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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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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Traditional competitive deals are referred to as Distributed because the two parties split (or distribute) a fixed pool of assets.   Integrative deals are often referred to as Win-Win or collaborative because the two sides cooperate to ‘enlarge the pie’ or increase the total value of assets beyond the initial scenario.

In China, however, where negotiations are often characterized by non-economic factors – often in the form of face, guanxi, or lately, nationalism – it is common to experience a third scenario: Lose-Lose negotiation.   To some Chinese negotiators, your gain is their loss and your loss is seen as a valuable asset.

In theory a negotiator should be neutral to the prospect of you earning 10 or 20 if his profit in each case if 15 – and he will certainly choose a gain over a loss, despite the counter-party’s outcome.  According to the orthodoxy of marginal economics, a rational actor will transact as long as his benefit is greater than zero.    But in China your counterparty will sometimes opt for a situation where he loses a little if you lose a lot over an outcome where you gain a lot and he gains a little.  This is particularly true in the case of risk-averse SOE representatives who don’t benefit directly from positive outcomes – but may be penalized for a negative outcome.   As trade tensions rise between China and the West, Win-Win deals will be regarded with increasing suspicion.  Chinese negotiators consider it increasingly advantageous to see you fail.

While we consider this spiteful, petty and quite frankly, NUTS, there is a rational explanation – at least some of the time.  American negotiators who count on Chinese counter-parties ‘ultimately coming to their senses and doing what’s best for everyone’ will be caught off guard if they don’t understand how the Chinese side understands the situation.

Different Valuations, Different Goals, Different Tolerances

Chinese dealmakers still see themselves as tougher and more willing to “Eat Bitterness” or endure pain than Westerners, so they are more willing to engage in ‘trench warfare’ negotiation – committing huge resources to a battle of inches over years.   Chinese negotiators are often working off a different time-frame and valuation model.  They are willing to wait a longer period of time to achieve a deal that gives them greater control and exposure to technology.  Because brand names matter less in China, they are also willing to engage in behavior that puts their reputation at risk.  Furthermore, many Chinese negotiators are working under policy constraints that American corporations simply can’t understand.  Finally, nationalism is playing an increasingly important role in Chinese negotiations – as real or perceived slights, insults and challenges impact on deal-making.

There are 5 factors that Western negotiators must consider when approaching a Chinese counter-party to avoid damaging sub-zero sum game outcomes.

1. Learning curve
Some negotiations aren’t really negotiations – they are educational opportunities for the Chinese side, and you are the unwitting teacher.  Chinese have a huge appetite for technology and a great deal of confidence in their ability to reverse-engineer a product once they understand its function.  Many so-called ‘negotiations’ are really new-product development exercises.  The Cisco-Huawei negotiation is a classic example, though the more recent China Rail – Japan Shinkansen (bullet train) case looks like it will be the new textbook example of the Chinese tactic to act as the ‘good student’ in high-tech negotiation.
Remember that Chinese entities consider brand development, business planning and marketing strategy to be highly desirable technologies that Western partners can be persuaded to provide free of charge.

2. Competitive factors
In many cases, Chinese entities will enter into negotiation with Western companies that they view as potential competitors.  JVs and cooperative arrangements start out just fine when they focus on the production and product development side, but when it comes time to access the Chinese market the deal falls apart.  Many observers consider the DANONE – Wahaha negotiation to be a case in point.  The JV was quite effective when it was exporting to foreign markets, but things got rocky when it came to the Chinese market.

3. Timing
Sometimes the problem is about timing.  The Western side wants to move fast – the Chinese side doesn’t.  Many banking and finance negotiations in the 90’s & 00’s suffered this fate – the Chinese side wanted to move slowly due to regulation, technology and the limited experience of their staff.  Western firms grew frustrated and walked away, but not before training an entire generation of Chinese bankers in the finer points of international finance.

4. Differing valuations of the Chinese market
The Chinese side tends to value China access more highly than Westerners do, and this can ultimately scuttle the deal.  China, after all, has a long and unfortunate history of Westerners benefiting economically from Chinese resources.  Chinese policy-makers and managers have become very sensitive to losing control of the domestic market or resources.

5.  Risk profile
Chinese and Western negotiators view risk differently.  Too much uncertainty will raise the penalty for proceeding, even when there is a chance of gain. Westerners tend to see uncertainty and risk of loss as two sides of the same coin.  Chinese negotiators, however, have a much greater sensitivity to uncertainty – and tend to freeze up and stop deal progress if they can’t see what the risks are. http://www.chinesenegotiation.com/tag/risk-and-uncertainty/ http://www.chinesenegotiation.com/2009/09/risk-and-uncertainty-in-chinese-american-negotiation/

Last but not least, many Chinese entities see a real value in destroying your China business.  In some cases there are policy considerations – such as Youtube, Twitter and Facebook.  But sadly, there actors on both sides of the Pacific who consider it patriotic to scuttle deals that may yield profits to ‘foreigners’.  In the US this is generally a regulatory matter that takes place away from the deal table.  But in China where you may be sitting across the table from an SOE or policy-driven manager the issue of patriotic hostility is a negotiating matter.  Determine the likelihood of executing the deal (not just signing a contract) early in the process – before you reveal sensitive technologies or business practices.

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1. Western commentators are once again connecting unnumbered Chinese dots to form the picture that they want to see.  The PBOC statement on Yuan flexibility says nothing about timing, direction –  or anything of substance having to do with the new RMB currency regime.  It may be the harbinger of a new Grand International Coalition, or it may be Orwellian doublespeak justifying anything Beijing wants to do.
2. The west is expected to take forex off the table forevermore in exchange for a vague non-promise of flexibility.  How does this change the situation on the ground?  Western financial leaders have once again been pressed into service against their own Main Streets.  If the rmb appreciates by less than 10% over the next year, Geithner & Co are going to look a lot like Jack trading the cow for magic beans.
3. The Chinese side is controlling not only the substance of the argument, but also the timing and the scope. This is classic Chinese negotiation tactics.

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

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

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

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

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We’ve looked at the causes of the BOPS and how it affects Chinese negotiating tactics. Now we are ready to look at how American negotiators in China can prepare and protect themselves from the fallout of BOPS.

Forewarned is forearmed.
Watch for shifts in behavior, communication style and attitudes.  Remember that even with good Chinese partnerships, your gain is often perceived as his loss – and vice versa.  One of the few constants in Chinese negotiation is that you have to be proactive about managing the relationship.  Well, it’s time for Westerners to raise their game a bit.  The days of qualifying as a cross-culture pro by learning to say ‘ni hao’ and passing business cards with two hands is over.   Building a relationship in China is a delicate process that will be influenced by external events.  Anything that impacts on the balance of power of your business will affect the relationship.   Don’t be blindsided by your counter-party’s negative reaction to your success or progress.

In China honesty tends NOT to be the best policy, but it has its uses.
Yes, Chinese people tend to be less direct than Americans, but this doesn’t mean that you are expected to speak in riddles and vague allusions.  If your counter-party seems dissatisfied, distant or hostile then you should find a non-confrontational way to start a dialogue.  Different regions of China have varying attitudes towards direct confrontation.  You may find that northerners and even many Beijingers have few reservations about sharing very frank opinions – particularly if there is booze involved.  Even if you don’t work through every personal or commercial issue, you will certainly learn a great deal from a serious discussion.  If the main thing you learn is that your counter-party isn’t being honest or forthcoming, then that’s a great bit of information to have.

Always be ready to go it alone.
Many Western counter-parties in China are more prepared for failure than for success.  Ask yourself a simple question at the start of your negotiation with a Chinese business person – ‘what if this is a big win?’  Sure, you may build a rock-solid joint venture that your grandchildren end up running together in amiable cooperation – but there are other, more likely, possibilities.  The fact is that you and your Chinese counter-party are each on a separate learning curve and have your agendas.  If you don’t already have a Plan B that involves you going your separate ways, then you are putting yourself in a very weak position for no reason.  Your Chinese counter-party certainly has a wide range of alternatives – and that is one source of his negotiating power.

Structure strategic deals with a rising pay-out.
Chinese and Americans view risk and opportunity differently.  For many Westerners, the China operation is an extension or expansion of a larger business.  We tend to be accretive – building up and accumulating pieces of the puzzle in an effort to assemble a large, stable operation.  Modern Chinese, on the other hand, have grown accustomed to an endless stream of potential counter-parties coming ‘round the bend and seeking them out.  When you tell a Chinese counter-party that he can expect a level payout from a stable business, he may very well take this as a sign that this deal has lost its potential and it’s time for him to find a more promising project.    Many Westerners sourcing goods in China are shocked and dismayed that instead of building guanxi and receiving better terms from long-term suppliers, they suffer from unpredictable quality problems and cut-throat price pressure.
Chinese negotiators tend to be more sensitive to opportunity cost than sunk cost and are always looking for a higher return.  It’s precisely this willingness to book gains and move on that gives Chinese so much leverage in negotiations with Westerners.

Don’t rely too much on your Chinese counter-party’s self-interest to preserve your partnership.
Clever Westerners used to gloat that they had guaranteed cooperation and compliance from Chinese partners by structuring a deal that only involved small up-front good faith payments—with the bulk of the payment coming after the Chinese side had performed satisfactorily.    This plan usually failed for one of three reasons.
First, this kind of behavior, while considered prudent in the West, tended to undermine guanxi and led to a vicious cycle of distrust and suspicion in China.  A second problem stemmed from the fact that cash was not the only asset involved.  While the Westerner was very withholding and cautious with his dollars, he tended to be much more generous with his IP – such as designs, brands, and processes.  Many Chinese counter-parties considered the up-front money a scholarship to Your Business University – and these guys take their education VERY seriously.  And finally, even a small up-front payment was worth having if the Western side was offering.  We don’t see this as often as we used to from established players in Beijing or Shanghai, but if you are dealing with entrepreneurs or venturing out to the sticks, a small sum can go a long way.