September 3, 2012
This is the first of 2 articles on the topic. The following link will take you to Part 2.
While preparing recently for negotiations with a Chinese distributor that wants to acquire a film I’m producing, I found myself nodding in agreement with advice offered by attorney Steve Dickinson in an article he wrote for the Harris Moure law firm’s ChinaLawBlog. Dickinson describes several business negotiating tactics that are often used by Chinese businesses to win major concessions from their foreign counterparts, and he sets forth a few rules foreign companies can follow to counter those tactics.
With permission from Dan Harris of Harris Moure, I have summarized several key points from Dickinson’s article below.
In negotiating with Chinese companies, we often see the following tactics from the Chinese side:
The most common tactic is for the Chinese company to seek to wear the foreign side down. This approach has two variants. In the first variant, the Chinese side relentlessly introduces new issues as quickly as old ones are resolved, resulting in an endless negotiation. The second variant is for the Chinese side to make wildly unreasonable demands and then increasingly resist the objections and counter-proposals of the foreign company. Both variants are designed to wear down the foreign side in a war of attrition until they become exhausted and finally capitulate to the Chinese side’s demands. Successful use of this strategy relies on the foreign negotiators’ disadvantages with regard to time and expense. The foreigners are typically busy people with too much to do and who rely on costly attorneys to do much of their bidding, while the negotiators on the Chinese side are relatively low-paid functionaries who have no other job but to instigate and manage such endless negotiations.
Another effective tactic is the artificial deadline. Under this approach, at the very beginning of the negotiating process the Chinese side sets a fixed date for a public signing ceremony, at which high-level officers from both sides will participate amidst much pomp and circumstance. The date is set far enough in advance to ensure that parties negotiating in good faith would reasonably expect to reach an agreement. But then the Chinese side ensures that no agreement is reached, either by engaging in re-negotiations and other delay tactics, or by refusing to concede on key points. Then, just a day or two before the signing ceremony, the Chinese side announces that the contract must be revised on one or more key issues in a way that entirely benefits the Chinese side, often because of some eleventh hour “emergency” in the form of a demand from a “government regulator” or an outside source such as a bank or insurance company. The Chinese side explains by saying, “we don’t want to go back on our word, but these other folks have forced us to do this.” Again, the plan is that the combination of the pressure of the impending signing ceremony and the general fatigue of the negotiators will result in a crucial concession favoring the Chinese side.
A third technique is for the Chinese side to revisit the key issues after the contract has been signed. In this strategy, after much negotiating the Chinese side signs a contract, conceding on the key issues. With the negotiation now behind them, the foreign side’s key negotiators, advisors and lawyers move on to work on other projects. After the agreed project has been started, and the foreign side has committed its people, funding, and other resources, the Chinese side then announces that certain key provisions of the contract must be changed, again, usually claiming this change is mandated by law, government regulators or banks and insurance companies. The only foreign personnel left at this point are the ones responsible for the project’s success, who have a strong incentive to allow for the change so the project can proceed. Often, these people do not fully understand the implications of the change the Chinese side is now demanding. They typically present the change to busy upper management as a minor technical revision and it gets signed. Everyone remembers how the initial negotiation was so troublesome and nobody wants to bring in “legal” to start the process over again.
Though crude and obvious, the three tactics work wonderfully well, so Chinese companies can be counted on to employ them. There is one simple antidote for each tactic:
If the Chinese side uses the “wear ‘em down” technique, the foreign side should simply refuse to participate. The foreign side should firmly state its position and not bend unless and until the Chinese side agrees or at least moves closer to the foreign side’s position.
Never agree to a fixed signing date. Make it clear that the signing ceremony will be scheduled only after the contract has completed final negotiations. Never allow the Chinese side to use a deadline as a tool. This seems like obvious advice, but we see the rule constantly violated. Chinese companies love signing ceremonies and foreigners fall into the trap because they do not want to cause offense at the start. The Chinese have contempt for a sucker, so refusing to go along on this obvious technique will not cause offense: it will instead earn the respect of the Chinese side.
Make it clear that there will be no changes to the contract after signing and any attempt by the Chinese side to change the contract will be treated as a material breach, leading to termination and a lawsuit for damages. Chinese companies are well known for using the signing of a contract as the start of a new negotiating process, not the termination. If the foreign party is willing to accept this approach, then a clear procedure must be instituted on the foreign side that brings back in the legal and China advisory team. The neutral players on the foreign side must make the decisions. The decisions should not be made by the foreign side players who have already become committed to the project.
When faced with the difficulties of language and cultural barriers, we sometimes forget ourselves and allow for tactics and behavior that we would never tolerate in our home territory. Bearing these simple rules in mind can help to reduce the frustration of a prolonged, seemingly unfair negotiation.
Remember too that your Chinese counterpart may have very different motivations than yours and a different context for the negotiation. I have sometimes found myself seeking a harmonious, “win-win” resolution only to learn that the Chinese side was operating under a “winner takes all” strategy.
As Henry Kissinger wrote in his superb book “On China,” Chinese statesmen have a long and successful history of dealing with foreigners, one that is informed by the writings and teachings of such brilliant strategists as Sun Tzu, author of The Art of War:
To Sun Tzu… the successful [negotiator] waits before charging headlong into battle. He shies away from an enemy’s strength; he spends his time observing and cultivating changes in the strategic landscape. He studies the enemy’s preparations and his morale, husbands resources and defines them carefully, and plays on his opponent’s psychological weaknesses—until at last he perceives the opportune moment to strike the enemy at his weakest point. He then deploys his resources swiftly and suddenly, rushing along the path of least resistance, in an assertion of superiority that careful timing and preparation have rendered a fait accompli. The Art of War articulates a doctrine less of territorial conquest than of psychological dominance.
I’m not suggesting that every Chinese negotiation should be viewed as a battle of life and death. But neither should a foreign negotiator assume that their Chinese counterpart shares similar motivations, values, or business ethics. Anyone can and should benefit from Sun Tzu’s sage advice, that foreknowledge and preparation are crucial to a successful outcome.
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