China Business

Ten Warning Signs of a Bad China Deal

China WFOE employees

The always excellent (but far too infrequent) Chinese Negotiation Blog recently posted on ten warning signs of an impending bad China deal in a post entitled, Negotiating in China Can Get Complicated Fast. [link no longer exists]

The post starts out stating two important and fairly obvious (though too often ignored) truths:

  • Many westerners who enter into a negotiation with a Chinese counter-party are so sensitive to cultural and interpersonal issues that they lose sight of business issues.
  • The key to success in China is to walk away from bad deals and find good ones. The fact is that many newcomers to China business have trouble spotting the red flags and danger zones that indicate a deal is about to fall apart. The result is that they hang in there and keep negotiating with inappropriate counter-parties until they end up with a bad compromise and a disastrous deal.

It then sets out ten warning signs of what will almost certainly turn out to be a bad China deal:

1. Terms that will change at some unspecified future time.

2. “New technology or connections to be introduced later – but priced now.” Your concern should be that the first iteration will not work (but will fulfill the terms of your contract) and the second one will never happen.

3. You pay now – the Chinese company delivers at some unspecified time in the future.

4. “Open ended liabilities or unsettled valuations. Every deal you do should have very specific valuations and timetables. You wouldn’t sign a contract with blanks – don’t do a deal until you’ve clarified all the terms.”

5. “Best effort sales/marketing. If you are investing or supplying technology and relying on your local counter-party to market your product, make sure that they have a solid network, good references and specific experience in your industry. Make sure you have a way out and a Plan B.”

6. “Anything involving connections, relationships or trust. If they say ‘I have guanxi’ you say ‘I have to go.’ Seriously.”

7. “Mysterious new players enter – particularly decision makers – and change the terms. This can happen to anyone in any country, but in China it means you are starting over from scratch. This is a common tactic here, and it doesn’t bode well for your partnership.”

8. “Deals escalate into long-term, multi-transaction JVs too quickly.” If you want to buy or sell something, start with a few test orders and develop the relationship over time. Do not believe your counterparty’s insistence that a joint venture is the only way to go in China, because it probably is not. Check with your lawyer on this one.

9. “They want you to do anything without a contract. Usually this takes the form that ‘the owner/accountant/treasurer is away on vacation and we can’t stamp the contract until he’s back but if we don’t get the deposit now we won’t be able to make the deadline…’ No. Just plain NO.

10. “They tell you that something is too complicated to explain. They’re right. Walk away now.”

All very good advice. My law firm’s China lawyers constantly see all of these tactics and we would love to hear stories from readers who also have experienced them (or not).

5 responses to “Ten Warning Signs of a Bad China Deal”

  1. Hey, no fair. I had to suffer through years of this before realizing what was going on and finally starting to do deals with only those companies that warranted it. Kidding aside, this is a great list.

  2. There’s a lot of things here which are relevant where ever you’re doing business, it just seems people are prone to go off their heads when doing business in China. The guanxi one is the kicker, its kind of like doing business in Sicily and having a business partner who says he can get things done through his ‘connections’. It may be totally innocent, but then again it may be the Mafia, and either way people don’t do something for nothing.

  3. Just to add to the list:
    11) ‘You give me [insert amount here] to start up a partnership now that I am the godfather to your son’
    12) ‘China is too complicated for you foreigners to understand so let’s do a JV and I’ll handle the local operations.’ Aka: it’s a China thing, you wouldn’t understand
    13) Anytime, anyone who you just met calls you ‘my friend’ run to the nearest exit
    14) ‘Regulations are just formalities in China so we’ll find a way to skirt them – ALL Chinese do this!’
    16) ‘I am offended that you do not believe I own this property, I will not show you the certificates of ownerships until you sign the lease’
    17) Confuse sycophantic hospitality with trustworthiness

  4. Aren’t these signs more or less universal in doing business anywhere in the world?
    3. You pay now – the Chinese company delivers at some unspecified time in the future.
    Any company that tells you to pay before delivering on some unknown date should set of warning bells. I think a lot of these points are just basic common sense, no?

  5. Looks like all these signs could be in any other country. Some in the above list are not necessarily a sign of bad intention, like: 7. “Mysterious new players enter …” or 8. “Deals escalate into long-term, multi-transaction JVs too quickly.”
    A deal with a clothe/toy manufacturer tends to be more unpredictable than a deal with an IT/financial company that has more well-educated employees.

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