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Negotiating Your Next China Deal

26 April 2013 12:24

Westerners negotiating business deals in China have two basic options: 

1) Change China

2) Change the way you approach business negotiation.

Everyone laughs at option 1 – Change China – yet to many Americans this is the default setting for doing business abroad.  I spent the first 6 years of my China career trying my best to accomplish this – and patting myself on the back for doing so.  Why?  Because all of the Chinese people I came into contact with said things like, “We have so much to learn from you.”  I quickly took on the role of teacher, coach and leader. I expected an endless stream of transactions and lucrative contacts in return – but once the Chinese side of the negotiation had learned what they needed, the moved on to the next counter-party.  I was out. I eventually figured out that what Chinese negotiators actually wanted was to acquire the technology and business methodology necessary to compete effectively in international markets.

Doing business in China has never been more important for international business – but the stakes of failure have never been greater.  Here are some ideas that will help Western negotiators be more successful in China: 

Rules of the Chinese negotiating road:

  1. Relationships Trump Contracts.  There is a misconception that contracts don’t count in China, but it’s not true.  They do, however, play a different role in the negotiating process.  To a Chinese negotiator, contracts are a written record of a particular agreement between two individuals at a specific point in time.  They are useful as guideposts and milestones – but the real source of stability and continuity in business dealings are the relationships between leaders.  If you lead with the lawyers, you will undermine the very trust that you need to be successful in China.
  2. Traditional customs still count.   The catch is that they generally won’t help you much – but they can work against you if you make mistakes.  Don’t believe the hype that traditional Chinese concepts like guanxi, face or harmony are relics of a forgotten age.  It’s not so.  Mainland counter-parties and consultants will make you comfortable by telling you how modern and efficient China has become – but Westerners have to get used to two inconvenient realities.  First, you are expected to obey Chinese norms of harmony and face by altering your behavior and making concessions when conflicts arise.  The second reality is a bit tougher -- the same norms don't offer foreigners protection or advantage.  Face, guanxi and harmony are considered vital when they benefit the Chinese - but archaic and outdated when they would give you the advantage.
  3. Negotiations don’t end in China – because they aren’t supposed to.  One of the greatest sources of frustration - and deal killing conflict - is differing expectations about when the negotiation ends.  For Americans - the quicker the better.  As soon as the contract or sales agreement is signed, we’re through talking and ready for action!  We draw a mental line between the negotiation phase (prelude) and the execution/ implementation phase (profit).  Chinese negotiators don't make the same distinction.   If the relationship is intact, the conversation continues. 
  4. Structure deals for success.   Western negotiators hope for success but plan for failure.  Our contracts and deal terms are all about limiting loss and protecting property.  But what happens if your business is a success?  Now you have two challenges.   First – your China operation is valuable – and that makes it worthwhile for someone to go after.  Sure, you have a contract – but going to court in China is expensive, time-consuming and risky.  The second challenge is your Chinese partner has probably signed an agreement that guarantees him a low margin or fixed payment.  This made sense when the business plan was unproven – but now looks paltry and unfair.   Good negotiators structure deals that make loyalty more profitable than IP theft counterfeiting and competition.   
  5. Your most important China negotiation takes place back home – with your own people.  Western negotiators know how to do deals in their own markets – they set their bottom line or BATNA, have an ambitious opening demand, and analyze the market to get an idea of where the deal is most likely to come in.  It's second nature.  In China, however, planning can be fuzzy and everything becomes relative.   China novices often send home glowing reports about how well everything is going during the relationship-building phase - when everyone loves everyone.  Before long, however, the unsuspecting negotiator is caught between the unreasonable expectations of his home office and the rapidly shrinking offers from the Chinese side.  You have to be able to walk away from a bad agreement – but that’s hard when your bosses expect a signed contract.

You can definitely negotiate profitable deals in China, and plenty of Westerners have developed long-lasting, mutually beneficial partnerships there.   If, however, you go in without a sensible strategy, and plan on following the same procedures you do back home then you’ll get nothing but conflict, lost opportunities and pilfered IP.  Budget time to build relationships, keep your time-table open ended, and structure smart deals that take both sides’ goals into account.   China is a tremendous opportunity, but carries significant risks.  Be prepared.

 

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Andrew Hupert runs ChinaSolved – which helps Western businesses negotiate more successfully in China.  Follow him on ChinaSolved.com and ChineseNegotiation.com

Content provided by Andrew Hupert of ChinaSolved.com

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