1. The China Business Proposals we see
Foreign companies frequently come to our law firm wanting to do business deals in China — less often now than a few years ago, but still quite often. 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 (often 15+ pages), with lots of facts and arguments stating why the deal is a good one. The document is usually quite impressive and involved a lot of work.
After reading the client’s China business proposal, our first question is usually “what exactly are you asking the Chinese side to do?” The client’s 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 that 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.”
2. The deal proposals that rarely work
Virtually no deal introduced this way 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 virtually 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 British client on a somewhat unusual investment project in China. The British side had worked many years with a Chinese manufacturer and had developed a good relationship based on trust. The British company sent the Chinese side an investment proposal. The document was complete, describing the investment opportunity and the prospective return on investment. The British side contacted our China legal team 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 interpreted the Chinese side’s message was as: “What do you want us to do?”
3. How to structure a business proposal for Chinese companies
We advised the client to assume it understood what would be the best deal for both sides and suggested it draft up a one-page proposal reflecting that. We then suggested our client send this one-page proposal to the Chinese side and then do a Zoom call with 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 after a series of Zoom meetings with the Chinese side, we eventually put together a good deal for both sides that led to a signed contract.
We suggest companies stick to the following four basic rules for making business proposals to Chinese companies:
1. Make a clear written proposal stating exactly what you expect your Chinese counter-party to do. Do not worry about being wrong about what the Chinese side wants. If the underlying deal is a good one, the Chinese will tell you what is wrong with your proposal and what you must do to fix it. The Chinese side will not usually be offended that you took the first step; they will be relieved.
On the other hand, the Chinese side will virtually never take the first step. If you don’t do it, it won’t happen. If you push the Chinese side really hard to make the first step, they virtually always go silent or just pull some proposal from the Internet that likely has little to do with your or its actual situation. Our China lawyers have been involved in close to a thousand China deals (many of which went nowhere) and I doubt that we have seen even a half dozen thoughtful business proposals from the China side.
2. Your clear written deal proposal should be at most three pages long. The Chinese often assume a deal that is too complex to explain in just a few pages is a fraud, and they will have no interest in being scammed. To show both sincerity and sophistication, we usually recommend our client’s China business proposal be translated into Chinese.
3. You should deliver your written deal proposal in advance of any meeting (live or virtual) at which the proposal will be discussed. Chinese business people generally want ample time to discuss business proposals with their bosses and advisors. If you spring a proposal on them and they have not had a chance to prepare, you will likely be met with an awkward silence.
4. Your project timeframe should not extend beyond three to five years. Many foreign investors believe Chinese companies have a long-term view of the world and of business relations, but in our experience, two to five years is by far the most typical time line. We think this is mostly due to the constant and rapid changes China has experienced since 1980, crushing confidence in long-term projections beyond each Five Year Plan. Your written deal proposal should reflect this.
For more on how to avoid problems with your China business proposal, check out China LOI and MOU: Don’t Let Them Happen to You.
