China negotiators have always found BATNA analysis to be a challenge. Accurate BATNA analysis in China requires a full knowledge of one’s business environment, competitive position, regulatory & legal framework and a deep understanding of your own earnings outlook. BATNA, which stands for Best Alternative To No Agreement can be understood as your ‘best worst-case scenario’ for any given negotiation. It tells you where you should be if your negotiation yields you a definitive NO – and thus enables you to formulate a wider range of options and alternatives. One of the worst mistakes a negotiator can make is to accept a deal that is below his BATNA – a situation that occurs with surprising frequency in China.
Example: What is the BATNA for the owners of a failing WOFE (Wholly Owned Foreign Enterprise) in China?
A) Walking away and forfeiting his investment.
B) Going through the cumbersome and costly paperwork to wind-up his investment legally.
C) Continuing to devote scarce resources to his China business believing that when the recession finally ends he will be in a stronger position.
For most entrepreneurs, the true BATNA is answer B – winding up his investment – even though it will take many months and incur fees starting in the neighborhood of $10,000 (but possibly going much higher.) Answer C is clearly wrong for many entrepreneurs, since there is no guarantee that the recession will end soon or that he will derive any benefit from throwing good money after bad. But what about answer A? Isn’t cheaper and easier to just leave the keys on the desk and head for the airport? Well – it only seems cheaper and easier in the very short term. When that entrepreneur decides to take another shot at the China market in a few years, he’ll find that the Chinese bureaucracy has an incredibly long and accurate memory – and that administrative black-lists are all too real. If you expect China to play any significant role in your future business, then the ‘last one out turn off the lights’ approach to dissolution is actually the single most expensive option.
China BATNA analysis – A moving target
BATNAs rise and fall for every negotiating entity, and that is particularly true in China right now as the economic situation shifts and slips. Negotiators in Europe and the US may have a bleak set of scenarios to analyze – but they are fairly consistent. China challenges negotiators with a much wider set of options. Beijing is still charting an 8% growth course – which would easily make China the brightest star in the 2009 economic sky. A more conservative 5% growth number would still make China the ‘last man standing’, though the figure is deceptive since it is far below China’s optimal growth figure. Anything below 4% would likely be disastrous and put China on par with other bombed-out economies. Still – the macro picture is just one of a dizzying array of variables that the China-based negotiator must contend with when coming up with a realistic BATNA.
Let’s examine 3 different negotiating cultures – Mainlanders, Americans and Europeans, and look at how their BATNA might be change over the next 18 – 24 months.
Mainland Chinese negotiators–
Time: Time is on their side – or is it? Chinese are famous – and infamous – in negotiating circles for their shrewd use of time as a bargaining tool. When you know how to run down the clock AND have the home field advantage, the power balance surely shifts to your favor. Chinese are adept at AVOIDANCE tactics, and there will certainly be growing lines of foreigners banging on their door with handfuls of US currency desperate for access to China’s consumer and B2B markets. It seems that all Chinese negotiators have to do is bide their time and choose the best offer from their lean & hungry counter-parties. The economic storm is almost certainly coming to China next, however, and if any individual Chinese negotiator waits TOO long he may find that his position has weakened compared to other Chinese businesses. Remember – even at 6% GDP growth, overall commercial activity in China will shrink dramatically. If we are really entering a “last man standing” scenario, then Chinese negotiators will have to be much more sensitive to the time element of their BATNA analysis. Chinese negotiators are, however, in a better position than they have ever been. They can afford to play the waiting game and let the global market come to them – providing that there is someone left to spend and invest.
Verdict: Time is a positive factor for the Chinese.
Batna analysis: Chinese negotiators always believe they have 1,000 potential partners waiting in the wings. These are the Avoiders, who prefer to wait quietly while counter-parties bid up the offer. As the China market becomes more important over the next 18 months, so their position becomes more powerful. The manufacturers who relied on foreign trade are already dead or dying – but those who can deliver the MWM (Mainlander With Money) buyers have never been in a stronger position.
American negotiators in China-
Time: Their quarterly (or monthly) income statement approach is turning against them now, sharply lowering their steady-state BATNA. Americans are the ones most at risk from the cut & run strategy. The Chinese don’t stamp your hand at the door when you leave to check out other venues – negotiators who plan on leaving quietly in the night and then sneaking back in when the party heats up again in 18 months or so had best sit down with a competent legal advisor. The Chinese authorities bear a grudge as a matter of policy. Right now, the emphasis is on stability and employment. You roil these waters and you might not be allowed back in the pool.
Verdict – American impatience will work against US negotiators. Plan accordingly – and get good advice before making any dramatic moves.
Batna Analysis: Companies with a strong China presence and cash from China operations will find that their BATNA is falling, but at a slower, softer rate than their home-town rivals back in the States. Smart American negotiators will take advantage of their hard-won China presence to offer other US firms entree to the lucrative but difficult China market. The best China deals may very well be in NY, Chicago and Cali.
European Negotiators –
Time: Euros play a longer game than the Americans or the Chinese, but it’s got to hurt that just as their patience was paying off the global recession threatens to call off their China game. Still, a gentle U-Shaped downturn & recovery in China could play to their strengths – they are long-term players who have seen plenty of business cycles before. For many mid-sized Euro operations, cash positions are going to continue weakening their global asset base and crimp their options.
Verdict – Time is now a neutral factor for European negotiators. They have the patience – but do they have the cash? Shrinking resources may force Europeans to play a Chinese game on a Chinese court. Still, they are better suited to this environment than their American counter-parts.
BATNA analysis: Just as their longer term, networking approach was starting to pay off, the recession came and crimped their options. But the Euros tended to be sellers into the Chinese market more than the Americans, so companies with a China base will be in relatively strong positions, at least in terms of other westerners. Euros are likely to dig in and try to build on their China accomplishments – or at least hold ground. Things back home in Euroland are pretty grim, and no one will be surprised to see French & Germans beggar the home operation to beef up China. Employment is a sensitive issue all over – but the medium sized entities that are small enough to fail may very well choose to reinvent themselves as China-centric businesses (with traditional Euro branding). Outfits like Paul Bakery could follow the KFC Colonel to book more profits in China than they do back home.