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Know Your Chinese Counterparty: Banquets and Baseline Behaviors

One set of New Year’s celebration is coming to a close, but for those of us involved in China business an even bigger celebration is fast approaching.  Chinese New Year is the central holiday on the Chinese calendar, and anyone meeting with Chinese suppliers, clients or partners had best prepare to “banquet up”.

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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By Andrew Hupert – January 3, 2012

Negotiation Conflict in China – Resolution or Dissolution?

Resolving Business Conflict – Chinese Style

This series of posts on Chinese negotiation conflict has taken care to avoid the word “resolution” , because more often than not Westerners and Chinese have a very different idea of what the word means.  Americans, with our bias towards justice and legal solutions, like to dig out the facts, determine who was at fault and resolve the situation with a settlement or penalty.  It’s all very public, final and transparent.   While American businessmen view a court of law as an arena where warriors slay or get slain, Chinese tend to see them more as sandboxes where spoiled children throw unseemly tantrums.

The Chinese idea of resolution is more quiet, subtle and passive.  Parties to a dispute are expected to move forward without complaint or fuss.  In many cases a third party exerts influence on one or both parties to the dispute.  Other times, the more powerful of the two will appeal, either directly or not, to the other side’s sense of pragmatism or self-interest.  Disputes are handled quietly, with an eye toward expedience and continuity.  The interests of the entire group outweigh the needs of a single participant, regardless of how worthy his claim might be.  Face must be protected at all times.  No blame is assigned, no penalties assessed – compensation will come in the form of favorable terms in a future transaction.  While the Chinese often refer to this mode of conflict resolution as “harmony”, to Americans it looks an awful lot like “surrender”.   In a business environment characterized by unwritten rules, conflicting regulations, nepotism, cronyism and corruption, the Chinese style of dispute resolution is seen as yet another example of inequitable treatment facing foreigners  – not part of a serious business solution.

The New Resolution

We can see the outlines of a new type of conflict resolution emerging between western and Chinese partners.  This is a hybrid approach to managing conflict that experienced negotiators from both Western and Chinese camps have naturally developed over times.  It serves the Western interest of insuring that the source of the dispute is identified, corrected and won’t repeat.  It also serves the Chinese notion of preserving face and strengthening the business relationship.

  • Problems get diagnosed without assignment of blame or fault.
  • Forward-looking solutions that balance out positions in subsequent transactions
  • Ongoing negotiation about new procedures and best practices
  • Increased communication and joint consultation about sensitive issues that are the source of conflict

Should you stay or should you go?

Some Westerners will deny that this approach to conflict resolution is feasible for their situation.  From their perspective, the Chinese partner may have no interest or plan to resolve the conflict at all, let alone equitably and fairly.  The underlying problem here is one of partner selection – not cross-culture conflict management.

When you are involved in business conflict in China, your only real choice is whether or not you continue this relationship.  If you have not laid down a solid foundation or one of the interested parties doesn’t trust the other, then there is really nothing to save.  This sounds simplistic, but all too many western negotiators continue dealing with Chinese counter-parties they don’t trust for far too long.  Maybe they feel that they can’t do any better or that they have no choice – maybe they think the situation will improve by itself over time.   But continuing to do business with a Chinese partner you don’t trust is lose-lose negotiation at its simplest.  In the West contracts, regulations and courts offer you a measure of protection.  The situation in China is improving, but the glue that binds commercial agreements is still personal relationships – not legal contracts.

Resolution vs. Satisfaction

One thing is certain – successful resolution to a Chinese conflict is rarely satisfying or dramatic.  You won’t get your money back.  You won’t get an apology.  No one will admit that they were wrong or that you were right.  The most you can hope for is that the wheels of commerce will turn a little more smoothly and a bit more on track.

In China, court cases and confrontation tend to yield pyrrhic victories – even if you win, it’s rarely worth it.  You might not care about quaint Chinese customs like face, harmony and guanxi – but your counter-party does.  No matter how difficult you found your Chinese partners before a shouting-match or court case, you can be sure that it will be much, much worse afterwards.  Make sure that you have solid alternatives in place before you try to “get satisfaction”  in a Chinese business dispute.  You will probably need it.

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By Andrew Hupert – November 10, 2011

Managing Conflict in Chinese Negotiation

Managing Conflict in Chinese Negotiation – Structure Deals for Success

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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By Andrew Hupert – November 8, 2011

Mitigating Conflict in Chinese Business Negotiation

 When negotiating in China, small conflict can actually strengthen your relationship – but the key is to keep mutual trust alive.

Controlling Conflict in Chinese Business Negotiation

You can avoid unnecessary business conflict  in China by picking the right counter-party.  But once you have identified a good candidate, you have to manage two opposing tendencies.  On the one hand, many westerners try to suppress all forms of disagreement or difficulty, no matter how minor.  This kind of manager is afraid that the tender shoots of a new business relationship are too vulnerable to survive the slightest   conflict, and he would rather concede a few deal points  than risk a confrontation.  One of the worst things you can do in connection-oriented China is to base your relationship on dishonesty – and that includes false expectations.  Don’t agree to terms you dislike or don’t fully understand.  If your plan is to build a cordial relationship by agreeing to big-picture issues that you will change or clarify later, you run the very real risk of looking dishonest and unreliable.

On the other hand, some negotiators try to make hay while the sun shines and want to use this rare face time to take care of all the details – no matter how unpleasant or awkward.  These strike-while-the-iron-is-hot negotiators tend to sign favorable contracts but never seem to do profitable business.  A signed document doesn’t carry the same weight in China as in the US or Europe.  Many mainland managers will find it easier to scuttle an unattractive deal by forcing a “face-losing” dispute rather than try to renegotiate terms.

The best conflicts in China are small, relaxed, and solvable.   You cannot avoid all confrontation, but successful western negotiators learn how to keep disagreements low-level and impersonal.   Once you show anger or insult the other side then the chances of settling the issue amicable drop to practically nothing.

So how can you mitigate conflict with a partner or customer in China without giving away the farm?

  • Be yourself.  Some westerners are so determined to cross every cultural barrier that they become a completely different person – one is more patient, tolerant and magnanimous than the one they are back home.  Don’t be so desperate to be liked that you become someone who isn’t respected.   Chinese know how to flatter and compliment without making promises, and you have to learn from their example.  Go into each meeting or negotiation with a list of issues you need to address.  Be sensitive, friendly and polite – but do the business.
  • Small Is Beautiful – when it comes to business conflict.  The ideal conflict in China surfaces quickly, gets solved completely and helps the two parties develop a manual for managing future conflict.   Build an atmosphere of trust by establishing a track record of small successes at different levels of the organization.
  • Keep trust alive.  Once a conflict undermines mutual trust, the relationship won’t survive.  Make sure that you keep the channels of communication open, and are prepared to over-compromise if you want to keep this connection.  Chinese negotiators tend to believe that their pool of potential counter-parties is limitless, so they have an inflated view of their own bargaining power.  When a Chinese counter-party feels that he has been insulted, betrayed or deceived, he usually finds it easier to terminate the relationship and wait for the next contestant.
  • Got to be in it to win it.   Much of Chinese business still depends on strong relationships.  Western managers dream of repeat business that requires next to no maintenance, but Chinese business people still like the personal touch.  Westerners are frequently criticized for not doing the required relationship maintenance – instead only calling to complain or ask for special favors.   If you only get out to China a couple of times a year, it is natural to want to resolve a lot of issues at once, but leave the laundry list at the hotel.   If you always show up with a folder of problems, discrepancies and issues, then you are the problem guy.  People don’t like volunteering or sharing with the problem guy.  Maximize your face time by building trust.
  • Guanxi and You.  Once your Chinese counter-parties start talking about guanxi, harmony or face, the situation has to be handled VERY carefully.  It’s rarely a good sign.  Beware the “guanxi trap” where you are expected to make real concessions right now for some vague promises of profitable relationships at some point in the future.  Chinese negotiators know that Westerners are very sensitive but unfamiliar with cultural issues like guanxi and face and are willing to exploit your fear of sabotaging the relationship that you think is key to success in the mainland.  Once you start responding to this line of discussion it can seriously undermine your negotiating position and lead to deal-ending disputes.

When it comes to controlling conflict and keeping disputes manageable, the key goal is to keep trust alive and growing.  Once your Chinese counter-parties feel betrayed or duped, nothing you do can rebuild the relationship.  In the US or Europe we’ll use contracts, arbitration and other legal options to insure that everyone respects the terms of the deal, but in China the institutional solution is usually not a good option.  The whole point of Chinese relationship-building procedures is to perform a kind of personal due-diligence investigation on you and your team.  If you fail that test due to dishonesty, emotional outbursts, or neglect, then the Chinese side feels that their system has worked the way it is supposed to – and saved them from a potentially dangerous association with the likes of you.

 

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By Andrew Hupert – November 1, 2011

Avoiding Conflict in Chinese Business Negotiation

The best way to deal with business conflict in China would seem to be avoiding it completely —  but as usual things are not always as simple as they seem in China.

 

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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By Andrew Hupert – October 27, 2011

Conflict in Chinese Negotiation – The Basics

Conflict Management in Western-Chinese Business Negotiation

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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By Andrew Hupert – October 23, 2011

Silence of the Mainland – US default & Chinese T-bond holdings

Sociologists call Mandarin Chinese a “high context” language to indicate that there is more to the message than just the words being spoken or written. You have to pay attention to the situation, environmental factors and history to understand the real meaning.

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.

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By Andrew Hupert – July 25, 2011

Negotiating in China. 2 Speed Chinese Dealmaking: Fast & No.

Are Chinese negotiating tactics an integral part of the new normal, or are is China still the exception making its own rules?

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 21st 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.

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By Andrew Hupert – June 15, 2011

Building a China Ready Negotiating Team

Senior managers from western companies love boarding the plane from China back to HQ with a signed contract in their pocket.  They talk about strategic alliances, about win-win joint ventures and capturing the enormous Chinese middle class market.  It makes for a great press release.

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

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

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

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

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

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

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

  3. No more one-size-fits-all solutions.
    Multinationals that have spent time, money and effort to build global systems try to apply them to China, and the results are often mixed at best.  Companies that negotiate effectively in China use flexible systems that are specific to their Mainland business.  Chinese don’t care how you do it in America, England, Italy or India.
  4. Know their weaknesses, know your weaknesses.
    They steal IP.  They may not consider it theft or wrong, but you probably do.   Westerners are lousy at relationship-building and time management – at least by Chinese standards.    Don’t paper over the big issues.  Make your weaknesses and differences the core of your relationship building – not a forbidden secret that no one can talk about.
  5. Constructive engagement means many small conflicts – not fake smiles and pretty lies.
    Your counterparties are tough-as-nails Chinese business professionals, not fragile China dolls.  As long as business disputes are not personally embarrassing or political in nature, then a very wide range of topics are ‘in bounds’.   Westerners have bought into the propaganda that Chinese are all delicate flowers who will wither and faint if confronted.    Lots of small, manageable confrontations is a relationship.  One big confrontation is a failure.
  6. It takes a team.
    Americans all want to be cowboys and Europeans still love their aristocrats, but China is about the team.  Don’t show up alone.  Negotiating teams should be multilevel and cross-departmental.   Chinese like authority, so senior management has got to be involved in a committed and serious way.  Purchasers and engineers who get “abandoned” by an HQ that doesn’t engage frequently with their Chinese counter-parts are easy targets for competitive negotiating tactics.
  7. Always be looking for new counter-parties and new opportunities.
    Expanding your network in China means constantly searching for new stakeholders and counter-parties – both within you existing partner’s operation and from new (external) potential partners.  This may be your only long-term source of leverage.  If you have a single counterparty in China then you are perceived as weak and vulnerable.   This is another area where your front-line people can provide valuable input and feedback.
  8. Empower your front line.
    Your front line staff needs the ability to build and block.  They must have the power to build relationships and block potentially problematic transactions.  “Divide and conquer” is a favorite technique of Chinese negotiators, and they are quick spot a purchasing manager or salesman who is not getting enough support from the home office.    Your people need the range of motion to build relationships (which may mean breaking from standard operating procedures) and to hit the panic button if they spot a problem that threatens the bottom line.
  9. In China, failed negotiations end – successful ones never do.
    Renegotiations are par for course here, and your Chinese counterparties consider it normal.  You have to as well.  You should treat ongoing renegotiations as an opportunity to build and expand relationships – not as an attempt to rip you off.  This is where real guanxi comes from – the give and take that arises from a shifting business environment.  Chinese feel that source of long-term stability in business is strong relationships – not  thick contracts and rigid adherence to out-dated agreements.
  10. For the Chinese side technology is the goal, time is the weapon.
    Chinese negotiators often assess the success or failure of a deal by the technology and IP they acquire.   They don’t really care how they get it.  One of the most successful tactics is to manipulate western negotiators with time tactics.  They rush to sign and drag their feet when executing.  The hope is that you will over-deliver  IP to win what you think is a valuable contract, and then throw up so many roadblocks while executing the actual business that you will go away – or go broke- before they have to deliver.
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By Andrew Hupert – April 18, 2011

Chinese Negotiating Best Practices: The Chinese BATNA

BATNA Basics:  You’ve always got alternatives, even if they are unattractive.

BATNA is your Best Alternative to No Agreement.  It’s your condition when the counter-party you are negotiating with gives you a final and definitive NO.  If you have a mediocre job and are talking with a new firm about a better position, your BATNA is to keep your old job.  If you don’t have a job now, then your BATNA is significantly lower – continue your job search while living off unemployment insurance, savings, part-time work and the generosity of others.  Clearly the person with the better Plan B has a stronger negotiating position.

Chinese BATNA:  There’s always another counter-party coming ‘round the bend.

Chinese negotiators generally consider their BATNA to be fairly strong because they operate under the assumption that there is always another available counter-party.  China has a large population, and the international commercial centers (Shenzhen, Shanghai, Beijing, etc) are packed with potential deal-makers.  Since Deng Xiaoping kicked off China’s economic reforms 30 years ago, there has been a steady stream of foreign counter-parties banging down the doors to get access to Chinese suppliers, markets and partners.  Chinese managers and entrepreneurs have faced their share of shortages and bottlenecks – but overseas negotiating counter-parties have never been scarce.

Does this put westerners in a weak position when they are negotiating in China?  Yes and no.  Obviously you will have a hard time if you position yourself as a rare and valuable commodity, but there are many ways to turn this high-velocity trading environment to your advantage.  Many westerners confuse ‘guanxi relationship’ with ‘lifelong monogamy’.  Chinese deal-making tends to be more fluid and dynamic than those in other environments.  It’s more like a raucous dance club than a small-town wedding.  Western negotiators who settle down with a single partner too soon often find that they have squandered their most powerful deal-point.

Turn China’s Negotiating Environment to Your Advantage:

1)      Don’t try to beat them – join them.  China’s high velocity deal-making environment can work for you as well.  Always have 3 counter-parties for any significant deal or business goal.   At any given time, you should have a primary partner or supplier, a back-up who can step in quickly, and a special situation that will take a longer to develop but meets specific needs.

2)      Don’t give away exclusivity.  Chinese deal-makers like to joke that in business it is best to have many girlfriends but no wife.  Westerners should take this hard-hearted advice to heart!  Many international JVs founder because the Chinese partner was a bad fit – or treated the exclusive partnership as an excuse to sit back and collect rents.  Offer exclusivity only when it serves your interests – and then make it conditional on objective benchmarks.  Also consider using limited exclusivity, based on region, product, time and/or performance.

3)      Consider diversifying your activities geographically.  If you are building a factory then you are clearly rooted to a specific place.  But if you are involved in services, sourcing, web-based businesses or other intangibles, keep your geographic options open.  China is a huge place, and the regulations, customs and enforcement of policy can vary significantly from one city or province to the next.  Check with a competent international lawyer or consultant first, since registration requirements may restrict certain activities.  Shanghai and Beijing are getting prohibitively expensive, however, and it’s wise to shop around.

4)      To tell or not to tell…   Do you let supplier A know that you are also talking to prospective suppliers B, C and D?   In China a little truth goes a long way, but dishonesty can land you in the ditch.  The best strategy is to begin your relationship by making it clear that you have a range of counter-parties but remain vague about their identity.  Don’t worry if your new Chinese associate feigns hurt feelings or outrage – they do the same thing when they negotiate.   Problems occur when you promise exclusivity – OR ALLOW THEM TO BELIEVE THAT YOU HAVE AGREED TO AN EXCLUSIVE ARRANGEMENT – and then look for new partners.

5)      Benchmark. A tried & true practice for successful Westerners in China is to play one partner off another.  It helps if they don’t know each other (this is where geographic diversification is helpful) – and if you have been above board from the start.  Remember that relationships count for more in China than in the US, so don’t make this mean-spirited or insulting.  The more matter-of-fact you are about your business methods and other relationships, the better your results will be.  Be wary of suppliers or distributors who get offended by a little competition – they may not be appropriate counter-parties.

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By Andrew Hupert – January 25, 2011