China negotiating and the “Dumb Money” paradox

I may be a little late on this one – I think that ChinaLawBlog.com has already flagged this excellent post from ChinaVortex called ‘ The New Investment Rules in China‘.  I believe this is Paul Denlinger’s new blog — and if you are not a regular reader you should be.  http://www.chinavortex.com/2008/10/investment-rules-china/

All his points are interesting, but novices to the China negotiating arena need to pay attention to Paul’s last point:

The dumb money has already been made in China. It’s time to rebalance your portfolio to make smart money. It can be done, but it won’t be easy. Think smart, work smart, and invest for 15 years. By that time, you should be able to retire.

This illustrates the “Dumb Money” paradox that seems to find its way into many negotiating positions in China (and where-ever else greedy businessmen dream). The notion is that the counter-party is rich enough to afford to buy your offering, but too dumb to see the the unfavorable points in the deal you are proposing.  

Dumb Money is hard to find in time

The fact is that the elusive “dumb rich” are extremely hard to find.  If they are really dumb, then they won’t be rich for long and you are probably already too late.  If they are smart enough to hire a good lawyer and financial advisor, then you are negotiating with a counter-party that will quickly learn about the flaws in your proposal.  (If they hire a bad lawyer and advisor, then your role is already filled.  Sorry.)  When you craft that highly aggressive proposal, you are really betting on slipping through the rapidly-closing window of opportunity that your counter-party has just come into money but hasn’t yet found decent advisors. Good luck with that.

Timing is better then skill

So where did the myth of “dumb money” come from, and what does it mean to the China negotiator?  In times of shifting economies and government policy, some incredibly lucrative opportunities open up to those with connections and/or speed & capital.  When China was still opening up, you could have scored a fortune making sandwiches for expats or teaching Chinese graduates how to interview for entry-level jobs at multinational corporations.  Anything you could push through customs and get onto a retail shelf seemed to sell — as long as it was foreign.  

But it wasn’t ‘dumb money’ buying — it was ‘dumb money’ selling.  The entrepreneurs and investors cleaning up after a structural shift probably know a lot more about the process of capitalizing on new demand (the guanxi guys with connections) or the process of putting capital at risk (VCs and investors) than about their product and market.  From the outside it seemed that a bunch of ‘dumb’ businessmen were cleaning up on childishly simplistic deals (English schools, western restaurants, gray-market iPods). Arbitrage and jumping into market niches always looks like ‘dumb money’, but unless you are among the first to capitalize on a market inefficiency then you are likely to get shut out.  

And THAT is the problem facing novice negotiators in China.  They are coming into a market where the dumb buyers have either been killed off or have already grown significantly more sophisticated.  China is no longer a risky, unexplored market that is starved for international goods and services.  If you are crafting a proposal for a Chinese counter-party, err on the conservative side.  Don’t set your opening position so high that your deal looks silly to a knowledgeable person.  Take the time to research the China market and figure out where the REAL opportunity is.   Chinese buyers are no longer entranced by Western brands and processes.  

There is still plenty of opportunity for expats in China, but only if you take the time to learn about market conditions.  If your proposals are based on your counter-party being rich enough to buy but too dumb to spot the disadvantages, then you may be in for a few surprises when negotiating in China.

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