Takeaway – Established Western brands will continue to defend their global leadership positions for a while yet, but Chinese corporates are taking control of growing niches and new categories. Look for Chinese entities to disrupt industries through enforced localization and substitution – not head-to-head competition.
Welcome to the Multiconomy
Phase 1: Frenemies on a Glass Bridge
The status quo of US – China commerce can best be described as frenemies who need each other more than they like each other. Up until now, both Chinese and Western commercial systems have been multi-faceted and opportunistic. National policies have been one of many inputs in business decision-making.
This situation can be characterized as brittle, but not necessarily fragile. Think of our existing system as a strong glass bridge. It’s very stable – right up until the moment it starts to crack. Then it can no longer support its own weight, but is very difficult to repair.
US Secretary of State Rex Tillerson made his first official visit to China last weekend, and the White House probably sees it as one of the bright spots in a rocky transition. His Beijing hosts, however, will view the meet as a major step towards their goal of regional hegemony and global respect. Like many western execs before him, Sec. Tillerson doesn’t seem to understand what the Chinese believe he’s agreed to.
This was how the new Sec of State described the US China relationship in January:
Some westerners are pushing back against the idea that we are facing the risk of rising trade barriers or a breakdown in orderly trade regimes. Their logic is that, “The US has a lot of levers, and we can assert our rights without necessarily sparking a trade war that the Trump Administration doesn’t want.” Not wrong, but it makes the dangerous assumption that trade relations are going to be something Washington stays in control of.
Trade frictions almost always take on a life of their own due to a single inconvenient point: Both sides in a dispute get an opinion. If you don’t know the other guy’s point of view (POV) then you have absolutely no control over the final result.
Chinese negotiators tend to shift from guanxi-seeking partner to cut-throat competitor mode when confronted with an unpredictable counter-party.
Chinese negotiations usually follow one of two paths – towards long-term partnership or one-off competition. What’s the difference? You are. If a Chinese counter-party feels that he can do better as a long-term partner, that’s what he’ll go after. If he feels that you won’t honor the terms and obligations of a durable & profitable relationship, he’ll go for your throat.
Chinese institutions are known for their long memories, and well after members of the new administration have forgotten their twitter tirades and decided to “move on and get on with business,” American firms will still face increased scrutiny, hostility, and non-economic barriers.
Will weaker Chinese growth strengthen your negotiating position?
The Chinese economy has been slowing for the last few quarters, and whether it is a controlled application of bureaucratic brakes or the start of a skid into a recessionary ditch, some international business people see China’s deceleration as an opportunity. International negotiators who believe that a slowing Chinese economy gives foreigners more leverage are, however, over-optimistic at best. There may be isolated cases were individual private Chinese businesses will be motivated to sweeten their offers in the face of a domestic slowdown, but it would be unwise to assume that Chinese counterparties are all feeling desperate. Westerners who calculate that the bureaucracy is going to become more welcoming to foreign businesses need to realize that a couple of years of slower growth will probably make their challenges in Beijing more severe.
In Chinese negotiation, don’t confuse polite rhetoric with concerted strategy.
American and European negotiators treat their Chinese counterparties’ “general principles” discussion like the “terms and conditions” screen – we just check the box and look for the real content. Big mistake.
General Principles Discussion can come back to haunt careless negotiators
Westerners in China often make important concessions without even knowing it. It’s common for Chinese negotiators to frame their position with a discussion of “general principles”. Westerners tend to shrug them off with vague agreement – particularly since these conversations tend to be phrased in vague, wooden rhetoric like “harmony and shared responsibility”. It all sounds like meaningless propaganda to us, and it mixes easily with the toasts, proverbs, unfamiliar historic references and folksy anecdotes that characterize a boozy banquet night in Shanghai or Beijing. Western negotiators tend to focus on transactions, and aggressive negotiators will make every effort to control the negotiating agenda and nail down concrete deal points – but the Chinese side never gives up on their deal points or general goals, regardless of the appearance of compromise or concession.
Relationship Building Not a One-Off Activity in China
In ChinaSolved’s latest book, “10 Common China Negotiating Mistakes”, 3 on the least wanted is “coasting on good starts and early successes”. While this is one of the biggest dangers that deep-pocketed MNCs (and their representatives” face in a long-term China business, it can be very hard to anticipate. Fortunately for us (but unfortunately for them), Microsoft provides a telling case study of how the best efforts don’t always yield successful outcomes.
Negotiating in China means talking about the relationship. (Sorry guys.)
Western businesspeople already know that to do business in China you have to have a relationship. This is the whole basis of guanxi and harmony. The problem is the way Americans and Chinese view relationship. To us Westerners, “relationships” are emotional – they are a matter of personal chemistry. We hear the word relationship and we think of family, romance, marriage, and friendship. In China relationships are regarded differently. They are more like a due diligence investigation – and you definitely have to negotiate for access and openness.
May has been another tough month for international negotiators doing business in China.
The indictment of 5 alleged cyber spies form the PLA threatened to bring US-China relations to a
new low. Meanwhile, territorial disputes escalated between China and the Philippines, Viet Nam and Japan threatened to spin out of control with disturbing regularity. That’s why there was so much headline space (though not all of it on the front page) devoted to a high profile energy deal between China and “Reliable Friend’ Russia. What does all of this mean for Western negotiators in China?