Negotiating with a Post-Recession China – Old is New.

Chinese negotiators are changing tactics as the global recession wears on, and westerners considering setting up or expanding their presence in China have to work even harder to keep up with new trends.
Over the weekend the ChinaSolved linkedin group conducted a small ‘flash-poll’ that asked, “Which economy will recover first – the US or China?” The results of a poll weren’t too surprising – of 45 respondents 42% said that US and Chinese will have BOTH recovered in 18 months – and 31% said that China will have recovered while the US is still in trouble. (See the results and take the survey: http://polls.linkedin.com/p/29708/wxaqt )

Linkedin poll:  http://polls.linkedin.com/p/29708/wxaqt

That means that over 70% of the admittedly small (and potentially biased) sample feels that China’s economy will recover within 18 months. Only 46% think that the US will be back on track by 4Q2010.
he implications of these trends – assuming they turn out to be true – should impact on the way that western investors and business people structure their negotiation with Chinese counter-parties.

Look for these 5 trends to impact on your future China negotiations:

    1) FDI is in demand again. Foreign Direct Investment is what helped to create China’s booming post-Deng economic miracle, but starting around 3 years ago western investors started noticing that ‘not all FDI was created equal’. Certain types of western investment were preferred – while some types of investment had a great deal of trouble getting approved. Nowadays, I’m hearing that FDI is in demand again – even in places like Suzhou that once turned up its nose at smaller or less hi-tech projects. As an inbound investor, your key leverage will be in the area of job creation. The more good jobs you can supply, the more favorably your applications will be viewed.

    2) Tougher access to markets & a more ‘middle class’ middle class. 40% of the pre-recession Chinese economy was ‘external’ – either exports, OEM, trading, multinational corporations, or other non-domestic activities. This was the exciting, vibrant part of the Chinese economy – the kind that Time and Business Week liked writing about. The recession has devastated this part of the Chinese economy and dashed the hopes of many western marketers and retailers who saw this burgeoning ‘middle class’ as a huge untapped market. The good news, however, is that the REAL Chinese middle-class – those making upwards of rmb 5,000 per month (about US$7,500 per year) is still growing. In fact, one of the main goals of the Chinese stimulus package is to diversify the benefits of China’s economic reform – thus spreading demand across a wider geographic range. The bad news – this market is tough for westerners to tap without local assistance. When you negotiate for marketing or distribution partners, make sure your counter-party already has established channels – and a realistic plan for moving your products. Get confirmation, and don’t be ‘oversold’. Almost no private distributor or retailer has true nation-wide access, so you should be skeptical. Be careful with nation-wide exclusivity. It is rarely a good idea.

    3) More SOE/ State bureaucracy. The MNCs are hurting, expats are repatriating and private Chinese businesses are getting slaughtered. Who is winning? State Owned Enterprises and those working directly with municipal, provincial and national governments. The Chinese economy is moving away from the ‘wild west’ anything goes capitalism of 2007 and becoming more like the centralized economy of years past. The lion’s share of the government’s stimulus plan targets infrastructure, government agencies and bureaus and SOEs. ‘Market economics with socialist features’ is out – ‘statist capitalism’ is in. This means your negotiations will take longer, be more guanxi-based and take place with groups of bureaucrats instead of a single decision-maker. Better practice those banquet & baijiu (Chinese liquor that tastes like rocket-fuel and packs more of a punch) skills. Gambei, penyou!

    4) BOP (Balance of Power) Perception Gap. Anyone who did business in Japan during the 1980s will remember this problem — both sides see their negotiating positions as stronger. Someone is going to have to give here, and if that chart in this article is accurate, it might end up being YOU. Yes, just as with Japan, the situation may very well change in the very near future. But if you can’t tolerate a touch of arrogance and condescension from across the table, then your negotiations in China could be extremely unpleasant – and unproductive. Suck it up and don’t let your discussions devolve into emotional conflict. Your counter-parties – particularly the bureaucratic ones – are likely to see the current economic climate as a vindication of Chinese methods and culture. Expect some lecturing. Sorry.

    5) Less Transparency, More Guanxi. Unfortunately, the trend towards greater openness, transparency and rationality in Chinese negotiation is waning. It may come back, but for now you are best off working off a more traditional playbook. I use Carolyn Blackman’s excellent “Negotiating China: Case Studies and strategies” – published in 1998- in my negotiating class, and used to refer to it as a great picture of what negotiating in China used to be like. Now I talk about how relevant her work has again become. She talks about old-school negotiating tactics favored by bureaucrats that seemed to be getting replaced by international technocratic methods. Now I am revisiting her work and finding a new relevancy. Order it on Amazon today.


ChineseNegotiation.com and ChinaSolved.com invite you to participate the ChinaSolved linkedin group. http://www.linkedin.com/groups?gid=1392417

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