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The Whirlpool of US-China Conflict. Part 1: The Drivers

US-China relations are clearly spiraling downward, and the ramifications for business negotiations are dire. Only a year ago the international community had reason to hope that a new US administration and a successful Chinese leadership could cooperate to lead the world out of economic crisis and environmental ruin. Now the only example of the US and China pulling together is our joint commitment to paddle directly into the whirlpool of an acrimonious trade dispute. The recent tit-for-tat blows over Taiwan and Iran are merely the latest manifestations of a competition that began in 2008 – and they are unlikely to be the last.

Two issues are undermining international cooperation. The first is that the US and China are at variance over the benefits of cooperation vs. competition. The second is that the two actors are working off a faulty stakeholder analysis – leading to misinterpretation of how the other side values the variables on the table.

Cooperation vs. Competition: An extended Prisoner’s Dilemma scenario:

Work I’ve done with US & Chinese negotiators in a prisoner’s dilemma-type scenario does not give cause for optimism. China-US negotiation is often characterized by relatively simple, naïve initial deal-making (usually based on incomplete or erroneous information) followed by increasingly uncooperative, competitive, often hostile disagreement.

Cooperation requires a ‘growing pie’ of benefits
For US & Chinese counter-parties to achieve stable cooperation in a Prisoners Dilemma type arrangement, 2 conditions must exist.

    1. Both sides must believe that steady-state cooperation will enhance their long term benefit over multiple iterations compared with short-term competitive behavior.
    2. The global payout must be rising over the course of the arrangement. In other words, for cooperation to be stable the ‘economic pie’ must be growing. Faced with a stable payout (a zero-sum game) the default behavior seems to be competition over cooperation.

Modern Chinese negotiators tend to believe that their BATNA (Best Alternative to No Agreement – otherwise known as ‘Bottom Line’) is enhanced by a constant stream of new counter-parties or options. American negotiators operating in mature economies tend to view stable-growth scenarios as sufficient to maintain cooperative negotiating relationships. Combined with lower penalties for breaking contracts in China than in the US, the result is that Chinese negotiators tend to be quicker to switch from cooperators to competitors than their American counterparts.

Stakeholder analysis & relative valuation of variables.
The second oar propelling us towards the whirlpool of acrimonious trade war is improper stakeholder analysis performed by both sides. Because US and Chinese actors seem to be working with a simplistic, incomplete view of their counterparty’s priorities and interests, each side made gross errors in estimating how the other side valued variables. In other words, US negotiators didn’t know what was important to Chinese counter-parties and Chinese negotiators didn’t know what was important to the US. This has driven China’s negotiation position to shift from relatively cooperative to extremely competitive over the last 2 years.

In many ways, our present problems started in 2008 when an uprising in Tibet turned violent. America and the West seemed not only sympathetic – but were perceived by China to be taking an active role in spreading false rumors and images about the cause and nature of the protests. A similar scenario played out in the summer of 2009 when violence broke out in Xinjiang – and anti-Beijing photos & clips (some of which were admittedly of a highly suspicious nature) started showing up on social media networks and YouTube.

These incidents were perceived as relatively minor or ‘business-as-usual’ in the West – especially since demonstrations and public criticism of US policy were commonplace in the waning days of the Bush administration. To Western negotiators, public reaction to mild street violence on the other side of the world simply wasn’t that big a deal. To Chinese decision-makers, however, these uprisings were considered to be major threats to their core values – the legitimacy of the CCP. In Beijing, US commentators and social networks siding with the protesters was likely perceived in much the same way that Washington policy makers would react to a string of Xinhua editorials cheering on Al Qaeda and the Taliban. It not only undermined trust and cooperation – but also empowered right-wing conservatives who felt that China had opened to far too fast.

The economic crisis in the West further undermined US-Chinese cooperation. In March 2009 Wen Jiabao sealed China’s competitive position in a speech at the CCP conference bluntly attacking the US currency and economic policy. This was an unusually unambiguous signal that China was taking a competitive tack in US-Sino relations.

This makes sense from China’s perspective – at least in the short term – since a crippled US economy meant that there was now a much smaller pie to divide. The system-wide payout was dropping just as China’s contribution to the global economy was rising in both relative and absolute terms. China simply had less to gain from cooperating with the West – and shifted to a competitive mode.

The Way Forward
Unfortunately, once a multiple-iteration negotiation (same 2 negotiators, many different negotiations over time) turns competitive it is very hard to break the cycle. Trade hawks on both sides are empowered and there seems to be little benefit for either Beijing or Washington to make the first move. If the US economy recovers or the Chinese economy stumbles, it will only reinforce the competitive mindset. Bluster about Iran sanctions or Taiwan arms sales might be just the beginning. Each new trade sanction or public dispute will reinforce the competitive environment and make it harder to break the cycle of conflict.

Next: The Whirlpool in your shop – how to negotiate under adverse US-China conditions.

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By Follow on Twitter: Chinasolved – February 2, 2010

Google-China as a case in Lose-Lose Negotiation

Everyone thinks that they know what Win-Win negotiating is, but what about Lose-Lose? Simply stated, it’s when both parties leave the negotiation worse-off then they entered.

There are two general categories of Lose-Lose negotiations:

The first is when a negotiation goes bad, and both sides lose time, money, assets or resources as a result. This what management students refer to as a ‘hygiene’ issue because unlike a ‘structural’ issue, the result is due to poor execution, bad planning or some other form of incompetence. If one or both sides were better at carrying out their own strategy, the result would not be lose-lose. Lots of US-China JVs end up this way.

The other type of Lose-Lose negotiation is structural. Due to environmental or external reasons there is certainly going to be a loss. The rational goal of this kind of lose-lose is to minimize the downside – either cooperatively or competitively. Think of a bankruptcy or divorce as an example of lose-lose.

So what do we have in the Google-China case?

3 Factors control this negotiation.

    1) Business interests
    2) Censorship
    3) Hacking

The hacking issue was actually the most significant – though it seems to be hazy and irrelevant to Google’s ongoing business. If the Chinese government is indeed, behind the hacking of Google’s servers then the company probably had no choice but to force the issue when it did – and had good reasons for doing it the way they did.

The Hack
If a bunch of 15 year-old script mutants from Estonia hack into AutoPartsWorld.xyz, then the site owner has the option of forgetting about it. But if an unnamed foreign entity (i.e. China) conducts a concerted quasi-military attack on Google and the company not only learns about it but also discovers that A) sensitive companies involved in US infrastructure and defense industries were also hit and B) its own employees may have been involved, then the company has severely limited options. If Google knew about this and said nothing to anyone then the best it could have hoped for was a PR nightmare – and it sounds like it might be edging towards treason (or at least prolonged GlennBeckian rants and special Congressional hearings) in a worst-case scenario. Sure, it could have handled it more discretely – but then there was the possibility of losing control of the message (when someone in the company or either government reveal it at a time of their choosing or through a blunder) and looking, well, EVIL when the pattern became apparent.

Only a handful of people know for sure the actual extent of the hacking and who was behind it – but the facts as presented would make ‘business as usual’ impossible for a responsible management. After 4 years doing business in China, Google couldn’t claim it didn’t know what the downside of this kind of hacking might have been. This is their business.

The Business Interest
There are some very good reasons for Google to take the position it did. No – the problem wasn’t that Google was failing in China. It was doing fine – and the most recent stats indicate that Google was actually making significant gains in the last few months. With China cracking down on piracy and IP violations, the industry was moving in Google’s direction (since Baidu still gets lots of its search traffic from MP3 downloaders). The business issue has to do with WHEN to force a confrontation, not WHETHER to do it. If the hacking was real, then it was in Google’s favor to have the negotiation earlier rather than later; louder rather than quieter. There are lots of people shouting that Google didn’t understand China’s culture. Well, I can’t speak for Brin, Page or Schmidt, but I like to think that I do understand a little about China’s negotiating culture. Handling this according to Chinese convention would have been an unmitigated disaster for the company. By going public and presenting its case in the court of public opinion, Google can balance its losses in China with gains elsewhere. If the company had conducted quiet, behind-the-scenes negotiations with Chinese bureaucrats it would be bargaining away all its advantages before the first meeting even started with little hope of improving its position either in China or globally. Deservedly or not, Google has managed to turn 180 degrees and go from being seen as a co-conspirator with a human rights violator to being the champion of justice and freedom. At the time of this writing, Google is still up and running on both the .COM and the .CN sites so the company hasn’t given up anything. Google’s harshest critics are saying that it should have happened sooner.

Censorship.
Although the loudest of the three arguments, this was probably the least important. Freedom of information flows is Google’s stock in trade – and it routinely makes arrangements that limit those flows under certain conditions and in certain places. If it can marry a stronger anti-censorship image to its brand name, then The Goog is in a much stronger position to defend its de-facto position as ‘repository of all human knowledge’ from nervous Western authorities. The censorship position makes a great bargaining chip. If Google and China do want to arrive at a face-saving decision, then this is the only option on the table that makes any sense at all. Google.CN is the variable in play. If Google decides to give something up to appease Beijing, they can jettison or alter the CN site. Likewise if Beijing wants to let the Goog look like it won something (as unlikely that may seem right now) then the two can issue joint press release that the new and improved Google.CN will be freer and opener in some way.

Once Google discovered the hack it had no option other than to engage in a loss-minimization strategy. The discovery was a game-changer that significantly constrained Google’s negotiation options. It’s BATNA plummeted, and the only rational course of action was to negotiate to limit its losses and counter-balance with new gains elsewhere.

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By Follow on Twitter: Chinasolved – January 25, 2010

A Stakeholder Analysis of Chinese Negotiation

Americans of a certain age still default to a negotiating model based on shareholder analysis. We like to know who the owner is. For us, the power structure of our counter-party is defined with a simple phrase: “Follow the money”.

Younger MBAs, Europeans and Asians prefer a stakeholder perspective. Stakeholders include everyone and anyone who can affect a decision – or be affected by it. It’s softer, messier, and much, much more complex.

In Chinese deal-making following the money just won’t work. Too much is hidden, unspoken, contextual and driven by non-economic factors. In many cases, you’ll never see the money trail because it may be irrelevant, hidden, non-existent – or may start AFTER you have transferred your funds. If you plan on negotiating successfully in China, you’d best start mastering the messy art of stakeholder analysis.

A stakeholder model is more applicable in China than in the US, but some American’s are still blundering around vainly searching for the key decision maker. In China dense, opaque organizational structures have evolved to make sure that this kind of tactic is unsuccessful. Overly aggressive Americans often find themselves negotiating with people claiming to be the true decision-maker – while the real power is hidden far away.

Mapping Chinese Stakeholders
A simple but powerful mapping technique for understanding stakeholder influence in Chinese negotiation is to set POWER along a horizontal X axis and ENGAGEMENT along the vertical Y axis. This is particularly useful in China, where your counter-parties may intentionally obscure or misrepresent the decision-making process.

Power is simple enough. In a deal-making context, half the ‘power’ story can be understood as the ability to make things happen. In a highly bureaucratic environment like China, regulatory approval often translates into power. The central bureaucracy is the stakeholder of last resort, and very little of significance can occur without the government’s knowledge and approval.

The power of negative thinking.
In China, the other side of the coin is Negative Power – the ability to STOP things from happening. Often the most potent negotiators are the ones that have the power to block, slow or alter the course of regulatory approval. Chinese negotiations are characterized by AVOIDANCE tactics to a degree unmatched in the US. Saying YES is often far more politically sensitive and riskier than saying NOT At This Time. The more frustrated you become with the delays, the more reluctant the counter-party is to take on the risk of approving your request.

Engagement is a big deal in China.
Often overlooked by American negotiators in China, discovering the true decision makers – and then getting them to participate in the process – is a huge challenge. If you are dealing with a purely commercial counter-party and negotiating about standard deal-terms like price, timetables and quality, you may find that you are only addressing half of the real issue. American negotiators in China have to devote time, energy and bandwidth to uncover the entire deal-making process and identify all of the stakeholders who need to buy in. If you are ignoring the bureaucracy until the last minute, you will find that your position is incredibly weak in the second, REAL negotiation.

3 Classes of Stakeholders in China.

Government bureaucracy.
This is the stakeholder of last resort. They are always there but rarely visible.

In general, the bureaucracy occupies the High-Power, Low-Engagement quadrant. Chinese bureaucrats are Avoiders
simply because so much of the power structure is stacked in their favor that they have very little to gain from direct involvement. One of the toughest negotiations in China is just identifying who the real decision makers are and how you can exert influence.

Bureaucratic avoidance is as potent as it is unfamiliar to most Americans who are accustomed to head-on horse-trade type negotiations. Pressure tactics are almost always counter-productive with Chinese bureaucrats. This is why so many Americans end up with signed contracts that can’t be executed – or worse, are executed poorly or partially.

Bureaucrats tend to avoid direct negotiation with foreigners. You’ll see these guys in their office or ministry, and the conversation is largely confined to paperwork and red tape. All of the high level wheeling-dealing takes place somewhere else – with someone else. Unless your Mandarin is excellent and you have already built up a great deal of credibility with the government, you probably won’t ever meet with one of these people on your own. You may however find yourself in a banquet or board room situation, but all of the serious stuff will happen in much more discreet settings. To negotiate with the Chinese bureaucracy, you will need someone with the right connections.

Connectors-
The second class of Chinese stakeholder includes consultants, partners, suppliers or service providers who negotiate on your behalf with the bureaucracy. Sometimes you hire these people directly and sometimes they are your counter-party who is responsible for regulatory approval.

These guys are highly engaged — in many cases they are actively looking for you. What you have to determine is A) their true level of power and B) whether they are a positive or negative force for you.

Connectors manage the relationship with the bureaucracy — and they almost always do a much better job than you could. The good news is that the right partner or agent can easily accomplish things that you never could. The bad news is that they’ve attained and maintained these relationships due to their utility to bureaucrats — not to the client. Often their real negotiation centers on strengthening their relationship with important officials – using your resources as currency.

Remember – in China many officials are given quotas and policy goals that run counter to your own. Many of those Westerner’s who lost their shirts in China due to misunderstandings, regulatory delays or failed approvals were really just cases of unsuspecting westerners trusting the wrong partner and ending up someone else’s guanxi payment.

Outsiders.
Foreigners, technical experts and multinationals make up this group. Highly engaged but usually fairly low power. The good news is that they can’t make bad things happen. The bad news is that they can’t make good things happen — except for special situations. Those situations include goal-setting, research, knowledge, staffing and due diligence — so this crew has definite uses. These guys are reliable in terms of safeguarding your IP and will have the most usable analysis of Chinese economic & market conditions. Their utility is that the bureaucracy has relatively little influence over them, so they will be loyal to your interests. Good for knowledge, niches and specific transactions, these outsiders rarely have the ability to complete a deal cycle.

Outside experts are most useful early in the process before you have made the catastrophic mistakes that are so common to this region.

Know what you need and who can deliver.
You’ll probably have to deal with all three in one form or another. Just makes sure that you know who is who. The bureaucrats are easiest to spot — they are unambiguously official. Connectors bridge the divide between you and the bureaucracy – but you have to have very clear goals and understand the lay of the land to make the right choices and ask for the right variables at the right price. Your process should begin with honest, competent research, planning and selection of the right connectors & counter-parties – which almost always requires a reliable outsider.

The danger for Westerners is in trusting a connector who is working against your interests. This is a leading cause of problems in China – and the best preventative is to locate loyal outsiders who can help you set appropriate goals and know how to perform due-diligence on the agents and counter-parties you will need to be successful in China. Many Americans in China end up relying on their highly competitive supplier or partner to negotiate on their behalf with the bureaucracy. It’s a huge mistake.

Outside consultants first, then motivated connectors and finally the bureaucrats. If you can find the right people in the right sequence, then you might stand a chance of negotiating successful in China.

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By Follow on Twitter: Chinasolved – January 18, 2010

The New Chinese Negotiator: From Harmony to Our Money (Part 2). Dealing With It.

Dealing with the new Chinese negotiator.

If you’ve been making deals in China for a year or so, you may feel that the mood is getting frosty and a bit tense. Those that have been in the game a little longer should be familiar with the attitude since it is a return to the ‘old days’ of the mid-90s when international business in China was more exception than rule. Beijing was extremely accommodating to both domestic entrepreneurs and foreign friends for most of the last decade, but now the policy people seem to have declared victory and moved on.

China Inc is maturing and the time has come to put away childish things and start getting down to real business of wielding the Mandate of Heaven. It is time for the foreign friends to either play quietly or go home.

Negotiation in China has always been adversarial – but now at least we can stop pretending in all that ‘everybody love everybody’ nonsense. Here are 10 rules for doing deals in New China.

    1. This may not get better soon.
    Cordial relations between China and the West is a fairly recent construct. Many tried to convince themselves that friendly cooperation & win-win business was the status quo for China deal-making, but it is simply not historically accurate. You may want to get along with everyone but US-China rivalry is written in the DNA of both governments. Look for both sides to slide into old patterns of zero-sum competition.

    2. Know your counter-party.
    The guy your are dealing with either represents the bureaucracy, an SOE or a private business – but they are all working off the same playbook. Every local is following both the stated and unstated policy directed by Beijing. This is trickle-down cuthroat competition, and you should beware of ‘good-cop’ partners who offer to manage the pesky bureaucrats for you.

    Most negotiating problems of the past were a result of misunderstanding, incompetence or flat-out dishonesty. Those are walks in the park compared to ideological disputes. If you have been working with a local partner, agent or service provider who has been talking up his powerful connections and guanxi with officialdom, you have to understand that those are the relationships he will work to preserve– not the short-term commercial relationship he has with you.

    3. Every Chinese deal has 2 negotiations.
    You negotiate twice in China – once to get the deal and once to do the business. If you are not budgeting time and resources for the second negotiation, then you are committing a serious tactical blunder.

    4. Double standards and unequal treatment are institutionalized.
    Obama sees Dolly – and suddenly your regulatory and bureaucratic procedures become more of a hassle. The rule of law never really caught on in China, and we may have already passed the high-water mark for equitable treatment of WOFEs and FIEs. Compliance with regulations and loose timetables aren’t just best practice in China anymore – they are immutable laws of nature. Plan on competing with locals who have much lower hurdles to cross.

    5. Staff up and pay up.
    Buy friends to influence people. That means having a lawyer, an accountant, and access to knowledgeable consultants who are answerable to you and you alone. I love “Mr. China” type stories about smart guys learning the hard way, but they are anachronisms. The cost of failure is rising rapidly. I know that no one likes to pay for professional advice, but the ground is shifting. Local counter-parties and suppliers are no longer valid sources of information (if they ever were). Make sure you have access to reliable, timely information. If that means spending money, time or bandwidth, then budget for it.
    Oh yeah — more bad news. Paying for expert advice is only the beginning. Then you have to actually follow it.

    6. Lock in gains.
    The relationships you have are the relationships you want to keep. The Chinese are serious about the value of relationships – but that cuts both ways. Yes, the people you’ve known and worked with for years will be loyal to you (maybe). Building new relationships, however, will be much harder in this environment. Vet new partners and suppliers carefully, and make sure that you are worthy of any trust and loyalty you’ve built up with locals over the last few years.

    7. Have a plan B
    You need an alternative course of action that doesn’t have the same risk profile as your main game. That might mean structuring your China operation differently — or maybe creating a scenario that doesn’t include China at all. Ask yourself a simple question – what if you and/or your key people can’t get a visa to enter China? Is it an inconvenience or a train wreck?

    8. How much China do you want?
    We used to ask, “How much do you need to be in China?” Now we’ll be asking, “How much China do you need to be in?” The days of growing an “organic” (i.e.: unplanned, seat-of-your-pants) China organization are over. China is now too expensive, competitive and risky to fly blind. How much money, personnel and bandwidth do you plan on investing, and what do you plan on getting in return? If you can’t answer those questions then you haven’t planned enough.

    9. Stop reinventing the wheel.
    Look for people you know who have already done this (i.e.: other expats) to partner with or hire as management consultants. An ideal partner is someone with a good reputation, a similar or complementary business, and has been through all the regulatory and licensing procedures. This can be a great way for newcomers and expanders to get exposure to China without taking on too much risk.

    10. You only get to play hardball once in China.
    Chinese negotiators tend to be passive-aggressive and are highly sensitive to perceived slights and insults. Two Americans can curse each others’ mothers in the heat of negotiations and still end up lifelong buddies and partners. This isn’t going to happen in China. If you feel that you have no choice but to issue an ultimatum or lay down the law, make sure it’s worth it. You may just trash your relationship – even if you were right about the facts.

China is becoming less cheap, more risky and decidedly less friendly. That’s not to say that business can’t be done or that you can’t make friends and have a wonderful life in China. But if the US and China slide into a trade war there is no neutrality.

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By Follow on Twitter: Chinasolved – January 12, 2010

The New Chinese Negotiator: From Harmony to Our Money (Part 1)

China’s international negotiating style has been changing over the last 2 years, and those of us with commercial interests here have already glimpsed what the future will bring. China’s fortunes have been rising just the West’s have been falling – and in the new decade we will confront a more confident, assertive and monolithic China.

When it comes to China’s negotiating style, what’s new is what’s old. In many ways Chinese negotiating is shifting back to a more traditional style where the power of the state is paramount and the main job of rulers is to defend Chinese territory (be it physical, financial or symbolic) & keep the barbarians outside the gate. There is a new feeling in China – not isolated to Beijing – that the Deng Xiaoping’s grand experiment has accomplished its mission. International cooperation has served its purpose – now Beijing can get back to business as usual. Policymakers seem to believe that multinationals and local entrepreneurs were important steps in China’s development, but now they have outlived their usefulness. What’s good for the Party is good for China, and vice versa.

Look for 5 big trends to characterize Chinese negotiation in the coming decade. Most are already evident on the national stage, but dealmakers at every level will quickly find that Beijing sets the tone for the rest of the country.

    1. China steps up to superpower status.
    We’ve been tiptoeing around this for years, but Wen Jiabao’s Copenhagen gambit seems to confirm that Beijing is through playing coy about its status in the world. For years local Chinese would feign astonishment when asked if the PRC counted as a Super – hemming & hawing awkwardly before finally admitting to being “important economically – but certainly not a military or political force in the world”. But while an emergent 1960s USSR blustered and threatened, rising China will initially take a softer, more passive-aggressive approach. Khrushchev banged on a table with his shoe – Wen Jiabao convened a press conference to publicly worry about the integrity of US Treasury Bonds.

    2. Head-to-head, zero-sum competition with the US
    China’s default negotiation position is zero-sum game/ competitive – and there doesn’t seem to be a crisis big enough to get the US and China pulling in the same direction. In the last 2 years we’ve witnessed a financial crisis, a climate showdown, terrorist threats and the emergence of rogue nuclear states – and in each instance China and the US have been at odds with one another. If the two can’t agree on the scary but simple stuff (nuclear Iran, reduction of greenhouse gases, a functioning global banking system) then it seems unlikely that we’ll find a way to cooperate on more complex issues that don’t threaten the survival of humanity. China is reverting to the pre-Deng doctrine that what is bad for America is good for China – and vice versa. Look for China to continue to find opportunities in American & Western challenges.

    3. State-control of all negotiation agendas
    Not long ago, Western pundits were positing a China where entrepreneurs and an emerging middle class would exert greater influence on the CCP and bring about a kinder, gentler PRC. Well, just the opposite is occurring. The party has co-opted (or arrested) successful entrepreneurs and glamoured the urban middle class to the point where there is only one voice in China – the official one. Xinhua has done a phenomenal job of taking charge of the internet and the rest of the media, expertly using 21st Century technology to deliver an old Imperial message – that the fortunes of the Chinese people and the Chinese leadership are as one. In the last few years Beijing has learned that the party need not own the means of production to control them. State Owned Enterprises are a burden, but policy directed enterprises are the assets that keep on giving. Scratch a private Chinese business and you’ll find a policy-driven organ of the bureaucracy

    4. RMB hegemony – from Harmony to Our Money
    Beijing goes out of its way to promise that it will never resort to the sort of brutal hegemony practices by Western colonial powers – at every Chinese military parade and naval exercise. But it’s not the gunboats – or even the cyber-squads – that should raise alarms. The new projection of Chinese power will be infrastructure projects and commercial deals. China’s foreign policy is driven by a need for raw materials, and it isn’t squeamish about who it has to get in bed with to obtain them. Sudan, Iran, Sri Lanka, Afghanistan and Myanmar/Burma are just a few of China’s most favored nations, and for now Chinese policymakers don’t see a downside to enriching warlords, dictators and tyrants. China favors a dual purpose string-of-pearls approach that is already well developed – and expanding steadily.

    5) Its not about the economy, stupid.
    Non-economic considerations drive Chinese organizations, as long-term policy concerns ace short-term profit/loss decision. For years Western dealmakers were driven to distraction by Chinese counter-parties that seemed blind to their own self-interest. It’s not that the Chinese side was dim or daft – rather they were driven by non-economic factors like policy, bureaucracy, relationship, technology and access to intellectual property. For a while it seemed that all of those returning MBAs and MNC-trained local managers would influence Chinese negotiating practices and usher in a more ‘rational’ decision-making process. Beijing’s stimulus program, however, has once again made central policy the 600 pound panda in the room. This is why the rationalistic arguments about the RMB-USD exchange rate eventually conforming to market forces at best unrealistic – and at worst, completely irrelevant.

What does all of this mean to US negotiators in China? The bad news is that Beijing sets the tone – and in many cases the substance – for Chinese dealmakers all the way down the line. The good news is that now you know the bad news (as is often the case in China).

Next – Surviving the New China Negotiation

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By Follow on Twitter: Chinasolved – January 5, 2010

Know Your Counter-party: The Chinese Bureaucrat

Don’t assume that all Chinese counter-parties negotiate the same way. Americans in China have a tendency to seek out primary decision-makers at private Chinese firms – but current trends favor Chinese entities that are either state owned or heavily influenced by government policy. A Chinese firm’s parentage or ownership structure isn’t as readily apparent as it once was, but if you have reason to believe that your counter-party is following an official state agenda then you have to adjust your negotiating approach.

What is the profile of a bureaucrat-negotiator in China?

    Adversarial, Win-Lose & Competitive
    Bureaucratic negotiators in China take their cues from pre-reform managers who operated in an environment of shortage and opacity. Expect your official relationship to be a bit more adversarial and competitive than your dealings with pure-private Chinese firms. These are zero-sum-gamers – any gain of yours is perceived as a loss to them. They tend to be more suspicious and nationalistic than sole-owners, and will end up following the official agenda very closely. These negotiators firmly believe that the balance of power favors them – so don’t be surprised if they negotiate “down” to you. No matter what the title on their business-card, you can expect SOE or bureaucratic Chinese negotiators to behave like executives at a monopoly – representatives of a powerful firm who are carrying out the goals and strategies of a committee.

    Adjust your variables
    Time has less value to Chinese bureaucrats than it does to private negotiators. Information has more – and they will tend to play their cards very close to their vest. Chinese bureaucratic negotiators view ‘relationship’ as both a negotiating tool and a bargaining point. This is the kind of counter-party that expects to be banqueted and entertained. The key here is that he believes you are scoring points when he agrees to your invitations, so behave accordingly. His attitude is that by allowing you to develop a relationship he is making a concession.

    Goals are not flexible
    Their goals have been developed somewhere higher up the ladder, so you are best off determining their true objectives early and then making a decision about whether or not it is worthwhile to continue. You are not going to get them to change their goals at the table – even if they lead you to believe that it is possible. This kind of Chinese negotiator is difficult – but surprisingly honest. They will stay true to their initial position – even if during your discussions they suggest options or lead you to believe that they have the power to change deal fundamentals. The only real negotiation about goals is INTERNAL – and it won’t involve you. If you can’t live with their initial statement of goals, then consider breaking off discussions early.

    Negotiating styles – Avoidance and Competitiveness
    They tend to believe that they are the only game in town – which is their main weakness. You may not be able to directly force or pressure these guys to do anything, but you can win major concessions by playing off their fear of loss RELATIVE TO OTHER SOEs or Chinese bureaucracies. This type of negotiator doesn’t want to see you win – but he lives in mortal terror that another Chinese competitor (from a different bureaucracy or network) will gain an advantage. Don’t overplay a weak hand, though. Chinese bureaucrats have incredibly long memories.

    Tactics and counter-tactics.
    Bureaucrats will attempt to intimidate with the brute force of their organization and wear you down using ‘broken record’ techniques. (For those of you who don’t know what a vinyl record is, the expression “broken record” means to keep saying the same thing over and over). They will frequently appeal to a higher authority – but you will never meet the real decision-maker or even know who it is.

    There are a few effective counter-tactics that you may employ. The first is to make your initial negotiation about information – not the final deal terms. Learn as much as you can about market conditions, pricing, organizational structure, competitors (both yours and theirs) and what they consider to be key variables. Once you have learned a bit more about the lay of the land, try your best to develop a second (or even third) counter-party. If you can play one side off the other, then a viable counter-tactic is the ‘take-away’ where you apply pressure by subtly threatening to take your deal elsewhere.

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By Follow on Twitter: Chinasolved – November 9, 2009

What would a US recovery mean to US-China relations?

The US economy, if not really growing at a sustained 3.5% GDP, seems at least to be touching bottom. (If you read Roubini or Financial Armageddon, you are excused from the rest of this.) With President Obama getting ready for his first big diplomatic visit to China in a couple of weeks, the economic mood swings in the US will likely affect the talks to a large degree. The agenda may be chock full of talks over military buildups and climate policies, but the stage will be set by relative economic strengths. Recovery headlines couldn’t have come a moment too soon for an Obama Administration that is desperate for an overseas win – but China-watchers want to know how it will play in Pingxiang? What will a recovering US economy mean to US-China relations?

There are three ways a sustained economy in the US could impact on the pan-Pacific meeting this month:

The Good:
A more engaged, confident, capable US will be less prone to hitting the trade-panic switch and a new sense of calm and mutual respect will characterize trade relations between the Pacific giants. A domestic recovery will keep the union bosses and congressional opportunists off Obama’s back – or at least give the President a little breathing room. The stronger economy will help shore up the flagging dollar – removing a thorn from the side of international trade relations in general, and big-lender China in particular. Peace will return to the valley and we will all find other things to worry about.

On the China side of the equation, a stronger US economy that is more capable of absorbing imports will be quite welcomed indeed. Nothing lubricates the gears of international relations like big slathers of consumption-driven spending. A US recovery in 409 or 1Q10 would be timed perfectly to help China wean its own consumption off of expensive Statist trickle-down stimulus spending.

A stronger US economy is Win-Win for everyone.

The Bad:
A recovering US economy will give US trade hawks and Buy-Americanistas the confidence and firepower to pursue their resentment. China has had it both ways – complaining about the weak dollar while still manipulating its own currency and thus preventing market mechanisms from doing their job. The recovery will be jobless at first, so the unions and the populists (i.e.: congressmen up for reelection) will be contending with uppity, unhappy constituencies that are sick and tired of being everyone’s whipping boy. First Washington, then Wall Street, and now China? Oh, No you don’t! A recovering US will be feisty and activist on trade.

A stronger US economy will also be met with mixed emotions in Beijing which has enjoyed the sustained glow of being the only stimulus hero on the block. China’s big swinging GDP has vindicated a lot of rhetoric – and burnished Beijing’s reputation as the policy-makers of the millennia. They were secretly hoping for pics of race riots and soup lines in to brighten up the People’s Daily homepage – a little payback for some unflattering Youtubery over the past couple of years. For China, this has been like Reagan and Gorbachev circa 1987 – with Wen Jiabao taking on the role of beneficent ascendant and Obama as the good-natured steward of a failed model. China has made great strides in international circles over the last 9 years – and the last thing the foreign policy people want to see is Obama’s charm backed up with muscular economic growth.

A stronger US economy is Win-Lose for China.

Most Likely –
Both sides will circle warily – with many photo ops and grand vagaries. The public sound bites will be about climate change – the back-room talk will be military cooperation. There may be an exchange or two about currency, but in the press each side will ‘endeavor to persevere” or something equally inconclusive. Cross-Pacific trade is, in actuality, one of the few global mechanisms that ain’t broke yet, and neither side is under much pressure to shake things up too much. In the grand scheme of things, US-China trade tensions don’t add up to a hill of cheap tires and chicken parts – yet.

A stronger US economy is not going to tilt the balance of power just yet.

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By Follow on Twitter: Chinasolved – November 3, 2009

Fighting Words: A glossary of conflict-laden phrases in US-China deal making.

The look perfectly innocent. They don’t seem like a lexicon of China-US business conflict:

    * Contract
    * Risk
    * Long Term
    * Truth … or truth
    * Harmony or justice.
    * Relationship
    * Transaction


But they are.

    Contract
    Americans see a contract as an independent entity – external from the two counterparties. Once signed and executed, the contract becomes another party in the deal – a neutral, binding, legally significant document. It becomes both the originator of the deal and the arbitrator of all disputes. Chinese view a contract as a record of a meeting of the minds between two specific individuals at a certain time and place, under specific circumstances. It is certainly useful as a tool towards reaching an understanding – but the actual agreement is between people. From the Chinese perspective – reasonable, honest men do not try to use contract trickery to enforce agreements that are no longer relevant under a new set of conditions. To the American, the contract is the final authority regardless of what has happened since the signing. A very good recipe for business conflict.

    Risk
    Risk, as used by Americans, encompasses two concepts. It includes a) possibility of loss and b) uncertainty. To Americans, these are two sides of the same coin. To Chinese, these are completely different things with wildly different ramifications. Possibility of loss doesn’t frighten Chinese deal-makers, but uncertainty drives them nuts. Confronted with an unclear or uncertain future, the wise Chinese deal-maker shuts down and waits for further information. When the American side attempts to push him into action, the Chinese side smells trouble, deception and trickery. Conflict and mistrust ensue.

    Long Term
    Research we’ve done indicates that when Chinese and Americans are involved in a negotiation, there are accusations and recriminations that one side is invariably short sighted, one-off and win lose, while the other is long-term thinking, cooperative win-win. The irony is that there is complete agreement over who is who. I am long term, cooperative and win-win – HE is short term, competitive and win-lose. Both sides saw the other as one-off cut throats. It was one of the few things both Chinese and Western negotiators agreed on. I’m long-term win-win – the other guy is just in it for the quick buck.

    Is it truth – or is it Truth?
    Truth, Justice – and the American Way. We of the Caucasoid persuasion tend to view Truth as an external, universal constant. It is bigger than we mere mortals – or at least bigger than we Westerners. Asians think that this is nuts. Everything changes. Price levels, supply chain factors, weather conditions – the world is always in flux. Yin and Yang, ups and downs. A man’s word is his bond – or it isn’t – to Americans. A man’s nature is reliable and consistent – or it isn’t – to Chinese. A righteous American feels that the words you said yesterday bind you today. A righteous Chinese feels that your intentions yesterday bind you today. Legalism died in China with Mo Zi – around 390 BC – when he and his book-burning Mohist posse got themselves bitch slapped by Confucius & the Morality Boyz (word to your Father) . For Americans, Legalism started in the Wilderness and was embodied in the US Constitution – and survived until around 2004.

    Harmony & Justice.
    China isn’t all fluidity and flux. Some things really are bigger than all of us – but it ain’t Truth and it ain’t Justice. It’s Harmony. The Chinese believe that we all gotta get along to go along. Americans like rock-hard Justice – like the kind that judges and courts can dispense. Chinese like soft, eternal Harmony – like that kind that rises from the will of the People. Both are great – but they don’t live in the same house.

    Relationship.
    Two successful 45 year old salesmen. One is Chinese, one is American. They have exactly the same worldview – a good deal-maker makes use of his network and his product benefits to make win-win transactions. But a 25 year old Chinese and a 25 year old American have completely different notions. That’s the default setting. Chinese start with the deal-making process by building relationships – and wait for the transactions to grow from there. Americans start with the transaction (i.e.: test orders) and the relationship grows from there.

Thoughts, comments, corrections? Share your opinions.

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By Follow on Twitter: Chinasolved – October 25, 2009

Conflict Avoidance vs. Conflict Resolution in China Part III: Structuring Better China Deals

Westerners with hard-won experience in Chinese negotiation structure their deals AND China business models completely differently than newcomers do. They take longer, spend a lot more time in the early stages, know a lot more about their counter-party and never try to force out-of-town rules onto a Chinese game. That doesn’t mean they do things the ‘Chinese way’ – they do it the ‘Smart-Westerner-in-China way’.

What do smart westerners in China do differently than newcomers?

    1. They are in it to win it, both during the negotiation and in the all-important post deal phase.
    Good dealmakers know that a Chinese deal isn’t done until … well, ever. If you have trouble, the dispute can stretch out forever. And if things go well, then you want to hold onto that counter-party forever. Either way, you need a strong on-the-ground presence. Ideally, you are the one building that presence. Plan B is having a China operation in place and making frequent, regularly scheduled trips. Coming back next year – or someday -is a pretty bad option.
    Relying on you counter-party to manage your affairs is simply not a viable option.

    2. They know that the real problems start AFTER the deal is done.
    The Chinese know this as well, and if you don’t then you are gong to put yourself at a severe disadvantage. This means that you have to budget time, bandwidth and resources to manage the post-deal renegotiation. If you plan on screaming into a phone at midnight from NY to fix things, you are just plotting your own destruction. This is how minor issues can turn into major conflicts during a cross-border transaction. If your Chinese counter-party knows that you are showing up in an hour then your situation is going to be pretty high on his list of priorities. Maybe. But if you are emailing or staying up late to phone it in, then there are lots of other things he can be doing with his time and energy.

    3) They find a partner to match their deal needs – they don’t find a deal to match the partner they have.
    Yeah, I know that opportunities change and you have to be flexible. But you should be coming to China to solve a specific business problem, and you need a partner who can fill in the gaps of your business model – not reinforce your own strengths. A big problem in China is that some newcomers get ‘match-made’ with the wrong partner – and then they use their skills and energy trying to turn his deal into the ‘right one’. Do the due diligence and make sure that your partner has the right level of integrity, competence and organization. If he doesn’t don’t try to force it. Conversely, you have to be the right partner to him. Chinese feel that they can negotiate profitable relationships from the start – no matter how long it takes. Americans are the ones who believe in building trust over time and many small transactions. You take up a long stretch of your Chinese counter-party’s time and energy – and then give him a piddling ‘test order’ when he expects a big deal. This has the potential to make him look bad in front of his people – and makes it seem that you are taking advantage of him. That’s why experienced deal-makers discuss the relationship that they are going to have during those long nights of guanxi-building toasting and singing. Tip: Try to align your expectations early. He may define success completely differently — and may see you as untrustworthy because you don’t trust him.

    4) Compensation has to be smart and fair.
    Be sensitive to how quickly the balance of power can shift in a cross-border deal. He needs you a lot up until the moment that the funds are injected or the assets are transferred. Once that happens, the whole balance of power shifts – and suddenly you are more valuable as a pissed-off ex-partner than as a satisfied real partner. If you want your Chinese counter-party to have a good reason to trust you and protect your interests then he has to A) want a long term deal and B) have good reason to expect a rising payout.

    If you plan on finding a new counter-party or setting up your own independent operation as soon as the business grows by 25%, then he’s looking at a dwindling business — and a new foreign competitor –after showing you the business and working through the hard parts. If you think he’s not going to be able to do that kind of math on his own, you are just wrong. On the other hand, if this guy’s numbers back up the notion that his business with you will be rising by 50% a year for the next few years, then you just may have the beginning of a beautiful partnership. There are only 3 ways to really understand what his goals are: You can guess; you can assume that both of your goals are the same; or you can ask him how he sees the world. The third option is the only one that makes sense to the Old Hands.

    5) The environment has to be right.
    I don’t care how good you connections are – you are not changing Chinese. Likewise, no matter how skillful or experienced your guy is, he can’t change the GDP level or affect the savings rate. If all the planets align and you have the right partner and the right business model – then you have the potential for a great deal. But if you’re missing something big — or worse — have something wrong, then nothing is gong to come together. Starting up a business in China because you think you’ll lose less money than opening in NY is dumb. You don’t want to be right at the wrong time.

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By Follow on Twitter: Chinasolved – October 19, 2009

Please help get www.USChinaForum.com off the ground

ChineseNegotiation.com and ChinaSolved have started a new undertaking called www.USChinaForum.com It is designed for students, educators and practitioners who have an interest in international trade and negotiation. The initial goal is to create a safe, structured environment for students from China and the West to come together and discuss international trade issues. (No politics, no hate-talk.) Once we have reached ‘critical mass’ in terms of users, we hope to start running realistic cross-border simulations of negotiating cases. Right now we envision this being team based — and any teachers who wish to make this a class project should contact us at teacher@uschinaforum.com to discuss cases and specific issues.

We are still in the early stages and there is much work to be done in terms of design and structure. There are, however, live discussion topics running now. They are:

    Who makes the first offer when you are negotiating a deal?
    G2 or G20 — Will China and the US be the ‘last men standing’?
    Is China’s Rise for Real — or a Japan-Style Bubble?

This new forum is primarily geared towards international students, but if any experienced professionals want to participate then you are more than welcomed. All we ask is that you don’t over-dominate the discussion and that you take a mentor-type role in the forum. Some students may feel intimidated or uncomfortable in a heated, competitive discussion.

It would really help out if we could get a few posts on the discussion boards to prime the pump a bit.
Thanks for your support.

-Andrew

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By Follow on Twitter: Chinasolved – October 18, 2009