Guanxi Type 1: Your new best friend
• Some Chinese counter-parties will use flattery, friendship and social events to build a cordial relationship.
• This is a ‘sales-type’ approach. He is selling his services to you, and he wants a salary or expects you to buy goods or services from his firm.
• Good news – they may be taking the initiative to build a strong, healthy, win-win relationship.
• Bad news – they may be pressuring you to reciprocate with better deal terms, IP, or relaxed QC/compliance requirements. He thinks his flattery and submissive behavior is a valuable service and expects compensation.
• More bad news – This scenario often leads to a balance of power shift. Once he has your money, technology and know-how, your status becomes somewhat less god-like.
• Even worse news – Those pretty young girls half your age who laugh at your jokes and think that you are so wonderful… yeah, they are in this category. Sorry, but someone had to tell you.

Guanxi Type 2: Your guide, teacher – and boss?
• Chinese businessmen will offer to help you through their connections, insider knowledge and guanxi with suppliers and regulators.
• Consultative approach. They are offering to help you solve specific problems and clear away existing bottlenecks.
• Good news – They may really know what they are doing and can facilitate your business.
• Bad news – They feel that they are in charge of the new partnership.
• More bad news – You probably need them more than they need you, so you are negotiating from a position of weakness.

Beware of your American impulses to treat every relationship as an equitable, just, “we’re all in this together” 50-50 partnership. It could be taken as a submissive gesture – which can invite aggressive, value-grabbing behavior.

===========
Stay Connected to ChinaSolved / ChineseNegotiation.com:

ChineseNegotiation.com and ChinaSolved.com invite you to participate the ChinaSolved linkedin group.

Twitter: @chinasolved VPN required in China.
Email at chinasolved@gmail.com

There are three problems with Apple’s corporate strategy, and the damage being done to its reputation is only the first to manifest. Apple has gone from being the corporate underdog who made good to the poster child for Evil Inc. remarkably quickly – largely due to the management policies of its Taiwanese OEM partner Foxconn (and its parent Hon Hai). Foxconn is a B2B outsourcer and doesn’t need a consumer-friendly brand image, but Apple can’t continue using the reverse Nuremberg defense, “it’s not our fault – we are just giving orders”. We all know how the products are made.

But I’ll let the PR pros weigh in on the benefits and costs of being an evil corporate monster. It hasn’t hurt Apple’s sales, and plenty of other companies and industries sell great products while behaving beastly to their workers and suppliers.

Apple does, however, have two other problems that will eventually pose a greater threat to its bottom line.

1. It is way too exposed to supply chain risk.  We’ve seen this before, and it doesn’t end well. Apple has given all the power to its suppliers but retained all the profit for itself. Its designs are in the hands of an engineering team it controls only indirectly. While Taiwanese OEM firms have a good reputation and track record for protecting their client’s intellectual property, Apple is giving up an important competitive competency by outsourcing it’s complete production cycle to a small group of companies that it doesn’t control. Foxconn is in a very powerful negotiating position, and it may not be satisfied with razor thin margins forever .

2. Apple is equally exposed to negotiating risk with China – and that may end up being even more dangerous. Beijing giveth, and Beijing retains the right to take away. Right now the considerable power of the Chinese government is flowing Apple’s way, making it easy for Foxconn to do business. But that can change without warning – as it has for so many in the past. If Apple finds itself out of favor with Beijing policy makers, its supply chain is vulnerable to the Chinese bureaucracy. The same is true if a Chinese competitor finds itself in possession of Apple’s proprietary technology. Right now China’s flexibility and ability to mobilize resources is drawing Apple in. China can be famously rigid and immobile when it wants to be.

All China has to do is find Apple (or its suppliers) guilty of violating PRC law – which is almost certainly happening – to shut down Foxconn production for a couple of days. Apple’s share price will tank, and management will find itself in a very weak negotiating position.  Beijing probably won’t, unless it stands to gain something – like technology or customers.

————————
Background articles on BusinessInsider.com:

This Article Explains Why Apple Makes iPhones In China And Why The US Is Screwed

Steve Jobs Freaked Out A Month Before First iPhone Was Released And Demanded A New Screen

Your iPhone Was Built, In Part, By 13 Year-Olds Working 16 Hours A Day For 70 Cents An Hour
===========
Stay Connected to ChinaSolved / ChineseNegotiation.com:

ChineseNegotiation.com and ChinaSolved.com invite you to participate the ChinaSolved linkedin group.

Twitter: @chinasolved VPN required in China.
Email at chinasolved@gmail.com

Chinese and American negotiators have differing views towards opportunity and sunk costs. Americans spend time, money and energy vetting deals and counterparties at the start of a negotiation, so once they decide on an investment they stay committed for as long as it makes economic sense. Abandoning one deal to search for another usually involves a significant loss – particularly when they are far from home. Chinese negotiators, however, spend the early phase of a deal focusing on relationship-building and learning about technology and business models. Until recently, they have invested relatively little in the way of cash – often putting up non-cash assets like production capacity, land, staff, and non-tangibles like distribution channels, connections and know-how. If they pull out of an agreement the opportunity costs are generally a lot lower – and if they have learned your business or acquired your IP in the early stages, may even be negative. (Think of negative opportunity cost as an incentive to move on to the next deal.)

A Chinese negotiator, therefore, has a greater range of motion than his American or European counterparty. This is one of the ways that Chinese negotiators shift the balance of power very effectively midway through a negotiation. Your assets are sunk and losing value – theirs assets are fluid and growing (now that you’ve taught them a business).

What does it take to hold on to a Chinese partner?
When structuring deals in China, if you want to hold on to your partner make sure there is a rising payout – and that he can make more working with you than working against you. If you can’t offer those terms, you have to seriously reconsider whether you want an equity or strategic partnership with a mainland Chinese counterparty.

Often the question is a simple one – would you rather own a minority stake in a money machine or a controlling interest in a broken down jalopy?

Do it the Disney Way
When Disney did their Shanghai deal, they didn’t play cat and mouse with the Chinese authorities.  Walt Disney Co. handed over about 57% of their cheese to a couple of SOEs representing the Shanghai government.  Sounds like the mouse got trapped — but you can bet that no one will be selling Disney knock-offs outside the Shanghai subway stations. This is a self-reinforcing deal, because the Chinese partner feels like the brand is working for them. Disney’s apparent weakness – its minority stake – is actually a strength. Shanghai now has something to lose if the partnership goes bad.

The key consideration is that Disney has a unique and highly recognizable brand that their key Chinese market is already clamoring for. If you don’t have that, then you’ll have to make do with money, technology or other assets. Your Chinese partners don’t just want a lot – they don’t just want a growing return. They want more than YOU are getting. For the Chinese side, sometimes one of the deal variables is out-dealing the foreigner – so plan accordingly.

But I Don’t Want To Give Up Control
If you’ve looked at all the angles and majority control is still your one and only choice, then plan accordingly and prepare for the tough times. That doesn’t mean you should act tough – just the opposite. You have to look patient, while keeping your options open and protecting yourself against an army of counterparties who feel that they have nothing to lose by trying to swipe your technology, business model, key people and markets. Here are a few of other things you have to do:

• No exclusivity talk. The Chinese will ask for it, and some Americans think they are being clever by playing coy and dangling exclusivity in front of their counterparty’s face like a carrot on a stick. Bad move. You are guaranteeing that you and your non-partner will have a damaging conflict. He may not win, but you’ll certainly lose.
• No partners. If you want to play the lone wolf, then be the lone wolf. Assuming that a Chinese partner will be satisfied with a perpetual subordinate role only works if you are A) over-paying, B) working with a stupid partner, or C) all of the above. Build nice, cordial relationships but be clear that you are paying for transactions – not offering an equity stake. If the Chinese side indicates that this isn’t what they are looking for, then for God’s sake, pay attention and move on! Don’t twist their arm into learning your business model and technology when you know they will eventually be dissatisfied.
• Have multiple counterparties for key functions and service chains. It’s not efficient, but you don’t go it completely alone in China for efficiency. Always be ready to move on to your next best option. This means that you have to build in plans and budgets for continually expanding your range of connections – and you can’t rely on the network of the people you may be leaving behind. When Partner A helps you hire internal staff and find your service-providers and suppliers, you have a problem dropping him in favor of Partner B – because the first guy now has conduits into your business.
• Safeguard your IP. If it’s any good, someone will make a play for it. Protect everything (with your own lawyers – not a partner’s) and only bring in what you can afford to lose. Even if you register and copyright everything, they will still copy and backwards engineer whatever they want to use. It won’t prevent you from using it in China, but you will be competing with your own designs.
• You have more to lose than money or technology. Apple is finding itself tied to some very unsavory labor practices, and it can’t disengage even if wants to. It’s brand image is going to be battered, but it has no choice but to stay involved with partners that make it look as evil as any other sweatshop operating, worker-killing, child labor exploiting factory boss.
• Be ready to walk away when the time comes. For some westerners, this is the hardest part. If you can’t do it, though, then you will never maintain full control over your own business.

===========
Stay Connected to ChinaSolved / ChineseNegotiation.com:

ChineseNegotiation.com and ChinaSolved.com invite you to participate the ChinaSolved linkedin group.

Twitter: @chinasolved VPN required in China.
Email at chinasolved@gmail.com

Every negotiation presents counter-parties with only 2 possibilities:

1. Support the status quo
2. Disrupt the status quo.

Supporters come in 2 varieties.

1. Monopolists or quasi-monopolists who have the power and/or environmental adaptation to benefit from the situation the way it is. These negotiators should be either competitive or avoiding.
2. Weak players, niche-exploiters, price takers, and those unable to adapt to an adverse environment. This class of status-quo preserver would say, ‘The devil we know is better than one we don’t’. These counter-parties are accommodators or compromisers.

Disrupters are generally pretty similar – they understand that the best way to advance their cause and maximize their interests is to shake things up. Start-ups, expanders and negotiators who believe they can benefit from shifts to the commercial or regulatory landscape are disrupters. This type of negotiator is a collaborator or a competitor. They benefit by breaking the rules or subverting entrenched market leaders.

US, China and the Status Quo
How a negotiator perceives status-quo will tell you a lot about his interests and goals.

Until about 2007, US counter-parties tended to approach US-China negotiation from the perspective that that the status quo was in their favor. This was part of the DNA of American negotiators – from the boot-strappingest start-up all the way up to the Federal government. Western strategists in China equated ‘progress & reform’ with ‘doing things the US way’. Sec of Treasury Geithner’s exchange-rate negotiating approach is a great example – he seems continual perplexed by China’s inability to conform to ‘business as usual’, and has spent the last 2 years waiting around for Beijing to come to its senses.

Chinese negotiators have their own quirks and biases when it comes to analyzing the status quo. Beijing orthodoxy is that the 21st century belongs to China, and that the rest of the world will pay any price to participate in the new China-centric economic order. Beijing seems intent on rolling back the calendar to pre-2006 times when central planning and state control was unchallenged. Compulsory technology transfers and increasing censorship of the internet indicate how Beijing sees the new world order.

Disruption Happens
The problem is that both sides can’t be right. If Washington and Beijing both conclude that inertia favors their goals, then the stage is set for a collision of interests. Ironically, conservative strategies actually lead to a highly unstable situation.

The future of US-China commerce depends on counter-parties’ ability to manage chaos and change. The same reality will govern individual businesses and industries. When entrenched players begin to lose ground to competitors – or are weakened by environmental factors – the stage is set for disruption and hyper-competition. This is not a scenario that favors soft-landings – or steady recoveries.

Our love is like a ship on the ocean
We’ve been sailing with a cargo full of, love and devotion
So I’d like to know where, you got the notion
Said I’d like to know where, you got the notion
To rock the boat, don’t rock the boat, baby
Rock the boat, don’t tip the boat over
Rock the boat, don’t rock the boat baby
–Hues Corporation 1974.

Next: When is it best to Rock the Boat?

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.
==============

Stay Connected to ChinaSolved / ChineseNegotiation.com:

ChineseNegotiation.com and ChinaSolved.com invite you to participate the ChinaSolved linkedin group.

ChinaSolved / ChineseNegotiation.com mailing list

Follow on twitter: @chinasolved TWITTER blocked in China

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.