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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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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Successful negotiation in China means knowing when to walk away.

Doing business in China is tough, but it’s definitely a realistic goal.  But one interesting aspect of negotiating in China is understanding how your Chinese host understands ‘time’ much differently than you do.  Remember one of our favorite bed-time sayings, “If a deal has to die, then sooner is better than later”. Sometimes westerners hang through more rounds of negotiation with Chinese partners or buyers only because they don’t have any alternative counter-party.   

If your deal is in trouble, your first step is to assess the chances for survival.  Most negotiations do not result in a successful deal.  There are infinite numbers of reasons for this, but there five general categories of “deal-killers” that you need to be aware of.  If one or more of these scenarios applies to your situation, then you should be aware that the chances of success are very low.  Remember – if a deal is going to die, then sooner is better than later.  

 The five deal-killers:

1)    Lack of trust.           

Do you distrust them? Do they distrust you?  Are negotiations based on overblown or unrealistic claims?  Does one of the parties involved think the other is trying to rob them or take advantage?  Does one of the parties fear that the deal will result in poor value or unequal profit potential?  There is a chance that this situation will improve over time – but it is not very likely.  Good managers simply do not sign contracts with people they distrust. 

2) Different goals or unclear goals

Your meetings are always relaxed and seem productive, but nothing ever really seems to happen.  You could be supplying free market research or helping someone look busy.  One thing is for sure — you aren’t getting rich as a result.  It’s ok to ask the other side what they want, but it’s not ok for them not to know. If you don’t know the other side’s goal, then you aren’t going to be able to reach a profitable arrangement.  If you have different perceptions of value or if your original business objective no longer makes sense, then you have to re-evaluate the benefit of continuing the negotiation.

Oh, by the way.  If you don’t feel comfortable asking the other side what they wan out of this deal, then you should not be involved in the negotiation.   

3) Different levels of commitment

Are they just using the “negotiations” as pretence to get information or free market research? Inappropriate levels of authority.

            Important decisions keep getting deferred

            Do you know your own price? Who will name a price first?

4) Lack of resources

There just isn’t enough time, money, or manpower to do all the deals we want to do.  It doesn’t matter how big or wealthy your negotiating partner’s company is – if they can’t get the approval for this deal, then they don’t have the resources.  Don’t waste time – and don’t waste the other side’s time.  Be honest and straightforward, and tell them that you will have to pass on this deal.

5) A Deal-killing Point / Unsolvable impasse

Sometimes “No” really does mean no.  If the two sides can’t agree on a major point, then you will have to drop the negotiations.  Price, schedule, and control issues are good examples of deal-killing points.    This may sound simple enough, but it is very common for inexperienced negotiators to defer or delay these points until the bitter end of a negotiation.  If you want the General Manager to be a local Chinese and your partner wants an ex-pat from Germany, then there is really not much point in worrying about the location of the new factory – you obviously have a major problem.  Fix it, or move on to another deal.