Conflict Avoidance vs. Conflict Resolution in China Part III: Structuring Better China Deals

Westerners with hard-won experience in Chinese negotiation structure their deals AND China business models completely differently than newcomers do. They take longer, spend a lot more time in the early stages, know a lot more about their counter-party and never try to force out-of-town rules onto a Chinese game. That doesn’t mean they do things the ‘Chinese way’ – they do it the ‘Smart-Westerner-in-China way’.

What do smart westerners in China do differently than newcomers?

1. They are in it to win it, both during the negotiation and in the all-important post deal phase.
Good dealmakers know that a Chinese deal isn’t done until … well, ever. If you have trouble, the dispute can stretch out forever. And if things go well, then you want to hold onto that counter-party forever. Either way, you need a strong on-the-ground presence. Ideally, you are the one building that presence. Plan B is having a China operation in place and making frequent, regularly scheduled trips. Coming back next year – or someday -is a pretty bad option.
Relying on you counter-party to manage your affairs is simply not a viable option.

2. They know that the real problems start AFTER the deal is done.
The Chinese know this as well, and if you don’t then you are gong to put yourself at a severe disadvantage. This means that you have to budget time, bandwidth and resources to manage the post-deal renegotiation. If you plan on screaming into a phone at midnight from NY to fix things, you are just plotting your own destruction. This is how minor issues can turn into major conflicts during a cross-border transaction. If your Chinese counter-party knows that you are showing up in an hour then your situation is going to be pretty high on his list of priorities. Maybe. But if you are emailing or staying up late to phone it in, then there are lots of other things he can be doing with his time and energy.

3) They find a partner to match their deal needs – they don’t find a deal to match the partner they have.
Yeah, I know that opportunities change and you have to be flexible. But you should be coming to China to solve a specific business problem, and you need a partner who can fill in the gaps of your business model – not reinforce your own strengths. A big problem in China is that some newcomers get ‘match-made’ with the wrong partner – and then they use their skills and energy trying to turn his deal into the ‘right one’. Do the due diligence and make sure that your partner has the right level of integrity, competence and organization. If he doesn’t don’t try to force it. Conversely, you have to be the right partner to him. Chinese feel that they can negotiate profitable relationships from the start – no matter how long it takes. Americans are the ones who believe in building trust over time and many small transactions. You take up a long stretch of your Chinese counter-party’s time and energy – and then give him a piddling ‘test order’ when he expects a big deal. This has the potential to make him look bad in front of his people – and makes it seem that you are taking advantage of him. That’s why experienced deal-makers discuss the relationship that they are going to have during those long nights of guanxi-building toasting and singing. Tip: Try to align your expectations early. He may define success completely differently — and may see you as untrustworthy because you don’t trust him.

4) Compensation has to be smart and fair.
Be sensitive to how quickly the balance of power can shift in a cross-border deal. He needs you a lot up until the moment that the funds are injected or the assets are transferred. Once that happens, the whole balance of power shifts – and suddenly you are more valuable as a pissed-off ex-partner than as a satisfied real partner. If you want your Chinese counter-party to have a good reason to trust you and protect your interests then he has to A) want a long term deal and B) have good reason to expect a rising payout.

If you plan on finding a new counter-party or setting up your own independent operation as soon as the business grows by 25%, then he’s looking at a dwindling business — and a new foreign competitor –after showing you the business and working through the hard parts. If you think he’s not going to be able to do that kind of math on his own, you are just wrong. On the other hand, if this guy’s numbers back up the notion that his business with you will be rising by 50% a year for the next few years, then you just may have the beginning of a beautiful partnership. There are only 3 ways to really understand what his goals are: You can guess; you can assume that both of your goals are the same; or you can ask him how he sees the world. The third option is the only one that makes sense to the Old Hands.

5) The environment has to be right.
I don’t care how good you connections are – you are not changing Chinese. Likewise, no matter how skillful or experienced your guy is, he can’t change the GDP level or affect the savings rate. If all the planets align and you have the right partner and the right business model – then you have the potential for a great deal. But if you’re missing something big — or worse — have something wrong, then nothing is gong to come together. Starting up a business in China because you think you’ll lose less money than opening in NY is dumb. You don’t want to be right at the wrong time.

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