When Americans negotiate with Chinese counter-parties, they often run into the ‘Frenemies’ dilemma. US dealmakers in China are sometimes so concerned with building good relations that they don’t perform proper due diligence until it is far too late. They end up losing money, time, IP – and destroy the very friendships that they worked so hard to develop.
Americans doing deals in China have all heard that Chinese value harmony and relationships, so they tend to work hard to build guanxi and give face at the beginning – especially if that is not their true nature. Newcomers to China are slow to get down to serious business discussions, because they don’t want to come off as boorish or overly aggressive to their Chinese counterparties. Instead of revealing their true agenda and personalities to the Chinese side, inexperienced American dealmakers tend to focus on small-talk pleasantries or else invent a fictitious façade on the fly. During early-stage trust building sessions they often miss the subtle cues and opportunities to bring up substantive issues and concentrate on telling the other side what they want to hear. They eat together, drink together and sing together all in the name of relationship building – but neglect to ask for references, guarantees or binding procedures while time is still on their side.
All too often in their first contact, the American side’s goal is to develop a friendship instead of performing due diligence as they would at this phase of a potential deal d back home. During the deal-structuring phase, Americans often focus on solidifying the relationship and learning basic facts about the industry and standard practices in China. They delude themselves that the only thing that matters with Chinese counterparties is the relationship – and that once mutual trust exists that all of their execution, compliance and QC problems will take care of themselves.
Many deals move rapidly through the contract phase without any of the hard conversations that would reveal underlying problems and weed out inappropriate partners because everyone is sensitive not to upset the wonderful friendship and harmony they have so painstakingly built up.
When it comes time to get down to real business, each side is basically shedding their ‘guanxi-building’ mask and revealing their true nature for the first time. Once funds or assets have been transferred the balance of power shifts from buyer to seller – and the cordial relationships revert to a more matter-of-fact business positions. Now that hard questions about quality, materials, experience and security are forced to the surface the cordial façade crumbles. Not only are the chances for misunderstanding and misinterpretation high, but once things start to go bad they tend to go into a self-reinforcing downward spiral. Each side feels it has over-compromised and the other has taken advantage. The US side feels that the Chinese have been duplicitous and dishonest about wanting to build a long-term relationship. The Chinese side feels that the Americans were deceptively hiding their true aggressive nature.
As each side tries to ‘balance’ the relationship, they tend to overcompensate and grab value to make up for being ‘too nice’ earlier. The new set of demands breaks the pattern set in the courtship period, and each side comes across as hostile and opportunistic.
We are seeing this pattern play out in relationships that run the gamut from national to individual. Unfortunately, once a US-China cross border relationship sours it is very difficult to set right. Western negotiators are advised to take a positive, friendly attitude toward their Chinese counter-party, but not to give short-shrift to matters of due-diligence, quality control and compliance. It is possible to be friendly and still get comprehensive answers to serious questions early in the process – but once assets have changed hands it is too late to try to perform due diligence or QC functions.
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