Smart-or-Honest is a Bad Choice in Chinese Negotiations

Americans negotiating in China must take care to avoid making a local counter-party choose between common sense and honesty. This is a bad idea anywhere in the world, but it is worth emphasizing here because so many American and European negotiators in China maneuver themselves into just that position.

Sometimes Westerners are so eager to ‘do the deal’ that they blur the line between cooperative partner and profit-seeking competitor. Chinese negotiations are famously social & cultural in nature – there are dinners, singing, girls, drinking and long discussions about the importance of trust and mutual cooperation. Many newcomers to Chinese business internalize their desire for a ‘guanxi’ to the point that they start to confuse their business relationship with friendship. Either through misjudgment or oversight, they put valuable assets in the hands of their local partners and then get on a plane back to NY or London. The Chinese party now finds himself with a huge incentive to harm the overseas party – and little in the way of control or oversight to prevent it.

Here are a few red-flags to be aware of when finalizing deals in Mainland China that indicate you are blurring the line between friendly competitor and loyal partner.

    • Starting work without a legally binding contract or actionable agreement.
    This is particularly relevant to service providers and consultants planning on getting paid by the Chinese counter-party – or anyone who has to transfer funds to get a deal started. As we’ll see, the problem isn’t that a contract in China offers you all that much protection, but that novice Westerners are too quick to assume that you have achieved a ‘meeting of the minds’ about costs and procedures. Many, many Western consultants have ended up working for free after they thought they had achieved a ‘verbal understanding’. Be particularly sensitive to situations where your local counter-party tells you that you have a deal, but the person who signs/stamps the documents is unavailable.

    • Making your local counter-party your only source of information.
    It is easier than ever to get information and data about the China market, yet many over-scheduled Westerners still end up relying on a local partner for 99% of their China business knowledge. Yes, it’s easy. No, it’s not what ‘everybody does’. Respecting the opinion and expertise of your local partner, supplier or employee is a great idea, but it’s not enough. If you don’t have the time to monitor your China business then you don’t have the time to do business in China. In 1995 it was very hard to get business news on China. Now we are swimming in it.

    • Leaving your counter-party as sole controller of valuable assets — including but not limited to your intellectual property, trademarks and product designs.
    Invest the money and time in a few hours with a competent international lawyer and find out what you should be protecting. Otherwise intelligent, pragmatic Westerners tend to be incredibly naïve and optimistic when it comes to trademarks, website names, patents and product designs in China. A US-registered trademark doesn’t necessarily mean anything in China. You need to understand your rights and obligations BEFORE you let your Chinese counter-party understand the potential value in this new market. No one likes spending money on lawyers and accountants – but it is much cheaper to do it early then wait until after a problem arises.

    • Lack of due diligence, reference checks or legal/accounting support.
    Westerners often ignore the most important type of China network – their own professional service providers. If you are doing business in China, you need a legal guy, a finance guy and possibly a consultant guy. These may be professional experts on retainer or part of informal network – but you need access to independent, informed decisions. You need to a network of experienced Old Hands to use as sounding boards. Going to your negotiating counter-party for legal and financial opinions makes even less sense in Shanghai than it does in NY.

    • Relying solely on contracts and written agreements that can’t be readily enforced.
    Contracts are vital everywhere but they function a bit differently here in China. In the US contracts tend to be conclusions and serve to finalize business agreements. In China, contracts often function as the starting point for the REAL final decision. That doesn’t undercut their usefulness, however. A contract articulates the agreement and demonstrates a meeting-of-the-minds at the time of signing – which is all very useful. But a Westerner angrily waving a piece of paper in the face of a Chinese counter-party has become the familiar emblem of a failed deal. Chinese courts are rarely good remedies for Western business people.

Chinese have a reputation among Americans as being less honest – and it very well may be deserved. But Americans have a reputation among Chinese as being less sharp – and that may very well be deserved as well.


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