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Is Guanxi on the Way Out of Chinese Negotiation? Part 2 of 2

Chinese negotiators see guanxi as a competitive advantage – and that’s not going to change.

Is guanxi on the way out?  No, but it will change – particularly as it relates to Western negotiators in China.

Last week we looked at the positive and negative aspects of guanxi from the perspective of Chinese negotiators.   The take-away is that while local Chinese may have their problems with the restrictive, unfair, and corrupt aspects of guanxi, it is a practice that is deeply imprinted on the Chinese businessman’s DNA and is unlikely to go away any time soon.  It matters to Chinese negotiators – so it matters to you.

Westerners are well familiar with headlines about “bad guanxi“, so we assume the importance of guanxi is waning – or at least perceived as a universal negative like corruption or taxation.  But is that a reasonable belief?

Is guanxi really on the way out?  Yes and No.  And No again.

Yes, guanxi is diminishing in importance for some types of negotiations.  The more Chinese business develops and internationalizes, the more opportunities there will be outside of traditional networks.  Among Chinese elites, it will be business as usual – so if you are looking to change the way a telecom does business or need a railroad to do something new, you’ll still require a hefty supply of Moutai, KTV favorites and red envelopes  .  But if you are looking to do standard business and bringing value to the table, you should probably focus on the positive aspects of guanxi – like relationship building and networking – that are analogous to business practices in other parts of the world.  China is becoming a more competitive place for both foreign and local companies.  As China’s economy changes – and certain industries & regions slow – local negotiators will become much more accommodating and aggressive.  That will help some foreign companies, but not everyone.  It depends on the value you offer and the negotiating skill you bring to bear.  Foreign companies with cash, technology and/or access to international markets are in demand, and your ability to throw back a shot of baijiu or observe traditional etiquette won’t matter that much.  If you don’t have much to offer, all the good manners in the world won’t help you.

No, guanxi is here to stay.  Chinese people like guanxi.  It’s integral to Chinese culture and just feels right.  The ability to build and maintain a network of connections is a valuable and respected skill, and Chinese businessmen are proud of their facility to develop strong ties with important contacts.  Honest Chinese businessmen want guanxi to change – not go away.  They would like to see bad guanxi go – including corruption, nepotism, inefficiency and opaque decision-making.  But as for the networking, relationship-building, and due diligence aspects of guanxi, they see absolutely no reason to alter the standard operating procedure.  It works just fine for them, and if you can’t manage it then that is just another competitive advantage that the Chinese negotiator enjoys on his own turf.

No again.  Before 2008 it really seemed that China Inc. was heading for international integration, a la HK, Singapore, or Taipei.  The entrepreneurial class was on the rise, the state sector seemed to be diminishing, and Chinese still looked Westward for their models of success and inspiration.  What a difference a financial crisis makes.  Post 2008, China is not only more confident in its own abilities and institutions, but also much more skeptical of the West’s. (Credit reports and transparent transactions didn’t seem to help the international business community much.) SOEs are back on top, and the private sector has been focusing on domestic business.  Manufacturers that rely on exports have been having problems with weak overseas demand and international inflation.  China has succeeded while the rest of the world stumbled, and Chinese business consider guanxi to be part of that success.

The takeaway for international negotiators in China:  Guanxi may not help foreigners much, but it can hurt you if you get it wrong.  Managing relationships and guanxi in China is part of the job, so it is your responsibility to be competent.

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By Andrew Hupert – May 9, 2012

Negotiation Lessons from the Chen Guangcheng Incident

Negotiation Lessons from the Chen Guangcheng Incident

What are the takeaways from the unfolding Chen Guangcheng incident, and what can US managers in China learn?

1. Focus on deal deliverables. American negotiators are too quick to declare “done deal, mission accomplished”.  We think that negotiations begin and end at finite times – and that a signed deal ends the discussion and locks everyone into place. Chinese negotiators don’t believe that. To them signed agreements are just milestones in a never-ending journey. Your gain today just drives them to work harder to find new ways to even things out next time. This will be over when Chen Guangcheng is in NY– but the cameras have already started turning towards some other more gawk-worthy event. Maybe GCG’s pleas to ride on the same plane with Sec of State Clinton weren’t so naïve after all. The takeaway for managers is that you have to maintain your focus — and include your HQ in the process — well after the documents are signed. Prep your people back home for a long post-agreement negotiation, and make sure they understand that the signed contract means little more than an acknowledgement of the latest iteration of the agreement. A China deal is never done until the money is in the bank (or the dissident is on US soil).

2. Build good goals that make sense in China – not just at HQ. Your strategy has to be logical and workable in China, and have some relevance to on-the-ground reality. The US State Dept. doesn’t issue a single statement on China without talking about the importance of human rights, the need to protect human rights, the sanctity of human rights. Why, then, didn’t the embassy have any kind of contingency plan in place just in case someone actually took them up on it? Corporate managers might think that’s funny – until someone asks them to put up or shut up on their “people are our number one resource” or “we are partners forever” pledge. Chinese can flatter the paint off a battleship without actually promising one single specific thing. It is a skill that American negotiators would do well to emulate. Don’t say it if you don’t mean it.

3. Have a plan. This is different from a goal. Americans are notorious for flying by the seat of their pants, and making things up as they go along in China. It’s not funny anymore. Have none of the State Dept. people ever heard of risk management or decision trees? If we do Action A, what will the other guy do? The Chinese side promised that CGC would not be hurt if he left the embassy. “We have their word.” Great – but these are the same people who swore to you that he was never mistreated in the first place. What were your negotiating variables? What were you using to verify compliance? What was the back-up plan?

The Chen saga unfolded just as the annual Strategic and Economic Dialogue talks were being set up across town. The Americans doing the day-to-day Chen handling were probably lower-middle tier of managers who could be spared from the truly high-level debates about which delegate would enter which door first when the Supers arrived. The Chen incident had all the hallmarks of the kind of over-delegation that undermines so many deals in China.  At the point Chen left the embassy, there was no agreement, no plan, and no meeting of the minds between US and Chinese counterparties. It looks like the US side caved on threats and allowed Chen to make a bad decision – just so that the embassy staff could wash their hands of the whole scary matter without any serious thought as to what could happen next.

4. Know what a win looks like. Plan for success. What if things actually work? What if people believe you? This is true for the embassy negotiation on two levels. First — what if you do actually win hearts and minds, and people look to you for answers? State seems so accustomed to Xinhua editorials and diplo-speak that they were caught completely off-guard by a regular human being that actually took them seriously. Even if you don’t want dissidents, protestors, or abused victims showing up on your embassy doorstep, surely there should be some kind of protocol in place.   The second challenge is knowing how to chart a successful course to your own goal.  Once you are already in the soup and you find yourself the guardian of a blind and injured victim of another government – what is your definition of an acceptable outcome? Shoving him out the door and hoping for the best doesn’t pass muster. Our negotiators didn’t know what a win looked like, so a positive outcome relied on luck and the kindness of strangers. American negotiators in China tend to plan for failure — we lead with the lawyers, include penalty clauses in thick contract documents and prepare for all kinds of negative contingencies. Too often we are caught off-guard by success and the faith of those we most need.

5. Ask what can go wrong? – and then act on the answer and prepare. Plan for success, but prepare for failure. Giving the bum’s rush to a blind, injured, hunted, human rights hero was one of the most humiliating moments for America since Abu Ghraib. It was a lucky accident and the courage of others that snatched victory from the jaws of defeat – so far. Hopefully whoever pushed this beautiful bumpkin out into the cold is already on a plane for a long, long posting in Angola or the Bering Straits. But if things had gone badly for Chen (and they still might), it will negate all the good work the State Dept. in particular and the US in general have worked so hard to accomplish. US managers have learned the hard way how quickly events and perceptions can spin out of control in China. Contingency planning isn’t an option here – it’s a high-priority requirement at every level of your organization.

6. Negotiation with China starts at home. US policy in China can be summed up as Clinton vs. Geithner. Sec of State Clinton is our voice on human rights, US values, and the spokesman for those who can’t speak for themselves. Sec of Treasury Geithner speaks for US commercial and economic interests. Neither is bad, but they don’t coexist naturally or organically. Many US companies have similar internal conflicts within their HQ, and that’s not a bad thing. But decisions have to be worked out BEFORE you start negotiating with the other side. Any competent Chinese negotiator knows how to play one side against the other. When our embassy staff took the path of expediency in allowing Chen to leave the safety of the embassy, it gave all the appearance of a bad compromise being made at the highest levels of the US decision- making chain. On-the-ground international managers in China often find themselves victims of the same process and forced to make a bad compromise that will push an ugly conflict under the rug right now — even while they know it will certainly rise as a much bigger, more threatening crisis later.

7. It ain’t over ’til it’s over. Don’t call victory after the first handshake deal (I’m looking at you State Dept.) and don’t hit the panic button at the first bump in the road (R-Money, Fox Team — you know who you are). In retrospect, almost no one is coming out of this looking dignified or competent. (Mr. Chen — we love you but Hillary Clinton is the Secretary of State of the United States- not your neighbor’s hot mom. Decorum, man. Decorum.) Chinese negotiations hardly ever end when you want them to, and never when you need them to.

Bottom line — the good guys got lucky this time. Chen Guangcheng’s escape is still not a sure thing — and the execution of this operation was more Three Stooges than Mission Impossible. Entrepreneurs and managers doing business in China should learn from the mistakes of others and walk into Chinese negotiations with a plan, a unified front, and a viable exit strategy. Hoping you’ll get lucky works once in a while, but it’s a losing strategy over the long run.

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By Andrew Hupert – May 7, 2012

Is Guanxi on the Way Out of Chinese Negotiation? Part 1 of 2

The Good and Bad Aspects of Chinese Guanxi

As the Chinese economy develops and grows increasingly international, will traditional Chinese business customs like guanxi become less important? Since returning to the US and talking to American businesspeople about negotiating deals in China that question has come up several times — though more often than not it’s more an assertion or hopeful statement rather than a genuine question.

Is guanxi on the wane in Chinese negotiation? The quick answer is NO. The complicated answer is Yes, No and No again.

Before we look at trends in Chinese negotiation going forward, let’s take a moment to examine the path that leads up to the present situation. (For more details, see this slideshow or these videos  )

Guanxi can be somewhat over-simply defined as a network of counter-balancing connections and business relationships. The word translates as “relationship”, but is usually used to indicate a network of business connections who trade contacts, influence, and favors to further their mutual interests. It may appear social, but for many traditional Chinese businesspeople, it is all business.

Guanxi is not the same as corruption, though most instances of bribery and graft use the language and customs of guanxi – connections, gift-giving, non-contractual agreements, and special favors. Guanxi, however, serves many useful functions that regular (i.e.: non-elite and non-corrupt) Chinese managers and dealmakers appreciate. The main reason that guanxi will never disappear from the Chinese business environment is that very few Chinese want it to. A good network is a valuable asset, and the ability to make powerful connections is a useful skill that Chinese managers are proud of.

There are positive and negative aspects to guanxi, and Westerners tend to focus on the problems. While it’s understandable for the media to write about the lurid and criminal; and individuals to warn colleagues and subordinates about pitfalls in the Chinese business environment, Westerners tend to be too dismissive of guanxi and other Chinese business traditions – which leads us to draw the wrong conclusions and make mistakes when planning.

The bad and good of guanxi

Guanxi brings with it plenty of problems. At its worst, guanxi is a gateway for corruption and bribery. It justifies exclusion, cliquish behavior, nepotism , and cronyism. Just as bad, it can make Chinese deal making a convoluted and opaque process – where doors are closed and opportunities withheld to anyone who doesn’t know the right people. It can be elitist, nationalistic, racist, and restrictive. While other business cultures can have the same problems, often China’s obsession with connections and guanxi makes these undesirable elements more prevalent, intractable and institutionalized in the PRC than in the West.

Guanxi has plenty of positive and commendable aspects that Western negotiators should do their best to capitalize on. Guanxi is part of Chinese culture and tradition – not a recent development that can be dispensed with or turned off when a Westerner walks into the room. It is a well established aspect of Chinese business that good strategists and planners must incorporate into their thinking if they want to be successful in Chinese negotiation.

For those who know how to use it, guanxi serves a valuable networking function. Traditional Chinese managers who need a source, a service, or a bureaucratic approval will conduct orderly searches among their network of contacts to find the shortest, most efficient path to locate the right person. This often strikes Western managers as unprofessional and improper, but the networking aspect of guanxi can be quite effective. It is not going away, so experienced manages know that they are better off incorporating the practice into daily operations rather than forcing it underground. (RFQs and RFPs are common in coastal cities, but traditional Chinese managers are still shocked that anyone would work with a stranger if they didn’t have to.)

Guanxi is used as a form of due diligence. Financial audits and credit reports were always viewed somewhat suspiciously in Chinese business — and the global financial crisis of 2008 didn’t do much to build confidence. Traditional Chinese negotiators want to know who they are dealing with on a more personal level — they want to know about your character, your attitude towards risk, and your general level of maturity and sophistication. Westerners who treat relationship-building banquets and social events as unimportant nuisances are blowing important opportunities. This is no time for empty small-talk. Even if you aren’t conducting detailed negotiation, it is still a valuable chance to clarify your position and align goals.

Guanxi has a compliance function as well. Chinese businessmen have only recently come to appreciate the importance of branding, but they do value their own status — even if only among other members of their network. No one wants a reputation as dishonest or incompetent. Americans like to ask for references or third party audits, but Chinese want to know who you know. If you have no powerful or influential associates, then you come off as someone lacking power and influence yourself. Relationship-building in China means presenting yourself as a solid member of the business community who either has deep roots — or plans on developing them. A favorite Chinese negotiating tactic is outlasting an interloper and waiting for them to go away. The more solid and well-connected a partner appears, the more likely that the Chinese side will honor deal terms.

Good guanxi is a sign of skill, intelligence, and rectitude. Chinese business people see guanxi as a valuable skill and an important source of competitive advantage. A person with a broad network of powerful, important associates is deserving of respect – not just because of the influence they command, but also because the ability to develop such a network is itself an important skill. It indicates maturity, intelligence, and experience.

Westerners see guanxi as a close relative to corruption and fraud — and it most definitely can be. But there is another side to guanxi that offers real value to traditional Chinese businessmen – and to Westerners who know how to use it to their advantage.

Guanxi matters to your Chinese counterparty, so it matters to you. Guanxi is not going away, so you would be wise to understand how to make it work for you.

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By Andrew Hupert – May 4, 2012

Guanxi for the Busy Professional — Part 1 (video)

An excerpt from Guanxi for the Busy American.

What is guanxi, and how can you make it work for you?

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By Andrew Hupert – April 28, 2012

The Prada Diaspora. When Chinese Investors Come Calling.

A few weeks ago we talked about the shifting negotiating agendas in a post-crisis China. One of the big trends in 2012 will be the outflows of funds from China to the rest of the world. This is the year that private Chinese business may knock on your door.

Why are Chinese Negotiators Looking Overseas Now?

The game is changing. A perfect storm is causing Mainlanders with money to look abroad. In the old, old days, pre-2000, they couldn’t afford to and didn’t have much to offer. During the boom years (up until around 2007) they didn’t have to relocate, since the home market was a powerhouse and they knew had a lock on. From 2007 until just about now, they didn’t want to. The US was looking scary, and China was still doing great.

So what has changed?

Three things. First and foremost, China shifted industrial gears during the global economic crisis (2007-2009) away from free-market private companies back towards state owned enterprises (SOEs) – who were the big recipients of China’s huge stimulus program. Private firms and entrepreneurs are still doing very well, but the policy shift was a not-so-subtle reminder that in China you never bet against the Party – and the Party’s interests are growing. No one is looking at wholesale nationalization, but many Chinese people feel that private industry’s best years are behind it. Revelations that Bo Xilai’s anti-crime measures might have been little more than thinly veiled extortion, the generally high levels of corruption, and the ever widening scope of SOE activity make entrepreneurs and business owners more than a little nervous.

The second concern is that China’s economy is definitely slowing — especially for the private sector. The big stimulus package did little to help the factories, which have been having tough times. Even if the export numbers are holding steady, manufacturers still have to contend with inflations, wage increases, labor shortages, and soft demand. Real estate investors are also bearing the brunt of Beijing’s cooling-off measures. It’s getting harder and harder for the regular rich (with limited government connections) to make an honest yuan these days.

Finally, the US is looking like it’s on an upswing. The average Zhou on the street has always had a soft spot for America — it’s Americans he can take or leave. But as far as the country goes — great schools, clean air, lots of food, shopping, Hollywood, NBA… The list goes on. Real estate prices are low but the GDP numbers are edging upwards and there is no more talk of a scary double-dip recession. It’s looking like the Chinese dream, and more and more Mainland parents are starting to follow their college-student child over the water to check out the situation.

What to do when a Chinese investor, client, or potential partner starts asking around.

Tips for Americans approached by a Chinese counterparty in the US:
 

  • 1. Happy up. It is time to start sounding positive. America has become a nation of complainers. It’s hip to be grim, and it seems that the better someone is doing the gloomier & doomier they talk. I don’t care what your politics are — the Tea Party and Fox News crowd (who are represent a big chunk of Main Street) and the Wall St. set both sound just plain miserable, besieged, and terrified – all the time. You may have your reasons to worry about the state of the union or fret about the future, but the apocalypse talk is going to make any Chinese investor slam on the breaks and wait until next year…or the year after that. You need to exude calm confidence from the moment you say hello until your potential partner is well out of earshot. Then you can go back to the Chicken Little talk that seems to be the new national dialect.
  • 2. Talk up your strengths. Chinese investors like stability, safety, and certainty. During the relationship-building phase of the negotiation, you want to make yourself, your company, and your location seem rock solid. If you are in a place that has fallen on hard times, then talk up the opportunities to profit from the planned rebuild. Don’t flat out lie, but accent the positive. Be aware of what rings the Chinese investor’s bell – because his wish list might be different from yours. The average Chinese investor would rather make a nice return on a sure thing than gamble big on an unknown quantity with rules he doesn’t understand. Your role in this is to be stable, well-connected, informed, and established. Chinese live and die by guanxi and connections, and his biggest fear is being on his own and ignorant. You are the solid, reliable partner who is going to show him the way.
  • 3. Take it slow and build the relationship. Americans start with a transaction and build to a relationship. The Chinese start with a relationship and build to a transaction. You both end up in the same place — a solid business relationship built on trust and respect. But you start from different places. Respect that. Americans frequently get confused by the way Chinese negotiators use the word “relationship”, and think it’s all emotional and sentimental — like family or friends. It’s not. They don’t have to love you, but they have to know who you are and trust you on some level. They aren’t looking for true romance, but a solid partner what will do what he says he’ll do and conduct his business in a steady, consistent manner. Deal terms and business talk will come later. They want to know who you are first.
  • 4. Know what you want. Don’t wait for them to make an offer before you consider what you want from a deal. You have to give some thought to how you make money off their business. Are you looking for an investor, a partner, a customer, or a supplier? Do you want to expand to China (or are you already there)? Do you need sourcing, manufacturing, R&D? Many Americans are over-sensitive to stories they’ve heard about “face” and “guanxi” that they never get around to stating what their own interests are. If you wait for the Chinese side to set the agenda, you will pay for it. Take your time and feel them out — but always know what you want, what you’ll take, and when you’ll walk away.

Stability, safety, transparency, fairness, governance.

Americans fear unemployment and decline. Chines fear chaos and marauding mobs.

I live in a place where the only American news channel is Fox, and if I didn’t know better I would think that the US is on the verge of collapse, invasion, and revolution – all at the same time. It’s not a pretty picture — but the reality is far better.

Think about what scares the Chinese investor. He is worried about civil unrest in the countryside, talk of corruption is commonplace, air and food are toxic, there are water shortages, and now it seems that the economy is slowing.

You live in a country that hasn’t had a revolution in 230 years and there is no chance of another one in the foreseeable future. You can walk the streets, drink the water, breather the air, and eat the food without fear for your family’s safety. Business regulations are fair and consistent. The government is relatively honest and does not interfere with your business or home life overly much. These are the things a Chinese investor cares about. He has plenty of confidence in his ability to make money if the economic and social environment will allow him to do so. You job is to make it clear that you can be part of his expansion to the US – if the terms are right.

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By Andrew Hupert – March 7, 2012

Know Your Chinese Counterparty: Learn to Negotiate from Lei Feng.

Negotiating in China effectively means learning about negotiating from weakness — and about knowing how the balance of power shifts.

March 5 is “Learn From Lei Feng Day” in China — a chance to celebrate the nobility of humility and come closer to the Master of Modesty himself, Comrade Lei Feng. A posthumous cultural revolution hero, Chinese kids have been learning obedience, humility, and self-sacrifice from the PLA icon since 1963.

The more things change the more they stay the same, and the Lei Feng icon is being recycled by a Party apparatus that understands the value of humility and sacrifice — as long as it is someone else’s.Learn to negotiate from Lei Feng The Legend of Lei is alive and well, and being recycled to exhort underpaid sweatshop workers and expense accounted bankers alike to strive for the good of the State.

Doesn’t seem like it would work — but it does.

Americans are great at negotiating from strength — or at least we think we are. The problem with negotiating from a position of strength is that unless you are actually strong, your counterparty can call your bluff. The myths we raise our future leaders on are about supermen with super powers — strength, skills, and special abilities. We grow up with Superman and Spiderman. They always did great until some villain or unforeseen calamity robbed them of their powers. Then they were in trouble. But by the end of the show the natural order was restored, and the hero regained his super-strength just in time to win the day against unbelievable odds.

Chinese are brought up on different stories, and Comrade Lei’s is one of the biggies. Praised for his humility, selflessness, and dedication to helping others, he’s like a superhero’s secret identity without the extraordinary abilities. Clark Kent or Peter Parker, toiling away (though probably not in the media industry). They didn’t transform — they persevered. They might never share in the spoils of victory — only the toils of struggle. But it was OK, because society would benefit and harmony would ultimately be attained for all.

Chinese learn three important negotiating lessons early

      1. A weak position doesn’t mean your side will lose.

 

      2. Cooperating with the group is the only path to victory.

 

    3. The weak can become strong when the balance of power shifts.

Chinese negotiators often put themselves in a position of apparent weakness. This tactic has two ramifications for Westerners who think that they are negotiating from strength.

First, they make their problem your problem.

      “Our technology lags, our systems are inefficient, our factories are antiquated, our brands are weak, our innovation is feeble — how are we going to fix it?” Chinese negotiators are great at being humble and even subservient when it suits them. “You want to be the boss — Huanying Guanglin Laoban! Welcome Boss!” “You want to own 65% of the JV. Sounds good to us!” “You want to teach, train, instruct, and call the shots? You’re the boss.”

This leads to the second outcome of skillful negotiation from weakness. Once you have fixed their problem — you become the new problem. Now they are strong, thanks to your help. You have suddenly become weak, thanks to the power of their various groups – regulators, courts, bureaucrats, workers, suppliers, distributors, and anyone else who would rather make use of your superpowers (technology, IP, capital, systems) without having you around.

You can pick your own example. Apple vs. Proview, Google vs. Baidu. GM vs. the domestic auto industry. In each case, the Western side entered into the market with a position of power. They came, the built, they taught…and in one way or another ran into roadblocks or administrative obstacles that are undermining their position of strength. No more superpowers.

March 5 is Learn from Lei Feng Day in China. Study hard, comrades, and learn your lessons.

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By Andrew Hupert – March 2, 2012

Capitulation or Calculation: Dreamworks and Disney Taking Minority Stakes in Chinese SOE Tie-ups

Americans negotiating in China are starting to learn that 40% of a fortune is better than 100% of nothing.

DreamWorks is following in Disney’s footsteps and cutting a deal that gives a couple of Shanghai based SOE’s (State Owned Enterprises) a majority stake in a venture that is really just a gateway to sell its wares in the lucrative Chinese market. In both cases, the US entertainment giants seemed to be giving away too much for what basically amounts to market access.

The DreamWorks deal was summed up in the American Law Daily :

“The new joint venture in China, to be called Oriental DreamWorks, is set to begin operations in Shanghai later this year. The enterprise will be capitalized with $330 million in cash and intellectual property, according. China Media Capital and Shanghai Media Group—a company owned by Shanghai Alliance Investment, the investment arm of Shanghai’s municipal government—will own 55 percent of Oriental DreamWorks.”

This follows the long-awaited Disney deal announced in November of 2011, as detailed in a Disney Resort press release:

The Walt Disney Company and Shanghai Shendi Group have joined together to invest in Shanghai Disney Resort. As part of the agreement, two new owner companies will be formed with Shanghai Shendi Group holding 57% of the shares and Disney holding the remaining 43% of shares.

Shanghai Shendi Group Co., Ltd. is a 100% state-owned joint venture investment holding company formed by three sponsors – Shanghai Lujiazui Group Co., Ltd., Shanghai Radio, Film and Television Development Co., Ltd., and Jinjiang International Group Holding Company. Shanghai Shendi Group Co., Ltd. is involved in project investment, construction, and operation through two full subsidiaries: Shanghai Shendi Resort Development Co., Ltd. and Shanghai Shendi Construction Co., Ltd.

Is this trend of US entertainment giants giving up controlling stakes and the majority of cash flow to the Chinese government a capitulation or calculation? Initial assessments that this is yet another example of Chinese communists bullying profit-starved American CEOs into accepting adverse terms may be misplaced. In fact, these may be better deals than they seem to be – and a harbinger of things to come in US-Chinese deal-making.

Advantage China:

China allows the US and international trade bodies to force them to do what Beijing really wanted all along – satisfy the masses and bring in thousands of high-level jobs for China’s best and brightest young grads. They also get the lion’s share of ownership and revenue.

The Party gets what it wants by putting their own cultural / political spin on the media message being broadcast. The Shanghai Disneyland will not have the iconic “Mainstreet USA” entrance, and instead will greet visitors with a typical Chinese garden landscape. It’s unlikely that the DreamWorks venture will be producing any films that Beijing will find objectionable.

In theory, they are also learning valuable management skills that can help them set up their own industries and eventually compete with their new American mentors.

Advantage US:

These entertainment titans aren’t really giving up all that much. The film & theme park businesses aren’t Intel or Roche. There is no source code or secret formulae locked away in secure vaults underground. The IP is on the screen and in the parks. Sure they’ve got great management, but anyone with deep enough pockets could walk out and buy up the best and brightest in either industry. (The film industry is not known for its high ethical standards or moral turpitude.) They’ve both been dying to access the China market for decades – getting Dis & DW to sign deals wasn’t exactly a stealth coup. 40% of a fortune is better than 100% of “we’ll keep your application on file”.

While the Chinese are getting to look under the MNC skirts, the Westerners get to do what they do best – identify the best human assets available and learn to market to the Chinese middle class.

By teaming up with SOEs, they effectively neutralize the real twin threats of China market entry – pirates nibbling away at the bottom line, and savvy entrepreneurs swiping big chunks off the top. SOEs have gotten better in recent years, but they are basically still bureaucrats in better suits. Not only do the entertainment giants not have to worry about wholesale piracy (as much), but they can trust their new partners to keep the real threats at bay. American entertainment, media and software firms have much more to fear from a copycat entrepreneur with an Ivy League education than a committee of Party stalwarts. Remember – Xinhua and Robin Li (Baidu) were both gunning for Google’s search business in China. Baidu did absolutely great – Xinhua failed fast and comprehensively. If Dis or DreamWorks could pick a long-term competitor in China, then the SOEs are the guys to beat – literally.

The Structural Trap of most Western-Sino JVs

The weakness of most joint ventures lies in the BOPS- or Balance of Power Shift. Western corporates with technology, IP, designs or know-how that the Chinese lack come to town and strike great deals when the local JV partner is in a position of weakness. But within a few months, the Chinese side has learned the entire business cycle and acquired the IP – while the Western side still can’t tell a Shanghai cabbie the address of his China corporate HQ.It gives the Chinese side a great incentive to cheat – swiping the needed technology and designs and striking out on their own, cutting out the Westerner all together. The structures that Dis and DW followed will cost a bit more in the early years, but achieve the holy grail of China deals – making them more valuable in the passenger seat than as road kill.

In China you have to choose your enemies wisely. If you are involved in mining, farming, production or anything engineering, then Chinese SOEs are tough competitors. But if you are in tourism, entertainment or media, then the party-guys are the ones you want to compete with. If you’ve ever been to the Shanghai Expo or Canton Trade Show, you probably feel like you’ve been though the Long March. You saw a lot and accomplished something you can tell the grandkids about, but you probably didn’t enjoy the experience – or pick up a lot of souvenirs. The SOEs will collect a lot of important data, but it will probably never find its way to market. Meanwhile US shareholders, corporate headhunters and marketing experts will get a windfall for years to come.

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By Andrew Hupert – February 20, 2012

Negotiating in Post-Crisis China – Your New Agenda.

Negotiating in China – New Agendas, New Opportunities

Negotiating Rules in China are about to shift again, and this time American negotiators stand to gain. Don’t blow the chance, because it may not last long.

A negotiating variable is what you actually ask for at the deal table. Variables are what make up the agenda. It’s the thing you need and the price you want. Negotiating strategy is great, but at the end of the day you only get what you ask for. Americans negotiating in China have to start asking for a new deal points and setting their agendas differently- or they will blow the best China opportunity they’ve had in a decade. Hint: The race to the bottom is over, and the manufacturers lost.

In the 90s, the key variable in US-Chinese negotiation was cash. They needed capital, we wanted cheap manufacturing and government assets.

In the 2000s is was about intellectual property. China wanted to climb the technology ladder, and we wanted cheap production.

In the 2010s a new set of negotiating variables is emerging. The Chinese side has split into a lopsided cage-match. The state sector is back – they’re well-funded & pumped up on stimulus money and nationalist fervor. The private sector is looking like a beat-up, slapped around challenger that is out- classed by a bigger opponent. In the Hollywood version of the story, the scrappy underdog fights back to his feet on pure grit and a purer heart. But in China, the state censors don’t like that story. The underdog is gonna bolt, and that’s where you come in.

Negotiating variables for post-crisis China

Know your counterparty.
China Inc. has gone statist. Pres. Obama talks about China gaming the system and not playing fair. This spells opportunity for Americans negotiating in China, because independent businesses and private entrepreneurs have to deal with those unfair practices every day in their own house. Know who you are dealing with:

SOEs want resources. If you own dairies, oil fields or mineral deposits and have the political firepower to get neo-colonial deals approved by your own government, you have a lot to talk about. Otherwise you are negotiating from a position of severe weakness. On their home turf, these people only want to steal your technology, and they aren’t even bothering to dress it up as part of a long-term guanxi thing. Approach at your own peril.

Successful entrepreneurs, real estate investors and private businesses have had a non-stop run of good times, and that absolutely terrifies the Chinese. Forget the “China Century” bluster and nationalistic posturing – Chinese are deeply suspicious of their own institutions. When they were poor and deprived, everyone was a comrade fighting together. Now that they have nice things and bank accounts, the Chinese middle class is nervous and insecure. They are afraid of the poor, afraid of the rich(er), afraid of the government, afraid of the bureaucracy.

Chinese negotiating variables are changing. Here’s how Americans should be setting their negotiating agenda’s for the rest of 2012 – and beyond.

  • International partnership is your lead card. You can help them grow internationally, but you want serious access to Chinese markets. Remember that Chinese are terrified of China-bashing and racism – yet they still see the US as their Promised Land. Work that. Fear and fantasy make a great negotiating position. After all, that’s how you ended up in China.
  • JVs are back in vogue, but sweat equity is out. The Chinese side has money to invest. Best efforts distribution is over. Cash is no longer your ace in the hole. Chinese partners now have capital, channels and technology. They need to become more competitive in terms of marketing, branding and management. You have to help them get better in exchange for getting serious access to their markets. The days of 60-40 equity splits, Westerners in the C-suite, Chinese on the factory floor are gone.
  • We’re all management consultants now. You’ll charge for more – particularly the soft skills. When the China was a factory, it was ok to give away IP like methodology, branding and marketing. Now that they are cash rich and control the basic technology, you have to charge for know-how.
  • Technology is a two-way street now. The big boys have moved from OEM to ODM in China, and now it’s your turn. OEM is original equipment manufacture. Your brains, their labor. The new move is original design manufacture. You create, they figure out how to design it. China manufacturing is expensive, but engineering talent is cheap. Stop trying to micro-manage and let Chinese partners do their thing.

Next: The Prada Diaspora. When the Chinese come a’callin.

 

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By Andrew Hupert – February 15, 2012

American Negotiators Get Ready to Hit the China Reset Button

American Negotiators – Time to Revisit Post-Crisis China

Get ready for a new wave of US-Chinese negotiation, but with decidedly different characteristics than in the past. Post-crisis China is more than race-to-the-bottom cost cutting.

Negotiating between US and Chinese business underwent a sea change after the 2007-8 financial crisis. Chinese negotiators become more confident and independent of international partners, while US and European actors shifted their focus inward and put China strategies on hold. For American SMEs (Small & Medium sized Enterprises) who delayed or cancelled China plans when things looked bleak at home, this might be a great time to take a fresh look.

The new “New China” – Race to the bottom is over (and manufacturers lost).

The new post-crisis China is more successful, more independent – and in some ways more mature. China’s massive stimulus package had a dual impact on the Chinese negotiating environment. On the one hand, China Inc. is more confident about its own abilities after weathering the global disruption in good form. In 2002, Chinese managers looked to the West for expertise and management know-how. In 2012 western models are looking suspect at best, and Chinese methods seem to work better – at least locally.

But Beijing’s stimulus had another result that western negotiators have to factor in to their strategies. Government bailouts focused on SOEs (State Owned Enterprises) and policy organs – particularly those in the interior of the country. As a result of the massive government spend, the state sector has made huge strides in wresting control of China’s economic development from entrepreneurs and private companies. As SOEs were getting the cash, privates were getting the shaft in the form of inflation. Prices soared and labor became scarcer. Chinese manufacturers have been hit with a deadly 1-2 punch of lower demand from stricken overseas markets and higher prices as home.

This has split China’s negotiating world in two. State owned & policy directed businesses have become tougher and more demanding, but private companies and entrepreneurs are ready to deal – if the terms and variables are right. Hint: Mainlanders with money (MWMs) want to take the money and get out of China. In the old days, successful entrepreneurs would send the kid to university and set up the wife with a green card while they stayed home and managed the factory. Post-crisis, they want to move the business overseas.

Pre-Dawn in America?

Americans have changed as well. After the financial crisis the first reaction at most firms was to entrench, pull back and hunker down. A few giant MNCs had the foresight and wherewithal to double down on China, and they reaped the benefits. Most, however, cut their China exposure, put expansion plans on hold and waited out the tough times. Now there are hopeful signs that the US economy is coming back to life – but it is not the same economy as in 2006. The American middle class has been devastated and is unlikely to come roaring back to its former buying power & glory any time soon (if ever). Stock markets are riding high again, which is great for board members and IPO zillionaires, but the housing market is still under water – destroying household income and spending power. Corporate coffers are full and the worst times are behind us, but businesses with products or services to sell have to start looking at China and the rest of Asia. Europe and Main Street America are simply not back to pre-crash levels.

US-China Negotiation in 2012: A Whole New Ball Game

1. China trade numbers are dropping. Either western markets are consuming less (possible) or they are sourcing from other places. Either way, Chinese producers are probably willing to renegotiate. Hint – forget about pure-price negotiations, which tend to favor the Chinese. It’s time for western negotiators to write up a new wish-list for their China deals. Look at ways to develop strategic relationships, quality assurance and serious access to markets and distribution channels. They need your market, you need theirs. It is time to start dovetailing differences and structuring creative solutions.

2. Chinese privates and successful entrepreneurs (i.e.: non-SOEs) are panicky and want out. Now is the time to for American related parties – downstream customers, marketing partners – to talk about ways for the Chinese to set up operations in the States. At the moment they are clueless newbies when trying to develop a US presence, but before long they will be serious competitors. Co-opt before you compete. Hint – Mainland Chinese are terrified of “China-bashing” in the US, so you have an advantage over their own network. They might be amenable to partnership that will help smooth their entry to the US – for the right terms.

3. Don’t ignore expats already doing business in China. With economic activity slowing, they may be ready to make interesting deals as well. Whether you are entering the China market, sourcing or filling in a global expansion plan, this might be your moment to leverage off the hard work and anxiety of people you already have connections with. Dig out those yearbooks (ok – Facebook friend lists) and get a dialogue going with other westerners who know the ropes.

4. For the first time in a decade, time is on your side. China has always been “hurry up and wait” for American SMEs – you were last in line when supplies were tight and put on hold when you wanted to set up your own operation. A jittery China Inc. is willing to deal, and successful Chinese entrepreneurs hear the clock ticking louder than you do.

5. Post-crisis China is more sophisticated, so they are more strategic. The days of “race to the bottom” cost cutting are over. Now it’s time for “race for the exit” expansion. Chinese businesses have more to offer – and for the first time they have serious money to spend. Time to get reacquainted with China if the last time you looked was in the pre-2007 manufacturing era.

Next: New Variables for Post-Crisis China Negotiation

 

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By Andrew Hupert – February 9, 2012

China and the WTO: Connecting the Dots, China Style

Americans and Europeans negotiating in China for a long time will recognize the pattern. A Chinese associate will make an innocuous but slightly off-topic comment in a business discussion. Later, in a seemingly unrelated discussion, the Chinese side will take offense or express surprise about the same point. Negotiators with limited China experience will wither bat the issue aside or try to win a minor point. The discussion will quickly return to more substantive matters.

When the deal falls apart soon after, the western manager will be scratching his head at the Chinese negotiator’s seeming inexplicable behavior. From the Chinese negotiator’s perspective, however, he has been open, honest – and maybe even a bit blunt.

Prediction: Within the first 6 months of  2012, China will demand a major restructuring of either the WTO or some other international economic forum – effectively removing any meaningful oversight or ability to penalize China (i.e.: member nations).

Here’s the handwriting on the wall:

China will play by rules it negotiates: official


HONOLULU | Mon Nov 14, 2011 12:58am EST
(Reuters) – China will play by the rules of international agreements that it has been party to negotiating, a Chinese official said on Sunday.
His remarks were a clear rebuttal to U.S. President Barack Obama who earlier said that China must act like a “grown up” and play by the rules of the international community in economic affairs.
“First we have to know whose rules we are talking about,” said Pang Sen, a deputy director-general at China’s Foreign Ministry.
“If the rules are made collectively through agreement and China is a part of it, then China will abide by them. If rules are decided by one or even several countries, China does not have the obligation to abide by that,” Pang said at a news conference after the APEC summit in Honolulu…

And then again yesterday – in an unattributed Op-Ed piece in the Global Times, an officially sanctioned English language PRC news site:

Time to reassess unfair WTO entry terms

Global Times | February 01, 2012 00:48
A WTO appeals panel has upheld a ruling against China restricting exports of nine types of raw materials. The ruling, completely unreasonable to Chinese, will threaten China’s resource preservation and environmental protection efforts.

China has generally been following WTO regulations and rulings. But it should find the best balance between applying WTO rules and protecting its national interests. Getting approval from the West is not our top concern.

Admittedly, joining the WTO has boosted China’s rise. However, entry was granted at the cost of China accepting some unfair terms, from which the aftereffects have gradually emerged, including this ruling. They may become a hidden problem for China’s economy.

The latest WTO ruling has highlighted the urgency of amending some of the unfair terms of The Protocol of China’s Entry into the WTO. It is also necessary to express China’s dissatisfaction and garner public support for the revision…

Should WTO rules be applied evenly, unevenly, more stringently, rewritten completely?  I don’t know – and that’s not the point of this post.

The significant issues are that

1) The Chinese side is putting an issue on the table. As far as Beijing is concerned, they are being open and direct about their concerns. The negotiation about the WTO and international trade has begun. If the western side is too slow or oblivious to catch the drift, that is their problem (from the Chinese perspective)

2) The Chinese side is setting the terms of the agenda NOW. The US and/or international side has to act immediately to push back or alter the variables, or they will be starting out at a significant disadvantage.This is where a lot of Americans negotiating in China drop the ball.

3) A common Chinese tactic is to use a manufactured conflict as an excuse to terminate an existing partnership or arrangement. Loss of fact, cultural misunderstanding or perceived insults can all be used as an exit strategy.

Look for WTO structure, rules and China’s continued membership to be major international negotiating variables within the next six months.

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By Andrew Hupert – February 2, 2012