China Business

Five Rules for Negotiating your China Deal.

Negotiating with Chinese Companies

When a foreign company calls me and says they are about to go to China to “finalize” a big deal with a Chinese company, my first thought is usually along the lines of “let’s talk again in three or four months.” If the potential deal is with a Chinese SOE (State Owned Entity), I mentally add a month or so, and another month still if it is with a Chinese city.

The foreign company calls either to give my law firm a “heads up” that a contract will be needed down the road, or to ask us to draft a contract to show to the Chinese company. I usually end up trying to tone things down and by suggesting that until more contract terms become clear, our next step should probably be just a fairly basic Memorandum of Understanding (MOU).

Nine times out of ten, the foreign company’s next call (upon their return to the United States) is to say they now realize they were not as close to a deal before they went to China as they had thought but now they are “90 percent of the way there and there are just a few small items that need to be resolved.” Two to three months later, I start drafting the contract.

The above scenario is not true of all China deals, but it is true of enough of them that I have come to see this as a normal course. And I am not the only one.

In Conflicting Deal Cycles: A New York Minute vs. a Chinese Lifetime [link no longer exists], China negotiating professor/guru Andrew Hupert describes how deals between foreign and Chinese companies typically go down and his description is not too unlike mine.

Hupert sets the stage by telling of how he has been asked to review “a deal in progress between a US service provider and the local government of a third-tier Chinese city.” Hupert talks of how the US company described its”progress” after “four months of email negotiation and one visit to the Chinese hinterlands” with words like “scam”, “backwards” and “funny business”.  Hupert’s analysis of the situation was that all systems were functioning rather normally:

“I can’t be sure, but it doesn’t sound like you are being ripped off. In fact, it seems like things are going pretty smoothly”. When I told them that they were on track for another six months or so of similar successes before they could expect a solid agreement, they didn’t look happy.

Hupert then sets out the following five rules “for New Yorkers negotiating their first China deal” that apply equally as well for anyone negotiating any China deal:

1. Time and scheduling.  It will take a very, very long time. Trying to rush the timetable will only delay things further as your local counter-parties get nervous and start adding people and extra meetings to try to appease you. Being a type A, table-banging, no-nonsense hard guy will not impress your Chinese counter-parties. In fact, to them it looks like you are having a hissy-fit. Yup. You’re not “The Donald” — you’re the brat who has to turn off “Sponge Bob”. If you are buying you can move things along a bit, but if you are selling or partnering, I’d be concerned if your negotiation took LESS than six months.

2. Truth and Honesty. 
They think they are being polite by telling you what you want to hear. New Yorkers do the same, but instead of them saying, “What a cute baby” or “you look great in those jeans” they are saying, “we’ll wire the money within 60 days” or “it looks like we have a deal”. They are surprised you took them seriously. Not impressed –- just surprised. If you want to avoid the worst of the overly polite double-talk, arrange for your own translators and spend an hour discussing background and procedures with them BEFORE your meetings. If you rely on the other side to provide translation services you are putting yourself at their mercy. And no, not everyone in China speaks English. It’s pretty much a given that your key decision-maker doesn’t –- at least not with you.

3. Dim lights, dusty city. 
If the Chinese are calling you, it probably won’t be from Shanghai or Beijing. Those people have already got a supply chain and service providers they know. Most of the exciting stuff is happening in 3rd tier cities deep in China’s interior. For New Yorkers, that would be like Syracuse NY or Allentown PA –- except in China those 3rd tier cities might have 7 million people and tons of government stimulus money. Expect to take a little plane from Beijing direct to the middle of nowhere, and then drive for 6 hours. Don’t panic, but yeah, you are off the map with no way of getting home and no one knows where you are and no one understands a word you say. Believe it or not, you’re completely safe.

4. Effort doesn’t count. 
If you are in the countryside, don’t joke about how bad the roads are. In the cities, don’t complain about the traffic or crowds. Don’t whine about how hard it is to get there or the lack of 5 star accommodations. You know how that guy from Texas sounds when he talks about the sky-scrapers blocking the sun in mid-town Manhattan? Well that’s you in China. This is their home. It’s not quaint or exotic. It’s where their parents grew up and where their children will probably grow old. They are not impressed that you are deigning them with your presence. If your negotiation goes well, you should plan on being there at least twice a year for the duration of your relationship. Make it clear to them that you understand that and are happy about it.

5. A little goes a little way.  
It’s nice that you can say ‘ni-hao’ and use chopsticks. And yeah, in the sticks they will flatter you and tell you how good your Chinese is. Smile, laugh, and be friendly. But don’t think you are done. Real compromise with a Chinese counter-party is a huge commitment. If you aren’t prepared to add manpower, put in the travel time and change your operating procedure to accommodate this new business, then you should think twice about starting the negotiation. A China operation isn’t like a fern that you water twice a week. It’s like a relationship that will sour and turn on you if you neglect it.

I agree with every word Hupert says with one minor exception.

Not only do you have to tell your Chinese counter-party of your willingness to do what is necessary to make the deal work, you have to show it and I find the best way to do that is to return for face to face negotiations almost at a moment’s notice. I know this is not the advice people like to hear, but in my experience, absolutely nothing works better than a face to face meeting when negotiations are flagging.

We have an expression in my office on how “a day on the ground is worth a month in the office” and what we mean by that is that to get foreign lawyers to get things done and to get our clients’ cases/matters moving, a meeting with them is oftentimes required. The power of the meeting is that work gets done before we arrive so no face will be lost when we are there and then at the meeting, we can work together so that the plan going forward is theirs, not ours.

The same is true, of course, regarding non-legal work. And if you are going to fly halfway around the world for the meeting, you have to make sure you have your own person there with you who speaks Chinese and who fully understands what you are trying to accomplish. Add another month to your deal if you are not willing to get on the plane and another month if you are not willing to bring along someone with both Chinese language skills and knowledge of the deal.

The longer negotiations drag on, the greater the chance something will intrude to put a kabosh on your deal. Face-to-face meetings not only the best way to move negotiations forward, they are also the best way to measure the seriousness of your Chinese counter-party.

What do you think?

2 responses to “Five Rules for Negotiating your China Deal.”

  1. The China Business Podcast shared a number of conversations about M&A and such over this summer; they went into more minutiae, but I think they’d agree with all these basic points.

  2. Dan, I think you are totally right. I’m a lawyer from Brazil and since something like an year ago I travelled to China to establish comercial relations there. I found out that, contrary to the american way of doing business, at first they want just to make real friends and check how much you respect their history and opinions. Only after you pass this test is that you are going to really be allowed to talk business seriously. And you are right, its common for them, in a truly oriental style, to calmly say whatever you want to hear in a meeting, no matter what they are really thinking. For those who does not know it, looks like they are ready to sign with you whatever you put on the table. But the truth is that you absolutelly have no idea what they are thinking, unless you have a real friend or something like that on the other side to tell you that. I think China, unlike countries like the US and Brazil, is still too worried about subjects like territorial integrity and political stability to talk strait business directly. They need to feel safe about your intentions and only after this happens they will accept you to the group.

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