China Business Negotiating -- When To Walk Away
Had a very long conversation with a potential client yesterday regarding conducting business in China. I have to be extremely vague here, but by the time our phone call had finished, I had concluded his business has tremendous potential in China, servicing American and European companies already there. I am convinced his U.S. clients will welcome his arrival to China, but that Chinese companies will not be willing to pay any premium for quality. I told him of my own firm's experience with Chinese clients and also relayed other incidents involving other companies. I talked about how frustrating it can be to deal with a company that is focused only on the price, with absolutely no concern for quality. As co-blogger Steve Dickinson is always saying, why do Chinese companies go to $300 per hour accountants and say they will pay only $100, rather than just going to a $100 per hour accountant in the first place?
Chinese Negotiation/Negotiating in China Blog has some answers. In a post entitled, "Negotiating in China: Ignorance is Power," the blog talks about when the Chinese company does not know enough to know about quality differences and so it does not care:
If your China business model involves B2B selling, there is a good chance that you will spend a lot of time negotiating with people who don�t know � or care � about how your product or service works. You are an expert in something that your counter-party is unfamiliar with. In the US, that would give you an advantage in the negotiation process. You would be able to play a large role in framing and scoping the project, and would get instant credibility as an authoritative expert.
In China, this is often not the case. Don�t be surprised if the negotiator isn�t fazed by his relative lack of expertise. It�s not unusual for him to point out shortcomings, deficiencies and problems in your proposal that don�t make any sense.
Purchasing and HR managers in China are notorious for this. Their senior managers task them with finding a supplier or hiring a consultant. If your counter-party doesn�t understand the assignment he won�t ask for a clarification or explanation, as that would result in a loss of face. Instead he�ll scan the internet or a magazine for a trendy buzzword or recent industry headline and base his interview with you around that. If your proposal is over his head (it will be) or you try to explain things to the decision maker, you will lose the deal.
This lack of knowledge causes the Chinese company to focus "on the only metric that they understand � COST." The post warns foreign companies to be wary of Chinese companies trying to bargain on "points that will result in making your product or service completely ineffective:"
The result is classic lose-lose negotiation. (How much of a discount can you give me if the truck only has 3 wheels?) You receive less than you think you should and deliver a product or service that is lower-quality than you would like it to be.
The solution: walk away and "find someone who already knows what they are doing."
So true. A typical example I gave to the potential client bears mentioning here as well. American company wants to sell a million dollar piece of equipment to Chinese company. American company always sends its technicians to the buyer's facility for a few weeks to install the equipment. Chinese company insists it can do the installation itself and seeks a $75,000 discount for doing so. American company gives in. Disaster nearly always follows. The Chinese company did not have the expertise to install the equipment and then it turns around and sues the American company for having provided a "defective product." We see cases like this all the time and this post is right. The best strategy is either to stick to the price with installation or just walk away.
Comments (26)
Read through and enter the discussion by using the form at the endLaoLao - March 24, 2007 8:51 AM
In regards to the last part of your article.
CLB= Nail on head.
I would rephrase the following sentence
"..American company always sends its technicians to the buyer's facility for a few weeks to install the equipment..." to read; " The American companies with any sense at all..."
So many stories I (and numerous others) could tell about taking from Peter to pay Paul.
Too many USA companies' Sales people sell out, quick and often to meet their quota.
This always ends up in a quagmire. Though, fortunately for me, I get paid do help them (USA company AND Chinese company)get out of the quagmire.
nanheyangrouchuan - March 24, 2007 10:24 AM
"As co-blogger Steve Dickinson is always saying, why do Chinese companies go to $300 per hour accountants and say they will pay only $100, rather than just going to a $100 per hour accountant in the first place? "
Because they feel better about making a good accountant knuckle under to their demands than going to a shabby accountant. The idea is get the best quality at the lowest price, and gain some "face" in the process.
And I received some interesting negotiating advice about how the Chinese think: What's mine is mine and what's yours is mine, what I keep for myself I do so because I deserve it and what I give to you I do so out of kindness and generosity.
Howard Lee - March 24, 2007 11:14 AM
Great story. However, I wonder why Chinese companies tend to operate in such a negative fashion. Is it just that they are inexperienced and do not understand the dynamic between price and quality, yet? Or is it something deeper within the societal background of the people?
Specifically, this whole price over quality issue kind of reminds me of the whole "red over expertise" issue during the Cultural Revolution. Basically, because of the Great Leap Forward and the disastrous Cultural Revolution, whole generations of Chinese people grew up not caring very much about technical expertise. As long as you have the "red", or desire to see something get done, it will be done.
Perhaps I am being overly simplistic. But often times I am baffled by the response I get from Chinese from the mainland when we get into a discussion over how China can do this or that in class. It seems they life falling back to "it can be done" because the people will see it through a bit too much.
Howard Lee - March 24, 2007 11:31 AM
Oh, and just reading the typical example that was given, it seems that someone is pocketing the $75000 discount. It sounds pretty absurd to have a company care about a $75000 discount vs. a $1 million piece of equipment working correctly. I guess a follow up question would be is this corporate or governmental corruption at work?
China Law Blog - March 24, 2007 2:57 PM
LaoLao --
I see what you are saying about the change, but what I am trying to convey here is that these companies sell the equipment in the US and in Europe and every single time they send over their technicians for the installation and then in China, for the first time, they are asked not to do so and they don't even know what to do. You are right though that it always ends up in a quagmire. The lucky American company ends up going over to do a re-installation, completely gratis. The unlucky American company gets sued. We have seen both many many times and it sounds like you have too.
China Law Blog - March 24, 2007 3:02 PM
nanheyangrouchuan --
To a certain extent, I think you are right. Steve tells me that when he taught an international negotiations class at the LLM program at the University of Washington, the Chinese students could not grasp the concept of compromise. They would stake out their position way at one end of the spectrum, not explain it, and just wait for the other side to go their way. The other side would never budge and a deal would never be reached.
All I can tell you is that I don't know any $300 per hour accountants who reduce their rates to $100 per hour and that trying to get them to do so is just a complete waste of everyone's time. My firm is so used to this by now that any time a Chinese company comes back to us with an absurd request for discount (and when they do it, they nearly always do it in the form of an imperative, such as, "we will not pay you more than $100 per hour on this and you will need to get started on this tomorrow," we just respond by saying, "you must have misunderstood us, our rates on this will be as follows and we will get started after X dollars is in our account. 9 times out of 10 we never hear from them again, which is just fine by us.
China Law Blog - March 24, 2007 3:04 PM
Mr. Lee --
Good question, to which I do not really know the answer. I tend to attribute it to inexperience with business. Certainly, many of the Chinese lawyers with whom we work in China do understand the benefits of having a long-term, trusting relationship based on quality, but they are the first to tell us that their clients rarely do.
China Law Blog - March 24, 2007 3:07 PM
Mr. Lee --
No, I do not think this is corruption at work, I think this is being penny wise and pound foolish. The person who knocks out the installation and "saves" $75,000 thinks he or she will be rewarded for saving $75,000. The fact that the product turns out to be a disaster because it was badly installed can be blamed on the foreign company that made the equipment. The expression, "time is money" does not really apply to China yet.
nanheyangrouchuan - March 24, 2007 4:50 PM
@CLB:
"the Chinese students could not grasp the concept of compromise. They would stake out their position way at one end of the spectrum, not explain it, and just wait for the other side to go their way. The other side would never budge and a deal would never be reached."
This is a cultural trait that is taught to chinese children at a young age at home and in school, that stone hard stubborness can often win the day. And if the other side doesn't budge that means they are looking down on you for being chinese.
China Law Blog - March 24, 2007 5:59 PM
nanheyangrouchuan --
Yes, but the better Chinese businesspeople are realizing this does not work terribly well in an international business context.
LaoLao - March 24, 2007 8:36 PM
@CLB - Understand your point on the last post and I agree completely. When I had my bar in Shanghai I could tell almost immediately when my patron was involved in a bad business situation. More times than not it was a "first-timer" who was in country for all of 2 days and had just spent those first two days repeatedly pounding their head against the Great Wall of Confusion and Denial.
China Law Blog - March 24, 2007 10:39 PM
LaoLao --
Problem is that the "first timer" who goes to China feels he has to come home with "something" so he makes an absurd deal and rationalizes it by telling himself and his people at home that this is how things are done in China. I am still sometimes shocked at the completely stupid deals smart companies have made in China, mostly because they know nothing about China and think what they have done was necessary.
Other Lisa - March 25, 2007 1:09 AM
Fascinating - and valuable - thread.
China Law Blog - March 25, 2007 1:44 AM
Other Lisa --
Long time no hear. Thanks.
David Li - March 25, 2007 8:46 AM
Well, you hate them smoking and hate them picking up cell phone halfway through the negotiation. Now, they get the two in one convenient box: a working GSM phone that holds half pack of cigarettes(http://www.gearfuse.com/the-ultimate-smokers-phone-holds-real-cagarettes ) Sorry to sidetrack but this is true Chinese innovation. ;)
Speaking of Chinese pricing, I used to take first time visitors to China down to the Xiangyang market to prep them for meetings so they don't get shocked with the price flexibility of the Chinese and told them to always remember why they come to China. I had experience with companies coming over, got into the meetings and forget their original reasons to come to China after three days of meeting and KTVs. All they remembered by the end is they have to make a deal in China.
Other Lisa - March 25, 2007 12:04 PM
Hey, CLB. Yeah, too busy. I just got back from Beijing as well.
China Law Blog - March 25, 2007 2:56 PM
Mr. Li --
That "invention" is unbelievable. Also disgusting.
Xiangyang is a good indicator. I went there once with one of our Chinese staffers and she insisted on bargaining for ten additional minutes over 5 RMB, the whole time I am thinking, I've got to get the hell out of here.
KTV can be deadly. We have a client who sends over only his female staff to China for important negotiations.
China Law Blog - March 25, 2007 2:58 PM
Other Lisa--
Well do keep stoppping by.
duncan - March 25, 2007 11:32 PM
On the quality vs price issue, I know it doesn't apply to all products (especially services) but I think the current speed of economic and social change has something to do with it. If you think your situation/business may have transformed in two years time, why invest in a product that will last five?
Only reason for buying an expensive "high quality" brand in many such situations is face, although that works too sometimes.
chris - March 26, 2007 7:06 AM
In my experience it very much depends on which group in China you are targeting or at least you have to know the background of the people you are negotiating with to really understand the price vs quality issue in China.
It is my experience that when you talk to highly educated Chinese they do understand the quality issues involved. The problem is that then you will be talking to the top 5-10% of the Chinese population and chances are, you are in Beijing or Shanghai in the rest of the mainland you will end up with the Price issue being number one on the agenda with all other matters subservient to the price negotiation.
China Law Blog - March 27, 2007 2:52 PM
Duncan --
I agree. I think much of this thinking is due to the newness of capitalism and a lack of trust in the system. I saw the same sorts of things in Russia soon after the fall of communism, but much "maturation" since then.
China Law Blog - March 27, 2007 2:54 PM
chris --
I completely agree. The Chinese lawyers with whom we work (and not just in Shanghai and Beijing) fully understand more than just price and their views of their own Chinese clients who do not are pretty much the same as ours.
Doug - March 28, 2007 3:39 PM
I am seeking to undererstand what sounds like a contradiction in ordinary transactional/business decisions made in China: on the one hand, most observers of the Xiangyang market might say that in China, everything is negotiable.
On the other hand, the resistance to paying for a product what it is "worth" leads to intransigence and ultimately one of 2 things: a sucker's bargain or a no-deal.
I would be interested in hearing more specific stories on how people surmounted this obstacle. Are there some clients who understand that what they are asking for is ridiculous and are ultimately persuaded to go higher?
William - March 31, 2007 9:05 PM
Watching people at computer/digital camera "markets" (like Bainaohui in Beijing or the ones at Xujiahui in Shanghai) can be a fascinating example too, as by definition there is a constant stream of new, better, cheaper products with more/better features coming out. So, by definition, the customer is not going to know exactly what they're talking about. Knowledge monopoly for the seller (usually).
The result? You see people happily wasting 1-2 hours of their afternoon putting together some weird, face-saving "compromise" deal involving a sticker discount off the (artificially high) initial price quoted plus some little freebies like memory sticks.
You could probably get the same goods pretty cheap at Carrefour, Metro, etc, in only 5 minutes. But it doesn't seem as popular. Carrefour, and perhaps more importantly the electronics chain Guomei are stuffed full of people with whom you can have as long a discussion/argument as you like.
China Law Blog - April 1, 2007 11:58 AM
Doug --
Sorry, I did not see your comment until now. You raise a good point, and I think the fault lies mostly in my descriptions. Everything is viewed as negotiable and yet, so many times, in the end the focus on price and the expectations on price are relatively fixed and unreasonable.
Take attorneys' fees. We recently had a matter where a top tier China law firm came to us needing our quick help for a Chinese client on a case here in the United States. There was an important deadline. We worked with the Chinese lawyer and came up with a dollar figure for the matter and jointly decided we would not budge a penny. Chinese lawyer went back to the client and we got silence for days as the deadline neared. A day or so before the deadline the Chinese client comes back and offers us 1/4 of our number. We said no and thought nothing more of it. Maybe 3-4 days later they come back again, this time offering us exactly what we had initially proposed, with one minor (and reasonable) face-saving modification. We agreed and started work. The deadline had already passed to their possible detriment, but there is still plenty more to do.
I too would love to hear from others on these issues.
China Law Blog - April 1, 2007 12:00 PM
William --
Thanks for checking in. Long negotiations over 5RMB are only possible when one does not equate time with money. As wages in China rise, something will have to give.