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.

Introducing, the Balance of Power Shift, or BOPS.

Part I: What’s the Balance of Power Shift?
Part II: BOPS and tactics.
Part III: BOPS and counter-tactics

In every Chinese deal a little power must shift. There will come a time when the prospective supplier who was kissing your assets yesterday starts acting surly and aloof. Or that busy, cell phone guy suddenly has all the time in the world for you. What’s going on – Balance of Power Shift. BOPS.

Chinese deals can have a lot of them, but they almost always have at least one. This is when the Westerner suddenly outlives his usefulness – or the Chinese realizes that the Lai Wai can do this just fine on his own from now on. One way or another your partner feels that the relative power of the relationship has changed, and now it’s your problem. The first rule is that you can’t ‘opt-out’ of the pettier and dumber aspects of the culture just because you think they are petty and dumb. Your Chinese counter-party has a propensity to get fussy about power games and deep strategy. And because it is part of their world, now it is part of your world. Got that?

Post-BOPS behavior patterns:
Behaviors change rapidly, and experienced negotiators know what the new signals mean. You should too.

After the Western side wires the funds, one of three things will happen.

•One is that everything stays 100% on track as both sides worry about execution and expansion in a balanced, systematic and logical manner. It usually doesn’t.
• Sometimes the Chinese will feel that they have been dealt a losing hand. Either it looks like they will make less money or that you will make more than optimistic estimates led them to believe. This is where the quality problems, the unfinished projects and the unanswered phone calls are born.
• The third option is that the Chinese side feels it has the advantage. That’s when you have outlived your usefulness. This is the signal for the start of some potentially aggressive behavior, like the kind of IP theft where they start running a competing business with your plan, product & designs.

China Deal BOP: Which way is it moving?

What triggers a power shift?
The BOPS – the Balance of Power Shift. It can be caused by something external to the negotiation or something internal – but suddenly your Chinese counterpart feels either stronger or weaker than he did yesterday – relative to YOU.

• Maybe you moved money into the partnership – in which case you are weaker. Maybe you signed a deal with a different Chinese firm – in which case you are stronger. If you are making more – or he is making less – it may be causing resentment which can force a BOPS earlier.
• You are supposed to be the brawn, they are the brains. Even though your brawn was cash, technology, designs and know-how – they were the brains of China. Each day the balance is shifting. As you transfer more money, know-how, training and IP to the circle, their power grows. As you learn more about China & the industry and build up your network, your power grows.
• In China, your success can suddenly trigger a BOPS against you – as your Chinese counter-parties decide that you are exploiting them and that they should A) charge more and B) find other deals that don’t include you.

Why does it occur?
They either think you were screwing them (your fault or not) or think they can do better by screwing you. Either way, it’s a decision – not a rule – and it’s governed by the Chinese notion that there is always another opportunity just around the corner. Another factor is that Chinese negotiators consider education about your operation and industry to be an intangible but valuable asset. The knowledge they’ve gained is part of their payout. It usually declines steeply. By the time they have the upfront money, they are done.

In other words, your cooperative structure may be eroding at the base even as it looks the most successful. While you are building and struggling, your Chinese counter-party remains loyal because he is still putting the pieces together. But once you have succeeded with your first order or preliminary operation, then your usefulness as a teacher is exhausted. They have learned it all, and can probably do better on their own in China than in helping YOU prop up your fat margins.

There are a lot of factors contributing to the BOPS, but it seems to be closely connected to how low-maintenance the relationship is, and what the earnings potential looks like. If the payout is level or falling, look for the Chinese side to decide that the grass is greener and the BATNA higher on the other side. At that point, you need them a lot more than they need you – hence the BOPS.

Time & Risk
Westerners believe that the safest course of action is to secure a stable base of operations and grow from there. The Chinese feel that the smart businessman acts quickly when an opportunity appears – and is always ready to move on to the next one. Both sides, pursuing a risk-reduction strategy, will undermine the partnership. It is important to put aside your own preconceptions about what constitutes long term benefit, best practices and common sense.

Next: BOPS II – How it affects tactics

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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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Two issues are undermining international cooperation. The first is that the US and China are at variance over the benefits of cooperation vs. competition. The second is that the two actors are working off a faulty stakeholder analysis – leading to misinterpretation of how the other side values the variables on the table.

Cooperation vs. Competition: An extended Prisoner’s Dilemma scenario:

Work I’ve done with US & Chinese negotiators in a prisoner’s dilemma-type scenario does not give cause for optimism. China-US negotiation is often characterized by relatively simple, naïve initial deal-making (usually based on incomplete or erroneous information) followed by increasingly uncooperative, competitive, often hostile disagreement.

Cooperation requires a ‘growing pie’ of benefits
For US & Chinese counter-parties to achieve stable cooperation in a Prisoners Dilemma type arrangement, 2 conditions must exist.

1. Both sides must believe that steady-state cooperation will enhance their long term benefit over multiple iterations compared with short-term competitive behavior.
2. The global payout must be rising over the course of the arrangement. In other words, for cooperation to be stable the ‘economic pie’ must be growing. Faced with a stable payout (a zero-sum game) the default behavior seems to be competition over cooperation.

Modern Chinese negotiators tend to believe that their BATNA (Best Alternative to No Agreement – otherwise known as ‘Bottom Line’) is enhanced by a constant stream of new counter-parties or options. American negotiators operating in mature economies tend to view stable-growth scenarios as sufficient to maintain cooperative negotiating relationships. Combined with lower penalties for breaking contracts in China than in the US, the result is that Chinese negotiators tend to be quicker to switch from cooperators to competitors than their American counterparts.

Stakeholder analysis & relative valuation of variables.
The second oar propelling us towards the whirlpool of acrimonious trade war is improper stakeholder analysis performed by both sides. Because US and Chinese actors seem to be working with a simplistic, incomplete view of their counterparty’s priorities and interests, each side made gross errors in estimating how the other side valued variables. In other words, US negotiators didn’t know what was important to Chinese counter-parties and Chinese negotiators didn’t know what was important to the US. This has driven China’s negotiation position to shift from relatively cooperative to extremely competitive over the last 2 years.

In many ways, our present problems started in 2008 when an uprising in Tibet turned violent. America and the West seemed not only sympathetic – but were perceived by China to be taking an active role in spreading false rumors and images about the cause and nature of the protests. A similar scenario played out in the summer of 2009 when violence broke out in Xinjiang – and anti-Beijing photos & clips (some of which were admittedly of a highly suspicious nature) started showing up on social media networks and YouTube.

These incidents were perceived as relatively minor or ‘business-as-usual’ in the West – especially since demonstrations and public criticism of US policy were commonplace in the waning days of the Bush administration. To Western negotiators, public reaction to mild street violence on the other side of the world simply wasn’t that big a deal. To Chinese decision-makers, however, these uprisings were considered to be major threats to their core values – the legitimacy of the CCP. In Beijing, US commentators and social networks siding with the protesters was likely perceived in much the same way that Washington policy makers would react to a string of Xinhua editorials cheering on Al Qaeda and the Taliban. It not only undermined trust and cooperation – but also empowered right-wing conservatives who felt that China had opened to far too fast.

The economic crisis in the West further undermined US-Chinese cooperation. In March 2009 Wen Jiabao sealed China’s competitive position in a speech at the CCP conference bluntly attacking the US currency and economic policy. This was an unusually unambiguous signal that China was taking a competitive tack in US-Sino relations.

This makes sense from China’s perspective – at least in the short term – since a crippled US economy meant that there was now a much smaller pie to divide. The system-wide payout was dropping just as China’s contribution to the global economy was rising in both relative and absolute terms. China simply had less to gain from cooperating with the West – and shifted to a competitive mode.

The Way Forward
Unfortunately, once a multiple-iteration negotiation (same 2 negotiators, many different negotiations over time) turns competitive it is very hard to break the cycle. Trade hawks on both sides are empowered and there seems to be little benefit for either Beijing or Washington to make the first move. If the US economy recovers or the Chinese economy stumbles, it will only reinforce the competitive mindset. Bluster about Iran sanctions or Taiwan arms sales might be just the beginning. Each new trade sanction or public dispute will reinforce the competitive environment and make it harder to break the cycle of conflict.

Next: The Whirlpool in your shop – how to negotiate under adverse US-China conditions.

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There are two general categories of Lose-Lose negotiations:

The first is when a negotiation goes bad, and both sides lose time, money, assets or resources as a result. This what management students refer to as a ‘hygiene’ issue because unlike a ‘structural’ issue, the result is due to poor execution, bad planning or some other form of incompetence. If one or both sides were better at carrying out their own strategy, the result would not be lose-lose. Lots of US-China JVs end up this way.

The other type of Lose-Lose negotiation is structural. Due to environmental or external reasons there is certainly going to be a loss. The rational goal of this kind of lose-lose is to minimize the downside – either cooperatively or competitively. Think of a bankruptcy or divorce as an example of lose-lose.

So what do we have in the Google-China case?

3 Factors control this negotiation.

1) Business interests
2) Censorship
3) Hacking

The hacking issue was actually the most significant – though it seems to be hazy and irrelevant to Google’s ongoing business. If the Chinese government is indeed, behind the hacking of Google’s servers then the company probably had no choice but to force the issue when it did – and had good reasons for doing it the way they did.

The Hack
If a bunch of 15 year-old script mutants from Estonia hack into AutoPartsWorld.xyz, then the site owner has the option of forgetting about it. But if an unnamed foreign entity (i.e. China) conducts a concerted quasi-military attack on Google and the company not only learns about it but also discovers that A) sensitive companies involved in US infrastructure and defense industries were also hit and B) its own employees may have been involved, then the company has severely limited options. If Google knew about this and said nothing to anyone then the best it could have hoped for was a PR nightmare – and it sounds like it might be edging towards treason (or at least prolonged GlennBeckian rants and special Congressional hearings) in a worst-case scenario. Sure, it could have handled it more discretely – but then there was the possibility of losing control of the message (when someone in the company or either government reveal it at a time of their choosing or through a blunder) and looking, well, EVIL when the pattern became apparent.

Only a handful of people know for sure the actual extent of the hacking and who was behind it – but the facts as presented would make ‘business as usual’ impossible for a responsible management. After 4 years doing business in China, Google couldn’t claim it didn’t know what the downside of this kind of hacking might have been. This is their business.

The Business Interest
There are some very good reasons for Google to take the position it did. No – the problem wasn’t that Google was failing in China. It was doing fine – and the most recent stats indicate that Google was actually making significant gains in the last few months. With China cracking down on piracy and IP violations, the industry was moving in Google’s direction (since Baidu still gets lots of its search traffic from MP3 downloaders). The business issue has to do with WHEN to force a confrontation, not WHETHER to do it. If the hacking was real, then it was in Google’s favor to have the negotiation earlier rather than later; louder rather than quieter. There are lots of people shouting that Google didn’t understand China’s culture. Well, I can’t speak for Brin, Page or Schmidt, but I like to think that I do understand a little about China’s negotiating culture. Handling this according to Chinese convention would have been an unmitigated disaster for the company. By going public and presenting its case in the court of public opinion, Google can balance its losses in China with gains elsewhere. If the company had conducted quiet, behind-the-scenes negotiations with Chinese bureaucrats it would be bargaining away all its advantages before the first meeting even started with little hope of improving its position either in China or globally. Deservedly or not, Google has managed to turn 180 degrees and go from being seen as a co-conspirator with a human rights violator to being the champion of justice and freedom. At the time of this writing, Google is still up and running on both the .COM and the .CN sites so the company hasn’t given up anything. Google’s harshest critics are saying that it should have happened sooner.

Censorship.
Although the loudest of the three arguments, this was probably the least important. Freedom of information flows is Google’s stock in trade – and it routinely makes arrangements that limit those flows under certain conditions and in certain places. If it can marry a stronger anti-censorship image to its brand name, then The Goog is in a much stronger position to defend its de-facto position as ‘repository of all human knowledge’ from nervous Western authorities. The censorship position makes a great bargaining chip. If Google and China do want to arrive at a face-saving decision, then this is the only option on the table that makes any sense at all. Google.CN is the variable in play. If Google decides to give something up to appease Beijing, they can jettison or alter the CN site. Likewise if Beijing wants to let the Goog look like it won something (as unlikely that may seem right now) then the two can issue joint press release that the new and improved Google.CN will be freer and opener in some way.

Once Google discovered the hack it had no option other than to engage in a loss-minimization strategy. The discovery was a game-changer that significantly constrained Google’s negotiation options. It’s BATNA plummeted, and the only rational course of action was to negotiate to limit its losses and counter-balance with new gains elsewhere.

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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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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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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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Its final exam time in Shanghai, so many of the students from my International Negotiation class are waking up and starting to ask naïve questions.  Those are the best kinds of questions since they get to the root of all possible misunderstandings.  This semester’s crew is finding BATNA a little tricky to apply in practice (cases). 

BATNA stands for Best Alternative To No Agreement.  There are variations on the acronym, but the basic concept is meant to identify where you’ll be if this negotiation yields a big fat ‘NO’ from one side or the other.

The BATNA should be an assessment of your present business assessment.  It forms the basis for your strategy and informs your action plan — but the BATNA is itself an essentially static description or snapshot of your organization’s assets, liabilities, capabilities and resources.  It has numbers and time.  It is a cold-blooded assessment of your organizations health- and is completely independent of the outcome of the negotiation you are planning.  That’s the whole point.  If you think your BATNA is ‘if we don’t get this deal than we’re screwed’ then your REAL BATNA is ‘we’re screwed’.    That’s the whole point of the exercise – to know how bad your worst-case scenario really is.   

Because the BATNA is so closely tied to the action plan, many students of the negotiation craft get them confused.  They end up developing a BATNA assessment that basically says, “if we don’t get this deal then we are going to be in trouble so we had better get this deal on the most aggressive terms possible since our situation in the marketplace is deteriorating so quickly”.  That’s neither a BATNA nor a negotiating plan.   A well-developed BATNA underpins a negotiating action plan, but it is not merely statement of that action plan.  BATNA analysis starts with independent metrics and observations about the organization.

Here are 5 elements to a BATNA analysis that demonstrate its importance.  The first one is the only one that is absolutely necessary.

Elements to BATNA analysis

1. Snapshot of the P&L and other basic business metrics. 
   Notice the words “metric” as in ‘to measure’.   The first job of BATNA analysis is to have a very clear idea of where you really are now.  Everyone thinks they are doing this implicitly, but that’s simply not good enough.  You have to sit down and articulate in very explicit terms just what your financial and operational status will be if this negotiation doesn’t yield an agreement.   
    
2.  Deal Structure. 
   The BATNA and Goal analysis work together to tell you what you should be negotiating for.  Put another way, the BATNA sets the M in your LIM analysis. The goal analysis tells you where you want to be. The BATNA analysis tells you where you are.  Now you understand the gap – and hopefully have numbers on it.  The BATNA forms the floor of your negotiating strategy.  You can now build your walk-away position as one that puts you marginally better off than your BATNA.  From there, putting your ‘most likely’ and ‘best case’ scenarios on the map are pretty easy.
    
3. Vector. 
   BATNAs fall and rise.  This is particularly important if your environment is in flux (i.e.: now, everyone) or if your competitive position is shifting.  You should know if your own BATNA is rising and falling in the near term.  Is your steady-state business remaining stable, or are you in a deteriorating position in a failing industry?  This is more of an environmental analysis than an inward looking audit.  I referred to ‘rising or falling BATNA’ in my class when the recession shifted the negotiating balance of power from suppliers to purchasers – and now my class thinks that this is the main purpose of the BATNA analysis.  Determining if your BATNA is rising or falling is an interesting issue to analyze – after you already have a solid understanding of your operational and financial status in the event of no deal.  BATNA’s shouldn’t be referred to as ‘rising’ or ‘falling’ until you’ve already stated what yours is.
    
4.  Short Term Tactics. 
   The BATNA analysis can act as your own personal ‘devil’s advocate’.  If performed seriously, it will let you know your own weaknesses and friction-points.  Your job is now to address your immediate shortcomings with good bargaining while simultaneously hiding or disguising your shortcomings from counter-parties.  In other words, the BATNA tells you what to look for and what to lie about.
    
5. Long Term Strategy. 
   In the short term, you can just react to deficiencies and weaknesses revealed by the BATNA.  In the long term, it’s your job as a manager to steadily improve your company’s strategic position — or to increase your company’s BATNA.  You can think of BATNA as a key metric for understanding a company’s strategic position — and every deal you do now should contribute to raising your company’s BATNA in the future. 

 Remember — a thorough BATNA analysis is the launching pad for a negotiating action plan — but it is by definition remains independent of the negotiation itself.  You BATNA should include numbers and descriptions of competitive pressures and advantages — but should not be a plan for changing the future.  That’s what your goal and LIM analyses are for.  

Many international investors and negotiators have never been realistic about their true BATNA – but now the time has come to face facts. If you have a WOFE (wholly owned foreign enterprise) in China – or are in the process of starting one — than you have to realize that your true BATNA may be lower than you think.

China’s economy is in better shape than the West’s, but that doesn’t mean you don’t have unseen risks and new challenges when negotiating here.

3 new shortages

There are three things that expat negotiators in China never thought we’d run out of that have suddenly gone into effective shortages:  Counter-parties, Capital and Manpower.  

Counter-parties

The reason recessions are called economic contractions is because the entire economy literally gets smaller.  More people have less money, so they cut their spending.  BUT the less obvious danger is that many people and businesses are taken out of the economy altogether.  People lose jobs and companies go bankrupt.  Financially speaking, they’re just not there anymore.   This means that you, as a business, have fewer qualified counter-parties.  The people you see are buying less — but what you don’t see is that there are fewer people to buy anything at all.  The same goes for suppliers, outsourcers and partners.  As bankruptcy and curtailed expansion plans become more commonplace, you’ll find that the pool of counter-parties for your proposal is shrinking rapidly. 

If your old BATNA in a negotiation was ‘Find a new customer / supplier / partner’ than you need to make sure you still have that alternative.

 Capital

No cash flow, no credit, no budget, no head-count, no expansion, no expenses.  Just because a couple of your competitors go out of business before you do is no reason to start rejoicing.  Yes, the weaker companies are already either bankrupt or will be soon.  But the stronger players are also feeling the pain of tighter credit, lower cashflow and spending cuts.  This is one of the most dangerous aspects of a recession — no one wants to lend or spend. 

Lack of capital can be a killer – because it destroys your time as well as your bottom line.  Make sure that your counter-party has access to funds early in the negotiating process.  Be very careful about your VARIABLES – particularly in terms of credit terms and conditions of payment.

Manpower

Manpower?  Doesn’t this actually RISE in a recession?  Yes – and no.  If you are a famous MNC with big offices and an established brand, then you may in fact find that you are seeing better candidates and more reasonable salary expectations.  But if you are a small or medium sized business, or worse – a start-up, you may just find that your negotiating position has actually weakened in China.  Why?  2 reasons.  First, you just became a riskier proposition than you were last year.  Unknown brands in China have always fought the famous international brands for talent — and usually lost.  Now you are fighting against more traditional Chinese employers who can promise security.  But even if you find the candidate of your dreams, you still might be paying more than you did in pre-crash days.  Many international companies in China were able to entice ambitious local managers with promises of commission, profit shares, bonus, a stake in the company and other variable compensation plans.  Well, now its about CASH.  And don’t expect an all-salary package to buy you any discounts. 

Chinese job-seekers are the ultimate AVOIDERS — they will wait and wait because they are sure there is a better offer coming down the road. 

WOFE owners must understand that their true BATNA is BANISHMENT!

Your new BATNA is bankruptcy in China – and being permanently barred from the Chinese market if you don’t follow bankruptcy procedures.  If you thought that setting up a WOFE in China was unpleasant, just wait until you try to shut one down!  No — you don’t just get to leave the keys on the desk and head for the door.  You’ve got to unwind this thing according to the rules — and my guess is that they are neither simple nor inexpensive. 

And lest you think you can use that foreign passport to just slip out of town — think again.  Sure, you’ll get away just fine — but you will probably never be able to operate a business in China again.  Bureaucracies have long memories — and China’s bureaucracy carries a grudge.  If China truly is destined to be the greatest economic power on the planet, you don’t want to get shut out forever because you found the paperwork too unpleasant.