Negotiating with Chinese Companies: You are the Cow and Here’s How to Avoid Getting Milked

I see it all the time and there is very little I can do about it beyond suggesting that maybe they be tougher.

The “they” are my law firm’s clients and the “it” is entering into a service contract with a Chinese company based on the belief that “it will all work out in the end, once we start working together.”  That “it” rarely if every happens.

Let me explain a bit more.

My law firm has written a large number of service contracts for American companies providing services to Chinese companies.  In the past, most had been for for technology or architectural services, but in the last few years, we have been writing quite a number for media and film and luxury service companies.  What nearly all of these service companies and the contracts we write have in common is that there has to be some degree of trust between the service seller (the American or European company) and the service buyer (the Chinese company) for the contract to work.  Take IT outsourcing.  I have had many a sophisticated in-house lawyer for an IT outsourcing company tell me that there really is no way to write a contract that covers every situation that will come up in a massive, complicated, multi-year outsourcing contract.  In IT outsourcing contracts between American companies, the two parties figure out how to handle any unforeseen situation. Typically, if it turns out more work is required, the vendor/seller gets paid more than contracted — which is what the contract very generally provides.  There is a huge element of trust in these sorts of agreements but the trust is usually warranted because for the project to succeed, the buyer cannot “squeeze” the vendor too hard.

In our experience, Chinese companies will squeeze and they will keep squeezing, without any regard for “the relationship.”  I know personally to the extent that I always check in with our clients 6-10 months after the contract has been signed and the project has commenced and pretty much invariably, I hear something along the lines of the following:

Not well.  Not well at all.  We did a great job for them but they keep asking for more.  Things that clearly were not part of the contract they are demanding of us and claiming that if we don’t provide those things, they will never use us again.  Frankly, I don’t care if they never use us again and I am not even sure if we will ever do a deal with China again and certainly not for what we charged this time.

So what is a service provider to do?  I tell our clients to charge at least 20% more than normal, so as to factor in for the invariable problems and always be careful not to let your work get too far ahead of payments.  Problem (advantage?) with this is that it likely will mean no project at all.

China negotiation expert, Andrew Hupert has his own spin on what to do.  His advice, set forth in Chinese Business Negotiation – Guarding Your Virtue, is that you need to stop bargaining like an American and give away nothing for free:

You’re the Cow. Are you a withholding, passive-aggressive manipulator who makes promises he can’t or won’t keep? Well, maybe it is time to start — at least in China. No one buys the cow when they can get the milk for free. In China, technology, IP and business methodology is the milk of profitable transactions. If you’re giving it away too early or too cheaply, then you are the expensive cow no one buys. Sorry.

Good Will is not a Bank in China. Americans new to Chinese negotiation think that they can build up a bank of good will and trust by “front loading” their benefit package. Novices think that doing business in China is about having Chinese partners owe them favors. They are kidding themselves — and forcing conflict. If the Chinese side of the deal feels that it is ahead of the game, their best move is to terminate the partnership and lock in their gains — not wait around for you to collect on what you feel is owed to you.

He is 100% correct.  According to Hupert, Americans seek to demonstrate their good will be over-delivering, hoping to build up a goodwill bank that will be reciprocated by the Chinese side.  The Chinese side often encourages this by talking up the importance of the relationship.  I have found that Korean and Japanese companies value “the relationship” considerably more than the typical Chinese companies, but far too many Americans think China and Korea and Japan are pretty much the same on this, but they most certainly are not.  Hupert explains China “relationships” in the real world:

American Intent. Win-Win type negotiators often feel that the best way to approach a negotiation is to demonstrate their good will, trust and value by “over-delivering”. They feel that if they provide the Chinese side with what it wants now (technology, brand, product designs), that the Chinese side will feel obligated to reciprocate later (distribution, execution, quality control). The western side has read up on guanxi and harmony, and believes that this is the way to develop loyalty and respect.Chinese Reaction

Chinese Reaction. The Chinese side may lock in gains by ditching you as soon as they are ahead. You see profitable transactions as the main goal, but your Chinese counter-party may care more about acquiring technology, designs and know-how so that he can operate independently. He’s willing to put up with you and cooperate as a means to an end. If you start off by satisfying his long-term goal, then you are simply shortening the life-cycle of a deal that was always supposed to end with you going home alone.

Hupert sees the solution as “understanding the value of your skills and technology — and being able to articulate and measure what you want them to deliver. Don’t let them set the agenda or determine benchmarks.”  He then sets out the following five ways to guard your assets in China:

1. Determine their real needs, and have a business response. Don’t project your desires on your Chinese partners. Find out what they really wants Assume nothing.

2. Know what you want. Profiting from your IP, technology, brand and other Western super-powers depends on two things — having something he wants and knowing what you want from him. Withholding is easy. Knowing what you want from him is tougher. Good negotiators in China are able to articulate a graduated list of goals and demands. Prepare for a “YES” when you negotiate.

3. Deal with the “exclusivity” dilemma.The Chinese side will generally angle for some form of exclusivity or guarantee that restricts your access to his competition. DON’T address this with vague promises you don’t plan on honoring.  Instead, ask for a specific plan for your future together — and negotiate the specifics of what he is offering. Your position on exclusivity — it is the product of a strong relationship, not the prerequisite.

4. Grow your deal — tap into his ambition. What does he really want? Chinese negotiators often ask for assets and technologies that they don’t really know what to do with, while ignoring variables that might really benefit them. Does he plan on expanding to western markets, developing his own brand or climbing the technology ladder? It might be possible to enlarge the scope of your proposed deal — and thus get more in return. But to do that, you may have to help him develop his own business plan — particularly if it involves international expansion.

5. Walk away smiling — if you have to. Some Chinese negotiators are too grabby for your own good. If all he cares about is your technology and your benefit is obviously a secondary consideration, you may have to withdraw and reassess. Don’t stick around hoping things will magically get better on their own. They won’t. If a China deal is going to die, than quick & clean is the best way. Don’t hang around to get abused and battered, praying that they’ll eventually see what a great partner you could be. Get the hell out of there now.

I completely agree. What do you think?  China negotiation stories sought.

For more on how to negotiate with Chinese companies, check out the following: