“I can’t be sure, but it doesn’t sound like you are being ripped off. In fact, it seems like things are going pretty smoothly”. When I told them that they were on track for another 6 months or so of similar successes before they could expect a solid agreement, they didn’t look happy.

New York has its own special style of deal-making during the best of times, but the economic situation is wearing people down and making them even more impatient and just a bit desperate. Not only do we hate wasting time, but we always want to know exactly where we stand. We respect decisive, straight-forward counter-parties who can give us a clear yes or no. If that means doing a few small test deals to work out the kinks and test the waters, then so be it.

This contrasts with the Chinese style of building life-long relationships that yield profitable transactions when the time is right. Like a winding mountain stream that eventually leads to the ocean, Chinese deals are rarely direct or efficient – and aren’t meant to be. If a potential partner has any character flaws or quirks it is best to find out before there is a fortune at stake. If it takes a long series of meetings over many months to get comfortable with one another, then so be it.

In the old days (2006) there was a safety valve built in to US-Chinese negotiations called “cultural barriers”. When China was a strange, undiscovered territory for US service providers – and Chinese SMEs (small & medium sized enterprise) wouldn’t dream of initiating deals in America – interaction between the two sides was regarded as exotic, specialized and just a little dangerous. People may not have known exactly what they were getting into – but they knew that they were getting into something that was at least a little over their head. Nowadays there is so much press about the difficulty of doing business in China that people think they are forewarned and forearmed about the dangers.

What perils lay in the distant gloom: Lions and tigers and bears — or the Bermuda triangle?
It’s not enough to be cautious and circumspect – you have to know what to be afraid of. New Yorker bravado has been an empty joke since Mayor Dinkins started cleaning up the streets in 1990 (yeah – you heard me. Dinkins) – and reading a few wise-ass articles in the Times about Shenzhen factory conditions does NOT count as cross-cultural training. Americans in general – but the hard-driving New Yorkers in particular – need to keep their eyes open during their first couple of China deals.

Rules for New Yorkers negotiating their first China deal:

1. Time and scheduling
It will take a very, very long time. Funny story – trying to rush the timetable will only delay things further as your local counter-parties get nervous and start adding people and extra meetings to try to appease you. Being a type A, table-banging, no-nonsense hard guy doesn’t impress your Chinese counter-parties and handlers. In fact, to them it looks like you are having a hissy-fit. Yup. You’re not “The Donald” — you’re the brat who has to turn off “Sponge Bob”. If you are buying you can move things along a bit, but if you are selling or partnering, I’d be concerned if your negotiation took LESS than 6 months.

2. Truth and Honesty
They think they are being polite by telling you what you want to hear. New Yorkers do the same, but instead of them saying, “What a cute baby” or “you look great in those jeans” they are saying, “we’ll wire the money within 60 days” or “it looks like we have a deal”. They are surprised you took them seriously. Not impressed – just surprised. If you want to avoid the worst of the overly polite double-talk, arrange for your own translators and spend an hour discussing background and procedures with them BEFORE your meetings. If you rely on the other side to provide translation services then you are putting yourself at their mercy. And no – not everyone in China speaks English. It’s pretty much a given that your key decision-maker doesn’t – at least not with you.

3. Dim lights, dusty city.
If the Chinese are calling you, it probably won’t be from Shanghai or Beijing. Those people have already got a supply chain and service providers they know. Most of the exciting stuff is happening out in 3rd tier cities deep in China’s interior. For New Yorkers, that would be like Syracuse NY or Allentown PA – except in China they have 7 million people and tons of government stimulus money. Expect to take a little plane from Beijing direct to the middle of nowhere, and then drive for 6 hours. Don’t panic – but yeah, you are off the map with no way of getting home and no one knows where you are and no one understands a word you say. Believe it or not, you’re completely safe.

4. Effort doesn’t count.
If you are in the countryside, don’t joke about how bad the roads are. In the cities, don’t complain about the traffic or crowds. Don’t whine about how hard it is to get there or the lack of 5 star accommodations. You know how that guy from Texas sounds like when he talks about the sky-scrapers blocking the sun in mid-town Manhattan? Well that’s you in China. This is their home. It’s not quaint or exotic. It’s where their parents grew up and where their children will probably grow old. They are not impressed that you are deigning them with your presence. If your negotiation goes well, you should plan on being there at least twice a year for the duration of your relationship. Make it clear to them that you understand that and are happy about it.

5. A little goes a little way.
It’s nice that you can say ‘ni-hao’ and use chopsticks. And yeah, in the sticks they will flatter you and tell you how good your Chinese is. Smile, laugh, and be friendly. But don’t think that you are done. Real compromise with a Chinese counter-party is a huge commitment. If you aren’t prepared to add manpower, put in the travel time and change your operating procedure to accommodate this new business, then you should think twice about starting the negotiation. A China operation isn’t like a fern that you water twice a week. It’s like a relationship that will sour and turn on you if you neglect it.

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Traditional competitive deals are referred to as Distributed because the two parties split (or distribute) a fixed pool of assets.   Integrative deals are often referred to as Win-Win or collaborative because the two sides cooperate to ‘enlarge the pie’ or increase the total value of assets beyond the initial scenario.

In China, however, where negotiations are often characterized by non-economic factors – often in the form of face, guanxi, or lately, nationalism – it is common to experience a third scenario: Lose-Lose negotiation.   To some Chinese negotiators, your gain is their loss and your loss is seen as a valuable asset.

In theory a negotiator should be neutral to the prospect of you earning 10 or 20 if his profit in each case if 15 – and he will certainly choose a gain over a loss, despite the counter-party’s outcome.  According to the orthodoxy of marginal economics, a rational actor will transact as long as his benefit is greater than zero.    But in China your counterparty will sometimes opt for a situation where he loses a little if you lose a lot over an outcome where you gain a lot and he gains a little.  This is particularly true in the case of risk-averse SOE representatives who don’t benefit directly from positive outcomes – but may be penalized for a negative outcome.   As trade tensions rise between China and the West, Win-Win deals will be regarded with increasing suspicion.  Chinese negotiators consider it increasingly advantageous to see you fail.

While we consider this spiteful, petty and quite frankly, NUTS, there is a rational explanation – at least some of the time.  American negotiators who count on Chinese counter-parties ‘ultimately coming to their senses and doing what’s best for everyone’ will be caught off guard if they don’t understand how the Chinese side understands the situation.

Different Valuations, Different Goals, Different Tolerances

Chinese dealmakers still see themselves as tougher and more willing to “Eat Bitterness” or endure pain than Westerners, so they are more willing to engage in ‘trench warfare’ negotiation – committing huge resources to a battle of inches over years.   Chinese negotiators are often working off a different time-frame and valuation model.  They are willing to wait a longer period of time to achieve a deal that gives them greater control and exposure to technology.  Because brand names matter less in China, they are also willing to engage in behavior that puts their reputation at risk.  Furthermore, many Chinese negotiators are working under policy constraints that American corporations simply can’t understand.  Finally, nationalism is playing an increasingly important role in Chinese negotiations – as real or perceived slights, insults and challenges impact on deal-making.

There are 5 factors that Western negotiators must consider when approaching a Chinese counter-party to avoid damaging sub-zero sum game outcomes.

1. Learning curve
Some negotiations aren’t really negotiations – they are educational opportunities for the Chinese side, and you are the unwitting teacher.  Chinese have a huge appetite for technology and a great deal of confidence in their ability to reverse-engineer a product once they understand its function.  Many so-called ‘negotiations’ are really new-product development exercises.  The Cisco-Huawei negotiation is a classic example, though the more recent China Rail – Japan Shinkansen (bullet train) case looks like it will be the new textbook example of the Chinese tactic to act as the ‘good student’ in high-tech negotiation.
Remember that Chinese entities consider brand development, business planning and marketing strategy to be highly desirable technologies that Western partners can be persuaded to provide free of charge.

2. Competitive factors
In many cases, Chinese entities will enter into negotiation with Western companies that they view as potential competitors.  JVs and cooperative arrangements start out just fine when they focus on the production and product development side, but when it comes time to access the Chinese market the deal falls apart.  Many observers consider the DANONE – Wahaha negotiation to be a case in point.  The JV was quite effective when it was exporting to foreign markets, but things got rocky when it came to the Chinese market.

3. Timing
Sometimes the problem is about timing.  The Western side wants to move fast – the Chinese side doesn’t.  Many banking and finance negotiations in the 90’s & 00’s suffered this fate – the Chinese side wanted to move slowly due to regulation, technology and the limited experience of their staff.  Western firms grew frustrated and walked away, but not before training an entire generation of Chinese bankers in the finer points of international finance.

4. Differing valuations of the Chinese market
The Chinese side tends to value China access more highly than Westerners do, and this can ultimately scuttle the deal.  China, after all, has a long and unfortunate history of Westerners benefiting economically from Chinese resources.  Chinese policy-makers and managers have become very sensitive to losing control of the domestic market or resources.

5.  Risk profile
Chinese and Western negotiators view risk differently.  Too much uncertainty will raise the penalty for proceeding, even when there is a chance of gain. Westerners tend to see uncertainty and risk of loss as two sides of the same coin.  Chinese negotiators, however, have a much greater sensitivity to uncertainty – and tend to freeze up and stop deal progress if they can’t see what the risks are. http://www.chinesenegotiation.com/tag/risk-and-uncertainty/ http://www.chinesenegotiation.com/2009/09/risk-and-uncertainty-in-chinese-american-negotiation/

Last but not least, many Chinese entities see a real value in destroying your China business.  In some cases there are policy considerations – such as Youtube, Twitter and Facebook.  But sadly, there actors on both sides of the Pacific who consider it patriotic to scuttle deals that may yield profits to ‘foreigners’.  In the US this is generally a regulatory matter that takes place away from the deal table.  But in China where you may be sitting across the table from an SOE or policy-driven manager the issue of patriotic hostility is a negotiating matter.  Determine the likelihood of executing the deal (not just signing a contract) early in the process – before you reveal sensitive technologies or business practices.

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• We’ve just reached a huge agreement with the Chinese government.
• We have never been more successful, happy or optimistic about our future in China or our relationship with the Chinese people.
• We have never been better disposed towards the Chinese government.
• Don’t tell anyone.

In spite of public signing ceremonies including photographers, reporters, dignitaries and permanent commemorative wall plaques – the Western institutions are instructed to treat the agreement as a state secret. This sounds much odder to those outside of China than to those that have been doing deals here for a while.

China celebrates the signing but hides the cooperation. There are three main reasons for this:

First, China likes to manage the time horizon of the commitment. Most of these deals are not explicitly open-ended – nor do they stipulate a meaningful expiration. This is emblematic of Chinese use of time as a negotiation factor. They will open the door you want them to, but leave themselves the option to close that door at a time of their own choosing. This gives China tremendous leverage later, and makes sure that the relationship maintains proper harmonious characteristics throughout.

Another cause for the seemingly irrational attitude towards publicly acknowledging agreements is that China’s internal power structure is complex, competitive and finely balanced. Westerners tend to view the Chinese bureaucracy as a single entity. Chinese negotiators see the bureaucracy as a community – or collection of clans. The ministry or bureau that ultimately sent a representative to the signing ceremony may have had to over-rule, outmaneuver or horse-trade with a dozen other bureaucratic competitors. One reason Chinese negotiators are slow to embrace the concept of Win-Win negotiation is that the math isn’t as simple here. It’s more like Win-Win-Lose. You and your counter-party may both benefit, but somewhere there is a third actor that has lost out to your Chinese counter-part. That person or group isn’t known to you – but is all too familiar to they guy you are being photographed with.

Finally, your big agreement may in fact be a small step towards a significant policy evolution. Chinese negotiators are known to use individual deals as trial balloon or test cases – usually without the Western counter-party’s knowledge. They will use this case to nudge a door open just a bit and see what happens. A big splash for you, this deal was just the Chinese side dipping a toe in the water. If you start making loud noise about the great deal you signed it may pre-empt a much bigger shift that is far deeper and broader than your contract.

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US business can learn a great deal about dealing with Chinese counter-parties from Mr. Geithner, but unfortunately most of the lessons are about how not to negotiate in China.

Lessons learned:

1. Timetables and deadlines must not be arbitrary. If you can’t back up a deadline, then don’t impose one. The April 15 Treasury Dept report on currency manipulation became the goal, not a tool. When Geithner punted on the deadline he lost the battle. Many have argued that the measure unfairly targeted China and never should have been used as a tactic. While that may or may not be true, Geithner’s last-minute capitulation was perceived in China as a victory and a sign of weakness. Westerners who come to China with an arbitrary deadline are putting themselves on a slippery-slope of endless compromise and back-tracking.

2. ‘Face’ might not matter to you, but it does to the Chinese. If your Chinese counter-party feels they have the advantage or that you lack dignity, it will impact on your negotiating power. Geithner and the Obama people may consider themselves to be enlightened Win-Win high-roaders, but in Beijing they are seen as amateurish blunderers who talk tough but back down. The Chinese side does not consider these Americans to be their equals, and every compromise Washington makes reinforces the Chinese notion that there are more benefits left to uncover.

3. Sell your deal at home first, settle on a rock-solid bottom line and ambit goals – and THEN sit down with your Chinese counter-parties. Be clear on your metrics and stick to them. If you want to succeed in China, you first have to develop your own notion of what constitutes a ‘win’. Like many US deal-makers before them, Geithner & Co. have returned from China to start a much tougher, more acrimonious negotiation with their own home office. Trying to explain to your senior management and Board of Directors why they should accept a bad deal in China is a career-killer.

Chinese negotiators often talk about the need for ‘harmony’ and ‘good relationships’ in business dealings, and novice Americans allow themselves to assume that this means 50-50, tit for tat compromise. More skilled Western negotiators know that the first point to be worked out is how each side defines what harmony and success really mean in the present context. The Obama administration is in the process of learning that they have been too quick to declare this deal ‘done’. Learn from their mistakes, or be ready to repeat them.

The Deal: The Obama Administration – with Tim Geithner’s Treasury taking the lead – has decided to delay the semiannual exchange rate report to Congress, originally slated for April 15, that would have possibly labelled China a systematic currency manipulator. http://www.nytimes.com/2010/04/04/business/04yuan.html
Future venues for the exchange-rate debates will now be moved to the G20 meeting in April, the annual Strategic and Economic Dialogue between US and China in May, and another G20 in June. It also seems that China will consider moving towards the rest of the major powers, including Russia, in attempting to persuade Iran to moderate its nuclear ambitions.

The Results: China won this one with a head fake and a promise that will never be made public. This decision is 100% Geithner — Treasury is still running China policy in Washington and this administration favors the kind of back-room, big-picture, elites-only dealmaking that the Chinese Communist Party understands and trains for. By moving the debate about renminbi-dollar exchange rates to the back rooms and allowing the Chinese to hijack the US decision-making process, the PRC has not only won this battle — they seem to have solidified their ability to influence US policy at will.

The Timing: The Treasury Department report on currency manipulation, scheduled for release on April 15, was the kind of solid, public deadline that Chinese deal-makers loathe. Chinese would much prefer to do their horse-trading quietly and to disclose only glimpses of the final decision. For the Chinese to wait until just days before the deadline to apply pressure to change the time, date, transparency, substance and scope of the deal was typical — and in this case, beautifully executed. Instead of a single authorative report accusing the Chinese of manipulation, we are now looking at a never-ending series of international consensus-building and jaw-boning.
Note to internatational deal-makers — when Chinese counter-parties don’t like the substance of a negotiation, they will attempt to delay it, make the discussion less binding, and move the debate to a more favorable venue.

The Scope: The US went into the currency negotiation with facts, figures and broad support for a measure that would be bad for China. Instead of taking on the forex issue head-on and publicly — a tactic that Americans favor but Chinese find distasteful – China deflected by tying other issues to the forex flap and significantly enlarged the scope of the deal. Chinese dealmakers are expert at cobbling together grand projects that make any particular disagreement seem puny when compared to the bigger picture. Forex is a sore subject for the Chinese — even their allies think that the currency is being manipulated. Iran’s attempt to get nuclear capabilities, while seemingly unrelated, gave China the leverage it needed to neutralize America’s most powerful weapon. Not only will the forex rates stay unchanged, but China is now recognized as the power-broker in the Middle East.
Note to international deal-makers — be careful about being ’scope-a-doped’ by Chinese counter-parties who find solutions by upping the ante. Keep sight of your original goals.

The Linkage: China linked two issues — the currency issue to which it is a central actor, and the nuclear Iran issue to which it is an ancillary participant. The currency revaluation would cost China a lot — the actual forex change would be messy & expensive, but the loss of face from being forced to make such a huge decision AND being insulted as a cheater would have stung even more. It would be a terrible fight where even victory would be costly. China’s response was to find a way to link the forex issue to something that the US cared about but was no-lose for the Chinese side — and that’s how the Iran issue found its way into the forex debate.
Note to negotiators: many westerners in China will agree to linkages of seemingly unrelated issues early in the discussion to ‘maintain face and harmony’, only to have it bite them in the back later.

The Outlook: China has scored a couple of short term wins here, but set the stage for their economic juggernaut to continue making winning plays for the rest of the season. They have stuck to their traditional playbook — creating linkages between unrelated issues, masterfully managing time and deadlines, and moving the real debate to forums that they consider most favorable. The Chinese have also burnished their international status as the ‘honest broker’ among major powers with their new role as the voice of reason in Iran. The US didn’t come out of this empty-handed — they have solidified a stronger anti-manipulation coalition within the US, though it remains to be seen how it will play in an international G20 environment where anything can happen — but usually doesn’t. The US can also get credit for inching China closer to the rest of the world on the nuclear Iran issue, though many are asking if that will be of much value moving forward.

So how does this end? The Chinese win in the short term — they continue manipulting forex rates until later, and they get arm-twisted into doing what was always in their best interest with Iran. In the longer term the Chinese will probably find it necessary to let the RMB appreciate — just to manage their own import issues — and the US side will have to start over by offering new enticements when the Chinese give the OK. The Chinese will continue wringing concessions out of this administration at will, simply because it can.

Got to say, though. Hu JinTao as the Good Cop while Grandpa Wen was the Tough Guy? Well played, my friends. Well played.

Opinions? Comments? Please feel free to go to the ChinaSolved linkedin group or leave a comment below.

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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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

Experienced dealmakers will spot a flaw in the design of this experiment. First of all it is a one-off with no future. Second, it is blind with no history. I designed a variation of this experiment for my undergrad negotiating class at NYU’s Shanghai campus. I call it the Factory Game. The two actors are Brand (from the US) and Manufacturer (China). Brand (B) approaches Manufacturer (M) with a unique product and contracts for a specific factory run – with price, quality and IP protection all stipulated in the agreement.

If all goes well (i.e.: cooperation, Win-Win) B receives quality merchandise at a fair price. M receives a fair payment, technological know-how and future orders. But either side may ‘cheat’ (i.e.: competitive Win-Lose behavior). B can cheat by failing to pay in full or by going to another factory with future orders. M cheats by failing to deliver, poor quality production or theft of IP.

To make it more realistic, I set up the game as 3 iterations (or ‘contracts’) of 3 trials each (to simulate repeat business).

In Iteration A the value of the contract was level each time – say 1,000. This was the baseline case, and represented a deal with an unknown partner.

In Iteration B the contract value rose each time – 1,000, 2,000, 4,000. This case represented a growing market or a ‘key-partner’ relationship.

Iteration C had a falling value – 1,000, 500, 250. It was intended to model a saturated market – or a declining relationship.

Payouts were set as a % of the contract value.

W-W yielded a 50 : 50 payout.
W-L => +75 : -25
L-W => -25 : +75
L-L => -10: -10

My pre-experiment assumptions: Actors would quickly see that it was in their best interests to stay ‘honest’ and cooperative as expected outcomes rose, but resort to cheating Win-Lose behavior as returns fell – or when a ‘contract’ was about to expire.

What really happened? — The participants fell victim to their own emotions and ego positions instead of coldly calculating their firm’s interests. Many participants based their decisions not on FUTURE payout possibility, but rather on PAST counter-party behavior. If A cheated last time, then B was gong to cheat this time – regardless of outcome.

One set of teams had the following outcome:
Trial one: Win-Lose when the payout was stable – as one actor attempted to score a short-term win.
Trial two: Lose-Lose – as distrust from trial one completely negated the possibility of maximum gains.
Trial three: Win-Win. Both sides realized that their barn-burning was counter-productive and anti-competitive (vis a vis other student groups!). Unfortunately, the Win-Win behavior only came into play AFTER the market had peaked and the best returns were behind them.

At first it sounds like they were just inexperienced and emotional – after all, the participants are undergrads with limited business history. But we see the same behavior all the time from so-called professional negotiators. What lessons can US negotiators in China draw from this exercise?

1 – Set the stage for trust, or you will poison the potential relationship from the start.
Test orders are an American concept while systematically building relationships is Chinese. Americans assume that the relationship will grow from successful transactions. Chinese assume that successful transactions will grow from relationships. The result is that Americans tend to under-promise (“we’ll have to see how well you do on the first order before we discuss raising the volume”) while the Chinese over-promise (“oh yeah, we can definitely do what you want at the right price and quality level” – even if they don’t know what they are doing – yet). Both behaviors tend to undermine trust in the early stages of a US-China business relationship.

2 – Penalties and missed bonuses are often interpreted by Chinese actors as ‘cheating’ behavior – and a betrayal of trust.
Americans often employ the ‘carrot and stick’ technique of using potential bonus payments and penalties to enforce positive behavior. Unfortunately, Chinese counter-parties often view this as dishonest and manipulative. It is human nature to count the bonus and ignore the penalty during the pre-execution phase of the deal. Once trust is lost, it is very difficult to restore. A missed bonus – regardless of how justified the American side feels it to be – often triggers negative behavior from the Chinese side.

3 – Guanxi-building activities like dinners, tours and meetings are the Chinese method of vetting partners.
You should be doing the same. Use your banquet time to talk about how you and your counter-party define success. What are your goals? How can you work together? American negotiators are often shocked at how much time the Chinese waste on relationship building. Chinese negotiators are equally shocked at how much opportunity the Americans waste by not building proper relationships.

4 – Overly picky contract terms tend to be counterproductive.
Your corporate lawyer thinks you can write-out the risk of overseas deals, but in China this can be counter-productive. Detailed contracts with penalties and financial stipulations can make the Chinese side feel that you are not a suitable long term partner. Contract terms that seem normal in the US can trigger the “cheat” switch in China — since they think you are already pulling fancy tricks.

5 – Relationships are not organic in China.
Americans tend to feel that close relationships are the product of positive experience and time. Chinese negotiators are a bit more transactional, and expect partners to ‘work at the relationship’ in the early stages. Don’t blow an opportunity by paying lip-service to your Chinese counter-party. When they say, “we want to have a good relationship” it isn’t necessarily a pro-form business platitude. Use the opportunity to define slippery terms like ‘trust’, ‘success’ and ‘long-term’. Assumptions can be lethal in a cross-cultural negotiation.

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American and Chinese negotiators view uncertainty in opposite ways. Chinese negotiators consider uncertainty to be an insurmountable obstacle, and tend to respond defensively by halting all forward progress. American dealmakers often see uncertainty as an opportunity that favors the bold. Risk-taking American entrepreneurs are famous for leaping in with both feet and gaining first-mover advantage in situations where others fear to tread.

The contrast can be brought to light through the use of a technique called the Johari Window (http://en.wikipedia.org/wiki/Johari_window). Johari Window is a framework that researchers use to study the different levels of knowledge that two parties have about a situation. It’s a simple 4 square matrix — across the top are Known to You and Unknown to You. On the vertical axis are Known to Them and Unknown to Them. It yields 4 squares — things that both parties know, things that you know but they don’t, things they know that you don’t, and things neither side know.

Johari in the Classroom
I’ve just started teaching a new Global Negotiating course at NYU’s Shanghai campus. The class is mostly made up of junior-year undergrads from New York University studying in Shanghai for a semester, but we also have a good number of local Chinese visiting students from Shanghai’s Jiao Tong University and East China Normal University. The group runs the full spectrum of Chinese-Western backgrounds – from Westerners of European descent to Asian-Americans to local Chinese who have never been outside of Mainland China. These are some of the brightest, most open minded young people I’ve ever worked with – but they lack real-world business experience. One couldn’t ask for a better setting to study negotiating behavior, since they are extremely intelligent and motivated but are still ‘blank slates’ in terms of hands-on management exposure.

I introduced the Johari Window to demonstrate the importance of research and preparation when negotiating a business deal. There was complete consensus when I explained the 3 ‘north-west’ quadrants. Everyone agreed that the “Known to Both Parties” quadrant presented negotiators with an even playing field, and that “Known to One, Unknown to the Other” gave an obvious advantage to the party with greater knowledge. But when I pointed out the “Unknown to Both” quadrant, consensus suddenly disappeared. Students raised in ethnically Asian households (regardless of geographic location) saw the “Unknown to Both” quadrant as a strongly negative deal environment. The chance of loss was unacceptable. Several Westerners in the group, however, emphatically disagreed. They saw the “Unknown to Both” quadrant as a significant opportunity. (The most vocal dissenters were male; age around 19). To them, uncertainty created an environment in which deal-makers could use their talents and abilities to wrest a competitive advantage. (See the post “Negotiating in China – Western vs. Chinese Attitudes towards Risk & Uncertainty” for more on the decomposition of risk into two components – possibility of loss and uncertainty)

Conflicting Assumptions of Universality
Both the Americans and the Chinese saw their views as obvious and universal. Before our discussion, neither side viewed reaction to uncertainty as a culturally-sensitive variable. To Americans, it was obvious that one had no choice but to proceed in an environment of uncertainty. The Chinese were equally convinced that that the only course of action was to avoid uncertainty and take a defensive posture. Every one of the students walked into the classroom fully aware of the need to be culturally sensitive and willing to be open to different ideas – but on an operational level they carried notions of universality that were completely ungrounded. They simply didn’t know what they didn’t know about the other group’s perspective.

Winning by Hitting the Ground Last
Another interesting observation had to do with the definition of ‘advantage’. Students with a Chinese background took a more absolutist view of uncertainty, while the Americans were more competitive. The western students felt that competitive advantage could be won by operating in an uncertain environment. They could use their intellect and resourcefulness to outperform their counter-party in a situation where both sides were equally uninformed. Those from Chinese households were more concerned about their absolute position. Uncertainty was viewed as unfavorable, and the fact that it might be more or less unfavorable to the other side was irrelevant.

To put it crudely: The American students, it seems, are less afraid of falling in the darkness as long as they can land on the body of their competitor. The Chinese would rather avoid the uncertain situation and wait for the light – even if it means passing up an opportunity.

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While this type of firm has always been around in China, their new prominence – and new agenda – makes them formidable negotiation counter-parties. They are particularly important in China-Western negotiating since their new power and scope will likely set the tone for negotiations even between pure-privates. For the last decade or so, Statists have had to mimic the negotiating style of pure private firms. We are now seeing the pendulum swing the other way – and pure privates will have to start making accommodations to Statist negotiating styles.

New power.
Who are these people? Think of them as private, profit-seeking bureaucrats. They are different from NGOs and traditional government agencies in that they are ostensibly private, profit seeking — but they are built and bred to thrive in policy environments. American negotiators tend to come to China looking to deal exclusively with private businesses. The danger here is that Chinese Statist firms look private -
and can even be listed on overseas stock exchanges — but are basically policy organs. Post-stimulus China has become a Statist economy, and even independent entrepreneurs will fall more directly into Beijing’s bureaucratic orbit.

New agendas.
Like large organizations everywhere, these firms have an institutional imperative to survive and grow. They like profit – but aren’t comfortable in openly competitive environments. These firms thrive on complexity, policy and back-room wrangling over regulations and approvals. These companies would rather shut out potential competitors by manipulating procedural approvals than go head-to-head in the marketplace. Statist negotiators tend to be sub-zero-sum gamers – they are lose-lose negotiators who would rather see the entire system shrink than give up their quasi-monopolistic position. Statists are the incumbents who view new competitors as existential threats – and place a premium on blocking entrance to the market. These actors find it much more cost effective to entertain government officials than to invest in R&D or new product development.

New variables.
These negotiators are determined to earn profit as an end goal — but whereas traditional profit-seekers see government regulations as an obstacle or interference, Statists view regulators and bureaucrats as clients or partners. They tend to measure success not only by sales and profit, but also by headcount, access to government or policy decision-makers, input to the regulatory process, and ability to master the approval process. Be very sensitive to the fact that these people are concerned with more than just securing their own approvals – they also work to block the approval of their competitors. In China, where regulations are not consistent or evenly applied, this becomes a very potent negotiating variable.

New tactics.
Chinese Statist negotiators are highly sensitive to balance of power and tend to behave like monopolists. They attempt build ‘the People’ or ‘the Nation’ into an external source of power — not just a neutral part of the deal-making environment. Their first priority is to enhance and leverage their ’special relationship’ with power structures and institutions. Statist negotiators magnify the role as ‘insiders’ or ‘guanxi’ — which marginalizes outsiders and westerners. Their main tactic is to control & limit access of outsiders to power structures– which serves to manipulate the process and make structures more opaque. Cooptation is more favored than conflict — head to head conflict is discouraged.

New counter-tactics.
Avoidance is the best approach — you are advised to develop plans that don’t involve them directly. This is a great time to consider partnerships with downstream players who have already gone through the time-consuming process of developing Statist relationships BEFORE they consolidated their power. If you have to deal with these Statist organizations directly, you are best off at cooptation (even it feels like YOU are the one being co-opted) rather than conflict or attempts at dominance. One way is to develop your own constituency or populist claims. If you can make it work, try an end-run around the Statist counter-party to appeal directly to their government sponsor/client. What we will probably end up doing it waiting for environmental shifts — or for corruption or new developments to weaken their position. The bad news is that Statists are very effective at blocking new entrants from accessing the marketplace. The good news is that they tend to sow the seeds of their own destruction by making the entire system less efficient and competitive – ultimately undermining their own power base.

While the rise of the Statist is not solely a Chinese phenomenon, the implications for American negotiators in China are profound. The re-emergence of Statist negotiating in China has been triggered by the collapse of external demand for Chinese manufactured goods and the size & composition of the Chinese stimulus package which favors infrastructure building and easy money distributed by policy banks. We are seeing a return to an older — and less efficient – form of Chinese governance that will be more ideological and less technocratic. Since this type of negotiation is better suited to conditions of shortage rather than surplus — those that can create shortage-type environments will benefit most. This is a classic definition of lose-lose negotiating – and American deal-makers have to reexamine their basic assumptions about China’s new business environment.
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