Doing business in China requires partnering – no matter what you call it.
By now you’ve heard the gospel about doing business in China — don’t form partnerships with locals. JVs, tie ups exclusive contracts — all bad, all counterproductive. Go WFOE (wholly foreign owned enterprise) or do arms-length deals, but never, ever sign a JV with a Chinese business. I’m not disagreeing with the theory – but in practical terms it is impossible to avoid real partnerships in China. You might not be calling your business arrangement a partnership – but from an operational (and negotiating) perspective you are hitched. Deal with it.
Why Westerners Partner in China
For transaction-oriented Westerners, the practical definition of “partnership” is much broader in China than it is back home. A lot of simple transactions that would be considered simple transactions in the West are considered to be relationships in China. That includes manufacturers, suppliers, distributors, consultants – even key staff and employees. In America, we pay money to avoid relationship. Many of the problems Western management teams routinely run into in China are a result of relationship/partner denial. In China you pay to build relationships – or you pay a price for not having them.
1. Partnerships in practice are much broader than the legal definition. Chinese business is relationship oriented– so you’ll have de-facto partnerships with distributors, suppliers, employees, etc.
2. New China Hands aren’t just sourcing or hiring migrant workforces in low-margin factory jobs. They are marketing, selling, designing and managing. If you want to retain top people or get high-value Chinese knowledge workers to contribute intellectual property, then you are partnering.
Chinese turnover is still much higher than in the West. In the US, if you offer someone a job then they owe you. In China, they have to choose you – and decide to continue working for you after they’ve already learned everything there is to know about your organization and products.
But aren’t Chinese people notoriously difficult to form partnerships with? Yes – that’s why you need a plan.
How to Partner Successfully in China
Your ability to partner successfully in China depends on 3 things:
Your utility value to the Chinese side. The Chinese side has to feel that you are going to be more valuable tomorrow than you were yesterday. China is a relationship-oriented business environment – but Chinese negotiators base relationships on your perceived utility value. The more you are worth to them, the better your relationship will be. In other words, don’t give up too much too soon.
Your ability to leave your existing partner for a new Chinese partner. Chinese partners aren’t afraid of you going off on your own in China. They think that once they understand your technology and business method that you are dead weight anyway. They do, however, just hate the idea of a Chinese competitor shearing their sheep. Always let it be known that you have other options – in China, but outside their network. If your Chinese partner (or potential partner) feels that you have no options then you are in a very weak bargaining position.
Your ability to monitor and control conflict. Beware of “steady state” relationships. There is no auto-pilot switch in Chinese business. Americans like no-maintenance business relationships that take care of themselves as long as price and quality are OK. Not gonna happen in China. You have to put in face time and do maintenance, or your Chinese partnerships go into a tailspin.
Avoidance doesn’t work
Of course we want to avoid partnerships in China — but they don’t, so you can’t. That’s the problem. If you approach China business as a series of necessary, overlapping and finite partnerships then you will do fine (maybe). If you are forced to forge an emergency partnership at the last minute, you are negotiating from a position of extreme weakness. They know it. You have to as well.
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