When the deal falls apart soon after, the western manager will be scratching his head at the Chinese negotiator’s seeming inexplicable behavior. From the Chinese negotiator’s perspective, however, he has been open, honest – and maybe even a bit blunt.

Prediction: Within the first 6 months of  2012, China will demand a major restructuring of either the WTO or some other international economic forum – effectively removing any meaningful oversight or ability to penalize China (i.e.: member nations).

Here’s the handwriting on the wall:

China will play by rules it negotiates: official

HONOLULU | Mon Nov 14, 2011 12:58am EST
(Reuters) – China will play by the rules of international agreements that it has been party to negotiating, a Chinese official said on Sunday.
His remarks were a clear rebuttal to U.S. President Barack Obama who earlier said that China must act like a “grown up” and play by the rules of the international community in economic affairs.
“First we have to know whose rules we are talking about,” said Pang Sen, a deputy director-general at China’s Foreign Ministry.
“If the rules are made collectively through agreement and China is a part of it, then China will abide by them. If rules are decided by one or even several countries, China does not have the obligation to abide by that,” Pang said at a news conference after the APEC summit in Honolulu…

And then again yesterday – in an unattributed Op-Ed piece in the Global Times, an officially sanctioned English language PRC news site:

Time to reassess unfair WTO entry terms

Global Times | February 01, 2012 00:48
A WTO appeals panel has upheld a ruling against China restricting exports of nine types of raw materials. The ruling, completely unreasonable to Chinese, will threaten China’s resource preservation and environmental protection efforts.

China has generally been following WTO regulations and rulings. But it should find the best balance between applying WTO rules and protecting its national interests. Getting approval from the West is not our top concern.

Admittedly, joining the WTO has boosted China’s rise. However, entry was granted at the cost of China accepting some unfair terms, from which the aftereffects have gradually emerged, including this ruling. They may become a hidden problem for China’s economy.

The latest WTO ruling has highlighted the urgency of amending some of the unfair terms of The Protocol of China’s Entry into the WTO. It is also necessary to express China’s dissatisfaction and garner public support for the revision…

Should WTO rules be applied evenly, unevenly, more stringently, rewritten completely?  I don’t know – and that’s not the point of this post.

The significant issues are that

1) The Chinese side is putting an issue on the table. As far as Beijing is concerned, they are being open and direct about their concerns. The negotiation about the WTO and international trade has begun. If the western side is too slow or oblivious to catch the drift, that is their problem (from the Chinese perspective)

2) The Chinese side is setting the terms of the agenda NOW. The US and/or international side has to act immediately to push back or alter the variables, or they will be starting out at a significant disadvantage.This is where a lot of Americans negotiating in China drop the ball.

3) A common Chinese tactic is to use a manufactured conflict as an excuse to terminate an existing partnership or arrangement. Loss of fact, cultural misunderstanding or perceived insults can all be used as an exit strategy.

Look for WTO structure, rules and China’s continued membership to be major international negotiating variables within the next six months.

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Chinese and American negotiators have differing views towards opportunity and sunk costs. Americans spend time, money and energy vetting deals and counterparties at the start of a negotiation, so once they decide on an investment they stay committed for as long as it makes economic sense. Abandoning one deal to search for another usually involves a significant loss – particularly when they are far from home. Chinese negotiators, however, spend the early phase of a deal focusing on relationship-building and learning about technology and business models. Until recently, they have invested relatively little in the way of cash – often putting up non-cash assets like production capacity, land, staff, and non-tangibles like distribution channels, connections and know-how. If they pull out of an agreement the opportunity costs are generally a lot lower – and if they have learned your business or acquired your IP in the early stages, may even be negative. (Think of negative opportunity cost as an incentive to move on to the next deal.)

A Chinese negotiator, therefore, has a greater range of motion than his American or European counterparty. This is one of the ways that Chinese negotiators shift the balance of power very effectively midway through a negotiation. Your assets are sunk and losing value – theirs assets are fluid and growing (now that you’ve taught them a business).

What does it take to hold on to a Chinese partner?
When structuring deals in China, if you want to hold on to your partner make sure there is a rising payout – and that he can make more working with you than working against you. If you can’t offer those terms, you have to seriously reconsider whether you want an equity or strategic partnership with a mainland Chinese counterparty.

Often the question is a simple one – would you rather own a minority stake in a money machine or a controlling interest in a broken down jalopy?

Do it the Disney Way
When Disney did their Shanghai deal, they didn’t play cat and mouse with the Chinese authorities.  Walt Disney Co. handed over about 57% of their cheese to a couple of SOEs representing the Shanghai government.  Sounds like the mouse got trapped — but you can bet that no one will be selling Disney knock-offs outside the Shanghai subway stations. This is a self-reinforcing deal, because the Chinese partner feels like the brand is working for them. Disney’s apparent weakness – its minority stake – is actually a strength. Shanghai now has something to lose if the partnership goes bad.

The key consideration is that Disney has a unique and highly recognizable brand that their key Chinese market is already clamoring for. If you don’t have that, then you’ll have to make do with money, technology or other assets. Your Chinese partners don’t just want a lot – they don’t just want a growing return. They want more than YOU are getting. For the Chinese side, sometimes one of the deal variables is out-dealing the foreigner – so plan accordingly.

But I Don’t Want To Give Up Control
If you’ve looked at all the angles and majority control is still your one and only choice, then plan accordingly and prepare for the tough times. That doesn’t mean you should act tough – just the opposite. You have to look patient, while keeping your options open and protecting yourself against an army of counterparties who feel that they have nothing to lose by trying to swipe your technology, business model, key people and markets. Here are a few of other things you have to do:

• No exclusivity talk. The Chinese will ask for it, and some Americans think they are being clever by playing coy and dangling exclusivity in front of their counterparty’s face like a carrot on a stick. Bad move. You are guaranteeing that you and your non-partner will have a damaging conflict. He may not win, but you’ll certainly lose.
• No partners. If you want to play the lone wolf, then be the lone wolf. Assuming that a Chinese partner will be satisfied with a perpetual subordinate role only works if you are A) over-paying, B) working with a stupid partner, or C) all of the above. Build nice, cordial relationships but be clear that you are paying for transactions – not offering an equity stake. If the Chinese side indicates that this isn’t what they are looking for, then for God’s sake, pay attention and move on! Don’t twist their arm into learning your business model and technology when you know they will eventually be dissatisfied.
• Have multiple counterparties for key functions and service chains. It’s not efficient, but you don’t go it completely alone in China for efficiency. Always be ready to move on to your next best option. This means that you have to build in plans and budgets for continually expanding your range of connections – and you can’t rely on the network of the people you may be leaving behind. When Partner A helps you hire internal staff and find your service-providers and suppliers, you have a problem dropping him in favor of Partner B – because the first guy now has conduits into your business.
• Safeguard your IP. If it’s any good, someone will make a play for it. Protect everything (with your own lawyers – not a partner’s) and only bring in what you can afford to lose. Even if you register and copyright everything, they will still copy and backwards engineer whatever they want to use. It won’t prevent you from using it in China, but you will be competing with your own designs.
• You have more to lose than money or technology. Apple is finding itself tied to some very unsavory labor practices, and it can’t disengage even if wants to. It’s brand image is going to be battered, but it has no choice but to stay involved with partners that make it look as evil as any other sweatshop operating, worker-killing, child labor exploiting factory boss.
• Be ready to walk away when the time comes. For some westerners, this is the hardest part. If you can’t do it, though, then you will never maintain full control over your own business.

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One of the main functions of relationship-building activities like banquets and KTV evenings is for everyone to relax, get used to one another and establish an idea about what the other side’s real personality is like.   When your Chinese hosts are pouring drinks and making toasts, they are really checking out your strengths and weaknesses, your tendencies and quirks.  This is part of their due diligence – they are determining what kind of person you really are.  You should be doing the same thing.

The Chinese banquet is their turf and they are hosting.  You can tell a lot about their business tactics by the way they conduct themselves at a banquet.  If they load the table with chicken feet, sea cucumber, thousand year eggs, dancing shrimp, 3 squeaks (http://www.culinaryschools.org/blog/three-squeaks/ ), or other delicacies that Chinese know give westerners trouble, then you can surmise that they plan on pressing their advantage to the fullest every chance they get.  If your counterparts reserve a famous restaurant that serves fine traditional local food but they go easy on the booze and consult with you on menu items, then these are probably people who know what they are doing and are sincere about doing business with you.

Watch the order of the toasting.  The person who toasts first is probably a handler or a junior manager.  When there’s a lull in the conversation or an awkward patch, he’s going to smooth it over with a toast.  It is unlikely that he is the true decision-maker, though he is probably going to be an important contact and facilitator.   (Note on Chinese toasts:  Ganbei translates as “dry glass”, not “cheers”.  You are supposed to empty your glass – and everyone else at the table has to do the same.  Among old school Chinese, it is taken seriously.  Don’t say it if you don’t mean it, and pay attention when they do.  You don’t want to embarrass yourself by sipping when everyone else is draining their glasses.)

The big boss will toast you directly when he is comfortable.  He may go multiple times in fairly rapid succession.  His drink of choice is usually Moutai – a very expensive, super strong variety of white liquor, or baijiu.  To westerners it tastes like lighter fluid mixed with industrial solvent, but they are as attached and proud of it as you are to your Maker’s Mark or Johnny Walker.  Don’t disparage or insult it.  You will look bad if you don’t throw back a couple of shots with the boss.  Good-natured partners with international experience will laugh it off if you can’t stomach the stuff and allow you to substitute beer or even red wine.  The guys who get offended or force you to drink in spite of your objections might prove to be equally obstinate when it comes to business, so take note.   Also be aware that they are taking your measure the whole time.  Be friendly, polite and cheerful, no matter how difficult it may be.

Outside of Shanghai it is still considered absolutely hilarious to get the foreign guy completely smashed – and lots of people doing big business in Shanghai are from out of town.  It is all good-natured fun, and you don’t have to worry about embarrassing yourself or others.  (Alcohol poisoning, on the other hand, is a threat.)  They are consuming almost as much as you are, and everyone is expected to kick back and enjoy himself.  The point, however, is that although banquets and dinner parties are business events, they are probably not the place to fine-tune numbers, rates or contracts.  You can talk about deals in general terms – but bear in mind that things might start getting messy an hour or so into the party.  Aggressive partners have been known to hold foreigners to promises made under the influence, but that’s probably a good indicator that you should be finding other counterparties.

Non-smokers be warned.  You will be offered cigarettes.  This shouldn’t be a big problem in Shanghai anymore, but you’ll almost certainly run into this practice in the smaller cities – particularly west and north.  Turning down a smoke is an insult akin to refusing a toast.  As an ex-smoker who gets awful hangovers when I smoke and drink, I feel your pain – literally.  Here’s what you do:  Take the cigarette hold it up and say thanks, and then say “I’ll smoke it later”.  Put it down on the table in front of you or behind your ear “so you won’t forget to smoke it”.  That works about 35% of the time.  You may have to let the guy light it, and then you’ll pantomime smoking it for a few minutes until you can dispose of it.  The lesson here is twofold. 1) These are not sophisticated, international people, but you probably knew that already.  Experienced Chinese know not to force cigarettes on Westerners.  2)  If your host makes you do something you are clearly not comfortable doing – particularly if it happens several times – then this is a snapshot of his personality.  These folks are not going to be flexible or easy to work with in the future.

Women drink, especially in Beijing.  You can forget about lite beer or other girly drinks.  You are going to throw back Moutai, or whatever rocket fuel is the local choice.  Two pieces of advice.  First, don’t hesitate on the first round.  It will make you a target of convenience for the rest of the night.  Second, keep your empty glass close to you, or they will continually refill it.  Woman are often given the option of switching to beer or red wine (yes—you drink shots of red wine in China) later in the evening, but you should be prepared to drink at least a glass or two of the hard stuff.  You might be able to compromise with “yellow wine” (huang jiu) – a much milder form of local booze that is closer to saki.  Again, you will learn a lot about working with these people in the future by the tone they use when making you drink.  If they are easy going and polite at the banquet, they will probably be reasonable as partners.  If they are bullying and aggressive then there’s a good chance they will exploit their local advantage later as well.

A note about KTV’s.  In mainland China you may find yourself at fancy KTV after dinner.  Some of the new places in Shanghai are enormous palaces with doormen, lines of female greeters, fountains, statues and all manner of glitz.  You will be escorted into a private room that looks like it might have been decorated by Hugh Hefner himself.  Sit down and get comfortable.  A long, involved negotiation with a female manager-type will take place, but don’t worry – they are just arranging the drinks and food.  The next step is difficult for some. An attendant will take a perfectly innocent bottle of 12 year old Glen Fiddich and dump it into big pitcher with pints of sugary ice tea.  Try not to scream or whimper.  Trust me – it doesn’t go over well.

Now the girls enter the picture.  A line of 8 – 12 girls is brought in and you are expected to choose one.  For some westerners, this is awkward and uncomfortable.  For others, it is a dream come true.  They will usually give you (or the highest ranking member of your group) first choice.  Note that nothing sexual is going to happen in the room, and you don’t have to worry about committing adultery, contracting disease or waking up married.  (This applies to KTVs in Mainland China.  In Taiwan, they can be much more … interactive.)  At the end of the evening the girls will be tipped by either you or your host (I think around rmb 300 is normal).  That should be the only cash that changes hands within the confines of the establishment.   The only thing you have to worry about is the drinking games.  Be a good sport, but pace yourself.  It’s likely to be a long evening.

The main take-away is that Chinese business people use social events to vet potential partners, build relationships and perform due diligence.  Many westerners treat banquets as an awkward chore or an obstacle that must be overcome before business can start.  To the Chinese side, this is the business and the negotiation has already started.  Remember that they are checking you out, so conduct yourself accordingly.  Be open-minded, friendly and respectful – even though things may get a little whacky at times.  You should also take advantage of this opportunity to observe and evaluate your new partner, supplier or client.  You are getting a snapshot of their true personality, so don’t ignore your instincts or observations.

Xin nian kui le.  Happy New Year.

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Western negotiators in China for a one-time purchase or transaction don’t have to worry about cultural misunderstandings or local business custom as much as they would have 10 years ago. Commercial centers in China are as sophisticated as any in the world. Those looking to crack the Chinese consumer market or resolve a dispute, however, will find that the Middle Kingdom is the same as it ever was.

Westerners negotiating in China have never had it so easy, and never faced such high risks. Understanding China is about reconciling opposites, and for dealmakers and managers the new bi-polar issue concerns speed of operation and bottlenecks.  Before 2008, American and European managers who made mistakes in China had to worry about losing orders or investments. Now they are losing brands and strategic initiatives.  Groupon (entry stalling) and Yahoo (asset transfer) are both finding that once the bad times start rolling in China you can lose control of your global strategy and even your brand.

One of the biggest challenges western negotiators face in China is understanding how easy things can be versus how hard they can get.  Getting money into China has never been more straight-forward, but once a deal goes off the rails it is often a total loss.  Far from making life easier for newcomers, the polarized nature of Chinese deal making has raised the stakes and made China more dangerous.  At least before 2008 you knew how weird it was going to be.

The simple stuff is getting easier…

China has always been hospitable to visitors, and after almost three decades of dealing with westerners a lot of the rough edges have worn down.  No more embarrassing questions about your age, weight or income.  The international hotels and western restaurants are pretty much the same as the ones back home. Chinese counterparties can talk about IP protection, product liability and third party mediation as smoothly as managers anywhere in the world. If you are coming to China to move funds and assets in, then it is a 21^st century dream.

But the hard stuff is harder

Rising prices and costs, adverse regulatory practices and a fierce local competition have made China an extremely competitive negotiating environment.  As Chinese companies improve their ability to provide international-level service and design on their own, international operators are wearing out their welcome earlier and earlier. That means that the aspects of Chinese negotiation that have always been hard – conflict resolution and power sharing – have become even more challenging. China has always had the desire to protect its domestic markets, but for the first time it has the technology and infrastructure to service home markets profitably.  Once western companies have built a market or transferred technology, there really isn’t that much left for them to contribute.  Westerners in China have seen their negotiating position within Mainland market getting weaker and weaker.  As local companies get better at servicing customers, international marketers in China have lost their most natural ally – the Chinese middle class demanding products and services only foreigners were good at.

10 years ago a local Chinese operation needed funding.  Westerners had both financial and technological leverage.  3 years ago local operators needed design and services.  International firms were losing their financial edge, but still held power in terms of technology, branding and IP.  Now local operators need markets and customers.  Unless international firms can find other ways to add value in the local Chinese market, their negotiating position will continue to weaken.

BATNA is your Best Alternative to No Agreement.  It’s your condition when the counter-party you are negotiating with gives you a final and definitive NO.  If you have a mediocre job and are talking with a new firm about a better position, your BATNA is to keep your old job.  If you don’t have a job now, then your BATNA is significantly lower – continue your job search while living off unemployment insurance, savings, part-time work and the generosity of others.  Clearly the person with the better Plan B has a stronger negotiating position.

Chinese BATNA:  There’s always another counter-party coming ‘round the bend.

Chinese negotiators generally consider their BATNA to be fairly strong because they operate under the assumption that there is always another available counter-party.  China has a large population, and the international commercial centers (Shenzhen, Shanghai, Beijing, etc) are packed with potential deal-makers.  Since Deng Xiaoping kicked off China’s economic reforms 30 years ago, there has been a steady stream of foreign counter-parties banging down the doors to get access to Chinese suppliers, markets and partners.  Chinese managers and entrepreneurs have faced their share of shortages and bottlenecks – but overseas negotiating counter-parties have never been scarce.

Does this put westerners in a weak position when they are negotiating in China?  Yes and no.  Obviously you will have a hard time if you position yourself as a rare and valuable commodity, but there are many ways to turn this high-velocity trading environment to your advantage.  Many westerners confuse ‘guanxi relationship’ with ‘lifelong monogamy’.  Chinese deal-making tends to be more fluid and dynamic than those in other environments.  It’s more like a raucous dance club than a small-town wedding.  Western negotiators who settle down with a single partner too soon often find that they have squandered their most powerful deal-point.

Turn China’s Negotiating Environment to Your Advantage:

1)      Don’t try to beat them – join them.  China’s high velocity deal-making environment can work for you as well.  Always have 3 counter-parties for any significant deal or business goal.   At any given time, you should have a primary partner or supplier, a back-up who can step in quickly, and a special situation that will take a longer to develop but meets specific needs.

2)      Don’t give away exclusivity.  Chinese deal-makers like to joke that in business it is best to have many girlfriends but no wife.  Westerners should take this hard-hearted advice to heart!  Many international JVs founder because the Chinese partner was a bad fit – or treated the exclusive partnership as an excuse to sit back and collect rents.  Offer exclusivity only when it serves your interests – and then make it conditional on objective benchmarks.  Also consider using limited exclusivity, based on region, product, time and/or performance.

3)      Consider diversifying your activities geographically.  If you are building a factory then you are clearly rooted to a specific place.  But if you are involved in services, sourcing, web-based businesses or other intangibles, keep your geographic options open.  China is a huge place, and the regulations, customs and enforcement of policy can vary significantly from one city or province to the next.  Check with a competent international lawyer or consultant first, since registration requirements may restrict certain activities.  Shanghai and Beijing are getting prohibitively expensive, however, and it’s wise to shop around.

4)      To tell or not to tell…   Do you let supplier A know that you are also talking to prospective suppliers B, C and D?   In China a little truth goes a long way, but dishonesty can land you in the ditch.  The best strategy is to begin your relationship by making it clear that you have a range of counter-parties but remain vague about their identity.  Don’t worry if your new Chinese associate feigns hurt feelings or outrage – they do the same thing when they negotiate.   Problems occur when you promise exclusivity – OR ALLOW THEM TO BELIEVE THAT YOU HAVE AGREED TO AN EXCLUSIVE ARRANGEMENT – and then look for new partners.

5)      Benchmark. A tried & true practice for successful Westerners in China is to play one partner off another.  It helps if they don’t know each other (this is where geographic diversification is helpful) – and if you have been above board from the start.  Remember that relationships count for more in China than in the US, so don’t make this mean-spirited or insulting.  The more matter-of-fact you are about your business methods and other relationships, the better your results will be.  Be wary of suppliers or distributors who get offended by a little competition – they may not be appropriate counter-parties.

]]> http://www.chinesenegotiation.com/2011/01/chinese-negotiating-best-practices-the-chinese-batna/feed/ 3 http://www.chinesenegotiation.com/2010/07/negotiating-chinese-partnerships-%e2%80%93-are-you-a-long-term-partner-or-a-short-term-resource/ http://www.chinesenegotiation.com/2010/07/negotiating-chinese-partnerships-%e2%80%93-are-you-a-long-term-partner-or-a-short-term-resource/#comments Tue, 20 Jul 2010 16:33:43 +0000 Andrew Hupert http://www.chinesenegotiation.com/?p=649 Western companies in China feel that the deck is stacked against them. Between rising labor costs, indigenous innovation requirements and slowing global demand, it has never been harder to make profit on the Mainland. Even the deep-pocketed China-fans like GE and Siemens are publicly complaining about the operating environment. The stock answer to China’s business challenges used to be finding a local partner who could open doors and bring a little local love. Unfortunately for newcomers and old-hands alike, Western partners in China JVs & tie-ups are reporting their own tales of woe – from pinched technology to crimped sales. More and more Chinese firms are telling their Western partners that the marriage is over.

Aren’t Chinese businesses supposed to be long term planners?

Yes, and that’s the problem. As many Western deal-makers are finding out, Chinese negotiators often see the foreign partnership as a short-term tactic on the way to the real long-term goal of independent global competitiveness.

Chinese firms are pragmatic. They acknowledge the need for Western technology and methodology, but that no longer means a permanent marriage. Since the financial crisis of 2007, Western firms have lost the brass ring that used to keep the Chinese side of the partnership in line – access to US and European markets. The cold hard fact is that Western firms are entering partnership negotiations with a hand that is not strong and growing weaker. The Chinese market is becoming the new El Dorado (though it may end up being just as mythical) and the technology gap is definitely growing narrower.

Chinese firms are increasingly viewing Western firms as a short-term partner, a medium-term customer or client and a long-term competitor. Operating a JV in China was tough enough before the crash in the US & Europe and China’s new ‘indigenous innovation’ policy came into force – but many international managers in China now see a bleak future.
Here are a few useful tactics for negotiating a long term relationship in China:

1. Plan first, negotiate after.
Don’t shy away from asking yourself hard questions about your basic plans for China. Do you really need a long term partner in China? Why? What’s the relative balance of power going to be through the life of your partnership? Are you looking for a perpetual subordinate – because your Chinese counter-party might not be interested in a permanent secondary role. As you and he both learn more about the business what’s the natural competitive environment going to evolve into? Not only do you have to plan for 2015 – you have to discuss those plans with the Chinese side. If you plan on calling the shots in China ad infinitum, then you would be wise to make that clear BEFORE you share your IP and trade secrets.

2. Structure is everything in China.
Forget about NDAs and contracts. The deal that makes sense is the deal you’ll end up with. If you plan on having a long term relationship, structure accordingly. If you are providing design and capital and he is providing market entry advice and distribution then you have to plan for a point 18 months from now when he has your designs and you have access to distribution channels. What are you basing JV 2.0 on? A Chinese partner who thinks he can do better without you is going to find a way out of the relationship, even if it means scuttling the business and starting over on his own after you have gone back home. If the only thing you have in your corner is a signed contract, then you are embarking on a lose-lose relationship.

3. Consider a sunset clause.
Your best relationship may be a short one with an option for some type of longer-term arrangement. Teenagers think that passion leads to happy-ever-after, but adults are supposed to know that compatibility is based on other things. Still – there’s nothing wrong with a quick hook-up if everyone knows that’s all there is. But don’t propose if all you want is dinner and a movie. No matter what your plan, always have a viable exit strategy.

4. Don’t pay today for what may or may not come tomorrow.
Cynical Chinese negotiators learned long ago that naïve Americans believe in the fantasy of ‘long-term guanxi’ and are more than happy to let you pay up-front for the relationship of your dreams. Their dream is being the sole patriarch of a family dynasty. You aren’t in their dream.

5. Use your words.
If you have thought it through and decided that a long-term relationship is what you want, then make that part of your negotiation from the beginning. Be explicit and open. This is exactly the kind of thing you should be talking about during those relationship-building activities & banquets. Don’t just stop with the easy platitudes about harmony and working together. Likewise, don’t hold your breath waiting for the Chinese side to come up with a comprehensive game plan. It’s up to you to come up with specifics that include benchmarks and a structure that keeps both sides satisfied.

Partnership hint: Long-term JVs in China are more threatened by success than failure. It’s relatively easy to pull together when disaster is at hand and everyone needs one another. It’s when the Chinese side comes to believe (rightly or wrongly) that you have outlived your usefulness that partnerships fall apart. Plan for the good times as well as the bad.
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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.

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Introducing, the Balance of Power Shift, or BOPS.

Part I: What’s the Balance of Power Shift?
Part II: BOPS and tactics.
Part III: BOPS and counter-tactics

In every Chinese deal a little power must shift. There will come a time when the prospective supplier who was kissing your assets yesterday starts acting surly and aloof. Or that busy, cell phone guy suddenly has all the time in the world for you. What’s going on – Balance of Power Shift. BOPS.

Chinese deals can have a lot of them, but they almost always have at least one. This is when the Westerner suddenly outlives his usefulness – or the Chinese realizes that the Lai Wai can do this just fine on his own from now on. One way or another your partner feels that the relative power of the relationship has changed, and now it’s your problem. The first rule is that you can’t ‘opt-out’ of the pettier and dumber aspects of the culture just because you think they are petty and dumb. Your Chinese counter-party has a propensity to get fussy about power games and deep strategy. And because it is part of their world, now it is part of your world. Got that?

Post-BOPS behavior patterns:
Behaviors change rapidly, and experienced negotiators know what the new signals mean. You should too.

After the Western side wires the funds, one of three things will happen.

•One is that everything stays 100% on track as both sides worry about execution and expansion in a balanced, systematic and logical manner. It usually doesn’t.
• Sometimes the Chinese will feel that they have been dealt a losing hand. Either it looks like they will make less money or that you will make more than optimistic estimates led them to believe. This is where the quality problems, the unfinished projects and the unanswered phone calls are born.
• The third option is that the Chinese side feels it has the advantage. That’s when you have outlived your usefulness. This is the signal for the start of some potentially aggressive behavior, like the kind of IP theft where they start running a competing business with your plan, product & designs.

China Deal BOP: Which way is it moving?

What triggers a power shift?
The BOPS – the Balance of Power Shift. It can be caused by something external to the negotiation or something internal – but suddenly your Chinese counterpart feels either stronger or weaker than he did yesterday – relative to YOU.

• Maybe you moved money into the partnership – in which case you are weaker. Maybe you signed a deal with a different Chinese firm – in which case you are stronger. If you are making more – or he is making less – it may be causing resentment which can force a BOPS earlier.
• You are supposed to be the brawn, they are the brains. Even though your brawn was cash, technology, designs and know-how – they were the brains of China. Each day the balance is shifting. As you transfer more money, know-how, training and IP to the circle, their power grows. As you learn more about China & the industry and build up your network, your power grows.
• In China, your success can suddenly trigger a BOPS against you – as your Chinese counter-parties decide that you are exploiting them and that they should A) charge more and B) find other deals that don’t include you.

Why does it occur?
They either think you were screwing them (your fault or not) or think they can do better by screwing you. Either way, it’s a decision – not a rule – and it’s governed by the Chinese notion that there is always another opportunity just around the corner. Another factor is that Chinese negotiators consider education about your operation and industry to be an intangible but valuable asset. The knowledge they’ve gained is part of their payout. It usually declines steeply. By the time they have the upfront money, they are done.

In other words, your cooperative structure may be eroding at the base even as it looks the most successful. While you are building and struggling, your Chinese counter-party remains loyal because he is still putting the pieces together. But once you have succeeded with your first order or preliminary operation, then your usefulness as a teacher is exhausted. They have learned it all, and can probably do better on their own in China than in helping YOU prop up your fat margins.

There are a lot of factors contributing to the BOPS, but it seems to be closely connected to how low-maintenance the relationship is, and what the earnings potential looks like. If the payout is level or falling, look for the Chinese side to decide that the grass is greener and the BATNA higher on the other side. At that point, you need them a lot more than they need you – hence the BOPS.

Time & Risk
Westerners believe that the safest course of action is to secure a stable base of operations and grow from there. The Chinese feel that the smart businessman acts quickly when an opportunity appears – and is always ready to move on to the next one. Both sides, pursuing a risk-reduction strategy, will undermine the partnership. It is important to put aside your own preconceptions about what constitutes long term benefit, best practices and common sense.

Next: BOPS II – How it affects tactics

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