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Negotiating in China: Swiping the Cab Fare
By andrew | March 20, 2007
Western business people put a lot of faith in Win-Win negotiation. They believe in the notion that if both sides are willing to accept less gain now, they can increase the overall profit potential of the relationship and both come out ahead. That can lead to problems when negotiating in China, because not all Chinese counter-parties are willing to forgo potential gain in the short term.
IN OTHER WORDS: Western negotiators who try to use promises of a big payoff in the future aren’t necessarily protecting themselves from being ripped off in the short term.
The most obvious example of this is the “up-front fee”, set-up fee, good faith money or deposit. A US business owner – let’s call him ‘Al’—contacts a Chinese counter-party –‘Bob’ — with the aim of having bathroom fixtures produced in Shenzhen for resale in the US. Al discusses the technical specifications with Bob, and lays out his plans for a long-term, win-win business arrangement. Bob will be Al’s supplier for years to come, with orders growing in size and value until both are rich and happy. Al feels that the prospect of having such a valuable stream of business in the pipeline will insure that Bob deals with him honestly and fairly. They agree on an initial order worth $25,000 to Bob’s factory. Al doesn’t worry when Bob asks for a relatively modest payment of $8,000 to set up the factory run or take care of regulatory obligations. Al wires the money, and waits for a progress report and sample of the production.
Al waits and waits and waits, but nothing happens. His calls and faxes to Bob don’t get returned, and when Al does manage to finally reach Bob, the conversation is vague and inconclusive. There are unspecified problems and vague promises that the situation will be resolved shortly. Bob may even ask for more money to clear up the delays.
What happened? Well, there’s always a chance that Bob is telling the truth and has encountered unexpected delays in filling the initial order. But it is very possible that Bob feels that their business is complete. That $8,000 may not seem like much to Al – or to you—but to Bob it is a good return for a few hours on the phone and a couple of international faxes. He’s satisfied. What about the hundreds of thousands of dollars worth of potential business? Well, to some people a small bird in the hand is worth more than a flock in the bush. The eight grand is real – pure profit. All of those other promises don’t necessarily mean a thing to Bob.
But another scenario is also possible. Maybe Bob really intended to honor his side of the deal, but couldn’t. His company didn’t have the necessary skill or equipment or ability to complete the order. Bob may not want to admit this to Al – it would be a humiliating loss of face. Pocketing the deposit and terminating the connection with Al is a much more dignified solution.
How can you protect yourself against counter-parties that are willing to destroy long-term value for the sake of tiny short-term gains?
Check references. Make sure that your counter-party has experience in this specific type of transaction, and that there are satisfied clients that will vouch for their honesty AND ability.
Don’t be anyone’s first international deal. Make sure your counter-party has successfully completed other overseas deals. Not all Chinese businesses have experience with foreigners, and encounter unexpected problems.
If a deal seems too good to be true, it is. The people who get ripped off in China are the ones who look for bargains. Go for value, not ‘cheap’.
Assume nothing. Don’t expect your own values, methods and skills to be the universal norm. Chinese managers are notorious for their weak problem-solving abilities, yet are surprisingly sensitive about their image and pride. Don’t count on them asking for help or admitting that they don’t know how to complete a transaction.
Put in your face time. If you have regular business in China, then plan on getting out there and visiting factories and suppliers. It’s a lot easier for a Chinese counter-party to pocket your initial payments if they think of you as just a fax number.
Find local partners you can count on. There are ex-pats and JVs based in China that perform due diligence on Chinese companies. Make use of them. Start your search here.
Topics: China Business, Business Entry, Due diligence |
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