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

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

Here’s the handwriting on the wall:

China will play by rules it negotiates: official

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

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

Time to reassess unfair WTO entry terms

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

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

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

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

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

The significant issues are that

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

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

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

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

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Guanxi Type 1: Your new best friend
• Some Chinese counter-parties will use flattery, friendship and social events to build a cordial relationship.
• This is a ‘sales-type’ approach. He is selling his services to you, and he wants a salary or expects you to buy goods or services from his firm.
• Good news – they may be taking the initiative to build a strong, healthy, win-win relationship.
• Bad news – they may be pressuring you to reciprocate with better deal terms, IP, or relaxed QC/compliance requirements. He thinks his flattery and submissive behavior is a valuable service and expects compensation.
• More bad news – This scenario often leads to a balance of power shift. Once he has your money, technology and know-how, your status becomes somewhat less god-like.
• Even worse news – Those pretty young girls half your age who laugh at your jokes and think that you are so wonderful… yeah, they are in this category. Sorry, but someone had to tell you.

Guanxi Type 2: Your guide, teacher – and boss?
• Chinese businessmen will offer to help you through their connections, insider knowledge and guanxi with suppliers and regulators.
• Consultative approach. They are offering to help you solve specific problems and clear away existing bottlenecks.
• Good news – They may really know what they are doing and can facilitate your business.
• Bad news – They feel that they are in charge of the new partnership.
• More bad news – You probably need them more than they need you, so you are negotiating from a position of weakness.

Beware of your American impulses to treat every relationship as an equitable, just, “we’re all in this together” 50-50 partnership. It could be taken as a submissive gesture – which can invite aggressive, value-grabbing behavior.

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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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G. Richard Shell, in the brilliant Bargaining for Advantage, classified all negotiators as Competitive, Compromising, Accommodating, Collaborating or Avoiding. If you care primarily about your own benefit and not at all about your counterparty’s, you are competitive. If your concern lies mainly with your counterparty’s benefit (such as those who must negotiate from weakness) then your style is accommodating or yielding. Those that believe in win-win, 2+2=5 deal-making are collaborators, while those that would rather not engage in any transaction at all are avoiders. Compromisers are more of a default setting, and many negotiators don’t consider it to be an independent style.

Chinese negotiators, with their attention to relationship building and harmony, are often mistakenly assumed to be highly collaborative. In fact, Chinese negotiators have traditionally had great facility with the bottom two quadrants of Shell’s matrix – SOE managers and bureaucrats display an avoiding style while price-cutting manufacturers and service providers who want a deal at any price are accommodators.

But with great success comes great pride, and China has been VERY successful in the last decade. They’ve imported much of the best of western business learning – and a few of the worst of our business habits. Egos have been rising as fast as the GDP, and nowadays you are as likely to encounter Chinese competitors at the negotiating table as their American counterparts.

American vs. Chinese Competitive Negotiators
An American competitor will lean forward and control as much of the table as possible. His power comes from the things he says – be they threats or promises. He is the battlefield commander, calling the shots and bringing the awesome firepower of his intellect to bear on the opposing forces.

A Chinese competitor, in contrast, is the emperor of the boardroom. He will sit back, turning his chair into a throne, deigning others to approach and present their case. Control of access is his key strength. He may not be able to decide who has physical access to his presence, but he can control what he says and to whom he says it. These are the entrepreneurs, the engineers-turned-managers, and the party cadres whose definition of business skill often includes connections, corruption, IP theft and fraud.

The good news is that Chinese competitors tend to overestimate their own position. They are easy to spot, and behave fairly predictably. Considering how mysterious and withholding they consider themselves to be, the Chinese are actually pretty easy to read. This style of Chinese negotiator likes to give the appearance of being able to endure any amount of pain, and would gladly see both of your fail rather than give up ground to the foreigner across the table. He does, however, have a significant weakness. While a competitive-type Chinese negotiator is happy to see you walk away with no deal, he hates the idea of you falling into the clutches of another Chinese competitor. Plan in advance and neutralize his advantage.

The bad news is that you are involved in a straight-up win-lose hypercompetitive relationship. . The chances of a one-off transaction with this kind of Chinese negotiator are fairly high, but the possibility of a strategic relationship are not. Once you have made your deal, he is going to move on to the next victim. These people are zero-sum gamers who want only two things from you – your assets and your absence

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One of the main functions of relationship-building activities like banquets and KTV evenings is for everyone to relax, get used to one another and establish an idea about what the other side’s real personality is like.   When your Chinese hosts are pouring drinks and making toasts, they are really checking out your strengths and weaknesses, your tendencies and quirks.  This is part of their due diligence – they are determining what kind of person you really are.  You should be doing the same thing.

The Chinese banquet is their turf and they are hosting.  You can tell a lot about their business tactics by the way they conduct themselves at a banquet.  If they load the table with chicken feet, sea cucumber, thousand year eggs, dancing shrimp, 3 squeaks (http://www.culinaryschools.org/blog/three-squeaks/ ), or other delicacies that Chinese know give westerners trouble, then you can surmise that they plan on pressing their advantage to the fullest every chance they get.  If your counterparts reserve a famous restaurant that serves fine traditional local food but they go easy on the booze and consult with you on menu items, then these are probably people who know what they are doing and are sincere about doing business with you.

Watch the order of the toasting.  The person who toasts first is probably a handler or a junior manager.  When there’s a lull in the conversation or an awkward patch, he’s going to smooth it over with a toast.  It is unlikely that he is the true decision-maker, though he is probably going to be an important contact and facilitator.   (Note on Chinese toasts:  Ganbei translates as “dry glass”, not “cheers”.  You are supposed to empty your glass – and everyone else at the table has to do the same.  Among old school Chinese, it is taken seriously.  Don’t say it if you don’t mean it, and pay attention when they do.  You don’t want to embarrass yourself by sipping when everyone else is draining their glasses.)

The big boss will toast you directly when he is comfortable.  He may go multiple times in fairly rapid succession.  His drink of choice is usually Moutai – a very expensive, super strong variety of white liquor, or baijiu.  To westerners it tastes like lighter fluid mixed with industrial solvent, but they are as attached and proud of it as you are to your Maker’s Mark or Johnny Walker.  Don’t disparage or insult it.  You will look bad if you don’t throw back a couple of shots with the boss.  Good-natured partners with international experience will laugh it off if you can’t stomach the stuff and allow you to substitute beer or even red wine.  The guys who get offended or force you to drink in spite of your objections might prove to be equally obstinate when it comes to business, so take note.   Also be aware that they are taking your measure the whole time.  Be friendly, polite and cheerful, no matter how difficult it may be.

Outside of Shanghai it is still considered absolutely hilarious to get the foreign guy completely smashed – and lots of people doing big business in Shanghai are from out of town.  It is all good-natured fun, and you don’t have to worry about embarrassing yourself or others.  (Alcohol poisoning, on the other hand, is a threat.)  They are consuming almost as much as you are, and everyone is expected to kick back and enjoy himself.  The point, however, is that although banquets and dinner parties are business events, they are probably not the place to fine-tune numbers, rates or contracts.  You can talk about deals in general terms – but bear in mind that things might start getting messy an hour or so into the party.  Aggressive partners have been known to hold foreigners to promises made under the influence, but that’s probably a good indicator that you should be finding other counterparties.

Non-smokers be warned.  You will be offered cigarettes.  This shouldn’t be a big problem in Shanghai anymore, but you’ll almost certainly run into this practice in the smaller cities – particularly west and north.  Turning down a smoke is an insult akin to refusing a toast.  As an ex-smoker who gets awful hangovers when I smoke and drink, I feel your pain – literally.  Here’s what you do:  Take the cigarette hold it up and say thanks, and then say “I’ll smoke it later”.  Put it down on the table in front of you or behind your ear “so you won’t forget to smoke it”.  That works about 35% of the time.  You may have to let the guy light it, and then you’ll pantomime smoking it for a few minutes until you can dispose of it.  The lesson here is twofold. 1) These are not sophisticated, international people, but you probably knew that already.  Experienced Chinese know not to force cigarettes on Westerners.  2)  If your host makes you do something you are clearly not comfortable doing – particularly if it happens several times – then this is a snapshot of his personality.  These folks are not going to be flexible or easy to work with in the future.

Women drink, especially in Beijing.  You can forget about lite beer or other girly drinks.  You are going to throw back Moutai, or whatever rocket fuel is the local choice.  Two pieces of advice.  First, don’t hesitate on the first round.  It will make you a target of convenience for the rest of the night.  Second, keep your empty glass close to you, or they will continually refill it.  Woman are often given the option of switching to beer or red wine (yes—you drink shots of red wine in China) later in the evening, but you should be prepared to drink at least a glass or two of the hard stuff.  You might be able to compromise with “yellow wine” (huang jiu) – a much milder form of local booze that is closer to saki.  Again, you will learn a lot about working with these people in the future by the tone they use when making you drink.  If they are easy going and polite at the banquet, they will probably be reasonable as partners.  If they are bullying and aggressive then there’s a good chance they will exploit their local advantage later as well.

A note about KTV’s.  In mainland China you may find yourself at fancy KTV after dinner.  Some of the new places in Shanghai are enormous palaces with doormen, lines of female greeters, fountains, statues and all manner of glitz.  You will be escorted into a private room that looks like it might have been decorated by Hugh Hefner himself.  Sit down and get comfortable.  A long, involved negotiation with a female manager-type will take place, but don’t worry – they are just arranging the drinks and food.  The next step is difficult for some. An attendant will take a perfectly innocent bottle of 12 year old Glen Fiddich and dump it into big pitcher with pints of sugary ice tea.  Try not to scream or whimper.  Trust me – it doesn’t go over well.

Now the girls enter the picture.  A line of 8 – 12 girls is brought in and you are expected to choose one.  For some westerners, this is awkward and uncomfortable.  For others, it is a dream come true.  They will usually give you (or the highest ranking member of your group) first choice.  Note that nothing sexual is going to happen in the room, and you don’t have to worry about committing adultery, contracting disease or waking up married.  (This applies to KTVs in Mainland China.  In Taiwan, they can be much more … interactive.)  At the end of the evening the girls will be tipped by either you or your host (I think around rmb 300 is normal).  That should be the only cash that changes hands within the confines of the establishment.   The only thing you have to worry about is the drinking games.  Be a good sport, but pace yourself.  It’s likely to be a long evening.

The main take-away is that Chinese business people use social events to vet potential partners, build relationships and perform due diligence.  Many westerners treat banquets as an awkward chore or an obstacle that must be overcome before business can start.  To the Chinese side, this is the business and the negotiation has already started.  Remember that they are checking you out, so conduct yourself accordingly.  Be open-minded, friendly and respectful – even though things may get a little whacky at times.  You should also take advantage of this opportunity to observe and evaluate your new partner, supplier or client.  You are getting a snapshot of their true personality, so don’t ignore your instincts or observations.

Xin nian kui le.  Happy New Year.

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Relationship-building and Conflict in China    

Conflict avoidance is the other side of the coin from relationship building.  Those that take the time to build substantial and mutually beneficial networks and relationships find that they have serious conflict less often.  Those who cut corners on the relationship building—working with paid consultants to make introductions or jumping into exclusive relationships too fast – are the ones that never seem to get clear of damaging, expensive business disputes.

The relationship-building phase of the negotiation is when Chinese parties emerge the issues that they feel are important,  even if they don’t come right out with a list of demands.  Whether its technology, IP, control, cash or other assets, the earlier you can bring up the issues that you care about, the better.  You may not decide on anything definitive for a while, but the idea is to find out how the Chinese side measures success and failure.   Ask a potential JV partner to describe what your successful business will look like in 5 years, and you might be surprised to learn that you don’t play a big part in his plans.  It’s important to make sure that you are all on the same page as far as a definition of success, because that can be the most stressful situation facing a Western-Chinese partnership.  Failures can be dealt with amicably, but healthy sales and big profits are worth fighting over.

Goldilocks and the Chinese Partner

During the relationship-building phase, you have to decide how you are going to raise significant issues.  Many Westerners come off as too weak – fearing that any objection or disagreement will make someone lose face and destroy guanxi.  Others become their own worst enemies by making big, open-ended promises that they don’t seriously plan on honoring .

The Goldilocks guide to building conflict-free relationships in China

• Too soft

–       Don’t accept adverse terms in the relationship-building phase of the negotiation, thinking you’ll correct things later.

–       Be careful not to cede too much operational control too early.

–       Don’t make promises about positions or divisions of responsibility until you are prepared.

• Too big

–       Be cautious talking about broad expansion plans or ambitious ramp-ups.

–       Don’t offer exclusivity, technology, co-branding or market access unless you are serious about it.

–       Don’t get lured into businesses, industries or services that you don’t understand.

• Too hard

–       Thick contracts with penalty clauses tend to undermine trust.

–       Find a diplomatic way to say, “we’ll see how the first transaction turns out”.  You are better off talking about most-likely estimates for the first year (or several years), “assuming we can align our systems”.

• Just right

–       You are friendly, open and forward-looking.  You are speaking in terms of mid-term or long-term success.

–       You are raising your significant issues in a non-confrontational but serious way.

–       There is an exchange of optimism and a frank discussion of concerns.

Don’t Send Mixed Messages

Your last trip to Shanghai or Shenzhen was a huge success.  You made some great contacts, had week full of meetings, lunches, dinners, and a few nights of drinking.  You were a big hit with the local management team, and they seemed to really like and trust you.  A brotherhood was forged, a deal was signed, and you reluctantly parted at the airport.

But now it’s just a few months later, and they never hear from you unless you are complaining about quality or deadlines.

You may not feel you are doing anything wrong, but they may think you are showing bad faith.   You promised an equal partnership – a relationship – and now you are treating them as though they are hired hands.  This kind of situation that can rapidly lead to destructive conflict.  The Chinese side cares about the relationship, and expect you to as well.   That means putting in routine maintenance and communicating on a regular basis.

Align Goals Early

One of the surest ways of avoiding destructive conflict is to make sure that you and your Chinese partners have similar or complementary goals for your new venture.  Do they plan on running the operation after you go home (which they expect to happen soon)?  Did you know that they plan on you going home and leaving them to run the operation?  Do they plan on being your exclusive agent, manufacturer or partner in China?  Does that fit in with your plans?

A key question to start asking is if they have plans for selling to your clients in your home market?  They may not tell you if they do, but it’s never too early to start gauging their intentions.   Having your former partner go after your customers with your technology and design is one conflict that you certainly want to avoid at all costs.

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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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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.

Western negotiators in China for a one-time purchase or transaction don’t have to worry about cultural misunderstandings or local business custom as much as they would have 10 years ago. Commercial centers in China are as sophisticated as any in the world. Those looking to crack the Chinese consumer market or resolve a dispute, however, will find that the Middle Kingdom is the same as it ever was.

Westerners negotiating in China have never had it so easy, and never faced such high risks. Understanding China is about reconciling opposites, and for dealmakers and managers the new bi-polar issue concerns speed of operation and bottlenecks.  Before 2008, American and European managers who made mistakes in China had to worry about losing orders or investments. Now they are losing brands and strategic initiatives.  Groupon (entry stalling) and Yahoo (asset transfer) are both finding that once the bad times start rolling in China you can lose control of your global strategy and even your brand.

One of the biggest challenges western negotiators face in China is understanding how easy things can be versus how hard they can get.  Getting money into China has never been more straight-forward, but once a deal goes off the rails it is often a total loss.  Far from making life easier for newcomers, the polarized nature of Chinese deal making has raised the stakes and made China more dangerous.  At least before 2008 you knew how weird it was going to be.

The simple stuff is getting easier…

China has always been hospitable to visitors, and after almost three decades of dealing with westerners a lot of the rough edges have worn down.  No more embarrassing questions about your age, weight or income.  The international hotels and western restaurants are pretty much the same as the ones back home. Chinese counterparties can talk about IP protection, product liability and third party mediation as smoothly as managers anywhere in the world. If you are coming to China to move funds and assets in, then it is a 21^st century dream.

But the hard stuff is harder

Rising prices and costs, adverse regulatory practices and a fierce local competition have made China an extremely competitive negotiating environment.  As Chinese companies improve their ability to provide international-level service and design on their own, international operators are wearing out their welcome earlier and earlier. That means that the aspects of Chinese negotiation that have always been hard – conflict resolution and power sharing – have become even more challenging. China has always had the desire to protect its domestic markets, but for the first time it has the technology and infrastructure to service home markets profitably.  Once western companies have built a market or transferred technology, there really isn’t that much left for them to contribute.  Westerners in China have seen their negotiating position within Mainland market getting weaker and weaker.  As local companies get better at servicing customers, international marketers in China have lost their most natural ally – the Chinese middle class demanding products and services only foreigners were good at.

10 years ago a local Chinese operation needed funding.  Westerners had both financial and technological leverage.  3 years ago local operators needed design and services.  International firms were losing their financial edge, but still held power in terms of technology, branding and IP.  Now local operators need markets and customers.  Unless international firms can find other ways to add value in the local Chinese market, their negotiating position will continue to weaken.

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.