Chinese Negotiation 101
- Author Gary Russell
- Published April 7, 2008
- Word count 4,549
Will your negotiation skills back home equip you for negotiating in China? Well they're important, but they're not quite enough. You'll also need a good grasp of the cultural differences or you'll be mystified by unexpected responses and they'll run circles around you. So here are a few key principles for negotiating in the land of the dragon.
- Be Objective
Many stories about China are exaggerated, one way or the other. We've heard of fabulous deals, providing goods and services at a fraction of local costs. We've heard of toxic Chinese products and business tycoons who will cheat you at the drop of a hat. But China is neither black nor white, and a successful business person needs to strip away the political agendas that get in the way of sound business decisions.
We should also be wary of snap judgments by people who bail out impatiently with accusations of rampant deception and contracts never honoured. Certainly we should heed all warnings of danger, and be constantly on our guard. But we must seek a realistic view, neither wearing rose-coloured glasses nor seeing treachery in every misunderstanding.
It's important to be realistic regarding issues of honesty. As in any country, there is no shortage of scoundrels in China. Neither is there a shortage of good and respectable citizens at all levels striving to meet high standards. Nothing unusual about that. But cultural differences make it easy to misinterpret strategic manoeuvres on their part. We may see it as outright deception when – in their own view of proper behaviour – they are acting honourably but cleverly. And they may see our own clever manoeuvres as questionable behaviour within their ethical system. The point is not to judge each other and kill the deal, but to find that common ground which produces a good contract for both parties. That requires us to find a delicate balance between giving our opponents the benefit of the doubt when we fail to fathom the purpose of their actions, and avoiding the risk that someone will take advantage of our trust.
We need to be careful about old advice. Any economy, in the years before it gets properly regulated, has a lot of leeway, and plenty of opportunities for unscrupulous dealers to rip you off. So consultants used to give sound advice to clients – watch out for treachery and dishonesty. Serious caution is still good advice, but times are changing at an amazing pace. The Chinese have aspirations of becoming world economic leaders, and they fully recognize the need for strict professionalism and integrity to meet their goals. It's not much of a stretch, since there's no lack of professional pride in Chinese history. You'll find that your major cautionary task in this century, apart from normal vigilance, is to identify the modern high-quality firms and separate them from the rogue elements. At the same time, the Chinese economy is still in flux, and there are still enough bandits out there to warrant serious caution.
- Ease In Carefully
Think you can leap in, sign a great deal, and move on? Not likely. You need to get the feel of negotiating in China. You have to get to know your partners, to determine who can be trusted and where you need to be careful. You need to make your first mistakes on low-value and low-priority deals. This can be good advice in any case, but it's especially important if you don't have much experience in the treacherous waters of inter-cultural negotiations. Try out a couple of low-risk transactions before plunging into the deep end.
You need to rein in your western tendency to jump in, cut to the chase, and score a deal cleanly and quickly. The Chinese don't quite work that way. Nonetheless, they've learned how to deal with we cowboys with money to burn, barging in to do serious business on the spot. We'll get the runaround, as befitting someone who isn't serious enough to develop a trusting relationship first. In their view – some barbarian who won't take the time to build relationships deserves to be outfoxed.
At the same time, this isn't universally the case. If you're dealing in Beijing or Shanghai or any other highly developed centre, they're more familiar with western styles of business. In fact, they're quite sophisticated. They're a little more willing to play the game your way, and make some compromises to western impatience in order to move the process along efficiently. In the less developed regions, they're often a little more steeped in traditional Chinese ways. But they both know how to deal with your eagerness and get what they want. In either case, learn the culture first, and take your time.
- Work with the Right People
Here's where a good knowledge of Chinese relationship structures is important. Certain people are authorized to make a deal, while others are only intermediaries – and you may not find them in familiar positions. In your first set of meetings, perhaps even for a long time, you may be dealing only with the intermediaries. They won't tell you that at the start, and you'll be frustrated when you find out that nobody has the authority to cut a deal. This may be offensive in the west, but it's proper protocol in the east. You'll probably be escorted to several meetings and banquets, and the key officials will be present at some of them, but you won't really know who's who until late in the game. This is where you need your diplomatic skills, to show your respect for Chinese traditional ways at the same time as you badger them to get the proper authorities at the table.
Actually, the intermediaries do have considerable importance. They're there to do the grunt work of finding out what's possible, and to iron out the initial proposals, so that their superiors need only deal with the final decisions. So treat them with respect, or you'll never get to see the key players. At the same time, be careful to determine if they really are properly connected to do the job. You may end up with some peripheral agent – who cites great experience in dealing with western business, but who really has little stature – because they want to feel you out before they have to deal with you directly. Beware if they send you a westerner who is really little more than an English teacher with grand aspirations. They don't trust him any more than you do, but he'll keep you at bay until they're ready to move.
Check references, making sure they're all in the same industry. Make the call to confirm. Be a detective, with an interpreter if necessary. Ask about track record. Did they meet deadlines? Did they understand the meaning of a completed job? In any environment of economic development, expect incompetence to be common, and search for the competent ones. Incompetence and inexperience are just as much trouble as dishonesty. Avoid firms dealing with westerners for the first time – they'll be out to establish their cleverness by taking you for a ride. Your best bet is a western-invested company with western executives at the highest levels. Check out everything.
- Seek Clarity
A good western negotiator, with any sense of strategy, will not offer his opponent a clear picture of his ultimate goals or what compromises he will accept. Chinese intermediaries have an even greater incentive to disguise their specific objectives and, in fact, to keep shifting them as the negotiation proceeds. They don't feel obligated to adhere to their proposals from session to session, since they're not the deciders. They don't think it's beneficial for either party if they stick rigidly to some "deal" they made with you yesterday. That would be viewed as irresponsible, since only the higher authority is entitled to make final decisions. They don't delegate authority as readily as we do. Don't expect to sign off some clause and then move on to the next, secure that the clause has been finalized, as you would back home. It doesn't work that way. Intermediate deals are flexible, and can be sacrificed unilaterally in the end game. Since everything is tentative until the final act, they may be quite evasive in the early stages. Or they may overstate a verbal agreement due to difficulties in understanding our language and our culture. So during these intermediate stages, you may have to fight tooth and nail for clarity.
But don't just treat it as fighting the culture, or trying to educate them in the straightforward ways of the west. The Chinese are indirect and group-oriented in ways that serve them well, even in business. They are rooted in a pre-market family-oriented culture, in which social harmony is maintained through a gentle style of communication – where individuals are not assaulted too directly with brutal facts. It's a communication style that comes into sharp conflict with our blunt and unfeeling western directness. The Chinese view their communication style as the essence of civilization, as distinct from us barbarians, and they will not abandon it easily. So don't just dismiss them – "The Chinese don't do clarity". Learn the language of indirect communication, and you will elicit much greater cooperation in finding what you need to know. Learn the trick of assertive indirectness.
- Bargain Strategically
To begin with, get control of the agenda. They may use their position as host to load you down with meetings and banquets, especially if they are old school – though in the modern centres they're more inclined to get straight down to business. Still, if you're spending the money, you're in charge. Determine if the meeting or banquet is important, if the officials you're meeting are really relevant to the discussion, or whether they are just window dressing to show off their connections and keep you tied to their agenda. You have to find a balance between receiving their hospitality graciously and getting down to business. Overall it's a polite power struggle right from the start, and you need to make it clear you want to negotiate the agenda. At the same time, remember that they want to deal with you and keep you away from their competitors, so leave the exit door open a little in case they're too inflexible. If you come in wide-eyed about making a China deal, you'll end up playing their game. Have a Plan B – an alternate source of supply will boost your confidence enormously.
Many western advisors will tell you to expect deception in China, but it's often just a different vision of what's legitimate and honourable in the competitive arena. It's only deception if the other party expects something different. That doesn't help you much. If you don't know the culture well, it's going to be deceptive in your eyes. So it's safer to follow the rule: expect deception. But don't express disrespect unless you catch them blatantly cheating or lying – and give them the benefit of the moral doubt if they're just backtracking because they got into trouble. It's a delicate game. Protect yourself without being offensive.
It's important not to automatically accept any claims at face value, without good reason. Are they really an old established company with a healthy market valuation, a strong market share, exclusive rights and patents, all the proper certifications, and plenty of orders from Europe? Better check these things out, since their definitions may be different from yours. Is the new plant they're preparing to build really going to bring dramatic improvement in quality and costs? You're putting up the money, so you should be allowed to see the books, though sometimes their claims of inadequate bookkeeping may be valid. You may need help here, since legitimate Chinese accounting practices are different from ours, and in some ways hard to fathom. And finally, don't accept the claim that they have the powerful connections that will make everything work out just fine in the end, because you have no way whatsoever of checking that out. Perhaps at this point they will throw the trust argument at you, claiming that your doubts are undermining a valued relationship. Don't fall for it.
If you're not picky, you'll leave holes they can drive a truck through. "Best effort" sales agreements are not enough. Get the details on their marketing network. Cash in advance is dangerous, no matter how much they throw the trust argument at you. Present it as a strict matter of policy, and point out safer payment vehicles which are readily available. If they can't get a bank to cooperate on a letter of credit, run for the hills. If you're a buyer, insist on a test order. They will talk about not doing test orders because they're building long-term relationships, but don't buy that argument. Chinese firms will do test orders when pressed. Look behind the facade to see if there's real brick and mortar and infrastructure in place. And remember that, if a firm is not very cooperative before the money has been transferred, they'll probably be even less cooperative afterwards. So get everything you can firmed up in advance, even if it threatens to sour the deal. The politeness and respect that you demonstrated from the beginning of the process will serve you well when you have to hold the line at the end.
Even when you reach an agreement, you'll find that many more things than you thought were unclear, or interpreted differently. Be prepared to renegotiate often, and get their agreement on a renegotiation process before you sign.
- Learn the Price Game
In a country where they bargain for apples on the street, they're not shy about bargaining, and they bargain hard. Don't be put off by an outrageous initial price. It's all part of the game. Whether or not they move to a reasonable price in short order is a clear indication of whether or not they're ready to bargain seriously. Let the opening moves play out. With apples on the street, some will overcharge a foreigner just on principle, as well as to defend their national pride and to save face. So keep a clear eye on your own range of acceptable prices, and stick to it rigorously.
If you're putting up the money, don't let them talk you into quoting the first price. The first move should be theirs, though exceptions may be allowed if you already have a good relationship with them through past dealings. Present it as your firm's policy, and refer to proper procedures. It's a game of polite assertiveness, and this may be the opening power struggle. Insist they provide figures to back up their price, and eventually settle for just a first price offer. But keep up the demand for backup data as the price discussion progresses. Don't let them win this opening round, or they'll have the upper hand.
Be prepared to deal with an outrageous price, which will be especially outrageous if they've lost the battle over the first offer. Match an outrageous price with a fairly-outrageous counter, because they may only inch their way down and you need room to manoeuvre. Be prepared to walk if their moves are only tokens. Do your homework, and know the market, so that you can confidently hold the line until they bring it into the ballpark. Then the real bargaining begins.
Don't accept a high price on a promise that they'll lower the price in the near future,
"when we get the new technology online",
"when we move to the new facility",
"when we develop the new product",
"when we hire the new engineer",
"when we get approval from the government',
"when we finish the merger".
Maybe they're sincere. But maybe they're wishful thinking. Hold out for the price you need. Cut them off quickly. "Not a chance. We don't do speculation. We need to work with real prices right off the bat."
And you may have to leave your fancy management theory behind. It's quite fashionable in the west to seek win-win solutions. But China's a developing country, not long out of poverty, in a brutal marketplace. They're quite accustomed to win-lose, and they're quite happy to win. But again, you'll find them somewhat more refined in the major centres.
- Pay Attention to the Non-price Issues
Many traders will tell you that Chinese are motivated by price alone. They will attach little importance to issues of quality or delivery or service, assuming these are secondary issues that can be put aside. That view of Chinese negotiators is someone outdated. A narrow price orientation is not as prevalent as it used to be, but you will still run into it often enough, and you may need to insist that the price is contingent on the whole package. Insist that the price agreement will be void if certain conditions are not met. Price cannot be negotiated in isolation. Some may try to brush that off, figuring that you won't push it. Push it. Be picky. Insist on engineering specs on the useful life of the product. Have them explain their quality control procedures, and their warrantee policy. Get a pricise definition of how satisfactory performance is specified, and what constitutes a completed project.
- Understand Networking and Contracts
This is a tough one. Networking isn't the same in China. It's a much deeper and more complex phenomenon, with implications that we westerners cannot easily fathom. The potential for misunderstanding is enormous.
It can be simplied a little. Think again of a pre-market society. How would a pre-market society organize themselves without benefit of the marketplace? They organize themselves into trusted circles of family and friends, and they exchange favours. The rules are strict – if someone offers you a favour, you owe an equal favour in return. These circles overlap and interconnect into complex networks. Over time some of these circles become more important than others, and if you find yourself linked into an important circle, you have "connections". The Chinese call it "guanxi" (pronounced gwan-shee), and there are two main rules as far as you're concerned. One, any favour or gift is a debt which must be repaid in full measure, or more if the giver belongs to a more important circle. And two, people with the right guanxi can accomplish anything for you, but it won't be free. And it's not guaranteed. Do him a favour and he will owe you something. But don't count on him to spend his guanxi capital to repay you.
Connected with that is an attitude toward contracts. The guanxi circle is a relationship of trust among colleagues. To overstate the argument a little – it's a western aberration to demand that all relationships be reduced to an impersonal rats-nest of contracts, as if no one can be trusted. For civilized people, your word is your bond. While in the modern Chinese business centres they've come to appreciate the value of a contract, and will even initiate it, there are still some who will try to convince you to make a commitment (and transfer your money) without one. They may play the trust card, so know how to deal with it.
Recognize that a westerner like you will never become a full member of any Chinese guanxi circle. You will always be an outsider, and a second-class citizen, with no rights and no recourse. "My guanxi is your guanxi – don't worry, I can get it for you" is not in the slightest degree a commitment you can take to the bank. You need it explicitly detailed in black and white, no matter how much that may brand you as a western barbarian. But I hasten to repeat that, the more progressive Chinese managers are on the same page as you and I, fully appreciating the need for a water-tight contract. Those are the ones you should look for. But if you're in a more traditional centre, you may have to fight for it.
- Understand Indirectness and Face
China is a relationship based society, developed long before the market turned our European ancestors into disjointed individuals competing with each other in the marketplace. Again to overstate for the sake of argument – we have no need for relationships. Market contracts regulate our lives and how we interact with each other. But for the Chinese, relationships are everything.
So how have the Chinese kept it all functioning smoothly? We have civil order based on a system of contract law to keep us in line. How have they kept people in line for thousands of years without that? They have established a mature and stable hierarchy of status relationships, and they maintain certain strict norms of behaviour. Chief amongst these behavioral norms, essential for maintaining order in a relationship-based society, are the following two. First, never provoke a confrontation by issuing direct challenges to others – which results in the famous Chinese indirectness. Second, never undermine someone's status in society by causing them to lose face. Understand how these rules lies at the root of the Chinese psyche, if you want to understand their reaction to our western brutishness.
So don't wonder why sometimes they seem to be running around in circles, and never seeming to get to the point. Bluntness is insensitive and uncivilized. A way must be found to press the point gently. You're just not understanding the language of indirectness. And don't wonder why they seem so concerned about losing face. Humiliating others is insensitive and uncivilized. Actually they are insensitive and uncivilized, when you come to think of it. In the midst of a frustrating negotiation session, take a moment to look at it from their point of view. Then look for a way out of the impasse which will not put them on the defensive, and which will grant them face. In fact, face-giving is the key to success. Find ways to make them happy, and they'll make you happy.
- Play the Game, but Cleanly
China has a sophisticated set of laws. She's come into the market only recently, but she's done a remarkable job of setting up a legal framework for commerce in such a short time. However, there's a Chinese way of doing everthing, reflected in those laws and regulations, and you would do well to learn to play the game. At the same time, China still has a long way to go, and not everything is fully covered by laws and procedures. There's a lot of leeway everywhere, in the gap between the socialist regulation of society and the law of the market.
Corruption ranges from black to shades of grey. There are many kinds of activities which anyone, east or west, would call corruption. And China's come a long way in routing out real corruption in the major centres. At the same time, there are many activities which fall into a grey area – they're not strictly illegal but not quite legitimate. Or the paperwork is lax, and nobody really knows what's going on. How do we deal with those?
It's often not so simple. The guanxi system runs by different rules, and it may be unclear what's legitimate and what's not – in their terms. What do we do when something is perfectly legitimate and honourable in Chinese eyes, but outright corruption in ours? After all, exchanging money for various considerations among in-groups is the essence of sound relationship economics, but we tend to view it in a market context as unethical. Do we call it corruption? Here's where we have to find a balance. Don't insult your adversaries by denouncing every favour that facilitates a transaction. But don't agree to anything illegal or clearly unethical. You'll have lot's of company. In modern Chinese society, there is a strong sentiment for rooting out corruption.
It's hard to know the prevalence of corruption. The government is probably correct to say that their anti-corruption campaigns have been effective, and there's a critical mass of influential people who pride themselves on clean practice. In that view, widespread corruption is old news, and you may well get caught. But there are also people in many places who still credibly claim they can't do a day's business without passing the red envelope under the table, and you just have to play along if you want to get anywhere.
So you'll have to play it by ear. Your general stance should be that you refuse to pay bribes. You run a clean ship with a clear set of transparent practices, and you want to keep it that way. At the same time, you may feel some need to look the other way when discretion dictates. But if you find yourself in a situation where bribes and kickbacks are the only game in town, you'll have to make your own decision whether to hold your nose or bail out.
- Do Your Due Diligence
Any economy like China, rapidly pulling out of underdevelopment, is going to be a contradiction containing many advanced firms with high standards alongside a significant still-backwards sector. So your primary due-diligence task is to sort them out. If you deal with a firm which is still trying to remain back in the lawless days, not only will you be propping up regressive forces, but you'll get ripped off. And you may get in trouble with the authorities. In recent years, Chinese authorities have been pretty effective in using enhanced enforcement and professional peer pressure to shift the centre of gravity toward ethical practices in the major centres. If you're working in the less developed areas, you'd better be on your guard.
In either case, you need to check their references rigorously. Conditions vary in China, and that dictates process. As a still-developing country, you can still expect to find many firms functioning at low levels with low standards. The days of poor quality, deadlines not honoured, work not finished, inappropriate substitutions, financial rip-offs, etc. are still alive in some quarters. It's true enough that the famous Chinese national pride is impelling them to develop higher standards and join the world community of top-level professionalism. So don't underestimate them, or the rapidity of their progress. Just don't get caught with a dud.
Of course there is the matter of the language and culture gap, which is why you need to work with knowledgable consultants. But these consultants themselves will vary in quality, so there's the first item for strict reference checking. Who have they worked for? Contact past clients and ask how satisfied they've been. These are probably people who speak English, so you can readily get a useful reference. Stick to professional references, not just friends and colleagues, and look for a track record of successful international deals.
When checking out Chinese firms, specialize in naive questions and keep asking until you're satisfied. Don't let them deflect you with embarassment. There's no such thing as a stupid question, and there's no shame in questioning repeatedly until you understand. Persistence may be effective in breaking through a runaround, and it's helpful if you know how to use indirect language in a passive-aggressive manner. But you'll do best when you can deal with the higher-quality firms that will be straight with you and won't give you the runaround in the first place.
Got this all down? Done your homework? You're ready to meet. Good luck.
Dr. Gary Russell is a Canadian professor who has been teaching business and economics in China for several years. He is well positioned to advise North American business on trade and negotiation with Chinese counterparts. Contact Gary@RussellResearch.ca or visit www.RussellResearch.ca.Article source: https://articlebiz.com
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