Aren’t Chinese businesses supposed to be long term planners?

Yes, and that’s the problem. As many Western deal-makers are finding out, Chinese negotiators often see the foreign partnership as a short-term tactic on the way to the real long-term goal of independent global competitiveness.

Chinese firms are pragmatic. They acknowledge the need for Western technology and methodology, but that no longer means a permanent marriage. Since the financial crisis of 2007, Western firms have lost the brass ring that used to keep the Chinese side of the partnership in line – access to US and European markets. The cold hard fact is that Western firms are entering partnership negotiations with a hand that is not strong and growing weaker. The Chinese market is becoming the new El Dorado (though it may end up being just as mythical) and the technology gap is definitely growing narrower.

Chinese firms are increasingly viewing Western firms as a short-term partner, a medium-term customer or client and a long-term competitor. Operating a JV in China was tough enough before the crash in the US & Europe and China’s new ‘indigenous innovation’ policy came into force – but many international managers in China now see a bleak future.
Here are a few useful tactics for negotiating a long term relationship in China:

1. Plan first, negotiate after.
Don’t shy away from asking yourself hard questions about your basic plans for China. Do you really need a long term partner in China? Why? What’s the relative balance of power going to be through the life of your partnership? Are you looking for a perpetual subordinate – because your Chinese counter-party might not be interested in a permanent secondary role. As you and he both learn more about the business what’s the natural competitive environment going to evolve into? Not only do you have to plan for 2015 – you have to discuss those plans with the Chinese side. If you plan on calling the shots in China ad infinitum, then you would be wise to make that clear BEFORE you share your IP and trade secrets.

2. Structure is everything in China.
Forget about NDAs and contracts. The deal that makes sense is the deal you’ll end up with. If you plan on having a long term relationship, structure accordingly. If you are providing design and capital and he is providing market entry advice and distribution then you have to plan for a point 18 months from now when he has your designs and you have access to distribution channels. What are you basing JV 2.0 on? A Chinese partner who thinks he can do better without you is going to find a way out of the relationship, even if it means scuttling the business and starting over on his own after you have gone back home. If the only thing you have in your corner is a signed contract, then you are embarking on a lose-lose relationship.

3. Consider a sunset clause.
Your best relationship may be a short one with an option for some type of longer-term arrangement. Teenagers think that passion leads to happy-ever-after, but adults are supposed to know that compatibility is based on other things. Still – there’s nothing wrong with a quick hook-up if everyone knows that’s all there is. But don’t propose if all you want is dinner and a movie. No matter what your plan, always have a viable exit strategy.

4. Don’t pay today for what may or may not come tomorrow.
Cynical Chinese negotiators learned long ago that naïve Americans believe in the fantasy of ‘long-term guanxi’ and are more than happy to let you pay up-front for the relationship of your dreams. Their dream is being the sole patriarch of a family dynasty. You aren’t in their dream.

5. Use your words.
If you have thought it through and decided that a long-term relationship is what you want, then make that part of your negotiation from the beginning. Be explicit and open. This is exactly the kind of thing you should be talking about during those relationship-building activities & banquets. Don’t just stop with the easy platitudes about harmony and working together. Likewise, don’t hold your breath waiting for the Chinese side to come up with a comprehensive game plan. It’s up to you to come up with specifics that include benchmarks and a structure that keeps both sides satisfied.

Partnership hint: Long-term JVs in China are more threatened by success than failure. It’s relatively easy to pull together when disaster is at hand and everyone needs one another. It’s when the Chinese side comes to believe (rightly or wrongly) that you have outlived your usefulness that partnerships fall apart. Plan for the good times as well as the bad.
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We’ve looked at the causes of the BOPS and how it affects Chinese negotiating tactics. Now we are ready to look at how American negotiators in China can prepare and protect themselves from the fallout of BOPS.

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

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

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

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

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

If you’ve been making deals in China for a year or so, you may feel that the mood is getting frosty and a bit tense. Those that have been in the game a little longer should be familiar with the attitude since it is a return to the ‘old days’ of the mid-90s when international business in China was more exception than rule. Beijing was extremely accommodating to both domestic entrepreneurs and foreign friends for most of the last decade, but now the policy people seem to have declared victory and moved on.

China Inc is maturing and the time has come to put away childish things and start getting down to real business of wielding the Mandate of Heaven. It is time for the foreign friends to either play quietly or go home.

Negotiation in China has always been adversarial – but now at least we can stop pretending in all that ‘everybody love everybody’ nonsense. Here are 10 rules for doing deals in New China.

1. This may not get better soon.
Cordial relations between China and the West is a fairly recent construct. Many tried to convince themselves that friendly cooperation & win-win business was the status quo for China deal-making, but it is simply not historically accurate. You may want to get along with everyone but US-China rivalry is written in the DNA of both governments. Look for both sides to slide into old patterns of zero-sum competition.

2. Know your counter-party.
The guy your are dealing with either represents the bureaucracy, an SOE or a private business – but they are all working off the same playbook. Every local is following both the stated and unstated policy directed by Beijing. This is trickle-down cuthroat competition, and you should beware of ‘good-cop’ partners who offer to manage the pesky bureaucrats for you.

Most negotiating problems of the past were a result of misunderstanding, incompetence or flat-out dishonesty. Those are walks in the park compared to ideological disputes. If you have been working with a local partner, agent or service provider who has been talking up his powerful connections and guanxi with officialdom, you have to understand that those are the relationships he will work to preserve– not the short-term commercial relationship he has with you.

3. Every Chinese deal has 2 negotiations.
You negotiate twice in China – once to get the deal and once to do the business. If you are not budgeting time and resources for the second negotiation, then you are committing a serious tactical blunder.

4. Double standards and unequal treatment are institutionalized.
Obama sees Dolly – and suddenly your regulatory and bureaucratic procedures become more of a hassle. The rule of law never really caught on in China, and we may have already passed the high-water mark for equitable treatment of WOFEs and FIEs. Compliance with regulations and loose timetables aren’t just best practice in China anymore – they are immutable laws of nature. Plan on competing with locals who have much lower hurdles to cross.

5. Staff up and pay up.
Buy friends to influence people. That means having a lawyer, an accountant, and access to knowledgeable consultants who are answerable to you and you alone. I love “Mr. China” type stories about smart guys learning the hard way, but they are anachronisms. The cost of failure is rising rapidly. I know that no one likes to pay for professional advice, but the ground is shifting. Local counter-parties and suppliers are no longer valid sources of information (if they ever were). Make sure you have access to reliable, timely information. If that means spending money, time or bandwidth, then budget for it.
Oh yeah — more bad news. Paying for expert advice is only the beginning. Then you have to actually follow it.

6. Lock in gains.
The relationships you have are the relationships you want to keep. The Chinese are serious about the value of relationships – but that cuts both ways. Yes, the people you’ve known and worked with for years will be loyal to you (maybe). Building new relationships, however, will be much harder in this environment. Vet new partners and suppliers carefully, and make sure that you are worthy of any trust and loyalty you’ve built up with locals over the last few years.

7. Have a plan B
You need an alternative course of action that doesn’t have the same risk profile as your main game. That might mean structuring your China operation differently — or maybe creating a scenario that doesn’t include China at all. Ask yourself a simple question – what if you and/or your key people can’t get a visa to enter China? Is it an inconvenience or a train wreck?

8. How much China do you want?
We used to ask, “How much do you need to be in China?” Now we’ll be asking, “How much China do you need to be in?” The days of growing an “organic” (i.e.: unplanned, seat-of-your-pants) China organization are over. China is now too expensive, competitive and risky to fly blind. How much money, personnel and bandwidth do you plan on investing, and what do you plan on getting in return? If you can’t answer those questions then you haven’t planned enough.

9. Stop reinventing the wheel.
Look for people you know who have already done this (i.e.: other expats) to partner with or hire as management consultants. An ideal partner is someone with a good reputation, a similar or complementary business, and has been through all the regulatory and licensing procedures. This can be a great way for newcomers and expanders to get exposure to China without taking on too much risk.

10. You only get to play hardball once in China.
Chinese negotiators tend to be passive-aggressive and are highly sensitive to perceived slights and insults. Two Americans can curse each others’ mothers in the heat of negotiations and still end up lifelong buddies and partners. This isn’t going to happen in China. If you feel that you have no choice but to issue an ultimatum or lay down the law, make sure it’s worth it. You may just trash your relationship – even if you were right about the facts.

China is becoming less cheap, more risky and decidedly less friendly. That’s not to say that business can’t be done or that you can’t make friends and have a wonderful life in China. But if the US and China slide into a trade war there is no neutrality.

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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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