The China Economic Review just published a piece on China business relationships by Andrew Hupert, a professor of negotiation at NYU in Shanghai. The article is entitled, “Trouble in commercial paradise,” and its thesis is that Chinese companies usually view their relationships with Western companies as short-term.
Hupert starts out by talking of how even the “big boys” have recently been complaining about being tossed aside by China:
Long term relationships are never easy, especially when one of the partners is a Chinese SOE. Until recently, many European and a few of the more patient & deep-pocketed US firms took upon themselves the role of a corporate Dr. Phil, offering easy, smug advice on how to woo and win the affection of a Chinese partner. But now even the happiest of Western partners – like GE, Siemens and BASF – are publically complaining that they are not feeling very significant in China in any more. If there’s trouble in commercial paradise for the most eligible suitors, where does that leave the newcomers?
Hupert goes on to seek to reconcile the apparent “paradox” between the insistence that “Chinese dealmakers have a long-range, relationship-oriented view of business” and their consistently engaging in actions that bely this. According to Hupert, Chinese companies do think long term, but that does not mean that “they are looking to settle down with any long-term partner in general – and a Western one in particular.” Be prepared for your Chinese partner to bolt when a more attractive partner comes along:
Many Euro and American management teams that have been involved with a Chinese supplier for more than 10 months tend to congratulate themselves on achieving a win-win, guanxi relationship but the reality is that they are actually engaged in a series of one-off deals with the same people. Once a better opportunity presents itself, the Chinese side considers itself a free agent.
* * * *
Western firms that are getting a little more “mature” — with a bulging pension liability and a thinning customer base – like the idea of settling down with the sexy young Asian firm that still has its best demographics ahead of it. Sure, the match may make sense on paper right now, but do the local Chinese targets share the same long-term hopes and dreams? The ugly truth is that established Mainland firms – the kinds with government support and resources of their own – tend to see a Western brand as a short-term partner, a medium-term customer and a long-term competitor.
Sure, the Westerners can be fun for a while. They have interesting technology, a new way of doing things and, oh – that intellectual property can be hot stuff. But once the assets have been transferred and the IP has been digested – well, that Western firm seems more appropriate as a customer, client or even a distributor. And in the longer term – say five or 10 years – the math changes completely. Now that partner is looking like less and less of a source of assets and growth and more of a liability – or even a competitor on the global stage. The Chinese firm knows that it is quickly outgrowing the maturing Western counter-party.
Sorry to say, but what Hupert describes is exactly what I have seen happen time and time again. Call me cynical, but every joint venture agreement my firm writes is written based on the assumption that we will be dealing with it again in a few years when the Chinese company is seeking to push our client out. It is a shame that my firm has garnered a reputation for not liking joint ventures because we actually love joint ventures for very selfish reasons. We love them because they make us a lot of money in the drafting of the contract and then they make us even more money when they go bad, and they nearly always do.
This short term tendency also frequently manifests itself in China licensing deals, of which I wrote previously:
My firm has been involved in countless IP licensing agreements over the years where foreign companies have licensed their IP (be it a patent, trademark or copyright) to Chinese companies.
One of the things we cannot help but noticing with these agreements is the tendency of the Chinese company to stop paying the licensing fee as the licensing contract starts nearing its end date. By then, the Chinese company has made good use of the IP and the Western company has made a good chunk of money from the agreement.
I have always seen this as simply a cost-benefit analysis by the Chinese company. It has paid the Western company, let’s say, USD $3 million for the IP and it simply does not believe the Western company will sue it in China over the remaining $200,000 due. So it just stops paying. At that point, we typically send a demand letter to the Chinese company, reminding it of its obligations, reminding it of exactly how the contract favors us if we sue, and telling it that it had better pay the $200,000 immediately or we will sue.
At that point the negotiations begin and a settlement usually follows.
Because of the above, our advice to our clients who license their IP to China is three-fold:
1. Base your pricing on the assumption that you will not get full payment on your final payments;
2. Do whatever you can to make sure the Chinese company still needs you at the end of the deal so that the Chinese company has no choice but to keep paying you;
3. Put in some killer provisions in your contract that deal with a situation where the Chinese company stops paying at the end.
And for more on how to do a joint venture with China (or how not to), check out the following:
- China’s Joint Venture Jeopardy (this post is on an article I wrote for the Wall Street Journal on the same subject.)
You might also want to listen to an AmCham podcast I did at the end of last year on the “return of the China joint venture.“