Negotiating with Chinese SOEs (State Owned Enterprises)

You’ll all be glad to hear that my battle with China Telecom is going swimmingly. I expect unqualified victory at any moment. I have refused to pay the last two month’s bills, so they are probably feeling the heat by now. Furthermore, I have finally gotten to the bottom of the whole situation and it is clear that my girlfriend’s mentally unstable mother gave Chinatel incomplete instructions when she called to set up my ADSL account. So now it is just a matter of having her get in touch with the right people over there and explain why they are so wrong – and then sittin’ back and lettin’ the SOE apologies roll in.

Sounds funny when someone else is saying it, doesn’t it?

SOEs are Chinese bureaucracies — the ultimate Avoiders. (Like many negotiators, divides the world into Avoiders, Competers, Compromisers, Accomodators/Yielders and Collaborators. More here.) They aren’t set up for external negotiation — just internal. In modern China, they PRETEND to be have reformed, but in most cases SOE negotiation is just an extension of internal negotiation. Sometimes powerful, connected local Chinese can expend guanxi resources to get the Bureaucracy to do what it always wanted to do anyway, but that’s just a version of internal negotiation. To deal profitably with the Chinese bureaucracy, most Westerners have only 3 choices:

1) Submit (accommodate their demands)
2) Avoid
3) Opportunistically exploit environmental factors

    1) Submit.
    Factor in the costs. Pass them on when you can, take the hit when you have to. If you can’t manage to build a meaningful relationship on your own then you should be very careful about getting clever with rented or borrowed guanxi. Make sure you can finish what your hired guns begin – after they’ve been paid and ride off into the sunset. Chinese SOEs – like most bureaucracies, tend to be relatively insensitive to market forces -and highly sensitive to time, schedules and procedures. Factor in approval timing, sequencing and delays. Gather as much data as you can about the correct order and EXPIRATION of approvals and processes. Know the holidays & schedules. There are lots of horror stories about shipments sitting in Chinese ports for weeks over Spring Festival and passports locked in visa offices over long holiday weekends. Don’t be that guy.

    2) Avoid.
    Structure your negotiations to steer clear of the SOEs and the bureaucrats as much as you can. There was a time when China business entry was all about rehabilitating state owned assets — but now it’s about developing markets. Dealing with market-friendly SOEs in Shanghai is relatively straight-forward – as long as you are a buyer, your transaction is standard and you aren’t trying to get special terms. Some Westerners are still schlepping out to the country-side to try getting bargain prices on farmland for factory sites. If you ask me, this is like poking a bear with a short stick – limited benefit but a truly horrific downside. As long as guanxi salesmen roam the Chamber of Commerce cocktail events there will be newcomers trying to beat the odds. Jiayou.

    3) Opportunistic deal-making.
    You can’t alter the business and economic environment, but you can monitor it — and be ready to move when the planets align. 12 months ago, that was advice I reserved for the undergrads studying the theory of negotiation in China because it doesn’t really work in your favor during a bull market. Nowadays the world is rewriting itself every 3 days or so — but it only helps if you’re watching what’s going on and have a plan to act when the gods smile upon you. If you have a business plan for an R&D center or a high-tech manufacturing facility, you’ll find that the local bureaucrats and SOEs are more accommodating than they’ve been in a long, long time. But that doesn’t mean you should start a new business just to capitalize on a recent policy trend. Opportunistic deals still have to pass muster.

As a general rule, the Chinese bureaucracies and most SOEs are worth steering clear of to the extent that you can. 10 years ago, that would have been silly advice. It just wasn’t possible. Now it’s almost possible. It may not stay that way for long, the way the wind is blowing. The Bureaucrats are in ascendance again – and we’ll be feeling it soon. But right here, right now — you can pick your battles to some degree.

The real advice here is to avoid being too clever. Business plans that hinge on making the Chinese bureaucracy bend to your will make about as much sense as planning for gravity to decrease or the speed of light to slow down. This is relevant for newcomers to China, because you’ll be meeting plenty of people who will tell you that they have the connections and guanxi to get around laws and get any kind of deal approved. If you are seriously considering this kind of approach, you should start your China career by finding an international lawyer whose company you truly enjoy – because he will be your best and only friend before too long.

Leave a Reply

Your email address will not be published. Required fields are marked *