China Law Blog

Andrew Hupert over at the Chinese Negotiation blog did an interesting and helpful post on negotiating strategy in China in a post entitled, US-China Variation of Prisoners Dilemma -- The Factory Game. In his post, Andrew, who teaches at New York University's (NYU) Shanghai campus, discusses in detail the experiment he did with his students and the results of that experiment.

More importantly, he then sets out five good lessons American businesses can learn from relating to their business negotiations with Chinese companies:

What lessons can US negotiators in China draw from this exercise?

1 – Set the stage for trust, or you will poison the potential relationship from the start.
Test orders are an American concept while systematically building relationships is Chinese. Americans assume that the relationship will grow from successful transactions. Chinese assume that successful transactions will grow from relationships. The result is that Americans tend to under-promise (“we’ll have to see how well you do on the first order before we discuss raising the volume”) while the Chinese over-promise (“oh yeah, we can definitely do what you want at the right price and quality level” – even if they don’t know what they are doing – yet). Both behaviors tend to undermine trust in the early stages of a US-China business relationship.

2 – Penalties and missed bonuses are often interpreted by Chinese actors as ‘cheating’ behavior – and a betrayal of trust.
Americans often employ the ‘carrot and stick’ technique of using potential bonus payments and penalties to enforce positive behavior. Unfortunately, Chinese counter-parties often view this as dishonest and manipulative. It is human nature to count the bonus and ignore the penalty during the pre-execution phase of the deal. Once trust is lost, it is very difficult to restore. A missed bonus – regardless of how justified the American side feels it to be – often triggers negative behavior from the Chinese side.

3 – Guanxi-building activities like dinners, tours and meetings are the Chinese method of vetting partners.
You should be doing the same. Use your banquet time to talk about how you and your counter-party define success. What are your goals? How can you work together? American negotiators are often shocked at how much time the Chinese waste on relationship building. Chinese negotiators are equally shocked at how much opportunity the Americans waste by not building proper relationships.

4 – Overly picky contract terms tend to be counterproductive.
Your corporate lawyer thinks you can write-out the risk of overseas deals, but in China this can be counter-productive. Detailed contracts with penalties and financial stipulations can make the Chinese side feel that you are not a suitable long term partner. Contract terms that seem normal in the US can trigger the “cheat” switch in China — since they think you are already pulling fancy tricks.

5 – Relationships are not organic in China.
Americans tend to feel that close relationships are the product of positive experience and time. Chinese negotiators are a bit more transactional, and expect partners to ‘work at the relationship’ in the early stages. Don’t blow an opportunity by paying lip-service to your Chinese counter-party. When they say, “we want to have a good relationship” it isn’t necessarily a pro-form business platitude. Use the opportunity to define slippery terms like ‘trust’, ‘success’ and ‘long-term’. Assumptions can be lethal in a cross-cultural negotiation.

My experience concurs with all these suggestions and I am going to speak to Andrew's Nos 2 and 4 because those relate most directly to my role as lawyer on foreign-Chinese transactions. My experience is contractual bonuses are frequently misunderstood and oftentimes do create unexpected problems. For whatever reason, Chinese companies frequently seem to be of the view that if a contract provides for a bonus for achieving a particular goal, getting close to that particular goal warrants the bonus, or at least a strong request that it be paid. I also agree with Andrew on the penalty front, but with a pretty big caveat. Our experience has been that they can be quite effective, not so much in their enforcement, but in their keeping the Chinese factory or counter-party's feet to the fire and, when things go wrong, as a leverage piece to force a quick discussion of how things will be resolved. In other words, their strength lies not so much in their enforcement, but in their availability as a leverage tool to get things done.

I also agree with Andrew's view on what he calls "overly picky contract terms." I have always had the sense that the typical Chinese company views the length of the contract as being inversely proportional to the strength of the relationship and though it is important that the contract have all of the critical terms, this is a big incentive to keep it as short as possible. One other thing Andrew hints at here is that Chinese companies typically do not interpret contracts as technically as do Americans. A great example of that is joint venture contracts. If an American holds 51% of a venture, it assumes it pretty much controls everything, whereas the Chinese company might well view that split as simply giving the American the right to 2% more of the profits.

Let's hear your China negotiating stories. What are you seeing out there?