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Negotiating in China: Secrets of Success, Part II

Last week we talked about the perils and pitfalls of SUCCESFUL negotiations in China. One of the first rules of doing business in China is that a signed contract is a starting gun, not a finish-line flag. In China, negotiations don’t really get started in earnest until after the signatures are on the dotted line.

But reaching the signing ceremony is getting tougher and tougher. Chinese deals almost always involve an element of policy, and China’s bureaucracy requires that international negotiators adopt a new set of rules.

What do the heavy-lifters of international negotiation have to say about reaching the contract-signing ceremony milestone in China?

1) Persistent.
They were all told it was impossible — that there was no way, no how, no chance. Persistence in China is about long term patience and composure – not threats or horse-trading. I remember the first time I put this lesson to work – long, long ago when the Portman Shangri La was the only hotel that international business people stayed in and one’s travel options were much more limited than they are today. An uncooperative concierge told me that the flight I wanted was booked and that there was nothing he could do. Instead of getting confrontational, I got comfortable. I took off my jacket and hung it on the back of the chair, put my bag down and settled in for a long conversation. As soon as he saw that I was neither leaving nor providing the adrenaline rush of a good barbarian throw-down, he quickly started supplying me with other options. I got to Beijing in time – which wouldn’t have happened if I had been issuing ultimatums or complaining. Persistence in China means becoming a very dull but not unpleasant part of your counter-party’s environment. If you go away when they tell you ‘no chance’ you’ll end up with nothing – but if you try too hard the discussion will quickly escalate into an emotional dispute. Your Chinese counter-part will enjoy a few moments of high-energy exchange, and then quietly and permanently check you off his ‘to do’ list. Westerners who get emotional, desperate or nasty are not deemed appropriate long term partners, and the initial ‘mei you ban fa’ – there’s nothing we can do’ is simply Chinese due diligence. If you don’t have the sense or smarts to try again, then you probably don’t have the resolve and maturity to be a serious business collaborator.

2) Innovative.
When Westerners describe innovation, they are usually talking about product innovation – the creation of new businesses, products and services to meet existing challenges. Chinese aren’t great at innovating products or brands, but they are masters at process innovation – figuring out new ways of getting jobs done. When Westerners view the Chinese government, we tend to see a single monolithic entity. We assume that the Ministry of Issue A has sole responsibility for Issue A and no other responsibilities. So when the representative of the Ministry says, ‘no’ our only hope is to get him to change that to a ‘yes’. Chinese dealmakers take a different approach. They are constantly looking for new contacts and revisiting overlooked branches of their network to find channels of access, potential supporters and previously unknown relationships. Competent Western deal-makers pursue the same track, believing that every time a door gets slammed shut a window is nudged open. By amassing a wide range of indirect contacts, the negotiator can eventually build a powerful network that maintains the kind of gentle but constant pressure that works on Chinese decision-makers. The successful Western negotiator in China never passes up an opportunity to add to his quiver of contacts and influencers, even if they don’t seem too useful at the moment.

3) Attention to process.
You can’t pressure the Chinese bureaucracy, but you can be ready, willing and able to move when the policy environment shifts in your favor. Winners in China play many angles in a battle of careful inches, and avoid bold dramatics that force a quick answer. The Westerners who succeed in negotiations with the Chinese conduct a concerted, serious, dignified effort that is consistent over a long period of time. When the right circumstances arise, these Westerners are aware of the situation and prepared to act quickly. Americans tend to be poor at the process element of the Chinese negotiation, while Europeans with their history of coalitions and network-building are a bit more astute. The Chinese process of deal-making looks chaotic and irrational to the newcomer, but there is a logic and order to it that remains strong even during times of great structural stress. Trying to take shortcuts, forcing decisions or aggressively taking control of the process will almost always end badly. You can’t change the Chinese regulatory and political environment, but you can monitor it and prepare in advance for the window of opportunity whenever it may arise.

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By Andrew Hupert – May 18, 2010

Negotiating in China: Secrets of Success

I’ve been to two meetings with major, MAJOR international institutions in the last few weeks where pretty much the same message was delivered.

• We’ve just reached a huge agreement with the Chinese government.
• We have never been more successful, happy or optimistic about our future in China or our relationship with the Chinese people.
• We have never been better disposed towards the Chinese government.
• Don’t tell anyone.

In spite of public signing ceremonies including photographers, reporters, dignitaries and permanent commemorative wall plaques – the Western institutions are instructed to treat the agreement as a state secret. This sounds much odder to those outside of China than to those that have been doing deals here for a while.

China celebrates the signing but hides the cooperation. There are three main reasons for this:

First, China likes to manage the time horizon of the commitment. Most of these deals are not explicitly open-ended – nor do they stipulate a meaningful expiration. This is emblematic of Chinese use of time as a negotiation factor. They will open the door you want them to, but leave themselves the option to close that door at a time of their own choosing. This gives China tremendous leverage later, and makes sure that the relationship maintains proper harmonious characteristics throughout.

Another cause for the seemingly irrational attitude towards publicly acknowledging agreements is that China’s internal power structure is complex, competitive and finely balanced. Westerners tend to view the Chinese bureaucracy as a single entity. Chinese negotiators see the bureaucracy as a community – or collection of clans. The ministry or bureau that ultimately sent a representative to the signing ceremony may have had to over-rule, outmaneuver or horse-trade with a dozen other bureaucratic competitors. One reason Chinese negotiators are slow to embrace the concept of Win-Win negotiation is that the math isn’t as simple here. It’s more like Win-Win-Lose. You and your counter-party may both benefit, but somewhere there is a third actor that has lost out to your Chinese counter-part. That person or group isn’t known to you – but is all too familiar to they guy you are being photographed with.

Finally, your big agreement may in fact be a small step towards a significant policy evolution. Chinese negotiators are known to use individual deals as trial balloon or test cases – usually without the Western counter-party’s knowledge. They will use this case to nudge a door open just a bit and see what happens. A big splash for you, this deal was just the Chinese side dipping a toe in the water. If you start making loud noise about the great deal you signed it may pre-empt a much bigger shift that is far deeper and broader than your contract.

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By Andrew Hupert – May 11, 2010

US-China Negotiating Rule: Don’t Kiss Frogs in China

In China, counter-party selection is more important than potential deal terms. Good partners don’t necessarily lead to good deals, but bad partners always lead to disaster. The Chinese know this about themselves – that’s why guanxi and networking are so important here. Westerners have a different set of terms – due diligence and reputation – but the meaning is analogous for business purposes.

If you are dealing with an honest, competent guy then due diligence isn’t particularly difficult. He has references, ongoing partnerships and relationships. But it’s up to you to lay down the right ground-work and then ask the right questions. Those annoying banquets and drawn-out lunches aren’t just for show – the Chinese are performing their due diligence on you. You should respond in kind – volunteering background information and sketching out general plans and priorities. They are getting to know you. Yeah, they are interested in how many kids you have – but what they really want to know is how stable and trustworthy you are as a partner. It’s ok for you to ask similar questions – about their plans for growth, expansion and client relationships. Keep it general and comfortable at the early stages – but don’t act like a buffoon talking ONLY about how developed Shanghai is or how much you enjoy Chinese food. They’re working, and you should be too.

If you are dealing with a dishonest, unreliable partner, due diligence is extremely easy. He won’t be able to provide a single relevant reference, and your job should be done. Walk away and don’t look back. It really is that simple.

Chinese partners who are reliable and solid today will be just as solid next year. The sketchy guy who flatters you but tries hoodwinking you over nickel & dime issues today is going to be just as sketchy next year.

Western bedtime stories talk about a frog that turns into a prince when shown a little trust and respect. The Chinese don’t have that story – and there’s a good reason.

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By Andrew Hupert – May 4, 2010

When Good Chinese Business Relationships Go Bad

Sun Tzu had his moments, but the best Chinese negotiating advice comes from Lao Tze in the Tao Te Ching. Deal with problems early – before they turn into crisis. (Or as he puts it in Chapter 63:

Deal with the difficult while yet it is easy;
Deal with the big while yet it is small. )

If you are having difficulty with a Chinese partner or counter-party, ask yourself a simple question – what will happen if you do nothing? There are three possibilities:

    A. It will go away by itself if you are patient, friendly and talk over your differences calmly.
    B. It will persist at exactly the same level of inconvenience forever, so the work-arounds and compromises you have already made will be sufficient.
    C. It will get worse and worse until it ultimately threatens to undermine your business.

In China there’s a strong chance the answer is C. Chinese negotiators aren’t stupid, yet they aren’t particularly innovative. If a tactic works for them once then they will keep doing it. It’s up to you to change the game.

China relationship game-changers.

    1. Raise your BATNA (Best Alternative to No Agreement, or no-deal option) by upping your skills, knowledge and abilities.
    2. Add a new player to the mix.
    3. Capitulate.
    4. Walk away slowly.
    5. Run away.

Let’s look at these options in a little more detail:

1) Raise your BATNA, or no-deal option.
If you are relying on your Chinese counter-party for basic market and business information well into the negotiation then your currency is probably dropping in his eyes. Hire an assistant, or better yet spring for someone more high-powered, but do something to develop your own flow of reliable industry information. Experienced deal-makers who are based in China consider this advice simplistic, but many overseas negotiators never seem to figure out that they are getting all of their data from a counter-party who has a vested interest in keeping things as confused and opaque as possible.

2) Add a new player to the mix.
Find an alternate counter-party or spread your risk by taking on additional suppliers or marketing channels. Don’t give away exclusivity unless you are absolutely certain you can rely on your partner – and even then its one of the riskiest decisions a Western negotiator can make in China. Once your Chinese counter-party thinks the balance of power has shifted in his favor then the relationship goes into a nose-dive. Local Chinese are always looking for a bigger & better partner – so should you.

3) Capitulate.
Give in. Do it his way. Maybe the Chinese side has a point. Maybe you are better off just giving in. After all, there’s a good chance that the right partner really does know what he’s talking about and you don’t. For the non-China expert, this isn’t always a bad option. Particularly true if your business involves marketing within China.

4) Walk away slowly.
For all their talk of harmony and consensus, Chinese negotiators are basically power-players. They respect strong counter-parties and are opportunistic & cut-throat when dealing with weaklings. If you aren’t ready to walk away, then expect to get taken advantage of. But having a Plan B isn’t enough – you have to know how to deploy this tactic in China. The best way is to be polite – even friendly – and tell your Chinese counter-party, “Well, it looks like we won’t be able to do business this time. Hopefully we’ll meet again under different circumstances. Thanks for all you’ve taught me about doing business here.” Smile and walk away – slowly. In many cases your counter-party will come back with better terms. Even if he doesn’t, you are better off making the move – provided you have already set up an alternative option.

5) Run away.
If your relationship is truly gone to hell, then your best option may be to burn your bridges and get out of there immediately. Some people are simply more valuable as enemies than friends. If your counter-party is actively stealing from you or worse – engaged in illegal or reputation damaging activities – then you are much better off being the one to terminate the relationship. Running away is different from walking away slow, because in this scenario you have no interest in keeping even a pro-forma relationship going.

A final option that may seem counter-intuitive is well suited for some Americans – force a conflict and make them mad. Yes, this is a risky tactic, but when all else fails you may want to try to shift the balance of power back in your favor by provoking the Chinese side. I’m talking about forcing an open conflict in a situation that you feel has gone so far out of control that the status quo in simply untenable. If pushing you around has been working for them and they consider you a weakling, then you’ll never get this deal back on track. If they want a deal with you and you show a little spine, then they’ll find a way to accommodate. Your worst option is playing the role of damaged goods in a relationship a Chinese counter-party doesn’t value.

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By Andrew Hupert – April 29, 2010

Jumping through hoops in the dark.

Negotiators often use the analogy of ‘jumping through hoops’ to describe the steps needed to reach an agreement. That’s certainly an apt description for the process of negotiating deals in China — but it’s not necessarily a prescription for success.

    Jumping through a hoop for a pot of gold can make great sense.
    Jumping through a hoop over the edge of a cliff makes less sense.

If you know where you are going to land you can make intelligent, enlightened decisions. But in China Western negotiators often find themselves required to take concrete actions now for an uncertain return at some unknown point in the future.

When you find yourself in a situation where you must jump through hoops in the dark, you are better off negotiating for a flashlight — not the gold. Being able to accurately measure progress is far more valuable than being able to extract vague promises.

    1. Know your goals.
    What’s your goal system? Where do you want to be, and how do you plan on getting there? What’s your counter-party’s goal system? Does it align with yours? Westerners often suffer from tunnel-vision in China. They can’t envision any set of alternatives beyond the ones they have plotted for themselves – often while working with incomplete information in their US corporate headquarters.

    2. Develop independent channels of intelligence
    Do you have adequate information about the process? Is your counter-party your only source of information? If a Chinese counter-party came to the US to negotiate a deal with you and he made it clear that you were his sole source of relevant information, you would be hard-put to disclose details that put your deal in a negative light. Due diligence, after all, is HIS responsibility not yours. This doesn’t make you dishonest or predatory — you are merely acting in your own professional best interest. Well, your Chinese counter-party is no different. Chinese dealmakers may not understand WHY you expect them to guide you through every phase of a negotiation, but they aren’t stupid enough to pass up an advantage.

    3. Negotiate for information about the deal process.
    Too many westerners rely on their Chinese counter-party to decide what will be exchanged for your compromises. The Fog of Business can be a great relationship-building exercise if it is handled properly. If there is an aspect of the negotiation that is unclear, make getting that information part of the process. It’s your responsibility to know what lies beyond the next concession.

    4. Trade real for real.
    Avoid trading real concessions for vague promises. ‘I pay now, you pay later’ is a source of problems — particularly when your payment is denominated in renmenbi and his payment is in the currency of goodwill, relationships, regulatory approval and best effort selling.

    5. You need professional help.
    Build a network of neutral experts — even if you have to pay them. Hiring a lawyer, accountant and relevant consultants before you sign a contract is a lot cheaper than hiring them to get a bad deal back on track. Having an experienced expert at your disposal to act as a sounding board can be some of the best money ever spent in China.

    6. Develop alternatives.
    Alternative deal options and alternative counter-parties. Even when dealing with the Chinese bureaucracy, there are few monopolies on information or approval channels. That may mean setting up shop in a different province or municipality, it may mean finding a new partner or changing the structure of your deal. If you walk into a meeting with a Plan B in place, then you are in a much stronger position.

    7. Strategy first, tactics later.
    Don’t start negotiating tactics until you have a sound strategy. If you rely on a negotiating counter-party to build your business strategy, then they are calling the shots. This isn’t necessarily a terrible idea – if you have structured your deal accordingly and have conducted proper due diligence. Many westerners, however, find out too late that they aren’t really the ones making the significant decisions.

Don’t require that your Chinese negotiating counter-party choose between being honest and smart. They’ll choose smart every time – and if they don’t, you probably don’t want their help with your China plans. The remedy is to learn more early and structure smarter deals that will survive for the long term. How do you achieve this? Ask more & better questions and dig beneath the surface. Many westerners complain that Chinese deal-makers waste too much time on small-talk and relationship building activities, but those are the best opportunities for learn more about the process. If you feel that you don’t have enough visibility to understand where your negotiation is taking you, then slow down and bargain for the information that will shed light on your real situation.

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By Andrew Hupert – April 19, 2010

Mr. Geithner goes to Beijing.

It’s hard to criticize China for being arrogant in its dealing with the West when the US is kowtowing like a supplicant. Like most rational negotiating entities, China tends to repeat tactics that are successful – and it has been very, very successful in its management of this US administration. If there are any good reasons for Beijing to alter its competitive Win-Lose tactics with Washington, they are well hidden. The Obama administration will be spending the next 2 ½ years lowering expectations and chasing after Beijing to execute on vague promises about forex and trade.

US business can learn a great deal about dealing with Chinese counter-parties from Mr. Geithner, but unfortunately most of the lessons are about how not to negotiate in China.

Lessons learned:

    1. Timetables and deadlines must not be arbitrary. If you can’t back up a deadline, then don’t impose one. The April 15 Treasury Dept report on currency manipulation became the goal, not a tool. When Geithner punted on the deadline he lost the battle. Many have argued that the measure unfairly targeted China and never should have been used as a tactic. While that may or may not be true, Geithner’s last-minute capitulation was perceived in China as a victory and a sign of weakness. Westerners who come to China with an arbitrary deadline are putting themselves on a slippery-slope of endless compromise and back-tracking.

    2. ‘Face’ might not matter to you, but it does to the Chinese. If your Chinese counter-party feels they have the advantage or that you lack dignity, it will impact on your negotiating power. Geithner and the Obama people may consider themselves to be enlightened Win-Win high-roaders, but in Beijing they are seen as amateurish blunderers who talk tough but back down. The Chinese side does not consider these Americans to be their equals, and every compromise Washington makes reinforces the Chinese notion that there are more benefits left to uncover.

    3. Sell your deal at home first, settle on a rock-solid bottom line and ambit goals – and THEN sit down with your Chinese counter-parties. Be clear on your metrics and stick to them. If you want to succeed in China, you first have to develop your own notion of what constitutes a ‘win’. Like many US deal-makers before them, Geithner & Co. have returned from China to start a much tougher, more acrimonious negotiation with their own home office. Trying to explain to your senior management and Board of Directors why they should accept a bad deal in China is a career-killer.

Chinese negotiators often talk about the need for ‘harmony’ and ‘good relationships’ in business dealings, and novice Americans allow themselves to assume that this means 50-50, tit for tat compromise. More skilled Western negotiators know that the first point to be worked out is how each side defines what harmony and success really mean in the present context. The Obama administration is in the process of learning that they have been too quick to declare this deal ‘done’. Learn from their mistakes, or be ready to repeat them.

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By Andrew Hupert – April 13, 2010

Monday Morning Quarterback: The US-China Forex Play

Team Obama just can’t seem to make a play in China. After 8 years of Bush/Chenney, Obama was supposed to be a stiff fresh breeze that blew out the cobwebs of war and nationalistic unilateralism. The Americans, however, can’t execute on the basics when facing China. This April Fool’s week announcement that the US was dropping currency as a negotiating variable for a definite maybe on nuclear Iran isn’t a cause for optimism. The Chinese have pushed the Americans around a lot in the first period, and they don’t see much reason to stop now. Obama has stayed on his feet but hasn’t managed to make anything happen. He’s tentative and slow out there — defensive and reactive. If the Americans are going to turn things around in the second half, they’re going to need to start calling better plays and executing the basics a lot more consistently then they’ve been doing so far.

The Deal: The Obama Administration – with Tim Geithner’s Treasury taking the lead – has decided to delay the semiannual exchange rate report to Congress, originally slated for April 15, that would have possibly labelled China a systematic currency manipulator. http://www.nytimes.com/2010/04/04/business/04yuan.html
Future venues for the exchange-rate debates will now be moved to the G20 meeting in April, the annual Strategic and Economic Dialogue between US and China in May, and another G20 in June. It also seems that China will consider moving towards the rest of the major powers, including Russia, in attempting to persuade Iran to moderate its nuclear ambitions.

The Results: China won this one with a head fake and a promise that will never be made public. This decision is 100% Geithner — Treasury is still running China policy in Washington and this administration favors the kind of back-room, big-picture, elites-only dealmaking that the Chinese Communist Party understands and trains for. By moving the debate about renminbi-dollar exchange rates to the back rooms and allowing the Chinese to hijack the US decision-making process, the PRC has not only won this battle — they seem to have solidified their ability to influence US policy at will.

The Timing: The Treasury Department report on currency manipulation, scheduled for release on April 15, was the kind of solid, public deadline that Chinese deal-makers loathe. Chinese would much prefer to do their horse-trading quietly and to disclose only glimpses of the final decision. For the Chinese to wait until just days before the deadline to apply pressure to change the time, date, transparency, substance and scope of the deal was typical — and in this case, beautifully executed. Instead of a single authorative report accusing the Chinese of manipulation, we are now looking at a never-ending series of international consensus-building and jaw-boning.
Note to internatational deal-makers — when Chinese counter-parties don’t like the substance of a negotiation, they will attempt to delay it, make the discussion less binding, and move the debate to a more favorable venue.

The Scope: The US went into the currency negotiation with facts, figures and broad support for a measure that would be bad for China. Instead of taking on the forex issue head-on and publicly — a tactic that Americans favor but Chinese find distasteful – China deflected by tying other issues to the forex flap and significantly enlarged the scope of the deal. Chinese dealmakers are expert at cobbling together grand projects that make any particular disagreement seem puny when compared to the bigger picture. Forex is a sore subject for the Chinese — even their allies think that the currency is being manipulated. Iran’s attempt to get nuclear capabilities, while seemingly unrelated, gave China the leverage it needed to neutralize America’s most powerful weapon. Not only will the forex rates stay unchanged, but China is now recognized as the power-broker in the Middle East.
Note to international deal-makers — be careful about being ’scope-a-doped’ by Chinese counter-parties who find solutions by upping the ante. Keep sight of your original goals.

The Linkage: China linked two issues — the currency issue to which it is a central actor, and the nuclear Iran issue to which it is an ancillary participant. The currency revaluation would cost China a lot — the actual forex change would be messy & expensive, but the loss of face from being forced to make such a huge decision AND being insulted as a cheater would have stung even more. It would be a terrible fight where even victory would be costly. China’s response was to find a way to link the forex issue to something that the US cared about but was no-lose for the Chinese side — and that’s how the Iran issue found its way into the forex debate.
Note to negotiators: many westerners in China will agree to linkages of seemingly unrelated issues early in the discussion to ‘maintain face and harmony’, only to have it bite them in the back later.

The Outlook: China has scored a couple of short term wins here, but set the stage for their economic juggernaut to continue making winning plays for the rest of the season. They have stuck to their traditional playbook — creating linkages between unrelated issues, masterfully managing time and deadlines, and moving the real debate to forums that they consider most favorable. The Chinese have also burnished their international status as the ‘honest broker’ among major powers with their new role as the voice of reason in Iran. The US didn’t come out of this empty-handed — they have solidified a stronger anti-manipulation coalition within the US, though it remains to be seen how it will play in an international G20 environment where anything can happen — but usually doesn’t. The US can also get credit for inching China closer to the rest of the world on the nuclear Iran issue, though many are asking if that will be of much value moving forward.

So how does this end? The Chinese win in the short term — they continue manipulting forex rates until later, and they get arm-twisted into doing what was always in their best interest with Iran. In the longer term the Chinese will probably find it necessary to let the RMB appreciate — just to manage their own import issues — and the US side will have to start over by offering new enticements when the Chinese give the OK. The Chinese will continue wringing concessions out of this administration at will, simply because it can.

Got to say, though. Hu JinTao as the Good Cop while Grandpa Wen was the Tough Guy? Well played, my friends. Well played.

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By Andrew Hupert – April 5, 2010

Scanning China’s Business & Negotiating Environment

The policy of Engagement has run its course. The US had unreasonable expectations about the allure of Western systems and methods. China has always been wildly optimistic about the effectiveness of its soft power.

As China realigns its relationship with the rest of the world, growing tension and conflict between governments will almost certainly have an impact on international negotiating. Instead of closing their eyes and hoping for the best, American managers can scan the shifting environment and try to figure out where the new challenges and opportunities are going to be.

Environmental scans are really just checklists of big-picture categories you should analyze. Social trends. Technological issues. Economics. Some people called these frameworks STEP or PEST or PESTLE. The most comprehensive seems to be the STEEPLE, so that’s what we’ll use as an example.

Society, Technology, Economics, Education, Politics, Legal, Environmental

For more background, look here. http://innovationwiki.brighton.ac.uk/index.php/STEEPLE

    Social.
    Chances are good that China and US are going to drift further away from one another compared to 2007 (before the financial crisis). Two societies mean two media industries, new brands, two distribution networks and two sets of stars. Bad for the global village, good for business. MNC management woes worsen as China’s whiz-kids choose Chinese. Access to China media market is tough and getting tougher.

    Technology.
    China wants more sophisticated technology. US has cyber warfare concerns. Chinese tech issues are getting more refined and more process-based. There was a time when bureaucrats put a premium on any western technology or process, but now China is finding certain types of investment unnecessary. Chinese auto industry in drive – the Geely Volvo deal has huge potential. Outside of autos, China having a hard time leveraging off the new infrastructure and shiny hardware to come up with the innovation that it needs the most – a viable international brand. China is moving fast to close the tech gap, but the differences are still vast.

    Education.
    Big opportunity for American and British institutions. China will be a big spender. American brands are still hotties. State testing still rules the schools in the provinces, while coastal yuppies spend fortunes educating and preparing for more education. Cross cultural and soft-skills training will be back in vogue as policy chills work their way into the office cubicles and senior management suites. Education services may be one of the hottest areas for Americans to market to middle-class China.

    Economics.
    Where to begin? Inflation is a potential issue in China, credit will continue to pose real threat in the US. Unemployment is the big deal in both countries for different reasons (US has layoff and fired unemployed, China has graduates unable to find work). Both sides are betting their legitimacy on the economy, and its even money all around. US numbers are looking good but weak and uneven. China is cooking with gas, but expectations are high and Beijing has bet the collective that the best days are yet to come. The picture would actually look kind of rosy if the two sides were getting along better, but bad politics rock markets. Still, the worst is probably behind us.

    Politics.
    Pretty bad and getting worse. Currency and structural impediments. This will be Congress level dialogue, so don’t look for an excess of rational thinking. Ironically, though, we could be in the sweet spot right now because the situation has the potential to get much more volatile in 2012 when the US election campaigns get under way. What happens if the CCP leadership veers ultra-nationalist as a double-dip recession has the U.S.A. Hailin’ Palin as the 45th president? Politics is likely to be more volatile than in 2007.

    Legal.
    Pretty bad and getting worse. Trade restrictions, local content requirements, tariffs, dumping, anti-dumping, product safety, currency, hacking, censorship, visas… Will Google.CN fade from memory with hardly anyone taking notice – like Facebook, YouTube & Twitter – or did The G just give itself a billion-dollar brand facelift at the expense of China’s reputation? A lot of people are talking about censorship and freedom again. Still, the key legal issue for the future of international business in China is the application of local law to overseas companies. If laws are systematically applied unevenly or if they favor locals, then we’ve just taken a major step backwards. This is one of the single biggest variables on the board right now.

    Environmental.
    China will have water issues. US and China will have energy issues. Wind and solar are sexy, but nuclear is the game changer. China is probably polluting the US, and is certainly ruining SE Asia. Will be an issue. US needs infrastructure, energy and money. In the US, environmental policy will be crisis driven. China will try to engineer state industries to solve and export.

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By Andrew Hupert – March 30, 2010

Negotiating in China: The Mystique of Madness

China-as-negotiator has been enshrouded in a Mystique of Madness – the notion that it will behave irrationally if refused or denied a bargaining point. Observers tend to regard China as a hair-triggered, unpredictable powder-keg that is not bound by the principles of self-interest or civilized behavior. The latest spats over Google, censorship, RMB exchange rates and international trade are all case studies of a China that cultivates an air of volatility to control expectations and wring concessions from counterparties. In fact, China has deftly set up dual channels of communication – using state-controlled information networks like Xinhua and the People’s Daily to issue thinly veiled threats and accusations while sending seasoned diplomats to quietly, patiently work out compromise – or at least stake out its position.

China, unfettered by democratic pressure, is actually hyper-pragmatic. The entire 30 year post Deng Xiaoping opening process is a repudiation of the party’s founding core values. Levis (the jeans company), Japan, Britain, Russia (then Soviets), the Kadoorie family (of the Peninsula Hotel and opium trade) were all, at one time or another, sworn enemies of the CCP. Either the Chinese have very short memories (they don’t) or the Party’s tendency to seek vengeance over gain is grossly exaggerated. Control of the media allows Orwellian freedom to rewrite history. Of late, China has been accused of capriciousness for adopting a position that, “The world needs China more than China needs the world”. This maxim may be obnoxious, it may be inaccurate and it may be short-sighted, but it is not on the face of it irrational. Europe, OPEC, Japan the old Soviet Union and, of course, the US have all been accused of taking the same approach. This may be wrong-headed, but that does not make it crazy.

Mystique of Madness is a tactic, and an effective one. It becomes even more successful when third parties carry the torch – competitors, commentators, consultants and media pundits spread dire warnings of vendettas and revenge only to have Beijing step in as the soft-spoken, harmony-seeking good guy. When it serves their interests, the Beijing party leadership is extremely flexible.

There are a number of advantages to this kind of negotiating behavior.

    1. It allows others to ‘force’ it to do things it needs to do anyway. Entry to the WTO is the prime example of this, but the tactic was also used to justify SOE reform, instituting market mechanisms, anti-corruptions drives and many of the other benefits of the post Deng Xiaoping Chinese economy. China routinely gets international concessions for bowing to its own self-interest.

    2. The Mystique of Madness allows Beijing to control expectations & timing and to reorder priorities. In other international business centers, ‘hurting the other side’s feelings’ is not a paramount concern, yet China has won many concessions to repair its bruised ego. In most countries an opaque, Byzantine bureaucracy is something that has to be justified. In China, counter-parties often find themselves composing written apologies for attempting to skip a step or cut through red tape.

    3. The Mystique allows China to drag out pre-negotiation posturing and talk issues to death so that by the time they are implemented it is already old news – and the impact on the market is extremely limited. Watch the exchange rate debate as an example.

Finally, the Mystique allows China to claim victory no matter what the outcome. This has earned China somewhat misplaced commendation for ‘always thinking two steps ahead’. When I suggested to another Westerner in Shanghai that the real cause of the Google-China falling out was the discovery of sophisticated industrial hacking, my colleague speculated that China intentionally allowed itself to be caught to force Google out of the country and thus shore up the fortunes of domestic players like Baidu. Possible, but highly unlikely. A better explanation is that by controlling the media and silencing conflicting opinions, China can put its own spin on events. Afraid of incurring the ire of an irrational giant, others prefer to go along.

China is an extremely rational actor, though the Mystique of Madness has one fatal flaw. If the bluff is called once, it loses its effectiveness and forces the negotiator to take real action. Unfortunately, that’s precisely how trade wars and international tensions escalate.

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By Andrew Hupert – March 23, 2010

US-China Negotiation Dilemma: Friends Without Benefits

When Americans negotiate with Chinese counter-parties, they often run into the ‘Frenemies’ dilemma. US dealmakers in China are sometimes so concerned with building good relations that they don’t perform proper due diligence until it is far too late. They end up losing money, time, IP – and destroy the very friendships that they worked so hard to develop.

Americans doing deals in China have all heard that Chinese value harmony and relationships, so they tend to work hard to build guanxi and give face at the beginning – especially if that is not their true nature. Newcomers to China are slow to get down to serious business discussions, because they don’t want to come off as boorish or overly aggressive to their Chinese counterparties. Instead of revealing their true agenda and personalities to the Chinese side, inexperienced American dealmakers tend to focus on small-talk pleasantries or else invent a fictitious façade on the fly. During early-stage trust building sessions they often miss the subtle cues and opportunities to bring up substantive issues and concentrate on telling the other side what they want to hear. They eat together, drink together and sing together all in the name of relationship building – but neglect to ask for references, guarantees or binding procedures while time is still on their side.

All too often in their first contact, the American side’s goal is to develop a friendship instead of performing due diligence as they would at this phase of a potential deal d back home. During the deal-structuring phase, Americans often focus on solidifying the relationship and learning basic facts about the industry and standard practices in China. They delude themselves that the only thing that matters with Chinese counterparties is the relationship – and that once mutual trust exists that all of their execution, compliance and QC problems will take care of themselves.

Many deals move rapidly through the contract phase without any of the hard conversations that would reveal underlying problems and weed out inappropriate partners because everyone is sensitive not to upset the wonderful friendship and harmony they have so painstakingly built up.

When it comes time to get down to real business, each side is basically shedding their ‘guanxi-building’ mask and revealing their true nature for the first time. Once funds or assets have been transferred the balance of power shifts from buyer to seller – and the cordial relationships revert to a more matter-of-fact business positions. Now that hard questions about quality, materials, experience and security are forced to the surface the cordial façade crumbles. Not only are the chances for misunderstanding and misinterpretation high, but once things start to go bad they tend to go into a self-reinforcing downward spiral. Each side feels it has over-compromised and the other has taken advantage. The US side feels that the Chinese have been duplicitous and dishonest about wanting to build a long-term relationship. The Chinese side feels that the Americans were deceptively hiding their true aggressive nature.

As each side tries to ‘balance’ the relationship, they tend to overcompensate and grab value to make up for being ‘too nice’ earlier. The new set of demands breaks the pattern set in the courtship period, and each side comes across as hostile and opportunistic.

We are seeing this pattern play out in relationships that run the gamut from national to individual. Unfortunately, once a US-China cross border relationship sours it is very difficult to set right. Western negotiators are advised to take a positive, friendly attitude toward their Chinese counter-party, but not to give short-shrift to matters of due-diligence, quality control and compliance. It is possible to be friendly and still get comprehensive answers to serious questions early in the process – but once assets have changed hands it is too late to try to perform due diligence or QC functions.

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By Andrew Hupert – March 19, 2010