Guanxi and common sense, part III – the WTO-column

(later also at Chinabiz)
Lawyer and my friend Mark Schaub focuses professionally often at the flip-side of doing business in China. For his speeches he uses a few one-liners on guanxi, a feature he holds strong opinions about. “When you do business in China, everybody seems to have this guanxi,” he says. “Only when you need that guanxi, it has always disappeared.” And “When you build your business on guanxi, you have a problem, since your guanxi will go away, retire or end up in prison.”

I remembered those one-liners as I was reading the sad story of Maurice R. Greenberg, ‘Hank’ for friends, who saw earlier this month his forty-year old reign of the American insurance company AIG end as the financial authorities in the US started an investigation into the financial practices of the company. He had been longer in charge than the previous pope! When somebody used to have guanxi in China, it was Hank Greenberg.
During the 1990s you could easily confuse him with the anchor men of Shanghai TV, so often the hard-working American business man showed up there. Thanks to his contact he was able to get at the beginning of the 1990s the first license to open a wholly foreign-owned life insurance company in Shanghai.
Much later, when the European competitors tried to enter the market, China’s regulatory authorities had their act much more together and foreign insurers had to enter a joint venture with a Chinese partner, before they could start their business in China.
That advantage for their American competitor has haunted the Europeans for a long time. In the last phase of the negotiations for China’s accession into the WTO in 2001 that difference between European and US insurance companies has caused lengthy delays and was the last major issue before Europe and China struck a deal on the WTO.

Now the tables have reversed. Under the current regulatory climate foreign insurers cannot expand their network of branches as fast as they want. But those with a Chinese partner can use the infrastructure of their partner from their erstwhile forced marriage. AIG is now distinctively having a disadvantage while Hank Guanxi is no longer around to fix the problems.
Whether AIG really has benefited from more than a decade guanxi and preferential access of the life-insurance market is another question. From the Bloomberg dispatch I learn that foreign insurance count their blessings in China more in terms of branch offices than in market share or – another alien counting method in Chinese life insurance - even in return on equity. Despite more than a decade of hard work, foreign insurers rule only at a tiny fragment of the market the domestic insurers have and that suggests that the market is not yet ready for foreign insurance practices. Chinese insurers have a tradition of conquering the market by losing millions.
Insurance companies always take a long shot before they can report on their returns, but in the case of China they might have to rejoice their previous lack of guanxi that has allowed many of them from starting to lose money a decade after AIG got that marvelous opportunity.

Fons Tuinstra

Part I: Common sense or guanxi
Part II: Readers’ reactions