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How To Handle Chinese Negotiating Tactics. Part Two.

Posted in China Business

This is Part Two of what is going to be a three part series on Chinese negotiating techniques. Part One can be found here. This series is intended to better equip you in how to handle Chinese negotiating tactics.

Following on my earlier post on Chinese negotiating techniques, in this post I will discuss three additional and common techniques used by Chinese companies to drive foreigners mad during the contract negotiation process. In Part Three, and the final part of this series, I will discuss two more common negotiating techniques employed by Chinese companies.

Before I start, consider why these issues are important. I describe below a set of negotiating techniques that are fundamentally unfair. They typify what we would call bad faith negotiation. Chinese companies have been using these techniques since the 80′s.

In the old days, they justified these tricks and traps by the fact that they were a poor, inexperienced, developing country that needed to defend itself against the superior power and experience of developed country negotiators. Times have changed. China is now the second largest economy in the world. Many predict that by 2020 China will be the largest economy in the world.

In this situation, there are two stark choices presented to world business people. The first is that Chinese companies will be held up to the highest standards of conduct expected of all international companies. This means that hard negotiation is accepted, but that bad faith negotiation is not. The second is that non-Chinese companies will accept being pulled down to the Chinese standard of bad faith negotiation.

My own view is that the first alternative is better. However, to achieve the first alternative, foreign companies must first understand how Chinese companies negotiate and then they must not tolerate bad faith negotiating techniques. However, in my experience, in their eagerness to make the deal, foreign companies seem more likely to follow the second alternative. In that case, this discussion will at least serve to make clear what is happening during that unfortunate process.

Here are three important Chinese negotiating techniques that everyone should learn to recognize (two more will follow in Part Three of this series):

1. Death by a thousand cuts.

The Chinese company is presented with a carefully drafted written contract. The Chinese company responds with a reasonable number of objections to the contract language or to the contract terms. It seems odd to the foreign party because the list seems random. The parties negotiate the issues and reach solutions. The foreign side naturally assumes that the negotiation process is complete and expects the next step will be to move on to execution and implementation of the contract.

The actual result instead is that the Chinese party provides a new set of randomly selected objections and requests for changes. The foreign side again negotiates, reaches a resolution and expects execution and implementation. Instead, the Chinese side returns with a new list of issues. This time, however, the list of issues includes changes and revisions to matters that were already decided in previous rounds of negotiation. Often, these requests are hidden among other trivial matters in the hope that the foreign side will either fail to notice or will concede this time due to a change in negotiators or simply out of fatigue.

In cases where the Chinese side has been forced to concede on important matters, the death by a thousand cuts round of demands from the Chinese side will be extended by the Chinese side indefinitely. That is, the Chinese side will not stop until they get what they wanted at the beginning.

This technique provides several unfair benefits to the Chinese side. In negotiating the initial set of objections from the Chinese side, the foreign side will often make concessions that weaken their position. This was done as part of the normal negotiating give and take and was done on the assumption that both sides have made concessions to make the deal. However, when the Chinese side comes back with new demands, they have already extracted concessions from the foreign side and are now seeking additional concessions.

The plan of the Chinese company is to simply wear down the foreign side so that it will finally concede on important points merely to get the deal done and move on. This is very dangerous for the foreign side and is a result that must be strongly resisted. Note that the Chinese negotiators are often very clever at mixing important issues together with trivial issues and at hiding important changes with seemingly minor changes in wording. Fatigue and changing negotiation staff from the foreign side will often allow these matters to slip through at the very end of the negotiation process.

The foreign negotiator must make sure to avoid death by a thousand cuts. The way to do this is to be very strict with the Chinese side. The Chinese side must be told very clearly: you have only one chance to comment, so make sure all your comments and objections are included in your first communication. Later comments will be ignored. Of course, the Chinese side will ignore this rule and will still come up with additional comments even after having been told that they will be ignored. The only way to deal with this is to live up to the commitment. Tell the Chinese side that the contract is now “take it or leave it.” The problem with this is that as often as not the Chinese side will decide to “leave it.” That is, the Chinese side will abandon a deal that would be good for both sides just because it cannot tolerate not forcing the last remaining concession down the throats of the foreign side of the deal. In this setting, the foreign side has to be the party that does a rational analysis. Often, the final resolution can be achieved if the foreign side concedes on several minor issues, giving the Chinese side the impression that it won the battle.

2. What if gravity stops?

Most already know that Chinese companies are uncomfortable with well-written complete contracts that tie them down on most or all key issues. Chinese companies generally prefer vague contractual commitments that allow for constant re-negotiating and clarifying of points as the transaction progresses. Of course, this is exactly what the foreign side seeks to prevent in negotiating a written contract.

This basic attitude by Chinese companies often produces an odd result when a Chinese company is forced to deal with a clear written contract. In response to clarity, the Chinese company often will demand “hyper-clarity.” Since Chinese companies inhabit a world where good faith negotiation and commercially reasonable contract interpretation is unknown, they will insist that every contract provision be specified in minute detail. Though this can be tolerated, in extreme cases they will move on and demand a provision for every possible far-fetched and unreasonable circumstance that could affect the contract situation.

At the extreme, they will start coming up with scenarios like: “What if gravity stops and all workers in the factory are levitated exactly three feet from the ground, making it impossible to walk around the factory floor? What do we do then?” If you provide a solution, they will then come back and say: “OK, now what happens if they are levitated exactly four feet from the ground.” This then goes on in an endless sequence, much like death with a thousand cuts. In other cases, they will interpret a perfectly reasonable and common boilerplate contract provision in a way that assumes that the foreign party intends to act in a bad faith and unreasonable manner to catch the Chinese side in some form of drafting trick.

The thing that makes this technique nearly impossible to counter is that the Chinese side will never propose a solution to any of the fanciful problems they raise. Normally, they will simply raise the issue without a solution. That is, they will simply provide a list of “what if” statements. More problematically, they will sometimes propose an obviously bad-faith and commercially unreasonable “solution” on the assumption that the foreign proposed “screw job” can only be countered by an equally malicious Chinese screw job.

No contract can be negotiated under these circumstances. When a foreign party senses the start of the “what if” trend in negotiation, the foreign party must step in very forcefully to stop it. It is dangerous even to entertain the first round of “what if” questions and proposals, because discussion of the first only encourages the Chinese side to think of more progressively far fetched scenarios. Since this kind of negotiation is by definition an exercise in bad faith, the only thing the foreign side can do is to refuse to participate. You have to say: “If you think that is our intention, and if you think a court would enforce that kind of  bizarre interpretation of our perfectly standard language, then there is clearly no basis for us to move forward on this contract.” If the Chinese will not come back to reality, you should pack your bags and go home. I can assure you that things will not get better over time.

3. The headless horseman.

Several of our readers have commented on their frustration with the “headless horseman” negotiating technique. This technique is used all over Asia, not just in China. This technique is used in face-to-face negotiations conducted in China. At great trouble and expense, the foreign side sends a negotiating team to China. Usually, preliminary negotiations have been completed and the plan is to finalize the deal in a final, conclusive negotiating session.

During the negotiation, the Chinese side then announces that none of their negotiators have the authority to make binding commitments for the Chinese side. At the end of each day of negotiation, the Chinese negotiators must return to the Chinese company and must request permission from their “boss” on whether or not any decision on any major point is acceptable. This is often a shock to the foreign negotiators, since their team has the authority to make binding decisions on the part of the foreign company. For the foreign negotiating team, it makes no sense to negotiate with people who cannot make decisions.

This headless horseman negotiating is not just a reflection of the poor way in which Chinese companies are managed. Chinese companies use this technique to gain a negotiating advantage against the foreign side. In each round of negotiation, the foreign side will make concessions in response to corresponding concessions from the Chinese side. This is done as part of a balancing of risks and analysis characterizing face-to-face negotiation. The Chinese side then takes everything back to the office and carefully reviews the day’s results in the calm and privacy of their office. Often, there is no discussion with the “boss.” Rather, the negotiating team conducts its own careful review and then comes back the next day with a revised response.

The essence of the approach is that the foreign side does not get a chance to take back their own agreements. Only the Chinese side has this opportunity, using the excuse that “the boss would not agree.” This is just a form of cheating, in the same way that consulting a chess computer between moves would be considered cheating in a live chess tournament. Either the negotiations are live or they are not. It is not consistent with normal commercial practice to make one party negotiate “live” while the other party has the opportunity to analyze and then pick and choose.

Headless horseman negotiation is a form of bad faith and should not be tolerated by the foreign party. Since this technique is so common in China, the foreign party should confirm the situation before even considering face-to-face negotiation in China. If the Chinese side is going to use the headless horseman technique, the foreign side has two choices. It can send a work group to China that is also not qualified to make any binding decisions. The two work groups can then seek to develop a common program, subject to review by both companie’ senior management at some later date. Alternatively, if the Chinese side insists on binding negotiations, then the foreign side must insist that it will not participate unless the Chinese negotiating team contains at least one person who can make on the spot binding decisions on behalf of the Chinese company. If the Chinese company will not agree, do not come to China. If the Chinese side agrees and then changes the rules during the negotiation, terminate the negotiation, pack your bags and take the next plane out of China, or at least take the next train to Hong Kong.

  • Nate

    Here’s another scenerio to add, though I don’t hve a name for it: My company was discussing the terms of an agreement with another company for their purchase of our services. During the meeting, two women came in and made some fairly outrageous demands regarding bring our price down by over 70% claiming that the quality was not as good as other options, though we’d already clearly demonstrated that it was. After they moaned and complained about how expensive we were, they got up and left without even giving me and my colleagues business cards. The people in the meeting still took issue with the price but not to such an extreme.

    We can’t be certain but we suspect the only reason they came in was to try and trip us up into mentally lowering our expectations on the price we could get from them. Perhaps we should call this “Bad Cop Very Bad Cop” negotiating technique.

  • Harland

    From this, it seems like nobody can do any business all in China, if the only proper response is “take it or leave it”.

  • Enriquo

    Yup, good to leave China, time to head for Mexico. When’s “MexicoLawBlog” happening? Or even BrazilLawBlog? Tell you what we need it! Ain’t nuthing but hurt in the PRC happening, just as the main man Dan here said. Romney get in thaar!!!
    He gets in China gonna gone down man. Fuggeddabutitt!!!

  • Volker Müller

    I love the “headless horseman”.
    “Boss, I like to do overwork, but my wife tells me I have to go home immediately”
    “Boss, I would like to accompany you for a drink, but my doctor does not allow me to drink alcohol”
    “Boss, I really would like to go to Afghanistan on business trip, by my religion forbids me to do so”.

    I think children in kindergarten learn this tactics, an it is not very China specific.

    Except that, I had so many negotiations with companies around the word, I don’t see any proof that the rate of bad faith negotiations in China is higher than in other countries.

  • nathan

    Interesting perspectives.

    When negotiating in China you definitely have to have a ‘walk-away’ point fixed in your head. Even if it gets no-where near that point, just having it thought out in your mind will make you a more relaxed and better negotiator.