When I speak about doing business in China, I make a point of telling audiences that I arrived in China in 1992 “unencumbered by any prior knowledge of the country.” As I explain, “I knew absolutely nothing about the country. I was an American Studies major at Yale, not a Chinese Studies major. I did not speak the language then; I do not speak the language now; and I can safely predict that I will never speak Chinese.”

I do this for two reasons. First, it happens to be true, and I’m not going to pretend otherwise. Secondly, I want to demystify China and make it more approachable for everyone. For too long, individuals who have studied China and have devoted the considerable amount of time it takes to learn the language have tended to make the country seem so mysterious, so complicated and so difficult, that it becomes an impediment for any person or company that wants to do business here.

With China emerging as the largest market for any product or service, this is not productive— everyone needs to be more engaged with China, not less. China is for everyone, and everyone needs to have the confidence that they can figure China out for themselves, personally or for their company.

Most people, when they listen to what I have to say, understand where I’m coming from and gain confidence from my comments. Every once in a while, however, someone will take exception and argue that I am treating something as important as the language in too cavalier a fashion. Nothing could be further from the truth. In fact, I go out of my way in my book, Managing the Dragon, to explain that most of the mistakes that are made in China are made due to miscommunication. Quite simply, I don’t want to add to the confusion by speaking imperfect Chinese, and would prefer to leave accurately translating what my managers, customers and Chinese partners have to say to the professionals, the native Chinese speakers. I believe that’s the most responsible position to take.

In the interest of brevity, I could paraphrase all of the comments I made in my book about “The Language Barrier” in China, but why do that? Instead, please allow me to quote directly from Chapter 16 in Managing the Dragon:

Wouldn’t speaking the language make it that much easier for me to work in China and function as the head of ASIMCO? Sure it would. If I were proficient in Chinese, my life would be much easier–but that’s a big “if”.

What amount of effort would it take for me to get my Chinese up to a level where I could rely on it in business? The answer is, a great deal. Chinese is an extremely complicated language. You can learn it to a level that helps in daily life–directing a taxi driver, ordering in a Chinese restaurant, asking for directions–but mastering it to where you can use it in business is another story. The people I know who’ve done it have spent at least two years studying intensively.

I was 42 when I left Wall Street to set up a business in Asia, and the second career I started was making automotive components in China. That decision came with two inherent difficulties. First, I was an American Studies major at Yale and had never studied China or Chinese. Second, my first career was in finance, and I had no experience in manufacturing or in the auto industry. Because I had to learn both a new country and a new industry, I simply had no time to spend two years or more learning a new language. My value add is my knowledge of the way capital markets work, my experience gathering capital, management, and technology resources for growing companies, and the vision and broader perspective I gained from twenty years on Wall Street. It’s not my ability to speak Chinese.

Studying the language part-time isn’t a realistic option, at least not for me. It would help a bit in getting around China, but I’d never gain the level of proficiency necessary for a business context. And the idea of coming home from a busy day at work and hitting the language lesson plan isn’t terribly appealing, either.

Even if I did somehow manage to achieve proficiency, I’d still be concerned about what I might miss if I didn’t have an interpreter. Wilson [ASIMCO’s head of Sales and Marketing] speaks English as well as anybody in China. But he admitted to me that if he’s sitting in a roomful of Westerners, he only gets about seventy to eighty percent of what’s being said. How much would I miss in a comparable situation? And how much can anybody ever afford to miss? For this reason, we always do translations at our general managers meetings, even though most of our top managers speak both languages. With important information, it pays to take a bit more time and make sure that everyone understands.

I fully recognize that there is a bit of rationalization in all of this, but again, I am just being truthful. I also believe, however, that there are many misperceptions that need to be overcome.

Maybe this is all one big rationalization for not having taken the time to learn the language. That’s part of it: languages have never been my thing. But I do believe that too much emphasis is put on the language, and not enough emphasis is put on gaining a more substantive understanding of China and how it works. There’s this sense that if you don’t speak the language you can’t possibly understand China; there’s also the equally wrong notion that anybody who speaks the language does understand China. I’ve seen plenty of instances where this isn’t the case.

By no means, do I encourage others in different circumstances to follow my example. What worked for me may not work for others.

Having said all of that, I would advise any young person with a serious interest in doing business here to learn the language. Early in your career, you can devote time to doing it the right way. All three of my kids started taking Chinese in high school, continued through college, and took language courses in China. Carleen [my wife] has managed to learn enough so that she can get around pretty well. If you can do it the right way, like my kids, by all means do it. If you can’t, but you still want to learn it for your own personal gratification, like Carleen, then by all means go ahead if that’s important to you. But don’t let the language present your first insurmountable hurdle to getting started here. Strictly in terms of business, my advice is to spend the time learning how China works and leave the language to the linguists.

Last week, I was interviewed by Garrett Sutton, author of numerous books dealing with personal and business finance, on www.Wsradio.com, a leader in Internet talk radio. The 20-minute interview covered a wide range of topics regarding China and doing business here.

During the first segment, which lasted over 14 minutes, we discussed how I started ASIMCO; how other companies might develop their strategies for China; the challenges of starting a business in the country; the importance of developing a local management team and the ways in which that team should interface with top management at headquarters; guanxi and the use of relationships in China; and living and working in Beijing and how that has changed over these past 15 years.

Unfortunately, there is a rather lengthy intermission between the two segments where the sponsors get to advertise their products, so you need a bit of patience to get to the second portion of the interview. During the second segment, which is considerably shorter at five minutes, we discussed areas of future growth in China as well as the future of China’s auto industry. We then closed with a discussion of the tragic earthquake in Sichuan Province.

It was a good interview that I enjoyed doing. Garrett asked good questions, and it’s not often that you get an opportunity to do more than sound bites and really get into a subject. Obviously, the interest in China continues to grow as we approach the Olympics.

If you would like to hear the entire interview, click on the button below:

“How do you build trust with your Chinese managers and employees?” was the first question on the sheet I held in front of me. I was standing in the lobby of the Dow Jones building in lower Manhattan, waiting to meet with Li Yuan of The Wall Street Journal Online. In our interview, Li Yuan wanted to discuss the issue of building trust in relationships in China, and had sent me a list of proposed questions ahead of time.

Born and raised in China, Li Yuan instinctively understands the importance of mutual trust in China, which is why she wanted it as the focus for our interview. When I first went to China, everyone continually referred to “mutual trust,” and the importance of establishing it, as the key to developing successful relationships in the country. In fact, the words were said so many times that I began to think of them as a platitude. But, did my new Chinese colleagues really believe so strongly in their meaning, or were they just saying the words?

Having been here for 15 years now, I have found that the words, “mutual trust,” are probably the two most important in the Chinese language. If you can ever truly achieve it—if your managers, employees, partners or customers really believe that you trust them— everything in China begins to change.

Harry S. Truman, the straight talking, “the buck stops here,” president of the United States, was from the “Show Me” state of Missouri. If you are trying to convince someone from Missouri of something, words only go so far, you have to show them. “Don’t tell me, show me,” they are apt to say.

In my 15 years in China, I have found that everyone here is from Missouri. The Chinese hold their judgment and look at what you do, not what you say.

With your managers and employees, the way you convince them that they have your trust is to empower them. You not only have to give them the title and the position, you have to give them the authority and the responsibility to carry out their duties. If they happen to falter, they must believe that you are there to help them, not criticize them.

With partners, customers and government officials, it works the same way. Filled with enthusiasm, many come to the country with grand promises of what they are going to do. When those promises are forgotten, as too often happens, the gulf between the two parties remains wide. On the other hand, a high level of trust begins to develop when actions follow words. Trust is something that is earned in China, and there is no shortcut to achieving it.

All of this and more is discussed in the interview with Li Yuan. Click here to listen to it in its entirety.

The Wall Street Journal recently ran an article regarding arbitration in China that described the pros and cons of Western companies submitting to arbitration in China or insisting on arbitration in more neutral venues such as Sweden. 

It’s an excellent article as far as it goes, but what it doesn’t emphasize is that arbitration is only the first step towards resolving legal conflicts in China. Whether a complaint is arbitrated in China or outside the country, the enforcement of any arbitral award that involves China will require a trip to a Chinese court, and that leads to the issue of enforcement.

For better or for worse, I have had a fair amount of experience dealing with the legal system here. Because it such an important issue, I devoted a section to it in my book, Managing the Dragon. Here is what I wrote:

Contrary to what most people think, China does in fact have a body of law and a legal system, including courts and arbitration panels where grievances can be brought.  On December 29, 1993, the National People’s Congress adopted a Company Law, which has been refined over the years and was last modified in 2006. The point is that China already has laws on its books. The difficulty lies in enforcement. 

There’s an International Arbitration Tribunal in Beijing, made up of both Chinese and Western judges, where a contractual dispute with a Chinese partner (or something of that nature) can be taken.  When I was researching the idea of setting up a business in China, I was told that a foreign investor or company could get a fair hearing in arbitration, and that foreign companies had actually prevailed in a majority of the cases.  I have found this to be true.

During the course of our history in China, we’ve had three cases that have gone to arbitration, two that we brought and one that was brought by one of our Chinese partners.  What we didn’t realize at first, but soon learned, is that prevailing in arbitration and getting an arbitral award is actually only the first–and the easier–step in the process.  Having the arbitral award enforced is the second and harder part. Because the job of enforcement reverts to the Chinese court system, the party with better relationships in the area in which the grievance occurred has a substantial advantage.

In the first case, we were new at the game and thought winning in arbitration was everything.  With the Tribunal’s ruling in our hand, we marched off to court in Harbin, the site of the complaint–only to find that our Chinese partner already had the system wired.  Despite several years’ worth of efforts, we got nowhere.

The second case was the one you read about in Chapter 8, where the general manager and our Chinese partner in Anhui had set up a competing factory in violation of a non-compete agreement that he’d signed only months earlier. Right was clearly on our side, and we won in arbitration.  But this time, we lined up support from the local government ahead of time. Armed with a favorable ruling, we asked them to help and got what we wanted in one meeting, presided over by the Party Secretary.  We never even had to go to court.

In the final case, a Chinese partner that we had bought out–with the blessing and encouragement of the local government–made claims against us and took us to arbitration.  (The local government was as frustrated as we were with the actions of the Chinese partner over the years, and believed we could better develop the business if it were wholly-owned.)  The case wasn’t credible and we won rather easily.  At all times, the local government was on our side, so enforcement wasn’t an issue.

My best advice on legal actions is to avoid them at all costs and use them only as a last resort.  The outcome is uncertain, and it’s going to take time–no matter what.  In all three arbitration cases, even though they were open and shut according to any objective legal advisor, it took a year to go through the arbitration process.  If you then have to go to court to enforce the award, you can easily add on a couple of years.  And that whole time, the business that’s the subject of the dispute will be in turmoil, with a cloud of uncertainty hanging over it.  Under these circumstances, given the competitiveness of the Chinese market, final victory will probably be pyrrhic, if it ever comes at all.

Maybe the best reason to avoid legal action in China is that once you go down that path, all other avenues for resolving a dispute are foreclosed.  We had this experience in each case.  Once we had filed arbitration, the local and provincial governments took the position that the matter was being resolved through the legal system, and they didn’t want to interfere.  Once the legal gauntlet is thrown down, you have no choice but to see it through to the end.  In my experience, negotiation is a better way to go.

All that said, the legal system is evolving and improving every day.  With government support and help from international legal experts, the body of law governing commercial transactions and contracts in China is becoming increasingly sophisticated.  It’s no longer so different from the legal frameworks that exist in the most developed countries.  But the key link remains enforcement through the judiciary system, and in this area personal relationships will continue to play an important role for some time to come. 

The article cites a case involving PepsiCo and a Chinese bottler. As part of their joint venture agreement, the parties agreed to resolve any disputes through arbitration in Stockholm. Subsequently, Pepsi took its partner to arbitration in two separate arbitration complaints, alleging several breaches of various contracts and seeking an order terminating the joint venture. The lead judge in the arbitration proceedings was Swedish, and along with the judge selected by Pepsi, sided with Pepsi. Both arbitrations were decided in Pepsi’s favor and were wrapped up in 2005.

Here is where the article makes my point. The last paragraph begins with: “Meanwhile, PepsiCo has yet to recover on the judgment…” Those final words say it all. Arbitration is only the first, and the easiest, of the two steps. Enforcement is where the rubber meets the road in China.

??????The Harvard Business School pioneered the use of case studies as a teaching aid for business school students, and the case study method remains a lasting trademark of the school.

Over a two-year period in the early 1970s, I had the pleasure of reading, analyzing and discussing three cases per day at HBS. During those two years, my classmates and I acted as “pretend CEOs“ of hundreds of companies in a variety of industries, and we had the opportunity to make three good, or three bad, decisions each and every day. More often than not, the cases dealt with business situations that had arisen years earlier. But that was OK. After all, business conditions in the 1950s and 1960s weren’t all that much different from those in the 1970s.

With the emergence of China, however, many of those cases may have to be rewritten, and a whole new set of cases needed to deal with today’s rapidly changing competitive landscape. China’s announcement on Sunday that it has formed a company to make passenger jumbo jets provides one example. Until China’s emergence as one of the world’s largest economies, CEOs of leading global companies did not have to deal with what I call “The China Dilemma.” Here’s how it works.

Imagine that you are the CEO of a very large, U.S. company that makes a very high ticket, very sophisticated product that must meet the highest possible safety standards. Due to the long development times for new products, a very high level of capital expenditures, and the sheer complexity of the product, the number of companies competing in the global market has been reduced to two: your company and its European competitor.

Just as the large developed markets for your product in the United States, Europe and Japan are maturing and industry growth is slowing, China begins to emerge from 30 years of hibernation, embarks upon a reform program that leads to incredible economic growth, and because it needs but can’t make your product, China rapidly becomes one of your largest markets, with years of fast growth ahead for as far as you can see. Naturally, you and your European rival begin battling for market share in this very attractive new market.

Now for the China dilemma. Should your company’s strategy be to continue to export from the U.S. to China, or should it be to secure a long-term market position by manufacturing in China and perhaps entering into a joint venture there with one of its industry players?

The arguments against going to China are compelling. By continuing to manufacture only in the United States, existing facilities can be better utilized; there’s less concern about intellectual property getting out; and proven quality and management systems ensure smoother operations and enhanced financial stability.

On the other hand, setting up in China is problematic. Completely new plants must be built; know-how must be transferred; workers and managers must be trained; profits must be shared; and joint ventures are messy. The only arguments for establishing operations in China are securing a long-term position in the local market through a manufacturing presence in the country — and a lower cost structure.

One important piece of information that will play a role in your decision making is the likelihood that a Chinese company can build the capability on its own and ultimately compete with you and your European rival. Therefore, you ask your engineers to provide their assessment. Their probable answer: “Not impossible, but very, very difficult. The technological and other hurdles are simply too high.”

A typical case study would then end with you staring out your office window, pondering the inevitable question: “What should you as CEO recommend to your board?”

The industry of course is the passenger jet industry, and the companies are Boeing of the U.S. and Airbus of Europe. Although I have not been privy to their boardroom discussions over these past several years, the question posed by the China dilemma has undoubtedly come up. Neither company has seriously pursued the China route. We are now seeing the predictable outcome of those decisions — China has decided to go into the business of making passenger jets.

In what may be the largest start-up of all time, the central and Shanghai governments and China’s two largest aircraft manufacturers have joined forces and are injecting 19 billion yuan ($2.72 billion) into the new venture. What’s at stake? Certainly, China’s domestic market that Airbus estimates will increase fivefold by 2026. But the global market is likely to be up for grabs as well. After all, whoever wins in China is also likely to be the winner globally.

Can the newly-formed China Commercial Aircraft Co. succeed? Nobody knows for sure, we’ll all just have to wait and see. However, you can bet that it will get a lot of help. My guess is that suppliers and engineering consultants to Boeing and Airbus, not wanting to miss the potential new customer prize of the 21st century, are already beating a path to China with offers of help in design, development and manufacturing. Those technical hurdles may not be so difficult to overcome.

Although the aircraft manufacturing business may be the most dramatic case study of all, every industry is likely to face its own version of the China dilemma in the years ahead. If the wrong decisions are made, the best days of the current crop of global leaders may already be behind them.

This afternoon, I returned to my office from an Amcham luncheon to find everyone preparing to evacuate our offices on the fourth floor of Parkview Center near the Holiday Inn Lido Hotel in Beijing. Moments before, my colleagues reported, our building shook and there were already reports of buildings throughout Beijing being evacuated.

Believe it or not, an earthquake in far away Sichuan Province was felt in Beijing. This is equivalent to an earthquake in Denver being felt in New York City. The earthquake occurred today (May 12) in Wenchuan County, Sichuan Province at 2:28 PM local time measuring 7.8 on the Richter scale. According to China Central Television (CCTV), Beijing had its own earthquake, a much smaller 3.9 temblor, seven minutes after Chengdu’s shake, but it seems most people were reacting to the event farther away. In addition to Beijing, Shanghai, and Chonqqing, cities in Shanxi, Shaanxi and Hubei provinces felt the quake.

ASIMCO has a small factory in Sichuan Province, which is the only one of ours I know of to suffer any damage. Minimal structural damage consisted mainly of broken windows and cracked walls. Thankfully, no one was hurt.

“Of all the industries you could have picked,” I am frequently asked, “Why automotive components? It’s a mature industry.” And that’s true. In developed economies like the United States, automotive is a mature industry. But in developing economies like China, it can be a growth industry.

Ever since it joined the World Trade Organization in December, 2001, the production and sales of vehicles—trucks, buses and passenger cars— in China has increased by at least one million units each year. China’s auto industry has grown by an incredible 20 percent to 50 percent each and every year since WTO entry, and in 2008, China will produce over 10 million vehicles, most likely surpassing vehicle production in the United States.

Although everyone is on the China bandwagon today, that was not always the case. It wasn’t long ago that global auto executives questioned how a country whose per capita income is only $1,000 (approximately the level for China at the beginning of this century) could possibly afford to buy passenger cars. No one asks that question anymore. But, it should not have taken so long for industry observers to become believers. As early as 1992, anyone who believed that China’s economy would continue to grow, could easily predict, as day follows night, that China would have a very large auto industry. Quite simply, there is no other way to get people and goods around a country the size of China without a system of highways—and plenty of trucks, buses and passenger cars.

When I came to China in 1992, the first thing that struck me about the country was its size. China is big. Almost to the square kilometer, China is the same size as the United States, which meant that every industry was fragmented, and companies were doing business locally rather than nationally. As China’s transportation and telecommunications infrastructure improved, I reasoned, industries would begin to consolidate, and companies able to do business nationally would come to the forefront. Rather than investing in individual companies, therefore, it became more important to pick an industry and develop a strategy for creating the leading company in that industry.

But that begged the question: What industry? Fortuitously, I was invited to attend a Euromoney Conference in Shanghai in September, 1992, and I went there hoping to get some answers. As I describe in Managing the Dragon, here is what happened:

One of the featured presenters at the conference was Dr. Stefan Messmann, a senior executive with Volkswagen. In his remarks, he explained to the roughly 300 people in attendance that Volkswagen viewed China as one of its key growth markets. The company had already invested more than $350 million in two joint ventures, in Shanghai and Changchun, and had clearly taken an early lead in the race to develop China’s automotive industry.

I was surprised. At that point, it wasn’t clear that China even had an auto industry. The streets were filled with bicycles and a couple of trucks here and there, but passenger cars were few and far between. The ones you did see were typically imported Mercedes, which usually belonged to government officials. But here was a high-ranking Volkswagen official saying that China was going to develop a major automotive industry. More important, he was saying that Volkswagen, a major player in the global industry, was counting on China for a great deal of growth. I sat up in my seat and started to listen more closely.

But, autos are a big industry that accounts for over 12 percent of global GDP. What segment of the auto industry should I focus on? When he finished his presentation, Dr. Messmann opened the floor for questions. His response to the first provided an answer.

“What’s your biggest problem?” somebody asked.

Without a moment’s hesitation, Dr. Messmann replied, “Our biggest problem is getting an adequate supply of high quality parts.”

When I’d been in investment banking, I had called on a number of companies in the automotive components area. Though times were tough then, in the late ’70s, I looked back at financial statements from the ’50s and ’60s and saw that these companies had all been very profitable. This had been America’s growth period in autos. GIs returning from World War II, people like my dad, wanted to get on with their lives and were buying houses, refrigerators, and cars in huge numbers. As General Motors, Ford, and Chrysler expanded production, components companies could literally fill up their plants for the year after three golf dates with buyers from the Big Three. If Messmann was right, the same thing was now about to happen in China 40 years later.

“Wow!” I thought to myself. As Yogi Berra had said, “This is déjà vu all over again!”

Dr. Messmann gave me the first hint that auto components might be a good industry to investigate. After all, if companies like Volkswagen were looking for new suppliers in China, there seemed to be a vacuum that needed to be filled, and that spelled opportunity.

I didn’t see Dr. Messmann again until last week, nearly 16 years later. In writing Managing the Dragon, I learned that he had left Volkswagen and was now teaching law at Central European University, a very interesting English-speaking graduate school in Budapest that was founded by George Soros, one of Hungary’s most famous émigrés. After communicating by e-mail, Dr. Messmann invited me to Budapest to meet CEU’s senior faculty and to deliver a lecture at the school.

What a great two days! Dr. Messmann and CEU could not have been more hospitable, and Budapest is a fabulous city that is full of history. As I also learned, CEU is one of a kind. Founded in 1991 with the explicit aim of helping the countries of Central and Eastern Europe and Central Asia transition from dictatorship to democracy. CEU’s 1400 students come from 80 different countries. As I stood there answering their questions, I was struck by the fact that the students surrounding me were from Slovakia, Russia, Uzbekistan, Kazhakstan and Nigeria, countries I rarely come in contact with. Like students everywhere, they were eager to learn more about China and how they might do business here.

Just as Dr. Messmann opened my eyes to the auto components opportunity in China 16 years ago, he has now opened my eyes to a new part of the world. I want to learn more, but my instinct is that this is a very interesting part of the world that may be a great connection for any China business. The region is comprised of countries that, like China, have emerged from closed economies and are now rapidly making up for lost time. These countries have much in common with China, including a lower cost perspective, and are rich with many talented and motivated people with a strong desire to get ahead.

Once again, thank you Dr. Messmann.

Several months ago, Joni Evans, a good friend of mine, began a new Web site www.wowowow.com (“The Women on the Web”) that is oriented to women, 40 years of age and over. Joni, a veritable powerhouse in the publishing industry whose career includes serving as president and publisher of Simon & Schuster and publisher at Random House, identified women over 40 as an underserved market on the Internet, and decided to create a Web site targeting this segment. To help her create, run and write for the site, Joni organized 15 extremely successful women, including Lesley Stahl (broadcast journalist), Peggy Noonan (political columnist), Mary Wells (inventor of modern day advertising); and entertainers, Whoopi Goldberg, Candice Bergen, Lily Tomlin, and Marlo Thomas into a powerful team.

Why do I mention this on Managing the Dragon, a site devoted to China? Trust me, there is a China angle– I’m getting to it. But first, a bit more background.

A popular feature of the site is the “Question of the Day” which each contributor is asked to answer. One of the first questions was a doozy. Followers of New York politics will recall that in mid-March, Eliot Spitzer, the self-righteous former Attorney General of New York who had been elected Governor in 2006, was literally caught with his pants down when an investigation uncovered that he had been spending tens of thousands of dollars on hookers over a 10-year period. All of New York and the United States watched as Governor Spitzer stepped down, effective March 17, a distraught Mrs. Spitzer by his side. wowowow’s Question of the day: “Should Silda Spitzer Stand By Her Man?”

Now to the main point. As the Olympics draw near, and all things relating to China take center stage, one of last week’s questions of the day on www.wowowow was: ”It’s been 19 years since the protests in Tiananmen Square. What do you think about China today?mebeli”

One way or another, this question will be asked over and over again in the coming months. Whether you think the views of these very accomplished women represent a cross section of Americans or not, they are opinion makers and their comments provide interesting reading.

I confess to being most impressed with the comments made by Mary Wells, whose opening lines demonstrate a refreshing open-mindedness regarding China:

It is easy to complain about China but can you find a country you fully admire and have no complaints about? Including America? There have been big differences in China since Tiananmen Square and if you haven’t been there in awhile a visit there is astonishing. You can’t think about Tibet without being reminded of America’s own mistakes and you can’t visit Beijing without being reminded of America’s past capitalistic growth.

Well said.

She continues with a common sense, pragmatic prescription for the future:

I think this is the time to start encouraging our young people to learn to speak and to write Chinese in school. I would guess that in their primary career years the timing will be such that to be expert in Chinese will enhance a career and, in an important competition, make the difference.

Unfortunately, many Americans and Europeans do not share the same balanced perspective as Mary Wells. On my recent trip to the United States, I was surprised by how frequently I heard negative remarks made about the country and its leaders. The focus on the Olympics and the publicity surrounding anti-China demonstrations is drawing true sentiments to the surface. Jack Cafferty of CNN said it most crudely, but I suspect his comments speak for many.

If the Beijing Olympic Games, by bringing millions of first-time visitors to China, help to close this “understanding” gap, they will be considered a great success.

In my recent post, “Industry Week: China’s Different Cost Perspective” and in the related article I wrote for the magazine, I discuss the fact that Chinese managers have a different, and much lower, cost perspective than managers from more developed countries. Briefly stated, when Americans look at a 100 yuan bill, their immediate reaction is to divide by eight, the approximate exchange rate that has been in effect for most of my time in China, and to see the equivalent of $12.50. When Chinese look at that same 100 yuan bill, however, they see the equivalent of $100. In other words, a $100 bill and a 100 yuan bill are looked at and treated exactly the same way in their respective countries, with very important implications for relative economics.

This explains why the Chinese can make things so cheaply, and also begins to explain why there are two markets for any product in China. See “China’s Two Markets.” It also is the single most important reason why companies need to localize their management in China. Quite simply, to have long term success in China, a company’s managers should have the same cost perspective as its customers and its competitors.

This is one of the themes I stress when speaking to various student and business groups in China and the United States in connection with the launch of my book, Managing the Dragon. As I explain to audiences how I came upon this insight and the many ways in which it impacts the daily operations of our business, I can literally see the heads nodding. The Chinese immediately recognize that this is in fact the way that they look at money, and non-Chinese begin to relate what I am saying to their own experiences.

I noticed that The Hindu, a news update service in India, devoted an entire article to this idea, quoting extensively from my book and finding the concept “immensely instructive” in their words. I suspect that a similar phenomenon exists in India and helps account for that country’s cost competitiveness.

Chris Devonshire-Ellis, a longtime friend from Beijing, also found this idea useful and saw fit to write it up in his China Briefing News. Chris had heard me explain my views on China’s lower cost perspective in a presentation I gave at a conference held recently by the Young Presidents Organization recently in Beijing.

One question naturally arises when I discuss this topic, though. Many are curious to know how long the Chinese will have this lower cost perspective, and wonder whether it will quickly go away with all of the wealth now being created in the country. My answer is that it is here for at least one or two generations, and perhaps longer. Once ingrained in an individual’s psyche, something this fundamental tends to remain for a long time. That is why even wealthy people in China still look at money differently than their foreign counterparts.

Also, 900 million people even today live in China’s countryside and subsist on substantially lower levels of annual income than the rest of the country. By definition, this group of people has a much lower cost perspective than individuals from wealthier economies. As China’s economic development continues in the years ahead, many more from this group will be drawn into the country’s economic mainstream. As they do, China’s lower-cost perspective will be constantly reinforced by a new group of participants who will keep it very much alive.

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