Americans negotiating in China are faced with the dilemma of deciding who should make the first offer. Is it better to hang back and let the Chinese side show their hand first — or should you dive in and hope that Fortuna favors the bold?
The general rule in negotiation, based on recent research and the authorities at Harvard’s Project on Negotiation (the PON Posse) says that whomever makes the first offer tends to ‘anchor’ the range of possible outcomes at a more favorable level. This, however, assumes that both parties have well considered, clearly established targets – a bit of a generous supposition when it comes to Americans doing their first deals in China. (Put another way, the gunslinger who draws first only has a serious advantage if his gun is loaded and he knows what he’s aiming at.)
The question of who should make the first offer has special implications for Americans engaged in negotiations with a Chinese counter-party.
* Many Americans walk into the negotiation ‘hoping to figure out what’s going on as they go’. For all too many Americans, the distinction between China research and Chinese negotiation is a murky one. There’s nothing necessarily wrong with this approach — provided you are willing to collect a range of bids from a number of counter-parties before making an offer of your own. If you are doing research and conducting live negotiations at the same time in China than you are engaging in extremely risky behavior.
* Chinese negotiators — particularly young ones — are often paralyzed by the thought of taking the lead in the discussion and freeze up or resort to a wildly optimistic opening bid that is unrealistic and poorly constructed. Humility, indirectness and risk avoidance are characteristics of traditional Chinese society, and this often translates into what appears to be indecisiveness in negotiations. If you are involved in a simple cash purchase, then fear not — your counter-party has a very clear idea about his bottom line price. He’ll still play coy at first, but you’ll quickly work through the give & take to arrive at a definite price. Problems arise, however, when you are trying to put together a multiple-variable deal that he has never done before. Chinese deal-makers with limited international experience tend to focus almost exclusively on price.
As an American, you have a real advantage here — perhaps one of your few – if you are ready, willing and able to exploit the opening.
1. Have a goal prepared. The Chinese side won’t go first, and if they do the initial offer probably won’t be meaningful. This gives you a great opportunity to seize the high ground – both in terms of price and in setting the agenda for the rest of your negotiations.
2. Anchor high, but not crazy. (As a general rule, your initial offer should be as high as you can go without making you sound crazy, stupid or dishonest.) Ideally, your opening bid should be 5 – 15% beyond his bottom line price. Make sure you can justify your optimistic price, even as you are prepared to make concessions. Beware of overplaying your hand – and under no circumstances should you improve your offer before the counter-party responds to the initial bid.
3. Chinese will often focus on price to the exclusion of all else, so make sure you ask for a goodly amount of non-cash deal points. Just make sure that the points you win can be achieved — schedules and timetables tend to be very difficult to enforce in China. Again – use this as an opportunity to put the variables you care about on the table early in the conversation.
4. In the case of cash purchases or manufacturing deals, be prepared for experienced Chinese counter-parties to try to psyche you out by opening very high (see One Foot Dealmaking). Just because he has given you a price doesn’t mean that you are compelled to shout back a counter-offer. Chinese negotiators in the retail field favor a ‘meet in the middle’ tactic where a split-the-difference compromise will yield them a very favorable price. If their first offer is nuts, disengage from serious negotiating about deal terms and either A) use this as an opportunity to learn more about the industry, B) get the hell out of there.
5. As in every other negotiation, anywhere in the world — the more research you’ve done and the more counter-parties you have waiting in the wings, the more successful you will be. Whether your conversation is a serious negotiation or a networking/research exercise, having a wide range of options strengthens your position.
As a general rule, American decisiveness and risk management skills give you a significant tactical advantage in the early stages of a Chinese negotiation. Use this to your advantage by taking the opportunity to frame the discussion in the most favorable terms and by raising the variables that you care about as priorities. Just beware of being too abrupt or direct when delivering your opening bid — remember that old-school Chinese will spend a very long time in the pre-offer waltz, dancing around the price issue for weeks while they build relationships and get to know one another. Making the initial offer will move the relationship to a new level, so you must make sure you are ready.
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