Sub Zero-Sum Game Negotiations in China

Classic negotiating theory divides all transactions into two categories – Distributive (Win-Lose deals), and Integrative (Win-Win).

Traditional competitive deals are referred to as Distributed because the two parties split (or distribute) a fixed pool of assets.   Integrative deals are often referred to as Win-Win or collaborative because the two sides cooperate to ‘enlarge the pie’ or increase the total value of assets beyond the initial scenario.

In China, however, where negotiations are often characterized by non-economic factors – often in the form of face, guanxi, or lately, nationalism – it is common to experience a third scenario: Lose-Lose negotiation.   To some Chinese negotiators, your gain is their loss and your loss is seen as a valuable asset.

In theory a negotiator should be neutral to the prospect of you earning 10 or 20 if his profit in each case if 15 – and he will certainly choose a gain over a loss, despite the counter-party’s outcome.  According to the orthodoxy of marginal economics, a rational actor will transact as long as his benefit is greater than zero.    But in China your counterparty will sometimes opt for a situation where he loses a little if you lose a lot over an outcome where you gain a lot and he gains a little.  This is particularly true in the case of risk-averse SOE representatives who don’t benefit directly from positive outcomes – but may be penalized for a negative outcome.   As trade tensions rise between China and the West, Win-Win deals will be regarded with increasing suspicion.  Chinese negotiators consider it increasingly advantageous to see you fail.

While we consider this spiteful, petty and quite frankly, NUTS, there is a rational explanation – at least some of the time.  American negotiators who count on Chinese counter-parties ‘ultimately coming to their senses and doing what’s best for everyone’ will be caught off guard if they don’t understand how the Chinese side understands the situation.

Different Valuations, Different Goals, Different Tolerances

Chinese dealmakers still see themselves as tougher and more willing to “Eat Bitterness” or endure pain than Westerners, so they are more willing to engage in ‘trench warfare’ negotiation – committing huge resources to a battle of inches over years.   Chinese negotiators are often working off a different time-frame and valuation model.  They are willing to wait a longer period of time to achieve a deal that gives them greater control and exposure to technology.  Because brand names matter less in China, they are also willing to engage in behavior that puts their reputation at risk.  Furthermore, many Chinese negotiators are working under policy constraints that American corporations simply can’t understand.  Finally, nationalism is playing an increasingly important role in Chinese negotiations – as real or perceived slights, insults and challenges impact on deal-making.

There are 5 factors that Western negotiators must consider when approaching a Chinese counter-party to avoid damaging sub-zero sum game outcomes.

    1. Learning curve
    Some negotiations aren’t really negotiations – they are educational opportunities for the Chinese side, and you are the unwitting teacher.  Chinese have a huge appetite for technology and a great deal of confidence in their ability to reverse-engineer a product once they understand its function.  Many so-called ‘negotiations’ are really new-product development exercises.  The Cisco-Huawei negotiation is a classic example, though the more recent China Rail – Japan Shinkansen (bullet train) case looks like it will be the new textbook example of the Chinese tactic to act as the ‘good student’ in high-tech negotiation.
    Remember that Chinese entities consider brand development, business planning and marketing strategy to be highly desirable technologies that Western partners can be persuaded to provide free of charge.

    2. Competitive factors
    In many cases, Chinese entities will enter into negotiation with Western companies that they view as potential competitors.  JVs and cooperative arrangements start out just fine when they focus on the production and product development side, but when it comes time to access the Chinese market the deal falls apart.  Many observers consider the DANONE – Wahaha negotiation to be a case in point.  The JV was quite effective when it was exporting to foreign markets, but things got rocky when it came to the Chinese market.

    3. Timing
    Sometimes the problem is about timing.  The Western side wants to move fast – the Chinese side doesn’t.  Many banking and finance negotiations in the 90’s & 00’s suffered this fate – the Chinese side wanted to move slowly due to regulation, technology and the limited experience of their staff.  Western firms grew frustrated and walked away, but not before training an entire generation of Chinese bankers in the finer points of international finance.

    4. Differing valuations of the Chinese market
    The Chinese side tends to value China access more highly than Westerners do, and this can ultimately scuttle the deal.  China, after all, has a long and unfortunate history of Westerners benefiting economically from Chinese resources.  Chinese policy-makers and managers have become very sensitive to losing control of the domestic market or resources.

    5.  Risk profile
    Chinese and Western negotiators view risk differently.  Too much uncertainty will raise the penalty for proceeding, even when there is a chance of gain. Westerners tend to see uncertainty and risk of loss as two sides of the same coin.  Chinese negotiators, however, have a much greater sensitivity to uncertainty – and tend to freeze up and stop deal progress if they can’t see what the risks are.

Last but not least, many Chinese entities see a real value in destroying your China business.  In some cases there are policy considerations – such as Youtube, Twitter and Facebook.  But sadly, there actors on both sides of the Pacific who consider it patriotic to scuttle deals that may yield profits to ‘foreigners’.  In the US this is generally a regulatory matter that takes place away from the deal table.  But in China where you may be sitting across the table from an SOE or policy-driven manager the issue of patriotic hostility is a negotiating matter.  Determine the likelihood of executing the deal (not just signing a contract) early in the process – before you reveal sensitive technologies or business practices.

Now on Kindle:  Guanxi for the Busy American  A BRIEF explanation of guanxi and relationship-building, written specifically for the overscheduled American professional.

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