Shifts in the power balance have to be seen through the filter of your counter-party’s culture and experience. You might think that moving money or assets into China means that you have more power in the relationship with your local partner – but to him this may signal the beginning of the end – his last chance to get paid before the finale. You see your new venture as something stable and growing – he may see it as one component of a larger, more fluid set of opportunities. He’s learned a new product or process from you, and profited a bit in the process. Staying put with you would be lazy and slothful – what he should be doing is putting this new expertise to work by developing his own operation. He’s already got the network and the channels – all he needed with process training.

Chinese tactics
After a balance of power shift, the tactics employed by your Chinese counter-party will become more aggressive and goal-oriented. In the pre-BOPS negotiation your counter-party was learning and waiting for you to put the pieces together. But now that your business is starting operations there is little more to be learned. It’s about cash now – and there are a few different approaches Chinese negotiators can employ after the BOPS occurs..

A BOPS in your favor.
Scenarios: You have developed expertise, contacts or resources of your own in China.
Key variables: Exclusivity, Territory, Pay-out
Tactics: Putting down roots and digging in for the long haul.
If you are becoming more successful and independent, your local counter-parties may see this as an increase in your power and influence in the relationship. From here on in, they will be looking to maximize money, power and influence within their own network (usually involving you buying, hiring or spending with their friends). The good news is that they aren’t going anywhere. The bad news is that it is going to become more expensive to maintain the relationship.

A BOPS in their favor.
Scenario A: You have brought in money, registered, set up the business and started operations. Now he wants out.
Variables: IP, trademark, designs, customer lists, quality, promotional material, etc
Tactics: Cut-throat quick-kills and fast exits.
You’ll be wondering why they are giving up a deal that is doubling in value for them – it’s because your share is going up even faster. They think they can do the same business elsewhere without having to give you the lions’ share of the profits. Their power and influence is at its highest point the moment you successfully start operations. They may feel that their best chances of capitalizing on your achievements don’t include you.

Scenario B: You have set up the business – and now he wants more:
Variables: Money, hiring & buying (from their network), quality.
Tactics: Spend your money to prop up their local network.
In this situation, they see you as the deep-pocketed Daddy Warbucks type who always has cash to throw around. They become resentful that you are exploitative and manipulative, and start upping fees and charges. The size of your operation – and staff – begins to increase rapidly. You are spending more – and facing increasingly aggressive counter-parties – but not seeing an improvement in terms of quality or service.

Next: Part III: BOPS and counter-tactics

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But reaching the signing ceremony is getting tougher and tougher. Chinese deals almost always involve an element of policy, and China’s bureaucracy requires that international negotiators adopt a new set of rules.

What do the heavy-lifters of international negotiation have to say about reaching the contract-signing ceremony milestone in China?

1) Persistent.
They were all told it was impossible — that there was no way, no how, no chance. Persistence in China is about long term patience and composure – not threats or horse-trading. I remember the first time I put this lesson to work – long, long ago when the Portman Shangri La was the only hotel that international business people stayed in and one’s travel options were much more limited than they are today. An uncooperative concierge told me that the flight I wanted was booked and that there was nothing he could do. Instead of getting confrontational, I got comfortable. I took off my jacket and hung it on the back of the chair, put my bag down and settled in for a long conversation. As soon as he saw that I was neither leaving nor providing the adrenaline rush of a good barbarian throw-down, he quickly started supplying me with other options. I got to Beijing in time – which wouldn’t have happened if I had been issuing ultimatums or complaining. Persistence in China means becoming a very dull but not unpleasant part of your counter-party’s environment. If you go away when they tell you ‘no chance’ you’ll end up with nothing – but if you try too hard the discussion will quickly escalate into an emotional dispute. Your Chinese counter-part will enjoy a few moments of high-energy exchange, and then quietly and permanently check you off his ‘to do’ list. Westerners who get emotional, desperate or nasty are not deemed appropriate long term partners, and the initial ‘mei you ban fa’ – there’s nothing we can do’ is simply Chinese due diligence. If you don’t have the sense or smarts to try again, then you probably don’t have the resolve and maturity to be a serious business collaborator.

2) Innovative.
When Westerners describe innovation, they are usually talking about product innovation – the creation of new businesses, products and services to meet existing challenges. Chinese aren’t great at innovating products or brands, but they are masters at process innovation – figuring out new ways of getting jobs done. When Westerners view the Chinese government, we tend to see a single monolithic entity. We assume that the Ministry of Issue A has sole responsibility for Issue A and no other responsibilities. So when the representative of the Ministry says, ‘no’ our only hope is to get him to change that to a ‘yes’. Chinese dealmakers take a different approach. They are constantly looking for new contacts and revisiting overlooked branches of their network to find channels of access, potential supporters and previously unknown relationships. Competent Western deal-makers pursue the same track, believing that every time a door gets slammed shut a window is nudged open. By amassing a wide range of indirect contacts, the negotiator can eventually build a powerful network that maintains the kind of gentle but constant pressure that works on Chinese decision-makers. The successful Western negotiator in China never passes up an opportunity to add to his quiver of contacts and influencers, even if they don’t seem too useful at the moment.

3) Attention to process.
You can’t pressure the Chinese bureaucracy, but you can be ready, willing and able to move when the policy environment shifts in your favor. Winners in China play many angles in a battle of careful inches, and avoid bold dramatics that force a quick answer. The Westerners who succeed in negotiations with the Chinese conduct a concerted, serious, dignified effort that is consistent over a long period of time. When the right circumstances arise, these Westerners are aware of the situation and prepared to act quickly. Americans tend to be poor at the process element of the Chinese negotiation, while Europeans with their history of coalitions and network-building are a bit more astute. The Chinese process of deal-making looks chaotic and irrational to the newcomer, but there is a logic and order to it that remains strong even during times of great structural stress. Trying to take shortcuts, forcing decisions or aggressively taking control of the process will almost always end badly. You can’t change the Chinese regulatory and political environment, but you can monitor it and prepare in advance for the window of opportunity whenever it may arise.

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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.

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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Deals in China can go off the rails easily and early.  The key to success in China is to walk away from bad deals and find good ones.  I know – that sounds simple.  The fact is that many newcomers to China business have trouble spotting the red flags and danger zones that indicate a deal is about to fall apart.  The result is that they hang in there and keep negotiating with inappropriate counter-parties until they und up with a bad compromise and a disastrous deal.

China deals can grow out of control in a hurry

One thing that you’ll find in China is that deals that start out very simple get incredibly complex very fast.  It’s not accident.  Your counter-party may use complicated structures and drawn out timetables to insert advantageous terms or conditions that get lost in the shuffle.

Here are 10 warning signs that a deal is about to get too complicated too fast.

1. Terms that will change at unspecified times or circumstances in the future.  This is particularly true of price, cost, product line or technology.  As in “we’ll sell you the existing technology at price X, and when the new product line is ready we’ll lower the price to Y”.   May also include:   “when we move to the new facility…”, “when we get the approval from the government…”, “when we develop the new product…”, “when we hire the new engineer…”, “when we tie up with our sister company…”  It’s not that they’re necessarily lying – but you can grow old waiting for the conditions to become reality.
    
2. New technology or connections to be introduced later – but priced now.  Many Chinese companies will assure you that they have the ability to develop new products or technologies in the near future that will meet the needs you have now.  Your big concern is that the first iteration of new technology won’t work – but will satisfy the terms of the contract.  You other concern is that they never hold up their end at all.
    
3. Asymmetrical payouts.  You pay now – they deliver at some unspecified time in the future.  This one was one of the big problems with all of those JV horror stories we used to read about. 
    
4. Open ended liabilities or unsettled valuations.  Every deal you do should have very specific valuations and timetables.  You wouldn’t sign a contract with blanks – don’t do a deal until you’ve clarified all the terms.   
     
5. Best effort sales / marketing.  Another big red flag in China.  If you are investing or supplying technology and relying on your local counter-party to market your product, make sure that they have a solid network, good references and specific experience in your industry.  Make sure you have a way out and a Plan B.  Chinese distributors are notoriously sketchy when it comes to fulfilling best-effort sales agreements.
     
6. Anything involving connections, relationships or trust.  If they say “I have guanxi” you say “I have to go”.  Seriously. 
     
7. Mysterious new players enter – particularly decision makers – and change the terms.  This can happen to anyone in any country, but in China it means you are starting over from scratch.  This is a common tactic here, and it doesn’t bode well for your partnership.  If you can’t meet the people you are really negotiating with then it is bound to end badly.  This may be a deal-killer, so be careful about proceeding.
     
8. Deals escalate into long-term, multi-transaction JVs too quickly.  If you want to buy or sell something, then you can start with a few test orders and develop the relationship over time.  Don’t believe any noise about Chinese only working with long-term relationships.  Reputable Chinese counter-parties work with test orders and short-term deals all the time.  
     
9. They want you to do anything without a contract.  Usually this takes the form “the owner/accountant/treasurer is away on vacation and we can’t stamp the contract until he’s back but if we don’t get the deposit now we won’t be able to make the deadline…”  No.  Just plain NO.
     
10. They tell you that something is too complicated to explain.  They’re right.  Walk away now.