Doing the China Deal vs. Doing the China Business

Westerners in China find it so difficult to negotiate agreements and jump through the required regulatory and bureaucratic hoops that they lose sight of the real challenge –  successfully executing the actual business.  In China, there is a big difference between winning the deal and running a winning business.  Getting a deal that can’t be executed is worse than not signing a contact at all.

Picture a matrix – a four quadrant box – with “Ease of Doing the Deal”  on the Y axis and “Ease of Doing the Business” across the bottom X axis.  You have four variations.

A)    Easy to do the deal, Easy to do the business.

B)    Easy to do the deal, Hard to do the business.

C)    Hard to do the deal, Hard to do the business.

D)    Hard to do the deal, Easy to do the business.

You’re in China, negotiating with a potential mainland partner.  Which do you choose?

Option A?  Sounds logical, but in most cases you are merely training your competition.  And this being China, there’s an excellent chance that your competition will turn out to be the party thought you were negotiating with.  Even if the enemy isn’t inside the gates, easy to the deal and easy to do the business is a prescription for mass competition and commodity business.  Think about Best Buy or Wal-Mart who were never able to differentiate themselves from local, more familiar, competitors.

Option B is also a loser, but it actually has certain merits.  The problem is that you’ll find lots of eager counterparties who will take your money to help out, sign a contract with you – but then disappear.  This is the old 4th tier SEZ model or consultant matchmaker.  Someone fast-tracks your business registration and sets you up with an inappropriate partner far from your market or supply chain.  You’re so busy building guanxi and making life-long relationships that you don’t do proper due diligence.  This is not a terrible option if you already know the downside, but a disaster if you don’t have all the angles figured well in advance.

Option C?  The advantage here is that you won’t have a lot competition.  The problem is that there is a good reason you don’t have much competition.  This is Facebook, eBay, Groupon, the big US banks, or anyone other foreigner that wants to move into a restricted or sensitive industry.  People will tell you that it will be hard but they can help.  People will tell you that you need the right partner.  People will tell you “in China nothing is easy but anything is possible”.  I’ll tell you that you never bet against the government – any government – particularly China.  If an industry is off limits, restricted or uncompetitive, then avoid it.

Option D is the winner – for the right company and  product.  Most recently this has been Apple.  Before them it was GM and Volkswagen.    International luxury brands also fit into this category. The ideal situation is that your technology or brand is too well known and too sophisticated to be convincingly faked – and that you are regularly updating with new models. It is best if the Chinese market is already clamoring for your brand.

 There’s always a difference between doing the business and doing the deal.  They are different skills.  Doing deals is about relationships and salesmanship.  In China, however, your counterparty may be the one selling you without you knowing it.  Your partner may in fact be your competitor who is after your money, technology, business model or marketing plan.  China Inc. still believes in the copycat model.  Baidu, Youku, Sina’s Weibo, Cherry, Huawei and countless others have all used this technique with lots of sophisticated American counterparties who thought they were negotiating for the keys to the Kingdom of Middle Class China.  Instead they were just training the competition.

In China, execution is a completely different function from negotiating an MOU.  Between government interference, difficult supply chains, regulation and technology theft and rising prices, successful implementing production and marketing plans has never been easy in China – and it is getting tougher as the global economy slows and dents Chinese profits.  Americans are notorious for skimping on due diligence (see ChinaLawBlog for an expert take)  in China – often relying on their partners and suppliers for vital market information.   Before you celebrate getting the deal, make sure that you won’t mourn getting the business.

 

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                     China Negotiation/Execution Matrix

Easy to do deals

Connections can’t save you now.
Enemy inside the gates.

Ideal – for you and  the competition.  Hard work for a little money.

Hard to do deals

Avoid if you can.

Information is your key variable.  Get as much as you can while giving away little.

   Your best bet for success – if you have the brand and product.

Hard to do business

Easy to do business

 

 

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