Antidotes to Chinese Negotiating Tactics, Part Three

This is the last of our three part series on how to handle Chinese negotiating tactics. Part One can be found here. Part Two can be found here. In this post I will discuss two additional techniques Chinese companies commonly use to drive foreigners mad during the contract negotiation process.

4. Never never land.

Chinese companies often justify their outrageous demands with the vacuous statement that “China is different.” It is shocking how many foreign negotiators accept this. China is different from other countries. This is a trivial statement, since every country is different from every other country.

But in terms of laws and regulations, China is not all that different from other countries. Chinese laws are not original. They are based for the most part on foreign models. In addition, as far as foreign investors are concerned, the content of Chinese laws is further constrained by China’s participation in the World Trade Organization (WTO), the World Intellectual Property Organization (WIPO), the Convention on the International Sale of Goods (CISG) and other international standards setting bodies and conventions.

China has for the most part brought its foreign investment and business laws in line with international standards. In most cases, China’s laws hew closer to international standards than the often eccentric laws of the United States and England. Chinese laws are based on the civil law standard. What often seems to a U.S. investor as an unusual legal provision is often nothing more than the difference between the common law and the civil law approach to certain issues.

Whenever the Chinese side of a negotiation argues that “China is different,” I request that it provide me with a copy of the Chinese statute or regulation that imposes this difference. In my more than 20 years of negotiating contracts in China, I have never once received a substantive response to this request. On occasion the Chinese side will send over a host of Chinese language documents. but they always turned out not to have anything to do with the issue at hand and none imposed the rule the Chinese claimed to require we honor their unreasonable request. Our China lawyers just this week wrapped up a negotiation where when the Chinese side did provide us with the law, it said exactly what we had been saying it said all along, just as we knew that it would.

What is “different” about China is that Chinese negotiators do not feel constrained by the rules of good faith negotiation. Thus, when a Chinese company argues “China is different,” what they really mean is that the fair and impartial laws of China do not reflect the reality of China. The reality is the Chinese side must take advantage of the foreign side. This means the foreign side must accede to the unreasonable request of the Chinese side. If the foreign side does not concede to patently unreasonable terms, no deal can be made.

In this sense China is different. However, this is a difference that should not be tolerated by the foreign party to any contract. The response from the foreign side should be first to demand to see the law that requires the unreasonable condition. After the Chinese side fails to provide that law it will usually say something like: “well, the law does not provide for this but our government will not approve the deal unless we include this provision. The response to that statement should be that “if your government will not approve the deal, then we will not do the deal.” This should be made very clear. If the Chinese side does not back down, you should terminate the negotiation.

Let me give an example. It is common in negotiating China Joint Ventures for the Chinese side to insist the foreign party contribute its intellectual property to the JV. The same is true in many technology license agreements where the Chinese side will say: “sorry, but you cannot protect your IP. You must transfer everything to us at the end of the license.” This situation is obviously the opposite of what the foreign side wants from these transactions. When the foreign side resists, the Chinese side will then play the “never never land” card and state that Chinese law requires such a transfer. Chinese law does not make any such requirement; this is simply what the Chinese side wants out of the deal. Of course, the Chinese government supports the Chinese side, since the free transfer of technology arguably benefits China, so everyone in China is on the same side. Thus government authorities involved will usually do nothing to clarify the situation.

The foreign side will all too often accept the “China is different” justification and go forward with the deal. Later, the Chinese side will drive out the foreign JV partner or terminate the license and appropriate the technology. When that happens, the foreign side will complain about the Chinese law that mandates such a result. However, there was never such a law. It is virtually always a case where the foreign side agreed to a contractual provision that guaranteed its own eventual doom. Chinese law is not at fault. Gullibility in falling for the China is different argument is where the fault lies.

5. Revenge is a dish best served cold.

In the discussion above, I advise the foreign side resist agreeing to unreasonable Chinese demands and if the Chinese side will not back down, the foreign side should terminate the negotiation and return home. The foreign side should not enter into a bad deal or a deal that it does not understand simply because it has been manipulated by standard Chinese bad faith negotiation techniques.

In these tough negotiations, it is usually required that the foreign side just has to say “take it or leave it.” In a surprisingly large number of cases, the Chinese side will “leave it,” even in cases where this decision seems to make little economic sense. Thus, when the foreign side gives the final ultimatum, the foreign side has to be prepared for the Chinese side to walk away from the deal.

In some cases, however, the Chinese side will back down and will accept restrictive provisions against which it has been vehemently fighting during negotiations. It will accept the challenge and it will “take it,” rather than walk away from the deal. In that case, the foreign side will congratulate itself on having “won” the negotiation.

Not so fast. The problem is the Chinese side oftentimes does not fully accept its concession and it will then work to unwind the concession in some way during the life of the transaction. It will focus on taking revenge for its defeat on the contract issue. It will focus on this revenge with little regard for whether it obtains economic benefit from its actions. Even when it will actually suffer economic damage from its conduct, it may still focus on obtaining revenge for its defeat. The passage of time makes little difference. Their only concern is on obtaining revenge.

Why is this? Social researcher Ian McKay has this to say in general about people who seek revenge:

People who are more vengeful tend to be those who are motivated by power, by authority and by the desire for status. They don’t want to lose face.

This description nicely describes the typical Chinese businessperson. They treat contract concessions as a loss of face, and they will focus on getting back their “face” to the exclusion of everything else. The economics of the deal do not matter. What really matters is the balance of power and their face. This attitude is quite foreign to most foreign business people who treat contract negotiations as an economic, not a personal issue. It is therefore difficult for foreign business negotiators to understand how this issue can impact their future business relations with a Chinese party.

The issue goes beyond face. If you discuss these matters with Chinese businesspeople you will learn that the Chinese side views the Western approach to contract negotiation as fundamentally unfair. They see the Western insistence on certainty and clarity as fundamentally a bad faith phenomenon. For the Chinese, certainty in contract terms is justified only for a one off, single transaction, “horse trade” style sales contract. The sale of an office building or a single shipment of a commodity is an example of this type of contract.

For any contract that requires continuing performance over time, the Chinese see attempts to pin them down and impose certainty as fundamentally unfair and contrary to reality. For the Chinese, the future is essentially uncertain and the attempt to impose certainty on this uncertain future makes no sense. Where the Chinese side agrees to such certainty, it does so under protest and with the belief that unequal bargaining power forced them into an inherently unfair transaction. Thus, they do not have moral qualms in taking their revenge by undoing the terms of this inherently unfair agreement at a later date. Their belief that they have the moral high ground fuels their need for revenge and explains why they will seek revenge even in cases where there is no economic benefit.

This feeling runs deep in China and is difficult to deal with rationally with the typical Western company business calculation. For foreign parties, it leads to complex assessments of negotiation strategy. Total victory is seldom useful in China. This then leaves open the question of what sort of compromise short of total victory will result in a contract that is still acceptable to the foreign party.

In my experience, there are two viable options for dealing with the final battle over key terms. The first is to walk away from the deal. No deal is better than a bad deal, and what looks like bad deal in China will certainly turn out to be just that. Where abandoning the deal is not acceptable, the foreign side should plan to concede on some issues important to the Chinese side so as to provide the Chinese side with some feeling of victory. This concession should always be balanced against an overall assessment of the benefits of the deal to the foreign side. No deal should be concluded in China that does not provide for substantial benefit to the foreign side. Close deals never work out in China. The foreign side needs room on the benefit side to overcome constant pressure to chip away at the foreign benefits at every stage in the process of performance.

What do you think?

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