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Business Negotiations in China

Negotiations in the PRC can take on many facets. There are similarities with negotiations elsewhere and several new dimensions to consider. Awareness of cultural differences as they affect the bargaining table will help bring a "deal" to a successful conclusion.


Business is conducted between friends:

The early stages of contract negotiations is a period of getting to know one another, breaking down(and understanding) barriers, and forming a "friendship". The Chinese still believe that business should be conducted between friends. There will usually be a number of meetings and dinners(the "banquet circuit"). During the banquets too much cognac is consumed, and despite the desires of the western businessman, too little work is accomplished. But trust and friendship, an important ingredient to business dealings, is what both parties are looking to establish at this point.

Throughout your dealings with your future Chinese partner, care must be given to "face" issues of the chinese partner. Simply put "face" is a much more complicated form of honor, respect and positive recognition. These face issues can quickly destroy the negotiating process. More on Face.

Once a level of trust and friendship develops, the negotiations become more meaningful both at the bargaining table and at the dinner table. Much progress and many a deal is still casually struck in backroom meetings over cognac and a cigar with just the leaders of the two parties, leaving the teams to work out the details in meetings the next morning.

To dispel an issue many have heard and believed: The Chinese are rumored to prefer working and dealing with American and Western businesses over the Japanese. The roots of this comment go back to World War II and the many crimes and abuses by the Japanese upon the Chinese. This has merit. However, the Chinese fully understand business, values, and making money. In fact there are many many Japanese investments in China and trade between the two is quite healthy. They will accept the deal that best suits them and is the one that produces the highest monetary value.


Composition of the Team:

Having the right mix of skill sets on the team is essential to your negotiations. Choose your team with consideration for chemistry between the members. They will be together in a distant, unfamiliar environment for an extended period of time. Previous experience is also a plus, with prior experience in the PRC valued at two pluses. The team should include up to six people in normal circumstances. Too many people may send the wrong messages(here comes another western company with a lot of money to spend- - look at how many people they have brought) . It can also intimidate your Chinese partner. Too few people results in insufficient skill set and brainpower(what one person sees the other may not).

Consider the following:

  • Operations Manager with the authority to cut a deal, sign a contract or write a letter of understanding.

  • Financial Analyst, send a trained business case analyst with strong business counsel skills, not an accountant who is capable of quick, high level assessments , but can follow through with detail later.

  • Engineer, with experience in the operations you are seeking to establish who also ideally has some business management training and can understand business case assessments.

  • Lawyer, as an adviser as contract terms can be confusing at best to the rest of the team

  • Procurement Specialist trained in international part and product sourcing if this is an essential component of the endeavor.

  • Marketing Specialist, trained in international marketing and perhaps some business research background.

  • Professional Negotiator, who is essential if the team has little or no experience, and optional if you have a strong experienced team.

  • Other skill sets as needed for the specific project.


Identifying what each partner wants out of the deal:

You know what you want to accomplish. But, what does the partner want? Understanding the answer to this question helps maximize your bargaining position. Perhaps it is crucial to your partner to couple with an international firm for prestige or to maximize capacity utilization. A chinese partner may simply want to invest capital and obtain a guaranteed return in exchange for helping you to enter the market place. A silent partner may be an ideal situation for your needs and with some creativity, a guaranteed return, perhaps with an upper limit, may best suit your needs. Devote a little time to identifying the key needs and wants. Use the things you learn at the bargaining table to extract the best deal. Avoid offering some "extra" that is not a key requirement of the partner, unless used as a "sweetener".


Identifying what each partner brings to the table:

One company entered joint venture negotiations with a potential chinese partner. The early understanding was the partner could bring domestic sales rights to the foreign investor. A little research and questioning brought out the realization that the partner was really incorporated in Hong Kong. This relationship would not have produced rights and access to domestic sales. Due diligence and investigation of the benefits offered by the partner paid off in avoidance of consummating a deal that would have only produced ill will and losses for both partners.

If you are looking for a distribution channel, thoroughly investigate the capabilities of the partner. Is he regional or national, how many employees, trucks, and facilities does he have? What do current customers say of his delivery performance? Is there any conflict of interest with competitors either domestically or foreign competition. If your project is sizable, check out his distribution facilities in a number of cities.

Identify and qualify specifics around what you want the chinese partner to provide. Then, re-ask and ask again to assure you know what you are buying.


Whack-A-Mole

In the arcade game Whack-A-Mole, you whack one mole as it pops out of the whole and immediately another pops out of another hole. s the game progresses, more than one mole pops out at a time. Negotiations can often appear to be like laying this game. In negotiations, you settle a specific tricky problem or contract clause, only to have another seemingly uncompromising issue pop up. As the negotiations progress, the issues and problems intensify with many issues and problems coming up. In the Chinese negotiating game this seems even more prevalent with previously resolved issues being brought back up at the table with a new problem or even a change in the proposal. Some of hi is a tactic of wearing down the partner and a method for seeking further concessions.

In chinese negotiations and deals it is often the unspoken agreements between "gentlemen" that have the most lasting value, even more important than the actual written contract rules.


At the Bargaining Table

American management in particular is most impatient in the bargaining process. Being too impatient to "cut the dale" the american manager will too easily offer concessions to sped up the deal and bring a conclusion. The Chinese(and Asian) parties are far more patient and extremely aware of this negotiating weakness. Westerners will fill pauses in conversation at the table. This "fill" may be a concession or information that the other side can use later. The Chinese seek pauses in the conversation, playing to this weakness.

The western team is also anxious to nail down each issue, doting the I's and crossing the T's. The chinese team look more upon the relationship and feel that if the partnership is good and trusting the many minor issues and details will be worked out later.

Arrange for a process that provides timeouts by either parties. Pre-arrange separate rooms where both sides can retire to to converse, debate and strategize. If you are in not in one of your facilities, consider whether the site is "secure".


Dealing with the Government

A general rule of thumb for negotiating with government organizations in the PRC: Everything is negotiable. Assume it is true until proven different. Exercise persistence. Do not quit after the the first or second attempt even if the doors appears solidly shut. It never hurts to ask.

Be wary of the "special deal just for you". This statement is the same with all salesman.

Contract and documents will often be pre-drafted and appear final. If you disagree with a term or condition, object. Take the issue to higher authorities . If your partner provides the form use the same questioning and protestations.

Seek concessions. You never know where a concession may be offered. The harder you press, the more your efforts will either succeed or prove that you have the best terms available.


Essential Ingredients to Negotiate:

The following components should be included and agreed upon in the negotiation process with your potential partner in the PRC:

Definition of the ventures business. What is the business, what goods and/or services will be performed? What is it's size and capitalization needs? What will it make or assemble? Of the output of the operations, what percent will be for each partner? Effectively, define the nature of the business.

Terms of Equity Investment. Define what the partners will invest in terms of cash, equity, capital, facilities to the venture. Also, identify and agree to whether the venture will take out loans for leveraging and if either of the partners will offer loan guarantees.

Charges from the parties. Discuss and agree upon what charges and or support will be provided to the venture and whether it is part of the investment or to be billed to the enterprise.

Percentage of ownership between partners. Most likely, the foreign company will want majority ownership with51% ownership being most common. The percentage of ownership will determine the level of investment and risk for both partners but it will also force discussion around issues of further growth and investment in the business as the minority partner may not wish to add further investment into the business, preferring to fund growth from profits of the business.

Board Members and Voting Rights. How many members, what is the voting rights of each party allowed in the board. This is inter-woven with protection of minority rights.

Protection of Minority Interests. The rights of the minority member must be contractually assured in some manner, lest the board makes decisions in the interest of the majority partner.

Currency for Transactions and Equity investment. Agree upon US dollars terms or Reminbi.

Protection of Trademark an Patents. Utilize your attorneys to assure these rights are not given away to either the venture or the other party. An issue not to be taken lightly.

Financial Business Case. Prepare and agree to the Profit and Loss, Balance Sheet and Cash Flow of the enterprise.

Repatriation of Profits. Agree upon how profits will be returned to the shareholders and/r re-invested into the business.

Termination Clauses. Company attorneys should advise and establish termination clauses suitable to each company, thoroughly considering all the potential acceptable reasons for termination. Include termination penalties.


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