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 start 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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Sometimes, you have to listen to what they are NOT saying.

And right now, China is saying less about the state of US fiscal policy than at any time since March 2009 – when Premier Wen publicly expressed his worries about the health of Treasury bonds.

Maybe China has tremendous faith in the democratic process. Maybe China trusts its good friend the US of A. Or maybe China has already received guarantees from the highest levels that they will continue to be paid in full in the event of a US default.  To understand China’s silence, you have to understand who sets the priorities in the event that a default means that the US can’t meet all its obligations. The US Department of the Treasury.

Stakeholder analysis: When analyzing any negotiation you start by identifying who the players are – who may win and who may lose. The stakeholders in any negotiation about the way that scarce US assets get allocated are easy to identify – you just have to look at where the money goes. According to the Bipartisan Policy Center (http://www.bipartisanpolicy.org/), the biggest payees are:

• Interest on the debt ($29 billion)

• Social Security ($49.2 billion),

• Medicare and Medicaid ($50 billion)

• Active duty troop pay ($2.9 billion)

• Veterans affairs programs ($2.9 billion)

• Defense vendors ($31.7 billion)

• IRS refunds ($3.9 billion)

• Food stamps and welfare ($9.3 billion)

• Unemployment insurance benefits ($12.8 billion)

• Department of Education ($20.2 billion)

• Housing and Urban Development ($6.7 billion)

• Other spending, such as Departments of Justice, Labor, Commerce, EPA, HHS ($73.6 billion)

That breaks down into 3 or 4 big stakeholder groups (depending on how cynical you are)

1. China (the largest overseas buyer of US T-bonds) and other overseas debt holders.
2. Military (soldiers – not defense contractors)
3. US middle class (and those hoping to stay in the middle class)
4. Wall St. (Wall Street interests align with bondholders (including China) and defense contractors. Food stamps, Dept. of Justice & Social Security – not so much.

So what impact will that kind of stakeholder analysis lead to? Here are some ideas:

Negotiating behavior: China
China favors quiet, behind the scenes dealmaking whenever possible. Students of Chinese diplomacy have gotten spoiled with free access to a bounty of information and data over the last 20 years. Those of us who have been watching China for a bit longer still remember stories of analysts sitting on a hilltop outside of Beijing counting locomotive coal cars to gauge PRC economic activity – because that was the only data publicly available.    China’s default setting for negotiation transparency is that less is best.  The PRC understands the value of secrecy, and they know the power of propaganda. The fact that they have practically stopped making public statements about US treasuries means that they have already made their deal.

Negotiating behavior: US
Secretary of Treasury Geithner has been in the public spotlight long enough for us to draw two important conclusions about his negotiating behavior. 1) He won’t stand up to China. (His office is probably the only organization in the western world still officially maintaining that the RMB is not a manipulated currency, despite the fact that Treasury is required by law to evaluate China’s forex policy twice every year). 2) His go-to solution for just about any problem is to squeeze the US middle class. He’s already bailed out Wall St., AIG, and GM at the expense of the US taxpayer (i.e.: the rapidly shrinking middle class), and there’s no reason to think he’s going to start thinking outside the box anytime soon.

Bottom line: Foreign bondholders (including China) will get paid on time, every time. US middle class will pay now and pay later – default or no. So while the USA’s slow-motion self destruction will be a disaster, those with interests in China can at least take solace from the fact that bond holders will fare the least-worst of anyone.

“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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Aren’t Chinese businesses supposed to be long term planners?

Yes, and that’s the problem. As many Western deal-makers are finding out, Chinese negotiators often see the foreign partnership as a short-term tactic on the way to the real long-term goal of independent global competitiveness.

Chinese firms are pragmatic. They acknowledge the need for Western technology and methodology, but that no longer means a permanent marriage. Since the financial crisis of 2007, Western firms have lost the brass ring that used to keep the Chinese side of the partnership in line – access to US and European markets. The cold hard fact is that Western firms are entering partnership negotiations with a hand that is not strong and growing weaker. The Chinese market is becoming the new El Dorado (though it may end up being just as mythical) and the technology gap is definitely growing narrower.

Chinese firms are increasingly viewing Western firms as a short-term partner, a medium-term customer or client and a long-term competitor. Operating a JV in China was tough enough before the crash in the US & Europe and China’s new ‘indigenous innovation’ policy came into force – but many international managers in China now see a bleak future.
Here are a few useful tactics for negotiating a long term relationship in China:

1. Plan first, negotiate after.
Don’t shy away from asking yourself hard questions about your basic plans for China. Do you really need a long term partner in China? Why? What’s the relative balance of power going to be through the life of your partnership? Are you looking for a perpetual subordinate – because your Chinese counter-party might not be interested in a permanent secondary role. As you and he both learn more about the business what’s the natural competitive environment going to evolve into? Not only do you have to plan for 2015 – you have to discuss those plans with the Chinese side. If you plan on calling the shots in China ad infinitum, then you would be wise to make that clear BEFORE you share your IP and trade secrets.

2. Structure is everything in China.
Forget about NDAs and contracts. The deal that makes sense is the deal you’ll end up with. If you plan on having a long term relationship, structure accordingly. If you are providing design and capital and he is providing market entry advice and distribution then you have to plan for a point 18 months from now when he has your designs and you have access to distribution channels. What are you basing JV 2.0 on? A Chinese partner who thinks he can do better without you is going to find a way out of the relationship, even if it means scuttling the business and starting over on his own after you have gone back home. If the only thing you have in your corner is a signed contract, then you are embarking on a lose-lose relationship.

3. Consider a sunset clause.
Your best relationship may be a short one with an option for some type of longer-term arrangement. Teenagers think that passion leads to happy-ever-after, but adults are supposed to know that compatibility is based on other things. Still – there’s nothing wrong with a quick hook-up if everyone knows that’s all there is. But don’t propose if all you want is dinner and a movie. No matter what your plan, always have a viable exit strategy.

4. Don’t pay today for what may or may not come tomorrow.
Cynical Chinese negotiators learned long ago that naïve Americans believe in the fantasy of ‘long-term guanxi’ and are more than happy to let you pay up-front for the relationship of your dreams. Their dream is being the sole patriarch of a family dynasty. You aren’t in their dream.

5. Use your words.
If you have thought it through and decided that a long-term relationship is what you want, then make that part of your negotiation from the beginning. Be explicit and open. This is exactly the kind of thing you should be talking about during those relationship-building activities & banquets. Don’t just stop with the easy platitudes about harmony and working together. Likewise, don’t hold your breath waiting for the Chinese side to come up with a comprehensive game plan. It’s up to you to come up with specifics that include benchmarks and a structure that keeps both sides satisfied.

Partnership hint: Long-term JVs in China are more threatened by success than failure. It’s relatively easy to pull together when disaster is at hand and everyone needs one another. It’s when the Chinese side comes to believe (rightly or wrongly) that you have outlived your usefulness that partnerships fall apart. Plan for the good times as well as the bad.
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1. Western commentators are once again connecting unnumbered Chinese dots to form the picture that they want to see.  The PBOC statement on Yuan flexibility says nothing about timing, direction –  or anything of substance having to do with the new RMB currency regime.  It may be the harbinger of a new Grand International Coalition, or it may be Orwellian doublespeak justifying anything Beijing wants to do.
2. The west is expected to take forex off the table forevermore in exchange for a vague non-promise of flexibility.  How does this change the situation on the ground?  Western financial leaders have once again been pressed into service against their own Main Streets.  If the rmb appreciates by less than 10% over the next year, Geithner & Co are going to look a lot like Jack trading the cow for magic beans.
3. The Chinese side is controlling not only the substance of the argument, but also the timing and the scope. This is classic Chinese negotiation tactics.

Still, the chundits (China pundits) and globalists are thanking Beijing and congratulating themselves for averting a crisis.  Well, it’s certainly nice to think so.  But as we prep for the Toronto G20, how does this announcement change the negotiating environment?

First, China gets to maintain the status quo until it sees fit to change.   Even more significantly, the global recovery debate has been shifted away from artificial exchange rates and structural trade imbalances to western debt levels (which are still very much on the G20 table).  China once again trades smoke and mirrors for concrete western concessions.

This time, however, Beijing may be outsmarting itself.  This is the second doublespeak manifesto to come out in 2 weeks – following close on the heels of the Internet White Paper  released on June 8.  Beijing is displaying a new tendency to spell out in black and white just how gray and subjective its standards are.  Chinese tacticians have always exalted ‘formlessness’ and misdirection, but after a while it becomes possible to benchmark deception.  A pattern is emerging – Beijing enacts a policy (the currency peg or the Great Firewall), calmly waits for international debate to die down, and then finally releases an official definition of terms.  These pronouncements are fait accompli that protect China’s complete range of motion – but are couched in legalistic terms that sound objective.

In the bad old days when capitalism was the enemy and secrecy the rule, China-watchers used to count  coal cars on trains heading into Beijing to gauge the level of economic activity.  With this new set of documents — the Internet Manifesto and the Yuan de-peg paper — we have a new metric by which we can understand Beijing’s true intent.  This time, however, we will be judging the hardness of the NO by the conviction with which we’re told MAYBE SOMEDAY.

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Old tensions were brushed under the rug
It’s been about 14 months since March 2009 when Wen Jiabao signaled the start of the ‘new relationship’ between China and the US by very publicly fretting about the future of the dollar and Treasuries.   The winter of 2010 saw relations between China and the West sink to their lowest level in decades.   During the few weeks between the Second China-US Strategic and Economic Dialogue (SED) and start of the Shanghai Expo there was a noticeable improvement in top-level relations.   Even the People’s Daily gushed that the world was amazed over sharp turnaround in China-U.S. relations:

The China-U.S. relations entered into a warm spring from a cold winter in less than a year, and previously, it also took almost the same amount of time to drive the ties from summer to winter.

New troubles on the way.
Ironically, it was China’s success at managing the last round of international tension that is feeding into a new, more serious round of conflict.  Leaders like Timothy Geithner who were so expertly ‘handled’ by the Chinese side in Round 1 are now looking like empty-handed suckers whose kowtowing to Beijing yielded nothing.  China’s argument that it could help the world most by keeping its own economy strong is wearing thin as the global economy sputters along while China overheats.  Globalists from Washington to Geneva have very little to show for their patience and diplomacy, and the international trade environment is becoming more hawkish than ever.

Old tensions are spawning new conflicts.  The WTO regulations that helped China pry open foreign markets are now being used by Europeans and Americans to press for increased access to Chinese consumers.  Labor unrest in the factories seems to be focused solely on overseas firms.  China’s whitepaper on the internet has  enshrined censorship and blockages as official policy. Domestic content rules and new trade restrictions are destroying hopes for a level playing field for domestic and international firms.

The economic recovery in the West is moving in fits and starts with persistent unemployment and uneven economic growth.  Main Streets in the US and Europe have grown tired of empty promises.   Chinese managers are facing troubles of their own, as inflation, labor strife and fear of bursting housing bubbles eat up what was left of their margins and threaten the only business models they know.  The Chinese operating environment is becoming expensive, less profitable and far less predictable than at any time in the last decade.   There are fears that a double-dip recession may strike in Europe, the US and China.

Why is this time different?
Where the pre-SED (crash – May 2010) round of tension was primarily a clash of world leaders over macro issues, the new troubles will be much more bottom-up.  If you were negotiating with a Chinese counter-party in the last year you may have noticed that the atmosphere was less cordial than in the times gone by, but your deal-points and goals probably weren’t affected.  Emerging tensions, however, will center on more bottom-line issues.   We all know that Chinese negotiators tend to put more emphasis on relationships.  During times of international harmony, this represents a significant but not necessarily unpleasant challenge for American negotiators. What about during times of rising tension?  How should Americans handle their relationship building?   In a word, ‘cautiously’.  Unlike the first round of trade conflict, this will not be a war of words between elites, but more of a bare-fisted brawl between street fighters.

The game is changing, and it’s up to you to decide whether or not the next phase will benefit you.

Next:  Best Practices for Bad Times.

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As China realigns its relationship with the rest of the world, growing tension and conflict between governments will almost certainly have an impact on international negotiating. Instead of closing their eyes and hoping for the best, American managers can scan the shifting environment and try to figure out where the new challenges and opportunities are going to be.

Environmental scans are really just checklists of big-picture categories you should analyze. Social trends. Technological issues. Economics. Some people called these frameworks STEP or PEST or PESTLE. The most comprehensive seems to be the STEEPLE, so that’s what we’ll use as an example.

Society, Technology, Economics, Education, Politics, Legal, Environmental

For more background, look here. http://innovationwiki.brighton.ac.uk/index.php/STEEPLE

Social.
Chances are good that China and US are going to drift further away from one another compared to 2007 (before the financial crisis). Two societies mean two media industries, new brands, two distribution networks and two sets of stars. Bad for the global village, good for business. MNC management woes worsen as China’s whiz-kids choose Chinese. Access to China media market is tough and getting tougher.

Technology.
China wants more sophisticated technology. US has cyber warfare concerns. Chinese tech issues are getting more refined and more process-based. There was a time when bureaucrats put a premium on any western technology or process, but now China is finding certain types of investment unnecessary. Chinese auto industry in drive – the Geely Volvo deal has huge potential. Outside of autos, China having a hard time leveraging off the new infrastructure and shiny hardware to come up with the innovation that it needs the most – a viable international brand. China is moving fast to close the tech gap, but the differences are still vast.

Education.
Big opportunity for American and British institutions. China will be a big spender. American brands are still hotties. State testing still rules the schools in the provinces, while coastal yuppies spend fortunes educating and preparing for more education. Cross cultural and soft-skills training will be back in vogue as policy chills work their way into the office cubicles and senior management suites. Education services may be one of the hottest areas for Americans to market to middle-class China.

Economics.
Where to begin? Inflation is a potential issue in China, credit will continue to pose real threat in the US. Unemployment is the big deal in both countries for different reasons (US has layoff and fired unemployed, China has graduates unable to find work). Both sides are betting their legitimacy on the economy, and its even money all around. US numbers are looking good but weak and uneven. China is cooking with gas, but expectations are high and Beijing has bet the collective that the best days are yet to come. The picture would actually look kind of rosy if the two sides were getting along better, but bad politics rock markets. Still, the worst is probably behind us.

Politics.
Pretty bad and getting worse. Currency and structural impediments. This will be Congress level dialogue, so don’t look for an excess of rational thinking. Ironically, though, we could be in the sweet spot right now because the situation has the potential to get much more volatile in 2012 when the US election campaigns get under way. What happens if the CCP leadership veers ultra-nationalist as a double-dip recession has the U.S.A. Hailin’ Palin as the 45th president? Politics is likely to be more volatile than in 2007.

Legal.
Pretty bad and getting worse. Trade restrictions, local content requirements, tariffs, dumping, anti-dumping, product safety, currency, hacking, censorship, visas… Will Google.CN fade from memory with hardly anyone taking notice – like Facebook, YouTube & Twitter – or did The G just give itself a billion-dollar brand facelift at the expense of China’s reputation? A lot of people are talking about censorship and freedom again. Still, the key legal issue for the future of international business in China is the application of local law to overseas companies. If laws are systematically applied unevenly or if they favor locals, then we’ve just taken a major step backwards. This is one of the single biggest variables on the board right now.

Environmental.
China will have water issues. US and China will have energy issues. Wind and solar are sexy, but nuclear is the game changer. China is probably polluting the US, and is certainly ruining SE Asia. Will be an issue. US needs infrastructure, energy and money. In the US, environmental policy will be crisis driven. China will try to engineer state industries to solve and export.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Next – Surviving the New China Negotiation

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“Which is better – a bad decision or no decision?”

Every single western student said, “Bad decision”.
Every single student who grew up in a Chinese household (in US or Mainland) said, “No decision”.

This is an old Harvard Business School koan that has achieved the status of proverb in the US –and the orthodox answer is “a bad decision is better – because it leads to more information and progress”. It reinforces an American notion that inertia and indecision lead to failure.

Chinese households teach their kids a different lesson. When confronted with a confusing, dangerous array of options, the best course is to delay action until the situation becomes clearer.

Which is better? Well, that depends on which side of the table you’re seated at – and what the environment is like. But the real point is that Americans and Chinese are walking into negotiating situations with VERY different assumptions about risk and decision-making. This particular cultural disconnect is very dangerous because both sides have internalized their behavior and don’t even consider that their counter-party may see the world differently.

Attitude towards risk: Chinese vs. Western traditions

Risk vs. Uncertainty
When Americans use the word ‘risk’ they are combining two concepts. First is the possibility of negative outcome – the chance of loss. The second is the degree of uncertainty – how much do we know about the possible outcome? Americans tend to treat them as opposite sides of the same coin. Chinese decision-makers have no problem with risk as ‘chance of loss’, but they are seriously bothered by uncertainty. We see the manifestation of this in negotiations all the time. When your Chinese counter-party asks for more and more information – or wants to review the same facts many times it may indicate that they still feel unclear about some basic point. (It may be a delaying tactic as well – more on that another time).

American negotiators tend to dive in to deal discussions and try to get at the “real meat” of the discussion – numbers, projections and deal points. This is sometimes off-putting to Chinese negotiators, who like to spend more time on background and big-picture issues. If you find your discussions hitting a snag on a very basic point – or your Chinese counter-parties ‘just don’t seem to get it’ – then the problem may be that they are uncomfortable with environmental factors. It’s important not to tense-up or get hostile here. Back off a bit, and lighten the conversation. If your Chinese counter-party drifts the conversation back to some big-picture market or operational issue, you may have an indication of what the blockage is about. They may want more information – or may have already made their decision. Either way, it is worth exploring.

Failure vs. non-success
To a western manager losing and not-winning are pretty much the same thing. If you didn’t get the deal, then it is your shame and disgrace. It doesn’t matter if you tried your hardest or missed the lead completely. Chinese organizations don’t have the same orientation. If you stick your head up and accept responsibility for something, then you now own that problem. Remember – commissions and bonuses and profit sharing are all relatively new in China. The Chinese worker who had to stamp his name on the bricks used to build the Great Wall didn’t get a bonus for the section that stayed up – but he was sure going to have a bad day if his name was on the brick that crumbled.

This is one of the many reasons why it’s so important to make sure your counter-party actually has the organizational buy-in or personal authority to execute the deals you are discussing. When dealing with Chinese organizations, don’t look for champions who are going to fight to get your deals approved. You are better off with a counter-party who will introduce you to the next level of the decision making unit. If you are having repeated meetings with a Chinese manager who is clearly taking orders from someone you still haven’t met, then you may want to investigate. You may simply be furnishing your guy with market and product information.

Opportunity costs
Chinese deal-makers tend to assume that there is always another opportunity coming down the road. Many western negotiators have been surprised to find that their ‘take it or leave it’ offers get left – often with no further discussion or bargaining. Taking a bad deal is illogical when it’s likely a better deal is about to walk through the door. Even when business is slow, Chinese negotiators tend to be more passive and reactive than their western counterparts. When facing an uncertain or dangerous situation, they will delay and wait for clarity.

If your counter-party is convinced that there is a better offer waiting in the wings, then you are going to have a hard time gaining concessions or controlling the pace of that deal. Your best option here is to maintain simultaneous discussions with multiple counter-parties and play one off against another. The same Chinese negotiator who is happy to see you slink away in defeat will be significantly less happy if one of his competitor’s ends up taking your money.

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