What happened next:

First the Brit tries to take control of the situation, arguing his moral position. The overnight bus was a complete rip off – he was shown photos of a modern luxury double-decker but was forced into an overcrowded, dilapidated minivan. He’s angry that the bus didn’t take him directly downtown, and is not in the mood to be ripped off again. For him this is just part of a larger issue and he wants to fight back. The British guy is right in some ways, but wrong in others. He is morally and ethically correct, but he can’t convert his anger into a negotiating goal or a set of actionable variables. He’s negotiating about emotional positions – not objective interests. The Brit doesn’t know what a ‘win’ looks like.

The Dutch guy was a compromiser. He aggregated a bunch of folks together and beats down the driver from extortion to mere larceny, but at least he transacts. This seems like a pragmatic position that is well suited to the situation. He knows that they will all get cheated on the price, but it is a one-off deal and he acknowledges the relative weakness of his position. Part of his problem was that the other side knows this tactic, and sets his opening price so high that even a 25% drop is still dear. But that’s not the extent of the Dutch negotiators’ trouble. He didn’t include two key variables – time and exclusivity. As soon as the group has loaded their luggage on the roof and taken their seats, the driver continued trying to lure in new passengers. The group has no choice but to sit and wait.

The young American was coming from Shanghai and using all the wrong benchmarks. He undermined his co-negotiators by repeatedly saying it is cheaper than Shanghai. He’ll always give more and get less. Not only is the American paying more now, but is institutionalizing higher price levels for all foreigners in the future. The longer this type of negotiator works with the same counterparty, the worse his outcome.

What could they have done different?

The first negotiation they should have conducted was internal. Instead of just “taking a shot” at a single driver one after the other, they should have discussed roles, strategy, tactics and limits among themselves first. The Brit would have made a great “bad cop”, while the American could have acted as “good cop” with the Dutchie acting as the “fair judge”.

They might have tried to play one driver off against another and undermined the first drivers de-facto monopoly.

They could have changed venue by walking away. By simply walking to the side of the road and trying to hail a passing cab they could have improved the balance of power. Nothing works better in a tough negotiation than walking away.

Me? No- I wasn’t the relatively rich guy from Shanghai.

I kept my bag on my lap and didn’t pay till we got to our destination. I jumped out of the car immediately, and then offered the driver a choice of currencies – both at a twenty percent discount to the Dutch price. He looked at my US dollars in horror, and quickly took the Thai baht without a complaint.

===========
Stay Connected to ChinaSolved / ChineseNegotiation.com:

ChineseNegotiation.com and ChinaSolved.com invite you to participate the ChinaSolved linkedin group.

Twitter: @chinasolved VPN required in China.
Email at chinasolved@gmail.com

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.

==============

Stay Connected to ChinaSolved / ChineseNegotiation.com:

ChineseNegotiation.com and ChinaSolved.com invite you to participate the ChinaSolved linkedin group.

Traditional competitive deals are referred to as Distributed because the two parties split (or distribute) a fixed pool of assets.   Integrative deals are often referred to as Win-Win or collaborative because the two sides cooperate to ‘enlarge the pie’ or increase the total value of assets beyond the initial scenario.

In China, however, where negotiations are often characterized by non-economic factors – often in the form of face, guanxi, or lately, nationalism – it is common to experience a third scenario: Lose-Lose negotiation.   To some Chinese negotiators, your gain is their loss and your loss is seen as a valuable asset.

In theory a negotiator should be neutral to the prospect of you earning 10 or 20 if his profit in each case if 15 – and he will certainly choose a gain over a loss, despite the counter-party’s outcome.  According to the orthodoxy of marginal economics, a rational actor will transact as long as his benefit is greater than zero.    But in China your counterparty will sometimes opt for a situation where he loses a little if you lose a lot over an outcome where you gain a lot and he gains a little.  This is particularly true in the case of risk-averse SOE representatives who don’t benefit directly from positive outcomes – but may be penalized for a negative outcome.   As trade tensions rise between China and the West, Win-Win deals will be regarded with increasing suspicion.  Chinese negotiators consider it increasingly advantageous to see you fail.

While we consider this spiteful, petty and quite frankly, NUTS, there is a rational explanation – at least some of the time.  American negotiators who count on Chinese counter-parties ‘ultimately coming to their senses and doing what’s best for everyone’ will be caught off guard if they don’t understand how the Chinese side understands the situation.

Different Valuations, Different Goals, Different Tolerances

Chinese dealmakers still see themselves as tougher and more willing to “Eat Bitterness” or endure pain than Westerners, so they are more willing to engage in ‘trench warfare’ negotiation – committing huge resources to a battle of inches over years.   Chinese negotiators are often working off a different time-frame and valuation model.  They are willing to wait a longer period of time to achieve a deal that gives them greater control and exposure to technology.  Because brand names matter less in China, they are also willing to engage in behavior that puts their reputation at risk.  Furthermore, many Chinese negotiators are working under policy constraints that American corporations simply can’t understand.  Finally, nationalism is playing an increasingly important role in Chinese negotiations – as real or perceived slights, insults and challenges impact on deal-making.

There are 5 factors that Western negotiators must consider when approaching a Chinese counter-party to avoid damaging sub-zero sum game outcomes.

1. Learning curve
Some negotiations aren’t really negotiations – they are educational opportunities for the Chinese side, and you are the unwitting teacher.  Chinese have a huge appetite for technology and a great deal of confidence in their ability to reverse-engineer a product once they understand its function.  Many so-called ‘negotiations’ are really new-product development exercises.  The Cisco-Huawei negotiation is a classic example, though the more recent China Rail – Japan Shinkansen (bullet train) case looks like it will be the new textbook example of the Chinese tactic to act as the ‘good student’ in high-tech negotiation.
Remember that Chinese entities consider brand development, business planning and marketing strategy to be highly desirable technologies that Western partners can be persuaded to provide free of charge.

2. Competitive factors
In many cases, Chinese entities will enter into negotiation with Western companies that they view as potential competitors.  JVs and cooperative arrangements start out just fine when they focus on the production and product development side, but when it comes time to access the Chinese market the deal falls apart.  Many observers consider the DANONE – Wahaha negotiation to be a case in point.  The JV was quite effective when it was exporting to foreign markets, but things got rocky when it came to the Chinese market.

3. Timing
Sometimes the problem is about timing.  The Western side wants to move fast – the Chinese side doesn’t.  Many banking and finance negotiations in the 90’s & 00’s suffered this fate – the Chinese side wanted to move slowly due to regulation, technology and the limited experience of their staff.  Western firms grew frustrated and walked away, but not before training an entire generation of Chinese bankers in the finer points of international finance.

4. Differing valuations of the Chinese market
The Chinese side tends to value China access more highly than Westerners do, and this can ultimately scuttle the deal.  China, after all, has a long and unfortunate history of Westerners benefiting economically from Chinese resources.  Chinese policy-makers and managers have become very sensitive to losing control of the domestic market or resources.

5.  Risk profile
Chinese and Western negotiators view risk differently.  Too much uncertainty will raise the penalty for proceeding, even when there is a chance of gain. Westerners tend to see uncertainty and risk of loss as two sides of the same coin.  Chinese negotiators, however, have a much greater sensitivity to uncertainty – and tend to freeze up and stop deal progress if they can’t see what the risks are. http://www.chinesenegotiation.com/tag/risk-and-uncertainty/ http://www.chinesenegotiation.com/2009/09/risk-and-uncertainty-in-chinese-american-negotiation/

Last but not least, many Chinese entities see a real value in destroying your China business.  In some cases there are policy considerations – such as Youtube, Twitter and Facebook.  But sadly, there actors on both sides of the Pacific who consider it patriotic to scuttle deals that may yield profits to ‘foreigners’.  In the US this is generally a regulatory matter that takes place away from the deal table.  But in China where you may be sitting across the table from an SOE or policy-driven manager the issue of patriotic hostility is a negotiating matter.  Determine the likelihood of executing the deal (not just signing a contract) early in the process – before you reveal sensitive technologies or business practices.

==============

Stay Connected to ChinaSolved / ChineseNegotiation.com:

ChineseNegotiation.com and ChinaSolved.com invite you to participate the ChinaSolved linkedin group.

ChinaSolved / ChineseNegotiation.com mailing list

Follow on twitter: @chinasolved TWITTER blocked in China

1. Western commentators are once again connecting unnumbered Chinese dots to form the picture that they want to see.  The PBOC statement on Yuan flexibility says nothing about timing, direction –  or anything of substance having to do with the new RMB currency regime.  It may be the harbinger of a new Grand International Coalition, or it may be Orwellian doublespeak justifying anything Beijing wants to do.
2. The west is expected to take forex off the table forevermore in exchange for a vague non-promise of flexibility.  How does this change the situation on the ground?  Western financial leaders have once again been pressed into service against their own Main Streets.  If the rmb appreciates by less than 10% over the next year, Geithner & Co are going to look a lot like Jack trading the cow for magic beans.
3. The Chinese side is controlling not only the substance of the argument, but also the timing and the scope. This is classic Chinese negotiation tactics.

Still, the chundits (China pundits) and globalists are thanking Beijing and congratulating themselves for averting a crisis.  Well, it’s certainly nice to think so.  But as we prep for the Toronto G20, how does this announcement change the negotiating environment?

First, China gets to maintain the status quo until it sees fit to change.   Even more significantly, the global recovery debate has been shifted away from artificial exchange rates and structural trade imbalances to western debt levels (which are still very much on the G20 table).  China once again trades smoke and mirrors for concrete western concessions.

This time, however, Beijing may be outsmarting itself.  This is the second doublespeak manifesto to come out in 2 weeks – following close on the heels of the Internet White Paper  released on June 8.  Beijing is displaying a new tendency to spell out in black and white just how gray and subjective its standards are.  Chinese tacticians have always exalted ‘formlessness’ and misdirection, but after a while it becomes possible to benchmark deception.  A pattern is emerging – Beijing enacts a policy (the currency peg or the Great Firewall), calmly waits for international debate to die down, and then finally releases an official definition of terms.  These pronouncements are fait accompli that protect China’s complete range of motion – but are couched in legalistic terms that sound objective.

In the bad old days when capitalism was the enemy and secrecy the rule, China-watchers used to count  coal cars on trains heading into Beijing to gauge the level of economic activity.  With this new set of documents — the Internet Manifesto and the Yuan de-peg paper — we have a new metric by which we can understand Beijing’s true intent.  This time, however, we will be judging the hardness of the NO by the conviction with which we’re told MAYBE SOMEDAY.

==============

Stay Connected to ChinaSolved / ChineseNegotiation.com:

ChineseNegotiation.com and ChinaSolved.com invite you to participate the ChinaSolved linkedin group.

ChinaSolved / ChineseNegotiation.com mailing list

Follow on twitter: @chinasolved TWITTER blocked in China

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.

==============

Stay Connected to ChinaSolved / ChineseNegotiation.com:

ChineseNegotiation.com and ChinaSolved.com invite you to participate the ChinaSolved linkedin group.

ChinaSolved / ChineseNegotiation.com mailing list

Follow on twitter: @chinasolved TWITTER blocked in China

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

==============

Stay Connected to ChinaSolved / ChineseNegotiation.com:

ChineseNegotiation.com and ChinaSolved.com invite you to participate the ChinaSolved linkedin group.

ChinaSolved / ChineseNegotiation.com mailing list

Follow on twitter: @chinasolved TWITTER blocked in China

• We’ve just reached a huge agreement with the Chinese government.
• We have never been more successful, happy or optimistic about our future in China or our relationship with the Chinese people.
• We have never been better disposed towards the Chinese government.
• Don’t tell anyone.

In spite of public signing ceremonies including photographers, reporters, dignitaries and permanent commemorative wall plaques – the Western institutions are instructed to treat the agreement as a state secret. This sounds much odder to those outside of China than to those that have been doing deals here for a while.

China celebrates the signing but hides the cooperation. There are three main reasons for this:

First, China likes to manage the time horizon of the commitment. Most of these deals are not explicitly open-ended – nor do they stipulate a meaningful expiration. This is emblematic of Chinese use of time as a negotiation factor. They will open the door you want them to, but leave themselves the option to close that door at a time of their own choosing. This gives China tremendous leverage later, and makes sure that the relationship maintains proper harmonious characteristics throughout.

Another cause for the seemingly irrational attitude towards publicly acknowledging agreements is that China’s internal power structure is complex, competitive and finely balanced. Westerners tend to view the Chinese bureaucracy as a single entity. Chinese negotiators see the bureaucracy as a community – or collection of clans. The ministry or bureau that ultimately sent a representative to the signing ceremony may have had to over-rule, outmaneuver or horse-trade with a dozen other bureaucratic competitors. One reason Chinese negotiators are slow to embrace the concept of Win-Win negotiation is that the math isn’t as simple here. It’s more like Win-Win-Lose. You and your counter-party may both benefit, but somewhere there is a third actor that has lost out to your Chinese counter-part. That person or group isn’t known to you – but is all too familiar to they guy you are being photographed with.

Finally, your big agreement may in fact be a small step towards a significant policy evolution. Chinese negotiators are known to use individual deals as trial balloon or test cases – usually without the Western counter-party’s knowledge. They will use this case to nudge a door open just a bit and see what happens. A big splash for you, this deal was just the Chinese side dipping a toe in the water. If you start making loud noise about the great deal you signed it may pre-empt a much bigger shift that is far deeper and broader than your contract.

==================

Stay Connected to ChinaSolved / ChineseNegotiation.com:

ChineseNegotiation.com and ChinaSolved.com invite you to participate the ChinaSolved linkedin group.

ChinaSolved / ChineseNegotiation.com mailing list

Follow on twitter: @chinasolved TWITTER blocked in China

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.

Jumping through a hoop for a pot of gold can make great sense.
Jumping through a hoop over the edge of a cliff makes less sense.

If you know where you are going to land you can make intelligent, enlightened decisions. But in China Western negotiators often find themselves required to take concrete actions now for an uncertain return at some unknown point in the future.

When you find yourself in a situation where you must jump through hoops in the dark, you are better off negotiating for a flashlight — not the gold. Being able to accurately measure progress is far more valuable than being able to extract vague promises.

1. Know your goals.
What’s your goal system? Where do you want to be, and how do you plan on getting there? What’s your counter-party’s goal system? Does it align with yours? Westerners often suffer from tunnel-vision in China. They can’t envision any set of alternatives beyond the ones they have plotted for themselves – often while working with incomplete information in their US corporate headquarters.

2. Develop independent channels of intelligence
Do you have adequate information about the process? Is your counter-party your only source of information? If a Chinese counter-party came to the US to negotiate a deal with you and he made it clear that you were his sole source of relevant information, you would be hard-put to disclose details that put your deal in a negative light. Due diligence, after all, is HIS responsibility not yours. This doesn’t make you dishonest or predatory — you are merely acting in your own professional best interest. Well, your Chinese counter-party is no different. Chinese dealmakers may not understand WHY you expect them to guide you through every phase of a negotiation, but they aren’t stupid enough to pass up an advantage.

3. Negotiate for information about the deal process.
Too many westerners rely on their Chinese counter-party to decide what will be exchanged for your compromises. The Fog of Business can be a great relationship-building exercise if it is handled properly. If there is an aspect of the negotiation that is unclear, make getting that information part of the process. It’s your responsibility to know what lies beyond the next concession.

4. Trade real for real.
Avoid trading real concessions for vague promises. ‘I pay now, you pay later’ is a source of problems — particularly when your payment is denominated in renmenbi and his payment is in the currency of goodwill, relationships, regulatory approval and best effort selling.

5. You need professional help.
Build a network of neutral experts — even if you have to pay them. Hiring a lawyer, accountant and relevant consultants before you sign a contract is a lot cheaper than hiring them to get a bad deal back on track. Having an experienced expert at your disposal to act as a sounding board can be some of the best money ever spent in China.

6. Develop alternatives.
Alternative deal options and alternative counter-parties. Even when dealing with the Chinese bureaucracy, there are few monopolies on information or approval channels. That may mean setting up shop in a different province or municipality, it may mean finding a new partner or changing the structure of your deal. If you walk into a meeting with a Plan B in place, then you are in a much stronger position.

7. Strategy first, tactics later.
Don’t start negotiating tactics until you have a sound strategy. If you rely on a negotiating counter-party to build your business strategy, then they are calling the shots. This isn’t necessarily a terrible idea – if you have structured your deal accordingly and have conducted proper due diligence. Many westerners, however, find out too late that they aren’t really the ones making the significant decisions.

Don’t require that your Chinese negotiating counter-party choose between being honest and smart. They’ll choose smart every time – and if they don’t, you probably don’t want their help with your China plans. The remedy is to learn more early and structure smarter deals that will survive for the long term. How do you achieve this? Ask more & better questions and dig beneath the surface. Many westerners complain that Chinese deal-makers waste too much time on small-talk and relationship building activities, but those are the best opportunities for learn more about the process. If you feel that you don’t have enough visibility to understand where your negotiation is taking you, then slow down and bargain for the information that will shed light on your real situation.

==================

Stay Connected to ChinaSolved / ChineseNegotiation.com:

ChineseNegotiation.com and ChinaSolved.com invite you to participate the ChinaSolved linkedin group.

ChinaSolved / ChineseNegotiation.com mailing list

Follow on twitter: @chinasolved TWITTER blocked in China

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.

===========

Stay Connected to ChinaSolved / ChineseNegotiation.com:

ChineseNegotiation.com and ChinaSolved.com invite you to participate the ChinaSolved linkedin group.

ChinaSolved / ChineseNegotiation.com mailing list

Follow on twitter: @chinasolved TWITTER blocked in China