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.
Please help with a research project by taking a brief, simple & anonymous survey about US-Mainland negotiation.
Click here for online survey: http://app.icontact.com/icp/sub/survey/start?sid=6256&cid=355149
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 .
Click here for survey: http://app.icontact.com/icp/sub/survey/start?sid=6256&cid=355149