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How To Handle Chinese Negotiating Tactics

Posted in Legal News

We have been drafting an increasing number of contracts for foreign companies licensing their concept or technology for use in China. In the old days, this type of licensing was primarily in the industrial sector. These days, most of our work has been on licensing agreements in the services sector in China. Much of this licensing is for operations in China that are prohibited from direct participation by foreign companies, such as in publishing, media, telecom, insurance and finance. Most of these foreign companies are choosing to license, rather than to participate in a China Joint Venture.  This post describes the negotiating tactics I so often see from the Chinese side and sets forth how foreign companies can counter those tactics.

The Chinese government is internally conflicted on how to treat this new form of licensing. In industrial sector licensing, the Chinese government is eager for the technology transfer to occur. The same is not true in the service sector. On the one hand, the Chinese government formally welcomes the transfer of Western expertise in the service sector. On the other hand, the Chinese government fears that U.S. participation in China’s service sector will result in unacceptable control of the Chinese system. As always, the Chinese government is uncomfortable with the introduction of Western intellectual concepts into China.

This ambivalence is mirrored by many of the potential licensees that we deal with in the service sector. Industrial licensees bargain hard, but the bargaining is similar to any commercial negotiation. In the service sector, we are finding that the Chinese side works to strike a much harder deal. This often surprises our clients, since they expect the service side to be softer than the industrial.

As part of this process, in service sector licensing contracts we are starting to see the Chinese side dust off negotiating tactics that were common in the 80′s and 90′s when the Chinese were negotiating their famously dysfunctional joint venture agreements.  In negotiating service sector licensing agreements with Chinese companies, we are seeing the following tactics from the Chinese side:

  • The most common tactic is for the Chinese company to seek to wear the foreign side down with endless issues. This tactic actually has two variants. In the first variant, the Chinese side raises a series of issues. As these issues are resolved, the Chinese side then raises a series of unrelated new issues. The list of issues is endless and the process never stops. The second variant is for the Chinese side to make a several unreasonable demands and then refuse to address the concerns of the foreign company on the other side. As in the first variant, the discussions proceed with no attempt at all by the Chinese side even to pretend to address the concerns of the other side. All of this is designed to simply wear down the foreign side in the hopes that the other side will simply concede. When the other side concedes, the Chinese side then inserts provisions in the agreement that are beneficial to the Chinese side, under the assumption that the foreign side is simply too tired to object. The success of this strategy rests on the negotiators on the foreign side being busy people with a lot to do, while the negotiators on the Chinese side are functionaries who have no other job but to involve themselves in the endless negotiation.
  • My favorite tactic is the artificial deadline. It is my favorite because it is such an obvious manipulation of the foreign side and yet it seems to work extremely well. The tactic works like this. At the very beginning of the negotiating process, the Chinese side sets a fixed date for executing the contract. It then sets up a public signing ceremony on that date, 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 can reach agreement on the contract. The Chinese side then ensures that no agreement is reached. This results in panic on the foreign side, since failure to get an agreement that the bosses will sign is seen as a loss of face. The Chinese side then uses this concern to extract concessions from the already exhausted foreign side negotiator.  This tactic also has two variants. The first variant is the crude approach. The Chinese side simply refuses to concede on key points under the quite reasonable assumption that the foreign side will crumble when faced with the fixed signing deadline. The second variant is much more subtle. In this variant, the Chinese side initially concedes on key points, while still holding its ground on numerous minor points, consistent with the “wear them down” tactic. 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. The Chinese side usually justifies this by refering to the demand of a “government regulator” or an outside source such as a bank or insurance company. The claim is “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.
  • The final technique is to come back to the key issues after the lawyers have left the room. Again, though this is an obvious technique, it seems to work very well with service businesses. This tactic involves the Chinese side signing a contract, conceding on the key issues. By virtue of the contract having been signed, the key negotiators, China advisors and most importantly the lawyers, are off working on other projects. The Chinese side then waits a reasonable time and works to get the project started. Once the project is started, the foreign side is then invested in the project. Since service projects involve people, rather than machines or product, this means certain key persons on the foreign side are now fully committed to the project. Once this happens, the Chinese side then comes to the committed parties on the foreign side and announces that certain key provisions of the contract must be changed. The Chinese side usually claims this change is mandated by law, government regulators or banks and insurance companies. The only people left at this point are the “committed parties” with a strong incentive to allow for the change so the project can proceed. Often, these people do not even fully understand the implications of the change the Chinese side is now demanding. The foreign side then presents the change to busy upper level 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 and so Chinese companies do not hesitate to employ them regularly (pretty much always).  There is one simple antidote for each tactic:

  1. If the Chinese side uses the “wear ‘em down technique,” the foreign side should 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.
  2. 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. If that takes forever, then it takes forever. 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.
  3. Make it clear to 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.

Negotiating a good licensing agreement with Chinese companies is difficult and time consuming, but not so much if you know how to handle Chinese negotiating tactics.  There is no reason to make the situation worse by falling for the simple negotiation tactics discussed above.

  • Jeanne DeMund

    Shades of the 1980′s!!!  I’m strongly reminded of my “bible” at the time…and upon googling, find that it is now available in its entirety, on line.  
    http://www.rand.org/pubs/reports/2007/R2837.pdf 
       
    If you want to get that feeling about politics, bad government and corruption, read the recently re-issued “Two Kinds of Time” by Graham Peck.  But be ready to get depressed about how much China hasn’t changed.  http://www.washington.edu/uwpress/search/books/PECTWO.html

     Plus ca change, plus c’est la meme chose. 

  • Chredwa

    Best advise I was given, if you would  not do the deal in New York (London, Sydney, etc) dont do it in Beijing. This means don’t fall for the “China is different” excuse that they like to use as a tactic. 

  • Hua Qiao

    Absolutely.  Great job.  I’ve seen all 3.  The overall theme is if they ever think you are hungrier for a deal than they are, you’ve lost already.  Manage your mother ship’s expectations.  Never ever be put in a position that you let on that you have to cut a deal. 

    One tactic I would add is the old “gee I would like to agree to that but my boss, board, regulator, tax revenue officer, auditor, police, wife won’t let me.”  There’s always a hidden bad cop that will be referred to as to why they can’t agree to something.  Unfortunately, since China’s rules and regs are so ambiguous and interpreted differently and in some cases, ignored across jurisdictions, it is frequently impossible to know if their impediment is legitimate or not.  That’s why it is good to hire Steve!

  • Phil H

    Not allowing access to the decision-maker. Every meeting the functionaries come in, listen to your arguments, and say, we can’t do anything about those items, we’ll get back to you.

  • Tsenam21

     If the Chinese are so cunning as fox, then how come the western countries are such a fool like donkey.

  • Nathan

    “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.”

    That is a very important point to remember.

    Here’s another one:

    Negotiation is a lot about framing. The frame is the perceptual context in which the negotiations take place. Basically who has the upper hand. This context can be real or it can be manufactured.

    It doesn’t have to be, but at least in China it is a powerful dynamic. Even when you can’t be in the driver’s seat you can exert very heavy influence by maintaining a willingness to walk away if things are going pear-shaped. Often times that is enough to ensure they won’t. You should always, always, always have a walk-away point fixed in your head. You’ll be a much calmer, focused and confidant negotiator.

    If you don’t know where to fix your walk-away point start with something easy and move upwards from there, eg.: ‘would I sell my child into slavery to get this deal?’ (If the answer is ‘yes’, you’re about to get steam-rolled in the boardroom).

    This applies to haggling for a taxi or a t-shirt as much as it does negotiating a supplier contract.

    One technique that I always apply is to just take my time. Even on a simple question such as coffee or tea I might take a deep breath and mull it over for a moment before making a decision. It’s not to patronize or to be difficult, but it makes a point that you can’t be rushed.

    Also, change tack. Change the conversation. Change directions. That will give you very strong clues as to what they other party’s priorities are. Believe me, they’ll do it to you too.

  • Cynical Observer

    Have seen a variant on the deadline issue as an employee. In this case, there IS a real deadline, which the company can ignore at basically no risk to itself (but the employee can’t), putting the worker in a tough situation.

    I worked at a place where they would often let foreign employees’ contracts AND visas expire, even though contracts had a date, clearly stated, by which a new contract was supposed to be agreed before the old one ended. The contract also states that once your visa with them has expired, your visa status is your issue (words to that effect), I guess that is pretty standard. The company has had a large foreign staff for many years, so visa/contract renewal is not a new issue that nobody knows how to handle.

    I saw it occur despite employees’ repeated reminders to the HR staff, who were often in the building as the days ticked away, and I saw more than one person get very upset and worried about this, in one case literally worrying whether they would be able to report to work the next day or would have to go to the airport the next morning.

    The explanation was always that someone had “forgotten” was “on leave” or “busy” etc. and the employee shouldn’t worry, because the company had “good relations” with the visa folks and would sort it out once the new contract was signed.

    Which did indeed occur when new contracts were signed … but …

    Once may just be a genuine oversight or disorganization. When it happens repeatedly, I think there’s a rather less benign explanation. It leaves the foreigner at a disadvantage.

    If your visa expires without an application for a new one, you are an overstayer. What proof do you have, that your employer has been dragging their feet on the paperwork? How do you know they won’t just say that you rejected a new contract?

    If the company is going to sort it out, no problem. But if for any reason discussions on a new contract don’t reach an agreement acceptable to you, what actually are you going to do? They don’t say it directly, but at this point, you are under pressure to reach an agreement on their terms.

  • Stranded in China

    I refer to your antidote to tactic (3) and we have personally been in situation where the other party was in breached. What we found out is there’s no obvious route to take legal action and action against large SOE is futile in Chinese context. I thought this was not addressed in the above blog.