Foreign companies frequently come to the international corporate lawyers at my law firm wanting to do business deals in China. When we ask them for all documents regarding the deal, the client will often show us what they have sent to the Chinese side. This is usually a long document (typically at least fifteen pages and often double that), with lots of facts and arguments stating why the deal is a good one. The document is almost always impressive and clearly involved a lot of work. However, the document is also almost always a waste of time, and so will be the trip to China designed to negotiate the deal.
After reading the document, we usually ask our client, “what exactly are you asking the Chinese side to do?” Their response is usually to tell us they intentionally left that part out of their document because they do not have a good sense of what the Chinese side will want to do. They then explain that this is why they set out so many facts and provided so many different options. They then further explain they cannot “just make a proposal because we do not really understand the motivation or concerns of the Chinese side and the last thing we want to do is offend them by making them think that we are trying to push them into a deal structure that will not work for them.
This approach to negotiation in China is almost always a disaster. Virtually no deal introduced this way ever gets off the ground in China because Chinese businesses typically want a simple, specific, concrete proposal to which they can respond. If the foreign side leaves the structure vague, the Chinese side will usually have nothing to say. In this situation, a deal that may be good for both sides never gets done because neither side can bring it to the point where the real bargain is negotiated. The Chinese side always wants to show its cards last. If you do not show your cards first, there will be no cards back from the Chinese side.
We recently worked with a client on a somewhat unusual investment project in China. The U.S. side had worked many years with a Chinese manufacturer and had developed a good relationship based on trust. The U.S. sent the Chinese side an investment proposal. The document was complete, describing the investment opportunity and the prospective return on investment. The U.S. side contacted me with a sense of frustration because the response from the Chinese side was not clear. The Chinese side had not said either yes or no; it had instead responded with frustration and irritation. We had to interpret the message and we told our client the Chinese side’s message was: What do you guys want us to do?
We advised the client to assume it understood what would be the best deal for both the Chinese side and the U.S. side and suggested it draft up a one page proposal reflecting that. We then suggested our client send this one one page deal proposal to the Chinese side and then visit the Chinese side a few days later. We stressed that this statement must be provided in writing in advance to give the Chinese side time to think about the deal and prepare its response.
Our client followed our advice and they met with the Chinese side for three days. At the end, they put together a good deal for both sides.
We suggest companies stick to the following four basic rules for making just about any type of business proposal to a Chinese company:
1. Make a clear written proposal stating exactly what the Chinese side is expected to do. If a joint venture corporation will be formed in China, your proposal should state that, along with the joint venture’s ownership percentages. Do not worry about being wrong about what the Chinese side wants. If the underlying deal is a good one, the Chinese will be quite willing to tell you what is wrong with your proposal and what you must do to fix it. The Chinese side will not be offended that you took the first step; they will be relieved. On the other hand, the Chinese side will never take the first step. If you don’t do it, it won’t happen.
2. Your clear written deal proposal should be one to two pages long. If you write more than that, the proposal will probably never get read. The Chinese often assume a deal that is too complex to explain in one or two pages is a fraud, and they will have no interest in being scammed.
3. You should deliver your written deal proposal in advance of any meeting where the proposal will be discussed. Chinese business people do not want to be put in the position where they are required to think on their feet. They want sufficient time to digest any proposal and to discuss the proposal with their bosses and their advisors. If you spring a proposal on them where they have not had a chance to prepare, you will likely be met with a stony silence at best, angry complaints at worst.
4. Your project timeframe should not extend beyond three to five years. Many foreign investors believe Chinese businesspeople have a long-term view of the world and of business relations. This is typically true of Japanese and Korean businesspeople but this is not generally true of the Chinese, who generally have a three year business time line. Due to China’s rapid changes since 1980, Chinese businesspeople are convinced business opportunities cannot be projected beyond three years. Your written deal proposal should reflect this.
What are you seeing out there?