Negotiating power shifts with changing economic fortune

Power and Negotiation.  Even in the best of times, analyzing and managing your relative power in a negotiation is tricky.  When counter-parties are from different cultures, it becomes even more difficult.  Then you throw in a global recession, and understanding and managing power and status becomes very risky.

Americans and Chinese counter-parties always seem to be able to agree on one thing – ‘the other guy has power issues’.  American’s accuse Chinese negotiators of using tricks and local knowledge to gain unfair advantage.  Chinese accuse Americans of being high-handed, rude and overvaluing their own technology, IP and methods.

Well, now that we find ourselves at the start of what could be a prolonged and bitter recession it is time to evaluate and examine what an economic slowdown will mean to the relative bargaining power of each side.

Traditional power relationships (in US-Chinese negotiation):

Usually, buyers of commodities and sellers of scarce goods rule the day.  When the government was involved as a buyer (or regulator of a buyer), it usually trumped everyone.  Americans did best when they were selling IP or technology, and when they were expanding.  Chinese did best when they controlled market access for American products.  Any squabble inside Mainland gave Chinese counter-parties a big advantage.  Overseas, the American side of a rock fight usually has a small to moderate advantage.  As China opened more, the advantage to the international side grew as Chinese rules became more transparent and level.  Big, famous brands tended to have the highest status in negotiations – but they also tended to pay the most (and the most often). 

Traditional (non-recession) power balance:

  • Monopolistic sellers
  • Sellers of unique goods, or products that are in shortage
  • Buyers of commodities
  • Rapid expanders

Pre-recession advantage:  Negotiations within the PRC tended to favor the Chinese – though the lead was diminishing. 

Post global recession power balance:

In a post-recessionary China, the situation will change radically.  Don’t fool yourself into thinking that the economic picture is lopsided in China’s favor.  They will be hurt by the recession – possibly harder than the US.  In the US tight credit and falling demand create a vicious cycle.  But China will be hit by falling demand as well – and most Chinese companies never had access to ANY credit in the first place.  They will feel as constrained by the recession as their US counter-parts.  Firms with traditional Chinese budgeting (ie: tight-fisted) are fighting on very familiar terrain, while the new high-flying Chinese companies that have grown used to foreign direct investment are going to be hard-pressed to adapt to the new reality in a hurry. 

The number of US counter-parties in China are going to spike at first as US owners think that they can reverse their fortunes by building new markets in China – creating a smokescreen of false demand among the Chinese.  The vast majority of these new entrants will retreat early, leaving many Chinese counter-parties burned and over-extended.  Established international brands and international SMEs with demonstrated staying power will find that they actually have more powerful positions after the smoke clears.  Chinese SMEs, however, will find themselves in a tougher position as powerful State Owned Enterprises (SOEs) with access to credit begin aggressively defending or targeting the domestic Chinese market – edging the little guys out.

New power balance favors: 

  • State Owned Enterprises
  • Established brands
  • Staying power
  • Low expenses
  • Access to credit
  • Access to markets

Post-recession advantage:  It is the Day of the SOE.  US businesses already in China that can survive the shake-out of newbies will find themselves slightly better off against their Chinese entrepreneurial counter-parts.  Negotiating with the big Staties and other deep-pocketed players will go from difficult to nearly impossible.  These guys are the waiters & watchers – they can go forever without making a move while you starve to death on their doorstep.   Big brands, no matter where they are from, will find it possible to gain ground just by standing still as their smaller, undercapitalized competitors quickly die off.

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