Since today’s guests spent a lot of time in China, I thought it would be appropriate to reprise a wonderful sign, my favorite, that was first broadcast in Episode 14. It’s a sign in front of a Mexican restaurant in Shanghai that said with Chinese on the top in English underneath, “Zapata’s Mexican Cantina does not sponsor prostitutes at our establishment. If you are a prostitute, please refrain from entering our garden or restaurant. If you are unsure whether you are a prostitute, please ask one of our friendly security guards to sort it out for you.”

With that, today’s guest is Gabor Holch. He is an intercultural leadership consultant, coach, author, and speaker who has served over 100 clients in over 30 countries. An expatriate since the age of 4, China-based since 2002 and working globally, Gabor Holch is a certified management consultant in both English and Mandarin at half a dozen global corporations and licensed in major assessment tools, Including the DISC, the Predictive Index, NeuroColor, and MBTI. His next book Dragon Suit, the Golden Age of expatriate executives in China will be published in the summer of 2023, which is now when we are broadcasting this. Welcome, delighted that you’ve joined us today.  

Thank you very much for having me on the podcast. 

So let’s start with your very fascinating background. You say that you’ve been an expatriate since age 4, and let me clarify for people who don’t know, an expatriate is a national of a country who has usually chosen to live in another country. So Gabor has been an expatriate since the age of 4. Please tell us where you were born and how you grew up.  

I was born in Budapest, Hungary and that is where I’m speaking with you at the moment. When I was four years old, my father, who was an engineer with his current company, got a job in Baghdad, Iraq. And then that’s where I spent some of my childhood between the age of 4 and 8. So that was my first expat experience.  

And I’m sorry, that was in Baghdad in around what years?  

In Iraq? Well, it was before the Iran-Iraq war. I was born in ‘71 so we went there in ‘75, and we were there for the following five, four years, which means that actually, we came back just before and because of the Iran-Iraq war.  

I think there were two or three Iran-Iraq wars. But yeah, before one of them.  

Yeah, that’s right. The one that started in 1980.

And did you learn Arabic as well? 

I was too young to be exposed to the local culture to that extent, and also, we lived in a community that was just outside of Baghdad, which I mean, it’s an American podcast. Many people with experience in the country will listen to this podcast and they will know Taji, Iraq for a very difficult experience for American service personnel. But actually, that’s where I spent some of my childhood and I have very happy memories of it.  

It’s wonderful that your main expertise is in China. How did you get to China? 

Well, I think that I was bitten by the travel bug at an early age, so even when we came back to Hungary, I was both dreaming and sometimes confabulating about traveling all over the world. I love languages. Everybody in my generation in Hungary hated having to learn Russian, but I enjoyed it quite a bit. Then I started learning English. I picked up some English already in Iraq. I didn’t pick up too much Arabic because we were a bit of an isolated ex-pat community over there, but I had a vocabulary of about a couple of 100 words. When I came back with my parents. 

So, like the turn of the regime from communism to non-communism, in Hungary, there was not as much opportunity for young people now. But I diligently learned foreign languages, and I wanted to be a foreign service professional. I learned languages. I learned philosophy because that was my most beloved subject. Then I went on to study international relations and then I studied diplomacy in Vienna. Then I was hired into a security organization, but they kept sending me to the former Yugoslavia and my supervisors told me that it was very unlikely that I would get a posting to the Far East, which was my dream. 

So, in 2002, I quit against their best advice. And took my two suitcases to China. It was supposed to be a two-year sabbatical to learn the language and learn martial arts, which is my other passion. But it turned into a 20-year stint. Every two or three years something happened that kept me in the country. I started my firm, my consultancy, in 2005. I met my wife, who’s my wife now, a lovely lady from Shanghai, a couple of years later, and so forth. And then two years turned into 20. 

And that’s very often what happens, especially when you learn to love a place. Well, as you know, the atmosphere now between Western countries and China has become quite poisoned. And I’ve heard from other guests, for example, that China is starting to tax foreigners’ rents in Shanghai and other cities as a way of forcing an exodus of foreigners from the country. What is your take on the situation?  

Well, first of all, the subtitle of the book Dragon Suit, which will be published this August is The Golden Age of expatriate executives in China. Sometimes on social media, I get quite critical comments asking,  “what makes you think that this is the Golden Age of expatriate executives in China and in the book?” I never say it is. I say it was and I start the book by quoting a study that says the Golden Age for foreign firms in China is ending and the phenomenon that you mentioned is, I think, part of this general zeitgeist of China not being as attractive as it was before. But I also don’t agree with the fact that China has a grand scheme of keeping foreigners out and keeping foreign businesses out. 

And whenever you read in the news that China uses this and that mechanism to give a hard time to international businesses, I think usually China has good intentions because if you read the local sources, they tried to keep foreign investment and the foreign population in China up just before the pandemic. Shanghai, for example, the government of Shanghai published a paper that said that in the next couple of years, they wanted to double the foreign population in the city, which didn’t happen. It’s less than half that it was before. We feel that there is this adversarial situation because the Chinese government tends to do things that fall into three different categories. 

So sometimes there are these restrictions and China gets exactly what they want, but it’s bad for foreign business. This happens for example, when they demand that foreign businesses keep all that data on Chinese servers. This is what happened to Tesla, for example, a while ago. And then the next category, the second category, is when China experiments with new legislation related to foreign business in China and gets confused, and the tax issue that you mentioned, which I’m going to explain in a little bit more detail, belongs in this category. And then finally, the third category is when China has a plan, but it backfires. They even tried to help foreign businesses in the country, but finally, they repelled them. 

So, for example, compliance issues related to Environmental Protection. When it came to recycling, laws became much stricter in China. And then authorities in Beijing and Shanghai started fining foreign companies for not recycling properly before they started fining local Chinese firms that were simply because foreign firms were more transparent. Or anti-corruption laws, for example, what is happening to foreign consultancies right now? The law is for everybody, including Chinese firms. It’s just easier to look into foreign firms because they are more transparent. 

So, what happened with the tax legislation that you mentioned in 2019 and 20 is that they indeed passed the legislation that makes benefits such as children’s international education and flats [apartments] and insurance, and so on. And of course, that is a huge proportion of what expats cost to foreign companies. 

So, I was in China at the time, and in places like AmCham [American Chamber of Commerce] and the European Chamber, you could meet people who spent hundreds and hundreds of hours, some of them billable, because they involved outsourced lawyers and accountants until they figured out how to live with this new legislation so that they can be profitable. And then when China realized how international companies hate this new legislation, they just suspended it. 

So, all these hours of planning went to waste during the Christmas season. But it’s suspended now; it hasn’t been enforced indefinitely, but it also means that it’s hanging over the heads of international businesses. I think unpredictability is worse than enforcing faulty legislation. It’s worse for a business in China.  

And in my experience, this is very typical of Communist countries where you never quite know what the law is. The law is whatever the local policeman decides it’s going to be that day, in a way.  

Yes, I mean, China is in a transition somehow, but you know the political reform that was hoped for is not as fast as expected. China is becoming more and more rule-following and more and more compliant. But the problem is it’s such a complex system that there is a lot of experimentation going on and the number one problem, the primary problem when it comes to foreign business in China, is that the Authority never consults international businesses. 

There is no forum for involving foreign businesses and foreigners in the country in a debate on legislation. So, you can emphasize a little bit with the lawmakers as well when they make new laws for foreign business in China. But they are flying completely blind without officially consulting the companies and individuals in question. 

And there’s another – I don’t know if it’s the law, but there’s certainly an issue that other guests have mentioned, which is that when hiring people in China, the company may want to hire someone. But very often there’s a Communist Party rep either embedded in the company or certainly in the district, who may suggest to the company that that person is not desirable for various reasons, and the company should not hire him or her. 

And for companies that are making a product, it’s easy to get around what I’m going to say. But if you’re, for example, in anything creative in the arts and journalism, if you’re saying or doing something that contradicts President Xi Jinping’s nationalistic stance, that’s also considered very unexpectable. So how do companies cope with these kinds of policies? 

They cope with it very well because as I mentioned, what companies hate is unpredictability, not interference. If the Communist Party interferes with business in predictable ways, which they often do, then companies can plan, and they can. They can apply the same risk management tools they would apply to the weather or to, let’s say, a country that has a fluctuation in exchange rates and so on. And so, it’s kind of predictably unpredictable now. Companies are in China to make money. And those Communist Party officials or Communist Party cells in local companies, private companies, but also increasingly international companies, their success, their career is tied to the performance of the companies where they represent the Communist Party. 

So actually, their vested interest is to make the partnership work and for a very long time, I understand why international companies resisted the presence of the Communist Party among their ranks. I mean this is a political decision. Very often it was based on principles and values. But increasingly, international firms volunteer to work together with the Communist Party. 

So, for example, companies like Walt Disney in China are joint ventures between state-owned firms and international firms. And the Communist Party is very well integrated into the operation. HSBC was the first international firm to volunteer to set up a Communist Party cell. And then there are political operatives and executives, who work together. 

If you want to see the real clash, it is not political. It is more with practical issues when China has certain regulations that international firms cannot accept for other reasons. For example, in the cosmetics industry, for a very long time, the national law in China said that you have to do animal testing, whereas the promise of some companies was that they don’t do animal testing … or equal opportunity requirements that headquarters set and Chinese branches find it difficult to implement because local habits are different. That’s why we have real [unclear] in my opinion. 

I’m sorry, we have the real what?  

The real dilemmas, dilemmas, dilemmas. Some cosmetics firms said that we have to do animal testing in China. But then we break the promise that we gave the market, or we cannot be in China at all. 

So, for example, The Body Shop solved it by not directly being present in the Chinese market. Some cosmetic firms did otherwise. But I will answer the question that you asked me about. Somebody being earmarked by the Communist Party is undesirable for the company. It happens much less often than you would think, although then it makes a lot of noise internationally, and I think justifiably so because it highlights a very important issue. 

But a couple of years ago, just before the pandemic, there was a very interesting experiment, an academic experiment about CV’s. They used big data tools to see what the difference is if somebody hands in a CV to companies with or without a course in Xi Jinping thought listed on their CV, and they found out that not only state-owned firms and Chinese private firms would be more willing to hire candidates who are trained in Xi Jinping thought, but even multinational companies would give preference to those candidates simply because. How do you say they are? They are less likely to make certain mistakes that can damage the profitability of the company.  

Yeah, that’s very interesting and a very wise way to manage it. 

Well, you know, I am European and let’s say if we look at requirements at an American company, certain Europeans would have a similar attitude there. You know, it’s when it comes to political correctness and so on. Sometimes you just simply have to make active efforts to adapt to a certain value system.  

Right. It’s very true. And privacy laws, for example in Europe, are much stricter than in the United States, and so American firms in Europe have to adjust to those national laws or EU laws the same way.  

One of my first assignments in Shanghai was teaching for the local program of an American university. And I was a consultant and I’m a diplomatic graduate. So, I taught subjects like negotiation and international relations and so on. And I remember that the American university gave me the same lecturers’ handbook that I would get in the United States about standards of political correctness. 

And one of the things that I read is never complimenting the student’s hair. Because that can be legally liable… for somebody brought up in Europe, it can be just as disconcerting as in China. Somebody telling you have never, never mentioned Tibet when you are in, when you are lecturing to Chinese too. So, I think if you move between continents very often you have to tune yourself a little bit to local political and social requirements.  

Yes, it’s very true. Very good perspective.

Can foreign companies obtain financing for their operations in China easily? Is financing through banks? Or is China financing in China primarily reserved for state-owned enterprises and favorite sectors there?  

This is a very dynamic picture. So, I spent 20 years in China, and I saw at least three big epochs, so to speak. In the beginning, right after I arrived in China, about the year after it had joined the WTO, the World Trade Organization. And at that time, it was extremely difficult for international firms to obtain funding from Chinese banks because… except for a couple, most of them are state-owned banks, and, as far as the Chinese government was concerned, international companies were in China to bring money, not to borrow money. 

So, what happened is that international firms brought their banks, you know, and that’s how Calyon [Crédit Agricole de Lyons] got in and Citigroup was there. And the Bank of Australia and New Zealand were there because they were financing foreign firms in China. At that time over 70% of loans from Chinese banks went to state-owned companies. And then with the so-called reform and opening era, this slowly turned around. About ten years ago, 70% of loans from Chinese banks went to private companies, but predominantly not foreign firms. 

Whether a foreign firm can obtain funding easily depends on which sector they are in and what that sector represents in the current five-year plan of China. And also, you have to know that recently the prominence of state-owned companies has returned. So again, a larger share of loans from Chinese banks go to state-owned companies. However, if you fall under one of these kinds of star industries like robotics currently, for example, artificial intelligence… and you’re a foreign firm and you bring the right research and development capacity to China, then it’s not impossible to secure funding. You have to keep an eye on the five-year plans and the priorities of the Chinese government. 

That would make sense also in that context. 

It does for China.  

Yes, of course.

 In terms of Chinese cultural values, many guests have spoken about guanxi, the relationships or connections as essential criteria to do business in China. But what about other cultural aspects such as boss/employee relationships or holidays, time off for weddings and funerals, and so forth?

Well, one chapter of Dragon Suit, my book, is intended as a kind of crash course on what you call guanxi and I think it’s a guanxi. The concept of guanxi is a good introduction to all the other issues that you mentioned because a lot of people have just arrived in China or started doing business in China or are prepared to do business with China. They start sleeping with this kind of Confucius business manual under their pillows, or how you can do business based on Sun Tzu’s The Art of War. But what you have to know is a couple of things. 

One of my favorite authors said that trying to do business in China based on Confucius or Sun Tzu is like trying to do business in the United States based on Herodotus or Plato, and I think there is a strong point to that. The other one is that over 90% of foreigners who ever visited China only visited the five biggest cities in China. Basically all the headquarters of international firms are in three cities: Beijing, Shanghai, and the Shenzhen conurbation. 

So, when you go to these places and you do business there, you are not exposed to traditional Chinese culture. This is why, for example, when a foreigner tries to learn the art of guanxi, you have to know that traditional guanxi is based on blood relations or whose father was which rank in the Communist Party, or with maybe somebody’s family as they were scribes before the revolution of 1949. Foreigners are not part of that. Most foreigners are proud of their guanxi skills, and guanxi with other foreigners. Or with Chinese people who work for multinational companies. 

So, you get to this kind of glass ceiling where you cannot say an awful lot about traditional Chinese hierarchies, and I would say if you managed operations in China and if you must be involved in things like how will our promotion system influence… or how will it integrate with the traditional family structure of China because it’s true. I mean, parents put a lot of pressure on young Chinese people to be promoted and be a manager for certain reasons, mostly not pride or faith or anything. But because of reasons of democracy, demography, for example, that you know, because of the one-child policy, they have to take care of the older generation. 

Just delegate this part to local Chinese employees and preferably not the ones who spent 20 years in the United States. And discuss it very often with them, and make sure that the solutions are compliant, and they are in line with the values of the firm, but they are going to be the ones who are going to see deep enough into holidays, weddings, and funerals, for example, how to remunerate because involving the family and remuneration the company can either choose to give cash or to give certain kinds of benefits. Ask local people how it would influence their lives because it’s very difficult to figure out these things as a foreigner consistently. 

And very good advice. Excellent advice. Thank you. 

In terms of intercompany or intracompany relationships, if a lower-level employee disagrees with the manager’s decision, is the employee expected simply to implement it, or can does the employee have the cultural impetus, perhaps, to challenge, or is this simply a function of how each company runs itself?  

International business people who do business with China have to be very careful with whom they listen in these situations. So, I already mentioned that I wouldn’t necessarily try to figure out these situations based on Confucius’s wisdom. I also wouldn’t necessarily try to figure it out by reading some intercultural classics such as Geert Hofstede. For the simple reason that those authors compare cultures, not people. 

So basically, some of the classics of intercultural management assume that all Chinese are typical Chinese, and all Americans are typical Americans, which is simply not the case. Studies show that about half of any society followed the mainstream in terms of cultural values and the other half are just all over the place. 

So basically, we have to ask who that manager is and who that employee is, and if this is a foreign manager and an employee who is born in mainland China, but born in one of these big and relatively cosmopolitan cities, and spent an accumulated six years abroad, including studies and professional experience, nobody will expect that employee to just blindly follow the word of the boss on both sides. Because the boss knows that this is an internationally trained employee, and the employee knows that this is a foreign boss, and this is the gestalt that 95% of foreign managers in China work in. 

Now of course, if you work for an agricultural organization and you find yourself on a chicken farm in Liaoning Province, or you work for a very traditional Chinese university, you may have to step into the shoes of a boss whom employees follow almost blindly, and you have to live with it and you have to figure out what to do in that case. Or if you go and you become like manager #107 in BYD or Huawei in China then you may have to follow like a more traditional Chinese employee, but that’s very rare statistically as a foreigner.  

It’s also very interesting. You’re right, it’s all relative, and it depends on the situation.  

Yes, because China is enormous, and even smaller societies have cultures below subcultures. So below the culture, I’m using air quotes here for the benefit of podcast listeners. “The Chinese” you know, of course, that’s a mainstream culture. But that 50% that doesn’t fall into the mainstream is almost a billion people. And cities, large cities have their own culture, and Beijing and Shanghai’s culture is very different from each other. 

Then we have the corporate cultures we deal with. It’s not the same. If you’re a, let’s say, a German pharmaceutical company dealing with a state-owned company in China or you’re a Japanese automotive firm whose client is international distribution. 

So, you always had this. This is why we intercultural coaches first map the situation in which cultures are involved here and what’s the temperament of the people who are part of the story.  

Do you have much experience with companies that do business both in China and Taiwan and how they manage? Are the benefits and appeals, for example, the marketing benefits and appeals, the same or different because each country’s culture is so different? 

If you listen to politicians and the decoupling or narrative, then you might find that firms have to choose, just like states do right. If you look at international politics, then there are a handful of countries in the world who basically approach Taiwan from the perspective of state-to-state relations, and most countries don’t… because basically, the People’s Republic of China would have an issue with that. 

And then many people assume that as a businessperson, you have to make the same choice, but that is simply not true. If you look at pharmaceutical companies, if you look at technology companies Taiwan and mainland China are just part of the same plan, not to mention Hong Kong, Macau, and then some other territories. 

So, for example, if you look at technology companies, especially if they have any relation to the semiconductor industry. Taiwan and mainland China are very much part of the same supply chain and of course, it happens now and then that assets are being moved from Taiwan to mainland China or as it is happening currently, from mainland China to Taiwan. Not just for security reasons, because journalists tend to think that if technology companies move assets including people, buildings and machinery from mainland China to Taiwan, it’s in preparation for some major geopolitical crisis. Sometimes it just makes sense for some other reason, like labor in mainland China is becoming rapidly becoming more expensive. 

We also have to just accept that everybody’s doing their job. You know, if there is a, if there is a fair, a country fair, and then the fire auditors come and shut down the Ferris wheel, the Ferris wheel people protest, everybody’s just trying to do their job. It’s the same thing with politicians. 

So, if politicians warn that we have to decouple from China because Taiwan is a hot issue, but the CEO of NVIDIA and Tesla, and Huawei, say it’s stupid to decouple from China because it’s good business. And the good long-term plan to be engaged, everybody’s just looking at the situation from their perspective. But I work with companies and executives who look at mainland China and Taiwan, as just different pieces on the same chess board. 

That makes sense. And you’re right. And it depends on the kind of company and also the sector. 

On a separate vein or separate question. You’ve worked in over 30 countries. What are some of the most difficult countries you’ve worked in and what factors made those countries more challenging, more difficult than others? And difficult, of course, is a relative term.  

It is, yes. But you feel it in your belly if something is difficult so … Well, it is very relative because perhaps my being Hungarian and spending some of my childhood in Iraq already raised my bar of difficulty in a way.

My first big professional assignment was in Bosnia Herzegovina. It’s not an easy place to work in, and it was right after the war. We only watched movies with subtitles because the sound system didn’t work in the cinema closest to us, and there was a lot of damage, but I have wonderful memories there and the people were fantastic. 

China itself is very challenging, mainly for its size and because as a management consultant, you realize that there are no best practices; there are no precedents when you do business in China because of the scale and the developmental path, every executive, every team, every company has to break ground in one way or another, and that’s even true today. If you look at companies like Tesla, for example, I mean they are doing something that nobody else has done before. China had just changed the law before Tesla arrived, and Tesla was the first wholly foreign-owned automotive company in China. But in terms of financing strategy, risk management is something completely different from what Volkswagen did, and then BMW afterward.

And so, as far as I know, I was the first consultant to train managers of state-owned companies in psychometric tools in North Korea. This was an interesting thing in a country with no Internet and very little exposure to the outside world, it was as part of a nonprofit organization that helped North Korean state-owned companies to modernize in terms of management methods. It was an amazing experience. I was there twice.

And last but not least, you know, I spend more time in my home region of Central Eastern Europe and to be very honest with you, we are not an easy bunch either when it comes to business, I help international businesses here in the region now. I can appreciate the challenges here as well. 

And you’re currently based in Budapest?

I currently split my time between Budapest and Shanghai. I was in Budapest for over a year now, mostly because of the zero-COVID policy in China. So I couldn’t return for a while, but now China gradually opens up and started issuing visas again a couple of months ago. Yeah, I think about the months, months ago, and flight prices are going down. 

So, I started doing projects in Shanghai again. And of course, I traveled all over Asia. So, my next trip is going to be to Singapore. Usually, if there is a program that one of the multinational companies like or I have a successful program with one executive coaching, then they just want to replicate the same experience in both Asia and Europe. 

That’s truly fascinating. Is there anything else you’d like to add before we close? 

Your questions went right into the marrow of the most important issues these days. 

So, I mean, of course, I think it already came across from what I said, if anybody who’s listening to this podcast wants to do business in China with China, just stay away from the very simplistic black-and-white win/lose stereotypes. And try to get a bit more information and just assume that everybody who is doing something weird has the best Intel. And I think that will make understanding very diverse points of use much easier in the long run.  

Thank you very much. 

This has been a fascinating conversation with Gabor Holch and I greatly appreciate your joining us and giving us your tremendous insider perspectives of China. It is not common that one has that opportunity. 

So, thank you so much. And for our guests, I hope you will all join us next week for another edition of Global Gurus and their stories of international business. 

Thank you for the stimulating questions.