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Guanxi in Chinese Negotiation: Of Alpha Dogs and Leg Humpers

Chinese negotiating counterparties like building relationships as part of the deal-making process, but they aren’t usually big fans of the type of even-split, 50-50 partnerships that Westerners favor. Traditional Chinese negotiators are more comfortable with a clear hierarchy. On one hand, they can be the alpha male who sets the rules and the pace – leveraging on their China knowledge and local contacts. But they are also comfortable elevating you to god-like leader status while they fawn and give face – and don’t contribute much else.

The only role that you aren’t likely to see a traditionally Chinese counterparty take on is the one you want – an equal partnership. If that’s what you are after, you had better plan on spending a lot of time searching out the right counterparty, and you’ll still have to negotiate very explicitly and thoroughly from the very first meeting.

    Guanxi Type 1: Your new best friend
    • Some Chinese counter-parties will use flattery, friendship and social events to build a cordial relationship.
    • This is a ‘sales-type’ approach. He is selling his services to you, and he wants a salary or expects you to buy goods or services from his firm.
    • Good news – they may be taking the initiative to build a strong, healthy, win-win relationship.
    • Bad news – they may be pressuring you to reciprocate with better deal terms, IP, or relaxed QC/compliance requirements. He thinks his flattery and submissive behavior is a valuable service and expects compensation.
    • More bad news – This scenario often leads to a balance of power shift. Once he has your money, technology and know-how, your status becomes somewhat less god-like.
    • Even worse news – Those pretty young girls half your age who laugh at your jokes and think that you are so wonderful… yeah, they are in this category. Sorry, but someone had to tell you.
    Guanxi Type 2: Your guide, teacher – and boss?
    • Chinese businessmen will offer to help you through their connections, insider knowledge and guanxi with suppliers and regulators.
    • Consultative approach. They are offering to help you solve specific problems and clear away existing bottlenecks.
    • Good news – They may really know what they are doing and can facilitate your business.
    • Bad news – They feel that they are in charge of the new partnership.
    • More bad news – You probably need them more than they need you, so you are negotiating from a position of weakness.

Beware of your American impulses to treat every relationship as an equitable, just, “we’re all in this together” 50-50 partnership. It could be taken as a submissive gesture – which can invite aggressive, value-grabbing behavior.

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By Andrew Hupert – January 25, 2012

Bad Apple in the China Barrel

Apple Inc. has been grabbing all the wrong headlines lately, and the NYTimes piece How the U.S. Lost Out on iPhone Work and the BusinessInsider.com commentary summarize one part of the problem. Apple isn’t the first company to build corporate strategy around supply chain considerations – it’s been a mainstay of Taiwan’s very successful business planning ever since the mid-1990s. But outsourcing has always been a controversial strategy for US companies, as demonstrated by the auto industry when it started shuttering Detroit factories in the 70s in favor of cheaper Mexican labor – and ended up enabling its own biggest competitors like Toyota and Datsun (predecessor to Nissan).

There are three problems with Apple’s corporate strategy, and the damage being done to its reputation is only the first to manifest. Apple has gone from being the corporate underdog who made good to the poster child for Evil Inc. remarkably quickly – largely due to the management policies of its Taiwanese OEM partner Foxconn (and its parent Hon Hai). Foxconn is a B2B outsourcer and doesn’t need a consumer-friendly brand image, but Apple can’t continue using the reverse Nuremberg defense, “it’s not our fault – we are just giving orders”. We all know how the products are made.

But I’ll let the PR pros weigh in on the benefits and costs of being an evil corporate monster. It hasn’t hurt Apple’s sales, and plenty of other companies and industries sell great products while behaving beastly to their workers and suppliers.

Apple does, however, have two other problems that will eventually pose a greater threat to its bottom line.

1. It is way too exposed to supply chain risk.  We’ve seen this before, and it doesn’t end well. Apple has given all the power to its suppliers but retained all the profit for itself. Its designs are in the hands of an engineering team it controls only indirectly. While Taiwanese OEM firms have a good reputation and track record for protecting their client’s intellectual property, Apple is giving up an important competitive competency by outsourcing it’s complete production cycle to a small group of companies that it doesn’t control. Foxconn is in a very powerful negotiating position, and it may not be satisfied with razor thin margins forever .

2. Apple is equally exposed to negotiating risk with China – and that may end up being even more dangerous. Beijing giveth, and Beijing retains the right to take away. Right now the considerable power of the Chinese government is flowing Apple’s way, making it easy for Foxconn to do business. But that can change without warning – as it has for so many in the past. If Apple finds itself out of favor with Beijing policy makers, its supply chain is vulnerable to the Chinese bureaucracy. The same is true if a Chinese competitor finds itself in possession of Apple’s proprietary technology. Right now China’s flexibility and ability to mobilize resources is drawing Apple in. China can be famously rigid and immobile when it wants to be.

All China has to do is find Apple (or its suppliers) guilty of violating PRC law – which is almost certainly happening – to shut down Foxconn production for a couple of days. Apple’s share price will tank, and management will find itself in a very weak negotiating position.  Beijing probably won’t, unless it stands to gain something – like technology or customers.

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Background articles on BusinessInsider.com:

This Article Explains Why Apple Makes iPhones In China And Why The US Is Screwed

Steve Jobs Freaked Out A Month Before First iPhone Was Released And Demanded A New Screen

Your iPhone Was Built, In Part, By 13 Year-Olds Working 16 Hours A Day For 70 Cents An Hour
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By Andrew Hupert – January 23, 2012

What can you do for me tomorrow?

American dealmakers pressure a counterparty by asking, “What have you done for me lately?”   Chinese dealmakers say, “What can you do for me tomorrow?”

Chinese and American negotiators have differing views towards opportunity and sunk costs. Americans spend time, money and energy vetting deals and counterparties at the start of a negotiation, so once they decide on an investment they stay committed for as long as it makes economic sense. Abandoning one deal to search for another usually involves a significant loss – particularly when they are far from home. Chinese negotiators, however, spend the early phase of a deal focusing on relationship-building and learning about technology and business models. Until recently, they have invested relatively little in the way of cash – often putting up non-cash assets like production capacity, land, staff, and non-tangibles like distribution channels, connections and know-how. If they pull out of an agreement the opportunity costs are generally a lot lower – and if they have learned your business or acquired your IP in the early stages, may even be negative. (Think of negative opportunity cost as an incentive to move on to the next deal.)

A Chinese negotiator, therefore, has a greater range of motion than his American or European counterparty. This is one of the ways that Chinese negotiators shift the balance of power very effectively midway through a negotiation. Your assets are sunk and losing value – theirs assets are fluid and growing (now that you’ve taught them a business).

What does it take to hold on to a Chinese partner?
When structuring deals in China, if you want to hold on to your partner make sure there is a rising payout – and that he can make more working with you than working against you. If you can’t offer those terms, you have to seriously reconsider whether you want an equity or strategic partnership with a mainland Chinese counterparty.

Often the question is a simple one – would you rather own a minority stake in a money machine or a controlling interest in a broken down jalopy?

Do it the Disney Way
When Disney did their Shanghai deal, they didn’t play cat and mouse with the Chinese authorities.  Walt Disney Co. handed over about 57% of their cheese to a couple of SOEs representing the Shanghai government.  Sounds like the mouse got trapped — but you can bet that no one will be selling Disney knock-offs outside the Shanghai subway stations. This is a self-reinforcing deal, because the Chinese partner feels like the brand is working for them. Disney’s apparent weakness – its minority stake – is actually a strength. Shanghai now has something to lose if the partnership goes bad.

The key consideration is that Disney has a unique and highly recognizable brand that their key Chinese market is already clamoring for. If you don’t have that, then you’ll have to make do with money, technology or other assets. Your Chinese partners don’t just want a lot – they don’t just want a growing return. They want more than YOU are getting. For the Chinese side, sometimes one of the deal variables is out-dealing the foreigner – so plan accordingly.

But I Don’t Want To Give Up Control
If you’ve looked at all the angles and majority control is still your one and only choice, then plan accordingly and prepare for the tough times. That doesn’t mean you should act tough – just the opposite. You have to look patient, while keeping your options open and protecting yourself against an army of counterparties who feel that they have nothing to lose by trying to swipe your technology, business model, key people and markets. Here are a few of other things you have to do:

  • No exclusivity talk. The Chinese will ask for it, and some Americans think they are being clever by playing coy and dangling exclusivity in front of their counterparty’s face like a carrot on a stick. Bad move. You are guaranteeing that you and your non-partner will have a damaging conflict. He may not win, but you’ll certainly lose.
  • No partners. If you want to play the lone wolf, then be the lone wolf. Assuming that a Chinese partner will be satisfied with a perpetual subordinate role only works if you are A) over-paying, B) working with a stupid partner, or C) all of the above. Build nice, cordial relationships but be clear that you are paying for transactions – not offering an equity stake. If the Chinese side indicates that this isn’t what they are looking for, then for God’s sake, pay attention and move on! Don’t twist their arm into learning your business model and technology when you know they will eventually be dissatisfied.
  • Have multiple counterparties for key functions and service chains. It’s not efficient, but you don’t go it completely alone in China for efficiency. Always be ready to move on to your next best option. This means that you have to build in plans and budgets for continually expanding your range of connections – and you can’t rely on the network of the people you may be leaving behind. When Partner A helps you hire internal staff and find your service-providers and suppliers, you have a problem dropping him in favor of Partner B – because the first guy now has conduits into your business.
  • Safeguard your IP. If it’s any good, someone will make a play for it. Protect everything (with your own lawyers – not a partner’s) and only bring in what you can afford to lose. Even if you register and copyright everything, they will still copy and backwards engineer whatever they want to use. It won’t prevent you from using it in China, but you will be competing with your own designs.
  • You have more to lose than money or technology. Apple is finding itself tied to some very unsavory labor practices, and it can’t disengage even if wants to. It’s brand image is going to be battered, but it has no choice but to stay involved with partners that make it look as evil as any other sweatshop operating, worker-killing, child labor exploiting factory boss.
  • Be ready to walk away when the time comes. For some westerners, this is the hardest part. If you can’t do it, though, then you will never maintain full control over your own business.

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By Andrew Hupert – January 20, 2012

Know Your Chinese Counterparty: Long Term Planners or Short Term Opportunists?

If Chinese deal-makers are such long-term relationship builders, how come I just got dumped? Wham Bam, Thank You American!

A Chinese negotiator approaches each deal with two options in mind. His Plan A is a win-win, long-term relationship that will bring him many profitable transactions over a long time. He knows that this will require a lot of time and effort, but this is the Chinese template for success, and he considers the investment to be standard operating procedure. It is simply the way they roll. Plan B is a one-off, win-lose transaction. While not optimal, normal business operations require plenty of non-strategic transactions. Since he doesn’t plan on seeing the counterparty again, he should maximize profit immediately. Often that means lower quality production, inferior materials and little or no service.

For a Chinese business person, the worst case option is investing lots of time building relations and educating a counterparty only to have the deal fizzle out and go nowhere. This is Plan F – as in failure. An experienced Chinese counterparty is continually assessing the situation, sensitive to any whiff of deal failure. A smart negotiator knows when to shift gears, and he’ll downgrade you from Plan A: Relationship to Plan B: One-Off in a heartbeat, without warning or explanation. In fact, if he’s worth his salt as a dealmaker he’ll disguise his tactic so you continue believe you are involved in a long term negotiation. It’s the best way for him to narrow his losses and recoup a portion of the time, money and opportunity cost he has already invested in this losing venture. He will view the failure to build and maintain a long-term relationship as either a betrayal or a disappointment – but either way it is on you. He just wants to salvage whatever he can and move on to the next opportunity.

What tips the scales to your detriment? It could be a lot of things, but the general idea is that you didn’t live up to your end. There are three general classes of foreign failure:

1. You or your product offering were found wanting from the very first encounter. It was never a long term thing. Foreigners read these books and hire consultants who talk about guanxi and face. They think that all Chinese are master strategists playing a multi-layered, long-term chess game. Sometimes a Chinese guy just wants to buy or sell something. Sometimes they just want free technology or IP. If the western guy wants to believe that there is some kind of eternal bond between him and the Chinese counterparty, that’s his funeral.

2. The Chinese side thought that there was something there, but it just isn’t working out. The westerner may not have the right temperament or character. He may be too crude, too aggressive, too impatient, too greedy or too stupid. Maybe the technology or product isn’t good enough or doesn’t fit the Chinese side’s business model. Whatever the reason, the relationship isn’t working and the Chinese negotiator needs to cut losses. That may mean a predatory transaction – or it may mean they simply stop returning calls or emails.

3. Some partners outlive their usefulness. A good Chinese business person is always trying to close the gaps in his own knowledge and find ways to drive down costs or expand markets. Westerners who plan on charging perpetual rent for last year’s technology (that the Chinese side has already mastered) are greedy and naïve. Chinese deal-making is all about “what can you do for me tomorrow”. Westerners can get away with demanding the lion’s share of profits when they are providing interesting technology or methods that the Chinese side doesn’t understand – but they had better keep the innovation train rolling. When the new ideas stop, so does the relationship.

To a Chinese manager with a long-term perspective, it doesn’t really matter if your betrayal or disappointment occurs in the first five minutes or after doing business for years. They will downgrade you from value-adding partner to one-off pest as soon as the circumstances require it.
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By Andrew Hupert – January 18, 2012

American Negotiating Culture – Through the Eyes of the Chinese Counterparty

Attention American negotiators: Here at ChineseNegotiation.com we spend a lot of time discussing the various attitudes, propensities and quirks of Chinese negotiators – and heaven knows there are more than a few. But turnabout is fair play, so let’s take a moment to consider what we Americans are doing to our poor, beleaguered Chinese counterparties. Crazy as it sounds, Americans have a negotiating culture of our own, and other people have to contend with our peculiar negotiating style.

American cultural quirks that Chinese have to put up with:

  • First and foremost – we are the only negotiating culture that leads with the lawyers. Europeans consider negotiation to be an exercise in diplomacy while Asians consider it the province of paternalistic company leaders to build lasting relationships. American negotiators – even when they are salesmen or purchasing managers – are fixated on contracts and legal institutions (like courts and regulations). Whereas traditional Asian negotiators feel that relationships are the key to business and that contracts are merely written records of agreements between individuals, Americans put more weight on the document than on the human bonds between business leaders.
  • We are the only negotiating culture that believes that liability can be assigned in advance through a contract. This is one of the many aspects of international negotiation that has become “normal”, but it still strikes traditional Asian negotiators as crazy that Americans consider contracts binding even as the market environment changes. Asian negotiators in general, and Chinese in particular, feel that as the external situation evolves, so must a business relationship. Many Chinese partners have been bewildered and disappointed when their American partner stated waving a piece of paper in their face instead of responding fairly and maturely to new market realities.
  • Americans believe that negotiations end. To Chinese, the negotiation is part-and-parcel of the business relationship. As long as the counterparties are still engaged in business, the negotiation is supposed to continue. What’s the point of taking the time to build a connection if you aren’t going to grow the relationship through continuous give and take?
  • Americans want to decide everything in advance and put procedures ahead of human decisions. Chinese (and most other Asian) negotiators understand that conflict and differences of opinion are inevitable, and their business agreements usually assume that the leaders or concerned parties from each side will work things out informally. American contracts, with their penalty clauses and rigid requirements, are not only insulting and arbitrary, but seem designed to undermine any kind of positive relationship.
  • Americans love deadlines, timetables and schedules, even when there is no business rationale for them. They can be arbitrary and illogical.
  • Most disturbing of all, American negotiators are adversarial and rude. We insist on running everything and taking control of situations that we don’t understand. We are famous for coming to China and trying to sell inappropriate products or services at ridiculous prices. Our technology and designs are nice enough, but we expect people to pay over and over for the same thing – even after their people have figured out how to make it themselves.

I’m not proposing that we give up our way of doing things – and I certainly understand the value of contracts and compliance with regulatory codes. It’s important, however, to acknowledge that the American way of negotiating is not the only way, and the Chinese person across from you is struggling just as hard as you are to successfully manage the yawning gap between your cultures.

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By Andrew Hupert – January 16, 2012

Know Your Chinese Counterparty: Competitive Negotiating Style

Chinese Negotiating Styles: Competitive Types

G. Richard Shell, in the brilliant Bargaining for Advantage, classified all negotiators as Competitive, Compromising, Accommodating, Collaborating or Avoiding. If you care primarily about your own benefit and not at all about your counterparty’s, you are competitive. If your concern lies mainly with your counterparty’s benefit (such as those who must negotiate from weakness) then your style is accommodating or yielding. Those that believe in win-win, 2+2=5 deal-making are collaborators, while those that would rather not engage in any transaction at all are avoiders. Compromisers are more of a default setting, and many negotiators don’t consider it to be an independent style.

Chinese negotiators, with their attention to relationship building and harmony, are often mistakenly assumed to be highly collaborative. In fact, Chinese negotiators have traditionally had great facility with the bottom two quadrants of Shell’s matrix – SOE managers and bureaucrats display an avoiding style while price-cutting manufacturers and service providers who want a deal at any price are accommodators.

But with great success comes great pride, and China has been VERY successful in the last decade. They’ve imported much of the best of western business learning – and a few of the worst of our business habits. Egos have been rising as fast as the GDP, and nowadays you are as likely to encounter Chinese competitors at the negotiating table as their American counterparts.

American vs. Chinese Competitive Negotiators
An American competitor will lean forward and control as much of the table as possible. His power comes from the things he says – be they threats or promises. He is the battlefield commander, calling the shots and bringing the awesome firepower of his intellect to bear on the opposing forces.

A Chinese competitor, in contrast, is the emperor of the boardroom. He will sit back, turning his chair into a throne, deigning others to approach and present their case. Control of access is his key strength. He may not be able to decide who has physical access to his presence, but he can control what he says and to whom he says it. These are the entrepreneurs, the engineers-turned-managers, and the party cadres whose definition of business skill often includes connections, corruption, IP theft and fraud.

The good news is that Chinese competitors tend to overestimate their own position. They are easy to spot, and behave fairly predictably. Considering how mysterious and withholding they consider themselves to be, the Chinese are actually pretty easy to read. This style of Chinese negotiator likes to give the appearance of being able to endure any amount of pain, and would gladly see both of your fail rather than give up ground to the foreigner across the table. He does, however, have a significant weakness. While a competitive-type Chinese negotiator is happy to see you walk away with no deal, he hates the idea of you falling into the clutches of another Chinese competitor. Plan in advance and neutralize his advantage.

The bad news is that you are involved in a straight-up win-lose hypercompetitive relationship. . The chances of a one-off transaction with this kind of Chinese negotiator are fairly high, but the possibility of a strategic relationship are not. Once you have made your deal, he is going to move on to the next victim. These people are zero-sum gamers who want only two things from you – your assets and your absence

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By Andrew Hupert – January 12, 2012

Failure is Always an Option in Chinese Negotiation

Let’s take momentary break from the usual pursuit of best practices in US-Chinese negotiation and speak for a moment about worst practices. I am referring to the idea that “failure is not an option” (FINAO) when pursuing a deal. For negotiators who know what they are doing, failure is not only an option – sometimes it is the only option. One of the hallmarks of modern negotiating is the concept of BATNA – best alternative to no agreement . This is what empowers a good negotiator and underpins sensible negotiation strategy. If you can’t decide when to walk away then you are a price-taker, which is not a good position to be in when doing a China deal.

Back home in the US, we generally encounter FINAO syndrome among hard-driving young salesmen and financial broker-types who don’t understand how much damage they are doing to their reputation by make every deal a life-or-death struggle and every prospect a mortal enemy. In China FINAO syndrome usually afflicts senior managers who are new to cross-border deal making. A combination of high expectations from HQ bosses and lack of experience finds China novices latching on to the first counter-party who can speak English. They spend all of their time trying to make an inappropriate deal work in an unfamiliar environment. The more resistance they run into, the more vested they become in forcing this particular deal through.

Sometimes the most important negotiation is the internal one. If your HQ is working with a bad set of assumptions and demanding that you deliver on goals that aren’t appropriate for China, you are setting yourself up for disaster. The second worst thing that can happen to you is that your Chinese counterparty gets frustrated and walks away. The worst thing that can happen to you and your career is that your Chinese counterparty figures out exactly what is going on, and signs a deal that is bad for you – or would be good for you in theory, but he doesn’t plan on delivering. In China there are always two negotiations – one about the contract and one about the actual business. FINAO guys do a great job with the first one – and get slaughtered like sheep on the second one.

The best China negotiators know how and when to walk away. They take the time to give themselves options – which includes preparing alternate counter-parties and business models in case their Plan A falls through. But even more important, they take the time and effort to build support with the higher-ups in their own organizations. Good Chinese negotiators will know when you are afraid to go home without a contract, and will make you pay for it – either now or later.

In negotiation, failure is always an option. If you know what you are doing in China, it can be a damned good one.
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By Andrew Hupert – January 10, 2012

Comparative Negotiating Styles 101: US and Europeans in China

Negotiating styles in China.

Americans, Europeans and Chinese negotiators can all reach great deals, but their approaches and styles differ.  One is not necessarily better than the others, but each style of negotiator has to align with the prevailing environment and set appropriate goals.

  • Americans are take-charge aggressors. They want to control and lead everything.
  • Europeans are diplomats.  They build networks and exploit niches.
  • Chinese are manipulators.  They like to build relationships – often from a position of apparent weakness – and later shift the balance of power to their advantage.

American deal-makers in China like to start out from a position of strength, which some negotiators equate with power and toughness.  Their plan is to intimidate early and then become nicer and more cooperative later on, as a concession.  To Americans, the relationship is the reward.  Unfortunately, this often triggers aggressively competitive behavior from the Chinese side, since they interpret the initial American position (aggressive tough-guy) as a rejection of Chinese relationship-building overtures.  Even though the American plans on ending up with a cordial relationship, it can be hard to put this train back on track if there is a misunderstanding in the early days.

Europeans in China have the opposite problem.  Natural networkers, Europeans are quick to make concessions to build a connection. This pliability on key issues is often interpreted as a sign of weakness, and once the conceding begins it is difficult to put on the brakes.  Chinese negotiators may feel like they are driving the relationship and will become more competitive and demanding.  Europeans will do more deals, but at less advantageous terms than might be possible.

Europeans see themselves as occupying a position midway between Chinese guanxi-builders and American dominators, but Chinese see them as American-lite.  Europeans in China do build better networks, though, mainly because they plan for and invest in them as a matter of strategy.  They send younger people over for longer postings.  Americans would rather buy or bully than build, and tend to make up a plan as they go along.  They see themselves as nimble and resourceful, while the Chinese tend to see them as unprepared.

The key to successful Chinese negotiation is to start out cordial but non-committal.  As the Chinese say, it is best to have many girlfriends but no wife.  Americans tend to do the opposite. They like to talk tough and play hard-to-get during courtship, but beneath the surface are as monogamous as the Puritan stock from which they spring.  This gives them the worst of both worlds – putting them in a weak position with a monopolistic service provider.  Americans could learn from the Europeans, who try to put Chinese on their back foot by committing early to a relationship in principle, but being vague about timetables and promiscuous about relationships.

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By Andrew Hupert – January 5, 2012

Know Your Chinese Counterparty: Banquets and Baseline Behaviors

One set of New Year’s celebration is coming to a close, but for those of us involved in China business an even bigger celebration is fast approaching.  Chinese New Year is the central holiday on the Chinese calendar, and anyone meeting with Chinese suppliers, clients or partners had best prepare to “banquet up”.

One of the main functions of relationship-building activities like banquets and KTV evenings is for everyone to relax, get used to one another and establish an idea about what the other side’s real personality is like.   When your Chinese hosts are pouring drinks and making toasts, they are really checking out your strengths and weaknesses, your tendencies and quirks.  This is part of their due diligence – they are determining what kind of person you really are.  You should be doing the same thing.

The Chinese banquet is their turf and they are hosting.  You can tell a lot about their business tactics by the way they conduct themselves at a banquet.  If they load the table with chicken feet, sea cucumber, thousand year eggs, dancing shrimp, 3 squeaks (http://www.culinaryschools.org/blog/three-squeaks/ ), or other delicacies that Chinese know give westerners trouble, then you can surmise that they plan on pressing their advantage to the fullest every chance they get.  If your counterparts reserve a famous restaurant that serves fine traditional local food but they go easy on the booze and consult with you on menu items, then these are probably people who know what they are doing and are sincere about doing business with you.

Watch the order of the toasting.  The person who toasts first is probably a handler or a junior manager.  When there’s a lull in the conversation or an awkward patch, he’s going to smooth it over with a toast.  It is unlikely that he is the true decision-maker, though he is probably going to be an important contact and facilitator.   (Note on Chinese toasts:  Ganbei translates as “dry glass”, not “cheers”.  You are supposed to empty your glass – and everyone else at the table has to do the same.  Among old school Chinese, it is taken seriously.  Don’t say it if you don’t mean it, and pay attention when they do.  You don’t want to embarrass yourself by sipping when everyone else is draining their glasses.)

The big boss will toast you directly when he is comfortable.  He may go multiple times in fairly rapid succession.  His drink of choice is usually Moutai – a very expensive, super strong variety of white liquor, or baijiu.  To westerners it tastes like lighter fluid mixed with industrial solvent, but they are as attached and proud of it as you are to your Maker’s Mark or Johnny Walker.  Don’t disparage or insult it.  You will look bad if you don’t throw back a couple of shots with the boss.  Good-natured partners with international experience will laugh it off if you can’t stomach the stuff and allow you to substitute beer or even red wine.  The guys who get offended or force you to drink in spite of your objections might prove to be equally obstinate when it comes to business, so take note.   Also be aware that they are taking your measure the whole time.  Be friendly, polite and cheerful, no matter how difficult it may be.

Outside of Shanghai it is still considered absolutely hilarious to get the foreign guy completely smashed – and lots of people doing big business in Shanghai are from out of town.  It is all good-natured fun, and you don’t have to worry about embarrassing yourself or others.  (Alcohol poisoning, on the other hand, is a threat.)  They are consuming almost as much as you are, and everyone is expected to kick back and enjoy himself.  The point, however, is that although banquets and dinner parties are business events, they are probably not the place to fine-tune numbers, rates or contracts.  You can talk about deals in general terms – but bear in mind that things might start getting messy an hour or so into the party.  Aggressive partners have been known to hold foreigners to promises made under the influence, but that’s probably a good indicator that you should be finding other counterparties.

Non-smokers be warned.  You will be offered cigarettes.  This shouldn’t be a big problem in Shanghai anymore, but you’ll almost certainly run into this practice in the smaller cities – particularly west and north.  Turning down a smoke is an insult akin to refusing a toast.  As an ex-smoker who gets awful hangovers when I smoke and drink, I feel your pain – literally.  Here’s what you do:  Take the cigarette hold it up and say thanks, and then say “I’ll smoke it later”.  Put it down on the table in front of you or behind your ear “so you won’t forget to smoke it”.  That works about 35% of the time.  You may have to let the guy light it, and then you’ll pantomime smoking it for a few minutes until you can dispose of it.  The lesson here is twofold. 1) These are not sophisticated, international people, but you probably knew that already.  Experienced Chinese know not to force cigarettes on Westerners.  2)  If your host makes you do something you are clearly not comfortable doing – particularly if it happens several times – then this is a snapshot of his personality.  These folks are not going to be flexible or easy to work with in the future.

Women drink, especially in Beijing.  You can forget about lite beer or other girly drinks.  You are going to throw back Moutai, or whatever rocket fuel is the local choice.  Two pieces of advice.  First, don’t hesitate on the first round.  It will make you a target of convenience for the rest of the night.  Second, keep your empty glass close to you, or they will continually refill it.  Woman are often given the option of switching to beer or red wine (yes—you drink shots of red wine in China) later in the evening, but you should be prepared to drink at least a glass or two of the hard stuff.  You might be able to compromise with “yellow wine” (huang jiu) – a much milder form of local booze that is closer to saki.  Again, you will learn a lot about working with these people in the future by the tone they use when making you drink.  If they are easy going and polite at the banquet, they will probably be reasonable as partners.  If they are bullying and aggressive then there’s a good chance they will exploit their local advantage later as well.

A note about KTV’s.  In mainland China you may find yourself at fancy KTV after dinner.  Some of the new places in Shanghai are enormous palaces with doormen, lines of female greeters, fountains, statues and all manner of glitz.  You will be escorted into a private room that looks like it might have been decorated by Hugh Hefner himself.  Sit down and get comfortable.  A long, involved negotiation with a female manager-type will take place, but don’t worry – they are just arranging the drinks and food.  The next step is difficult for some. An attendant will take a perfectly innocent bottle of 12 year old Glen Fiddich and dump it into big pitcher with pints of sugary ice tea.  Try not to scream or whimper.  Trust me – it doesn’t go over well.

Now the girls enter the picture.  A line of 8 – 12 girls is brought in and you are expected to choose one.  For some westerners, this is awkward and uncomfortable.  For others, it is a dream come true.  They will usually give you (or the highest ranking member of your group) first choice.  Note that nothing sexual is going to happen in the room, and you don’t have to worry about committing adultery, contracting disease or waking up married.  (This applies to KTVs in Mainland China.  In Taiwan, they can be much more … interactive.)  At the end of the evening the girls will be tipped by either you or your host (I think around rmb 300 is normal).  That should be the only cash that changes hands within the confines of the establishment.   The only thing you have to worry about is the drinking games.  Be a good sport, but pace yourself.  It’s likely to be a long evening.

The main take-away is that Chinese business people use social events to vet potential partners, build relationships and perform due diligence.  Many westerners treat banquets as an awkward chore or an obstacle that must be overcome before business can start.  To the Chinese side, this is the business and the negotiation has already started.  Remember that they are checking you out, so conduct yourself accordingly.  Be open-minded, friendly and respectful – even though things may get a little whacky at times.  You should also take advantage of this opportunity to observe and evaluate your new partner, supplier or client.  You are getting a snapshot of their true personality, so don’t ignore your instincts or observations.

 

Xin nian kui le.  Happy New Year.

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By Andrew Hupert – January 3, 2012

Negotiation Conflict in China – Resolution or Dissolution?

Resolving Business Conflict – Chinese Style

This series of posts on Chinese negotiation conflict has taken care to avoid the word “resolution” , because more often than not Westerners and Chinese have a very different idea of what the word means.  Americans, with our bias towards justice and legal solutions, like to dig out the facts, determine who was at fault and resolve the situation with a settlement or penalty.  It’s all very public, final and transparent.   While American businessmen view a court of law as an arena where warriors slay or get slain, Chinese tend to see them more as sandboxes where spoiled children throw unseemly tantrums.

The Chinese idea of resolution is more quiet, subtle and passive.  Parties to a dispute are expected to move forward without complaint or fuss.  In many cases a third party exerts influence on one or both parties to the dispute.  Other times, the more powerful of the two will appeal, either directly or not, to the other side’s sense of pragmatism or self-interest.  Disputes are handled quietly, with an eye toward expedience and continuity.  The interests of the entire group outweigh the needs of a single participant, regardless of how worthy his claim might be.  Face must be protected at all times.  No blame is assigned, no penalties assessed – compensation will come in the form of favorable terms in a future transaction.  While the Chinese often refer to this mode of conflict resolution as “harmony”, to Americans it looks an awful lot like “surrender”.   In a business environment characterized by unwritten rules, conflicting regulations, nepotism, cronyism and corruption, the Chinese style of dispute resolution is seen as yet another example of inequitable treatment facing foreigners  – not part of a serious business solution.

The New Resolution

We can see the outlines of a new type of conflict resolution emerging between western and Chinese partners.  This is a hybrid approach to managing conflict that experienced negotiators from both Western and Chinese camps have naturally developed over times.  It serves the Western interest of insuring that the source of the dispute is identified, corrected and won’t repeat.  It also serves the Chinese notion of preserving face and strengthening the business relationship.

  • Problems get diagnosed without assignment of blame or fault.
  • Forward-looking solutions that balance out positions in subsequent transactions
  • Ongoing negotiation about new procedures and best practices
  • Increased communication and joint consultation about sensitive issues that are the source of conflict

Should you stay or should you go?

Some Westerners will deny that this approach to conflict resolution is feasible for their situation.  From their perspective, the Chinese partner may have no interest or plan to resolve the conflict at all, let alone equitably and fairly.  The underlying problem here is one of partner selection – not cross-culture conflict management.

When you are involved in business conflict in China, your only real choice is whether or not you continue this relationship.  If you have not laid down a solid foundation or one of the interested parties doesn’t trust the other, then there is really nothing to save.  This sounds simplistic, but all too many western negotiators continue dealing with Chinese counter-parties they don’t trust for far too long.  Maybe they feel that they can’t do any better or that they have no choice – maybe they think the situation will improve by itself over time.   But continuing to do business with a Chinese partner you don’t trust is lose-lose negotiation at its simplest.  In the West contracts, regulations and courts offer you a measure of protection.  The situation in China is improving, but the glue that binds commercial agreements is still personal relationships – not legal contracts.

Resolution vs. Satisfaction

One thing is certain – successful resolution to a Chinese conflict is rarely satisfying or dramatic.  You won’t get your money back.  You won’t get an apology.  No one will admit that they were wrong or that you were right.  The most you can hope for is that the wheels of commerce will turn a little more smoothly and a bit more on track.

In China, court cases and confrontation tend to yield pyrrhic victories – even if you win, it’s rarely worth it.  You might not care about quaint Chinese customs like face, harmony and guanxi – but your counter-party does.  No matter how difficult you found your Chinese partners before a shouting-match or court case, you can be sure that it will be much, much worse afterwards.  Make sure that you have solid alternatives in place before you try to “get satisfaction”  in a Chinese business dispute.  You will probably need it.

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By Andrew Hupert – November 10, 2011