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Conflict Avoidance vs. Conflict Resolution in China Part II: So you are in a Chinese business dispute…

Part II: So you’ve found yourself in a Chinese conflict…

Ok — breathe. Remember that step – and repeat as necessary. Inhale, exhale. Good. Now you’re ready.

    Rule 1 – It’s just business.
    It’s not personal, patriotic, nationalistic, racial, or genetic. It’s just business. You need a business solution.

    2. Interests, not positions.
    This old saw from Fisher, Ury & Patten’s Getting To Yes is still true at it ever was, though the Chinese applications may be a little different. About the only thing you are in control of is whether or not you will deal with this counter-party again. But if you lose your temper or make threats, then that option is off the table as well.

    3. What do you want to happen?
    Do you want cash back? That’s a tough trick to pull off in the Middle Kingdom. Are you planning on suing? Talk to a busy lawyer first — not one with time on his hands. He’ll tell you just how bad an idea that will be. Do you want justice? Meiyou. Never made it here. We got harmony, and we got seething resentment. Which one will you have?

    4) Do you know people who are able to help you?
    People who are willing to help? People who need you to succeed? Get these people mobilized. The ones who can help may very sit on the sidelines until the very last minute. Get them into the game. This is where Chinese culture comes into play, because motivating 3rd parties to intercede on your behalf is not simple. HINT: They are going to be very unwilling to get involved if you are foaming at the mouth and talking about how you would like to kill those thieving bastards. But if you are ‘confused about the best way to resolve this unfortunate situation….’ (followed by that long, long pause so common in this land) then they may take those first tentative steps. Relying on the offices of others is by far your best option – but it and it can result in you getting dinged again if your new Chinese Rabbi turns out to be scamming you. If you get the impression that they feel helping you is a slightly less attractive than root canal, then you are on the right track.

    5) Don’t show your worst side… How would you feel if your counter-party started screaming or sobbing during a deal? Maybe he’s nuts or maybe he’s just a big baby — but he is certainly not a suitable counterparty. Well, that’s what Chinese counter-party thinks about you when you display anger in front of them. They don’t get intimidated — they think you are a sketchy lightweight. Alternatively, don’t look like a chump. Even the Chinese -who respect stoicism – need to understand that you know you’ve been messed with, or it’s going to keep happening over and over.

Ironically, your only real choice is ‘do you go back for more pain or not?’. I know — this sounds crazy. But the fact is that there are many circumstances where your best course of action may be doubling-down and betting again on the same hand. If you have checked out your guy and gotten decent references AND the dispute stems from a genuine misunderstanding or a change in environment (yes — including price level changes), then dealing with this guy again might not necessarily be nuts. If your Chinese counter-party really didn’t intend to screw you over, then this ironically is exactly where guanxi gets built. Real guanxi — not the KTV toasting nonsense. If your guy really feels that the first deal just broke bad for you but would like to make sure that the next one treats you better — then you might have a good thing going.

If, however, the phone doesn’t get answered or worse — the deal never moves beyond the upfront money– then you need to cut your losses and move on. Unfortunately, your troubles may extend beyond the parties directly involved. Whoever introduced you or facilitated the deal is also suspect. Not necessarily, but once you’ve been punked in public you may look like an easy mark.

The road to long term profits is paved with good intentions.

It comes to intentions. I know that sounds counter-intuitive — and it really doesn’t make your life any easier. But if a Chinese counter-party is trying to do right by you, then you have to understand how they deal with a business disagreement. To an HONEST, 100% trustworthy Chinese counter-party, outside circumstances and unforeseen environmental factors still supersede your existing contract. He’ll do his best — but he expects you to be realistic. If his factory burns down or a typhoon shuts down the port, he expects you to cut him some slack. Now here’s the important thing — if his upstream supplier drops the ball or a raw material price spikes, he STILL expects you to cut him some slack. It’s not just HIS problem — it’s your problem too. That’s what guanxi means. When you get all ‘Rambo’ up in his face, talking about who drew first blood and betrayal, then he feels you are not an appropriate counterparty. This lets him off the hook and absolves him of any and all obligations he might have othewise felt towards you.

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By Follow on Twitter: Chinasolved – October 12, 2009

US-China Variation of Prisoners Dilemma – The Factory Game.

Most business school students are familiar with the game theory exercise of ‘Prisoners Dilemma’. It’s a relatively simple game that looks at the economic utility of cooperating with a partner versus competing. Actors can either cooperate for a moderate gain, or attempt to cheat/compete for a higher payout that victimizes the trusting counter-party. Another risk is that if both sides cheat then they both suffer a loss.

Experienced dealmakers will spot a flaw in the design of this experiment. First of all it is a one-off with no future. Second, it is blind with no history. I designed a variation of this experiment for my undergrad negotiating class at NYU’s Shanghai campus. I call it the Factory Game. The two actors are Brand (from the US) and Manufacturer (China). Brand (B) approaches Manufacturer (M) with a unique product and contracts for a specific factory run – with price, quality and IP protection all stipulated in the agreement.

If all goes well (i.e.: cooperation, Win-Win) B receives quality merchandise at a fair price. M receives a fair payment, technological know-how and future orders. But either side may ‘cheat’ (i.e.: competitive Win-Lose behavior). B can cheat by failing to pay in full or by going to another factory with future orders. M cheats by failing to deliver, poor quality production or theft of IP.

To make it more realistic, I set up the game as 3 iterations (or ‘contracts’) of 3 trials each (to simulate repeat business).

In Iteration A the value of the contract was level each time – say 1,000. This was the baseline case, and represented a deal with an unknown partner.

In Iteration B the contract value rose each time – 1,000, 2,000, 4,000. This case represented a growing market or a ‘key-partner’ relationship.

Iteration C had a falling value – 1,000, 500, 250. It was intended to model a saturated market – or a declining relationship.

Payouts were set as a % of the contract value.

W-W yielded a 50 : 50 payout.
W-L => +75 : -25
L-W => -25 : +75
L-L => -10: -10

My pre-experiment assumptions: Actors would quickly see that it was in their best interests to stay ‘honest’ and cooperative as expected outcomes rose, but resort to cheating Win-Lose behavior as returns fell – or when a ‘contract’ was about to expire.

What really happened? — The participants fell victim to their own emotions and ego positions instead of coldly calculating their firm’s interests. Many participants based their decisions not on FUTURE payout possibility, but rather on PAST counter-party behavior. If A cheated last time, then B was gong to cheat this time – regardless of outcome.

One set of teams had the following outcome:
Trial one: Win-Lose when the payout was stable – as one actor attempted to score a short-term win.
Trial two: Lose-Lose – as distrust from trial one completely negated the possibility of maximum gains.
Trial three: Win-Win. Both sides realized that their barn-burning was counter-productive and anti-competitive (vis a vis other student groups!). Unfortunately, the Win-Win behavior only came into play AFTER the market had peaked and the best returns were behind them.

At first it sounds like they were just inexperienced and emotional – after all, the participants are undergrads with limited business history. But we see the same behavior all the time from so-called professional negotiators. What lessons can US negotiators in China draw from this exercise?

    1 – Set the stage for trust, or you will poison the potential relationship from the start.
    Test orders are an American concept while systematically building relationships is Chinese. Americans assume that the relationship will grow from successful transactions. Chinese assume that successful transactions will grow from relationships. The result is that Americans tend to under-promise (“we’ll have to see how well you do on the first order before we discuss raising the volume”) while the Chinese over-promise (“oh yeah, we can definitely do what you want at the right price and quality level” – even if they don’t know what they are doing – yet). Both behaviors tend to undermine trust in the early stages of a US-China business relationship.

    2 – Penalties and missed bonuses are often interpreted by Chinese actors as ‘cheating’ behavior – and a betrayal of trust.
    Americans often employ the ‘carrot and stick’ technique of using potential bonus payments and penalties to enforce positive behavior. Unfortunately, Chinese counter-parties often view this as dishonest and manipulative. It is human nature to count the bonus and ignore the penalty during the pre-execution phase of the deal. Once trust is lost, it is very difficult to restore. A missed bonus – regardless of how justified the American side feels it to be – often triggers negative behavior from the Chinese side.

    3 – Guanxi-building activities like dinners, tours and meetings are the Chinese method of vetting partners.
    You should be doing the same. Use your banquet time to talk about how you and your counter-party define success. What are your goals? How can you work together? American negotiators are often shocked at how much time the Chinese waste on relationship building. Chinese negotiators are equally shocked at how much opportunity the Americans waste by not building proper relationships.

    4 – Overly picky contract terms tend to be counterproductive.
    Your corporate lawyer thinks you can write-out the risk of overseas deals, but in China this can be counter-productive. Detailed contracts with penalties and financial stipulations can make the Chinese side feel that you are not a suitable long term partner. Contract terms that seem normal in the US can trigger the “cheat” switch in China — since they think you are already pulling fancy tricks.

    5 – Relationships are not organic in China.
    Americans tend to feel that close relationships are the product of positive experience and time. Chinese negotiators are a bit more transactional, and expect partners to ‘work at the relationship’ in the early stages. Don’t blow an opportunity by paying lip-service to your Chinese counter-party. When they say, “we want to have a good relationship” it isn’t necessarily a pro-form business platitude. Use the opportunity to define slippery terms like ‘trust’, ‘success’ and ‘long-term’. Assumptions can be lethal in a cross-cultural negotiation.

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By Follow on Twitter: Chinasolved – October 9, 2009

Conflict Resolution vs Conflict Avoidance in Chinese Business (Part 1)

I was recently asked to speak about conflict resolution between Chinese and Western counter-parties in China. This is a bit of a challenge, because there really isn’t any such thing as conflict resolution in China in a traditional sense – at least between Chinese and non-Chinese counter-parties.. The Chinese wants Harmony, the American wants Justice. Those two principles may co-exist BEFORE a business conflict exists – if both sides have structured their deal carefully – but they tend to destroy one another the moment conflict arises. Harmony is soft and fluid – Justice is firm and solid.

We’re going to handle this one in 3 parts. Today we’ll look at why conflict resolution between Chinese and Western business counter-parties seems to be so uncommon. Next time we’ll discuss strategies to minimize damage when you DO find yourself involved in conflict with your Chinese counter-party. Finally, we’ll take a look at ways to structure deals that will help avoid conflict with Chinese partners down the road.

Why conflict resolution doesn’t really work in China – at least with non Chinese counterparties:

    1. It’s about Harmony – not Justice.
    Chinese don’t use institutions to resolve conflicts with other Chinese. In fact, big parts of Chinese social behavior have evolved with the implicit or explicit purpose of AVOIDING Chinese institutions like police, courts and government structures. 2 members of a group engaged in a conflict will usually opt to submit to a mutually respected 3rd party (old guy) or a proto-jury (loud guys). Once the police or courts get involved, it is straight up LOSE LOSE. Lately this is less true in the downtown sections of big cities, but traditional Chinese wisdom states that smart people keep officialdom as far away as possible.

    2. It’s a Guanxi thing – you’ll get yours on the flip side.
    Chinese counter-parties don’t return cash or pay restitution even when they acknowledge they are wrong. Disputes are remedied on the next deal. ‘Yes, I see how you did get screwed here a little. I’ll get you back next time. We cool?’ ‘Yeah, we cool’. Cigarettes are lit, and harmony quietly returns. This doesn’t work with foreigners because you are unlikely to remain engaged with a counter-party that has taken advantage of you.

    3. Non-economic values.
    Chinese counter-parties tend to focus on cash during the negotiation – and non-cash benefits in the post-negotiation. In other words, they bargain about money, but often seek their real value in things like technology, design, contacts etc. That’s one of the reasons Westerners are often surprised at how often Chinese actors seem to be to ‘destroy value’ by screwing up a potential long-term relationship. It may, in fact, be that the Chinese has already met his objectives when he got your business model or new product design. To him, there is no conflict to be resolved. They never planned on following through with the deal in the first place.

    4. It’s easy to fool a foreigner.
    For many Chinese counter-parties, taking advantage of foreign counter-parties is still part of the deal. This notion of “you can always fool a foreigner” faded briefly in the early part of the decade, but now seems to be back in full force. Anyone who has ever been involved in a Chinese court case can verify that even the winners lose. While you pay expensive international lawyers and shell out for airfare and business hotels, your local counter-party is going to dinner with the bureaucrats in charge and will be back with his family by 10 PM.

    5. Another counter-party is always coming down the road.(The ballad of the bull market).
    Business conflict resolution is a product of the business environment. As long as Chinese counter-parties feel that there are 2 more potential deals waiting in the lobby, the incentive to resolve conflicts will be uneven. He has had a Plan B since the beginning – and finds it somewhat amusing that you don’t.

For further reading: 10 Warning Signs that Your China Deal is Getting Too Complicated

Next: Part II – So you are in a Chinese business dispute…

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By Follow on Twitter: Chinasolved – October 7, 2009

What Is the Hardest Part of Doing Business in China?

    “Be extremely subtle, even to the point of formlessness. Be extremely mysterious, even to the point of soundlessness. Thereby you can be the director of the opponent’s fate.”
    Sun Tzu’s “Art of War” Spring and Autumn Period

    “What the hell is this? That isn’t what I ordered.”
    Herb Feldstein, Feldstein Fixtures and Lighting. Paramus NJ

I ran a pair of surveys on Linkedin recently. One survey appeared on a set of Linkedin business groups with NO specific geographic orientation and asked, “What is the most difficult aspect of doing business?” I broke down the deal process into 5 phases –

    1) Finding appropriate counter-parties
    2) Clarifying deal terms
    3) Finalizing the deal – signing the contract
    4) Executing the agreement / doing the actual business
    5) Post-deal compliance, Quality Control

I ran another survey with the same answer choices, but which phrased the question slightly differently – and targeted China-oriented business groups. This time the question was: “What is the most difficult aspect of doing business IN CHINA?”

The results were as follows:

Linkedin.com Surveys

Linked.com Surveys


__________________________

Outside of China, a little over 50% of the respondents said that the biggest challenges occurred pre-deal, with only 23% reporting that their main difficulties occurred once the contract was finalized. In China, however, almost half of respondents said that their problems started AFTER they thought an agreement was reached.

One can draw two conclusions from this data:

1. Chinese businessmen deceive, cheat, mislead, or otherwise fail to honor their word.

2. Westerners in China are choosing inappropriate counter-parties, aren’t doing proper due diligence or are cutting WAY too many corners early in the negotiating process.

Which conclusion is valid? Let’s take a look:

Is choice 1 correct?
Considered politically incorrect and borderline racist in the west, answer 1 is not without validity. But rather than accuse your dear author of racism for vilifying the entire Chinese Nation with charges of dishonesty, better you re-examine your own puritanical notions about the universality of honesty as a virtue. You may be the one guilty of a subtle yet pervasive form of racism – one that is far more damaging and dangerous to you than to your Chinese counter-party. You may come from a society that holds Judeo-Christian notions of an objective, immutable Truth and considers honesty to be a simple matter of black and white, good and evil – but not everyone in the world necessarily shares your opinion. Chinese history is peopled with strong, moral and SUCCESSFUL leaders who instructed their students about the virtue and efficacy of deception. Sun Tze, in the classic “Art of War” is the most famous Chinese leader to advice followers on the most effective ways to employ deception. Years later, Mao Ze Tong’s “On Guerilla Warfare” described how deception and surprise could neutralize an enemy possessing superior technology and firepower. Even Deng Xiaoping’s “White Cat, Black Cat” lecture effectively argues that managers need to adapt a fluid, pragmatic approach to be successful.

Win-Win negotiation is hardly standard operating procedure in the US (remember “never give a sucker an even break”?) and it certainly never really caught on in China. Astute Chinese dealmakers would be ashamed at leaving money on the table or failing to maximize their benefit in a transaction. If the Western counter party is satisfied with the outcome of a deal then the Chinese side has clearly not worked hard enough. Let the Westerners wave signed contracts around all day long – there are always new opportunities and new counter-parties coming down the road.

Or is Choice 2 the true explanation?
Westerners just aren’t doing enough due diligence and are rushing into deals with the wrong counter-parties and a poorly considered deal structure. Actually, I think that this may be the problem much of the time. International lawyers are constantly warning Western clients that suing in Chinese courts is an expensive, time-consuming and ultimately unsatisfying endeavor (www.ChinaLawBlog.com – assorted) – yet novice deal-makers still seem to think that an aggressive legal strategy will remedy any unfavorable deal outcome.

There are several major factors leading Westerners to accept less stringent deal structures (or unreliable counter-parties) in China than they would back home.

    A) It’s so hard to get to the negotiating stage with ANY Chinese counter-party that no one wants to let go of the first guy who seems to fit the bill for fear of never finding another one. China is indeed a difficult environment to do your first few deals – and between jet-lag, culture gap and language problems, senior Western managers have been known to suffer from some pretty serious lapses in judgment. Tired, confused and frustrated, otherwise savvy Westerners tend to hear what they want to hear – and believe promises that they would ordinarily suspect.

    B) The politically correct types are so afraid of making the Chinese side “lose face” or are so anxious to “build guanxi” that they don’t drive a hard enough bargain — or don’t ask for the right things. Are you in town to buy & sell – or are you here to make friends and build your network? It’s very hard to maximize your profits and ‘build guanxi’ at the same time. Many Americans have left money on the bargaining table – or worse, signed deals that don’t provide adequate safeguards or quality controls – in the name of ‘building a long term relationship’. Well – once that American has to explain to his boss or board of directors why he’s just squandered the firm’s money he tends to be less excited about his new relationship in China.

    C) Not knowing how to structure a proper China deal. When money changes hands the power balance shifts. That’s when smiles disappear — and phone calls don’t get returned. If your China deal involves up-front payments or transfers of assets and IP, then you are putting yourself in a very dangerous situation. Pay attention to the way you have structured your deal so that your Chinese counter-party doesn’t have to choose between common sense and honesty. Trust is wonderful. Verification is better.

Experienced deal-makers – Chinese and Westerner alike – know to budget time and bandwidth to post-deal negotiation in China. No matter how much time you spend hammering out the deal terms and contracts, you should still expect to conduct your second REAL negotiation after you thought the deal was already done.

Click here to see the original Linkedin poll

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By Follow on Twitter: Chinasolved – September 23, 2009

Risk and Uncertainty in Chinese-American Negotiation.

American and Chinese negotiators view uncertainty in opposite ways. Chinese negotiators consider uncertainty to be an insurmountable obstacle, and tend to respond defensively by halting all forward progress. American dealmakers often see uncertainty as an opportunity that favors the bold. Risk-taking American entrepreneurs are famous for leaping in with both feet and gaining first-mover advantage in situations where others fear to tread.

The contrast can be brought to light through the use of a technique called the Johari Window (http://en.wikipedia.org/wiki/Johari_window). Johari Window is a framework that researchers use to study the different levels of knowledge that two parties have about a situation. It’s a simple 4 square matrix — across the top are Known to You and Unknown to You. On the vertical axis are Known to Them and Unknown to Them. It yields 4 squares — things that both parties know, things that you know but they don’t, things they know that you don’t, and things neither side know.

Johari in the Classroom
I’ve just started teaching a new Global Negotiating course at NYU’s Shanghai campus. The class is mostly made up of junior-year undergrads from New York University studying in Shanghai for a semester, but we also have a good number of local Chinese visiting students from Shanghai’s Jiao Tong University and East China Normal University. The group runs the full spectrum of Chinese-Western backgrounds – from Westerners of European descent to Asian-Americans to local Chinese who have never been outside of Mainland China. These are some of the brightest, most open minded young people I’ve ever worked with – but they lack real-world business experience. One couldn’t ask for a better setting to study negotiating behavior, since they are extremely intelligent and motivated but are still ‘blank slates’ in terms of hands-on management exposure.

I introduced the Johari Window to demonstrate the importance of research and preparation when negotiating a business deal. There was complete consensus when I explained the 3 ‘north-west’ quadrants. Everyone agreed that the “Known to Both Parties” quadrant presented negotiators with an even playing field, and that “Known to One, Unknown to the Other” gave an obvious advantage to the party with greater knowledge. But when I pointed out the “Unknown to Both” quadrant, consensus suddenly disappeared. Students raised in ethnically Asian households (regardless of geographic location) saw the “Unknown to Both” quadrant as a strongly negative deal environment. The chance of loss was unacceptable. Several Westerners in the group, however, emphatically disagreed. They saw the “Unknown to Both” quadrant as a significant opportunity. (The most vocal dissenters were male; age around 19). To them, uncertainty created an environment in which deal-makers could use their talents and abilities to wrest a competitive advantage. (See the post “Negotiating in China – Western vs. Chinese Attitudes towards Risk & Uncertainty” for more on the decomposition of risk into two components – possibility of loss and uncertainty)

Conflicting Assumptions of Universality
Both the Americans and the Chinese saw their views as obvious and universal. Before our discussion, neither side viewed reaction to uncertainty as a culturally-sensitive variable. To Americans, it was obvious that one had no choice but to proceed in an environment of uncertainty. The Chinese were equally convinced that that the only course of action was to avoid uncertainty and take a defensive posture. Every one of the students walked into the classroom fully aware of the need to be culturally sensitive and willing to be open to different ideas – but on an operational level they carried notions of universality that were completely ungrounded. They simply didn’t know what they didn’t know about the other group’s perspective.

Winning by Hitting the Ground Last
Another interesting observation had to do with the definition of ‘advantage’. Students with a Chinese background took a more absolutist view of uncertainty, while the Americans were more competitive. The western students felt that competitive advantage could be won by operating in an uncertain environment. They could use their intellect and resourcefulness to outperform their counter-party in a situation where both sides were equally uninformed. Those from Chinese households were more concerned about their absolute position. Uncertainty was viewed as unfavorable, and the fact that it might be more or less unfavorable to the other side was irrelevant.

To put it crudely: The American students, it seems, are less afraid of falling in the darkness as long as they can land on the body of their competitor. The Chinese would rather avoid the uncertain situation and wait for the light – even if it means passing up an opportunity.

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By Follow on Twitter: Chinasolved – September 9, 2009

Smart-or-Honest is a Bad Choice in Chinese Negotiations

Americans negotiating in China must take care to avoid making a local counter-party choose between common sense and honesty. This is a bad idea anywhere in the world, but it is worth emphasizing here because so many American and European negotiators in China maneuver themselves into just that position.

Sometimes Westerners are so eager to ‘do the deal’ that they blur the line between cooperative partner and profit-seeking competitor. Chinese negotiations are famously social & cultural in nature – there are dinners, singing, girls, drinking and long discussions about the importance of trust and mutual cooperation. Many newcomers to Chinese business internalize their desire for a ‘guanxi’ to the point that they start to confuse their business relationship with friendship. Either through misjudgment or oversight, they put valuable assets in the hands of their local partners and then get on a plane back to NY or London. The Chinese party now finds himself with a huge incentive to harm the overseas party – and little in the way of control or oversight to prevent it.

Here are a few red-flags to be aware of when finalizing deals in Mainland China that indicate you are blurring the line between friendly competitor and loyal partner.

    • Starting work without a legally binding contract or actionable agreement.
    This is particularly relevant to service providers and consultants planning on getting paid by the Chinese counter-party – or anyone who has to transfer funds to get a deal started. As we’ll see, the problem isn’t that a contract in China offers you all that much protection, but that novice Westerners are too quick to assume that you have achieved a ‘meeting of the minds’ about costs and procedures. Many, many Western consultants have ended up working for free after they thought they had achieved a ‘verbal understanding’. Be particularly sensitive to situations where your local counter-party tells you that you have a deal, but the person who signs/stamps the documents is unavailable.

    • Making your local counter-party your only source of information.
    It is easier than ever to get information and data about the China market, yet many over-scheduled Westerners still end up relying on a local partner for 99% of their China business knowledge. Yes, it’s easy. No, it’s not what ‘everybody does’. Respecting the opinion and expertise of your local partner, supplier or employee is a great idea, but it’s not enough. If you don’t have the time to monitor your China business then you don’t have the time to do business in China. In 1995 it was very hard to get business news on China. Now we are swimming in it.

    • Leaving your counter-party as sole controller of valuable assets — including but not limited to your intellectual property, trademarks and product designs.
    Invest the money and time in a few hours with a competent international lawyer and find out what you should be protecting. Otherwise intelligent, pragmatic Westerners tend to be incredibly naïve and optimistic when it comes to trademarks, website names, patents and product designs in China. A US-registered trademark doesn’t necessarily mean anything in China. You need to understand your rights and obligations BEFORE you let your Chinese counter-party understand the potential value in this new market. No one likes spending money on lawyers and accountants – but it is much cheaper to do it early then wait until after a problem arises.

    • Lack of due diligence, reference checks or legal/accounting support.
    Westerners often ignore the most important type of China network – their own professional service providers. If you are doing business in China, you need a legal guy, a finance guy and possibly a consultant guy. These may be professional experts on retainer or part of informal network – but you need access to independent, informed decisions. You need to a network of experienced Old Hands to use as sounding boards. Going to your negotiating counter-party for legal and financial opinions makes even less sense in Shanghai than it does in NY.

    • Relying solely on contracts and written agreements that can’t be readily enforced.
    Contracts are vital everywhere but they function a bit differently here in China. In the US contracts tend to be conclusions and serve to finalize business agreements. In China, contracts often function as the starting point for the REAL final decision. That doesn’t undercut their usefulness, however. A contract articulates the agreement and demonstrates a meeting-of-the-minds at the time of signing – which is all very useful. But a Westerner angrily waving a piece of paper in the face of a Chinese counter-party has become the familiar emblem of a failed deal. Chinese courts are rarely good remedies for Western business people.

Chinese have a reputation among Americans as being less honest – and it very well may be deserved. But Americans have a reputation among Chinese as being less sharp – and that may very well be deserved as well.

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By Follow on Twitter: Chinasolved – August 31, 2009

Americans negotiating in China – Who makes the first offer?

Americans negotiating in China are faced with the dilemma of deciding who should make the first offer. Is it better to hang back and let the Chinese side show their hand first — or should you dive in and hope that Fortuna favors the bold?

The general rule in negotiation, based on recent research and the authorities at Harvard’s Project on Negotiation (the PON Posse) says that whomever makes the first offer tends to ‘anchor’ the range of possible outcomes at a more favorable level. This, however, assumes that both parties have well considered, clearly established targets – a bit of a generous supposition when it comes to Americans doing their first deals in China. (Put another way, the gunslinger who draws first only has a serious advantage if his gun is loaded and he knows what he’s aiming at.)

The question of who should make the first offer has special implications for Americans engaged in negotiations with a Chinese counter-party.

* Many Americans walk into the negotiation ‘hoping to figure out what’s going on as they go’. For all too many Americans, the distinction between China research and Chinese negotiation is a murky one. There’s nothing necessarily wrong with this approach — provided you are willing to collect a range of bids from a number of counter-parties before making an offer of your own. If you are doing research and conducting live negotiations at the same time in China than you are engaging in extremely risky behavior.

* Chinese negotiators — particularly young ones — are often paralyzed by the thought of taking the lead in the discussion and freeze up or resort to a wildly optimistic opening bid that is unrealistic and poorly constructed. Humility, indirectness and risk avoidance are characteristics of traditional Chinese society, and this often translates into what appears to be indecisiveness in negotiations. If you are involved in a simple cash purchase, then fear not — your counter-party has a very clear idea about his bottom line price. He’ll still play coy at first, but you’ll quickly work through the give & take to arrive at a definite price. Problems arise, however, when you are trying to put together a multiple-variable deal that he has never done before. Chinese deal-makers with limited international experience tend to focus almost exclusively on price.

As an American, you have a real advantage here — perhaps one of your few – if you are ready, willing and able to exploit the opening.

    1. Have a goal prepared. The Chinese side won’t go first, and if they do the initial offer probably won’t be meaningful. This gives you a great opportunity to seize the high ground – both in terms of price and in setting the agenda for the rest of your negotiations.

    2. Anchor high, but not crazy. (As a general rule, your initial offer should be as high as you can go without making you sound crazy, stupid or dishonest.) Ideally, your opening bid should be 5 – 15% beyond his bottom line price. Make sure you can justify your optimistic price, even as you are prepared to make concessions. Beware of overplaying your hand – and under no circumstances should you improve your offer before the counter-party responds to the initial bid.

    3. Chinese will often focus on price to the exclusion of all else, so make sure you ask for a goodly amount of non-cash deal points. Just make sure that the points you win can be achieved — schedules and timetables tend to be very difficult to enforce in China. Again – use this as an opportunity to put the variables you care about on the table early in the conversation.

    4. In the case of cash purchases or manufacturing deals, be prepared for experienced Chinese counter-parties to try to psyche you out by opening very high (see One Foot Dealmaking). Just because he has given you a price doesn’t mean that you are compelled to shout back a counter-offer. Chinese negotiators in the retail field favor a ‘meet in the middle’ tactic where a split-the-difference compromise will yield them a very favorable price. If their first offer is nuts, disengage from serious negotiating about deal terms and either A) use this as an opportunity to learn more about the industry, B) get the hell out of there.

    5. As in every other negotiation, anywhere in the world — the more research you’ve done and the more counter-parties you have waiting in the wings, the more successful you will be. Whether your conversation is a serious negotiation or a networking/research exercise, having a wide range of options strengthens your position.

As a general rule, American decisiveness and risk management skills give you a significant tactical advantage in the early stages of a Chinese negotiation. Use this to your advantage by taking the opportunity to frame the discussion in the most favorable terms and by raising the variables that you care about as priorities. Just beware of being too abrupt or direct when delivering your opening bid — remember that old-school Chinese will spend a very long time in the pre-offer waltz, dancing around the price issue for weeks while they build relationships and get to know one another. Making the initial offer will move the relationship to a new level, so you must make sure you are ready.

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By Follow on Twitter: Chinasolved – August 24, 2009

American Negotiating in China — Doing Chinese Deals on One Foot

When doing business in China, American negotiators already know that they have to be ready to walk away from the table — but just make sure you do it right.

Chinese negotiators are expert at manipulating American counter-parties with deadly combinations of tactics that will have you scratching your head all through the fight back to the US. One particularly effective set of maneuvers used by Chinese negotiators is to start with an opening offer that is several times the price that they actually expect to receive from a knowledgeable counter-party. They follow with a very reasonable, “well what were you thinking of paying?” The Chinese side will then rapidly – and quite humbly – allow you to ‘beat them down’ to a price only 200% over the reasonable market level. I’ve seen Americans accept terrible deals – but leave the table convinced that they’ve out-dealt the Chinese side because they were able to cut the initial offer in half.

A real danger for Americans negotiating in China is that you may get drawn into an emotional haggling match instead of a considered business negotiation. You’ve probably read the standard negotiating literature about focusing on ‘interests – not positions’ and this is exactly what they are talking about. If your negotiations with the Chinese get emotional or heated then you have already lost. Keep your cool throughout the entire deal cycle – from making first contact with a potential partner all the way through to the end of the negotiation. Be careful to have a clear bottom-line, and stick to.

If you decide that there is no point in continuing the discussion, then you have to walk away. But like everything else in Chinese negotiating, there is a right way to do it.

    1) Don’t get emotional. Smile. Breathe. Relax. Stay friendly, cordial, polite – but most of all, professional. Its just business. Your goal is to move on to the next meeting – not to ‘teach them a lesson’ or get in a final zinger.

    2) Thank them. This tends to put the Chinese off-balance. “I appreciate your honesty and frankness. Even though we can’t do business this time, I’ve certainly learned a lot from the experience. Thank you.”

    3) Acknowledge the Chinese side’s position – and then some. I like to say something along the lines of, “clearly your offer is honest and considered, but your product or service is far beyond my needs and expectations. If this is a fair offer on your part then we aren’t talking about the same type of material/product/service. But I hope that we can try again if my situation changes in the future.”

    4) Now it’s time to walk away – but do it slowly. There’s an excellent chance that they will come back with a much more reasonable offer. I call this part, “doing business on one foot” because you are in the process of walking away – albeit in slow motion.

    5) DO NOT COME BACK TO THE TABLE UNLESS THE OFFER IS SIGNIFICANTLY IMPROVED. The one-foot approach only works once, and if you just pick up where you left off the previous negotiation then you have squandered your advantage.

As in all negotiations in China, your chances of success are vastly improved if you have researched market conditions thoroughly, decided on a clear walk-away point, and have a wide range of potential counter-parties waiting in the wings. Be warned though – all of your preparations count for nothing if you lose your head and allow your China negotiations to become an emotionally-charged haggling session.

Next: Who should make the first offer – the Chinese or American Negotiator?

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By Follow on Twitter: Chinasolved – August 21, 2009

Cry Me A Red River: 5 Lessons We Can Learn From Rio Tintos Misery

I don’t know much about the Rio Tinto case, nor the specifics of the laws, regulations or personalities involved. But after working with international negotiations in China for more than a few years, I know these five things:

    1. Rio Tinto’s local Chinese consultants and advisors kept saying, “This Is China. It’s expected to do business this way.”
    2. Then they said, “Don’t worry about it. Mr. XYZ has guanxi with that department/bureau.
    3. After that they said, “Everyone does it. No one worries about that law.”
    4. They didn’t say, “The Chinese government values information MUCH differently than you do.
    5. Payback is a bitch.

So let us learn from the lesson another has paid for: The true price of intellectual property in China can actually be quite high – especially if it’s THEIRS.

Just because China has lax IP protection and lots of pirating, many Westerners fall victim to the misguided notion that China doesn’t value intellectual property. They value it plenty, but they don’t like paying for it – and they bloody well hate sharing it with you.

Note to the newbies: When we Old Hands talk about learning the business culture of China, WE AREN’T TALKING ABOUT THE DAMNED TWO-HANDED BUSINESS CARD PASS. That’s not the business culture of China. Rio Tinto’s top management clearing their schedule for a month to put out a fire that they helped to feed over a deal they didn’t do — yeah, that’s what we’re all going on and on about.

I hope we all learned something from this. Thank you.

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By Follow on Twitter: Chinasolved – August 12, 2009

Americans Negotiating in China — Fear the BOPS.

Balance of Power Shifts. Bops, re-bops – You ain’t gonna like this tune.

Business disagreements in China often follow this pattern: You meet a charming, friendly, engaged Chinese business-person, and begin to craft your Win-Win deal. Things progress smoothly through the preliminary phases, and both sides are cooperative and cordial enough to come up with a written agreement very quickly. There seems to be a real bond of trust here. The American side agrees to transfer funds and technical specifications immediately, and a date is set for the delivery or completion of the project. This is, in reality, the day that negotiations REALLY begin in earnest – and it’s likely the American will get much less than he bargained for.

This example can be broken down into 3 distinct phases.

    Phase 1. Courtship.
    The Balance of Power (BOP) favors American side. Chinese side is cordial, flattering, Win-Win, compromising. American side feels confident, in control, optimistic about expanding business ties in China. “Why does everyone say this is so hard?”

    Phase 2. Assets transferred.
    Moments after the American side transfers an investment, up-front payment, deposit, good-faith money and/or IP & tech specs, the BOP suddenly shifts to the Chinese side. Their need for the American side has dropped SIGNIFICANTLY now that the money and technology is in China– and the foreigners have already gone back to their oversized American homes and giant gas-guzzling SUVs. The Chinese side starts dealing with the American side on a more even, informal basis (a good thing) but may become less responsive and communicative (a bad thing). The American side may not sense that a shift in the power balance has already taken place. These relationships are still intact – but will vary in terms of productivity.

    Phase 3. Deal concluded.
    The Chinese side has delivered, and the deal is done. “Xie Xie ni, wai pengyou – don’t let the door hit your butt. Here’s the container, the building, the project — or the story. We’re all done now.” For many Americans in China, this is when the REAL negotiation begins. It’s only after the deal is supposed to be completed that the American side finds how little communication/compliance there actually was. The American side wants to re-engage and persuade the Chinese side to execute the agreement the way they said they would. But now something strange happens. The Chinese side may simply ignore their former partners. This ‘avoider’ strategy is very well respected among China’s commercial set, and if you are unlucky you will find out just how good they can be at it. The power shift is complete, and you no longer have access to the decision-makers that you need to negotiate a settlement.

Three vital lessons for Americans doing deals in China:

    1. Watch the timing of the negotiation, because the Chinese side is much, much more patient than you are.

    2. Structure your deals so that funding and asset transfers reinforce your position — not undermine it.

    3. Face time is vital. You have to be in it to win it? Maybe. But how about a more China-oriented version: You have to show up to follow up. If you – or someone who represents you (and your counter-party is NOT that guy) isn’t around to make sure that the spirit of your agreement is respected, then you will certainly end up with less than you thought you bargained for.

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By Follow on Twitter: Chinasolved – August 11, 2009