But in more and more cases it’s the Chinese side that has the last word.  It used to be that Mainland negotiators were confused and intimidated by binding contracts – now the tables have turned and the Chinese are exploiting Western assumptions about legal agreements.  The Chinese are more than happy to sign on the dotted line, knowing that they can use their Western partner to climb the technology ladder and acquire the know-how to develop marketable products on their own.  Once the Chinese side has gotten what it needs from the partnership, it is a simple matter to drive the foreigner out with front-line tactics that play out on the factory floor and the distribution network.   Chinese dealmakers have learned to honor the letter of the contract while shredding the spirit of the agreement.

It is easy to blame the Chinese side – there’s plenty there to criticize.  They play fast and loose with the truth, they exploit the home-court advantage and outmaneuver western partners with government & bureaucratic connections.  What they don’t  do is mix up their tactics.  Chinese negotiators tend to be consistent and predictable.   When they find something that works they keep doing it – over and over.

Western management has often been its own worst enemy in China.    HQ managers view contracts as set-in-stone blueprints, and they are quick to see any variance between the document and the real world as the fault of their own front line managers – be they purchasing, sales, HR or operations.

Western negotiators need to stop negotiating the contract and start negotiating the business.   China business is not won with boardroom masterstrokes – it’s a battle of inches slugged out on the front lines.

Here are the rules for building a China-ready negotiating team:

1. Plan for two sets of negotiations
   Senior managers tend to talk with one another about collaborative, win-win deals, but the real negotiation is the one that plays out on the front line – and that one is cut-throat and competitive.  HQ managers have to budget the time, resources and bandwidth for an ongoing negotiation, and stop living in a fantasy world where contracts are binding and win-win is the norm.  TIC – This Is China.
2. Get more feedback from your own  front lines.
   Purchasers, salesmen, HR and engineers should by your first source of business intelligence.   Large western organizations tend to be poor at internal negotiation, and favor top-down information flows.  That usually means that the people who know the least about China are making all of the decisions.    Develop open-ended procedures for getting feedback – not annual company meetings or boilerplate status updates.

   Adjust corporate culture if necessary.  Senior managers must be more tolerant of failure, delays & disconnects.   “No-nonsense tough-guys” who bully underlings to get the job done at any cost are suppressing the only reliable flow of information that the company has – honest assessments from the front-line staff that is dealing with purchasing, selling, hiring and producing.

3. No more one-size-fits-all solutions.
   Multinationals that have spent time, money and effort to build global systems try to apply them to China, and the results are often mixed at best.  Companies that negotiate effectively in China use flexible systems that are specific to their Mainland business.  Chinese don’t care how you do it in America, England, Italy or India.
4. Know their weaknesses, know your weaknesses.
   They steal IP.  They may not consider it theft or wrong, but you probably do.   Westerners are lousy at relationship-building and time management – at least by Chinese standards.    Don’t paper over the big issues.  Make your weaknesses and differences the core of your relationship building – not a forbidden secret that no one can talk about.
5. Constructive engagement means many small conflicts – not fake smiles and pretty lies.
   Your counterparties are tough-as-nails Chinese business professionals, not fragile China dolls.  As long as business disputes are not personally embarrassing or political in nature, then a very wide range of topics are ‘in bounds’.   Westerners have bought into the propaganda that Chinese are all delicate flowers who will wither and faint if confronted.    Lots of small, manageable confrontations is a relationship.  One big confrontation is a failure.
6. It takes a team.
   Americans all want to be cowboys and Europeans still love their aristocrats, but China is about the team.  Don’t show up alone.  Negotiating teams should be multilevel and cross-departmental.   Chinese like authority, so senior management has got to be involved in a committed and serious way.  Purchasers and engineers who get “abandoned” by an HQ that doesn’t engage frequently with their Chinese counter-parts are easy targets for competitive negotiating tactics.
7. Always be looking for new counter-parties and new opportunities.
   Expanding your network in China means constantly searching for new stakeholders and counter-parties – both within you existing partner’s operation and from new (external) potential partners.  This may be your only long-term source of leverage.  If you have a single counterparty in China then you are perceived as weak and vulnerable.   This is another area where your front-line people can provide valuable input and feedback.
8. Empower your front line.
   Your front line staff needs the ability to build and block.  They must have the power to build relationships and block potentially problematic transactions.  “Divide and conquer” is a favorite technique of Chinese negotiators, and they are quick spot a purchasing manager or salesman who is not getting enough support from the home office.    Your people need the range of motion to build relationships (which may mean breaking from standard operating procedures) and to hit the panic button if they spot a problem that threatens the bottom line.
9. In China, failed negotiations end – successful ones never do.
   Renegotiations are par for course here, and your Chinese counterparties consider it normal.  You have to as well.  You should treat ongoing renegotiations as an opportunity to build and expand relationships – not as an attempt to rip you off.  This is where real guanxi comes from – the give and take that arises from a shifting business environment.  Chinese feel that source of long-term stability in business is strong relationships – not  thick contracts and rigid adherence to out-dated agreements.
10. For the Chinese side technology is the goal, time is the weapon.
    Chinese negotiators often assess the success or failure of a deal by the technology and IP they acquire.   They don’t really care how they get it.  One of the most successful tactics is to manipulate western negotiators with time tactics.  They rush to sign and drag their feet when executing.  The hope is that you will over-deliver  IP to win what you think is a valuable contract, and then throw up so many roadblocks while executing the actual business that you will go away – or go broke- before they have to deliver.

Two parties recently met to discuss a new business venture in China. On one was Bob – an American small business owner looking to expand into China, and the other was Cindy – a Chinese entrepreneur who wants to partner with him.

The first meeting was textbook cross-border business courtship – both sides were chatting about big-picture business plans, impressions about China business and their own personal views and experiences. It was typical of the relationship building session that many American and Chinese expect in the early stages of a partnership negotiation. Bob then did something very smart – and very significant. He said, “So it will be an equal 50-50 partnership between the 2 of us, right?” Cindy answered, “Well, I have family connections in XXXzhou who have guanxi with the local government, and they may want a percentage.” The conversation then resumed course.

2 points make this conversation a very important case study for Americans doing deals in China:

1) The American side broached a substantive business issue without breaking context. It was still light, big-picture and friendly, but the westerner made the decision to discuss REAL business. Furthermore, instead of just making an assumption based on what seemed obvious to him, Bob asked a naïve question about the basics – and then shut up.

Many novice American dealmakers erroneously believe that the early-stage discussions are all lightness and touchy-feely platitudes. Not so. But when Americans talk about business there is a tendency to get overly formalist and ‘lawer-y’. Chinese aren’t squeamish about touching on business terms early as long as it is handled in a light and non-threatening way. They probably won’t make the first move – and they definitely get spooked when things turn adversarial or are couched in legalistic, contractual language. You should talk about real issues, but look for common ground first – you can iron out differences later. Chinese prefer to start with the easy stuff – Americans sometimes like to tackle the big issues early to figure out if it’s worth it to stake in the discussion.

2) The Chinese side brought up a very significant point that may turn out to be a deal-breaker down the line. The local partner is a very real factor. There are important considerations here.

a. A local family member is going to be involved. This is a double-edged sword. The local connections are going to come in handy – in fact, Cindy may view her family connections to be her main contribution to the new partnership. The family relationship, however, is being packaged as a new partner instead of as part of Cindy’s ‘half’ of the business. This weakens Bob’s position and opens the door for corruption, mission-creep and a variety of other worst-practices. It shouldn’t kill the conversation (necessarily), but likewise – Bob shouldn’t disregard this casual statement just because he doesn’t like or understand it. This is part of the deal, and the Chinese side was honest and forthright about it. Now it is up to Bob to manage it – before it turns into a crisis.

b. This is new deal-point – and a significant one. Bob has gone from being one of two partners to being a minority shareholder. He has to digest this new information, incorporate it into a new business plan and negotiate accordingly.

Americans tend to view a family relationship as a negative to be avoided – a cost to the new business. It is the Chinese side’s responsibility – and should come out of their pocket. Chinese view the family connection as a rare commodity that they are contributing to the venture – one that will benefit the entire organization and should be borne by all beneficiaries equally.

Whichever view you take, it is ‘best practices’ to deal with this issue early. If it turns out that after meeting number 3 or 4 that the new silent partner issue ends up scuttling the deal, then no one is out much and we can walk away as friends. If they don’t deal with the issue until much later – as is the case in many US-China deals – then the costs in terms of money, time, resources and opportunity skyrockets.

c. This challenge may be best addressed with a creative business structure. American lawyers would handle this with contractual clauses and penalties – but this is like daring the Chinese side to find a way to outwit you. The best way to handle the silent partner may be structure this as a multi-phase deal, with the silent partner playing a role in only the first part. Or the answer may be a sunset clause, or Bob may want the rights to set up an independent operation in different city, or some other new option. The existence of a third partner is a structural issue – not a contractual one. When Americans try to solve guanxi problems with contractual clauses, trouble usually ensues.

The point is to ‘surface’ the key issues early – and to recognize potential deal-breakers before you have too much skin in the game. The Chinese side’s position that guanxi isn’t free and the western side is expected to pay for it. Now it is the westerner’s turn to make the decision. He can A) accept the deal structure the way it is and negotiate about the cost and terms of the new partner, B) compromise by adjusting or limiting the role of the new partner, or C) back out of the deal. Unfortunately, for many American negotiators in China there is also an F) option – ignore the real cost of the guanxi relationship until it threatens the partnership and undermines the business.

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After our last discussion of foreigners and relationships in China, you may be tempted to dismiss ‘guanxi‘ as another word for ‘corruption’ – or at least a quick road to disaster. Unfortunately, nothing involving international business in China is ever quite so black & white. While it is a bad idea for westerners to rely too much on guanxi, remember that your Chinese partner or counter-party may be a firm believer in it.

When the literature talks about ‘cultural barriers’ between China and the West, be aware that the key differences are not “fork & knife vs. chop sticks” superficialities – they are deep-seated core beliefs like guanxi vs. due diligence. When you tell your Chinese associate that guanxi is an archaic custom, it is like HIM telling YOU that checking references and analyzing financial reports are silly wastes of time.
If you plan on working with Chinese, the issue of guanxi is certainly going to come up.

Here are 10 rules for dealing with Chinese partners who believe in guanxi:

Caveat #1: Do not be overly dismissive.
Guanxi may or may not have real benefits – but what really matters is that the Chinese people you are speaking to genuinely believe in it. When I am doing business with Chinese counter-parties who are too quick to disregard my advice about performing due-diligence or market research, it sends me the wrong messages about their general competence and respect for American methods. Likewise, when you dismiss their advice about guanxi, you may be correct – but in the wrong way. You may mean, “I don’t want to engage in corruption or shortcuts” but they may hear “I don’t understand Chinese methods and don’t have much respect for your opinion”. The first conversation you have with a Chinese counter-party about guanxi is the perfect time to discuss the approval process of your deal or business. It is also an appropriate time to take the moral and ethical temperature of your counter-party, industry, and general practices in your new business.

Caveat #2: Chinese really believe, not only in guanxi, but also in its uniquely Chinese characteristics.
The only thing worse than saying ‘guanxi doesn’t exist’ is to say, ‘every business culture has some form of networking and relationship building’. Many Chinese – particularly those not experienced with international business – find this insulting. (A later post will deal with the issue of Face – not to be confused with western notions of pride, status or reputation). Westerners tend to look for common ground, but Chinese may consider it a swipe at the integrity of the Chinese culture.

Caveat #3: If your new partner’s only contribution is guanxi connections, you had best be on your guard.
Chinese consultants and counter-parties know that you have read that guanxi is vital to business in China. In other words, your counter-parties may believe that building guanxi is a short-term goal of yours. When I was in Beijing in the early 90s, it was a sure bet that every foreigner gathering or junket had at least one guy who offered to connect you with the right people. In those days, it was a real job because doing business in China was so opaque and convoluted. Nowadays the rules are much more straightforward – for good or ill. You should not need special connections to get most approvals – and if you do then you should take it as an indicator that your business plan has flaws. In 2010 China, most experienced Chinese managers should either have the necessary connections or know how to develop them as needed.

Caveat #4: Guanxi is a rental, not a purchase.
Guanxi does not transfer. When your guanxi guy goes, so does the relationship.
As ChinaLawBlog points out, your guanxi relationship is with a person at the organization — not the organization itself. When your special relationship at the ministry, regulator, supplier or distributor moves on you have to start all over.

Caveat #5: Guanxi cuts both ways.
It places obligations upon you – and you do not always control how you will pay back a guanxi debt. Examples have included pressure to accept low quality production, delays, inferior materials, IP theft, material theft, corruption, nepotism, etc. Remember – guanxi is a series of favors, and you have to give to get. The problem is that you have only the most limited control over what you will be asked to do, and how it will be valued. That is the side of guanxi that people do not talk about with Westerners much, but Chinese understand well.

Caveat #6: It is not the same as corruption, but it can be close.
The regulatory standards are higher for Westerners in China – both among Mainland bureaucrats and those back home. Even the appearance of corruption can come back to haunt Western dealmakers – and it is definitely your responsibility to monitor and control the activities of your employees, partners and agents. ‘Business as usual’ for local Chinese is too weak a standard for foreigners. You need to have rule & procedures and prepare for different contingencies. If a Chinese businessperson appeared in a US court and said, “but someone I just met told me that everybody ignores that local zoning regulation”, he might appear dishonest, arrogant and/or clueless – but extremely liable. Well, you’ll come off the same in a Chinese court when your new guanxi connection goes awry.

Caveat #7: Foreigners cannot really build it up the same way that locals do.
Consider the difference between a business proposal from your high-school buddy or college roommate and a Chinese businessperson that you’ve had dinner with a few times. Both constitute a connection – but your relationship with your former roommate has completely different characteristics. You can be more honest with him about his ideas, make suggestions and possess a deeper understanding than you ever would with the Chinese counter-party. The danger isn’t necessarily that your Chinese associate will try to cheat you – he may kill you by being overly polite and sensitive to your feelings.

Caveat #8: Distinguish between everyday guanxi and ‘special relationships’.
If your counter-party’s guanxi is rooted in familiarity with ‘standard operating procedure’ at the ministries, regulators, supply chain and distribution channels -then the situation is fine. It is a normal business competence that weighs in his favor – but is more of a basic requirement than a game-changer. But take note of ‘special relationships’ – like a close relative of an official or executive at a customer or supplier. These are the entanglements that get messy quickly.

Caveat #9: China has laws now.
Chinese have a very high regard for bureaucracy, procedures and regulations. Guanxi is not as important as it once was, and low-level transactions and routine approvals should not require special connections. In fact, circumventing basic rules can cause BIG problems later on. Remember that it is much easier for foreigners to get money into China than getting it out. It is easy to find fixers who can speed your investment through – but getting the licenses and permissions to actually sell goods, repatriate profits and move money may be a different story.

Caveat #10: Guanxi may be able open some doors – but it can also close and lock them.
Strangers are not generally ripping off westerners who lose investment, IP and assets in China usually. 9 times out of 10, the very people assured them about the power of their guanxi connections that turn around and use them to lock out the westerner once the assets are transferred.

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China Law Blog recently posted on the basics of how to do business in China , and raised the issue of ‘guanxi’ relationships. It is a controversial point among the international community in China. Dan Harris and Steve Dickinson of CLB are not believers – warning that it doesn’t help all that much and may cause problems. On the other hand, every conversation I have with a Mainlander eventually focuses on the power and importance of their network of guanxi connections.

What’s really going on here?
Let’s start with a quick definition. ‘Guanxi’ literally translates as ‘connection’ though it is often used to mean ‘relationship’ and ‘network’. When Mainlanders use the phrase among themselves, they are referring to a fluid network of cordial business obligations and debts – sort of an institutionalized version of ‘you scratch my back, I’ll scratch yours’. A person with a wide range of well-placed relationships, all of whom acknowledge their indebtedness and willingness to reciprocate, is clearly in a very advantageous position. Conversely, a person who lacks connections and is not in a position to do favors for new counter-parties is in a relatively weak situation. The worst position of all is one who owes valuable favors to a wide range of highly placed connections.

When Chinese associates talk to Westerners about guanxi, it takes on a slightly different meaning. Here the emphasis is on the ability to influence members of his network – to ‘make things happen’ and expedite profitable transactions or bureaucratic approvals. A common Chinese business aphorism – “Everything is possible but nothing is simple” – underscores the importance of guanxi in the Mainland. For a long time, guanxi was synonymous with “local knowledge” – but carried a strong implication of corruption and under-the-table inducements.

When the China economy was first opening to the world (up until the mid 2000’s), commercial laws were still haphazard, contradictory and opaque. In such a chaotic environment, a local ‘fixer’ was often required to prod bureaucrats and state managers to make a decision – and a certain amount of persuasion helped to ensure that the decision was a favorable one. There was a time when no one – Westerner, Asian, Overseas Chinese or Mainlander – disputed the need for guanxi. The only issue was locating someone who really had the connections to facilitate basic business transactions. China’s central government, however, was busily constructing what it hoped would be a strong legal system and a (relatively) transparent regulatory framework – and objected to the close connection between guanxi and corruption, bribery & misuse of state assets.

That is why Westerners in China often find themselves caught between two opposing views on the guanxi issue. On the one hand, locals still maintain it is the only way to get things done in Mainland China – and that without it foreigners will never overcome their status as rich but clueless outsiders. However, a growing community of experienced, knowledgeable international experts maintains that guanxi is an ineffective, expensive and ultimately counter-productive throwback to the ‘bad old days’ of a lawless, chaotic China where personal influence trumped laws and regulations.

So which view represents the reality in China? Is guanxi a real force that all business-people in China need to have, or is it a shortcut to scammers, cheats and regulatory hot water?

The Truth About Guanxi
Guanxi is extremely useful and powerful – as an information network. A broad, active web of plugged-in connections can alert you to people who are willing and able to help – but who have no idea how to find you and no other way of being found by you. A good guanxi network is like a combination road map and address book – that will enable help you engage exactly the right resource or decision maker. As a research tool, a good guanxi network is extremely effective and powerful.

As a skeleton key that will magically unlock doors, it is problematic. Yes, guanxi can open doors, but there are three problems: 1 – it won’t necessarily open the door you need unlocked. 2- When all you have is a key, all problems look like locked doors. You may end up rewriting your business plan because your guanxi connection leads you to a single type of resource or decision maker. And 3 – that door may lock behind you. Westerners who encounter problems in China are rarely suffering losses at the hands of complete strangers. The people gutting you of your investment, assets and IP are the very same ones who lured you in with promises of powerful connections and influential friends.

In short, guanxi can play a role in your Chinese negotiating, but you will have to monitor and decide what that role will be. Guanxi networks are great as information and networking resources. However, if you plan on using connections to open doors – or knock down walls – then you are going to encounter some major difficulties down the line. When you use guanxi as a shortcut in China commerce, the destination is usually business failure.

Part II: Guanxi for Foreigners: 10 Caveats

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If you are dealing with an honest, competent guy then due diligence isn’t particularly difficult. He has references, ongoing partnerships and relationships. But it’s up to you to lay down the right ground-work and then ask the right questions. Those annoying banquets and drawn-out lunches aren’t just for show – the Chinese are performing their due diligence on you. You should respond in kind – volunteering background information and sketching out general plans and priorities. They are getting to know you. Yeah, they are interested in how many kids you have – but what they really want to know is how stable and trustworthy you are as a partner. It’s ok for you to ask similar questions – about their plans for growth, expansion and client relationships. Keep it general and comfortable at the early stages – but don’t act like a buffoon talking ONLY about how developed Shanghai is or how much you enjoy Chinese food. They’re working, and you should be too.

If you are dealing with a dishonest, unreliable partner, due diligence is extremely easy. He won’t be able to provide a single relevant reference, and your job should be done. Walk away and don’t look back. It really is that simple.

Chinese partners who are reliable and solid today will be just as solid next year. The sketchy guy who flatters you but tries hoodwinking you over nickel & dime issues today is going to be just as sketchy next year.

Western bedtime stories talk about a frog that turns into a prince when shown a little trust and respect. The Chinese don’t have that story – and there’s a good reason.

Younger MBAs, Europeans and Asians prefer a stakeholder perspective. Stakeholders include everyone and anyone who can affect a decision – or be affected by it. It’s softer, messier, and much, much more complex.

In Chinese deal-making following the money just won’t work. Too much is hidden, unspoken, contextual and driven by non-economic factors. In many cases, you’ll never see the money trail because it may be irrelevant, hidden, non-existent – or may start AFTER you have transferred your funds. If you plan on negotiating successfully in China, you’d best start mastering the messy art of stakeholder analysis.

A stakeholder model is more applicable in China than in the US, but some American’s are still blundering around vainly searching for the key decision maker. In China dense, opaque organizational structures have evolved to make sure that this kind of tactic is unsuccessful. Overly aggressive Americans often find themselves negotiating with people claiming to be the true decision-maker – while the real power is hidden far away.

Mapping Chinese Stakeholders
A simple but powerful mapping technique for understanding stakeholder influence in Chinese negotiation is to set POWER along a horizontal X axis and ENGAGEMENT along the vertical Y axis. This is particularly useful in China, where your counter-parties may intentionally obscure or misrepresent the decision-making process.

Power is simple enough. In a deal-making context, half the ‘power’ story can be understood as the ability to make things happen. In a highly bureaucratic environment like China, regulatory approval often translates into power. The central bureaucracy is the stakeholder of last resort, and very little of significance can occur without the government’s knowledge and approval.

The power of negative thinking.
In China, the other side of the coin is Negative Power – the ability to STOP things from happening. Often the most potent negotiators are the ones that have the power to block, slow or alter the course of regulatory approval. Chinese negotiations are characterized by AVOIDANCE tactics to a degree unmatched in the US. Saying YES is often far more politically sensitive and riskier than saying NOT At This Time. The more frustrated you become with the delays, the more reluctant the counter-party is to take on the risk of approving your request.

Engagement is a big deal in China.
Often overlooked by American negotiators in China, discovering the true decision makers – and then getting them to participate in the process – is a huge challenge. If you are dealing with a purely commercial counter-party and negotiating about standard deal-terms like price, timetables and quality, you may find that you are only addressing half of the real issue. American negotiators in China have to devote time, energy and bandwidth to uncover the entire deal-making process and identify all of the stakeholders who need to buy in. If you are ignoring the bureaucracy until the last minute, you will find that your position is incredibly weak in the second, REAL negotiation.

3 Classes of Stakeholders in China.

Government bureaucracy.
This is the stakeholder of last resort. They are always there but rarely visible.

In general, the bureaucracy occupies the High-Power, Low-Engagement quadrant. Chinese bureaucrats are Avoiders
simply because so much of the power structure is stacked in their favor that they have very little to gain from direct involvement. One of the toughest negotiations in China is just identifying who the real decision makers are and how you can exert influence.

Bureaucratic avoidance is as potent as it is unfamiliar to most Americans who are accustomed to head-on horse-trade type negotiations. Pressure tactics are almost always counter-productive with Chinese bureaucrats. This is why so many Americans end up with signed contracts that can’t be executed – or worse, are executed poorly or partially.

Bureaucrats tend to avoid direct negotiation with foreigners. You’ll see these guys in their office or ministry, and the conversation is largely confined to paperwork and red tape. All of the high level wheeling-dealing takes place somewhere else – with someone else. Unless your Mandarin is excellent and you have already built up a great deal of credibility with the government, you probably won’t ever meet with one of these people on your own. You may however find yourself in a banquet or board room situation, but all of the serious stuff will happen in much more discreet settings. To negotiate with the Chinese bureaucracy, you will need someone with the right connections.

Connectors-
The second class of Chinese stakeholder includes consultants, partners, suppliers or service providers who negotiate on your behalf with the bureaucracy. Sometimes you hire these people directly and sometimes they are your counter-party who is responsible for regulatory approval.

These guys are highly engaged — in many cases they are actively looking for you. What you have to determine is A) their true level of power and B) whether they are a positive or negative force for you.

Connectors manage the relationship with the bureaucracy — and they almost always do a much better job than you could. The good news is that the right partner or agent can easily accomplish things that you never could. The bad news is that they’ve attained and maintained these relationships due to their utility to bureaucrats — not to the client. Often their real negotiation centers on strengthening their relationship with important officials – using your resources as currency.

Remember – in China many officials are given quotas and policy goals that run counter to your own. Many of those Westerner’s who lost their shirts in China due to misunderstandings, regulatory delays or failed approvals were really just cases of unsuspecting westerners trusting the wrong partner and ending up someone else’s guanxi payment.

Outsiders.
Foreigners, technical experts and multinationals make up this group. Highly engaged but usually fairly low power. The good news is that they can’t make bad things happen. The bad news is that they can’t make good things happen — except for special situations. Those situations include goal-setting, research, knowledge, staffing and due diligence — so this crew has definite uses. These guys are reliable in terms of safeguarding your IP and will have the most usable analysis of Chinese economic & market conditions. Their utility is that the bureaucracy has relatively little influence over them, so they will be loyal to your interests. Good for knowledge, niches and specific transactions, these outsiders rarely have the ability to complete a deal cycle.

Outside experts are most useful early in the process before you have made the catastrophic mistakes that are so common to this region.

Know what you need and who can deliver.
You’ll probably have to deal with all three in one form or another. Just makes sure that you know who is who. The bureaucrats are easiest to spot — they are unambiguously official. Connectors bridge the divide between you and the bureaucracy – but you have to have very clear goals and understand the lay of the land to make the right choices and ask for the right variables at the right price. Your process should begin with honest, competent research, planning and selection of the right connectors & counter-parties – which almost always requires a reliable outsider.

The danger for Westerners is in trusting a connector who is working against your interests. This is a leading cause of problems in China – and the best preventative is to locate loyal outsiders who can help you set appropriate goals and know how to perform due-diligence on the agents and counter-parties you will need to be successful in China. Many Americans in China end up relying on their highly competitive supplier or partner to negotiate on their behalf with the bureaucracy. It’s a huge mistake.

Outside consultants first, then motivated connectors and finally the bureaucrats. If you can find the right people in the right sequence, then you might stand a chance of negotiating successful in China.

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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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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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All his points are interesting, but novices to the China negotiating arena need to pay attention to Paul’s last point:

The dumb money has already been made in China. It’s time to rebalance your portfolio to make smart money. It can be done, but it won’t be easy. Think smart, work smart, and invest for 15 years. By that time, you should be able to retire.

This illustrates the “Dumb Money” paradox that seems to find its way into many negotiating positions in China (and where-ever else greedy businessmen dream). The notion is that the counter-party is rich enough to afford to buy your offering, but too dumb to see the the unfavorable points in the deal you are proposing.  

Dumb Money is hard to find in time

The fact is that the elusive “dumb rich” are extremely hard to find.  If they are really dumb, then they won’t be rich for long and you are probably already too late.  If they are smart enough to hire a good lawyer and financial advisor, then you are negotiating with a counter-party that will quickly learn about the flaws in your proposal.  (If they hire a bad lawyer and advisor, then your role is already filled.  Sorry.)  When you craft that highly aggressive proposal, you are really betting on slipping through the rapidly-closing window of opportunity that your counter-party has just come into money but hasn’t yet found decent advisors. Good luck with that.

Timing is better then skill

So where did the myth of “dumb money” come from, and what does it mean to the China negotiator?  In times of shifting economies and government policy, some incredibly lucrative opportunities open up to those with connections and/or speed & capital.  When China was still opening up, you could have scored a fortune making sandwiches for expats or teaching Chinese graduates how to interview for entry-level jobs at multinational corporations.  Anything you could push through customs and get onto a retail shelf seemed to sell — as long as it was foreign.  

But it wasn’t ‘dumb money’ buying — it was ‘dumb money’ selling.  The entrepreneurs and investors cleaning up after a structural shift probably know a lot more about the process of capitalizing on new demand (the guanxi guys with connections) or the process of putting capital at risk (VCs and investors) than about their product and market.  From the outside it seemed that a bunch of ‘dumb’ businessmen were cleaning up on childishly simplistic deals (English schools, western restaurants, gray-market iPods). Arbitrage and jumping into market niches always looks like ‘dumb money’, but unless you are among the first to capitalize on a market inefficiency then you are likely to get shut out.  

And THAT is the problem facing novice negotiators in China.  They are coming into a market where the dumb buyers have either been killed off or have already grown significantly more sophisticated.  China is no longer a risky, unexplored market that is starved for international goods and services.  If you are crafting a proposal for a Chinese counter-party, err on the conservative side.  Don’t set your opening position so high that your deal looks silly to a knowledgeable person.  Take the time to research the China market and figure out where the REAL opportunity is.   Chinese buyers are no longer entranced by Western brands and processes.  

There is still plenty of opportunity for expats in China, but only if you take the time to learn about market conditions.  If your proposals are based on your counter-party being rich enough to buy but too dumb to spot the disadvantages, then you may be in for a few surprises when negotiating in China.