China Law Blog

Excellent and pithy article in the Shanghai Daily the other day by Iain McGregor (the "pen name for a former senior aerospace executive, intelligence officer and diplomat who is a novelist and occasional commentator living in Shanghai.") on what it really takes to do business in China (h/t to All Roads Lead to China).

The article is entitled, "Don't whine about China business," and it starts out bemoaning those foreign businesspeople who do business with China yet are always bemoaning the difficulties of doing business in China, because of the following:

They're [Chinese businesspeople] intransigent, they leave everything to the last minute, they don't know what they're doing, they are trying to rip me off!

McGregor's rejoinder to all the wailing is to point out essentially three things:  plenty of people are making plenty of money doing business in China, doing business in China is (at its base level) really no different from doing business anywhere else, and, if you do not like it, go elsewhere. 

I agree.

McGregor correctly notes that "despite the loud wailing," deals get "done, contracts are signed, and goods continue to flow in increasing volumes across Shanghai's port to the world."  This is the people are making money in China part.

McGregor then notes that business in China is, at its core, like business everywhere else; there is no "black magic hokey-pokey":

The process is global and despite all the China pundits selling their special skills at doing business in China, the key to every China deal is still the fundamental principle of economics, and not some black magic hokey-pokey.

Business in China, when you boil it all down, is like business everywhere else.

Simple as it is, it bears repeating: business in China is, at its core, like business everywhere else.  What this means at its heart is that if your deal does not make economic sense to you, it does not make economic sense.    China may be on the other side of the world from the United States, but the basic laws of economics and of common sense do apply. 

McGregor has his own theory as to what it is about China that causes "the angst":

When foreign businessmen began to return to China following the launch of Deng Xiaoping's open-door policy, they confronted a very difficult business environment, and a very different one from today.

China had suffered the excesses of the "cultural revolution" and lost many of its most capable citizens. Its legal and business framework was in tatters, and the ability of the state, in all its aspects, was severely depleted.

Into this environment strode enthusiastic businessmen, only to find themselves beached in interminable negotiations with people who seemed not to understand one whit of what they were trying to do.

To negotiate a single clause in a contract took months in those years. China was not being difficult or intractable. It was being prudent.

Ten years of wanton destruction had taken its toll; the comeback would be slow.

McGregor sees today's China business as very different:

Today, a contract in China can be negotiated in a single sitting. The debate focuses around specific commercial variables such as price, delivery dates, or quantities.

And when there is a hiccup, it is frequently caused by a new clause within which a new concept lies and needs to be explicated.

He is right.  Business has evolved in China such that contracts in many arenas have become pretty standard.  For example, my firm has a Chinese language non disclosure agreement (never used in China), we instantly know to become suspicious of that Chinese business.  The same is true for the boilerplate portion of our Chinese language original equipment (OEM) agreements. 

From time to time, however, our American or European clients want us to put a provision in one of these contracts we know is not typical for Chinese business and we pretty much know will not be accepted. Our job as lawyers at that point is to tell our client we can put in their requested provision, such a provision will (or maybe will not be) enforceable under Chinese law, but there is about a 99% chance the Chinese company on the other side will reject it and our putting it in the contract will almost certainly end up costing everyone extra time and money and may even damage the relationship between the two companies.  I suspect it is these sorts of "new clauses" to which McGregor is referring.

McGregor then explains how business is done in China these days, which is really no different from how business is done in the West:

Sound commercial practice, prudent negotiation, careful steps leading to an agreement that both sides understand and can live with - these are steps to business in today's China.

McGregor concludes his piece with some basic, yet excellent advice:

Next time you are frustrated because "they" are acting in a manner that you can't fathom, look for the piece that you don't understand.

If the negotiation is getting prickly and it's not just about ordinary commercial terms, then look for that which is causing the other side difficulty, and ask yourself why.

The etiquette of better business is the practice of mentally swapping sides, changing places across the table, then looking for the common ground that brought you both there in the first place.

It should be added, however, that there are "businesses," in China, usually state owned entities (SOEs), that do not always operate as we expect businesses to operate.  The paramount goal of these businesses is not always to make a profit and when you find yourself dealing with such a company, you must figure out its goals in seeking to do a deal with you. Does it want to do the deal just so it can say it has done a deal with a foreign company?   Does it want to do the deal so as to avoid having to lay off another 100 of its workers?  What other than profits is driving it?

McGregor is dead on.