American cultural quirks that Chinese have to put up with:

• First and foremost – we are the only negotiating culture that leads with the lawyers. Europeans consider negotiation to be an exercise in diplomacy while Asians consider it the province of paternalistic company leaders to build lasting relationships. American negotiators – even when they are salesmen or purchasing managers – are fixated on contracts and legal institutions (like courts and regulations). Whereas traditional Asian negotiators feel that relationships are the key to business and that contracts are merely written records of agreements between individuals, Americans put more weight on the document than on the human bonds between business leaders.

• We are the only negotiating culture that believes that liability can be assigned in advance through a contract. This is one of the many aspects of international negotiation that has become “normal”, but it still strikes traditional Asian negotiators as crazy that Americans consider contracts binding even as the market environment changes. Asian negotiators in general, and Chinese in particular, feel that as the external situation evolves, so must a business relationship. Many Chinese partners have been bewildered and disappointed when their American partner stated waving a piece of paper in their face instead of responding fairly and maturely to new market realities.

• Americans believe that negotiations end. To Chinese, the negotiation is part-and-parcel of the business relationship. As long as the counterparties are still engaged in business, the negotiation is supposed to continue. What’s the point of taking the time to build a connection if you aren’t going to grow the relationship through continuous give and take?

• Americans want to decide everything in advance and put procedures ahead of human decisions. Chinese (and most other Asian) negotiators understand that conflict and differences of opinion are inevitable, and their business agreements usually assume that the leaders or concerned parties from each side will work things out informally. American contracts, with their penalty clauses and rigid requirements, are not only insulting and arbitrary, but seem designed to undermine any kind of positive relationship.

• Americans love deadlines, timetables and schedules, even when there is no business rationale for them. They can be arbitrary and illogical.

• Most disturbing of all, American negotiators are adversarial and rude. We insist on running everything and taking control of situations that we don’t understand. We are famous for coming to China and trying to sell inappropriate products or services at ridiculous prices. Our technology and designs are nice enough, but we expect people to pay over and over for the same thing – even after their people have figured out how to make it themselves.

I’m not proposing that we give up our way of doing things – and I certainly understand the value of contracts and compliance with regulatory codes. It’s important, however, to acknowledge that the American way of negotiating is not the only way, and the Chinese person across from you is struggling just as hard as you are to successfully manage the yawning gap between your cultures.

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This series of posts on Chinese negotiation conflict has taken care to avoid the word “resolution” , because more often than not Westerners and Chinese have a very different idea of what the word means.  Americans, with our bias towards justice and legal solutions, like to dig out the facts, determine who was at fault and resolve the situation with a settlement or penalty.  It’s all very public, final and transparent.   While American businessmen view a court of law as an arena where warriors slay or get slain, Chinese tend to see them more as sandboxes where spoiled children throw unseemly tantrums.

The Chinese idea of resolution is more quiet, subtle and passive.  Parties to a dispute are expected to move forward without complaint or fuss.  In many cases a third party exerts influence on one or both parties to the dispute.  Other times, the more powerful of the two will appeal, either directly or not, to the other side’s sense of pragmatism or self-interest.  Disputes are handled quietly, with an eye toward expedience and continuity.  The interests of the entire group outweigh the needs of a single participant, regardless of how worthy his claim might be.  Face must be protected at all times.  No blame is assigned, no penalties assessed – compensation will come in the form of favorable terms in a future transaction.  While the Chinese often refer to this mode of conflict resolution as “harmony”, to Americans it looks an awful lot like “surrender”.   In a business environment characterized by unwritten rules, conflicting regulations, nepotism, cronyism and corruption, the Chinese style of dispute resolution is seen as yet another example of inequitable treatment facing foreigners  – not part of a serious business solution.

The New Resolution

We can see the outlines of a new type of conflict resolution emerging between western and Chinese partners.  This is a hybrid approach to managing conflict that experienced negotiators from both Western and Chinese camps have naturally developed over times.  It serves the Western interest of insuring that the source of the dispute is identified, corrected and won’t repeat.  It also serves the Chinese notion of preserving face and strengthening the business relationship.

• Problems get diagnosed without assignment of blame or fault.
• Forward-looking solutions that balance out positions in subsequent transactions
• Ongoing negotiation about new procedures and best practices
• Increased communication and joint consultation about sensitive issues that are the source of conflict

Should you stay or should you go?

Some Westerners will deny that this approach to conflict resolution is feasible for their situation.  From their perspective, the Chinese partner may have no interest or plan to resolve the conflict at all, let alone equitably and fairly.  The underlying problem here is one of partner selection – not cross-culture conflict management.

When you are involved in business conflict in China, your only real choice is whether or not you continue this relationship.  If you have not laid down a solid foundation or one of the interested parties doesn’t trust the other, then there is really nothing to save.  This sounds simplistic, but all too many western negotiators continue dealing with Chinese counter-parties they don’t trust for far too long.  Maybe they feel that they can’t do any better or that they have no choice – maybe they think the situation will improve by itself over time.   But continuing to do business with a Chinese partner you don’t trust is lose-lose negotiation at its simplest.  In the West contracts, regulations and courts offer you a measure of protection.  The situation in China is improving, but the glue that binds commercial agreements is still personal relationships – not legal contracts.

Resolution vs. Satisfaction

One thing is certain – successful resolution to a Chinese conflict is rarely satisfying or dramatic.  You won’t get your money back.  You won’t get an apology.  No one will admit that they were wrong or that you were right.  The most you can hope for is that the wheels of commerce will turn a little more smoothly and a bit more on track.

In China, court cases and confrontation tend to yield pyrrhic victories – even if you win, it’s rarely worth it.  You might not care about quaint Chinese customs like face, harmony and guanxi – but your counter-party does.  No matter how difficult you found your Chinese partners before a shouting-match or court case, you can be sure that it will be much, much worse afterwards.  Make sure that you have solid alternatives in place before you try to “get satisfaction”  in a Chinese business dispute.  You will probably need it.

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Disagreement is part of normal  business.  At its best, it can take the form of an honest exchange of ideas and opinions that leads to constructive solutions and a closer relationship.  At its worst, conflict is an express lane to lose-lose outcomes and value destruction.  Western and Chinese take a different approach to conflict, but that doesn’t necessarily mean you should try to suppress disputes and paper over disagreement at all cost.  It does mean, however, that you have to manage Chinese negotiation conflict more deliberately and proactively than you would at home.

In China, conflict avoidance is a function of finding the right partner (or counter-party) ,   conflict mitigation is a matter of preserving mutual trust  , and  conflict management is a result of proper deal structure.

Structuring deals to manage conflict.

If you are an American or European doing business in China, then your Chinese counter-party is going to outgrow you long before you outgrow him.  The Chinese side is actively pursuing the knowledge, technology and skills to run the business without you from the first meeting.      Westerners, on the other hand, are notorious for spending years in China without developing the ability to “go it alone” and operate independently of their Chinese partner.  Western managers call it “delegation” or “specialization”.  Chinese call it dumb.  This situation often presents even the most honest Chinese negotiator with a conundrum — they have to choose between being smart and being honest.  It is a tough choice if they like you and see a profitable future in your partnership.  It’s a good deal simpler for the Chinese side if they think you are trying to cheat or exploit them.   That’s where good deal structure comes in very handy.

Conflict as Exit Strategy – The Lost Face Shuffle

Let’s  role-play for a moment.  You are a Chinese manager or business owner, and you have been doing business with an American partner for 6 months.  Maybe you are manufacturing his product or supplying his raw materials.  Maybe you are distributing his brand in China.  Whatever the deal, you have been doing your best to absorb the technology and processes to run the business on your own, and now you think you know enough to get started.   What do you do in the following scenarios?

1.  Your profit margin is less than 5% – and dropping.  Even though your operating environment is deteriorating due to inflation and regulations, your American partner resists any and all cost adjustments.  The only time you hear from him is when he complains about quality or asks for something special.
2. You are earning 60% of the profits from the JV or partnership, and the American side is actively engaged in new product development, technology upgrades and marketing.

Now, at the start of Month 7, you and your American counter-party have a disagreement about some relatively minor issue.

If you are like most rational, profit-oriented businessmen, you are going to work much harder to keep arrangement #2 intact.  The problem will be dealt with quickly and quietly.  You will be proactive, creative and resourceful about finding a good solution, and your relationship will probably be strengthened by the amicable resolution.

For managers involved in arrangement #1, on the other hand, the disagreement provides a very convenient “last straw”.  You had been looking for a way out of this entanglement ever since you mastered the technology, and now the Americans have provided you with an exit vehicle.  This seemingly minor problem can easily be spun into a face-robbing insult that makes all further interaction impossible.

Just because polite Chinese negotiators don’t like giving a flat “no” doesn’t mean that they accept any situation or offer.   If there is dissatisfaction with deal, then small conflicts will quickly get blown out of proportion.  Good deal structure tends to be much more successful at controlling conflict than contract documents.

Structuring Deals to Manage Conflict

• Plan for success.  American negotiating teams tend to be headed or influenced by lawyers, so they have a bias towards limiting loss and protecting against the downside.  Chinese negotiators still have an engineering bias, which means they are concerned with process and technology.   When Westerners present the Chinese side with thick contracts full of penalty clauses and performance requirements, all the trust that they worked so hard to build tends to go out the window.  As soon as the Chinese side acquires the know-how and technology they need, they’ll try to get out of the partnership.   The Chinese exit strategy of choice is relationship-destroying conflict.
• Watch for timing differences where you pay now, and they perform later.   Avoid deal structures where it makes financial sense to force a conflict after you hand over cash, intellectual property, molds, designs, etc.
• Over-compromise early.  Learn from Mickey Mouse.  When the Disney folks wanted to set up shop in Shanghai, they knew that there was a lot that could go wrong after the deal was signed, so they picked the right partners (Shanghai-based State Owned Enterprises) and gave them a majority stake (roughly 60%) in the project.  That payout gives the Shanghai side of the deal a tremendous incentive to keep the partnership going through thick and thin.
• Walk away in such a way that you can come back.   Letting him know you have alternatives is the single best option you have – but just make sure that if you do walk away you do it with a smile on your face and a harmonious word on your lips.  “Unfortunately it doesn’t look like things will work out for us this time,” is good.  “You are a thief and I am going to sue you into oblivion,” is not.
• Conflict management begins at home.  Internal negotiation is a must if the people coming to China to arrange deals are reporting to bosses back at HQ.   Your own management team may inadvertently spark conflict by trying to apply western best practices to Chinese deals.  Nothing undermines trust faster than being unable to deliver on promises – or springing new terms & requirements on an unsuspecting Chinese partner.

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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.

Old tensions were brushed under the rug
It’s been about 14 months since March 2009 when Wen Jiabao signaled the start of the ‘new relationship’ between China and the US by very publicly fretting about the future of the dollar and Treasuries.   The winter of 2010 saw relations between China and the West sink to their lowest level in decades.   During the few weeks between the Second China-US Strategic and Economic Dialogue (SED) and start of the Shanghai Expo there was a noticeable improvement in top-level relations.   Even the People’s Daily gushed that the world was amazed over sharp turnaround in China-U.S. relations:

The China-U.S. relations entered into a warm spring from a cold winter in less than a year, and previously, it also took almost the same amount of time to drive the ties from summer to winter.

New troubles on the way.
Ironically, it was China’s success at managing the last round of international tension that is feeding into a new, more serious round of conflict.  Leaders like Timothy Geithner who were so expertly ‘handled’ by the Chinese side in Round 1 are now looking like empty-handed suckers whose kowtowing to Beijing yielded nothing.  China’s argument that it could help the world most by keeping its own economy strong is wearing thin as the global economy sputters along while China overheats.  Globalists from Washington to Geneva have very little to show for their patience and diplomacy, and the international trade environment is becoming more hawkish than ever.

Old tensions are spawning new conflicts.  The WTO regulations that helped China pry open foreign markets are now being used by Europeans and Americans to press for increased access to Chinese consumers.  Labor unrest in the factories seems to be focused solely on overseas firms.  China’s whitepaper on the internet has  enshrined censorship and blockages as official policy. Domestic content rules and new trade restrictions are destroying hopes for a level playing field for domestic and international firms.

The economic recovery in the West is moving in fits and starts with persistent unemployment and uneven economic growth.  Main Streets in the US and Europe have grown tired of empty promises.   Chinese managers are facing troubles of their own, as inflation, labor strife and fear of bursting housing bubbles eat up what was left of their margins and threaten the only business models they know.  The Chinese operating environment is becoming expensive, less profitable and far less predictable than at any time in the last decade.   There are fears that a double-dip recession may strike in Europe, the US and China.

Why is this time different?
Where the pre-SED (crash – May 2010) round of tension was primarily a clash of world leaders over macro issues, the new troubles will be much more bottom-up.  If you were negotiating with a Chinese counter-party in the last year you may have noticed that the atmosphere was less cordial than in the times gone by, but your deal-points and goals probably weren’t affected.  Emerging tensions, however, will center on more bottom-line issues.   We all know that Chinese negotiators tend to put more emphasis on relationships.  During times of international harmony, this represents a significant but not necessarily unpleasant challenge for American negotiators. What about during times of rising tension?  How should Americans handle their relationship building?   In a word, ‘cautiously’.  Unlike the first round of trade conflict, this will not be a war of words between elites, but more of a bare-fisted brawl between street fighters.

The game is changing, and it’s up to you to decide whether or not the next phase will benefit you.

Next:  Best Practices for Bad Times.

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Deal with the difficult while yet it is easy;
Deal with the big while yet it is small. )

If you are having difficulty with a Chinese partner or counter-party, ask yourself a simple question – what will happen if you do nothing? There are three possibilities:

A. It will go away by itself if you are patient, friendly and talk over your differences calmly.
B. It will persist at exactly the same level of inconvenience forever, so the work-arounds and compromises you have already made will be sufficient.
C. It will get worse and worse until it ultimately threatens to undermine your business.

In China there’s a strong chance the answer is C. Chinese negotiators aren’t stupid, yet they aren’t particularly innovative. If a tactic works for them once then they will keep doing it. It’s up to you to change the game.

China relationship game-changers.

1. Raise your BATNA (Best Alternative to No Agreement, or no-deal option) by upping your skills, knowledge and abilities.
2. Add a new player to the mix.
3. Capitulate.
4. Walk away slowly.
5. Run away.

Let’s look at these options in a little more detail:

1) Raise your BATNA, or no-deal option.
If you are relying on your Chinese counter-party for basic market and business information well into the negotiation then your currency is probably dropping in his eyes. Hire an assistant, or better yet spring for someone more high-powered, but do something to develop your own flow of reliable industry information. Experienced deal-makers who are based in China consider this advice simplistic, but many overseas negotiators never seem to figure out that they are getting all of their data from a counter-party who has a vested interest in keeping things as confused and opaque as possible.

2) Add a new player to the mix.
Find an alternate counter-party or spread your risk by taking on additional suppliers or marketing channels. Don’t give away exclusivity unless you are absolutely certain you can rely on your partner – and even then its one of the riskiest decisions a Western negotiator can make in China. Once your Chinese counter-party thinks the balance of power has shifted in his favor then the relationship goes into a nose-dive. Local Chinese are always looking for a bigger & better partner – so should you.

3) Capitulate.
Give in. Do it his way. Maybe the Chinese side has a point. Maybe you are better off just giving in. After all, there’s a good chance that the right partner really does know what he’s talking about and you don’t. For the non-China expert, this isn’t always a bad option. Particularly true if your business involves marketing within China.

4) Walk away slowly.
For all their talk of harmony and consensus, Chinese negotiators are basically power-players. They respect strong counter-parties and are opportunistic & cut-throat when dealing with weaklings. If you aren’t ready to walk away, then expect to get taken advantage of. But having a Plan B isn’t enough – you have to know how to deploy this tactic in China. The best way is to be polite – even friendly – and tell your Chinese counter-party, “Well, it looks like we won’t be able to do business this time. Hopefully we’ll meet again under different circumstances. Thanks for all you’ve taught me about doing business here.” Smile and walk away – slowly. In many cases your counter-party will come back with better terms. Even if he doesn’t, you are better off making the move – provided you have already set up an alternative option.

5) Run away.
If your relationship is truly gone to hell, then your best option may be to burn your bridges and get out of there immediately. Some people are simply more valuable as enemies than friends. If your counter-party is actively stealing from you or worse – engaged in illegal or reputation damaging activities – then you are much better off being the one to terminate the relationship. Running away is different from walking away slow, because in this scenario you have no interest in keeping even a pro-forma relationship going.

A final option that may seem counter-intuitive is well suited for some Americans – force a conflict and make them mad. Yes, this is a risky tactic, but when all else fails you may want to try to shift the balance of power back in your favor by provoking the Chinese side. I’m talking about forcing an open conflict in a situation that you feel has gone so far out of control that the status quo in simply untenable. If pushing you around has been working for them and they consider you a weakling, then you’ll never get this deal back on track. If they want a deal with you and you show a little spine, then they’ll find a way to accommodate. Your worst option is playing the role of damaged goods in a relationship a Chinese counter-party doesn’t value.

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But they are.

Contract
Americans see a contract as an independent entity – external from the two counterparties. Once signed and executed, the contract becomes another party in the deal – a neutral, binding, legally significant document. It becomes both the originator of the deal and the arbitrator of all disputes. Chinese view a contract as a record of a meeting of the minds between two specific individuals at a certain time and place, under specific circumstances. It is certainly useful as a tool towards reaching an understanding – but the actual agreement is between people. From the Chinese perspective – reasonable, honest men do not try to use contract trickery to enforce agreements that are no longer relevant under a new set of conditions. To the American, the contract is the final authority regardless of what has happened since the signing. A very good recipe for business conflict.

Risk
Risk, as used by Americans, encompasses two concepts. It includes a) possibility of loss and b) uncertainty. To Americans, these are two sides of the same coin. To Chinese, these are completely different things with wildly different ramifications. Possibility of loss doesn’t frighten Chinese deal-makers, but uncertainty drives them nuts. Confronted with an unclear or uncertain future, the wise Chinese deal-maker shuts down and waits for further information. When the American side attempts to push him into action, the Chinese side smells trouble, deception and trickery. Conflict and mistrust ensue.

Long Term
Research we’ve done indicates that when Chinese and Americans are involved in a negotiation, there are accusations and recriminations that one side is invariably short sighted, one-off and win lose, while the other is long-term thinking, cooperative win-win. The irony is that there is complete agreement over who is who. I am long term, cooperative and win-win – HE is short term, competitive and win-lose. Both sides saw the other as one-off cut throats. It was one of the few things both Chinese and Western negotiators agreed on. I’m long-term win-win – the other guy is just in it for the quick buck.

Is it truth – or is it Truth?
Truth, Justice – and the American Way. We of the Caucasoid persuasion tend to view Truth as an external, universal constant. It is bigger than we mere mortals – or at least bigger than we Westerners. Asians think that this is nuts. Everything changes. Price levels, supply chain factors, weather conditions – the world is always in flux. Yin and Yang, ups and downs. A man’s word is his bond – or it isn’t – to Americans. A man’s nature is reliable and consistent – or it isn’t – to Chinese. A righteous American feels that the words you said yesterday bind you today. A righteous Chinese feels that your intentions yesterday bind you today. Legalism died in China with Mo Zi – around 390 BC – when he and his book-burning Mohist posse got themselves bitch slapped by Confucius & the Morality Boyz (word to your Father) . For Americans, Legalism started in the Wilderness and was embodied in the US Constitution – and survived until around 2004.

Harmony & Justice.
China isn’t all fluidity and flux. Some things really are bigger than all of us – but it ain’t Truth and it ain’t Justice. It’s Harmony. The Chinese believe that we all gotta get along to go along. Americans like rock-hard Justice – like the kind that judges and courts can dispense. Chinese like soft, eternal Harmony – like that kind that rises from the will of the People. Both are great – but they don’t live in the same house.

Relationship.
Two successful 45 year old salesmen. One is Chinese, one is American. They have exactly the same worldview – a good deal-maker makes use of his network and his product benefits to make win-win transactions. But a 25 year old Chinese and a 25 year old American have completely different notions. That’s the default setting. Chinese start with the deal-making process by building relationships – and wait for the transactions to grow from there. Americans start with the transaction (i.e.: test orders) and the relationship grows from there.

Thoughts, comments, corrections? Share your opinions.

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What do smart westerners in China do differently than newcomers?

1. They are in it to win it, both during the negotiation and in the all-important post deal phase.
Good dealmakers know that a Chinese deal isn’t done until … well, ever. If you have trouble, the dispute can stretch out forever. And if things go well, then you want to hold onto that counter-party forever. Either way, you need a strong on-the-ground presence. Ideally, you are the one building that presence. Plan B is having a China operation in place and making frequent, regularly scheduled trips. Coming back next year – or someday -is a pretty bad option.
Relying on you counter-party to manage your affairs is simply not a viable option.

2. They know that the real problems start AFTER the deal is done.
The Chinese know this as well, and if you don’t then you are gong to put yourself at a severe disadvantage. This means that you have to budget time, bandwidth and resources to manage the post-deal renegotiation. If you plan on screaming into a phone at midnight from NY to fix things, you are just plotting your own destruction. This is how minor issues can turn into major conflicts during a cross-border transaction. If your Chinese counter-party knows that you are showing up in an hour then your situation is going to be pretty high on his list of priorities. Maybe. But if you are emailing or staying up late to phone it in, then there are lots of other things he can be doing with his time and energy.

3) They find a partner to match their deal needs – they don’t find a deal to match the partner they have.
Yeah, I know that opportunities change and you have to be flexible. But you should be coming to China to solve a specific business problem, and you need a partner who can fill in the gaps of your business model – not reinforce your own strengths. A big problem in China is that some newcomers get ‘match-made’ with the wrong partner – and then they use their skills and energy trying to turn his deal into the ‘right one’. Do the due diligence and make sure that your partner has the right level of integrity, competence and organization. If he doesn’t don’t try to force it. Conversely, you have to be the right partner to him. Chinese feel that they can negotiate profitable relationships from the start – no matter how long it takes. Americans are the ones who believe in building trust over time and many small transactions. You take up a long stretch of your Chinese counter-party’s time and energy – and then give him a piddling ‘test order’ when he expects a big deal. This has the potential to make him look bad in front of his people – and makes it seem that you are taking advantage of him. That’s why experienced deal-makers discuss the relationship that they are going to have during those long nights of guanxi-building toasting and singing. Tip: Try to align your expectations early. He may define success completely differently — and may see you as untrustworthy because you don’t trust him.

4) Compensation has to be smart and fair.
Be sensitive to how quickly the balance of power can shift in a cross-border deal. He needs you a lot up until the moment that the funds are injected or the assets are transferred. Once that happens, the whole balance of power shifts – and suddenly you are more valuable as a pissed-off ex-partner than as a satisfied real partner. If you want your Chinese counter-party to have a good reason to trust you and protect your interests then he has to A) want a long term deal and B) have good reason to expect a rising payout.

If you plan on finding a new counter-party or setting up your own independent operation as soon as the business grows by 25%, then he’s looking at a dwindling business — and a new foreign competitor –after showing you the business and working through the hard parts. If you think he’s not going to be able to do that kind of math on his own, you are just wrong. On the other hand, if this guy’s numbers back up the notion that his business with you will be rising by 50% a year for the next few years, then you just may have the beginning of a beautiful partnership. There are only 3 ways to really understand what his goals are: You can guess; you can assume that both of your goals are the same; or you can ask him how he sees the world. The third option is the only one that makes sense to the Old Hands.

5) The environment has to be right.
I don’t care how good you connections are – you are not changing Chinese. Likewise, no matter how skillful or experienced your guy is, he can’t change the GDP level or affect the savings rate. If all the planets align and you have the right partner and the right business model – then you have the potential for a great deal. But if you’re missing something big — or worse — have something wrong, then nothing is gong to come together. Starting up a business in China because you think you’ll lose less money than opening in NY is dumb. You don’t want to be right at the wrong time.

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Ok — breathe. Remember that step – and repeat as necessary. Inhale, exhale. Good. Now you’re ready.

Rule 1 – It’s just business.
It’s not personal, patriotic, nationalistic, racial, or genetic. It’s just business. You need a business solution.

2. Interests, not positions.
This old saw from Fisher, Ury & Patten’s Getting To Yes is still true at it ever was, though the Chinese applications may be a little different. About the only thing you are in control of is whether or not you will deal with this counter-party again. But if you lose your temper or make threats, then that option is off the table as well.

3. What do you want to happen?
Do you want cash back? That’s a tough trick to pull off in the Middle Kingdom. Are you planning on suing? Talk to a busy lawyer first — not one with time on his hands. He’ll tell you just how bad an idea that will be. Do you want justice? Meiyou. Never made it here. We got harmony, and we got seething resentment. Which one will you have?

4) Do you know people who are able to help you?
People who are willing to help? People who need you to succeed? Get these people mobilized. The ones who can help may very sit on the sidelines until the very last minute. Get them into the game. This is where Chinese culture comes into play, because motivating 3rd parties to intercede on your behalf is not simple. HINT: They are going to be very unwilling to get involved if you are foaming at the mouth and talking about how you would like to kill those thieving bastards. But if you are ‘confused about the best way to resolve this unfortunate situation….’ (followed by that long, long pause so common in this land) then they may take those first tentative steps. Relying on the offices of others is by far your best option – but it and it can result in you getting dinged again if your new Chinese Rabbi turns out to be scamming you. If you get the impression that they feel helping you is a slightly less attractive than root canal, then you are on the right track.

5) Don’t show your worst side… How would you feel if your counter-party started screaming or sobbing during a deal? Maybe he’s nuts or maybe he’s just a big baby — but he is certainly not a suitable counterparty. Well, that’s what Chinese counter-party thinks about you when you display anger in front of them. They don’t get intimidated — they think you are a sketchy lightweight. Alternatively, don’t look like a chump. Even the Chinese -who respect stoicism – need to understand that you know you’ve been messed with, or it’s going to keep happening over and over.

Ironically, your only real choice is ‘do you go back for more pain or not?’. I know — this sounds crazy. But the fact is that there are many circumstances where your best course of action may be doubling-down and betting again on the same hand. If you have checked out your guy and gotten decent references AND the dispute stems from a genuine misunderstanding or a change in environment (yes — including price level changes), then dealing with this guy again might not necessarily be nuts. If your Chinese counter-party really didn’t intend to screw you over, then this ironically is exactly where guanxi gets built. Real guanxi — not the KTV toasting nonsense. If your guy really feels that the first deal just broke bad for you but would like to make sure that the next one treats you better — then you might have a good thing going.

If, however, the phone doesn’t get answered or worse — the deal never moves beyond the upfront money– then you need to cut your losses and move on. Unfortunately, your troubles may extend beyond the parties directly involved. Whoever introduced you or facilitated the deal is also suspect. Not necessarily, but once you’ve been punked in public you may look like an easy mark.

The road to long term profits is paved with good intentions.

It comes to intentions. I know that sounds counter-intuitive — and it really doesn’t make your life any easier. But if a Chinese counter-party is trying to do right by you, then you have to understand how they deal with a business disagreement. To an HONEST, 100% trustworthy Chinese counter-party, outside circumstances and unforeseen environmental factors still supersede your existing contract. He’ll do his best — but he expects you to be realistic. If his factory burns down or a typhoon shuts down the port, he expects you to cut him some slack. Now here’s the important thing — if his upstream supplier drops the ball or a raw material price spikes, he STILL expects you to cut him some slack. It’s not just HIS problem — it’s your problem too. That’s what guanxi means. When you get all ‘Rambo’ up in his face, talking about who drew first blood and betrayal, then he feels you are not an appropriate counterparty. This lets him off the hook and absolves him of any and all obligations he might have othewise felt towards you.

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We’re going to handle this one in 3 parts. Today we’ll look at why conflict resolution between Chinese and Western business counter-parties seems to be so uncommon. Next time we’ll discuss strategies to minimize damage when you DO find yourself involved in conflict with your Chinese counter-party. Finally, we’ll take a look at ways to structure deals that will help avoid conflict with Chinese partners down the road.

Why conflict resolution doesn’t really work in China – at least with non Chinese counterparties:

1. It’s about Harmony – not Justice.
Chinese don’t use institutions to resolve conflicts with other Chinese. In fact, big parts of Chinese social behavior have evolved with the implicit or explicit purpose of AVOIDING Chinese institutions like police, courts and government structures. 2 members of a group engaged in a conflict will usually opt to submit to a mutually respected 3rd party (old guy) or a proto-jury (loud guys). Once the police or courts get involved, it is straight up LOSE LOSE. Lately this is less true in the downtown sections of big cities, but traditional Chinese wisdom states that smart people keep officialdom as far away as possible.

2. It’s a Guanxi thing – you’ll get yours on the flip side.
Chinese counter-parties don’t return cash or pay restitution even when they acknowledge they are wrong. Disputes are remedied on the next deal. ‘Yes, I see how you did get screwed here a little. I’ll get you back next time. We cool?’ ‘Yeah, we cool’. Cigarettes are lit, and harmony quietly returns. This doesn’t work with foreigners because you are unlikely to remain engaged with a counter-party that has taken advantage of you.

3. Non-economic values.
Chinese counter-parties tend to focus on cash during the negotiation – and non-cash benefits in the post-negotiation. In other words, they bargain about money, but often seek their real value in things like technology, design, contacts etc. That’s one of the reasons Westerners are often surprised at how often Chinese actors seem to be to ‘destroy value’ by screwing up a potential long-term relationship. It may, in fact, be that the Chinese has already met his objectives when he got your business model or new product design. To him, there is no conflict to be resolved. They never planned on following through with the deal in the first place.

4. It’s easy to fool a foreigner.
For many Chinese counter-parties, taking advantage of foreign counter-parties is still part of the deal. This notion of “you can always fool a foreigner” faded briefly in the early part of the decade, but now seems to be back in full force. Anyone who has ever been involved in a Chinese court case can verify that even the winners lose. While you pay expensive international lawyers and shell out for airfare and business hotels, your local counter-party is going to dinner with the bureaucrats in charge and will be back with his family by 10 PM.

5. Another counter-party is always coming down the road.(The ballad of the bull market).
Business conflict resolution is a product of the business environment. As long as Chinese counter-parties feel that there are 2 more potential deals waiting in the lobby, the incentive to resolve conflicts will be uneven. He has had a Plan B since the beginning – and finds it somewhat amusing that you don’t.

For further reading: 10 Warning Signs that Your China Deal is Getting Too Complicated

Next: Part II – So you are in a Chinese business dispute…

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