Marketing deals in China. Pull vs. Push

December 17, 2008 – 1:50 am

Western companies looking for a marketing partner in China have their work cut out for them.  You’ve basically got 3 broad options: 

 

  1. Set up your own sales operation
  2. Hire someone to sell for you
  3. Form a partnership where the China party has responsibility for sales and marketing.

Let’s focus on options 2 & 3 right now.  How will you structure your marketing deal with a Chinese counter-party? 

Less is More
Don’t get married when all you want is dinner and a movie.  I’ve seen lots of smart western managers who thought they were delegating away all of their China responsibility when they signed a JV with a Chinese entity.  Boy were they wrong.  Managing a JV required much more time, hard-work and risk than any sales effort.  If you want someone to sell for you, then pay them to sell for you.  Forming a partnership doesn’t give you more leverage over your local counter-party – in many cases it gives you much less power and much more exposure.  You are better off with a properly structured commission arrangement. 

Structuring the deal
Getting someone to sell for you involves 2 options:

 

  •  Push (contracts, quotas, punishment, penalties)
  •  Pull (Incentives, bonuses, exclusivity)

 In China, you are about Pull.  You want to appear to be giving and giving and giving – so build that into your agreement.  Incentives, bonuses, and exclusive territory – all valuable prizes that your local counter-party can win by hitting the targets you agree upon.  That’s what the negotiation is about – targets and payouts.  Always growing, always smiling.

Unfortunately, many westerners go the Push route and take the Big Stick approach to sales management.  They like contracts that have quotas, penalties and claw-backs.  These almost never work in China.  (The only place they seem to work is the US, and maybe some 4th world submerging markets.)  Believe me – you tell a local Chinese counter-party with a warehouse full of your product that he’s not getting full pay for last quarter because the company missed quota, and this guy is going to find a way to get what he thinks is his.  Compliance is a tricky business in China, and trying to be the long-distance bully never works.

 Variables:  Bad & Better

Bad negotiating variables:
Market share is not a negotiating variable.  Profit margin and gross revenue are also bad.  These are goals – not deal points.  They are non-enforceable – unless of course you want to go the punishment route.  If you try dinging a Chinese distributor with a lawsuit or contractual penalty for NOT selling your stuff then you will be lucky if it just kills the relationship.  It could end up ruining your future in China.

 Better methods:

 

  1. Realistic board control. Majority is good – but only if you choose the Chairman, CEO and head of sales, HR and finance.  Caveat – requires cooperation of your counter-party, regardless of the contract language.  If your counter-party uses gatekeepers or avoidance techniques, you don’t have his cooperation and stacking the board will be tricky in practice even if you can get an agreement.
  2. Hire key department heads – and have the power to replace them.  Especially Sales & HR.
  3. Incentives for reaching targets. Cash bonus, better commission or profit margin and preferential sales terms.
  4. Territory.  Expansion &  Exclusivity
  5. Contests, events, promotions.  Make big cash awards central to the event.

In China, short term is better than long term for incentives.  So don’t bother with things like stock ownership plans – you’re better off with quarterly or monthly incentives. Make sure you negotiate these points thoroughly and conclusively. 

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Negotiating in China: Basics. BATNA Analysis

December 15, 2008 – 12:06 am

Its final exam time in Shanghai, so many of the students from my International Negotiation class are waking up and starting to ask naïve questions.  Those are the best kinds of questions since they get to the root of all possible misunderstandings.  This semester’s crew is finding BATNA a little tricky to apply in practice (cases). 

BATNA stands for Best Alternative To No Agreement.  There are variations on the acronym, but the basic concept is meant to identify where you’ll be if this negotiation yields a big fat ‘NO’ from one side or the other.

The BATNA should be an assessment of your present business assessment.  It forms the basis for your strategy and informs your action plan — but the BATNA is itself an essentially static description or snapshot of your organization’s assets, liabilities, capabilities and resources.  It has numbers and time.  It is a cold-blooded assessment of your organizations health- and is completely independent of the outcome of the negotiation you are planning.  That’s the whole point.  If you think your BATNA is ‘if we don’t get this deal than we’re screwed’ then your REAL BATNA is ‘we’re screwed’.    That’s the whole point of the exercise – to know how bad your worst-case scenario really is.   

Because the BATNA is so closely tied to the action plan, many students of the negotiation craft get them confused.  They end up developing a BATNA assessment that basically says, “if we don’t get this deal then we are going to be in trouble so we had better get this deal on the most aggressive terms possible since our situation in the marketplace is deteriorating so quickly”.  That’s neither a BATNA nor a negotiating plan.   A well-developed BATNA underpins a negotiating action plan, but it is not merely statement of that action plan.  BATNA analysis starts with independent metrics and observations about the organization.

Here are 5 elements to a BATNA analysis that demonstrate its importance.  The first one is the only one that is absolutely necessary.

Elements to BATNA analysis

 

  1. Snapshot of the P&L and other basic business metrics. 
    Notice the words “metric” as in ‘to measure’.   The first job of BATNA analysis is to have a very clear idea of where you really are now.  Everyone thinks they are doing this implicitly, but that’s simply not good enough.  You have to sit down and articulate in very explicit terms just what your financial and operational status will be if this negotiation doesn’t yield an agreement.   
     
  2.  Deal Structure. 
    The BATNA and Goal analysis work together to tell you what you should be negotiating for.  Put another way, the BATNA sets the M in your LIM analysis. The goal analysis tells you where you want to be. The BATNA analysis tells you where you are.  Now you understand the gap - and hopefully have numbers on it.  The BATNA forms the floor of your negotiating strategy.  You can now build your walk-away position as one that puts you marginally better off than your BATNA.  From there, putting your ‘most likely’ and ‘best case’ scenarios on the map are pretty easy.
     
  3. Vector. 
    BATNAs fall and rise.  This is particularly important if your environment is in flux (i.e.: now, everyone) or if your competitive position is shifting.  You should know if your own BATNA is rising and falling in the near term.  Is your steady-state business remaining stable, or are you in a deteriorating position in a failing industry?  This is more of an environmental analysis than an inward looking audit.  I referred to ‘rising or falling BATNA’ in my class when the recession shifted the negotiating balance of power from suppliers to purchasers – and now my class thinks that this is the main purpose of the BATNA analysis.  Determining if your BATNA is rising or falling is an interesting issue to analyze – after you already have a solid understanding of your operational and financial status in the event of no deal.  BATNA’s shouldn’t be referred to as ‘rising’ or ‘falling’ until you’ve already stated what yours is.
     
  4.  Short Term Tactics. 
    The BATNA analysis can act as your own personal ‘devil’s advocate’.  If performed seriously, it will let you know your own weaknesses and friction-points.  Your job is now to address your immediate shortcomings with good bargaining while simultaneously hiding or disguising your shortcomings from counter-parties.  In other words, the BATNA tells you what to look for and what to lie about.
     
  5. Long Term Strategy. 
    In the short term, you can just react to deficiencies and weaknesses revealed by the BATNA.  In the long term, it’s your job as a manager to steadily improve your company’s strategic position — or to increase your company’s BATNA.  You can think of BATNA as a key metric for understanding a company’s strategic position — and every deal you do now should contribute to raising your company’s BATNA in the future. 

 Remember — a thorough BATNA analysis is the launching pad for a negotiating action plan — but it is by definition remains independent of the negotiation itself.  You BATNA should include numbers and descriptions of competitive pressures and advantages — but should not be a plan for changing the future.  That’s what your goal and LIM analyses are for.  

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Caijing Reports: Western negotiators crying over spilt milk.

December 12, 2008 – 3:42 am

If you are negotiating deals in China, you must read the piece on Taizinai Dairy and the Western investment banks in Caijing’s online edition:  http://english.caijing.com.cn/2008-12-11/110037270.html
 
Quick & dirty rendition:  Western investors win a pyrrhic battle for control of a zombie China dairy business with huge undisclosed liabilities and no market, lose upwards of US$ 170 mil– and get laughed at.

The best minds in big-time international finance bought the wrong asset for the wrong price from the wrong people at the wrong time.  These NY investment banks may have lost a fortune and turned themselves into laughing stocks in the process — but at least we can learn from their humiliation.  And that’s something.

Here’s a bit of Caijing’s take:

Actis, Morgan Stanley and Goldman Sachs sank a combined US$ 73 million into Taizinai in 2006, a decade after Li Tuchun started the business with a yoghurt drink that gradually became popular across China. They added another US$ 30 million in November. The foreign investors also helped win a 500 million yuan loan from a consortium of six international banks led by Citigroup in September 2007.
 
Turning investor heads was a Taizinai report of pre-2006 annual growth rates of 50 percent and 2006 sales of about 1 billion yuan. The financial data also supported the company’s prediction that it would become the first Chinese dairy to list on a U.S. stock exchange.
 
Behind the Books
 
What Taizinai’s accounting books apparently failed to explain was that the dairy had been struggling to compete against several other popular makers of milk products including Yili and Mengniu, two of the country’s largest dairies, which won larger markets shares in major cities and developed their own yoghurt drinks.
 
And questions about the company’s financial data surfaced shortly after the foreign investors arrived.

You read the article and see if you can find examples of the following:

  1. Lack of basic market research.  (Why were they able to report growth numbers?  What were their competitors doing?  How was their market responding?
  2. Lack of due diligence.  (Yes, I know it’s hard to do, but that’s why it’s so important.  These investors must have noticed problems when they failed to prepare the IPO documents back in 2006.  Instead, they ended up buying lots of ugly, open-ended liabilities that any decent accountant with China experience would have seen.)
  3. Not knowing when to walk away. (How about 1 second after the accountants refused to turn over 3 years of financials?  This deal started smelling bad at least 2 years ago.)
  4. Unclear or disparate goals.  (The investors were never on the same page with senior management.)
  5. Wrong variables.  (The Western investors clearly thought that a minority position on the board protected their interests, and they sacrificed a lot to get their seats.  Didn’t end up doing them much good.)

This case smells of lots of ego and greed, but all of the classic China negotiation blunders are there.  Read it now for free, or learn it the hard way in the future.

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When Ni Hao means Goodbye

December 10, 2008 – 2:27 am

When do you say goodbye?  Power balance and post-boom China negotiation.

I was facilitating a negotiation simulation recently at the Shanghai offices of a Euro-based multinational.  It was clear from the get-go that the two parties weren’t going to reach an agreement.   The negotiators for the team representing the big, rich American firm was acting like bullies – not even letting the ‘local side’ of the simulation finish articulating their opening positions.  What should you do if you find yourself rolling a boulder up a very steep mountain?

There are 3 good options, one bad one.

The Good:

 

  1. Change the rules of the game.  Go around, above, underneath or straight through, but take some type of control over the process.  Change the venue, break up into smaller groups, and bring someone else in.  Take a step back and try to negotiate about process or big-picture mission statements, or zoom in and try to focus on one small obstacle or bit of common ground to give you a quick & easy mutual win.  The point is to do something to asset some control over the direction of the meeting – or you will certainly end up with a bad deal.
     
  2.   Walk away – slow.  Switch the power balance.  This works best if he has traveled a long distance to negotiate a deal – or if his bosses think a big win is likely.  If you are the one that has come to China for this meeting, then you had better make sure you have a Plan B.  HINT:  Acceptable Plan B’s include – other prospects, other potential partners or other potential suppliers.  Have this set up in advance, and your BOP (Balance of Power) is much stronger.
     
  3.     Learn about his business.  If this guy likes talking so much, get him talking about his technology, his competitors, and his market plans.  Make some mistakes that he’ll jump on – tell him his technology isn’t leading edge or that his competitors have better customer service.  He’ll probably be so quick to ‘correct’ your idiotic misconceptions that he’ll tell you some key facts – like who his clients and competitors are.   

Bad option:

 

  1. Stand there with your eyes closed, windmilling your fists and hoping to land a killer blow before you get beaten down.  If the guy isn’t treating you with respect now, then he’s probably not going to discover your inner beauty and talents after kicking you around the meeting room for 25 minutes.  If you stuck with lemons, then use the above tactics to try making lemonade.  But once it’s clear that you are simply being pressured you gain very little by sitting there taking body-blows.  Chinese negotiators are known to get belligerent and aggressive – it’s often a cover for weakness or skeletons.  Chinese counter-parties are expert at running down the clock – don’t be surprised if the uncooperative jerk across from you on days 1 & 2 suddenly transforms into someone much more professional and reasonable 5 hours before your flight leaves.  But there are also plenty of counter-parties who would make inappropriate partners or supplies.  Sometimes are rough stone can be polished into a gem – but sometimes it’s just a rock. 
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When Chinese Client Wants To Renegotiate Terms

December 3, 2008 – 2:16 am

China sellers are afraid to pick up the phone when it rings.  If deals aren’t collapsing completely then clients are demanding to renegotiate prices and terms.  What do you do when the deal you thought was solid suddenly gets holes punched in it?  This situation is tough anywhere, but Westerners dealing with Chinese buyers or partners will feel a sharper sting.

When you are the receiving end of a renegotiation call, you need a strategy.  As quickly as you can, consider the answer to these 5 questions.

1 – What is motivating the call now? 

  • No, the correct answer is not, “they’re a bunch of cheap, cutthroat bastards”.  In fact, there are three possibilities:  First, they may be in financial trouble themselves.            Second, they are being opportunistic and profit seeking. Third, they are being directed to renegotiate by their own bosses.
  • None of these are good, and you are clearly engaged in Lose-Win negotiation from a position of weakness.  But negotiating from weakness is still negotiating, not surrendering.  Find out as much as you can about your Chinese counter-party’s situation and motivation.  You may have more common ground than you think.  At the very least, you should be able to gain information and a bit of transparency.

2 – Are there cultural issues?

  • You see it as breaking a sacred trust.  You and he have given your word and signed a contract.  A man’s word is his bond.  But the Chinese view of contacts is much more fluid.  Your counter-party sees renegotiation as a fact of life.  When the situation changes for one, it changes for all.  Don’t blunder into a cross-culture debacle that will only harm your interests now and in the future.

3—Who is holding the money?

  • Are they talking about paying less for something you’ve already delivered?   In that case, you are in a seriously weakened position.  But if they are talking about future orders or deliveries, you may have a bit more leverage. 

4—What’s your recourse?

  • You may have PRACTICAL legal options – or you may not.  Where are disputes settled in your agreement?  Beijing or NY?  If you are playing by China rules, a lawsuit is not going to help you.  Many Chinese contracts are written with an HK arbitration option, but even that is cumbersome and expensive (though much cheaper than court).   Do you have any non-financial leverage?  If they are in a much more powerful situation, your practical options for the future may boil down to “deal or no-deal”.  In the short term, you want to get paid.

5 – Do you want this to get ugly?

  • What is your BATNA?  If you really need this customer or partnership, then you’re going to have to man-up and figure out a loss-minimization strategy.  But if it isn’t worth the trouble, then make your most professionally cordial exit from the scene and get on with your business.  The point is, very little is gained by making these issues emotional or personal. 

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My name is Andrew Hupert, and I’m a teacher and writer in Shanghai. I am now working on a project for my International Negotiation class at New York University’s Shanghai campus (in cooperation with East China Normal University). 

Thanks very much for your cooperation in my research. I would be happy to share raw data with any participants who wish to see it, and will publish my findings on ChinaSolved.com , ChineseNegotiation.com and DiligenceChina.com .

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China Negotiation: Interests vs. Positions

December 1, 2008 – 12:38 am

Everyone loves talking about Win-Win negotiation.  It sounds so sophisticated and evolved.  The fact is that Win-Win is usually little more than a smokescreen used to conceal our tactical battle for inches in the negotiating trench warfare that defines modern international business.  If you are in a traditional buyer or seller role, then you are probably not really engaging in Win-Win negotiating.  Your all about relative power and zero-sum gains.  For you to win, someone else has to lose. 

There are times, however, when Win-Win is more than a buzzword.  If you have a partner or a strategic relationship with a supplier or customer, then you may very well be engaging in true Win-Win negotiation. 

 Positions are ego-driven.  You need for the other guy to lose in order for you to win.  Your bosses and colleagues will judge you by how much you can force on the other guy.  It’s a dog-eat-dog world, and you have to defend yourself.   To top quote management consultant Richard Bobby, “If you ain’t first, you’re last”.

 Interest based negotiation puts your side’s interests ahead of the negotiator’s position.  This kind of negotiation requires clear, strategic goals and an objective explicit decision to work with a specific partner to reach those goals.  Interest-based negotiators look beyond the variables and bargaining demands and dig out the drivers behind the positions.  Interest-based negotiators spend a lot of time uncovering the motivations and rationale behind the stated demands, and attempt to find ways to unify the goals of both sides.

 

Position Based Negotiation

 

  • Goals are ill defined or relative to broad benchmarks.
  • Price or cost are the key – or only – variables
  • No relationship with counter-party
  • Little or no transparency
  • Power struggle
  • Limited time & deadlines

Interest Based Negotiation

  • Goals are strategic and objective
  • Wide range of variables
  • History of relationship with partner
  • Transparent
  • Partnership
  • Time is not an issue

 Not every negotiation needs to be Win-Win.  One-off or non-strategic transactions are often competitive – and don’t require a lot of in-depth discussion or sharing of sensitive data.  But if your are involved in a strategic relationship that seeks to benefit both sides, than you would be better off taking an interest-based approach rather than a positions-based one.   In China, this may require some patience and education.  Your Chinese counter-party knows how to talk about Win-Win, but he is probably still a great deal more secretive, opaque and reticent than you are.  Don’t get pulled into a positions-based shoving match.  If you are really committed to an interest-based negotiation in China, then it is possible.  But don’t be surprised if you have to make the first move – and the second.  But stick with it and don’t lose sight of your goal – to get a deal that serves your interests better than any other.

 

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My name is Andrew Hupert, and I’m a teacher and writer in Shanghai. I am now working on a project for my International Negotiation class at New York University’s Shanghai campus (in cooperation with East China Normal University). 

Thanks very much for your cooperation in my research. I would be happy to share raw data with any participants who wish to see it, and will publish my findings on ChinaSolved.com , ChineseNegotiation.com and DiligenceChina.com .

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Is there a link between long-term planning horizon and strong business relationships?

November 27, 2008 – 5:51 am

Does taking a long-term view lead to developing stronger relationships?  Is there a link between long term business planning and strong relationships?  Are relationships less important for counter-parties who think that they are negotiating a one-off deal?  Can you be in business long term, yet still have a series of one-off deals with a wide range of different counter-parties?

US negotiators in China tend to see long planning horizons and a broad network of strong relationships as being closely linked.  How can a business survive in a market or industry for the long-term if it doesn’t have strong relationships with its customers, suppliers and partners?  Likewise, strong relationships will lead to long-term business arrangements.  A good client or customer is one that continues to do business and expand the relationship.  Transparency and access between the two businesses will also increase.  The seller develops a strong brand and good reputation, and the buyer receives better service and preferential treatment.    

Because Chinese counter-parties tend to emphasize the importance of ‘guanxi’ and relationship, many Western negotiators confuse cordial relations with a long-term planning horizon.  Westerner’s are often bewildered and frustrated by Chinese negotiating counter-parties who talk about the need to build strong relations but then behave in a manner that undermines the chances of doing follow-up deals.  Chinese negotiators, it seems, tend to talk long term but walk short term.

The root of the misunderstanding is the different function that relationships play in the two societies.

Western executives tend to build their relationships on successful transactions.  If I do business with Bob at XYZ Corp and it is successful, I’ll go back to Bob and continue to do more deals.  The relationship is a direct result of transactions. 

Chinese negotiators take the opposite approach.  They don’t feel comfortable doing business – no matter how small the initial test order may be – until they have spent time with the counter-party. The relationship drives the transaction.  

That means that a Chinese negotiator wants to invest time and energy to build a personal relationship with you – even if he only plans on engaging in a one-time deal with you.  This seems inefficient to westerners – but you have to remember that most Chinese business still operates without credit checks or recourse for non-performance.  The only way to be sure of success is to be sure of the counter-party.

Western dealmakers in China have to stop assuming that their Chinese negotiating counter-party wants to get married and settle down.  Just because they talk about being in the business for the long-term doesn’t necessarily mean that they expect to be doing business with YOU for a long time.   Make this an explicit discussion, and not a vague assumption.  It’s important that you understand how long they plan on doing business with you – and what they consider to be the criteria for continued transactions.  You may be surprised to find that the Chinese negotiator had not even considered completing more than one transaction with you.  If you handle the negotiation correctly, you may be able to secure more business than the Chinese side had originally planned on offering.  And if not, then at least you know that you’ll have to search out a new Chinese partner as soon as this transaction is finished.  

________________  

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My name is Andrew Hupert, and I’m a teacher and writer in Shanghai. I am now working on a project for my International Negotiation class at New York University’s Shanghai campus (in cooperation with East China Normal University). 

 

Thanks very much for your cooperation in my research. I would be happy to share raw data with any participants who wish to see it, and will publish my findings on ChinaSolved.com , ChineseNegotiation.com and DiligenceChina.com .

 

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Send in the Lawyers? Best-Effort Marketing Deals in China

November 26, 2008 – 3:40 am
    Undergrads can say the darndest things.  Like yesterday – I was talking with my NYU Shanghai class about cross-border marketing agreements.  I had given them a hypothetical case about a Western company that was looking at forming a JV with a private Mainland Chinese company.  The Western side was contributing capital, equipment, IP and process know-how.  The Chinese side was helping with business set-up and taking responsibility for marketing in China.    

    One of the student teams came up with a proposal that included a  Year 1 sales target of US$750,000 worth of B2B services in China.  

    “What happens if their sales are low?  What if they don’t make their number?” I asked.

    “Oh, that’s the laywers’ problem.  We’ll sue them,” the group leader told me confidently.

    It sounds so cute coming from a teenager who has never done business before.  It’s a lot less cute coming from a US CEO or senior negotiator in town to sign their first China deal.

    Even if it were possible to sue for non-performance (which it probably isn’t in China), this is still such a bad idea that I would be reluctant to consider it a viable option.  So if suing isn’t an option, what is?

    Structure better marketing deals.  If you are considering a tie-up that requires marketing within China,  you have to tread very carefully and make sure that you are creating a true win-win structure.

    Problem with traditional marketing agreements:

    The main problem with the traditional JV model is that the Western side injects capital and assets NOW, but the Chinese side is required to execute the sales & marketing plan LATER.  Unfortunately for the Western partners, the balance of power shifts to the Chinese side as soon as the funds transfer and asset injection takes place.  Those once accommodating, win-win, engaged Chinese businessmen are now holding half your cash and all of your inventory.  Even if they are truly committed to selling your product, they may not be able to.  And there’s a good chance that marketing your goods has suddenly become a much lower priority now that  your cash is in their bank.  Even if you put controls on the funds and assets that you inject into the new China JV, there’s a great chance that your partners existential crisis is over.  They can keep their doors open, maintain production of your jointly owned products – and also their own proprietary production. The pressure’s off.  And what if things get really bad and the Western side wants to pull out?  Great.  Go.  The Chinese side has all the know-how, IP and processes that you touted as uniquely value-adding.  

    Options for marketing agreements in China:

  • 1) Best-effort marketing.   Most marketing agreements I’ve seen in China were best-effort – even if the Western signatory believed he had legal recourse.  There’s nothing wrong with best-effort marketing – it simply means that your seller is going to try his best to market your product.  There IS a problem with exclusivity and no-recourse best-effort marketing arrangements.  Best-effort deals are about the commission.  That’s the only driver.  If you think that your stake in a JV is giving you leverage in a best-effort marketing arrangement in China, you had better reconsider your deal structure.  The Chinese side is the one with the leverage.  
     
  • 2) Our Man in HR.  A better option for equity-holders in a Western-Chinese JV is to tie staffing and compensation decisions to the ownership stake.  You want to make hiring and compensation one of your bargaining points in the INITIAL round of talks.  In other words, you want to be able to hire and fire the guy leading the sales team.  (You also want a say over the finance people, but we’ll discuss that another time.) If you can select the sales manager and construct the compensation plan, you’re off to a great start.  The Chinese side won’t like this, and will resist (effectively) once capital and assets are transferred.  Get this on the agenda early.
     
  • 3) Exclusivity vs. Non-exclusivity.  China is a HUGE country with a population more than 4 times that of the US – yet Chinese counterparties tend to demand exclusive sales terms.  You want to tie exclusivity to performance – and make the terms very explicit and triggered by specific numbers or targets.  If your guys come in within 75% of target, then they retain their exclusive hold over a specific market.  Don’t give one partner exclusive control over all of China – it’s ludicrous to think that they can handle it, and it could limit your options down the road.
     
  • 4) Variable commission structures.  2% commission for the first $250,000 in sales.  3% for the next $250k.  Etc.  Also works with bonus payments, incentives and other cash or non-cash compensation.  Make it worth their while to sell MORE, not less.  You’re best off figuring out the cost model for their own products (or anything else they are selling) and make sure your products are more lucrative for them.  
     
  • 5) Track record.  Know who you’re dealing with early.  This seems like the simplest and most obvious tactic, but I rarely see it happen.  I know it’s hard to ask for and even harder to get good information in China.  But good companies understand why you are asking and will be able to provide you with data and referrals.    Make sure that they have experience in your product category and industry – not just in a related product.  The guy who sells household air-conditioners will swear to you that he has a great network and tons of experience selling industrial refrigeration units – because after all, they both use compressors.  Test orders are a great idea in China.  
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My name is Andrew Hupert, and I’m a teacher and writer in Shanghai. I am now working on a project for my International Negotiation class at New York University’s Shanghai campus (in cooperation with East China Normal University). 

 

Thanks very much for your cooperation in my research. I would be happy to share raw data with any participants who wish to see it, and will publish my findings on www.ChinaSolved.com , www.ChineseNegotiation.com and www.DiligenceChina.com .

 

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Western Negotiators in China – Avoid These 2 Traps (of Your Own Creation)

November 21, 2008 – 7:39 am

Western negotiators in China tend to walk into two traps that they set for themselves.  They are both caused by a limited perspective – your own – when trying to anticipate the goals of counter-party.

 Western negotiators in China should be very careful if they hear themselves or a member of their team say some variant of the following:

 1)    They’ll have to do XYZ because if they don’t the whole deal will fall apart and we’ll both suffer.  It’ll be the END OF THE WORLD.

 2)    These people  (whom I barely know and can never seem to understand) will obviously choose Option A.  They would be crazy not to. 

 It’ll be the end of the world.    This tactic is sometimes called ‘Armageddon’ in negotiating books.  The idea is that the alternative to making a deal is so unthinkably disastrous that no one in his or her right mind will possible consider doing anything else.  The problem here is that you and your Chinese counter-party don’t necessarily see things the same way - particularly when it comes to viewing your company’s health and well-being.  Yes, it would be unfortunate if your company goes out of business or if you have to re-neg on your downstream contracts because you can’t get an order filled.  But it’s not the end of the world for everyone – just for you.  Unfortunately, you may seem much the same situation when negotiating over the fate of an up-and-running JV that you have already sunk a lot of capital into.   If it fails, you are certainly out of the China business for good.  End of the world.  But what about your counter-party?  He may not be much worse off at all – particularly if he has been anticipating this moment since the initial meeting.    You’ve got to separate your BATNA (best alternative to no agreement) from his BATNA.  If you were contributing capital and know-how to a partnership, your BATNA has been falling since the deal was signed and your partner’s has been rising.  You’ve got to build an agreement that will preserve the equilibrium structure of the agreement. 

 

They would be crazy not to…  Famous last words – particularly when used to describe service contracts, due diligence procedures, regulatory approvals and just about any other non-price variable in a Sino-Western negotiation.  Negotiations may get handed down across many levels of organizational responsibility in China.  There is a very good chance that the last guy you speak with has been given a target figure – and nothing else to go on.  He doesn’t care about quality, warranties, service contracts, long term relationships, function or anything else but his target figure.  I’ve seen many good deals go very bad in the last stages because counter-parties were miles apart on the values they assigned to non-price factors.  

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Chinese negotiating counter-parties: Risk vs. Uncertainty

November 20, 2008 – 3:41 am

Chinese negotiators have an undeserved reputation for being risk-avoiders.   Books and speakers tend to generalize Chinese businesspeople as being unusually sensitive to risk or loss.  This causes confusion for westerners negotiating in China when they are suddenly confronted by behavior on the part of the Chinese that seems extremely risky.  Chinese, it seems, are sometimes extremely cautious but can also have a penchant for blithely playing long shots.  What is the true picture?

Chinese negotiators are not particularly risk averse.  In some cases, they seem to go out of their way to take risk.   What they hate is uncertainty.  If they don’t see all of the pieces to the puzzle, they hold off.   If all the pieces fit together to show a risky situation, he may take the deal and he may not.  

If you tell a Chinese counterparty that venture X has 30% chance of paying off, but that he can expect returns of Y if it is successful, then he will consider it – even though you might feel it’s too risky.

If you tell a Chinese counter-party that the chances of venture X paying off are unknown, then he probably won’t proceed no matter what the payoff.  

Chinese attitude towards risk when the parameters are known (or at least seem to be known) probably skews a bit higher than the average western businessperson.  Westerners – particularly Americans – seem to do better with uncertainty.  

Chinese negotiators don’t like working in the dark.  American negotiators will develop work-arounds, incremental strategies or make best-guess projections based on what they do know.  This drives Chinese negotiators nuts – they think it’s crazy to proceed when you don’t know exactly where you’re going.   The Chinese counter-party – when confronted with unknowns or uncertainty – usually opts to wait until the situation becomes clarified.  If they can’t gather new information themselves, then they will often choose to wait until the environment shifts and makes the situation less uncertain.  This drives American negotiators nuts – they think it’s crazy to stop making progress and give up momentum for no reason. 

The misunderstanding grows worse when both sides start talking to each other about RISK when the real problem is UNCERTAINTY.  Remember – risk refers to the probability of an event occurring (though some definitions encompass the degree of loss).  Uncertainty refers to whether or not parameters and probabilities are clearly and accurately understood.  There’s an excellent chance that you and your Chinese counter-party are talking about two completely different things when you are throwing around the word, “risk”.   If you back up a little and discuss your situation from a broader, less opaque point of view, you may find that you and your Chinese counter-party aren’t as far apart as you had thought.  

There is always the danger of misunderstanding between any two parties in a negotiation.  The risk of uncertainty is much higher when you are negotiating in China.

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