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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We’ve looked at the causes of the BOPS and how it affects Chinese negotiating tactics. Now we are ready to look at how American negotiators in China can prepare and protect themselves from the fallout of BOPS.

Forewarned is forearmed.
Watch for shifts in behavior, communication style and attitudes.  Remember that even with good Chinese partnerships, your gain is often perceived as his loss – and vice versa.  One of the few constants in Chinese negotiation is that you have to be proactive about managing the relationship.  Well, it’s time for Westerners to raise their game a bit.  The days of qualifying as a cross-culture pro by learning to say ‘ni hao’ and passing business cards with two hands is over.   Building a relationship in China is a delicate process that will be influenced by external events.  Anything that impacts on the balance of power of your business will affect the relationship.   Don’t be blindsided by your counter-party’s negative reaction to your success or progress.

In China honesty tends NOT to be the best policy, but it has its uses.
Yes, Chinese people tend to be less direct than Americans, but this doesn’t mean that you are expected to speak in riddles and vague allusions.  If your counter-party seems dissatisfied, distant or hostile then you should find a non-confrontational way to start a dialogue.  Different regions of China have varying attitudes towards direct confrontation.  You may find that northerners and even many Beijingers have few reservations about sharing very frank opinions – particularly if there is booze involved.  Even if you don’t work through every personal or commercial issue, you will certainly learn a great deal from a serious discussion.  If the main thing you learn is that your counter-party isn’t being honest or forthcoming, then that’s a great bit of information to have.

Always be ready to go it alone.
Many Western counter-parties in China are more prepared for failure than for success.  Ask yourself a simple question at the start of your negotiation with a Chinese business person – ‘what if this is a big win?’  Sure, you may build a rock-solid joint venture that your grandchildren end up running together in amiable cooperation – but there are other, more likely, possibilities.  The fact is that you and your Chinese counter-party are each on a separate learning curve and have your agendas.  If you don’t already have a Plan B that involves you going your separate ways, then you are putting yourself in a very weak position for no reason.  Your Chinese counter-party certainly has a wide range of alternatives – and that is one source of his negotiating power.

Structure strategic deals with a rising pay-out.
Chinese and Americans view risk and opportunity differently.  For many Westerners, the China operation is an extension or expansion of a larger business.  We tend to be accretive – building up and accumulating pieces of the puzzle in an effort to assemble a large, stable operation.  Modern Chinese, on the other hand, have grown accustomed to an endless stream of potential counter-parties coming ‘round the bend and seeking them out.  When you tell a Chinese counter-party that he can expect a level payout from a stable business, he may very well take this as a sign that this deal has lost its potential and it’s time for him to find a more promising project.    Many Westerners sourcing goods in China are shocked and dismayed that instead of building guanxi and receiving better terms from long-term suppliers, they suffer from unpredictable quality problems and cut-throat price pressure.
Chinese negotiators tend to be more sensitive to opportunity cost than sunk cost and are always looking for a higher return.  It’s precisely this willingness to book gains and move on that gives Chinese so much leverage in negotiations with Westerners.

Don’t rely too much on your Chinese counter-party’s self-interest to preserve your partnership.
Clever Westerners used to gloat that they had guaranteed cooperation and compliance from Chinese partners by structuring a deal that only involved small up-front good faith payments—with the bulk of the payment coming after the Chinese side had performed satisfactorily.    This plan usually failed for one of three reasons.
First, this kind of behavior, while considered prudent in the West, tended to undermine guanxi and led to a vicious cycle of distrust and suspicion in China.  A second problem stemmed from the fact that cash was not the only asset involved.  While the Westerner was very withholding and cautious with his dollars, he tended to be much more generous with his IP – such as designs, brands, and processes.  Many Chinese counter-parties considered the up-front money a scholarship to Your Business University – and these guys take their education VERY seriously.  And finally, even a small up-front payment was worth having if the Western side was offering.  We don’t see this as often as we used to from established players in Beijing or Shanghai, but if you are dealing with entrepreneurs or venturing out to the sticks, a small sum can go a long way.

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

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

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

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

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

Next: Part III: BOPS and counter-tactics

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

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

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

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

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

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

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

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

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

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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If you’ve been making deals in China for a year or so, you may feel that the mood is getting frosty and a bit tense. Those that have been in the game a little longer should be familiar with the attitude since it is a return to the ‘old days’ of the mid-90s when international business in China was more exception than rule. Beijing was extremely accommodating to both domestic entrepreneurs and foreign friends for most of the last decade, but now the policy people seem to have declared victory and moved on.

China Inc is maturing and the time has come to put away childish things and start getting down to real business of wielding the Mandate of Heaven. It is time for the foreign friends to either play quietly or go home.

Negotiation in China has always been adversarial – but now at least we can stop pretending in all that ‘everybody love everybody’ nonsense. Here are 10 rules for doing deals in New China.

1. This may not get better soon.
Cordial relations between China and the West is a fairly recent construct. Many tried to convince themselves that friendly cooperation & win-win business was the status quo for China deal-making, but it is simply not historically accurate. You may want to get along with everyone but US-China rivalry is written in the DNA of both governments. Look for both sides to slide into old patterns of zero-sum competition.

2. Know your counter-party.
The guy your are dealing with either represents the bureaucracy, an SOE or a private business – but they are all working off the same playbook. Every local is following both the stated and unstated policy directed by Beijing. This is trickle-down cuthroat competition, and you should beware of ‘good-cop’ partners who offer to manage the pesky bureaucrats for you.

Most negotiating problems of the past were a result of misunderstanding, incompetence or flat-out dishonesty. Those are walks in the park compared to ideological disputes. If you have been working with a local partner, agent or service provider who has been talking up his powerful connections and guanxi with officialdom, you have to understand that those are the relationships he will work to preserve– not the short-term commercial relationship he has with you.

3. Every Chinese deal has 2 negotiations.
You negotiate twice in China – once to get the deal and once to do the business. If you are not budgeting time and resources for the second negotiation, then you are committing a serious tactical blunder.

4. Double standards and unequal treatment are institutionalized.
Obama sees Dolly – and suddenly your regulatory and bureaucratic procedures become more of a hassle. The rule of law never really caught on in China, and we may have already passed the high-water mark for equitable treatment of WOFEs and FIEs. Compliance with regulations and loose timetables aren’t just best practice in China anymore – they are immutable laws of nature. Plan on competing with locals who have much lower hurdles to cross.

5. Staff up and pay up.
Buy friends to influence people. That means having a lawyer, an accountant, and access to knowledgeable consultants who are answerable to you and you alone. I love “Mr. China” type stories about smart guys learning the hard way, but they are anachronisms. The cost of failure is rising rapidly. I know that no one likes to pay for professional advice, but the ground is shifting. Local counter-parties and suppliers are no longer valid sources of information (if they ever were). Make sure you have access to reliable, timely information. If that means spending money, time or bandwidth, then budget for it.
Oh yeah — more bad news. Paying for expert advice is only the beginning. Then you have to actually follow it.

6. Lock in gains.
The relationships you have are the relationships you want to keep. The Chinese are serious about the value of relationships – but that cuts both ways. Yes, the people you’ve known and worked with for years will be loyal to you (maybe). Building new relationships, however, will be much harder in this environment. Vet new partners and suppliers carefully, and make sure that you are worthy of any trust and loyalty you’ve built up with locals over the last few years.

7. Have a plan B
You need an alternative course of action that doesn’t have the same risk profile as your main game. That might mean structuring your China operation differently — or maybe creating a scenario that doesn’t include China at all. Ask yourself a simple question – what if you and/or your key people can’t get a visa to enter China? Is it an inconvenience or a train wreck?

8. How much China do you want?
We used to ask, “How much do you need to be in China?” Now we’ll be asking, “How much China do you need to be in?” The days of growing an “organic” (i.e.: unplanned, seat-of-your-pants) China organization are over. China is now too expensive, competitive and risky to fly blind. How much money, personnel and bandwidth do you plan on investing, and what do you plan on getting in return? If you can’t answer those questions then you haven’t planned enough.

9. Stop reinventing the wheel.
Look for people you know who have already done this (i.e.: other expats) to partner with or hire as management consultants. An ideal partner is someone with a good reputation, a similar or complementary business, and has been through all the regulatory and licensing procedures. This can be a great way for newcomers and expanders to get exposure to China without taking on too much risk.

10. You only get to play hardball once in China.
Chinese negotiators tend to be passive-aggressive and are highly sensitive to perceived slights and insults. Two Americans can curse each others’ mothers in the heat of negotiations and still end up lifelong buddies and partners. This isn’t going to happen in China. If you feel that you have no choice but to issue an ultimatum or lay down the law, make sure it’s worth it. You may just trash your relationship – even if you were right about the facts.

China is becoming less cheap, more risky and decidedly less friendly. That’s not to say that business can’t be done or that you can’t make friends and have a wonderful life in China. But if the US and China slide into a trade war there is no neutrality.

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Americans see contracts as independent constructs that put limitations and obligations on both signatories. Chinese negotiators see contracts as snapshots of agreements at a specific moment under specific circumstances. Americans view contracts as a destination, while Chinese view them as milestones.

This isn’t a matter of semantics or rhetoric. It’s a completely different orientation to the deal-making process. The upshot is that many American negotiators get on a plane with a signed contract and a wholly erroneous belief that they are doing business in China. Their Chinese counter-party heads back to his office believing that he has begun a long process of starting to do business with an American. While the situation isn’t necessarily going to end badly, there is certainly a disconnect between the two sides that has the potential for disaster.

Americans doing business in China have to differentiate between doing deals and doing business. Chinese negotiators tend to see business agreements as far more fluid and flexible than Americans. These

Execution: Americans tend to equate a signed contract with deal execution. In China, many agreements simply never progress to the actual business stage. Chinese counter-parties often have to ‘sell’ their deal internally – even after a contract is signed. They expect their new American contact to assist – or at least show flexibility – as Chinese work to secure internal approval and buy-in. When the American side displays impatience at the delay or re-negotiation, deals quickly fall apart. Many American deal-makers find that their hard-won concessions and horse-trading amount to nothing in the end.

Renegotiation: Be prepared for ongoing negotiation and haggling over deal-points you thought were already settled. Experienced expats warn newcomers to China that nothing is really settled until the money is in the bank. Negotiation never really ends in China – and waving a piece of paper in front of your Chinese counter-party accomplishes very little. Make sure to build sufficient slack into your timetables to allow for re-renegotiation.

Conflict resolution: Lawsuits are rarely a viable solution in China. Even arbitration is a long-shot. It’s ok to point out to your Chinese counter-party that the matters in question are explicitly covered in the contract – but this works much better as a starting point than as a final argument.

Exit strategies: It’s a very good idea to discuss how and when your deal will end – unless you want it to end badly. Even if you don’t plan on including this in the contract document, you should at least broach the subject of how the relationship will end early in the negotiation process. Americans assume that one successful deal will automatically lead to subsequent deals with the same terms and conditions. Your Chinese counter-party may not object to more business – but he may want to change the deal.