China negotiators — Know how low it can go.

This is a good time for international negotiators in China to recheck their positions.  There is a very real chance that your BATNA (Best Alternative To No Agreement) is falling faster than the Dow Jones average. In case you haven’t noticed, you are walking into negotiations with far fewer options than you used to have.  

Many international investors and negotiators have never been realistic about their true BATNA – but now the time has come to face facts. If you have a WOFE (wholly owned foreign enterprise) in China – or are in the process of starting one — than you have to realize that your true BATNA may be lower than you think.

China’s economy is in better shape than the West’s, but that doesn’t mean you don’t have unseen risks and new challenges when negotiating here.

3 new shortages

There are three things that expat negotiators in China never thought we’d run out of that have suddenly gone into effective shortages:  Counter-parties, Capital and Manpower.  

Counter-parties

The reason recessions are called economic contractions is because the entire economy literally gets smaller.  More people have less money, so they cut their spending.  BUT the less obvious danger is that many people and businesses are taken out of the economy altogether.  People lose jobs and companies go bankrupt.  Financially speaking, they’re just not there anymore.   This means that you, as a business, have fewer qualified counter-parties.  The people you see are buying less — but what you don’t see is that there are fewer people to buy anything at all.  The same goes for suppliers, outsourcers and partners.  As bankruptcy and curtailed expansion plans become more commonplace, you’ll find that the pool of counter-parties for your proposal is shrinking rapidly. 

If your old BATNA in a negotiation was ‘Find a new customer / supplier / partner’ than you need to make sure you still have that alternative.

 Capital

No cash flow, no credit, no budget, no head-count, no expansion, no expenses.  Just because a couple of your competitors go out of business before you do is no reason to start rejoicing.  Yes, the weaker companies are already either bankrupt or will be soon.  But the stronger players are also feeling the pain of tighter credit, lower cashflow and spending cuts.  This is one of the most dangerous aspects of a recession — no one wants to lend or spend. 

Lack of capital can be a killer – because it destroys your time as well as your bottom line.  Make sure that your counter-party has access to funds early in the negotiating process.  Be very careful about your VARIABLES – particularly in terms of credit terms and conditions of payment.

Manpower

Manpower?  Doesn’t this actually RISE in a recession?  Yes – and no.  If you are a famous MNC with big offices and an established brand, then you may in fact find that you are seeing better candidates and more reasonable salary expectations.  But if you are a small or medium sized business, or worse – a start-up, you may just find that your negotiating position has actually weakened in China.  Why?  2 reasons.  First, you just became a riskier proposition than you were last year.  Unknown brands in China have always fought the famous international brands for talent — and usually lost.  Now you are fighting against more traditional Chinese employers who can promise security.  But even if you find the candidate of your dreams, you still might be paying more than you did in pre-crash days.  Many international companies in China were able to entice ambitious local managers with promises of commission, profit shares, bonus, a stake in the company and other variable compensation plans.  Well, now its about CASH.  And don’t expect an all-salary package to buy you any discounts. 

Chinese job-seekers are the ultimate AVOIDERS — they will wait and wait because they are sure there is a better offer coming down the road. 

WOFE owners must understand that their true BATNA is BANISHMENT!

Your new BATNA is bankruptcy in China – and being permanently barred from the Chinese market if you don’t follow bankruptcy procedures.  If you thought that setting up a WOFE in China was unpleasant, just wait until you try to shut one down!  No — you don’t just get to leave the keys on the desk and head for the door.  You’ve got to unwind this thing according to the rules — and my guess is that they are neither simple nor inexpensive. 

And lest you think you can use that foreign passport to just slip out of town — think again.  Sure, you’ll get away just fine — but you will probably never be able to operate a business in China again.  Bureaucracies have long memories — and China’s bureaucracy carries a grudge.  If China truly is destined to be the greatest economic power on the planet, you don’t want to get shut out forever because you found the paperwork too unpleasant.

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