If you have been reading the business news on China, two things ought to have jumped out at you. One, Chinese companies are looking to buy technology innovation. And, two, Chinese companies have a very annoying habit of backing out of their deals. For news on the former, see this May 31 Wall Street Journal article, China’s Xiaomi to Buy 1,500 Patents From Microsoft, subtitled, “deal reflects smartphone maker’s efforts to acquire the intellectual property it needs to broaden its reach.” For the later, I give you this June 1 Wall Street Journal article, China’s Latest Export: Broken Deals.
For the last year or so, our China lawyers have been seeing a steady stream of both.
Chinese companies are looking to buy technology innovation
Let’s talk about innovation first. Can China innovate? That question has been asked countless times in the last ten or so years. But I have stopped asking that question ever since a friend of mine pointed out to me that it is no longer the salient innovation question to be asking about China. The better question is a slightly broader one: Can China secure innovation either by generating its own or by buying it?
Many in China (including at the highest levels of the Chinese government), have given up on China becoming a top-tier innovator and have turned their attention to China becoming a top tier innovation acquirer. And that is what is happening and what our China lawyers have been seeing. Chinese companies are looking to acquire innovation/technology/IP any way they can, including by licensing, by purchasing (either the technology itself or the entire company) or by joint ventures.
Chinese companies have a habit of backing out of their deals
Let’s now talk about why so many of technology deals do not come to fruition and why negotiating these deals is so difficult.The Chinese government is telling Chinese companies to acquire technologies and Chinese companies badly want to acquire technologies, but this does not mean they know how to acquire technologies from overseas.
Here is how our firm did a technology licensing deal for a Spanish company recently. This Spanish company wanted to buy a U.S. company with a cutting edge technology. The Spanish company negotiated a purchase price with the U.S. company and discussed other key terms. The Spanish company then did its due diligence on the U.S. company and that due diligence uncovered a few warts and raised a few issues. So the Spanish and the U.S. company sat down again and negotiated on some of the new issues and renegotiated on some of the old issues, and within a week or so the deal was again ready to move forward. The whole process from start to finish took about three months.
Here is what typically happens when we represent an American company seeking to do a technology deal with a Chinese company:
1. The American company and the Chinese company reach what sounds like a perfectly reasonable deal.
2. Our China IP transaction lawyers draft a contract that reflects the perfectly reasonable deal and the Chinese company then completely changes it.
3. The American company tells the Chinese company that it cannot do the new deal the Chinese company just proposed.
4. The Chinese company comes up with some really bizarre explanation for why the new deal it is proposing is absolutely essential and explains why the deal our client thought it had can never work.
5. We then spend weeks explaining why the old deal is just fine, while the Chinese company alternately acts like it will do the old deal with just a few small changes or hints very strongly to our client that it should take the new deal or the Chinese company will just walk away.
I could go on and on, but you get the point. Chinese companies like to draw in American and European companies with what looks like a really good deal and then go back on that deal. Chinese companies negotiate like this because they realize that once an American company commits to a deal, it wants to close the deal. Once five people in an American company have told their fellow employees “we have a deal with XYZ Chinese company,” those five employees do not want to keep negotiating that deal for another 5-6 months or just walk away from it. Chinese companies know this and they seek to wear down the other side, plain and simple.
Chinese companies will change the deal not just monetarily, but in even bigger ways as well. Have a deal where you don’t turn over anything about your technology unless and until you get a large upfront payment? Prepare for an explanation from the Chinese company months into the deal why that is no longer possible. Have a deal where the Chinese company is supposed to get your three- year-old technology? Prepare for an explanation months into the deal as to why you now need to replace that with your newest technology, and all at the same price. Again, I could go on and on.
The best way to handle this sort of negotiating is by remaining firm and resolute.
