Chinese Negotiation » BATNA

Failure is Always an Option in Chinese Negotiation

Andrew Hupert — Tue, 10 Jan 2012 02:00:14 +0000

Let’s take momentary break from the usual pursuit of best practices in US-Chinese negotiation and speak for a moment about worst practices. I am referring to the idea that “failure is not an option” (FINAO) when pursuing a deal. For negotiators who know what they are doing, failure is not only an option – sometimes it is the only option. One of the hallmarks of modern negotiating is the concept of BATNA – best alternative to no agreement . This is what empowers a good negotiator and underpins sensible negotiation strategy. If you can’t decide when to walk away then you are a price-taker, which is not a good position to be in when doing a China deal.

Back home in the US, we generally encounter FINAO syndrome among hard-driving young salesmen and financial broker-types who don’t understand how much damage they are doing to their reputation by make every deal a life-or-death struggle and every prospect a mortal enemy. In China FINAO syndrome usually afflicts senior managers who are new to cross-border deal making. A combination of high expectations from HQ bosses and lack of experience finds China novices latching on to the first counter-party who can speak English. They spend all of their time trying to make an inappropriate deal work in an unfamiliar environment. The more resistance they run into, the more vested they become in forcing this particular deal through.

Sometimes the most important negotiation is the internal one. If your HQ is working with a bad set of assumptions and demanding that you deliver on goals that aren’t appropriate for China, you are setting yourself up for disaster. The second worst thing that can happen to you is that your Chinese counterparty gets frustrated and walks away. The worst thing that can happen to you and your career is that your Chinese counterparty figures out exactly what is going on, and signs a deal that is bad for you – or would be good for you in theory, but he doesn’t plan on delivering. In China there are always two negotiations – one about the contract and one about the actual business. FINAO guys do a great job with the first one – and get slaughtered like sheep on the second one.

The best China negotiators know how and when to walk away. They take the time to give themselves options – which includes preparing alternate counter-parties and business models in case their Plan A falls through. But even more important, they take the time and effort to build support with the higher-ups in their own organizations. Good Chinese negotiators will know when you are afraid to go home without a contract, and will make you pay for it – either now or later.

In negotiation, failure is always an option. If you know what you are doing in China, it can be a damned good one.
===========
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 Negotiating Best Practices: The Chinese BATNA

Andrew Hupert — Tue, 25 Jan 2011 03:16:41 +0000

BATNA Basics: You’ve always got alternatives, even if they are unattractive.

BATNA is your Best Alternative to No Agreement. It’s your condition when the counter-party you are negotiating with gives you a final and definitive NO. If you have a mediocre job and are talking with a new firm about a better position, your BATNA is to keep your old job. If you don’t have a job now, then your BATNA is significantly lower – continue your job search while living off unemployment insurance, savings, part-time work and the generosity of others. Clearly the person with the better Plan B has a stronger negotiating position.

Chinese BATNA: There’s always another counter-party coming ‘round the bend.

Chinese negotiators generally consider their BATNA to be fairly strong because they operate under the assumption that there is always another available counter-party. China has a large population, and the international commercial centers (Shenzhen, Shanghai, Beijing, etc) are packed with potential deal-makers. Since Deng Xiaoping kicked off China’s economic reforms 30 years ago, there has been a steady stream of foreign counter-parties banging down the doors to get access to Chinese suppliers, markets and partners. Chinese managers and entrepreneurs have faced their share of shortages and bottlenecks – but overseas negotiating counter-parties have never been scarce.

Does this put westerners in a weak position when they are negotiating in China? Yes and no. Obviously you will have a hard time if you position yourself as a rare and valuable commodity, but there are many ways to turn this high-velocity trading environment to your advantage. Many westerners confuse ‘guanxi relationship’ with ‘lifelong monogamy’. Chinese deal-making tends to be more fluid and dynamic than those in other environments. It’s more like a raucous dance club than a small-town wedding. Western negotiators who settle down with a single partner too soon often find that they have squandered their most powerful deal-point.

Turn China’s Negotiating Environment to Your Advantage:

1) Don’t try to beat them – join them. China’s high velocity deal-making environment can work for you as well. Always have 3 counter-parties for any significant deal or business goal. At any given time, you should have a primary partner or supplier, a back-up who can step in quickly, and a special situation that will take a longer to develop but meets specific needs.

2) Don’t give away exclusivity. Chinese deal-makers like to joke that in business it is best to have many girlfriends but no wife. Westerners should take this hard-hearted advice to heart! Many international JVs founder because the Chinese partner was a bad fit – or treated the exclusive partnership as an excuse to sit back and collect rents. Offer exclusivity only when it serves your interests – and then make it conditional on objective benchmarks. Also consider using limited exclusivity, based on region, product, time and/or performance.

3) Consider diversifying your activities geographically. If you are building a factory then you are clearly rooted to a specific place. But if you are involved in services, sourcing, web-based businesses or other intangibles, keep your geographic options open. China is a huge place, and the regulations, customs and enforcement of policy can vary significantly from one city or province to the next. Check with a competent international lawyer or consultant first, since registration requirements may restrict certain activities. Shanghai and Beijing are getting prohibitively expensive, however, and it’s wise to shop around.

4) To tell or not to tell… Do you let supplier A know that you are also talking to prospective suppliers B, C and D? In China a little truth goes a long way, but dishonesty can land you in the ditch. The best strategy is to begin your relationship by making it clear that you have a range of counter-parties but remain vague about their identity. Don’t worry if your new Chinese associate feigns hurt feelings or outrage – they do the same thing when they negotiate. Problems occur when you promise exclusivity – OR ALLOW THEM TO BELIEVE THAT YOU HAVE AGREED TO AN EXCLUSIVE ARRANGEMENT – and then look for new partners.

5) Benchmark. A tried & true practice for successful Westerners in China is to play one partner off another. It helps if they don’t know each other (this is where geographic diversification is helpful) – and if you have been above board from the start. Remember that relationships count for more in China than in the US, so don’t make this mean-spirited or insulting. The more matter-of-fact you are about your business methods and other relationships, the better your results will be. Be wary of suppliers or distributors who get offended by a little competition – they may not be appropriate counter-parties.

Negotiation and Status Quo – When is it best to ‘Rock the Boat’?

Andrew Hupert — Sun, 16 Jan 2011 19:58:01 +0000

When is it best to ‘rock the boat’?

Powerful incumbents do best by supporting the status quo. Their big move is to set the agenda and timing of negotiations, and tend to display AVOIDING or COMPETING styles. In the US-China negotiating landscape, the classic supporter of status quo is the Chinese SOE and the entrenched MNC. The State Grid and KFC may not seem to have much in common, but they both feel that things are just fine the way they are – and will work hard to keep the negotiating environment stable. Both parties benefit from rules and practices that raise the barrier of entry.

Newcomers and ambitious but relatively weak counter-parties should favor disruptive strategies. They do best in times of change, shifting tastes & trends, and chaos. Often those coming from a weaker position will start-off as appeasers or even collaborators, but these approaches will put them at a perpetual disadvantage unless they can destroy the competitive equilibrium. This can be achieved by posing as friend or subordinates and then, after they have acquired experience, knowledge and technology, take action to undermine the position of incumbents. Huawei, Wahaha and much of the Chinese auto industry have followed this path with great success. Most Western businesses enter the China market with some sort of disruptive strategy in mind – whether they know it or not.

The problem for Americans in China is that we tend to negotiate as though the status quo favors our business model when it really isn’t. We are all still working off of Jack Welsh’s playbook – always be number 1 or 2 in your industry and don’t waste a lot of time building when its quicker to buy leadership. This strategy leads to problems in China, where the status quo favors local SOEs.

Weak overcomes the Strong

Chinese negotiators are well schooled in tai-chi tactics – and are all too happy to allow brash, confident (and well-financed) western partners and buyers to dominate business relationships until they over-extend their resources and transfer technology, know-how, and best practices. Then the Chinese partner breaks off and goes it alone – usually tweaking the product or business model for maximum impact on the local market. Expat managers, confident that the Chinese market will eventually ‘figure things out’ and start conforming to Western patterns, are often quick to blame and slow to correct their own product or business.

What can expats and international managers do to diagnose the situation and react when the trend is not their friend?

Get better analysis. You can negotiate successfully from a position of strength, and you can negotiate successfully from a position of weakness. What you can’t do is negotiate as though you are stronger when in fact you are weaker. Americans tend to think that they can import market leadership to China. Most of the more spectacular negotiating failures of the past few years (eBay, Tim Geithner) started with the American side assuming that the Chinese side needed the Americans more than the Americans needed the Chinese.
What if your deal is successful? Chinese are simply better at post-deal disruption than their western counter-parts. Quite frankly, it’s getting a little late in the game for this. Western negotiators seem unable to envision a future where the Chinese side is unsatisfied with a minority stake in a successful Chinese business. (Think Danone-Wahaha or China’s absorption of fast-train tech from Japanese and German partners. ) Time after time, the Chinese allow their American partners to believe that NY or LA is still calling the shots when all that is going on is a wholesale transfer of technology and assets. US negotiators try to minimize risk with contracts and clauses, while the Chinese side is concerned with acquiring technology and know-how. 18 months into the relationship, the contract is worthless but the technology has been developed and tweaked into a valuable asset.
Ask, ‘what can go wrong’? There are two ways to pose this question – as an expression of confidence (like market leaders and monopolists) or a hard-hitting risk assessment (like disrupters). Hint – the first thing that can go wrong is that your bulky, detailed contract doesn’t hold water in China. If you can’t envision a scenario where your Chinese partner ends up cleaning your clock in your own home market than you are either not performing a rigorous enough analysis or you are choosing the wrong partner. Americans tend to be incredibly naïve and short-sighted when it comes to scenario analysis in China.
Don’t be afraid of conflict. Western managers have to stop undergoing voluntary de-clawing when they pass through Chinese border control. We hear the Chinese talk about ‘harmony’ and we read about ‘losing face’ and ‘guanxi’, and we convince ourselves that our counter-parties are all pacifist Buddhist monks. This is the road to ruin in China. If you can’t say ‘no’ then you are not negotiating – you are a subordinate. Americans are direct, analytic and assertive. Chinese partners tend to be passive-aggressive, manipulative and – quite frankly – a bit whiney. If your first casual disagreement undermines your business relationship, then you don’t have a viable relationship. If the status quo is in your favor then you can afford to give in on procedural issues – but if you are evenly matched or worse than you have to be a little scrappier. Don’t stomp around like a bully – but you can’t be walking on eggshells all the time.
Go into the light. Americans tend to fritter away their biggest advantages by agreeing to backroom negotiation, confidentiality and secrecy. The ability to be direct and to function in an atmosphere of full disclosure is the American negotiator’s secret superpower. It’s the Chinese who know how to be subtle, secret and sublime. As soon as you start engaging in secrecy, confidentiality and informal agreements, you are playing on someone else’s court. Experienced expats in China usually end up agreeing to far more confidentiality and informal agreements than they would at home, but you shouldn’t make that your starting position. Get concessions and score a deal point or two in exchange for sending the contract lawyers home early.

Negotiating in China: Countering the BOPS

Andrew Hupert — Wed, 09 Jun 2010 05:23:59 +0000

Chinese-Western negotiations are more fluid than deals in the US. If you expect your business in China to be stable and predictable once a contract is signed then you are in for some educational times ahead. Westerners doing business in China report that they have more problems after the contract is signed than before. Much of this has to do with the BOPS – the Balance of Power Shift that affect most US-Chinese relationships.

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.

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.

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

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

~~Follow on twitter: @chinasolved~~ TWITTER blocked in China

Email at chinasolved@gmail.com

Chinese Tactics: The Balance of Power

Andrew Hupert — Fri, 28 May 2010 01:36:30 +0000

When the power shifts in a Chinese relationship, you’d better know it.

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

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

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

~~Follow on twitter: @chinasolved~~ TWITTER blocked in China

Email at chinasolved@gmail.com

Jumping through hoops in the dark.

Andrew Hupert — Mon, 19 Apr 2010 13:51:36 +0000

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

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

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

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

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

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

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

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

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

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

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

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

==================

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

The Whirlpool of US-China Conflict. Part 1: The Drivers

Andrew Hupert — Tue, 02 Feb 2010 03:21:43 +0000

US-China relations are clearly spiraling downward, and the ramifications for business negotiations are dire. Only a year ago the international community had reason to hope that a new US administration and a successful Chinese leadership could cooperate to lead the world out of economic crisis and environmental ruin. Now the only example of the US and China pulling together is our joint commitment to paddle directly into the whirlpool of an acrimonious trade dispute. The recent tit-for-tat blows over Taiwan and Iran are merely the latest manifestations of a competition that began in 2008 – and they are unlikely to be the last.

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.

===========

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

Google-China as a case in Lose-Lose Negotiation

Andrew Hupert — Mon, 25 Jan 2010 13:25:46 +0000

Everyone thinks that they know what Win-Win negotiating is, but what about Lose-Lose? Simply stated, it’s when both parties leave the negotiation worse-off then they entered.

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.

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

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

Americans negotiating in China – Who makes the first offer?

Andrew Hupert — Mon, 24 Aug 2009 08:39:34 +0000

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

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

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

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

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

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

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

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

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

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

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

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

—————————————
—————————————

Stay Connected to ChinaSolved / ChineseNegotiation.com:

~~Follow on twitter: @chinasolved~~ TWITTER blocked in China

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

American Negotiating in China — Doing Chinese Deals on One Foot

Andrew Hupert — Fri, 21 Aug 2009 05:53:34 +0000

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

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

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

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

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

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

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

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

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

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

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

—————————————
—————————————

Stay Connected to ChinaSolved / ChineseNegotiation.com:

~~Follow on twitter: @chinasolved~~ TWITTER blocked in China

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