Chinese Statist Negotiation.

An older style of Chinese negotiating is returning to dominance after being forced to the sidelines for many years – practiced by ‘Statist’ deal-makers. They are a cross between traditional bureaucrats and private profit-oriented companies. In China they are not new – they fit in between State Owned Enterprises (like China Telecom and the 4 Big Banks) and the pure private enterprises that American dealmakers tend to seek out. The most famous examples are firms like HuaWei and Lenovo – ostensibly private Chinese firms whose corporate goals are interwoven with central government policy initiatives. These are ‘state directed’ companies that work in concert with bureaucrats to implement policy, but are still nominally private companies. (Since President Obama’s administration has taken office in the US, we have seen our own ‘Statist’ entities rise to new prominence: government assisted banks, automakers and labor unions that work hand-in-glove with the Obama administration to execute policy.)

While this type of firm has always been around in China, their new prominence – and new agenda – makes them formidable negotiation counter-parties. They are particularly important in China-Western negotiating since their new power and scope will likely set the tone for negotiations even between pure-privates. For the last decade or so, Statists have had to mimic the negotiating style of pure private firms. We are now seeing the pendulum swing the other way – and pure privates will have to start making accommodations to Statist negotiating styles.

    New power.
    Who are these people? Think of them as private, profit-seeking bureaucrats. They are different from NGOs and traditional government agencies in that they are ostensibly private, profit seeking — but they are built and bred to thrive in policy environments. American negotiators tend to come to China looking to deal exclusively with private businesses. The danger here is that Chinese Statist firms look private –
    and can even be listed on overseas stock exchanges — but are basically policy organs. Post-stimulus China has become a Statist economy, and even independent entrepreneurs will fall more directly into Beijing’s bureaucratic orbit.

    New agendas.
    Like large organizations everywhere, these firms have an institutional imperative to survive and grow. They like profit – but aren’t comfortable in openly competitive environments. These firms thrive on complexity, policy and back-room wrangling over regulations and approvals. These companies would rather shut out potential competitors by manipulating procedural approvals than go head-to-head in the marketplace. Statist negotiators tend to be sub-zero-sum gamers – they are lose-lose negotiators who would rather see the entire system shrink than give up their quasi-monopolistic position. Statists are the incumbents who view new competitors as existential threats – and place a premium on blocking entrance to the market. These actors find it much more cost effective to entertain government officials than to invest in R&D or new product development.

    New variables.
    These negotiators are determined to earn profit as an end goal — but whereas traditional profit-seekers see government regulations as an obstacle or interference, Statists view regulators and bureaucrats as clients or partners. They tend to measure success not only by sales and profit, but also by headcount, access to government or policy decision-makers, input to the regulatory process, and ability to master the approval process. Be very sensitive to the fact that these people are concerned with more than just securing their own approvals – they also work to block the approval of their competitors. In China, where regulations are not consistent or evenly applied, this becomes a very potent negotiating variable.

    New tactics.
    Chinese Statist negotiators are highly sensitive to balance of power and tend to behave like monopolists. They attempt build ‘the People’ or ‘the Nation’ into an external source of power — not just a neutral part of the deal-making environment. Their first priority is to enhance and leverage their ‘special relationship’ with power structures and institutions. Statist negotiators magnify the role as ‘insiders’ or ‘guanxi’ — which marginalizes outsiders and westerners. Their main tactic is to control & limit access of outsiders to power structures– which serves to manipulate the process and make structures more opaque. Cooptation is more favored than conflict — head to head conflict is discouraged.

    New counter-tactics.
    Avoidance is the best approach — you are advised to develop plans that don’t involve them directly. This is a great time to consider partnerships with downstream players who have already gone through the time-consuming process of developing Statist relationships BEFORE they consolidated their power. If you have to deal with these Statist organizations directly, you are best off at cooptation (even it feels like YOU are the one being co-opted) rather than conflict or attempts at dominance. One way is to develop your own constituency or populist claims. If you can make it work, try an end-run around the Statist counter-party to appeal directly to their government sponsor/client. What we will probably end up doing it waiting for environmental shifts — or for corruption or new developments to weaken their position. The bad news is that Statists are very effective at blocking new entrants from accessing the marketplace. The good news is that they tend to sow the seeds of their own destruction by making the entire system less efficient and competitive – ultimately undermining their own power base.

While the rise of the Statist is not solely a Chinese phenomenon, the implications for American negotiators in China are profound. The re-emergence of Statist negotiating in China has been triggered by the collapse of external demand for Chinese manufactured goods and the size & composition of the Chinese stimulus package which favors infrastructure building and easy money distributed by policy banks. We are seeing a return to an older — and less efficient – form of Chinese governance that will be more ideological and less technocratic. Since this type of negotiation is better suited to conditions of shortage rather than surplus — those that can create shortage-type environments will benefit most. This is a classic definition of lose-lose negotiating – and American deal-makers have to reexamine their basic assumptions about China’s new business environment.
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