Negotiating in China: Dangers of Deal Drift

When your goals aren’t as crystallized or informed as you would like them to be, you are in danger of “deal drift”. That’s when you go into a negotiation with one set of goals, and over the course of discussing, learning and compromising you end up with a deal that is completely different. There’s nothing necessarily wrong with this – as long as the new deal still makes sense.

Newcomers to China often start out negotiating a specific TRANSACTION and end up with a far-reaching, exclusive RELATIONSHIP that they are ill prepared to manage or develop. There are lots of guanxi and behavioral reasons for this, and I’ll put up some posts in the future. Right now all you care about is that you have to keep on eye on your critical deal points.

Let’s say that AmeriCuisine Inc starts talks with Shanghai Restaurants LTD to distribute the US company’s line of spices and specialty foods (used mainly in professional kitchens) in and around Shanghai. Within a few weeks, Bob the US CEO is looking at proposals for JV to process and package spices in Szechuan and is setting up a trading company with Shanghai Restaurants to export Chinese spices to the US and Europe. Does this new set of deals make sense?

Answer: No, No and Maybe.

No – The deal does little to address Bob’s original business challenge – finding distribution for his company’s products in Shanghai. Now you may ASSUME that the other side wouldn’t recommend enlarging the deal if they couldn’t handle the basic responsibilities of the initial deal. Bad assumption. Our friend Bob has let the other side drift him away from his original goal of selling stuff in China.

No – You don’t necessarily want to be in these other businesses. There are probably more efficient, less risky means of achieving YOUR business goals. The one who wants to set up a larger, more far-reaching structure is your counter-party. Why? Does he want you to fund his expansion?

Maybe – Sometimes the only way to make China work is by going through some pretty cumbersome procedures – and setting up a JV may make business sense. Double check this, however, and then check it again. It’s great to be open to new ideas – but bad to be blind to the real costs.

Why is deal drift so common in China?

    1) Your own goals evolve and emerge. There’s a great chance you are learning about China, local markets, business customs, regulatory and legal requirements and your new counter-party all at the same time WHILE you are running your business back home WHILE you are discussing investments and contracts. It’s natural for your goal-setting to be a little looser than normal. You are setting goals and negotiating transactions at the same time. You’re not shooting at a moving target – you’re shooting at 50 moving targets with a machine gun while hurtling through space. Try to relax, learn from the process, and don’t sign anything until you’ve spoken to a few people you trust first.

    2) You learn more about the environment and market. As you figure out exactly how things work in China and the specific markets you want to access, your plans will change. Your priorities will shift. You’ll encounter new challenges – and may find that a few things are easier than you had expected. You’ll get some perspective on the scope of business here and revise your sales & profit estimates. By the end of your first serious China negotiation you will know a hell of a lot more than you did walking in. The problem, however, is that you started this deal when you were still a novice. In other words, things like Mission, Strategy, Resources, Partner Selection and Operations were all decided by the ‘novice you’. Make sure all the numbers still add up.

    3) You learn more about your partner’s objectives and capabilities. Is he a nice guy who you can really trust – but just doesn’t have the experience, training or resources to deliver? Or is he a hard-hitting shark who plans on using you to set him up in a new industry? Maybe he’s the best of both worlds – competent and trustworthy. Maybe he’s neither. If you aren’t comfortable with a counter-party to handle your initial requirements, be hesitant about accepting other offers from him. Why couldn’t he help you with your original needs? What is the reason for the deal to change, expand or refocus?

Sometimes westerners are so overwhelmed by the challenges of their first deals in China that they clutch at straws. They latch on to one advisor or potential partner and rely on that local connection for too much. When your sources of information are limited, signing far-reaching JVs or contracts can seem like a sensible idea. Often, however, the early worm gets eaten. It’s best not to jump into partnerships, legal entanglements or long-term contracts until you have a very good business reason for doing so. Many, many expat owners in China have started their second venture much wiser – and far poorer – after a rough lesson from their first deal.

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