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

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

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

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

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

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

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Background articles on BusinessInsider.com:

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

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

Your iPhone Was Built, In Part, By 13 Year-Olds Working 16 Hours A Day For 70 Cents An Hour
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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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American cultural quirks that Chinese have to put up with:

• First and foremost – we are the only negotiating culture that leads with the lawyers. Europeans consider negotiation to be an exercise in diplomacy while Asians consider it the province of paternalistic company leaders to build lasting relationships. American negotiators – even when they are salesmen or purchasing managers – are fixated on contracts and legal institutions (like courts and regulations). Whereas traditional Asian negotiators feel that relationships are the key to business and that contracts are merely written records of agreements between individuals, Americans put more weight on the document than on the human bonds between business leaders.

• We are the only negotiating culture that believes that liability can be assigned in advance through a contract. This is one of the many aspects of international negotiation that has become “normal”, but it still strikes traditional Asian negotiators as crazy that Americans consider contracts binding even as the market environment changes. Asian negotiators in general, and Chinese in particular, feel that as the external situation evolves, so must a business relationship. Many Chinese partners have been bewildered and disappointed when their American partner stated waving a piece of paper in their face instead of responding fairly and maturely to new market realities.

• Americans believe that negotiations end. To Chinese, the negotiation is part-and-parcel of the business relationship. As long as the counterparties are still engaged in business, the negotiation is supposed to continue. What’s the point of taking the time to build a connection if you aren’t going to grow the relationship through continuous give and take?

• Americans want to decide everything in advance and put procedures ahead of human decisions. Chinese (and most other Asian) negotiators understand that conflict and differences of opinion are inevitable, and their business agreements usually assume that the leaders or concerned parties from each side will work things out informally. American contracts, with their penalty clauses and rigid requirements, are not only insulting and arbitrary, but seem designed to undermine any kind of positive relationship.

• Americans love deadlines, timetables and schedules, even when there is no business rationale for them. They can be arbitrary and illogical.

• Most disturbing of all, American negotiators are adversarial and rude. We insist on running everything and taking control of situations that we don’t understand. We are famous for coming to China and trying to sell inappropriate products or services at ridiculous prices. Our technology and designs are nice enough, but we expect people to pay over and over for the same thing – even after their people have figured out how to make it themselves.

I’m not proposing that we give up our way of doing things – and I certainly understand the value of contracts and compliance with regulatory codes. It’s important, however, to acknowledge that the American way of negotiating is not the only way, and the Chinese person across from you is struggling just as hard as you are to successfully manage the yawning gap between your cultures.

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Back home in the US, we generally encounter FINAO syndrome among hard-driving young salesmen and financial broker-types who don’t understand how much damage they are doing to their reputation by make every deal a life-or-death struggle and every prospect a mortal enemy. In China FINAO syndrome usually afflicts senior managers who are new to cross-border deal making. A combination of high expectations from HQ bosses and lack of experience finds China novices latching on to the first counter-party who can speak English. They spend all of their time trying to make an inappropriate deal work in an unfamiliar environment. The more resistance they run into, the more vested they become in forcing this particular deal through.

Sometimes the most important negotiation is the internal one. If your HQ is working with a bad set of assumptions and demanding that you deliver on goals that aren’t appropriate for China, you are setting yourself up for disaster. The second worst thing that can happen to you is that your Chinese counterparty gets frustrated and walks away. The worst thing that can happen to you and your career is that your Chinese counterparty figures out exactly what is going on, and signs a deal that is bad for you – or would be good for you in theory, but he doesn’t plan on delivering. In China there are always two negotiations – one about the contract and one about the actual business. FINAO guys do a great job with the first one – and get slaughtered like sheep on the second one.

The best China negotiators know how and when to walk away. They take the time to give themselves options – which includes preparing alternate counter-parties and business models in case their Plan A falls through. But even more important, they take the time and effort to build support with the higher-ups in their own organizations. Good Chinese negotiators will know when you are afraid to go home without a contract, and will make you pay for it – either now or later.

In negotiation, failure is always an option. If you know what you are doing in China, it can be a damned good one.
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Americans, Europeans and Chinese negotiators can all reach great deals, but their approaches and styles differ.  One is not necessarily better than the others, but each style of negotiator has to align with the prevailing environment and set appropriate goals.

• Americans are take-charge aggressors. They want to control and lead everything.
• Europeans are diplomats.  They build networks and exploit niches.
• Chinese are manipulators.  They like to build relationships – often from a position of apparent weakness – and later shift the balance of power to their advantage.

American deal-makers in China like to start out from a position of strength, which some negotiators equate with power and toughness.  Their plan is to intimidate early and then become nicer and more cooperative later on, as a concession.  To Americans, the relationship is the reward.  Unfortunately, this often triggers aggressively competitive behavior from the Chinese side, since they interpret the initial American position (aggressive tough-guy) as a rejection of Chinese relationship-building overtures.  Even though the American plans on ending up with a cordial relationship, it can be hard to put this train back on track if there is a misunderstanding in the early days.

Europeans in China have the opposite problem.  Natural networkers, Europeans are quick to make concessions to build a connection. This pliability on key issues is often interpreted as a sign of weakness, and once the conceding begins it is difficult to put on the brakes.  Chinese negotiators may feel like they are driving the relationship and will become more competitive and demanding.  Europeans will do more deals, but at less advantageous terms than might be possible.

Europeans see themselves as occupying a position midway between Chinese guanxi-builders and American dominators, but Chinese see them as American-lite.  Europeans in China do build better networks, though, mainly because they plan for and invest in them as a matter of strategy.  They send younger people over for longer postings.  Americans would rather buy or bully than build, and tend to make up a plan as they go along.  They see themselves as nimble and resourceful, while the Chinese tend to see them as unprepared.

The key to successful Chinese negotiation is to start out cordial but non-committal.  As the Chinese say, it is best to have many girlfriends but no wife.  Americans tend to do the opposite. They like to talk tough and play hard-to-get during courtship, but beneath the surface are as monogamous as the Puritan stock from which they spring.  This gives them the worst of both worlds – putting them in a weak position with a monopolistic service provider.  Americans could learn from the Europeans, who try to put Chinese on their back foot by committing early to a relationship in principle, but being vague about timetables and promiscuous about relationships.

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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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Disagreement is part of normal  business.  At its best, it can take the form of an honest exchange of ideas and opinions that leads to constructive solutions and a closer relationship.  At its worst, conflict is an express lane to lose-lose outcomes and value destruction.  Western and Chinese take a different approach to conflict, but that doesn’t necessarily mean you should try to suppress disputes and paper over disagreement at all cost.  It does mean, however, that you have to manage Chinese negotiation conflict more deliberately and proactively than you would at home.

In China, conflict avoidance is a function of finding the right partner (or counter-party) ,   conflict mitigation is a matter of preserving mutual trust  , and  conflict management is a result of proper deal structure.

Structuring deals to manage conflict.

If you are an American or European doing business in China, then your Chinese counter-party is going to outgrow you long before you outgrow him.  The Chinese side is actively pursuing the knowledge, technology and skills to run the business without you from the first meeting.      Westerners, on the other hand, are notorious for spending years in China without developing the ability to “go it alone” and operate independently of their Chinese partner.  Western managers call it “delegation” or “specialization”.  Chinese call it dumb.  This situation often presents even the most honest Chinese negotiator with a conundrum — they have to choose between being smart and being honest.  It is a tough choice if they like you and see a profitable future in your partnership.  It’s a good deal simpler for the Chinese side if they think you are trying to cheat or exploit them.   That’s where good deal structure comes in very handy.

Conflict as Exit Strategy – The Lost Face Shuffle

Let’s  role-play for a moment.  You are a Chinese manager or business owner, and you have been doing business with an American partner for 6 months.  Maybe you are manufacturing his product or supplying his raw materials.  Maybe you are distributing his brand in China.  Whatever the deal, you have been doing your best to absorb the technology and processes to run the business on your own, and now you think you know enough to get started.   What do you do in the following scenarios?

1.  Your profit margin is less than 5% – and dropping.  Even though your operating environment is deteriorating due to inflation and regulations, your American partner resists any and all cost adjustments.  The only time you hear from him is when he complains about quality or asks for something special.
2. You are earning 60% of the profits from the JV or partnership, and the American side is actively engaged in new product development, technology upgrades and marketing.

Now, at the start of Month 7, you and your American counter-party have a disagreement about some relatively minor issue.

If you are like most rational, profit-oriented businessmen, you are going to work much harder to keep arrangement #2 intact.  The problem will be dealt with quickly and quietly.  You will be proactive, creative and resourceful about finding a good solution, and your relationship will probably be strengthened by the amicable resolution.

For managers involved in arrangement #1, on the other hand, the disagreement provides a very convenient “last straw”.  You had been looking for a way out of this entanglement ever since you mastered the technology, and now the Americans have provided you with an exit vehicle.  This seemingly minor problem can easily be spun into a face-robbing insult that makes all further interaction impossible.

Just because polite Chinese negotiators don’t like giving a flat “no” doesn’t mean that they accept any situation or offer.   If there is dissatisfaction with deal, then small conflicts will quickly get blown out of proportion.  Good deal structure tends to be much more successful at controlling conflict than contract documents.

Structuring Deals to Manage Conflict

• Plan for success.  American negotiating teams tend to be headed or influenced by lawyers, so they have a bias towards limiting loss and protecting against the downside.  Chinese negotiators still have an engineering bias, which means they are concerned with process and technology.   When Westerners present the Chinese side with thick contracts full of penalty clauses and performance requirements, all the trust that they worked so hard to build tends to go out the window.  As soon as the Chinese side acquires the know-how and technology they need, they’ll try to get out of the partnership.   The Chinese exit strategy of choice is relationship-destroying conflict.
• Watch for timing differences where you pay now, and they perform later.   Avoid deal structures where it makes financial sense to force a conflict after you hand over cash, intellectual property, molds, designs, etc.
• Over-compromise early.  Learn from Mickey Mouse.  When the Disney folks wanted to set up shop in Shanghai, they knew that there was a lot that could go wrong after the deal was signed, so they picked the right partners (Shanghai-based State Owned Enterprises) and gave them a majority stake (roughly 60%) in the project.  That payout gives the Shanghai side of the deal a tremendous incentive to keep the partnership going through thick and thin.
• Walk away in such a way that you can come back.   Letting him know you have alternatives is the single best option you have – but just make sure that if you do walk away you do it with a smile on your face and a harmonious word on your lips.  “Unfortunately it doesn’t look like things will work out for us this time,” is good.  “You are a thief and I am going to sue you into oblivion,” is not.
• Conflict management begins at home.  Internal negotiation is a must if the people coming to China to arrange deals are reporting to bosses back at HQ.   Your own management team may inadvertently spark conflict by trying to apply western best practices to Chinese deals.  Nothing undermines trust faster than being unable to deliver on promises – or springing new terms & requirements on an unsuspecting Chinese partner.

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