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5 Lessons from the Danone-Mengniu deal

No retreat or surrender from the China market.  Bien joué, Danone!

Danone, the French dairy giant, is hoping that the third time is the charm as they re-enter the China market with some creative and well-considered partnerships. Its latest set of bold JVs with SOE giant COFCO – China’s largest food company –  and Mengniu Dairy  is a noteworthy  example of mutually beneficial deal structure built to leverage each partner’s unique competencies. Danone has made accessing the China market a strategic priority – especially as its European market base collapses. Mengniu is a leader in the Chinese market for milk, yoghurt and dairy products – but its reputation has been badly damaged by repeated scandals involving milk products tainted with melamine. The Danone-Mengniu deals reinforces the relative strength of each of its partners – both parties get to do what they are best at and create new value in a growing market.

Three-Way Deal Points

Danone’s immediate investment is for the equivalent of US $417 million into Mengniu’s main investor, COFCO. A new JV will be formed between COFCO and Danone, with the SOE taking a 51% majority position. The investment will take give Danone a 4.1% indirect stake in Mengniu and a seat on the board – with the possibility of enlarging the position to 10% in coming years. A second JV between Danone and Mengniu will focus on making and distributing chilled yoghurt products – and is expected to take 21% of the huge Chinese market for such drinks.

Third Time’s the Charm

Regular readers will know that Danone is one of the main cases from the Fragile Bridge  used to demonstrate what NOT to do in a Chinese business dispute. Their conflict and ultimate failure to maintain a 51% stake owned JV with Wahaha was a recipe for disaster – they owned too much equity in a powerful Chinese brand, didn’t control the IP, lost control of their own competitive advantage and most of all – picked the wrong partner. Wahaha, headed by Zong Qinghou, China’s richest individual, was too powerful, too independent – and in the end too capable to be satisfied with a minority stake in a Chinese business that it could run on its own. Danone dug its own grave and then executed terribly – ultimately beating a retreat after a bruising battle that reached to all the way to the top levels of Chinese and French governments.

Lessons from the DANONE – Mengniu Deal

This time Danone did a lot of things right. This is a deal that will be discussed for years, but right now there are 5 big takeaways of interest to international negotiators.

  1. Danone kept trying. China is strategic for Danone, and it is putting its money, its management and its reputation where its mouth is. The Danone-Wahaha battle was a bruiser, followed by another painful false start between Danone and Mengniu in 2007.
  2. They pursued different avenues with new partners. This is the 3rd try for Danone- they didn’t give up, and kept learning from its efforts, eventually completing this complex and far-reaching set of partnerships. This is a complex, non-traditional deal that involves multiple counterparties.
  3.  Good partner selection. Danone has found a good partner –or really, two partners. Mengniu’s largest stakeholder and its largest stakeholder, COFCO. For Danone, it is the best of both worlds – the SOE should help navigate the perilous waters of China bureaucracy, and the private Mengniu has distribution and brand recognition.
  4.  Each side is leveraging its strengths in a way that reinforces its competitive advantage. Danone is bringing to the table its expertise and reputation for food safety and cutting-edge manufacturing processes. Since the 2008 melamine scandal, Mengniu needs to protect its brand name and demonstrate that it is safe to eat. Since Danone’s presence is solving a branding problem for the local partner, it can’t be easily shouldered out of the way this time. The more successful the JV becomes, the stronger the Danone presence will be. Danone’s local partners won’t outgrow it as it did with the Wahaha deal.
  5. Danone went in smaller with established partners. In the Wahaha deal, Danone was the major shareholder and the main brand name. It created a stand-alone franchise that its locally connected partner found too good to resist. This time Danone is taking a smaller stake in existing brands (though it will be developing its own Bio and Dumex infant formula) and securing government backing early in the process.

Danone has achieved the kind of deal that MNCs should emulate when trying to exploit the China market – it is creating a JV where its position gets stronger as the brand succeeds. Both the partner and the regulator actually want to see Danone stick around.

In many ways, this is reminiscent of Disney’s deal to build a theme park in Shanghai with SOE partners. It is emblematic of a new breed of deal making in China – foreign firms taking a smaller piece where their value is unique, irreplaceable, and non-threatening. Disney and DreamWorks do creativity – Danone does food quality and safety. This comforts Chinese consumers (and regulators) without threatening their assumptions or bruising their egos. Ownership and customers both have good reasons to keep the western brand in the loop. The foreign presence is enhancing value – not claiming it.

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A Bibliography of recent reports:

August 2012
Great Moments in Chinese Conflict Management: The Danone Fail
Great moments in Western-Chinese conflict, from The Fragile Bridge – Conflict Management in Chinese Business:

http://www.chinesenegotiation.com/2012/08/great-moments-in-chinese-conflict-management-the-danone-fail/
Groupe Danone of France was a frontrunner in the race to win the China market, striking what it thought was a win-win deal with a well-known Chinese brand, Wahaha. The two companies formed the first of a series of JVs in 1996 using a fairly typical structure of those times that ultimately gave Danone fifty-one percent of the new firm – and rights to the Wahaha trademark – in exchange for an investment of $41 million. Or so the French dealmakers believed. In a move that now seems naïve, Danone maintained the partnership agreement even after Chinese regulators struck down the transfer of the trademark. Instead, the two firms made a private contractual agreement to transfer use of the Wahaha name to Danone – a deal that would later be found insufficient to protect the French group’s interests in China.

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Danone Official Press Release: May 21, 42013

http://media.corporate-ir.net/media_files/IROL/13/131801/Danone_COFCO_Mengniu_ENG.pdf
COFCO, Mengniu and Danone Join Forces to Accelerate the
Development of Fresh Dairy Products in China
COFCO, the State-owned largest food company in China, has signed an agreement with
Danone, pursuant to which the two parties will form a joint-venture. COFCO has agreed to sell 148,014,022 shares in China Mengniu (a Hong-Kong listed company) to the joint venture. COFCO and Danone will own 51% and 49% respectively in the newly formed company. After the transaction, COFCO will continue to be the single largest shareholder in Mengniu. Danone will become a strategic shareholder in Mengniu, owning an indirect interest of approximately 4% at the initial stage, with an aim to increase the interest in Mengniu based on market conditions in the future.
In addition, Danone and Mengniu today signed a framework agreement to establish a joint venture for the production and sales of chilled yogurt products in China, combining their respective assets in this category for a total 2012 pro-forma net sales of about 500 million euros, with an estimate market share around 21% and 13 factories across China. This joint venture will benefit from the complementarity of Danone and Mengniu brands. It will achieve synergies by introducing Danone’s undisputed worldwide expertise in quality and product innovation, while fully leveraging Mengniu’s leadership and distribution capability in China’s yogurt category. Danone will own 20% and Mengniu 80% of the new joint-venture in China. Danone will assign experienced senior executives to join the top management team, assisting Mengniu to further upgrade its management capability.

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Financial Times – 5/20/2013

Danone aims to end China struggles with Mengniu deal
By Leslie Hook in Beijing and Hugh Carnegy in Paris
http://www.ft.com/intl/cms/s/0/261d51ae-c13a-11e2-b93b-00144feab7de.html#axzz2Tqo9Cy00

Danone is hoping it will be third time lucky in China after the French food group said it would invest €325m in two joint ventures with Mengniu, one of the big Chinese producers tarnished by a 2008 scandal over contaminated baby formula.

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Reuters 5/20/2013

French food group Danone takes second chance with China Mengniu
http://www.reuters.com/article/2013/05/20/us-chinamengniu-danone-idUSBRE94J01920130520
(Reuters) – Danone Group (DANO.PA) has agreed to invest 325 million euros ($417 million) in two deals with China Mengniu Dairy Co Ltd (2319.HK), marking a comeback for the French group in China where scandals have hurt confidence in food safety.

French food group Danone takes stake in China Mengniu

http://www.scmp.com/business/companies/article/1241892/french-food-group-danone-takes-stake-china-mengniu

A Danone Group joint venture has agreed to take a stake worth about HK$3.6 billion in China Mengniu Dairy, marking a comeback for the French company in China where food scares have hit consumer confidence.
China Mengniu, one of the country’s largest dairy producers, also said on Monday it would set up an 80 per cent-owned joint venture with Danone to develop a chilled yoghurt product portfolio in China, Hong Kong and Macau

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Just-Food.com 5/20/2013

CHINA: Danone, China’s Mengniu try again with dairy JV
By Dean Best | 20 May 2013
http://www.just-food.com/news/danone-chinas-mengniu-try-again-with-dairy-jv_id123261.aspx

Danone and Chinese dairy Mengniu have announced plans to set up a dairy venture in China – five years after a similar agreement ended in just 12 months.
The French food giant today (20 May) announced two deals involving Mengniu.
One will see the two companies combine their yoghurt assets in China to form a venture that will produce and distribute products around the country. Danone will hold a 20% stake in this partnership, which will have 13 plants across China and, the French firm, claimed a market share of around 21%. Danone’s second agreement is with state-owned food group COFCO, the largest shareholder in Mengniu. The state-backed group has sold shares in Mengniu to the venture; COFCO will hold a 51% stake in the venture, with Danone owning the rest.
Through this agreement, Danone will become a shareholder in Mengniu, indirectly owning 4% in the company. Danone said it aimed to own more of the business “based on market conditions in the future”.
In 2007, Danone and Mengniu ended a venture in China that had seen the two companies produce and distribute fresh dairy products in the country. At the time, the companies said the business conditions for the venture had not been met.
Danone will invest around EUR325m (US$418.3m) as a result of the two agreements. Today, Danone chairman and CEO Frank Riboud said the new deals would help the Activia owner boost its presence in China. “Joining the strengths of Danone, COFCO and Mengniu will create the winning combination to unlock the potential of the fresh dairy products category in China. Backed by COFCO’s extensive expertise in the Chinese food industry and by Mengniu’s nation-wide leading platform in the Dairy sector, our brands will benefit from significantly wider reach to the largest number of Chinese consumers,” he said.

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By Andrew Hupert – May 21, 2013

Danone Tries Again to Milk China Market

From today’s Bloomberg: Danone Invests in Mengniu as Chinese Demand Food Safety

Danone (BN), owner of Activia yogurt and Evian water, will spend about 325 million euros ($417 million) to form a joint venture and invest in China’s biggest dairy producer to expand its brands in the most populous nation.

Danone will have an initial indirect interest of about 4 percent in China Mengniu Dairy Co. (2319), with the aim of increasing that in the future, the Paris-based company said in a statement today. It will also set up a venture with Mengniu for yogurt products in China. Mengniu shares surged the most in four years.

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An excerpt from The Fragile Bridge – Conflict Management in Chinese Business 

Great Moments in Chinese Conflict Management

Groupe Danone of France was a frontrunner in the race to win the China market, striking what it thought was a win-win deal with a well-known Chinese brand, Wahaha. The two companies formed the first of a series of JVs in 1996 using a fairly typical structure of those times that ultimately gave Danone fifty-one percent of the new firm – and rights to the Wahaha trademark – in exchange for an investment of $41 million. Or so the French dealmakers believed. In a move that now seems naïve, Danone maintained the partnership agreement even after Chinese regulators struck down the transfer of the trademark. Instead, the two firms made a private contractual agreement to transfer use of the Wahaha name to Danone – a deal that would later be found insufficient to protect the French group’s interests in China.

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By Andrew Hupert – May 20, 2013

Chinese Negotiating Styles – Avoiders. A Casual Friday Video

We continue with our Chinese Negotiating Styles series by taking a look at a common Chinese negotiating type — the Avoiders. Westerners doing business in China — or negotiating with Chinese counterparties in home markets — have to get used to avoiding behaviors and tactics. Americans tend to view avoiders as weak or ineffective negotiators — but Chinese businessmen are adept at using avoidance to win concessions.
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By Andrew Hupert – May 17, 2013

Chinese Negotiator Has a Split Personality

Are Chinese deal-makers patient & reserved or quick & direct?  Yes.

I spoke with two real estate professionals over the weekend in NYC in separate conversations about their recent experiences with mainland Chinese clients (both of whom turned out to be from Shanghai).  Their experiences were so different it was hard to believe the men in question came

Does your Chinese client plan on seeing you again?

Does your Chinese client plan on seeing you again?

from the same city.  Type 1 was the no-nonsense, bare-knuckled, “what’s your best price right now” street haggler.   Type 2 was the patient, reserved, “cards close to the vest” deep thinker.  Which one represents the true nature of Chinese negotiators?  Unfortunately for you, both do.  You may run into either deal-making personality, depending on their intent and situation.  The basic question that predicts which set of traits they’ll project:  Do they plan on seeing you again or not?

If a Chinese negotiator knows that he won’t ever have business dealings with you or anyone you know again, then he is as direct and mercenary as anyone you’ve ever met (even by NYC standards).  Chinese will tell you that this is the “modern, international Chinese”, but it is actually the continuation of the tough mercantile trader persona that has been around since Huangdi  bought his first training-sword.  Chinese are known as tough, abrupt, no nonsense traders.

If, on the other hand, he thinks there is a good chance that he will be doing business with you again in the future then he will run through his entire relationship-building repertoire, which involves all the cultural touchstones like face, harmony and guanxi.

What about our 2 NYC realtors who had such different experiences with two Mainlanders who, for all we know, were neighbors back home?   These variables probably influenced the behavior of the Chinese clients:

1. Buyer or seller.  If they are the ones paying, the Chinese tend to be slower and more reserved.  They are risk averse — not sensitive to opportunity cost or time.  If they are selling it is a different story – then they are much more sensitive to opportunity cost.  Remember – Chinese negotiators use relationship-building as a form of due diligence, so it is part of their risk-management strategy.

2.  Were you introduced by someone they respect?  This immediately bumps you up from the “transaction” category to the “relationship” category.  If you know the right people, you are now part of his network.

3.  Your perceived social status.  Chinese negotiators are very into status, so if you seem wealthy, have a prestigious address, a big office, live in the neighborhood and display other signs of status, you are more likely to get the “relationship” treatment.

4.  How useful do they think you are?  If they feel you have discretion or power over the deal, then it is worthwhile to build a relationship.  If you are simply a glorified salesclerk, then they will treat you as such.

5. Their power within the group.  If the Chinese are negotiating in a group, those at the very top and the very bottom are nice, patient and considerate.  The ones at the bottom have to be, the ones at the top can afford to be.  The ones in the middle are under pressure to show results, and they tend to be tougher and more direct.

Neither role is particular unique to the Chinese, and both have advantages and drawbacks as negotiators.  The no-nonsense take-it-or-leave it trader may be abrupt, but you’ll know where you stand and won’t waste time.  You just have to size him up and respond appropriately.  The slow relationship guy will find direct Q&A jarring, and you may scare him off.  You’ll have to invest more time and effort to make him comfortable before he makes a decision.

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By Andrew Hupert – May 14, 2013

Chinese Negotiating Styles – Accommodators. A Casual Friday Video

Accommodating or Yielding is an important Chinese negotiating style.

In China, displays of weakness are not predictors of negotiating failure. Quite the opposite. Americans and other Westerners negotiating business in China must take care when Chinese counter-parties seem to place themselves in subordinate positions. In China, weakness and vulnerability are not the same thing.

 

See the original 5 Styles of Chinese Negotiator video: http://youtu.be/jbrjhmGGB4k

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By Andrew Hupert – May 10, 2013

Foreign Ghost in the China Machine

Your Chinese partner wants to get rid of you and is willing to pay a high price to get you out.

Westerners who rely on Chinese self-interest to keep everyone honest and engaged in the joint business are undermining their own position in China. Your ideas about self-interest and “not bad-bffcutting off your nose to spite your face” don’t work in China. Chinese are selfish enough – but they have a different value system. Getting rid of you may be one of their top priorities – even if it seems to you that they are undermining the business.
Everyone in business is selfish and opportunistic, but not in the same way.
Principles of Chinese Selfishness:

  1. You’ll leave eventually. When the going gets tough, the foreigners always do. The Mongols did. The Europeans did (for a while). The Japanese did (and will again). Foreigners leave when the road gets rough – and Chinese partners are more than happy to navigate your JV onto the worst roads available to send the point home. 
  2. All you really have to offer are your clever little technology tricks, and they are a one-time competitive advantage.  Once the Chinese know 75% of your IP, they feel they can do better without you. Without them, you are expensive dead-weight.
  3. Their learning curve is much steeper than yours. They have been figuring out how to operate without you since the first meeting. Your priority during that time has been figuring out how to get them to do more. They can run your China operation better than you can. You still can’t tell a cab driver the address of your factory in Songjiang District of Shanghai.

Hold On to that Partner – China Style


What can an MNC or foreign partner do to keep the Chinese side loyal, engaged and pulling in the same direction? These ideas are all simple – but if you try putting them in place AFTER your existing partner or counterparty has peaked behind the curtain and seen that you are a mere mortal they won’t work.

1. Have more to offer. The Chinese side wants bigger, better and richer – and if you can’t offer it he’ll try for it on his own. Always have an option for making the Chinese partnership bigger. Expansion is a good place to start – domestic growth is OK, overseas is better. Better deal structures that see his payout rising as a percentage of revenue – not squeezing his margins just as the business grows. New markets, new technologies, new opportunities – you’ve got to make yourself look more valuable tomorrow than you were yesterday.

2. Do something they can’t do. Leverage your strengths where they are weak. Branding, new product development, and frequent product rollouts work. Look at successful brands like Apple, Burberry and GM. Their business model is based on a series of regular, highly anticipated new product developments – and they all have to work beautifully the first time. Chinese can be efficient or innovative – they have trouble doing both at the same time.

3. Ditch them first. Nothing makes a partner sexier than the threat of them leaving first. Start making plans to go WFOE as soon as you can. For most Western firms, this requires 2 ½ competencies: Distribution and HR are definite gets. Regulatory and bureaucratic facility might be required, depending on your situation. The less needy you seem, the hotter a partner you make.

4. Have multiple partners from day 1. Access your inner slut and put it out on the street early. Once you have a successful JV or WFOE, you start giving off Chinese pheromones that everyone wants to get with. Having 5 partners only seems like it would be 5 times the work. In fact, it’s only 4.5x as much work. But still. Play one off the other.

5. Do a PacMan. He’ll try to poach your best assets – technology, brand and business process. Identify and pursue his best assets – probably senior managers and connected networkers. Build up the HR and external network you need to work on your own. http://www.chinasolved.com/2013/02/11/china-management-competence-as-competitive-advantage/ Chinese partners who are arrogant and disloyal to you are probably no better to their own people.

Remember the ChinaSolved ABCs of working in China – Always Be Connecting.

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By Andrew Hupert – May 9, 2013

Self-Interest Won’t Keep Chinese Partners Honest.

Chinese negotiators have a different definition of selfishness, and you have to know it.

See saw - not balanced

Finding balance is harder than you think it should be

A recent post on ChinaSolved asked Western managers in China to answer a simple question – What is your Chinese Partner’s Plan B?  What are his alternatives to doing business without you? This is a key question for Western negotiators doing business in China, because there’s a good chance you are operating under a dangerous misconception.

Mutually Assured Business Destruction?
Many Westerners negotiating business deals in China erroneously believe that self-interest and that most blessed of all instincts – greed – will keep their Chinese partners engaged and relatively honest. After all, without me and my technology, assets, designs, marketing, brand…. (fill in unique competitive advantage here) the Chinese side would earn much less. “They need me at least as much as I need them…” are the famous last words in many US-China failures. The Chinese side may be working under a completely different set of assumptions, and what you consider to be universal values may in fact be quite variable. Case in point: They may consider getting rid of you to be an extremely important and valuable business objective – one that they are willing to pay a high price to realize.

Understand Chinese Negotiators’ Differences:
Forget the myth of common ground  . Smart negotiators in China focus on differences, and accept that their local counterparty’s values, orientations and priorities have very little in common with their own. Don’t assume that they will be satisfied with the same deal terms that would make you happy. Westerners sometimes think that they can secure cooperation and loyalty with carrot & stick tactics – enforcing contract terms with the promise of big rewards later. Back ended payouts don’t always work in China. The Chinese side has a different definition of self- interest and different priorities. They don’t necessarily care about cash – they may want something different, like technology, branding, product, or customer lists.

Different Destinations
You are all about the cash. They may not be. What are Chinese partners after?

  • Technology & IP
  • Product designs
  • Production process
  • Marketing techniques.
  • Overseas markets & clients

The problem is that you would be happy to share much of that in the normal course of business, and if they just cooperate as good, honest partners, they will meet their goals. But they see it differently. Why wait around and put up with you for 2 years (and bear the cost of lost opportunity) when it is much easier to drive you out of the market and still have 70% of your IP right away. Never estimate a Chinese partners’ self-confidence to backwards engineer and patch together work-arounds.

Different Routes
As far as they are concerned, the China market belongs to them. You think you are hiring them to manufacture, and you’re splitting profits on a distribution deal in the mainland market. They don’t see it that way. They helped you develop the product, and now you should go away and leave the local market to them. Government bureaucracy, corruption, convoluted distribution, regulations, insider advertising deals and distribution bottlenecks all support their efforts to get rid of you. You see these diseconomies as wasteful, unnecessary taxes on your resources. They see them as viable and sustainable competitive advantages.

Different Values
Getting rid of you may be a top priority and they may be willing to pay a high cost. There may be many complex cultural and sociological reasons for this – but you don’t care about any of them. The only thing that matters to you is the extent to which YOUR China business may be jeopardized by partners, staff, suppliers and distributors, and what you can do to safeguard your interests.

In our next post, we’ll talk about how to assess the situation, what you can do to align your Chinese partners’ interests with yours – and what to do if you can’t.

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By Andrew Hupert – May 7, 2013

The Chinapology — Casual Friday Video

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By Andrew Hupert – May 3, 2013

Chinese Business Negotiation – Guarding Your Virtue

Stop giving it away in China.

You’re the Cow.COW
Are you a withholding, passive-aggressive manipulator who makes promises he can’t or won’t keep? Well, maybe it is time to start – at least in China. No one buys the cow when they can get the milk for free. In China, technology, IP and business methodology is the milk of profitable transactions. If you’re giving it away too early or too cheaply, then you are the expensive cow no one buys. Sorry.

Good Will is not a Bank in China
Americans new to Chinese negotiation think that they can build up a bank of good will and trust by “front loading” their benefit package. Novices think that doing business in China is about having Chinese partners owe them favors. They are kidding themselves – and forcing conflict. If the Chinese side of the deal feels that it is ahead of the game, their best move is to terminate the partnership and lock in their gains – not wait around for you to collect on what you feel is owed to you.

American Intent
Win-Win type negotiators often feel that the best way to approach a negotiation is to demonstrate their good will, trust and value by “over-delivering”. They feel that if they provide the Chinese side with what it wants now (technology, brand, product designs), that the Chinese side will feel obligated to reciprocate later (distribution, execution, quality control). The western side has read up on guanxi and harmony, and believes that this is the way to develop loyalty and respect.

Chinese Reaction
The Chinese side may lock in gains by ditching you as soon as they are ahead. You see profitable transactions as the main goal, but your Chinese counter-party may care more about acquiring technology, designs and know-how so that he can operate independently. He’s willing to put up with you and cooperate as a means to an end. If you start off by satisfying his long-term goal, then you are simply shortening the life-cycle of a deal that was always supposed to end with you going home alone.

The Solution
Structure China deals so that you get what you need as they get what they want.  That means understanding the value of your skills and technology – and being able to articulate and measure what you want them to deliver. Don’t let them set the agenda or determine benchmarks.

5 Ways to Guard Your Assets in China:


1. Determine his real needs, and have a business response. Don’t project your desires on your Chinese partners. Find out what he really wants. Assume nothing. Your first job in mastering Chinese negotiation is to be able to acquire mission-critical information, and nothing is more critical than figuring out what his real goals are.

2. Know what you want. Profiting from your IP, technology, brand and other Western super-powers depends on two things – having something he wants and knowing what you want from him. Withholding is easy. Knowing what you want from him is tougher. Good negotiators in China are able to articulate a graduated list of goals and demands. Prepare for a “YES” when you negotiate.

3. Deal with the “exclusivity” dilemma. The Chinese side will generally angle for some form of exclusivity or guarantee that restricts your access to his competition. DON’T address this with vague promises you don’t plan on honoring!  Instead, ask for a specific plan for your future together – and negotiate the specifics of what he is offering. Your position on exclusivity – it is the product of a strong relationship, not the prerequisite.

4. Grow your deal – tap into his ambition. What does he really want? Chinese negotiators often ask for assets and technologies that they don’t really know what to do with, while ignoring variables that might really benefit them. Does he plan on expanding to western markets, developing his own brand or climbing the technology ladder? It might be possible to enlarge the scope of your proposed deal – and thus get more in return. But to do that, you may have to help him develop his own business plan – particularly if it involves international expansion.

5. Walk away smiling – if you have to. Some Chinese negotiators are too grabby for your own good. If all he cares about is your technology and your benefit is obviously a secondary consideration, you may have to withdraw and reassess. Don’t stick around hoping things will magically get better on their own. They won’t. If a China deal is going to die, than quick & clean is the best way. Don’t hang around to get abused and battered, praying that they’ll eventually see what a great partner you could be. Get the hell out of there now.

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By Andrew Hupert – May 2, 2013

Negotiating in China: Turning Gatekeepers into Messengers

Americans negotiating in China must understand the Chinese decision making process.

One of the difficulties negotiating Win-Win deals in China  is widespread usage of gate-keepers (assistants and other access-controllers) in Chinese business. Unlike their American counterparts, Chinese access-controllers often take on the appearance of important decision-makers, when in fact they are low-ranking functionaries. The American gatekeeper says, “He’s unavailable, would you like to leave a message?” In China, you are more likely to hear, “he’s leaving the country on business tomorrow and you need to send a detailed proposal including technical specs on your product or service by noon.”

Messenger boy graphic

Chinese gate-keepers: Messengers in disguise

Gatekeeper as messenger

The trick to handling gatekeepers in China is to understand that they are one-way, one-time messengers directly to your decision-makers office – and treat them that way. You can’t and should not negotiate with a gatekeeper – but you needn’t obey him either. He wants a proposal that, according to him, will go right to the top people. Treat this for what it is – a one shot delivery system. Craft your message accordingly.

Gatekeepers as information sources

The Chinese gatekeeper says a lot about the organization, decision-making structure and boss that he is working for – you just have to know what to look for. 
Is he treating his boss with imperial deference? You’ll be expected to do the same. Is he hostile or condescending to foreigners? That probably means his boss is too. Is he an informed, helpful, professional facilitator with the authority to begin and maintain a business relationship? That indicates his organization may make a good partner.
Most of all, the gatekeeper will tell you exactly what the company wants from you – he just wants it the next day, for free.

How can WE handle this?

In many cases, the gatekeeper is a frustrated, neglected, disrespected poor wretch, toiling away in obscurity in the shallow end of the bureaucratic pool. A little attention may go far. “I need your advice – how have past Western suppliers / partners handled this?”  ”How does your boss like to see information – tech specs, financials data or detailed explanation?”   “What kind of proposals has he been happy with before?”   “What would you do if you were part of our team?”

Dealing with gate-keepers

  1. Identify what they want. HINT: It’s probably not a transaction. Chinese gatekeepers are notorious for acquiring IP, plans and big-picture technical data. This can work for you or against you.
  2. Control the content of your proposal or message. Figure that whatever information you provide will be lost and used against you. If it’s advertising or a semi-public whitepaper – no problem. If it’s highly sensitive or proprietary data, then that is a problem.
  3. Information is a two-way street. Talk about “WE” a lot, and find out what others have done right in the past. Play on his desires to do a good job. “I don’t want to waste your boss’ time…”, “I consider this a tremendous opportunity and I’m nervous about making a mistake…” Let him fill in the blanks on who makes the decisions, what their criteria will be. Try your best to get names and titles. If you can get him talking about the decision-making process, that’s a win.
  4. Don’t invest anything you aren’t afraid of losing – and that includes TIME. Gatekeepers are a direct, one-way conduit to the real decision-maker, and should be treated as such. Service providers in China have learned not to spend the time crafting detailed proposals – even outlines. Most of the consultants I know have a two page introduction prepared that they customize for prospects in China. Don’t outline projects, provide timetables or analyze problems for free. Local service providers (probably related to the boss in some way) will get the actual contract based on your assessment.
  5. Know your limits – and know when to walk away. If the gatekeeper was sent to steal information then this is never going to turn into a deal. Sometimes the most important piece of information is that the negotiation is not worth the time or effort.

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By Andrew Hupert – April 29, 2013