Following on my previous two posts on Chinese negotiating techniques, in this post I will discuss two additional and common techniques used by Chinese companies to drive foreigners mad during the contract negotiation process.
4. Never never land.
The Chinese often will justify its outrageous demands with the vacuous statement that “China is different.” It is shocking how many foreign negotiators fall for this statement and accept such terms. The problem, of course, is that China IS different from many countries. This is a trivial statement, since every country is different from every other country.
The fact is, however, that in terms of laws and regulations, China is not all that different from other countries. Chinese laws are not original. They are based for the most part on foreign models. In addition, as far as foreign investors are concerned, the content of Chinese laws is further constrained by China’s participation in the World Trade Organization (WTO), the World Intellectual Property Organization (WIPO), the Convention on the International Sale of Goods (CISG) and other international standards setting bodies and conventions.
China has worked very hard and successfully over the past decade to bring its foreign investment and business laws in line with international standards. In most cases, China’s laws hew closer to international standards than the often eccentric laws of the United States and England. Chinese laws are based on the civil law standard. What often seems to a U.S. investor as an unusual legal provision is often nothing more than the difference between the common law approach and the civil law approach to certain issues.
Whenever the Chinese side of a negotiation argues that “China is different,” I request that it provide me with a copy of the Chinese statute or regulation that imposes this difference. In over 25 years of negotiation in China, I have never once received a substantive response to this request. On occasion the Chinese side will send over a host of Chinese language documents. To date, it has always turned out that these rules and regulations have nothing to do with the issue at hand and do not impose the rule that the Chinese claim requires that their unreasonable request be accepted. We just wrapped up a negotiation where when the Chinese side did provide us with the law, it said exactly what we had been saying it said all along, just as we knew that it would.
What is “different” about China is that Chinese negotiators do not feel constrained by the rules of good faith negotiation. Thus, when a Chinese company argues that “China is different,” what they really mean is that the fair and impartial laws of China do not reflect the reality of China. The reality is that the Chinese side must take advantage of the foreign side. This means that the foreign side must accede to the unreasonable request of the Chinese side. If the foreign side does not concede to patently unreasonable terms, then no deal can be made.
It is very true in this sense that China is different. However, this is a difference that should not be tolerated by the foreign party to any contract. The response from the foreign side should be first to demand to see the law that requires the unreasonable condition. After the Chinese side fails to provide that law it will usually say something like: “well, the law does not provide for this but our government will not approve the deal unless we include this provision. The response to that statement should be that “if your government will not approve the deal, then we will not do the deal.” This should be made very clear. If the Chinese side does not back down, you should terminate the negotiation.
Let me give an example. It is common in negotiating China Joint Ventures for the Chinese side to insist that the intellectual property contributed to the JV by the foreign partner must ultimately be transferred to the Chinese JV partner. The same is true in many technology license agreements where the Chinese side will say: “sorry, but you cannot protect your IP. You must transfer everything to us at the end of the license.” This situation is obviously the opposite of what the foreign side wants from the transaction. When the foreign side resists, the Chinese side will then play the “never never land” card and state that Chinese law requires such a transfer. In fact, however, Chinese law does not make any such requirement. This is simply what the Chinese side wants out of the deal. Of course, the Chinese government supports the Chinese side, since the free transfer of technology arguably benefits China, so everyone in China is on the same side. Thus government authorities involved will usually do nothing to clarify the situation.
The foreign side will all too often accept the “China is different” justification and go forward with the deal. Later, the Chinese side will drive out the foreign JV partner or terminate the license and appropriate the technology. When that happens, the foreign side will complain about the Chinese law that mandates such a result. However, there was never such a law. It is virtually always a case where the foreign side agreed to a contractual provision that guaranteed its own eventual doom. Chinese law is not at fault. Gullibility in falling for the China is different argument is where the fault lies.
5. Revenge is a dish best served cold.
In the discussion above, I advise that the foreign side strongly resist agreeing to unreasonable Chinese demands and negotiation techniques. I advise that if the Chinese will not back down, then the foreign side should terminate the transaction and return home. My point is the obvious one that the foreign side should not enter into a bad deal or a deal that it does not understand simply because it has been manipulated by standard Chinese bad faith negotiation techniques.
In these tough negotiations, it is usually required that the foreign side just has to say “take it or leave it.” In a surprisingly large number of cases, the Chinese side will “leave it,” even in cases where this decision seems to make little economic sense. Thus, when the foreign side gives the final ultimatum, the foreign side has to be prepared for the Chinese side simply walking away from the deal.
In some cases, however, the Chinese side will back down and will accept restrictive provisions against which it has been vehemently fighting during negotiations. It will accept the challenge and it will “take it,” rather than walk away from the deal. In that case, the foreign side will congratulate itself on their negotiation skills and the fact that it “won” the negotiation.
The problem with this though is that the Chinese side oftentimes does not fully accept its concession and it will treat it as a personal challenge. It will then work to unwind the concession in some way during the life of the transaction. It will focus on taking revenge for its defeat on the contract issue. It will focus on this revenge with little regard for whether it obtains economic benefit from its actions. Even when it will actually suffer economic damage from its conduct, it may still focus on obtaining revenge for its defeat. The passage of time makes little difference. Their only concern is on obtaining revenge.
Why is this? Social researcher Ian McKay has this to say in general about people who seek revenge:
People who are more vengeful tend to be those who are motivated by power, by authority and by the desire for status. They don’t want to lose face.
This description nicely describes the average Chinese business negotiator. They treat contract concessions as a loss of face, and they will focus on getting back their “face” to the exclusion of everything else. The economics of the deal does not matter. What really matters is the balance of power and their face. This attitude is quite foreign to most foreign business people who treat contract negotiations as a purely economic issue and not as a personal matter. It is therefore very hard for foreign business negotiators to understand how this issue can impact their future business relations with a Chinese party.
The issue goes beyond face. If you discuss these matters with Chinese business people you will learn that the Chinese side views the Western approach to contract negotiation as fundamentally unfair. They see the Western insistence on certainty and clarity as fundamentally a bad faith phenomenon. For the Chinese, certainty in contract terms is justified only for a one off, single transaction, “horse trade” style sales contract. The sale of an office building or a single shipment of a commodity is an example of this type of contract.
For any contract that requires a continuing performance over time, the Chinese believe that any attempt to pin them down and impose certainty on their behavior is fundamentally unfair and contrary to reality. For the Chinese, the future is essentially uncertain and the attempt to impose certainty on this uncertain future makes no sense. Any party who insists on this must have a bad intent. Where the Chinese side agrees to such certainty, they do it under protest and they strongly feel that unequal bargaining power on the side of the foreign party has forced them into an inherently unfair transaction. Thus, they do not have moral qualms in taking their revenge by undoing the terms of this inherently unfair agreement at a later date. Their belief that they have the moral high ground fuels their need for revenge and explains why they will seek revenge even in cases where there is no economic benefit.
This feeling runs very deep in China and is difficult to deal with rationally pursuant to the typical Western company business calculation. For foreign parties, it leads to very complex assessments of negotiation strategy. Total victory is seldom useful in China. This then leaves open the question of what sort of compromise short of total victory will result in a contract that is still acceptable to the foreign party.
In my own experience, there are two viable options in dealing with the final battle over key terms. The first is to walk away from the deal. No deal is better than a bad deal, and what looks like bad deal in China will certainly turn out to be just that. Where abandoning the deal is not acceptable, then the foreign side should plan to concede on some issues that are important to the Chinese side so as to provide the Chinese side with some feeling of victory in the conclusion of the negotiation. This concession should always be balanced against an overall assessment of the benefits of the deal to the foreign side. No deal should be concluded in China that does not provide for substantial benefit to the foreign side. Close deals never work out in China. The foreign side needs a lot of room on the benefit side to overcome the constant Chinese pressure to chip away at the foreign benefits at every stage in the process of performance.
What do you think?