China Business

Get Ready for Lose-Lose Negotiating

China contract lawyers

There’s an old joke about a Frenchman, an Englishman and a Russian who are told they have only one day until the end of the world. The Frenchman says he will spend his last day with a bottle of Bordeaux and a beautiful woman. The Englishman says he will take his favorite sheepdog for a walk across the moors. The Russian says he will burn down his neighbor’s house.

A couple years ago I told a Chinese attorney friend of mine who runs a Shanghai law firm what my firm looks for in all our hires. His response was that he does not like to hire attorneys “that good” because they will end up wanting to start their own firm because they will not be paid enough. My response was to suggest he pay his people more. His response was to look at me like I had two heads.

In Sub Zero-Sum Game Negotiations in China [link no longer exists], Andrew Hupert, professor of Chinese negotiating at NYU, tells how foreign businesses need to be prepared for “burn your neighbor’s house down lose lose negotiating in China”.  Andrew’s post begins by explaining the more familiar “win-lose” and “win-win” deals:

Classic negotiating theory divides all transactions into two categories – Distributive (Win-Lose deals), and Integrative (Win-Win).
Traditional competitive deals are referred to as Distributed because the two parties split (or distribute) a fixed pool of assets.

Integrative deals are often referred to as Win-Win or collaborative because the two sides cooperate to ‘enlarge the pie’ or increase the total value of assets beyond the initial scenario.

In China, however, where non-economic factors, such as “face, guanxi, or lately, nationalism” can be important factors, “it is common to experience a third scenario: Lose-Lose negotiation.” According to Hupert, “in China your counter-party will sometimes opt for a situation where they lose a little if you lose a lot over an outcome where you gain a lot and they gain a little.” This is most likely to be the case in dealing with a representative from a State Owned Entity (SOE) because that person may not “benefit directly from positive outcomes, but may be penalized for a negative outcome. As trade tensions rise between China and the West, Win-Win deals will be regarded with increasing suspicion. Chinese negotiators consider it increasingly advantageous to see you fail.”

“Chinese negotiators are often working off a different time-frame and valuation model” than their Western counterparts. They are usually more willing to wait to achieve a deal that gives them greater control and exposure to technology, and because brand names matter less in China, they are also willing to engage in behavior that could damage their reputation. “Finally, nationalism is playing an increasingly important role in Chinese negotiations — as real or perceived slights, insults and challenges impact on deal-making.”

Hupert sets out five factors Western companies must consider to avoid “damaging sub-zero sum game outcomes”:

1. Learning curve.  Some negotiations are not really negotiations; they are “educational opportunities for the Chinese side.” Beware of “negotiations” that “are really new-product development exercises.”

2. Competitive factors.  Joint Ventures (JVs) and cooperative arrangements start out just fine when they focus on production and product development, but when it comes time to access the Chinese market, the deal often falls apart.  “Many observers consider the DANONE-Wahaha negotiation as a case in point. The JV was quite effective when it was exporting to foreign markets, but things got rocky when it came to the Chinese market.”

3. Timing. Sometimes the problem is about timing. The Western side wants to move fast – the Chinese side doesn’t.

4. Differing valuations of the Chinese market. China “has a long and unfortunate history of Westerners benefiting economically from Chinese resources. Chinese policy-makers and managers have become very sensitive to losing control of the domestic market or resources.”

5. Risk profile. Chinese and Western negotiators view risk differently. “Westerners tend to see uncertainty and risk of loss as two sides of the same coin. Chinese negotiators, however, have a much greater sensitivity to uncertainty – and tend to freeze up and stop deal progress if they can’t see what the risks are.”

Hupert then explains the “value” to Chinese companies of “destroying your China business.”

Last but not least, many Chinese entities see a real value in destroying your China business. In some cases there are policy considerations – such as Youtube, Twitter and Facebook. But sadly, there are actors on both sides of the Pacific who consider it patriotic to scuttle deals that may yield profits to ‘foreigners’. In the US this is generally a regulatory matter that takes place away from the deal table. But in China where you may be sitting across the table from an SOE or policy-driven manager the issue of patriotic hostility is a negotiating matter. Determine the likelihood of executing the deal (not just signing a contract) early in the process – before you reveal sensitive technologies or business practices.

What do you think?

 

5 responses to “Get Ready for Lose-Lose Negotiating”

  1. I agree in general with the line of this argument, although I’m not sure whether the average Chinese negotiator will have a lot of national political consideration on (mostly) his mind. The argument is based on the notion that the negotiator on the Chinese side has not direct interest in getting a positive outcome and might settle for a lose-lose situation.
    That is why corruption has been invented: the negotiator does get a direct benefit from a positive outcome. Many Western firm might not see this as a legit way to avoid this conundrum and that is possibly why it is missing here.

  2. Really interesting negotiating concept. It would be good to add to the article a lose-lose negotiation case study to illustrate the concept.
    I’ve also had a bit of trouble understanding how the 5 factors (which are good knowledgeable advice) will prevent the “sub-zero” outcome… when the initial assumption is that what they look for is your business loss (even if they need to have a small loss themselves)…
    I understand from the article how those factors will help avoid IP or know-how theft (factor 1), market access blockage (factor 2) … but it still sounds like win-lose. … Factors 3 & 5 will give insights on what to expect about timing … but I do not see how they prevent the sub-zero outcome…
    And I honestly do not agree with point 4. The original article states that “The Chinese side tends to value China access more highly than Westerners do, and this can ultimately scuttle the deal”. I think companies who are serious about entering the Chinese market value China access as a key part of the deal….and know how difficult it is…. (maybe I misunderstood that one)

  3. Win-win (integrative), win-lose (distributive) negotiations are mainstays of businessmen. I find that lawyers perform a fair amount of lose-lose negotiations, primarily after unexpected factors arise that destroy the original goal – and only to reduce the harms to the parties that already occurred – “palliative” or “rehabilitative” would be appropriate terms.
    Just as companies that lose money over the long term eventually go belly up, parties that persist in lose-lose negotiations eventually lose everything. Sometimes, the solution is an honorable withdrawal.

  4. The lose-lose negotiator mentality herein depicted reads true to me, i.e., I can think of people who personally take weird pleasure in creating a lose lose (两败俱伤)situation. While such personal impulses, driven by face protection or its augmented version, nationalism, or whatever, could be checked by greed for profit or other such practical concerns, the SOE institution often removes that check…

  5. From my cultural perspective (European), I prefer to think in terms in terms of win win, however in China I noticed and experienced that win lose is the common way of thinking (from a Chinese perspective). They want to win, so you have to lose. Actually they don’t care if you lose, as long as they win (especially financially, but also in terms of face). It’s a short term, non-collaborative approach, which can only improve over time (if you are lucky), by investing in and developing a sound quanxi with your – hopefully reliable – business partner (however, that can be complicated and time consuming). The best thing you can do in China is to determine how your business partner may determine lose, so you may translate it to your on own win. As such win win and win lose do not exclude each other. However, in the long run and especially in business, it is very complicated to win inside China. It’s not part of their mindset or (business) culture. Most of it is short term success in their advantage, which is quite understandable if you look at the history, political, cultural and economic developments in China and especially since the cultural revolution started. In China, if you are not native Chinese, you will never win, because they fight for their face. They have already lost too much, so now it is time to change roles. It’s not a good development, but understandable.

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