Managing Conflict in Chinese Negotiation

Managing Conflict in Chinese Negotiation – Structure Deals for Success

Disagreement is part of normal  business.  At its best, it can take the form of an honest exchange of ideas and opinions that leads to constructive solutions and a closer relationship.  At its worst, conflict is an express lane to lose-lose outcomes and value destruction.  Western and Chinese take a different approach to conflict, but that doesn’t necessarily mean you should try to suppress disputes and paper over disagreement at all cost.  It does mean, however, that you have to manage Chinese negotiation conflict more deliberately and proactively than you would at home.

In China, conflict avoidance is a function of finding the right partner (or counter-party) ,   conflict mitigation is a matter of preserving mutual trust  , and  conflict management is a result of proper deal structure.

Structuring deals to manage conflict.

If you are an American or European doing business in China, then your Chinese counter-party is going to outgrow you long before you outgrow him.  The Chinese side is actively pursuing the knowledge, technology and skills to run the business without you from the first meeting.      Westerners, on the other hand, are notorious for spending years in China without developing the ability to “go it alone” and operate independently of their Chinese partner.  Western managers call it “delegation” or “specialization”.  Chinese call it dumb.  This situation often presents even the most honest Chinese negotiator with a conundrum — they have to choose between being smart and being honest.  It is a tough choice if they like you and see a profitable future in your partnership.  It’s a good deal simpler for the Chinese side if they think you are trying to cheat or exploit them.   That’s where good deal structure comes in very handy.

Conflict as Exit Strategy – The Lost Face Shuffle

Let’s  role-play for a moment.  You are a Chinese manager or business owner, and you have been doing business with an American partner for 6 months.  Maybe you are manufacturing his product or supplying his raw materials.  Maybe you are distributing his brand in China.  Whatever the deal, you have been doing your best to absorb the technology and processes to run the business on your own, and now you think you know enough to get started.   What do you do in the following scenarios?

  1.  Your profit margin is less than 5% – and dropping.  Even though your operating environment is deteriorating due to inflation and regulations, your American partner resists any and all cost adjustments.  The only time you hear from him is when he complains about quality or asks for something special.
  2. You are earning 60% of the profits from the JV or partnership, and the American side is actively engaged in new product development, technology upgrades and marketing.

Now, at the start of Month 7, you and your American counter-party have a disagreement about some relatively minor issue.

If you are like most rational, profit-oriented businessmen, you are going to work much harder to keep arrangement #2 intact.  The problem will be dealt with quickly and quietly.  You will be proactive, creative and resourceful about finding a good solution, and your relationship will probably be strengthened by the amicable resolution.

For managers involved in arrangement #1, on the other hand, the disagreement provides a very convenient “last straw”.  You had been looking for a way out of this entanglement ever since you mastered the technology, and now the Americans have provided you with an exit vehicle.  This seemingly minor problem can easily be spun into a face-robbing insult that makes all further interaction impossible.

Just because polite Chinese negotiators don’t like giving a flat “no” doesn’t mean that they accept any situation or offer.   If there is dissatisfaction with deal, then small conflicts will quickly get blown out of proportion.  Good deal structure tends to be much more successful at controlling conflict than contract documents.

Structuring Deals to Manage Conflict

  • Plan for success.  American negotiating teams tend to be headed or influenced by lawyers, so they have a bias towards limiting loss and protecting against the downside.  Chinese negotiators still have an engineering bias, which means they are concerned with process and technology.   When Westerners present the Chinese side with thick contracts full of penalty clauses and performance requirements, all the trust that they worked so hard to build tends to go out the window.  As soon as the Chinese side acquires the know-how and technology they need, they’ll try to get out of the partnership.   The Chinese exit strategy of choice is relationship-destroying conflict.
  • Watch for timing differences where you pay now, and they perform later.   Avoid deal structures where it makes financial sense to force a conflict after you hand over cash, intellectual property, molds, designs, etc.
  • Over-compromise early.  Learn from Mickey Mouse.  When the Disney folks wanted to set up shop in Shanghai, they knew that there was a lot that could go wrong after the deal was signed, so they picked the right partners (Shanghai-based State Owned Enterprises) and gave them a majority stake (roughly 60%) in the project.  That payout gives the Shanghai side of the deal a tremendous incentive to keep the partnership going through thick and thin.
  • Walk away in such a way that you can come back.   Letting him know you have alternatives is the single best option you have – but just make sure that if you do walk away you do it with a smile on your face and a harmonious word on your lips.  “Unfortunately it doesn’t look like things will work out for us this time,” is good.  “You are a thief and I am going to sue you into oblivion,” is not.
  • Conflict management begins at home.  Internal negotiation is a must if the people coming to China to arrange deals are reporting to bosses back at HQ.   Your own management team may inadvertently spark conflict by trying to apply western best practices to Chinese deals.  Nothing undermines trust faster than being unable to deliver on promises – or springing new terms & requirements on an unsuspecting Chinese partner.

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