international one, it becomes particularly crucial

for manufacturers to consider both technical (e.g., commission rates and price setting

strategy) and non-technical problems (e.g., differences in business culture) which they

may not have taken into consideration in a domestic commercial situation

1.2 Reasons for Choosing Chinese Distributors

It is well known that Chinese distributors are difficult to deal with in terms of

negotiations, retailing prices, and poor sales, just to name a few In addition, there

have been cases of defaulting on contracts, fake sales reports, and payment delays In

spite of this, the number of Japanese firms adopting Chinese distributors is increasing

The reason for this is that Japanese firms potentially benefit a lot by cooperating with

local distributors First, they do not need to negotiate with government officials, who

are famous for their inefficiency For instance, the procedure for a licence could last

for months if you are not in the acquaintance of key personnel Second, it is no longer

necessary to handle complicated human relations Thirdly, since the distributor

provides its own stores and salesmen, the cost of a sales force is greatly reduced The

last and most significant advantage is that the distributor who is familiar with the

local market will itself conduct the market investigation on behalf of the Japanese

firm, and all the manufacturer needs to concern with is the contract

1.3 Business Relationship in China

Japanese firms that have established subsidiaries in China have shown a

strong desire in expanding their business They do not only wish to take advantage of

low labor costs, but are also increasingly concerned about selling their products

within the Chinese market JETRO (The Japan External Trade Organization)

conducted a survey investigating marketing performances of Japanese firms’

subsidiaries in China in 2002 According to this survey, it is observed that 81.4 per

cent of the firms used their own networks as the distribution channel to sell products

in China, and 24.3 per cent used other Japanese firms’ channels In addition, it is

reported that 27.1 per cent of the firms whose target is to maintain their market share

worked with independent Chinese distributors It is an interesting fact that most

companies using Japanese related distribution channels made less profit, with some

even suffering losses in the fiscal year 2001 This has been attributed mainly to the

incapacity and the inefficiency of Japanese related distributors in China It therefore

becomes necessary to seek other possible ways for survival, with Chinese distribution

channels appearing to be a good choice

Figure 1-1: Are Negotiations Slower than in Other Developing Countries?

Negotiating with the Chinese tends to be slow

compared to other developing countries

(Campbell & Peter, 1988, p 100)1

When Japanese manufacturing firms show an increased desire to cooperate

with Chinese distributors, communication is crucial and worth paying attention to

Problems lie in the way to communicate, negotiate, and transact with Chinese

distributors in an unstable business environment According to Figure 1-1, most of

foreign firms agreed that business negotiations in China are slower than in other

developing countries In a study of American businessmen’s perception of market and

negotiation in China, Lee & Lo (1988) suggested that businesses in China require

more interaction than those in the US, with very “tough” negotiation often required

Thus, as explained above, Japanese firms would be better off with a first hand

understanding of Chinese business practices in order to smoothen their transactions

and increase their profits

1.4 Chinese Businesses Practice Guanxi

1

This book is based on a survey carried out by the China Research Unit at Manchester Business School during the early months of 1988 The purpose of this survey, including topics of performance, strategy, costs, attitudes to equity investments, is to investigate how foreign companies organize their China operations, and how they view the business environment generally

To understand Chinese business practice, guanxi is one of the most frequently

quoted terms Guanxi literally refers to any kind of relationships In the Chinese

business world, guanxi is understood as the network of business relationships among

various parties cooperating or supporting one another “Tou Zhi Yi Tiao, Bao Zhi Yi

Li” (if you give me a peach, I will give you a plum in return) describes a common

Chinese mentality In essence, it can be regarded as acts of exchanging favors, which

are supposed to be carried out voluntarily

Foreign marketers may have heard about the term guanxi, but they may not

know its literal or practical meaning The first part of the term, guan, means “door” or

“to close up” For example, one may think of a household When you are inside, you

are “one of us” When you are outside, however, you are barely recognized Hence

the word could refer to a pathway getting through the obstacle which lies between

you and the inside group The second part of the term, xi, means “tie”, and has an

extensive meaning for “relationship” and “kinship” Therefore the combination of the

two parts of guanxi refers to distinct relationships between individuals, firms, and

even countries in the Chinese context

Relationship orientation is not unique to china It is also a universal business

culture of Japan, Korea, and other managed economies Since 1949 in China,

however, the use of guanxi was often the only way to get things worked out, in this

highly centralized bureaucratic state With the elimination of legal and judicial system

after 1949 in China, and the subsequent difficulty to enforce contracts, guanxi

becomes an economically better mode of governance of transactions than contracts

(Arias, 1998) Although China has opened its door to welcome foreign investments, it

has not yet been ready to get itself involved in the market-oriented commercial

environment after decades of self-imposed economic isolation It has been argued that

the generally accepted business ethics should be in place However, firms who have

had experience of conducting business with Chinese would rate business ethics in

China at a low level (Szeto et al., 2006) China is not a country controlled by law as

Japan In many cases, businesses in China are practiced flexibly Leung (1995, p 74)

suggested that “Chinese value reputation and trust over and above strict legal terms

and conditions of a contract” Especially in socialist China, government officials have

great power to allocate critical resource and influence legislative decision

Establishing guanxi with government officials is necessary for coping with legal

uncertainties in Chinese business (Lo & Everett, 2001, p 22) As foreign investments

face legal uncertainties in China and necessitate minimizing these uncertainties,

guanxi becomes a dispensable tool We are not suggesting that rules and terms are not

important Rather than that, foreign investors might need to implement the formal

conditions in conjunction with guanxi when building Sino-foreign partnership

A previous study (Yang et al., 1999) suggested that success in China often

depends on a certain degree of adaptation to Chinese conditions and practices It is

widely accepted that guanxi is important in China Through relationships and

connections, problems can be resolved and goals can be achieved Paull (2004)

argued that from the perspective of channel member relationships, this particular

concept should be greatly emphasized as it relates to performance

In light of the importance of guanxi, international firms could adopt this

particular Chinese tradition to tackle problems in Chinese business Accordingly,

Japanese firms could also make use of guanxi to workings the secrets of channel

member relationship in China and insure their market share As Xin (1998) asserted,

foreign firms’ success in China invariably owe much to guanxi and networks of

trusted associates Nevertheless, Japanese firms’ practice of guanxi might not be as

automatic as they would be to a Chinese Therefore it is crucial for Japanese firms to

obtain a thorough knowledge about guanxi to achieve success in the Chinese business

market

Though foreign firms approach guanxi so as to gain positive outcomes in

China, guanxi also has positive and negative impacts on social networks Illegal

payments and bribes are commonly observed during transactions Snell (1999) argued

that guanxi could produce a short-term transactional relationship between two parties

As Chinese person become more mobile, and it is difficult to cultivate long-term

relationship with the rapid changing economy, they might use guanxi connection to

achieve direct short-term goals Unethical guanxi therefore is considered as a

transactional “gimmick” sometimes Yet, as suggested by overwhelming literature,

guanxi’s positive function has been widely perceived by most of foreign investors,

including Japanese firms Also, they do not hesitate to use guanxi, in an appropriate

manner, when dealing with Chinese businessmen Upon good understanding of

positive and negative sides of guanxi, foreign firms might be more likely to approach

guanxi ethically

1.5 Objectives of the Study

With the recent entry into the World Trade Organization and the impending

hosting of the Beijing 2008 Olympics, China has emerged as a major market in the

business world with continual economic development In the midst of doing business

in China, there is a parallel interest in comprehending the mindset of Chinese

corporate strategists to better understand Chinese companies and achieve success in

China’s business world

Among the many strategies of international marketing, the concept of

relationship marketing is perceived as the major instrument for successful foreign

corporations in China This research will explore how the concept of relationship

marketing is linked to the traditional Chinese concept of guanxi within the context of

Sino-Japanese business’ marketing channel relationships

Although many studies have examined the importance of guanxi in doing

business in China, only a few have discussed the role of guanxi in channel member

relations The major objective of this research is to address the relations in

distribution channels that span diverse cultures, especially the Sino-Japanese channel

relationships The present investigation introduces the constructs of guanxi culture

into established network of relationships and explores its consequence The way in

which guanxi is perceived and operates during communications, conflicts, and

relationship performances will be examined and discussed in detail

This thesis will be based on an approach introduced by LaBahm & Harich

(1997), who proposed the concept of sensitivity to foreign cultures in the study of

channel relationships They developed this approach after investigating the effects of

sensitivity to national business culture on communication, conflict and performance

in U.S.-Mexican channel relationships Such a model will be adopted in the present

study of Sino-Japanese channel relationships, and will enable us to examine the role

of guanxi in channel members in particular It is hoped that the results will enhance

our understanding of the issues surrounding communications and conflicts in

Sino-Japanese channel relationships, as well as the role that guanxi might assume in this

regard

1.6 Methodology and Organization of the Study

For the present study, “sensitivity to national culture” in LaBahm & Harich’s

model (1997) will refer specifically to the “perception and operation of guanxi”, as a

means to examine the relationship between Japanese manufacturers and Chinese

distributors in China The research material for this thesis has been collected as

follows:

a) literature review

b) questionnaire survey on the understanding and operation of guanxi, conflict, communication, and relationship performance in Sino-Japanese channel member relationships

c) three in-depth interviews with Japanese informants who are in charge of the marketing departments of Japanese manufacturers, and two informal interviews with two Japanese informants working in China

The selected companies currently carry on the sale of products through

Chinese retailers or wholesalers in China In addition, the three informants who have

been subject to in-depth interviews have been working in China for over 5 years

They are believed to possess a high level of understanding of guanxi Hypotheses will

be tested through the results of the questionnaire survey and with data collected

during the interviews

This thesis is divided into five chapters Chapter one identifies the research

problems and introduces the objectives and the methodology of the present study The

second chapter examines Japanese firms’ steps into the Chinese market, and the

investment environment in China The reasons accounting for the difficulty in doing

business in China will follow, with special attention paid to the Chinese distribution

system The discussion ends with a review of the historical issues that are believed to

be responsible for the disharmony between Chinese and Japanese This chapter, the

background of Sino-Japanese business, helps to enhance Japanese firms’

understanding of the importance of guanxi when conducting business in China

Chapter three is a literature review on issues related to channel member

relationship, and guanxi The traditional Japanese keiretsu, which appears to be

different from the Chinese guanxi, is examined In addition, I review western

marketers’ views on the Chinese market and Japanese firm’s marketing strategies To

introduce the main objective of this study, studies on distribution channel

relationships, the role of guanxi in channel member relationship, and the way of

comprehending it in international context are also discussed Chapter four details the

research design and methodology used in addressing the research questions I first

explain LaBahm & Harich (1997)’s model and suggests ways in which this model

could be modified to evaluate the role of guanxi in channel member relationships;

five hypotheses will be presented Secondly, this chapter includes a quantitative

survey examining guanxi’s role in Sino-Chinese channel member relationships This

survey presents a picture of the manufacturers’ perception and operation of guanxi

and its relationship components on conflict, communication and relationship

performance Following the section covering the process of data collection, survey

results and descriptive analysis is offered Chapter five is the detailed discussion on

the survey results Data collected from on-site interviews supplement the results of

the hypotheses testing, including the implications for Japanese manufacturers

presented The concluding chapter is a review of this study Finally, limitations of the

present research and suggestions for further research will be provided

Chapter Two: Japanese Business in China

To understand the key role of guanxi in the Sino-Japanese distribution channel

member relationship, it is necessary to comprehend the background of Japanese

businesses in China, the actual situation in the Chinese market, the problems that

Japanese firms face in distribution channels, and the potential risk caused by

historical problems that exist between China and Japan On the ground of hardship in

dealing with Chinese businesses, the importance of guanxi’s emergence will be

discussed

2.1 Japan’s Entry into China

China is the most populated country in the world In other words, China also

has the highest potential consumer market With the advent of the ‘open door’ policy

after the 1980s, the economy developed rapidly with the level and capacity of

consumption increasing constantly Thanks to stable economic development progress,

China entered the WTO after years of effort, and was chosen to host the Olympic

Games in 2008 China sought to provide different business opportunities, and began

attracting multinational companies (MNCs) from all over the world

The roots of Japanese doing business in China can be traced back to 1952,

when Japan started ‘non-governmental businesses’ with China and served as the most

important business partner for China until 1962 (Wanaka, 2001) In 1972, China and

Japan set up diplomatic relations with one another, which resulted in Sino-Japanese

trade breaching new highs Due to Deng Xiao Ping’s support of China’s economic

development and openness, communication between China and Japan has developed

actively since the 1980s In particular, Japan’s investment has increased dramatically

Entering the Chinese market has become a popular issue among Japanese

businessmen In the last few decades, Japanese firms have scraped up a great deal of

experience and achieved remarkable success In turn, the Japanese technologies and

capital has positively influenced China’s growth to a large extent As a result, between

China and Japan, a close economic strategic partnership has emerged

2.2 What Makes China Distinct?

There is a Chinese saying that “a good understanding of both ourselves and

the enemy will lead to complete success in war” To obtain success in the Chinese

market, Japanese businessmen should better understand China by acquiring a

thorough knowledge of the Chinese government, economy, law, culture, history,

religion, and business rules

Everyday sees drastic changes in China Government intervention in the

economy is reduced; information technology is more commonly applied; the

seniority-based salary system is transformed into a capacity-based system; and

globalization has developed quickly These changes have provided foreign firms with

excellent business opportunities such as the use of the Chinese market, technologies,

and human resource With the severity of global competition and increase of MNCs’

demand for cooperation, Chinese firms have become more open in establishing

business ties with foreign firms As such, exploring the market, sourcing strategic

partners, and establishing relationships with Chinese firms are getting easier than

what it used to be On the other hand, Chinese businessmen and firms have become

more dependent on products, services, and technologies provided by foreign firms

Thus, globalization has met the increased desire for rapid improvement for both

China and the MNCs

While the market looks bright and hopeful, many marketers may fail in their

first attempt to sell products within China, despite spending time and effort Many

foreign businessmen, whose knowledge is “domestic”, often find out that their initial

understanding of the China market is incompatible with the actual and more complex

situation China therefore is said to be distinctive from other markets Sun & Entô

(2004) suggested two aspects that can account for the difficulties in handling the

Chinese market:

1 China is controlled by the Communist Party and is still a bureaucracy-led country

Regardless of the type of business, MNCs who wish to enter the Chinese market have

to deal with the government’s requests, an inflexible political system, intricate

administrative processes, as well as the direct or indirect influence from the

Communist Party Many firms complain that it always takes much longer to apply for

a licence from the Chinese government than it is in their home countries in spite of

providing all the required documents If they are unable to find a solution to get

through these unclear obstacles, the government response to the licence application is

usually “discussion is in progress”

2 Chinese society consists of a wide range of elements that pose difficulties to

foreign investors, namely, a huge population, complex geographic distribution, a large

income divide, and provinces with different dialects and cultures It is not uncommon

to find a different language and different culture when one walks from one town to

another nearby Therefore, marketers should not take a holistic view of the Chinese

market when designing marketing strategies

2.3 Complicated Chinese Distribution Channels

To design marketing strategies for China, the most burdensome issue is to deal

with its complicated distribution systems which, to a certain extent, reflect China’s

multicultural background There is a great number of business customs involved,

which foreign marketers cannot master with ease Although some of the customs are

common sense for the Chinese people, foreigners may take a long time to understand

their rationale

Among the problems encountered with Chinese distributors, the collection of

payment is often regarded as the most difficult issue (Kakehi, 2002) It is not rare for

payments to be untimely, and Japanese suppliers may have to press for it many times

Even if a marketer visits a distributor in person, collection of payment is never

guaranteed This is a common issue for many Japanese firms in China

In Japan, if there is no capital in the bank for payment on the due date in the

case of a draft settlement, the payer will be forced to cease operations due to the

dishonored bill If the company lets the same situation happen twice, bankruptcy is

inevitable (Inagaki, 1998) In sharp contrast, due to what may be a more

magnanimous culture in China, consecutive non-payments cannot lead to bankruptcy

directly, and thus no special attention is given to the issue

The other problem concerning distribution channels is market information

(Kakehi, 2002) It is important for manufacturers to know what kind of product sells

and what kind of features are in demand Manufacturers can conduct investigation

among customers, but it is also critical to continuously obtain real-time responses

from distributors In China, however, many foreign manufacturers often find it

difficult to obtain such significant information

Figure 2-1: Three Distribution Solutions Adopted by Japanese Firms in China

Customers Manufacturers

Figure 2-1 shows three solutions which a number of companies use to resolve

the problems mentioned above The first solution is to setup their own distribution

companies Certainly, a lot of time and effort is required, but it offers a great deal of

first-hand market information Furthermore, collection of payment is no longer the

major concern For example, SHISEIDO (Japan’s leading cosmetic company) has

established sales forces in many cities of China (Sun & Entô, 2004)

Secondly, the use of brand power can also mitigate the problems with

Establishment of Own Channel

Power of Brand Distributor

Foreign Distributors

distributors as well A brand which has an overwhelming rapport with customers

represents a bargaining chip for the manufacturer when negotiating with distributors

In this way, the payment condition may possibly be set according to the

manufacturer’s preferred direction For example, having eliminated collection of

payment, TOTO (Japan’s biggest toilet company) has explored cash settlement to

avoid troubles in payment (Sun & Entô, 2004)

The third solution is to use Japanese related distributors China’s entry into the

WTO has seen an increase in the number of foreign distributors As the investors are

capable of acting according to international standards, some Japanese manufacturers

prefer to make deals with them instead of the Chinese ones MARUBENI (a general

trading company active in various fields such as finance, IT, steel, and chemicals) is a

good example that has set up distribution companies in some main cities of China

(Sun & Entô, 2004)

2.4 China and Japan

Historical issues are inevitable in examining the relationship between Chinese

and Japanese people for it reveals critical factors of the Sino-Japanese relation in

regards to politics, the economy, and cultural communication

2.4.1 Japan in China’s Media

To examine the propaganda about Japan in China’s media, an investigation

was carried out by Cui (2002) regarding Nan Fang Zhou Mo (Southern Weekend)’s

coverage of Japanese affairs from 1990 to 2000 Nan Fang Zhou Mo is a weekly

published newspaper At present, it has the largest circulation among local

newspapers in China, and attracts popular attention from both domestic and overseas

readers The analysis is as follows

In terms of the contents of the report (see Table 2-1), it changed from

“culture” to “war self-examination” and “invasion into China” after 1995 In

1990~1994, reports on Japanese social culture remained neutral, and it is almost the

same on both positive and negative sides After 1995, however, the focus apparently

shifted to invasion and war self-examination Negative reports accounted for 23.03

per cent of the total number in 1990~1994, while it increased to 64.62 per cent in the

years 1995~2000 With the influential impact of media on the Chinese people, Japan

is turned into a potential hostile counterpart

According to Table 2-2, there is little difference in the total number of reports

on Japan between 1990~1994 and 1995~2000 However, a distinct change in the

connotation of reports is observed Although the number of positive reports remains

consistently low in both periods, the number of neutral reports has decreased

significantly In addition, there is a dramatic increase in the number of negative

reports in 1995~2000

Table 2-1: Analysis of Focused Topics on Japan

Table 2-2: Analysis of Trend of Report Content

Positive Report Negative

Report

Neutral Report Total

2.4.2 Influence on Japanese Firms

Since the 1990s, Hitachi and Toshiba have established strong brand power in

the field of home appliances In the following decade, Japanese brands like SONY,

MATSUSHITA, FUJI, TOTO, and SHISEIDO have consolidated their positions in

many industries However, in 2000, some Chinese consumers asked TOSHIBA (one

of Japanese leading laptop and home appliances producers) for compensation for

drive problems in their laptops (Liu, 2000) Also, TOSHIBA responded more slowly

to Chinese consumers’ requests compared with equal compensation given to

consumers of other nations In 2003, TOYOTA’s (one of Japanese leading motor

manufacturers) made two stone lions, a traditional symbol of power in China, salute

and bow to Toyota cars in two advertisements (Xinhuanet.com, 2004) This action

was also suspected to be contemptuous of China’s dignity Eventually, TOYOTA had

to apologize for the inappropriate commercial Many Chinese regarded these two

incidents as a sign of distrust and discrimination

If the problems are associated with historical issue, the situation only gets

worse To many Chinese, Japan denies the fact of invasion during World War II and

constantly seeks opportunities to enhance their military power When Chinese cannot

feel sincerity and regret from Japanese, they may become angrier and overreact to the

problems Therefore, Japanese firms have to put more effort in constructing good

images and maintaining good relations with the Chinese as compared to foreigners

from other countries

2.5 Why does Guanxi Matter?

In light of the above mentioned problems, Japanese firms’ engagement in China

seems risky With regard to the actual business environment in Chinese distribution

channels and the problematic Sino-Japanese relationship, Japanese firms have been

careful in setting out strategies to decrease the obstacles in Chinese business,

especially the cultural estrangement Tanaka (1996) suggested that guanxi is a kind of

insurance in case problems occur in China As discussed previously, China’s legal

system remains undeveloped In many cases, business cannot be conducted according

to rules and conditions indicated in contacts Business standards applicable in

developed countries may sometimes be unworkable in China with great structural and

legal uncertainties (Lo &Everett, 2001, p.22) If one is in trouble, any kind of trouble,

guanxi can protect him by means of some kind of established network To achieve

success in Chinese business environment, guanxi is a factor that cannot be overlooked

by foreign marketers and Japanese businessmen in particular, because Japan is

potentially perceived as a hostile country by China, a country undergoing serious

politics and legal reform As such, research on the nature of guanxi and its working

principles within Sino-Japanese channel relationships have become imperative I will

discuss the relation between channel relationships and guanxi in the following chapter

Chapter Three: Literature Review

3.1 Japanese Distribution Channels

There is a large body of literature on the subject of Japanese distribution

channels (Tajima, 1994; Miwa, 2002; Min, 1996) Among them, most of the work

focuses on domestic activities and its characteristics To explain the secret of success

in Japanese industry, the recent trend has been to use the term keiretsu, or network

Keiretsu is a Japanese term for a set of companies with interlocking business

relationships and shareholdings Miwa (1996) suggested that, keiretsu can be

categorized into three different types in general, namely, financial keiretsu, vertical

keiretsu, and distribution keiretsu Financial keiretsu is typically organized around a

major bank, trading company, insurance company, and large manufacturing company

Vertical keiretsu usually consists of a large independent company and its subsidiaries

and affiliates Distribution keiretsu, or marketing keiretsu, usually includes

distribution, sales, and marketing firms in wholesale and retail sectors

The dominant force in the Japanese distribution keiretsu is the Sôgô Shôsha

(General Trading Company) whose function is to sell products (Miwa, 2002) Sôgô

Shôsha has played a significant role in Japanese domestic distribution activities for

years By maintaining strong linkages between firms, trading companies serve as

important mediators between local suppliers, parent companies, and customers in

Japan (Goldmen, 1994).Small retail stores also play a part in the Japanese keiretsu

system Many large manufacturers maintain a large network of small retailers by

providing them with business or financial supports

In light of the above studies, keiretsu plays a significant role in the Japanese

domestic market Through keiretsu, a manufacturing firm can find distribution

partners within its networks more easily If the parent companies of the producer and

the seller belong to the same group, the two companies are then connected with one

another automatically On the other hand, companies outside the group may not be

considered for collaboration in the first place Indeed, keiretsu also applies well in

China Hence it is not surprising to hear about a manufacturer having 100 per cent of

its transactions with a Sôgô Shôsha, the general trading company Looking more

closely, one observes that Sôgô Shôsha is primarily used either to handle export to

Japan, or to transfer products from one Japanese firm to another In China,

transactions through Sôgô Shôsha are basically limited within Japanese firms and

keiretsu still work in these cases However, when it comes to selling products to

Chinese middle and end customers, keiretsu partly, or even completely, loses their

power and influence

The studies introduced above may reveal some aspects of the Japanese

distribution system Unfortunately, they do not explain the ways channel member

relations have been adapted to the global market, including China In other words, all

of them have analyzed the characters of Japanese distribution from a domestic

perspective, but not from an international viewpoint When Japanese manufacturing

firms enter a foreign country, they have to be prepared for new challenges as they

may be forced to deal with relationships other than keiretsu If we apply Japanese

distribution strategies into a Chinese context, what adjustments should be applied to

cater for the unfamiliar marketing environment? The present study will try to answer

this by examining the ways Japanese manufacturers approach business practices in

China

3.2 International Business: Trade in China

Japanese manufacturing firms have been keen to set-up subsidiaries in China

for the low labor cost, and to sell their products within the Chinese market It would

be interesting to know how Japanese firms expand their business to China and use

their existing distribution strategies in order to trade with Chinese partners The

nature of the Chinese market and the way in which Japanese distribution’s strategies

are adapted to this market will be touched upon in this section

3.2.1 Chinese Market: Western View on the Biggest Market

There are a large number of studies on foreign firms’ entry to China (Hoon,

1998; Wilson & Brennan, 2003; Kenneth & Perry, 1996) These studies provide

detailed analyses of the differences between the marketing strategies found in China

and those encountered in western countries Hoon (1998) pointed out that several

distribution bases for market segmentation are used in the West, which makes it more

flexible and easier to design pricing and promotion strategies However, the Chinese

marketing system only operates in a limited way Due to the traditional planned

economy, the Chinese government has set up product and price strategies with few

levels in its distribution system

Wilson & Brennan (2003) suggested that the Chinese government’s policies

have changed their attitude towards foreign investment since its entry in the WTO

Business is no longer limited to joint ventures Foreign firms are given opportunities

to set-up wholly owned subsidiaries and conduct international business In addition,

Wilson & Brennan’s study pointed out that British managers put little emphasis on the

understanding of cultural differences, and revealed that some companies conduct little

research to resolve issues regarding the presence of cultural gaps Indeed, cultural

knowledge is a crucial element during discussions of distribution strategies within an

international context Hence, I believe that more extensive research in this area needs

to be carried out In addition, while there is a large number of papers discussing the

joint venture performance in China through the analysis of market entry methods

(Beamish, 1987; Geringer & Herbert, 1991; Killing 1983), there are only a few

convincing studies on the relationship between business performance and the

understanding of diverse cultures The gap of the research area therefore turns out to

be the way of dealing cross nation culture in China for foreign investors

Previous studies have pointed out the significance of understanding the

Chinese market, and analyzed in detail the difficulties in expanding business in China

(Campbell & Peter, 1988) With regard to distribution channel strategies, they have

taken into account the complexity of Chinese regional markets However, no inroads

have been made in regard to the method of selecting distributors, and the way to

manage relationships between manufacturers and distributors in China These are

recognized as critical factors by any marketing strategists Though it is critical to

understand of market disparities, distribution mechanisms should attract more

attention once the first stage of market research is completed

3.2.2 Japanese International Marketing in China

Taking Honda and Sony as successful examples, Kohara (1994) gave an

overview of Japanese international marketing He suggested that Japanese firms have

evolved from export firms to multinational firms, to finally become global firms

Concomitant with such development, their marketing strategies evolved into

international marketing It is argued that if they did not ever seek to enter the global

market, they would never have survived in their own market (Kohara, 1994) As

channels of promotion, Sôgô Shôsha has helped Japanese products to achieve

significant performance in the international market (Kohara & Yamanaka, 1995)

However, with regards to the changing situation and disparity of the global market,

the strategies of distribution channels must have changed a great deal Yet, local

distribution in the target country, which is a critical factor for overseas marketing,

might have been overlooked in these studies

Campbell (1987) conducted a survey involving 115 foreign companies in

Beijing In his analysis, he first compared the ways in which Japanese and Western

firms were approaching the Chinese market Secondly, he recorded foreign firms’

opinions on the Chinese business environment This study pointed out major

differences between Japanese and their western rivals in their entry mode strategy,

technology transfer, trading, and methods of building local relationships Furthermore,

it also suggested that “the major characteristics of Japanese strategy in China [was]

their willingness to bide their time, take risks, and accept low profits” (Campbell,

1987, p 69) However, the focus of Campbell’s study is the relationship between the

employers and employees, as opposed to the one between organizations Hence it did

not mention the relationships that take place between foreign firms and local

distributors

Studies on Japan’s economical success have been well documented and offer

many relative explanations However, these studies did not pay much attention to the

features of Japanese subsidiaries’ activities in marketing and distributing overseas A

large number of studies have focused on the way businesses are organized in Japan

(Wong et al, 1995) The current paper will therefore explore the ways in which

Japanese firms deal with Chinese distribution channels

3.3 Channel Member Relationships

To explore the relationships between Japanese manufacturing firms and

Chinese distributors, it is necessary to address the conceptual understanding of

relationships in channel members in existing research A channel member relationship

usually begins with a good understanding of its contract However, it should be noted

that the inter-personal relation is more important than any other factors when

fostering a relationship A previous study (Anonym, 1993) suggested the ways in

which manufacturers and distributors could guarantee long-term relationships and

maintain trust: 1) keep in contact; 2) try to solve the problem by yourself first; 3) try

to trust the partner and let the partner know about it

Similarly, a later study showed that distributors with a high-level of trust from

the manufacturer will be more effective and generate more benefits for the

manufacturer than distributors with low trust (Svensson, 2001) However, it is

emphasized that both parties must treat each other fairly to establish trust in the

manufacturer-distributor relationship In this context, distributive justice and

procedural justice have proved to be critical in terms of bilateral communication,

impartiality, and familiarity Needless to say that transaction costs can be reduced by

maintaining trust between channel partners The long-term and stable relationship can

also help to develop more creative ways of serving customers Therefore,

manufacturers need to be careful and studious in their relationships with distributor

partners while playing the “power game” and the “trust game” (Svensson, 2001)

Most MNCs have taken advantage of foreign distribution systems when

trading overseas Stern & El-Ansary (1992) suggested several problems that MNCs

may face in foreign markets First, it is not always easy to find out which distributor

would be available to handle a company’s merchandise, namely, its distribution

selection strategy Second, when the distributor does not perform appropriately, it

may be necessary to terminate the relationship at a proper time Third, it is important

to motivate the distributor with promotional programs so that the distributor will

maintain a high-level of interest in the manufacturers’ products Forth, controlling the

distributor is difficult because of the complexity of channels typically used in

international distribution Some companies solve the problem by establishing their

own distribution systems, whilst others use franchises or exclusive distributorships to

maintain control through the first stages of the channels

Buttle (1996) commented that, only recently has the introduction of the

concept of supply-chain management offered a more harmonious view of the

relationships between manufacturers and distributors As the crucial elements in

relationship marketing, trust and commitment serve as the focus of attention in much

of the published research More research also appears to be focusing on the

relationships between members of the distribution channel (Dwyer et al., 1987;

Anderson & Narus, 1990) Dwyer et al (1987) found that channel members have

expectations of making their relationship persist over time and express mutual trust

Unfortunately, these studies did not discuss the manufacturer-distributor relationship

within the international context

Although there is extensive literature on international channel relationships,

empirical research on distribution channels is limited to channel relationships within a

single culture, and only a few studies explore cross-national channel relationships

(Klein et al., 1992) In the context of globalization, behavioral relations in distribution

channels between different cultures nevertheless are becoming increasingly

significant (Johanson, 1986) Researchers (Tse et al., 1988; Hallen et al., 1987) have

explored cultural difference in consumption behaviors, managements of relationships,

and marketing strategies For example, Rosson & Ford (1982) examined the

manufacturer-distributor relationship between Canada and the U.K Other researches

examined the relationships between the U.S and Mexico (Leuthheser et al., 1995),

and between firms in the U.K and Germany (Moore, 1990) Matear et al (2000) laid

focus on the relationships between firms in western and non-western cultures It came

up with a range of concepts about the essential means for good export channels and

examined the elements that constitute a good international channel relationship It is

suggested that mutual trust and benefit serve as the core element in a good

distribution channel relationship In addition, elements of a good relationship are

identified as follows: trust, commitment, information sharing, communication, and

response to problems or conflict However, it merely focuses on the ways to build

good relationships in distribution channels in Southeast Asian markets such as

Singapore, Malaysia, and Indonesia Thus, research that examines relationships

between Japanese and Chinese firms is sparse

With regards to channel studies, little attention has been paid to Chinese

distribution channels (Bolton & Yan, 2003; Jiang & Prater, 2002) With China’s entry

into the WTO, China’s distribution environment began receiving attention from

researchers However, only a few of them focus on the relationship between foreign

firms and Chinese distributors Of the limited channel studies, Wortzel (1985)

reviewed the distribution channel for each classification of consumer goods in China

In another study, Liu and Wang (1999, p.133) suggested future points of research on

China’s distribution channels:

a) Description of China’s distribution network;

b) Progressive changes in its distribution structure;

c) Obstacles to physical distribution in China;

d) Changing regulations on channels and their implications; and

e) Relative pros and cons of different channels in China and their suitability for foreign practitioners

Although Liu and Wang (1999) did not include in their study the behavioral

dimension of channel relationships with different styles of relationship management,

the paper primarily emphasizes the intra-channel relationship between Western firms