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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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There are 3 rules that all owners and managers entering the China market should understand when negotiating during the early stages of your entry to the China market.

1. Go Slow. The China Market is not going away any time soon.
2. Build a network of professional service providers first, do business after.
3. Have a Plan … and a Plan B.

1) Go slow.
China has been around for 4,000 years, give or take. It’s not going away anytime soon. Are you late to the game? Maybe, maybe not. Odds are you are right in the middle of the first big move of a prolonged expansion that will continue on for years.

China is not the place for fast money. When business entry consultants and suppliers hear you are in a hurry, it’s like that cash-register noise from cartoons. A basic rule of thumb is, the faster you want to make money, the further you should stay from China. In other words, you will make the fastest money buying China-made goods in the US and Europe and reselling them for a small profit. If you need a presence in the Mainland for strategic reasons, it will be a long-term endeavor.  
If you are serious about investing strategically in China, then there is much to be said for getting on a plane and spending a week visiting retail stores, malls or supermarkets in Shanghai, Beijing and a couple of second cities. It could be the best money you’ve ever spent. Remember the First Rule of China Business: If you are too busy to research the market, then you are too busy to be successful in China. Stay home.

2) Build a professional network first, transact business next.
You should not even consider starting your China business until you have a reliable source of the following experts:

Accountants. There is a range of qualified accounting consultants in the big cities. You have to decide if you need a bookkeeper, an advisor, or a CFO. All are available. The best way to really screw up in China is to hire a low-priced bookkeeper and base your strategic plans on his/her advice. You wouldn’t do it in NY “don’t do it in Shanghai.
Lawyers. A good international legal expert should be your first stop when executing a successful China operation. Yes, China has a legal code. NO, you really can’t sue anyone who has ripped you off and get satisfaction. Lawyers are much more useful for PREVENTING problems in China, as opposed to solving them after you’ve already found yourself in hot water.

Translator / Assistant. There are many options. Simultaneous spoken translation is the most expensive and hardest to find. If you plan on hiring a translator to help you handle meetings in Mandarin, test them out first. Experience counts, but it is expensive. Translating documents from Chinese to English is relatively cheap and straight-forward. If you plan on doing it often or have big quantities of work, you are best off skipping the expensive agencies and hiring an assistant. Good universities are cranking out English majors by the boatload. Most document translation is priced per word or page, not by the hour.

Business Entry consultant. This phrase covers a lot of ground. The industry developed around business registration for WOFEs or JVs, but it has now gotten very specialized. Go slow on the business registration, and find an outfit that can add value and help you formulate a solid business plan. Look for relevant industry experience and useful contacts. Be aware that thousands and thousands of new graduates are running around the big cities claiming to be business entry consultants. Experience counts.

HR (if you plan on opening or hiring a local rep). Good agencies abound. HR will be a major challenge for your China business, and if you plan on hiring a local representative or staff, you had better budget plenty of time and money. Don’t neglect this, just because the salaries seem low and there are plenty of resources around. You will be spending far more time than you think you will on HR.

Value Added Sourcer. You need a really good reason for going directly to manufacturers on your own. Most buyers in China are going through value added sourcing agents who can help them locate suppliers, negotiate pricing and regulate quality. If you plan on exporting, you should choose a business entry consultant based on their ability to add value in this area.

Realtor (or serviced office). If you will need space in Shanghai, Beijing, or Shenzhen, you should start doing your research early. It won’t be cheap.

People here tend to be less aggressive (i.e.: no follow up), so be prepared to make effort to keep the conversation alive. Talk to consultants BEFORE you need them. Schedule appointments from home – or even better, set up conference calls with a variety of players. Talk to large multinationals, medium-sized expat partnerships and small local companies.

There is a structure to the service industry here, and until you have a good handle on it you are not ready for China business. If you plan on using the same person for more than one function, have a good reason. Saving time, too much trouble, too busy chasing hookers are all bad reasons.  ‘Consultant X is a specialist in my industry and has an HR or accounting facility’ is a good reason. Make sure you are using Value added service providers. Following westerners’ stupid instructions has become a cottage industry here. You need advice and recommendations. This is not the time to hire ‘yes men’, so you have to make sure that your consultants are up to the task.

3) Have a Plan, and a Plan B.
Take your original notes and plans about China, have yourself a good laugh and throw them in the trash. If your original plan still looks good, then there’s an excellent chance you haven’t done enough research.

Make sure you have given plenty of thought and research to the following key areas: Entry strategy Management strategy Competitive analysis Marketing plan / operating plan Budgets and Timetables Expansion strategy Exit strategy You should be putting in real figures and actual people & company names. There may still be a lot of gaps and question marks, but that gives you good understanding about what kind of work you still need to do. The landscape changes a lot, but that is an excellent reason for doing more planning – not less.