This is the first in an eventual series of posts I will do on the business and legal issues related to foreign companies selling high value equipment to Chinese companies. The behavior of Chinese companies in this area is quite uniform, and it is therefore possible for me to present a uniform approach to sales into China. Before moving to a detailed analysis, it will be best to step back and consider how Chinese companies view the process. Once the fundamental viewpoint of the Chinese side is understood, it is then much easier to determine how to craft an effective sales strategy for China.
Chinese companies purchased a fair amount of advanced equipment from foreign companies in the 90s. But these purchases slowed considerably as Chinese companies shifted their focus to manufacturing for the export market. However, these export oriented Chinese companies have recently started showing a renewed interest in purchasing advanced equipment from foreign manufacturers. That China is now Germany’s largest trading partner is good proof of this.
The reason Chinese companies are buying more advanced equipment from overseas is clear to anyone who visits Chinese factories. The simple truth is that much of the production equipment in these factories is old technology nearing the end of its useful life. The Chinese businesses that have made China the factory of the world have pushed their manpower and outdated tools to the limit and for them to continue to compete in the world manufacturing market, technical upgrades are required. Chinese companies are mostly unable to innovate in this area on their own; so they are reluctantly making purchases from foreign entities.
Though the world has greatly changed since the 90s, the attitude of Chinese companies towards the purchase of foreign equipment has not. There are five basic beliefs that drove Chinese advanced equipment purchases back when I was working on them in the 1990s and those same five basic beliefs drive these purchases today. Once these beliefs are understood, Chinese behavior on these equipment transactions becomes easy to understand. Once you understand the basis for the behavior of your Chinese counterpart on these deals, you can design a program that can be successful in the Chinese market.
In entering into a sales agreement with a Chinese factory interested in buying your high value equipment, you should understand that the Chinese factory owner almost certainly holds the following five fundamental beliefs that will drive its behavior in the sale process:
1. Your price is unfairly high. The important thing to know is that the Chinese side believes your price is both too high and fundamentally unfair. The Chinese side views this as the legacy of foreign imperialism, designed to keep the Chinese down, always under the thumb of the foreign oppressor. This attitude is supported by the general ideology of the PRC government. Under this basic belief, the Chinese factory owner feels morally justified in working to avoid paying you the full price for the equipment.
To achieve this, the basic strategy of the Chinese side will be the following:
a. Insist on paying in installments, then not paying the last installment.
b. Insist on a major discount, in the range of 30% to 40%. This then becomes the new base price for the equipment.
c. After paying the discounted price for the first two units, insist on an additional discount for future purchases.
2. Training is not necessary. Any requirement for training the Chinese side in how to use your equipment is just another way for you to unfairly extract more money from the Chinese side. It is also a way to keep the Chinese side down by showing that the Chinese have something to learn from foreigners. The Chinese believe that operation of the equipment is governed by a simple magic pill. Foreign companies that insist on a training program are withholding access to the magic pill.
3. Proper equipment set-up is not necessary. Your requirement that the Chinese side retain you for proper equipment set-up is a waste of time and designed to shift blame for operational failure onto the Chinese side. The Chinese side believes the equipment should “just work.” For this reason, elaborate site set up and pre-operations testing should not be required. Just turn the key and go.
4. After sale support and maintenance is not required. Requirements from the foreign equipment supplier for such after-sale support is designed to do two things: unfairly extract more money from the Chinese side and keep the Chinese side employees ignorant about the true nature of how the equipment operates. That is, you are unfairly hiding the magic pill from them. In addition, the equipment should “just work,” with no need for after sale maintenance or support. Your requiring a service contract or related after-sale support is either your admitting that your equipment is fundamentally defective or your trying to unfairly milk more money from the Chinese side.
5. Your attempts to protect your IP is foreign oppression. Intellectual property protection that prevents the Chinese side from copying your equipment is just another form of foreign oppression. The Chinese side does not believe the design of your equipment is the result of years of hard work and R&D and it wants to be able to copy it so that it can be manufactured in China at a “fair” price.
This then means the Chinese side’s standard strategy will be to purchase as few units as possible and then use its initial purchase(s) to extract the “magic formula.” The strategy is to abandon future purchases and have clones of your equipment manufactured in China.
Obviously not all Chinese companies subscribe to all five of these beliefs and some Chinese companies do not subscribe to any of them. But most do and I know this from what they have told me (in Chinese), from what I have overheard (in Chinese) and from what I have read (in Chinese). I mention all this because foreign companies find this all hard to believe and even when they do believe it, they find it hard to truly internalize and adjust their selling behavior accordingly. The typical Chinese factory owner will negotiate and implement its purchases of advanced foreign equipment based on these five beliefs. Many foreign suppliers, when faced with the resulting behavior, will conclude that the Chinese are operating in bad faith. However, to deal with the Chinese buyers, the first step is to understand that they believe their approach is fair. They are simply working against the unfair advantage of the foreign seller by making a more level playing field.
The important thing from the standpoint of the foreign seller is to recognize the following:
- These basic beliefs are natural and will not be changed.
- Since these basic beliefs are pretty much universal among Chinese companies, it is easy to predict how the Chinese buyer will behave at every critical point in the sales process.
- Since the approach of the Chinese side can rarely if ever be changed, foreign companies that want to sell their high value equipment to China should design their sales programs based on what the Chinese side will do, with contracts that protect the foreign seller from the negative consequences of near certain Chinese company actions.
In my next post, I will outline a basic program for achieving this.