Negotiating Partnerships in China: Your China PPP – The Perfect Partner Profile

As US and other Western companies turn their attention towards the Mainland Chinese market, we’re likely to see resurgence in Sino-US joint ventures and marketing partnerships. Formal, contractual partnerships have been out of favor among US companies entering the China market since 2006. As it became easier for non-Chinese companies to set up Wholly Owned Foreign Enterprises (WOFEs) that enjoyed full protection under Chinese law, western managers who wanted a China presence opted to go it alone. But as China grows – and the US slows – it is likely that more US owners are going to look for ways to access the Chinese middle class market without setting up a full-fledged branch or subsidiary in China.

Partnerships – be they formal JVs, long term contracts or informal best-effort sales deals – aren’t necessarily bad ideas for US businesses who would want to sell into China, but they are tricky to set up and can lead to problems that far outweigh the benefits if you are unfortunate or unprepared.

Learn from the mistakes of others: research has revealed a few basic trends when it comes to negotiating with Mainland Chinese counter-parties.

1) Your China deal is much more likely to run into snags AFTER the contract is signed. In the US, you have much greater latitude and inclination to put the brakes on a potentially bad deal early. In China, you often don’t know until it’s too late that you are negotiating with an inappropriate counter-party or discussing the wrong deal points. Roughly half of all western dealmakers report that they have the biggest negotiating problems AFTER the contracts are signed than in the early stages. Compliance, QC and implementation are the most common potholes that westerners report.

2) You are much more likely to be a victim of misunderstanding and incompetence than fraud and dishonesty. That usually means that traditional Western due diligence isn’t necessarily going to spot these problems before they occur. Your Chinese counter-party may be doing his honest best to satisfy the terms of your deal — and can’t understand what YOUR problem is. Culture, attitudes, standard operating procedures and QC metrics are very different between China and the US. Unfortunately, ambitious business-people tend to give everyone (including themselves) the benefit of the doubt that ‘everything will work out’ in the early stages of deal-making.

3) Sellers have a much tougher time negotiating successfully in China than buyers. Americans have traditionally come to China for manufacturing or to buy finished goods. Purchasing experience is still quite valuable, but it doesn’t necessarily prepare you or your operation for selling to the Chinese market. B2B sales in China have some things in common with US markets – but retail selling is completely different.

4) The most successful western dealmakers in China have the fewest counter-parties. Old China Hands who rank themselves as successful or highly successful tend to have a relatively small universe of counter-parties. Less successful negotiators are speaking to more people – particularly young counter-parties who may not have the authority to make deals. Lot’s of experienced deal-makers are saying, “of course, that’s obviously true in any market’’ – but just make sure you ‘walk the walk’ while you are struggling to make those first few deals. You’ll make the fastest progress with the young, sophisticated, bilingual grads who attend the AmCham mixers – but the deal will be made with the middle-aged guy in the smoke-filled private banquet room of a restaurant or KTV. In the US, you can work your way up the food chain – but that doesn’t always work in China. Make your early negotiations about access to the real decision-makers – not costs and commissions.

5) Americans perceive Mainland Chinese as the best dealmakers in China — and tend to view themselves as the worst. Overseas Chinese, who used to be perceived as the ‘gold standard’ for cross-culture deal making, seem to be losing their appeal. There are ways of neutralizing or minimizing your Mainland host’s home field advantage – but they all involve doing more research before you land, checking facts and being patient. Americans who plan on out-dealing Chinese at the table are the ones that have the most trouble. You’ll fly home with the wrong contract – signed by the wrong people.

These are not earth shattering revelations — but together they paint a picture that is powerful and simple: Many westerners are simply negotiating with the wrong people — and not walking away when they should.

The PPP: Perfect Partner Profile recommends that you build a PPP – a Perfect Partner Profile for every deal you are doing in China BEFORE you start negotiating. This is an idealized description of your ‘dream partner’ in China – and it may contain a few surprises. Many Americans come to China looking for the biggest, most powerful & well connected counter-parties – only to find out later that there is no effective way to apply leverage or enforce agreements. Conversely, American bosses who join up with smaller startups in the hope of controlling the partnership often find that their new partners are willing – but no able – to satisfy the terms of the agreement.

When crafting a PPP, you are looking for complimentary gaps in skills and capabilities — not similarities. You are also trying to partnerships with counter parties who are too large, so small, too weak or too powerful.

    Size: How big should your partner be?
    If they are too big your deal won’t matter. If they are too small, they may not have sufficient resources to fulfill all of your requirements. Americans who come to China thinking that a signed contract or regulations are going to protect their interests are in for a very rude awakening. In China, the best deal structures are those that incentivize compliance. If your counter-party feels that a relationship with you will contribute to his bottom line, it will continue. Otherwise you have merely educated your potential competitor.

    BOP – Balance of Power.
    The ideal balance is 60-40 in your favor. Game theory demonstrates that as the power level of the weaker partner diminishes below ‘reasonable parity’ it can distort the relationship and lead to non-economic outcomes. In China, if you are too powerful, the other side has lots of motive and opportunity to cheat – or to walk away. This is where cultural differences often manifest themselves. The NY boss who shouts at his “subordinate” in Shanghai will quickly finds that his calls don’t get returned – or worse.

    Culture — How local do you want to go?
    Americans trying to enter China should decide in advance, because you have more choices than you may know about. If you are looking to sell to the Chinese mass market, you want a pretty local partner. It’s worth your while to hire translators and sophisticated middle managers who can help you bridge the culture gap. If you are looking to buy, recruit, manufacture or design, then you may be ok looking for a more international or multicultural JV. More than a few westerners end up in incestuous deals with people who have more in common with them than with their Chinese target market.

    It’s important to select a partner that will satisfy your needs now and for the foreseeable future. Weak partners are the easiest to negotiate with – but the partnerships are the least stable. If a potential partner can only satisfy a portion of your needs and you will have to find additional resources, you are best off working out a non-exclusive buy/sell agreement. Chinese owners have an unfortunate tendency to over-promise before the deal is signed, and then confront you with new demands for resources or cash in order to bring their own abilities up to standard.

    Timeframe: Where do they see themselves in 3-5 years?
    Is there room for you in their growth plan? If not, then consider negotiating a shorter arrangement with a sunset provision that will outline how you are going to part ways. If you plan on shedding your partner and going independent in a few years, then plan accordingly. Determine what your counter-party’s attitude is. If you are transferring IP or know-how, then you are never getting it back. Westerners are criticized for their lack of patience and short time horizons in China. Chinese negotiators are renowned for their ability to outlast counter-parties. Plan accordingly.

Next: Profiling your counter-party’s goals, variables and BATNA

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