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June 15, 2010

US-China Negotiation and the Balance of Power Shift (BOPS) Part II – How it affects Chinese tactics

Filed under: Uncategorized — Tags: — ktetaichinh @ 6:45 pm

Last time we talked about why US-China deals undergo a shift in the balance of power.

Shifts in the power balance have to be seen through the filter of your counter-party’s culture and experience. You might think that moving money or assets into China means that you have more power in the relationship with your local partner – but to him this may signal the beginning of the end – his last chance to get paid before the finale. You see your new venture as something stable and growing – he may see it as one component of a larger, more fluid set of opportunities. He’s learned a new product or process from you, and profited a bit in the process. Staying put with you would be lazy and slothful – what he should be doing is putting this new expertise to work by developing his own operation. He’s already got the network and the channels – all he needed with process training.

Chinese tactics
After a balance of power shift, the tactics employed by your Chinese counter-party will become more aggressive and goal-oriented. In the pre-BOPS negotiation your counter-party was learning and waiting for you to put the pieces together. But now that your business is starting operations there is little more to be learned. It’s about cash now – and there are a few different approaches Chinese negotiators can employ after the BOPS.

A BOPS in your favor.
Scenarios: You have developed expertise, contacts or resources of your own in China.
Key variables: Exclusivity, Territory, Pay-out
Tactics: Putting down roots and digging in for the long haul.
If you are becoming more successful and independent, your local counter-parties may see this as an increase in your power and influence within the relationship. From here on in, they will be looking to maximize money, power and influence within their own network (usually involving you buying, hiring or spending with their friends). The good news is that they aren’t going anywhere. The bad news is that it is going to become more expensive to maintain the relationship.

A BOPS in their favor.
Scenario A: You have brought in money, registered, set up the business and started operations. Now he wants out.
Variables: IP, trademark, designs, customer lists, quality, promotional material, etc
Tactics: Cut-throat quick-kills and fast exits.
You’ll be wondering why they are giving up a deal that is doubling in value for them – it’s because your share is going up even faster. They think they can do the same business elsewhere without having to give you the lions’ share of the profits. Their power and influence is at its highest point to moment you successfully start operations. They may feel that their best chances of capitalizing on your achievements don’t include you.

Scenario B: You have set up the business – and now he wants more:
Variables: Money, hiring & buying (from their network), quality.
Tactics: Spend your money to prop up their local network.
In this situation, they see you as the deep-pocketed Daddy Warbucks type who always has cash to throw around. They become resentful that you are exploitative and manipulative, and start upping fees and charges. The size of your operation – and staff – begins to increase rapidly. You are spending more – and facing increasingly aggressive counter-parties – but not seeing an improvement in goods or services.

Next: Part III: BOPS and counter-tactics

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Chinese-Western negotiations are more fluid than deals in the US.  If you expect your business in China to be stable and predictable once a contract is signed then you are in for some educational times ahead.  Westerners doing business in China report that they have more problems after the contract is signed than before.  Much of this has to do with the BOPS – the Balance of Power Shift that affect most US-Chinese relationships.

We’ve looked at the causes of the BOPS and how it affects Chinese negotiating tactics. Now we are ready to look at how American negotiators in China can prepare and protect themselves from the fallout of BOPS.

    Forewarned is forearmed.
    Watch for shifts in behavior, communication style and attitudes.  Remember that even with good Chinese partnerships, your gain is often perceived as his loss – and vice versa.  One of the few constants in Chinese negotiation is that you have to be proactive about managing the relationship.  Well, it’s time for Westerners to raise their game a bit.  The days of qualifying as a cross-culture pro by learning to say ‘ni hao’ and passing business cards with two hands is over.   Building a relationship in China is a delicate process that will be influenced by external events.  Anything that impacts on the balance of power of your business will affect the relationship.   Don’t be blindsided by your counter-party’s negative reaction to your success or progress. In China honesty tends NOT to be the best policy, but it has its uses.
    Yes, Chinese people tend to be less direct than Americans, but this doesn’t mean that you are expected to speak in riddles and vague allusions.  If your counter-party seems dissatisfied, distant or hostile then you should find a non-confrontational way to start a dialogue.  Different regions of China have varying attitudes towards direct confrontation.  You may find that northerners and even many Beijingers have few reservations about sharing very frank opinions – particularly if there is booze involved.  Even if you don’t work through every personal or commercial issue, you will certainly learn a great deal from a serious discussion.  If the main thing you learn is that your counter-party isn’t being honest or forthcoming, then that’s a great bit of information to have.

    Always be ready to go it alone.
    Many Western counter-parties in China are more prepared for failure than for success.  Ask yourself a simple question at the start of your negotiation with a Chinese business person – ‘what if this is a big win?’  Sure, you may build a rock-solid joint venture that your grandchildren end up running together in amiable cooperation – but there are other, more likely, possibilities.  The fact is that you and your Chinese counter-party are each on a separate learning curve and have your agendas.  If you don’t already have a Plan B that involves you going your separate ways, then you are putting yourself in a very weak position for no reason.  Your Chinese counter-party certainly has a wide range of alternatives – and that is one source of his negotiating power.

    Structure strategic deals with a rising pay-out.
    Chinese and Americans view risk and opportunity differently.  For many Westerners, the China operation is an extension or expansion of a larger business.  We tend to be accretive – building up and accumulating pieces of the puzzle in an effort to assemble a large, stable operation.  Modern Chinese, on the other hand, have grown accustomed to an endless stream of potential counter-parties coming ‘round the bend and seeking them out.  When you tell a Chinese counter-party that he can expect a level payout from a stable business, he may very well take this as a sign that this deal has lost its potential and it’s time for him to find a more promising project.    Many Westerners sourcing goods in China are shocked and dismayed that instead of building guanxi and receiving better terms from long-term suppliers, they suffer from unpredictable quality problems and cut-throat price pressure.
    Chinese negotiators tend to be more sensitive to opportunity cost than sunk cost and are always looking for a higher return.  It’s precisely this willingness to book gains and move on that gives Chinese so much leverage in negotiations with Westerners.

    Don’t rely too much on your Chinese counter-party’s self-interest to preserve your partnership.
    Clever Westerners used to gloat that they had guaranteed cooperation and compliance from Chinese partners by structuring a deal that only involved small up-front good faith payments—with the bulk of the payment coming after the Chinese side had performed satisfactorily.    This plan usually failed for one of three reasons.
    First, this kind of behavior, while considered prudent in the West, tended to undermine guanxi and led to a vicious cycle of distrust and suspicion in China.  A second problem stemmed from the fact that cash was not the only asset involved.  While the Westerner was very withholding and cautious with his dollars, he tended to be much more generous with his IP – such as designs, brands, and processes.  Many Chinese counter-parties considered the up-front money a scholarship to Your Business University – and these guys take their education VERY seriously.  And finally, even a small up-front payment was worth having if the Western side was offering.  We don’t see this as often as we used to from established players in Beijing or Shanghai, but if you are dealing with entrepreneurs or venturing out to the sticks, a small sum can go a long way.

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