What happened next:

First the Brit tries to take control of the situation, arguing his moral position. The overnight bus was a complete rip off – he was shown photos of a modern luxury double-decker but was forced into an overcrowded, dilapidated minivan. He’s angry that the bus didn’t take him directly downtown, and is not in the mood to be ripped off again. For him this is just part of a larger issue and he wants to fight back. The British guy is right in some ways, but wrong in others. He is morally and ethically correct, but he can’t convert his anger into a negotiating goal or a set of actionable variables. He’s negotiating about emotional positions – not objective interests. The Brit doesn’t know what a ‘win’ looks like.

The Dutch guy was a compromiser. He aggregated a bunch of folks together and beats down the driver from extortion to mere larceny, but at least he transacts. This seems like a pragmatic position that is well suited to the situation. He knows that they will all get cheated on the price, but it is a one-off deal and he acknowledges the relative weakness of his position. Part of his problem was that the other side knows this tactic, and sets his opening price so high that even a 25% drop is still dear. But that’s not the extent of the Dutch negotiators’ trouble. He didn’t include two key variables – time and exclusivity. As soon as the group has loaded their luggage on the roof and taken their seats, the driver continued trying to lure in new passengers. The group has no choice but to sit and wait.

The young American was coming from Shanghai and using all the wrong benchmarks. He undermined his co-negotiators by repeatedly saying it is cheaper than Shanghai. He’ll always give more and get less. Not only is the American paying more now, but is institutionalizing higher price levels for all foreigners in the future. The longer this type of negotiator works with the same counterparty, the worse his outcome.

What could they have done different?

The first negotiation they should have conducted was internal. Instead of just “taking a shot” at a single driver one after the other, they should have discussed roles, strategy, tactics and limits among themselves first. The Brit would have made a great “bad cop”, while the American could have acted as “good cop” with the Dutchie acting as the “fair judge”.

They might have tried to play one driver off against another and undermined the first drivers de-facto monopoly.

They could have changed venue by walking away. By simply walking to the side of the road and trying to hail a passing cab they could have improved the balance of power. Nothing works better in a tough negotiation than walking away.

Me? No- I wasn’t the relatively rich guy from Shanghai.

I kept my bag on my lap and didn’t pay till we got to our destination. I jumped out of the car immediately, and then offered the driver a choice of currencies – both at a twenty percent discount to the Dutch price. He looked at my US dollars in horror, and quickly took the Thai baht without a complaint.

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

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

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

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

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

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

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Background articles on BusinessInsider.com:

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

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

Your iPhone Was Built, In Part, By 13 Year-Olds Working 16 Hours A Day For 70 Cents An Hour
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Two parties recently met to discuss a new business venture in China. On one was Bob – an American small business owner looking to expand into China, and the other was Cindy – a Chinese entrepreneur who wants to partner with him.

The first meeting was textbook cross-border business courtship – both sides were chatting about big-picture business plans, impressions about China business and their own personal views and experiences. It was typical of the relationship building session that many American and Chinese expect in the early stages of a partnership negotiation. Bob then did something very smart – and very significant. He said, “So it will be an equal 50-50 partnership between the 2 of us, right?” Cindy answered, “Well, I have family connections in XXXzhou who have guanxi with the local government, and they may want a percentage.” The conversation then resumed course.

2 points make this conversation a very important case study for Americans doing deals in China:

1) The American side broached a substantive business issue without breaking context. It was still light, big-picture and friendly, but the westerner made the decision to discuss REAL business. Furthermore, instead of just making an assumption based on what seemed obvious to him, Bob asked a naïve question about the basics – and then shut up.

Many novice American dealmakers erroneously believe that the early-stage discussions are all lightness and touchy-feely platitudes. Not so. But when Americans talk about business there is a tendency to get overly formalist and ‘lawer-y’. Chinese aren’t squeamish about touching on business terms early as long as it is handled in a light and non-threatening way. They probably won’t make the first move – and they definitely get spooked when things turn adversarial or are couched in legalistic, contractual language. You should talk about real issues, but look for common ground first – you can iron out differences later. Chinese prefer to start with the easy stuff – Americans sometimes like to tackle the big issues early to figure out if it’s worth it to stake in the discussion.

2) The Chinese side brought up a very significant point that may turn out to be a deal-breaker down the line. The local partner is a very real factor. There are important considerations here.

a. A local family member is going to be involved. This is a double-edged sword. The local connections are going to come in handy – in fact, Cindy may view her family connections to be her main contribution to the new partnership. The family relationship, however, is being packaged as a new partner instead of as part of Cindy’s ‘half’ of the business. This weakens Bob’s position and opens the door for corruption, mission-creep and a variety of other worst-practices. It shouldn’t kill the conversation (necessarily), but likewise – Bob shouldn’t disregard this casual statement just because he doesn’t like or understand it. This is part of the deal, and the Chinese side was honest and forthright about it. Now it is up to Bob to manage it – before it turns into a crisis.

b. This is new deal-point – and a significant one. Bob has gone from being one of two partners to being a minority shareholder. He has to digest this new information, incorporate it into a new business plan and negotiate accordingly.

Americans tend to view a family relationship as a negative to be avoided – a cost to the new business. It is the Chinese side’s responsibility – and should come out of their pocket. Chinese view the family connection as a rare commodity that they are contributing to the venture – one that will benefit the entire organization and should be borne by all beneficiaries equally.

Whichever view you take, it is ‘best practices’ to deal with this issue early. If it turns out that after meeting number 3 or 4 that the new silent partner issue ends up scuttling the deal, then no one is out much and we can walk away as friends. If they don’t deal with the issue until much later – as is the case in many US-China deals – then the costs in terms of money, time, resources and opportunity skyrockets.

c. This challenge may be best addressed with a creative business structure. American lawyers would handle this with contractual clauses and penalties – but this is like daring the Chinese side to find a way to outwit you. The best way to handle the silent partner may be structure this as a multi-phase deal, with the silent partner playing a role in only the first part. Or the answer may be a sunset clause, or Bob may want the rights to set up an independent operation in different city, or some other new option. The existence of a third partner is a structural issue – not a contractual one. When Americans try to solve guanxi problems with contractual clauses, trouble usually ensues.

The point is to ‘surface’ the key issues early – and to recognize potential deal-breakers before you have too much skin in the game. The Chinese side’s position that guanxi isn’t free and the western side is expected to pay for it. Now it is the westerner’s turn to make the decision. He can A) accept the deal structure the way it is and negotiate about the cost and terms of the new partner, B) compromise by adjusting or limiting the role of the new partner, or C) back out of the deal. Unfortunately, for many American negotiators in China there is also an F) option – ignore the real cost of the guanxi relationship until it threatens the partnership and undermines the business.

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“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.

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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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