Your First China Deal, Part II. The China Negotiating Plan

Negotiating your first China deal is not a simple or quick process

Treat your first China negotiation as though it were a separate business – complete with a business plan, budget, and cost-benefit analysis. In China there is a big difference between doing the deal and doing the business. A Chinese negotiation is a long-term commitment – not a quick conversation. The only thing you can know with certainty is that if you botch the negotiation due to poor planning, then you will certainly lose the business opportunity.

In the last post we introduced the idea of a China negotiation plan.  If you are new to China, you have to look at the negotiation as a protracted campaign. You are venturing into territory that, while not necessarily hostile, is certainly risky. You need to keep your options open, control your costs, and know where the exits are at all times. You have to be able to assert some level of control over the process – which usually means not relying too much on anyone who stands to gain from you or your assets.

This time we will be looking at the second set of five questions you should be able to answer in preparation for your first China deal.

6. What will you have to sacrifice to get this deal? Every negotiation requires you to give up something to get something else. Ideally, you are giving up things that are relatively low in value (to you) but receiving something of significantly higher value. This means knowing how the other side values the assets on the table — but it is even more imperative that you to know what is important to you. In China, the stakes are different. You have to consider a range of new variables like trademark, proprietary technology, promotional material, and business model. In the US you might not consider these things to be negotiating variables, but in China they most certainly are. If you don’t perform an audit of your IP, technology, and processes BEFORE you start negotiating, you are likely to give away valuable assets for free. It happens all the time. Once they see your design, trademarks, and business plan, they won’t “unsee” them if the deal falls apart.

The simple method for figuring out how much you are willing to sacrifice is to identify what scares you the most. When Cisco had their first meeting with Huawei back in the early 2000s , the Chinese firm was struggling to produce simple telecommunications hubs and routers. The Americans, thinking they had nothing to worry about, allowed their engineers to cooperate too much in an effort to get entrée to the China market. Huawei is now eating Cisco’s lunch in most major markets — including Europe. Had Cisco paid more attention to what could go wrong and established sensible limits, they would have saved themselves some big legal fees – and had a less threatening competitor.

Know your own boundaries BEFORE you start negotiating.

7. What can you get from China? One of my biggest frustrations is working with Westerners who have no idea what they want. It’s vital to have a goal, as we discussed in the last post. You want your goals to be SMART – Specific, Measurable, Actionable, Realistic, and Timely. Read more about the China aspects of SMART goal setting here…

If you are new to China, however, you also have to consider your variables and benchmarks. Variables are what you ask for. This is how you convert general goals into specific deal terms. If you want to make money, then that’s your goal. But good negotiators are careful to talk about currency, guarantees, contingencies, timing, payment terms, payment methods, banks, etc. Those are your variables. In China, you have to worry about far more variables than you do back home. If you don’t ask, you won’t receive — but you have to make sure you ask for the right things.

The classic example has to do with one of our favorite subjects — Power. When Americans and Chinese negotiate the JV, the Americans typically want control. They demand the majority of seats on the board, and the right to select the CEO, the CFO and other top brass. The Chinese will quietly give in, reserving for themselves a couple of mid-level spots — including the financial controller and the company secretary. Later in the negotiation, the Chinese side will ask for access to the Western side’s technology or trademarks. In exchange the Chinese side offers to take responsibility for managing local operations — which includes preparing and looking after the company chops – or seals.

Newcomers might think that the Western side has just locked this deal up — but in fact they have just locked themselves out. Chinese courts normally recognize the holder of the financial seal as the sole party controlling the bank accounts, and the company seal has de-facto control over the company registration – i.e.: ownership. Old hands know that these are key variables, and usually specify how the bank accounts and company registration are organized. Newcomers win the wrong fight and end up paying for it.
Ask for the right things, and set benchmarks that matter. In the case we just looked at, the key benchmark is Chinese corporate law — not American or “International” best practice. If you need other examples, examine the problems that Apple is having with Proview over who sold what to whom, where.

8. How long will it take? This is really two questions. How long will it take to get the deal, and how long will it take to do the business. Right now, we are concerned with the first part. How long will the negotiation take? The answer is really pretty simple — much longer than you think. There seems to be an inverse relationship between the level of cooperation and congeniality at the initial meetings and the time to takes to finalize the decision. Guanxi and relationship-buildingtake a while, and the Chinese side won’t generally start getting down to specifics until they feel they know who you are.

It’s almost always to the Chinese side’s advantage to build relationships quickly, but then make the process drag on for a long time. They consider the early phase of a negotiation a learning opportunity. They are learning about you — which is fine. But they are also learning about your business, your technology, your solutions — and this is precisely the information you should not be revealing until you are A) working together and getting paid, or B) getting valuable information in return.

The more of a rush you are in to “wrap things up”, the more concessions you make in terms of useful information and solid deal points. Once you start cracking, they have no incentive to allow any real progress, and you are working from a position of weakness from then on. The more information they get for free, the less value you will offer as a partner.
You’ve got to budget for a protracted negotiation. Even a simple, straightforward JV or partnership will take at least 6 months (though it won’t be a daily activity). Sourcing and simple manufacturing, however, will be much quicker. If you are selling or partnering, however, just reaching a contract agreement will take months, and the actual agreement can take much longer.

9. Who in your operation will run the China business? If you represent a small or medium sized business, you are probably delaying any big manpower spend until the China operation is up and running. Still, you should have a good idea of what kind of person you are looking for — and how much to budget for senior staff. Unfortunately, this won’t be cheap. Experienced local managers are going to cost you as much as expats, if not more. Allowing your local partner to run the show opens you up to all kinds of problems — from company strategies that get rewritten without your knowledge to wholesale theft of your IP, technology, assets and clients.

A sensible solution is to start building your China team in-house by having a team of candidates (who already work for you) take charge of the negotiation process. That includes the research and preparation. The best case scenario is that you have people on hand who are responsible, engaged, and ambitious enough to add real value to the process. But you might find that you lack the talent, the time, and the other resources to get the ball rolling. This is an important observation, and you have to find a way to close the gap.

It’s never too early in the China negotiating process to start thinking about manpower and managerial talent.

10. What is your first step? If a potential Chinese partner, supplier or client has contacted you, then simply reacting to his proposal is risky business. You have to step back and consider how you are going to participate in the negotiating process. Many Westerners take a passive, “let’s see what their best offer is like” approach – mistaking this for conservative, safe play. It’s not. Whenever you are talking, they are learning about your business and IP. The Chinese are famous for being able to backwards-engineer the pieces of a puzzle, but still need help putting them together in a meaningful way. That’s where you come in. If you don’t know what you are doing, there’s an excellent chance you’ll give them far more help than you realize.

You’re first step is to know more. That might mean educating yourself, hiring the right people, or taking a trip out there to get the lay of the land. One of the absolute worst things a China novice can do is to rely on their negotiating counterparty for basic information about the economy, market, or regulations. If you don’t have the ability to analyze their claims, evaluate their offers, and make informed counter-proposals then you are going to get slaughtered.

Next: Your First China Deal Part III: The Research Plan

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