Best practices for Bad times- Negotiating in China during Interesting Times Part II

In Part 1 of “Negotiating in China During Interesting Times” we talked about the coming phase of trade tension between China and the West.  Identifying the problem is one thing – dealing with it is something else.   Business is still business, and even if we can’t keep top-down national rivalry completely off the negotiating table, there are things we can do to minimize the negative impact of simmering trade tension.

This time it’s commercial.

What’s different this time?  In the last round of trade tensions there were three sets of automatic dampers that kept the international drama out of your life.  First- most of the tough talk was drowned out by the noise of the financial sector going down the drain.  It was hard to worry too much about individual WTO rulings when the world as we knew it seemed about to crash and burn.   Second –  since most of us were trying to scale back and de-leverage, the notion of US-China hostilities actually shortened our ‘to do’ list by conveniently starving us of cash for expansion and new inventory.   Finally-  the previous round of tension centered on big-picture macro issues that didn’t really impact on us too much.  From here on in, the situation will be much more localized and granular.  The next trade war won’t be about the big-picture business environment – it will be about contract terms and bottom-line economics.   How should you handle negotiations with Chinese counter-parties during times of international trade tension?

5 best practices for negotiating in a less-friendly China.

  1. Be patriotic
  2. Counter-party selection is more crucial than ever.
  3. Take a risk and show some trust.
  4. Have a range of options
  5. Now more than ever — be ready to walk away.
    1.  Wave that flag – just don’t be a jerk about it.
    The Chinese tend to be very patriotic and consider it to be standard operating procedure.  Don’t be misled by local Chinese who criticize bureaucrats, red tape or corrupt officials – they are often the most patriotic of all.  Westerners who try to pander or curry favor with Chinese partners by disrespecting their own country are considered weak and untrustworthy (even if you really feel that way).  Criticizing your own government about a specific policy or politician is ok, but beware of the slippery slope.  China is still a Confucian society, and if you don’t respect your own group how can you be trusted to respect the new relationship you are building?   It’s best to say nothing controversial or political – but if tested you are advised to come across as pro-American without being anti-Chinese.  If your counter-party asks you to explain something about US law or society, that’s ok.  If he tries to convince you about the superiority of the Chinese way of doing things then he’s sending a message that you shouldn’t ignore – but needn’t be a deal-killer.  Remember that some of the strongest relationships are built on a foundation of mutual respect between parties with honest differences.    If, however, he is overtly insulting, offensive or chauvinistic then you need to find a new counter-party at once.
    2.  Counter-party selection is more crucial now than ever.
    You know enough not to work off a nationalistic agenda – now you need to find a Chinese partner that has the same good sense.  The best counter-parties are the ones who genuinely couldn’t care less about anything but transacting.  There are plenty around (at least in Shanghai, though in Beijing the pickings may be a little slimmer).  As tensions grow, beware of SOEs who consider ruining your business prospects to be an act of patriotism.Be realistic and sensitive about how your counter-party is affected by the international trade environment.  Ideally, both he and you agree that politics is left to the politicians and business to the business people.   It is natural, however, for your counter-party to raise the nationalist bar a bit – but it should still be possible to do business.  If you have to pay a bit more, don’t sweat it too much — everyone is.  If quality or compliance is suffering, then you have a problem.    But beware of subtle and overt signs that your counter-party is working off a purely nationalistic, non-economic agenda.  Walk away quickly, quietly and amicably.  Let him have the last word.  The important thing is to get the hell out of there.  This is a disaster in the making.  If you guy has a nationalistic agenda, then you are weakening your position with every word you utter.  Starting a new relationship with a bureaucrat or SOE manager is particularly daunting right now.

    3. Take a calculated risk – be the first to show trust.
    Even in the best of times, Chinese dealmakers tend to feel that they are constantly being pressured to over compromise.  When tensions are high China can feel like one big mine-field.  The guy you are looking for is just like you – he is as nervous about you screwing him over as you are about him.  You may have to expose yourself to a little more risk at first.  Tread carefully, but if you have reason to believe that this counter-party is strategic for you then you might be wise to take a chance.  True guanxi isn’t developed at banquets or KTVs – it’s built through trust, reliability and flexibility.  He is in the same boat as you.

    4.  Have a range of options and alternatives in place BEFORE any particular round of negotiations gets too advanced.
    Now is the time to get creative.  Even by Chinese standards, the situation is particularly fluid and unpredictable right now.  If there is any way for you to diversify your risk or develop new options then you should explore the possibility.  The time may be right to try an arms-length transaction or to consider working through another expat firm that may charge a bit more but can be relied on to give you a straight answer.  If your business depends on government or regulatory approval then you may want to consider partnering with a local firm (or established expat) that already has the requisite relationships in place.  Avoid ‘all or nothing’ deals and ‘least worst’ decision-making.  Before you make decisions based on the notion that “the devil you know is better than the devil you don’t” double check to make sure you know what you think you do.

    5.       Know when to cut bait.
    This is a great time to review your bottom line and decide when to walk away.  This is a good idea in even the best of times – and these are not the best of times.  Ironically, this will require some tough negotiation with your own people back home.  If the heaviest pressure to sign a China contract is coming from your CFO and VP of Marketing in Edison NJ then you are in for a very rough ride.  It’s best to have a wide range of options – and putting your China deal on hold for a few months may be one of them.   When tensions are high and the ground is shifting, you don’t want to flying by the seat of your pants.  Chinese negotiators smell desperation a mile off.

Next:

Part III The Sub-zero sum game negotiator

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