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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Chinese and American negotiators have differing views towards opportunity and sunk costs. Americans spend time, money and energy vetting deals and counterparties at the start of a negotiation, so once they decide on an investment they stay committed for as long as it makes economic sense. Abandoning one deal to search for another usually involves a significant loss – particularly when they are far from home. Chinese negotiators, however, spend the early phase of a deal focusing on relationship-building and learning about technology and business models. Until recently, they have invested relatively little in the way of cash – often putting up non-cash assets like production capacity, land, staff, and non-tangibles like distribution channels, connections and know-how. If they pull out of an agreement the opportunity costs are generally a lot lower – and if they have learned your business or acquired your IP in the early stages, may even be negative. (Think of negative opportunity cost as an incentive to move on to the next deal.)

A Chinese negotiator, therefore, has a greater range of motion than his American or European counterparty. This is one of the ways that Chinese negotiators shift the balance of power very effectively midway through a negotiation. Your assets are sunk and losing value – theirs assets are fluid and growing (now that you’ve taught them a business).

What does it take to hold on to a Chinese partner?
When structuring deals in China, if you want to hold on to your partner make sure there is a rising payout – and that he can make more working with you than working against you. If you can’t offer those terms, you have to seriously reconsider whether you want an equity or strategic partnership with a mainland Chinese counterparty.

Often the question is a simple one – would you rather own a minority stake in a money machine or a controlling interest in a broken down jalopy?

Do it the Disney Way
When Disney did their Shanghai deal, they didn’t play cat and mouse with the Chinese authorities.  Walt Disney Co. handed over about 57% of their cheese to a couple of SOEs representing the Shanghai government.  Sounds like the mouse got trapped — but you can bet that no one will be selling Disney knock-offs outside the Shanghai subway stations. This is a self-reinforcing deal, because the Chinese partner feels like the brand is working for them. Disney’s apparent weakness – its minority stake – is actually a strength. Shanghai now has something to lose if the partnership goes bad.

The key consideration is that Disney has a unique and highly recognizable brand that their key Chinese market is already clamoring for. If you don’t have that, then you’ll have to make do with money, technology or other assets. Your Chinese partners don’t just want a lot – they don’t just want a growing return. They want more than YOU are getting. For the Chinese side, sometimes one of the deal variables is out-dealing the foreigner – so plan accordingly.

But I Don’t Want To Give Up Control
If you’ve looked at all the angles and majority control is still your one and only choice, then plan accordingly and prepare for the tough times. That doesn’t mean you should act tough – just the opposite. You have to look patient, while keeping your options open and protecting yourself against an army of counterparties who feel that they have nothing to lose by trying to swipe your technology, business model, key people and markets. Here are a few of other things you have to do:

• No exclusivity talk. The Chinese will ask for it, and some Americans think they are being clever by playing coy and dangling exclusivity in front of their counterparty’s face like a carrot on a stick. Bad move. You are guaranteeing that you and your non-partner will have a damaging conflict. He may not win, but you’ll certainly lose.
• No partners. If you want to play the lone wolf, then be the lone wolf. Assuming that a Chinese partner will be satisfied with a perpetual subordinate role only works if you are A) over-paying, B) working with a stupid partner, or C) all of the above. Build nice, cordial relationships but be clear that you are paying for transactions – not offering an equity stake. If the Chinese side indicates that this isn’t what they are looking for, then for God’s sake, pay attention and move on! Don’t twist their arm into learning your business model and technology when you know they will eventually be dissatisfied.
• Have multiple counterparties for key functions and service chains. It’s not efficient, but you don’t go it completely alone in China for efficiency. Always be ready to move on to your next best option. This means that you have to build in plans and budgets for continually expanding your range of connections – and you can’t rely on the network of the people you may be leaving behind. When Partner A helps you hire internal staff and find your service-providers and suppliers, you have a problem dropping him in favor of Partner B – because the first guy now has conduits into your business.
• Safeguard your IP. If it’s any good, someone will make a play for it. Protect everything (with your own lawyers – not a partner’s) and only bring in what you can afford to lose. Even if you register and copyright everything, they will still copy and backwards engineer whatever they want to use. It won’t prevent you from using it in China, but you will be competing with your own designs.
• You have more to lose than money or technology. Apple is finding itself tied to some very unsavory labor practices, and it can’t disengage even if wants to. It’s brand image is going to be battered, but it has no choice but to stay involved with partners that make it look as evil as any other sweatshop operating, worker-killing, child labor exploiting factory boss.
• Be ready to walk away when the time comes. For some westerners, this is the hardest part. If you can’t do it, though, then you will never maintain full control over your own business.

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A Chinese negotiator approaches each deal with two options in mind. His Plan A is a win-win, long-term relationship that will bring him many profitable transactions over a long time. He knows that this will require a lot of time and effort, but this is the Chinese template for success, and he considers the investment to be standard operating procedure. It is simply the way they roll. Plan B is a one-off, win-lose transaction. While not optimal, normal business operations require plenty of non-strategic transactions. Since he doesn’t plan on seeing the counterparty again, he should maximize profit immediately. Often that means lower quality production, inferior materials and little or no service.

For a Chinese business person, the worst case option is investing lots of time building relations and educating a counterparty only to have the deal fizzle out and go nowhere. This is Plan F – as in failure. An experienced Chinese counterparty is continually assessing the situation, sensitive to any whiff of deal failure. A smart negotiator knows when to shift gears, and he’ll downgrade you from Plan A: Relationship to Plan B: One-Off in a heartbeat, without warning or explanation. In fact, if he’s worth his salt as a dealmaker he’ll disguise his tactic so you continue believe you are involved in a long term negotiation. It’s the best way for him to narrow his losses and recoup a portion of the time, money and opportunity cost he has already invested in this losing venture. He will view the failure to build and maintain a long-term relationship as either a betrayal or a disappointment – but either way it is on you. He just wants to salvage whatever he can and move on to the next opportunity.

What tips the scales to your detriment? It could be a lot of things, but the general idea is that you didn’t live up to your end. There are three general classes of foreign failure:

1. You or your product offering were found wanting from the very first encounter. It was never a long term thing. Foreigners read these books and hire consultants who talk about guanxi and face. They think that all Chinese are master strategists playing a multi-layered, long-term chess game. Sometimes a Chinese guy just wants to buy or sell something. Sometimes they just want free technology or IP. If the western guy wants to believe that there is some kind of eternal bond between him and the Chinese counterparty, that’s his funeral.

2. The Chinese side thought that there was something there, but it just isn’t working out. The westerner may not have the right temperament or character. He may be too crude, too aggressive, too impatient, too greedy or too stupid. Maybe the technology or product isn’t good enough or doesn’t fit the Chinese side’s business model. Whatever the reason, the relationship isn’t working and the Chinese negotiator needs to cut losses. That may mean a predatory transaction – or it may mean they simply stop returning calls or emails.

3. Some partners outlive their usefulness. A good Chinese business person is always trying to close the gaps in his own knowledge and find ways to drive down costs or expand markets. Westerners who plan on charging perpetual rent for last year’s technology (that the Chinese side has already mastered) are greedy and naïve. Chinese deal-making is all about “what can you do for me tomorrow”. Westerners can get away with demanding the lion’s share of profits when they are providing interesting technology or methods that the Chinese side doesn’t understand – but they had better keep the innovation train rolling. When the new ideas stop, so does the relationship.

To a Chinese manager with a long-term perspective, it doesn’t really matter if your betrayal or disappointment occurs in the first five minutes or after doing business for years. They will downgrade you from value-adding partner to one-off pest as soon as the circumstances require it.
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Managing conflict in China is a tough, but if you leverage on the relationships you’ve built  and observe a few simple rules you might come out of your disagreement with a stronger partnership than ever.

Conflicts arise in every relationship.  Westerners have two main modes of managing conflict in China – ignore the situation completely or take a scorched earth approach to solve the problem once and for all.  Managers who find a middle path are generally more successful, but that’s no easy feat.  Conflict management is closely tied to relationship-building skills – you can’t be good at one without the other.  Those who build strong relationships with well-structured deal terms are the ones who recover and prosper through disagreements and misunderstandings.   If you cut corners early, used consultants or third parties to make your introductions or over-promised during the relationship-building phase of the negotiation, then you can expect conflicts to occur more often, accelerate faster and have worse outcomes than average.

Will Trust Survive?

They key to dealing with conflict in China is to make sure that mutual trust isn’t the first casualty of battle.  The whole point of building a relationship in China is to get to the point where your word means something to the other side.  If you plan on working with this person again then it’s important to know where the lines are drawn.  If he feels you have been dishonest or failed to hold up your end in some way, then the invisible bonds of  trust are broken (without your knowledge) and now he is free to pursue more aggressive negotiating tactics (lying, stealing, under-delivering).  After all, you made the first move – even if you had no idea that’s what you were doing.

The problem is, his definition of “bad faith” covers a much broader range of meanings than yours does, and might include botched business etiquette, cultural slights, a brusque manner, an insubordinate underling, or just about anything else.   Building a Chinese relationship is child’s play compared to repairing a damaged partnership.  Due to distance and cultural barriers, minor disagreements often fester for months or years in silence and then suddenly spiral into uncontrolled combat after a seemingly minor provocation.   Your job is to stay out ahead of the situation by carefully monitoring your counterparty and his organization, looking for non-verbal cues that you are becoming less popular, and not permitting the situation to snowball out of control.   It is easier to deal with problems when they are still small.

The Path of Reconciliation

One intercultural quirk that western negotiators need to be aware of is that Westerners and Chinese resolve conflict in different directions.  Westerners look back to the cause and assign blame.  Chinese look to the next transaction and acknowledge power.  This means you either have to take a whole new approach to conflict management — or persuade them to take your approach.  Once the disagreement starts, speaking louder and repeating yourself doesn’t actually help.  You are talking about who is to blame and they’re saying how lucky it is that they can hook you up with a new deal right away.

Chinese negotiators like to resolve conflict with a forward-looking perspective.  If they acknowledge that things went badly for you in the last deal, they’ll try to fix things on the next deal.  This cements the relationship (doing more business together), preserves face (no need to admit to anything, both sides have an incentive to smooth over the conflict) and gives each side room to maneuver for maximum advantage (I’ll get him again / get him back ).  Harmony is preserved, the authorities don’t stick their noses in and everything is handled quickly and quietly.

Western negotiators are usually either lawyers or lawyered-up, and they resolve conflict with a very backwards-oriented approach.  They like to publicly identify who was right, who was wrong, when the damages occurred and how it was done.   Americans also like suing for damages.  Public humiliation is part of the process, and punitive settlements could be astronomical.

Is there a way to reconcile the two perspectives on conflict resolution?  Over the next few weeks I’ll be looking at Chinese-Western Conflict (business only).   The series will cover  Conflict Avoidance, Conflict Mitigation and Conflict Management, and will finish with a Best Practices guide to managing conflict in China.

• Conflict Avoidance. Conflict avoidance means picking the right partner – and walking away from the rest.  Good relationships count for a lot in China – especially when there’s a disagreement.
• Conflict Mitigation. Conflict mitigation is about knowing the appropriate level of conflict and figuring out ways to control it.  Always make sure everyone can come back to the table without looking foolish.
•  Conflict Management.  Conflict management is often a function of deal structure.  Both sides have to want to stay in the partnership. 

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But in more and more cases it’s the Chinese side that has the last word.  It used to be that Mainland negotiators were confused and intimidated by binding contracts – now the tables have turned and the Chinese are exploiting Western assumptions about legal agreements.  The Chinese are more than happy to sign on the dotted line, knowing that they can use their Western partner to climb the technology ladder and acquire the know-how to develop marketable products on their own.  Once the Chinese side has gotten what it needs from the partnership, it is a simple matter to drive the foreigner out with front-line tactics that play out on the factory floor and the distribution network.   Chinese dealmakers have learned to honor the letter of the contract while shredding the spirit of the agreement.

It is easy to blame the Chinese side – there’s plenty there to criticize.  They play fast and loose with the truth, they exploit the home-court advantage and outmaneuver western partners with government & bureaucratic connections.  What they don’t  do is mix up their tactics.  Chinese negotiators tend to be consistent and predictable.   When they find something that works they keep doing it – over and over.

Western management has often been its own worst enemy in China.    HQ managers view contracts as set-in-stone blueprints, and they are quick to see any variance between the document and the real world as the fault of their own front line managers – be they purchasing, sales, HR or operations.

Western negotiators need to stop negotiating the contract and start negotiating the business.   China business is not won with boardroom masterstrokes – it’s a battle of inches slugged out on the front lines.

Here are the rules for building a China-ready negotiating team:

1. Plan for two sets of negotiations
   Senior managers tend to talk with one another about collaborative, win-win deals, but the real negotiation is the one that plays out on the front line – and that one is cut-throat and competitive.  HQ managers have to budget the time, resources and bandwidth for an ongoing negotiation, and stop living in a fantasy world where contracts are binding and win-win is the norm.  TIC – This Is China.
2. Get more feedback from your own  front lines.
   Purchasers, salesmen, HR and engineers should by your first source of business intelligence.   Large western organizations tend to be poor at internal negotiation, and favor top-down information flows.  That usually means that the people who know the least about China are making all of the decisions.    Develop open-ended procedures for getting feedback – not annual company meetings or boilerplate status updates.

   Adjust corporate culture if necessary.  Senior managers must be more tolerant of failure, delays & disconnects.   “No-nonsense tough-guys” who bully underlings to get the job done at any cost are suppressing the only reliable flow of information that the company has – honest assessments from the front-line staff that is dealing with purchasing, selling, hiring and producing.

3. No more one-size-fits-all solutions.
   Multinationals that have spent time, money and effort to build global systems try to apply them to China, and the results are often mixed at best.  Companies that negotiate effectively in China use flexible systems that are specific to their Mainland business.  Chinese don’t care how you do it in America, England, Italy or India.
4. Know their weaknesses, know your weaknesses.
   They steal IP.  They may not consider it theft or wrong, but you probably do.   Westerners are lousy at relationship-building and time management – at least by Chinese standards.    Don’t paper over the big issues.  Make your weaknesses and differences the core of your relationship building – not a forbidden secret that no one can talk about.
5. Constructive engagement means many small conflicts – not fake smiles and pretty lies.
   Your counterparties are tough-as-nails Chinese business professionals, not fragile China dolls.  As long as business disputes are not personally embarrassing or political in nature, then a very wide range of topics are ‘in bounds’.   Westerners have bought into the propaganda that Chinese are all delicate flowers who will wither and faint if confronted.    Lots of small, manageable confrontations is a relationship.  One big confrontation is a failure.
6. It takes a team.
   Americans all want to be cowboys and Europeans still love their aristocrats, but China is about the team.  Don’t show up alone.  Negotiating teams should be multilevel and cross-departmental.   Chinese like authority, so senior management has got to be involved in a committed and serious way.  Purchasers and engineers who get “abandoned” by an HQ that doesn’t engage frequently with their Chinese counter-parts are easy targets for competitive negotiating tactics.
7. Always be looking for new counter-parties and new opportunities.
   Expanding your network in China means constantly searching for new stakeholders and counter-parties – both within you existing partner’s operation and from new (external) potential partners.  This may be your only long-term source of leverage.  If you have a single counterparty in China then you are perceived as weak and vulnerable.   This is another area where your front-line people can provide valuable input and feedback.
8. Empower your front line.
   Your front line staff needs the ability to build and block.  They must have the power to build relationships and block potentially problematic transactions.  “Divide and conquer” is a favorite technique of Chinese negotiators, and they are quick spot a purchasing manager or salesman who is not getting enough support from the home office.    Your people need the range of motion to build relationships (which may mean breaking from standard operating procedures) and to hit the panic button if they spot a problem that threatens the bottom line.
9. In China, failed negotiations end – successful ones never do.
   Renegotiations are par for course here, and your Chinese counterparties consider it normal.  You have to as well.  You should treat ongoing renegotiations as an opportunity to build and expand relationships – not as an attempt to rip you off.  This is where real guanxi comes from – the give and take that arises from a shifting business environment.  Chinese feel that source of long-term stability in business is strong relationships – not  thick contracts and rigid adherence to out-dated agreements.
10. For the Chinese side technology is the goal, time is the weapon.
    Chinese negotiators often assess the success or failure of a deal by the technology and IP they acquire.   They don’t really care how they get it.  One of the most successful tactics is to manipulate western negotiators with time tactics.  They rush to sign and drag their feet when executing.  The hope is that you will over-deliver  IP to win what you think is a valuable contract, and then throw up so many roadblocks while executing the actual business that you will go away – or go broke- before they have to deliver.

When is it best to ‘rock the boat’?

Powerful incumbents do best by supporting the status quo.  Their big move is to set the agenda and timing of negotiations, and tend to display AVOIDING or COMPETING styles.  In the US-China negotiating landscape, the classic supporter of status quo is the Chinese SOE and the entrenched MNC.  The State Grid and KFC may not seem to have much in common, but they both feel that things are just fine the way they are – and will work hard to keep the negotiating environment stable.   Both parties benefit from rules and practices that raise the barrier of entry.

Newcomers and ambitious but relatively weak counter-parties should favor disruptive strategies.  They do best in times of change, shifting tastes & trends, and chaos.  Often those coming from a weaker position will start-off as appeasers or even collaborators, but these approaches will put them at a perpetual disadvantage unless they can destroy the competitive equilibrium.  This can be achieved by posing as friend or subordinates and then, after they have acquired experience, knowledge and technology, take action to undermine the position of incumbents.   Huawei, Wahaha and much of the Chinese auto industry have followed this path with great success.  Most Western businesses enter the China market with some sort of disruptive strategy in mind – whether they know it or not.

The problem for Americans in China is that we tend to negotiate as though the status quo favors our business model when it really isn’t.    We are all still working off of Jack Welsh’s playbook – always be number 1 or 2 in your industry and don’t waste a lot of time building when its quicker to buy leadership.   This strategy leads to problems in China, where the status quo favors local SOEs.

Weak overcomes the Strong

Chinese negotiators are well schooled in tai-chi tactics – and are all too happy to allow brash, confident (and well-financed) western partners and buyers to dominate business relationships until they over-extend their resources and transfer technology, know-how, and best practices.   Then the Chinese partner breaks off and goes it alone – usually tweaking the product or business model for maximum impact on the local market.  Expat managers, confident that the Chinese market will eventually ‘figure things out’ and start conforming to Western patterns, are often quick to blame and slow to correct their own product or business.

What can expats and international managers do to diagnose the situation and react when the trend is not their friend?

1. Get better analysis.   You can negotiate successfully from a position of strength, and you can negotiate successfully from a position of weakness.  What you can’t do is negotiate as though you are stronger when in fact you are weaker.   Americans tend to think that they can import market leadership to China.  Most of the more spectacular  negotiating failures of the past few years (eBay, Tim Geithner) started with the American side assuming that the Chinese side needed the Americans more than the Americans needed the Chinese.
2. What if your deal is successful?  Chinese are simply better at post-deal disruption than their western counter-parts.  Quite frankly, it’s getting a little late in the game for this.   Western negotiators seem unable to envision a future where the Chinese side is unsatisfied with a minority stake in a successful Chinese business.  (Think Danone-Wahaha or China’s absorption of fast-train tech from Japanese and German partners. )  Time after time, the Chinese allow their American partners to believe that NY or LA is still calling the shots when all that is going on is a wholesale transfer of technology and assets.  US negotiators try to minimize risk with contracts and clauses, while the Chinese side is concerned with acquiring technology and know-how.  18 months into the relationship, the contract is worthless but the technology has been developed and tweaked into a valuable asset.
3. Ask, ‘what can go wrong’?  There are two ways to pose this question – as an expression of confidence (like market leaders and monopolists)  or a hard-hitting risk assessment (like disrupters).  Hint – the first thing that can go wrong is that your bulky, detailed contract doesn’t hold water in China.  If you can’t envision a scenario where your Chinese partner ends up cleaning your clock in your own home market than you are either not performing a rigorous enough analysis or you are choosing the wrong partner.  Americans tend to be incredibly naïve and short-sighted when it comes to scenario analysis in China.
4. Don’t be afraid of conflict.  Western managers have to stop undergoing voluntary de-clawing when they pass through Chinese border control.   We hear the Chinese talk about ‘harmony’ and we read about ‘losing face’ and ‘guanxi’, and we convince ourselves that our counter-parties are all pacifist Buddhist monks.   This is the road to ruin in China.  If you can’t say ‘no’ then you are not negotiating – you are a subordinate.  Americans are direct, analytic and assertive.  Chinese partners tend to be passive-aggressive, manipulative and – quite frankly – a bit whiney.  If your first casual disagreement undermines your business relationship, then you don’t have a viable relationship.  If the status quo is in your favor then you can afford to give in on procedural issues – but if you are evenly matched or worse than you have to be a little scrappier.  Don’t stomp around like a bully – but you can’t be walking on eggshells all the time.
5. Go into the light.  Americans tend to fritter away their biggest advantages by agreeing to backroom negotiation, confidentiality and secrecy.  The ability to be direct and to function in an atmosphere of full disclosure is the American negotiator’s secret superpower.  It’s the Chinese who know how to be subtle, secret and sublime.    As soon as you start engaging in secrecy, confidentiality and informal agreements, you are playing on someone else’s court.   Experienced expats in China usually end up agreeing to far more confidentiality and informal agreements than they would at home, but you shouldn’t make that your starting position.  Get concessions and score a deal point or two in exchange for sending the contract lawyers home early.

Every negotiation presents counter-parties with only 2 possibilities:

1. Support the status quo
2. Disrupt the status quo.

Supporters come in 2 varieties.

1. Monopolists or quasi-monopolists who have the power and/or environmental adaptation to benefit from the situation the way it is. These negotiators should be either competitive or avoiding.
2. Weak players, niche-exploiters, price takers, and those unable to adapt to an adverse environment. This class of status-quo preserver would say, ‘The devil we know is better than one we don’t’. These counter-parties are accommodators or compromisers.

Disrupters are generally pretty similar – they understand that the best way to advance their cause and maximize their interests is to shake things up. Start-ups, expanders and negotiators who believe they can benefit from shifts to the commercial or regulatory landscape are disrupters. This type of negotiator is a collaborator or a competitor. They benefit by breaking the rules or subverting entrenched market leaders.

US, China and the Status Quo
How a negotiator perceives status-quo will tell you a lot about his interests and goals.

Until about 2007, US counter-parties tended to approach US-China negotiation from the perspective that that the status quo was in their favor. This was part of the DNA of American negotiators – from the boot-strappingest start-up all the way up to the Federal government. Western strategists in China equated ‘progress & reform’ with ‘doing things the US way’. Sec of Treasury Geithner’s exchange-rate negotiating approach is a great example – he seems continual perplexed by China’s inability to conform to ‘business as usual’, and has spent the last 2 years waiting around for Beijing to come to its senses.

Chinese negotiators have their own quirks and biases when it comes to analyzing the status quo. Beijing orthodoxy is that the 21st century belongs to China, and that the rest of the world will pay any price to participate in the new China-centric economic order. Beijing seems intent on rolling back the calendar to pre-2006 times when central planning and state control was unchallenged. Compulsory technology transfers and increasing censorship of the internet indicate how Beijing sees the new world order.

Disruption Happens
The problem is that both sides can’t be right. If Washington and Beijing both conclude that inertia favors their goals, then the stage is set for a collision of interests. Ironically, conservative strategies actually lead to a highly unstable situation.

The future of US-China commerce depends on counter-parties’ ability to manage chaos and change. The same reality will govern individual businesses and industries. When entrenched players begin to lose ground to competitors – or are weakened by environmental factors – the stage is set for disruption and hyper-competition. This is not a scenario that favors soft-landings – or steady recoveries.

Our love is like a ship on the ocean
We’ve been sailing with a cargo full of, love and devotion
So I’d like to know where, you got the notion
Said I’d like to know where, you got the notion
To rock the boat, don’t rock the boat, baby
Rock the boat, don’t tip the boat over
Rock the boat, don’t rock the boat baby
–Hues Corporation 1974.

Next: When is it best to Rock the Boat?

After our last discussion of foreigners and relationships in China, you may be tempted to dismiss ‘guanxi‘ as another word for ‘corruption’ – or at least a quick road to disaster. Unfortunately, nothing involving international business in China is ever quite so black & white. While it is a bad idea for westerners to rely too much on guanxi, remember that your Chinese partner or counter-party may be a firm believer in it.

When the literature talks about ‘cultural barriers’ between China and the West, be aware that the key differences are not “fork & knife vs. chop sticks” superficialities – they are deep-seated core beliefs like guanxi vs. due diligence. When you tell your Chinese associate that guanxi is an archaic custom, it is like HIM telling YOU that checking references and analyzing financial reports are silly wastes of time.
If you plan on working with Chinese, the issue of guanxi is certainly going to come up.

Here are 10 rules for dealing with Chinese partners who believe in guanxi:

Caveat #1: Do not be overly dismissive.
Guanxi may or may not have real benefits – but what really matters is that the Chinese people you are speaking to genuinely believe in it. When I am doing business with Chinese counter-parties who are too quick to disregard my advice about performing due-diligence or market research, it sends me the wrong messages about their general competence and respect for American methods. Likewise, when you dismiss their advice about guanxi, you may be correct – but in the wrong way. You may mean, “I don’t want to engage in corruption or shortcuts” but they may hear “I don’t understand Chinese methods and don’t have much respect for your opinion”. The first conversation you have with a Chinese counter-party about guanxi is the perfect time to discuss the approval process of your deal or business. It is also an appropriate time to take the moral and ethical temperature of your counter-party, industry, and general practices in your new business.

Caveat #2: Chinese really believe, not only in guanxi, but also in its uniquely Chinese characteristics.
The only thing worse than saying ‘guanxi doesn’t exist’ is to say, ‘every business culture has some form of networking and relationship building’. Many Chinese – particularly those not experienced with international business – find this insulting. (A later post will deal with the issue of Face – not to be confused with western notions of pride, status or reputation). Westerners tend to look for common ground, but Chinese may consider it a swipe at the integrity of the Chinese culture.

Caveat #3: If your new partner’s only contribution is guanxi connections, you had best be on your guard.
Chinese consultants and counter-parties know that you have read that guanxi is vital to business in China. In other words, your counter-parties may believe that building guanxi is a short-term goal of yours. When I was in Beijing in the early 90s, it was a sure bet that every foreigner gathering or junket had at least one guy who offered to connect you with the right people. In those days, it was a real job because doing business in China was so opaque and convoluted. Nowadays the rules are much more straightforward – for good or ill. You should not need special connections to get most approvals – and if you do then you should take it as an indicator that your business plan has flaws. In 2010 China, most experienced Chinese managers should either have the necessary connections or know how to develop them as needed.

Caveat #4: Guanxi is a rental, not a purchase.
Guanxi does not transfer. When your guanxi guy goes, so does the relationship.
As ChinaLawBlog points out, your guanxi relationship is with a person at the organization — not the organization itself. When your special relationship at the ministry, regulator, supplier or distributor moves on you have to start all over.

Caveat #5: Guanxi cuts both ways.
It places obligations upon you – and you do not always control how you will pay back a guanxi debt. Examples have included pressure to accept low quality production, delays, inferior materials, IP theft, material theft, corruption, nepotism, etc. Remember – guanxi is a series of favors, and you have to give to get. The problem is that you have only the most limited control over what you will be asked to do, and how it will be valued. That is the side of guanxi that people do not talk about with Westerners much, but Chinese understand well.

Caveat #6: It is not the same as corruption, but it can be close.
The regulatory standards are higher for Westerners in China – both among Mainland bureaucrats and those back home. Even the appearance of corruption can come back to haunt Western dealmakers – and it is definitely your responsibility to monitor and control the activities of your employees, partners and agents. ‘Business as usual’ for local Chinese is too weak a standard for foreigners. You need to have rule & procedures and prepare for different contingencies. If a Chinese businessperson appeared in a US court and said, “but someone I just met told me that everybody ignores that local zoning regulation”, he might appear dishonest, arrogant and/or clueless – but extremely liable. Well, you’ll come off the same in a Chinese court when your new guanxi connection goes awry.

Caveat #7: Foreigners cannot really build it up the same way that locals do.
Consider the difference between a business proposal from your high-school buddy or college roommate and a Chinese businessperson that you’ve had dinner with a few times. Both constitute a connection – but your relationship with your former roommate has completely different characteristics. You can be more honest with him about his ideas, make suggestions and possess a deeper understanding than you ever would with the Chinese counter-party. The danger isn’t necessarily that your Chinese associate will try to cheat you – he may kill you by being overly polite and sensitive to your feelings.

Caveat #8: Distinguish between everyday guanxi and ‘special relationships’.
If your counter-party’s guanxi is rooted in familiarity with ‘standard operating procedure’ at the ministries, regulators, supply chain and distribution channels -then the situation is fine. It is a normal business competence that weighs in his favor – but is more of a basic requirement than a game-changer. But take note of ‘special relationships’ – like a close relative of an official or executive at a customer or supplier. These are the entanglements that get messy quickly.

Caveat #9: China has laws now.
Chinese have a very high regard for bureaucracy, procedures and regulations. Guanxi is not as important as it once was, and low-level transactions and routine approvals should not require special connections. In fact, circumventing basic rules can cause BIG problems later on. Remember that it is much easier for foreigners to get money into China than getting it out. It is easy to find fixers who can speed your investment through – but getting the licenses and permissions to actually sell goods, repatriate profits and move money may be a different story.

Caveat #10: Guanxi may be able open some doors – but it can also close and lock them.
Strangers are not generally ripping off westerners who lose investment, IP and assets in China usually. 9 times out of 10, the very people assured them about the power of their guanxi connections that turn around and use them to lock out the westerner once the assets are transferred.

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China Law Blog recently posted on the basics of how to do business in China , and raised the issue of ‘guanxi’ relationships. It is a controversial point among the international community in China. Dan Harris and Steve Dickinson of CLB are not believers – warning that it doesn’t help all that much and may cause problems. On the other hand, every conversation I have with a Mainlander eventually focuses on the power and importance of their network of guanxi connections.

What’s really going on here?
Let’s start with a quick definition. ‘Guanxi’ literally translates as ‘connection’ though it is often used to mean ‘relationship’ and ‘network’. When Mainlanders use the phrase among themselves, they are referring to a fluid network of cordial business obligations and debts – sort of an institutionalized version of ‘you scratch my back, I’ll scratch yours’. A person with a wide range of well-placed relationships, all of whom acknowledge their indebtedness and willingness to reciprocate, is clearly in a very advantageous position. Conversely, a person who lacks connections and is not in a position to do favors for new counter-parties is in a relatively weak situation. The worst position of all is one who owes valuable favors to a wide range of highly placed connections.

When Chinese associates talk to Westerners about guanxi, it takes on a slightly different meaning. Here the emphasis is on the ability to influence members of his network – to ‘make things happen’ and expedite profitable transactions or bureaucratic approvals. A common Chinese business aphorism – “Everything is possible but nothing is simple” – underscores the importance of guanxi in the Mainland. For a long time, guanxi was synonymous with “local knowledge” – but carried a strong implication of corruption and under-the-table inducements.

When the China economy was first opening to the world (up until the mid 2000’s), commercial laws were still haphazard, contradictory and opaque. In such a chaotic environment, a local ‘fixer’ was often required to prod bureaucrats and state managers to make a decision – and a certain amount of persuasion helped to ensure that the decision was a favorable one. There was a time when no one – Westerner, Asian, Overseas Chinese or Mainlander – disputed the need for guanxi. The only issue was locating someone who really had the connections to facilitate basic business transactions. China’s central government, however, was busily constructing what it hoped would be a strong legal system and a (relatively) transparent regulatory framework – and objected to the close connection between guanxi and corruption, bribery & misuse of state assets.

That is why Westerners in China often find themselves caught between two opposing views on the guanxi issue. On the one hand, locals still maintain it is the only way to get things done in Mainland China – and that without it foreigners will never overcome their status as rich but clueless outsiders. However, a growing community of experienced, knowledgeable international experts maintains that guanxi is an ineffective, expensive and ultimately counter-productive throwback to the ‘bad old days’ of a lawless, chaotic China where personal influence trumped laws and regulations.

So which view represents the reality in China? Is guanxi a real force that all business-people in China need to have, or is it a shortcut to scammers, cheats and regulatory hot water?

The Truth About Guanxi
Guanxi is extremely useful and powerful – as an information network. A broad, active web of plugged-in connections can alert you to people who are willing and able to help – but who have no idea how to find you and no other way of being found by you. A good guanxi network is like a combination road map and address book – that will enable help you engage exactly the right resource or decision maker. As a research tool, a good guanxi network is extremely effective and powerful.

As a skeleton key that will magically unlock doors, it is problematic. Yes, guanxi can open doors, but there are three problems: 1 – it won’t necessarily open the door you need unlocked. 2- When all you have is a key, all problems look like locked doors. You may end up rewriting your business plan because your guanxi connection leads you to a single type of resource or decision maker. And 3 – that door may lock behind you. Westerners who encounter problems in China are rarely suffering losses at the hands of complete strangers. The people gutting you of your investment, assets and IP are the very same ones who lured you in with promises of powerful connections and influential friends.

In short, guanxi can play a role in your Chinese negotiating, but you will have to monitor and decide what that role will be. Guanxi networks are great as information and networking resources. However, if you plan on using connections to open doors – or knock down walls – then you are going to encounter some major difficulties down the line. When you use guanxi as a shortcut in China commerce, the destination is usually business failure.

Part II: Guanxi for Foreigners: 10 Caveats

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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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