Teaching an old dog new tricks: Guanxi in today's world

Singapore SME's are at the crossroads between modernity and ancient customs.

The mention of "SME" sometimes conjures up an image of a company founded in the 1960s, with practices more suited to that era. But the realities of the face and practices of these modern SMEs are nothing like those of old.

Today, SMEs are helmed by 20-50 year olds. Most have tertiary education. They are widely travelled and they are not shy about sharing their views on countless social media platforms.

However, Singapore's SMEs are still rooted in Asia, and most of their trade and business happen in the region. Many SMEs in neighbouring countries, though, are still rooted to ancient business customs like guanxi. Therefore, Singapore's SMEs tend to find themselves in a very unique situation - they need to keep an eye on modern systems and yet understand and be able to work around customs like guanxi.

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Ancient business based on trust

Roughly translated, guanxi means relationships or connections, and has been described as the relationships cultivated between individuals, usually in a non-work setting, but often the lines between work and play are blurred.

While relationships are a crucial part of doing business all over the world, including in developed nations, guanxi has become a significant part of Asian business life. It is thought to have originated during the period of time when the business community did not trust the law and persons who represented the law.

A simple and common adage that will demonstrate this point: "What is the use of having contracts when the police or courts can be bribed?"

Therefore, traders and businessmen formed clans, associations and other informal communities to govern themselves. These informal communities are often hierarchical, so that breaches can be addressed by an elder or leader in the informal community.

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This system of trust has become so ingrained, that even in today's modern China - which, granted, still has some way to go to create a modern, reliable and robust legal system - it is still the preferred way of doing business. In other parts of Asia that remain undeveloped, a version of guanxi is also present.

As Chinese traders from Fujian, Hainan and Guangdong traded with and started to settle in Singapore, they brought with them many of their cultural habits, including their food, religion and, of course, their way of doing business: guanxi. This is understandable as at the time, Singapore had little to no formal legal system, and doing business with a country that was thousands of miles away required significant amounts of trust.

Race to the bottom

Today, Singapore's legal system has changed - it's modern, robust and reliable. Yet, despite this, it is not unusual for local SMEs to conduct multi-million-dollar business deals with other SMEs in Asia, based on nothing more than a handshake or telephone call.

This is the dilemma which our SMEs have to face, on a day-to-day basis. The question and challenge to our SMEs will therefore be: "Do we lead the region in pursuing modern legal trust or do we compete in this anachronistic race to the bottom?"

Our SMEs should take up the mantle and lead in this area. Our government has invested millions of dollars into building robust laws. Our courts and international dispute resolution centres are world renowned.

Through various regional and international treaties, our awards from the Singapore International Arbitration Centre are enforceable. Our laws on commercial agreements are on a par against the best in the world.

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What does all this mean for Singapore SMEs?

They can confidently use our laws to operate and do business outside of Singapore. No longer are they confined to a small market comprising close friends and associates. By embracing our Singaporean way of doing business, our SMEs can create growth opportunities for themselves.

The alternative is not tenable

Businesses thrive on consistency and transparency. Proper documentation offers that.

Most of the cases that end up in court fall within three main categories: People who have no contracts and forge agreements based on guanxi, people who download agreement templates from the Internet and misapply to the underlying transaction, and people who have agreements but do not follow their terms.

Typically, 90 per cent of such cases involving SME disputes could have been avoided through more robust contracts. Singapore's contract law is the envy of the world, and a well put-together contract - be that for business partnerships or employment agreements - will provide an unbreakable safety net in the event that something goes wrong.

Clauses built into the contract will cover for late payment, late delivery or non-delivery of goods. Should the dispute then end up in court, then the client can have the confidence that he/she is protected, and the judgment will come down in his/her favour.

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Cost is, of course, a factor but firstly, the cost of a court case will far outweigh the cost of initially engaging with a law firm and having well-written contracts developed.

However, in the age of the Internet, there are law firms in Singapore that leverage technology to bring down the cost of contract creation and management to such an extent that it has now become more accessible than ever. In some cases, legal document assembly software can reduce costs by more than 40 per cent.

Contract law may be dry, pre-emptive and often not seen as a priority, but it is essential if SMEs are to grow and thrive in Singapore.

Furthermore, for those looking to expand abroad, especially into neighbouring states that do not have as robust a system as Singapore, the need for strong contracts becomes even more important. SME owners should fight their ingrained cultural biases against the legal industry, and embrace contracts and documentation.

This article was first published on Mar 28, 2017.
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