Doing Business in China

How to negotiate with Chinese companiesIn this series of posts I am looking at themes explored by Lucian Pye in his work Chinese Commercial Negotiating Style. Pye concludes that the way most Sino-Foreign negotiations are conducted helps the Chinese side apply its preferred strategies and tactics. My first post looked at how Chinese companies tend to control the preliminaries during what I have called the “courtship” phase. The second post considered what Pye has to say about the Chinese tendency to prefer agreements on generalities. In this third post I examine what he has to say about specific Chinese negotiating tactics.

According to Pye, Chinese negotiators tend to use the following tactics:

Open with flattery — In response to flattering remarks the foreigner feels compelled to give an enthusiastic affirmation. The foreigner is then called on to give an emphatic denial of a feigned, self-deprecating remark. This puts the foreigner on the back foot from the outset.

Operate on two levels — There is the manifest level of bargaining about the concrete and there is also the latent level at which attempts are made to strike emotional bargains based on dependency. Chinese negotiators seek relations in which the foreigner will feel solicitous toward China, thus implicitly becoming a protector and more a superior than an equal.

Focus on mutual interests — Westerners like to think of themselves as conciliators. The Chinese tend to reject the principle of compromise and prefer instead to stress mutual interests. When mutual interests have been established it is easier to ask the foreign party to bear a heavier burden without protest.

Use meetings as seminars — Negotiations are seen partly as information-gathering operations. Foreign competitors are played off against against one another to extract maximum technical intelligence from presentations. Negotiating sessions are used frequently for training purposes. The foreigner is encouraged to perform so as to impress the passive Chinese host. The obliging guest entertains in repayment for hospitality and brings “gifts of knowledge”. Put simply, Chinese companies often claim to want to do a deal with you when all they really want is to get access to your technology or know-how. I cannot stress enough how often our China lawyers see this sort of situation.

Blur the lines of authority — You can’t tell who reports to whom or where the apparent leader fits in the hierarchy of the Chinese company. Negotiating teams tend to be large but the lines of authority are diffuse and vague. Chinese negotiators are often unsure of their mandates and of the probable decisions of their superiors. They therefore tend to give inaccurate signals about the state of negotiations. Foreigners persist in trying to find a particular person who has command authority at each level. In China it cannot be assumed that power is tied to responsibility. Proof of a person’s importance often lies precisely in their being shielded from accountability.

Never say “no” — Chinese negotiators will frequently seem to be agreeing when they say something is “possible” but often this is an ambiguous way of saying “no”. They will often respond with silence to a proposal and then at a much later date suddenly return with interest.

Never telegraph their next move — Chinese negotiators don’t telegraph their next moves through displays of emotion. The level of friendliness or impersonality remains the same whether negotiations are heading for success or failure. This brings surprises. Warm and progressively friendly meetings can lead to disappointing outcomes. Chinese negotiators are quite prepared to end meetings or negotiations on a negative note. As negotiators often have little authority they often find it prudent to maintain a negative attitude. At the same time, apparently disinterested negotiators can suddenly announce that a positive agreement is possible.

Exploit Chinese members of the foreign team — Ethnic Chinese associated with the foreign team will be sought out in the belief that they are naturally sympathetic to China. Our China attorneys have also seen many instances where an Ethnic Chinese person on the foreign side is accused of disloyalty for not siding with the Chinese side in the negotiations — always in Chinese, of course.

Use “shaming” — Chinese negotiators may be quick to point out “mistakes” in an effort to put the foreign party on the defensive. There is a deep belief that people will be shattered by the shame of their faults so there is a tendency to make an issue over trivial slip-ups and misstatements.

Make big asks — Chinese negotiators often have no hesitation in presenting what they must understand are unacceptable demands. These demands are often accompanied by a hint that they will be withdrawn in return for only modest or symbolic concessions. Extreme language is often used to obtain symbolic victories.

Stall — Chinese negotiators are masters of creative use of fatigue. They have, according to Pye, great staying power and almost no capacity for boredom. These traits keep foreigners’ hopes alive. This approach may also reflect lack of experience, bureaucratic problems or a subordinate’s fear of criticism from above. Conversely, when agreement reached it is often the Chinese who become impatient for deliveries by the foreigners. For more on this tactic, see Doing Business In China Requires Patience. Don’t Just Be Leaving On That China Jet Plane.

As I have said before, Pye never moralizes or suggests there is anything wrong with the Chinese approach. He merely points out how different it is from the typical Western approach, leaving readers to conclude that foreigners ignore or disregard Chinese negotiating tactics at their own peril. This is certainly consistent with our view that one should not rush to blame the Chinese when things go wrong.

In my final post in this series I will outline Pye’s tips for foreigners when negotiating with Chinese companies.

Use your own interpreter or don't bother.
Use your own interpreter or don’t bother.

You’ve come all the way to China to talk to a prospective business partner. Maybe it’s an investor or maybe it’s a buyer. China is a big market. And you’ve heard there’s a lot of money here too.

After you arrive in town the Chinese are so helpful. They know you can’t speak their language. They provide an interpreter because one of their people is bi-lingual. The interpreter is nice. You think the meeting is going really well. You’re told how much they want to “co-operate” with you. They want to invest in your business or buy whatever it is you’re selling. Like, right now. They just need some more detailed information about your offering. Some more documents to look at. Some more specifications. You’re asked to prepare an MOU. For some reason it needs to be signed before you fly out. For some reason this seems alright to you.

You get a bit carried away. The meeting isn’t what you think it is. There’s a lot of discussion about you but you don’t realize it isn’t the kind of thing you’d want to hear. It’s about what to do with you. You converse with the interpreter and then watch helplessly as the interpreter converses with the others on the Chinese side. Those carefully worded points you think you’re making don’t seem to be getting across. Your witticisms are falling flat. You don’t understand that it isn’t always a good sign when Chinese smile at you in meetings. You have no idea what’s going on. None at all. Worse still, maybe the leader of the Chinese side doesn’t know what’s going on either. Perhaps both of you are in the dark. The Chinese boss is so proud of the clever interpreter but they’re running their own racket. Right under the boss’s nose that helpful interpreter says all sorts of things you’ve never said. They want someone else to win the boss’s business. Someone who’ll look after them better. Don’t laugh. If you don’t believe me, take a meeting in Beijing and pretend you don’t speak Chinese. You’ll soon find out what’s really going on.

This is how it should go down — as you look your interlocutor straight in the eye he or she addresses you in Chinese from across the table. Sitting closely beside you, your own interpreter translates simultaneously sotto voce. You don’t look at your interpreter. The Chinese side can’t tell what your interpreter is saying to you. It’s just a murmur. Your rhythm is undisturbed. You’re really communicating now. You notice how careful and attentive the interpreter on the other side has suddenly become. They aren’t talking among themselves any more. You’ve just shut down all the games. Now you have a chance.

Simultaneous interpreting is a valuable service. It requires artistry beyond the mere mastery of two languages. Proper use of an interpreter is also an art. Usually, the value of the service and the art of using it are not appreciated. The result of not taking the role of an interpreter seriously is that foreigners often don’t know what’s going on. A good interpreter is invisible. They don’t initiate or hold a conversation. You don’t watch them have a long discussion in Chinese and then rely on them to give you a little summary afterwards. They do not play a central role in a meeting. They’re not one of your executives. They’re not doing the talking. You’re the presenter. Do you think the interpreters you see on the news sitting behind world leaders at big meetings get a say in things?

Should your interpreter be a native speaker or will a fluent foreigner do? Decide that one for yourself. Just know that Confucian proprieties won’t prevent a foreign interpreter from speaking frankly to someone in a position of seniority. Your foreign interpreter won’t be asked whose side they’re on right in front of you. They won’t be invited to dinner that night to discuss a few things without you around to spoil it. Or, if they are, they’ll probably interpret these little gems for you along with everything else.

If you want to do business in China right, use your own interpreter.

The eight IP questions you should be asking before you bring your business into China.
The eight IP questions you should be asking before you bring your business into China.

The below is a modification of a ten item list on the Heerlaw website. That list was geared towards Canada; this one is geared towards China.

The Heerlaw list starts out advising new companies to concern themselves “with intellectual property rights at the start of any new business.” It goes on to note that if your new business fails to respect others’ intellectual property rights, it may become liable for damages and it also could be required to rebrand or redesign its product or service.

All this holds equally true for China, where many a foreign company has sought to retain one or more of the China lawyers at my firm to pursue claims against a company in China that is “violating our trademark,” only to have us discover that our client is actually violating the trademark of the Chinese company. Why the disconnect? Because the foreign company assumed its trademark rights extended to China and based on that assumption, had failed to register its brand name or logo in China and a Chinese company had beaten them to it and now owned it. See Don’t Sleep on Your China Trademark.

The following are the eight questions foreign companies starting a business in China (or even with China) should be asking about their own intellectual propery before they start doing business in China (or even with China):

  1. Can we adopt, use and register as trademarks in China the names we want to use for our products or services in China?
  2. Is any aspect of our IP new, inventive and useful and therefore potentially patentable in China or anywhere else relevant to our business?
  3. Have we instituted procedures to keep any of our potentially patentable inventions confidential until a patent application may be filed? See China NNN Agreements — No, Don’t Do That
  4. Are there any third party patents that could prevent us from selling our services or products in China or even from manufacturing our products there or anywhere else?
  5. What aspects of our products or services are protected by copyright?
  6. Is the design of our product protectable as a design patent in China or elsewhere?
  7. Are there any third party design registrations that could prevent us from selling our product in China or .elsewhere?
  8. Do we have written agreements with our China employees and manufacturers that clearly assign IP created to us and that provide for maintaining the confidentiality of our information and our trade secrets? See The Four Keys To China Trade Secret Protection

I often “clean” my computer on Saturday and in doing so today I found an email that contained my notes from an AmCham talk I gave four or five years ago in Beijing, focusing on what it takes to conduct business in China successfully. If I recall correctly, I was on a panel with a couple of other China lawyers and we were to lead it off given two minutes to talk about the ONE thing foreign companies doing business in China should know. The below is what I wrote to myself in preparation for the event:

Best practices for doing business in China. The two minute version.
Best practices for doing business in China. The two minute version.

Make the law your friend. If you operate both legally and with an eye towards the legal ramifications of what you do, you will have greater leverage both with the Chinese companies with which you deal and with the Chinese government.

As an example, if you get bad product and you have a great contract, you almost certainly have leverage to require your Chinese supplier to remedy the problem. If you have no contract, you almost certainly lack the leverage to get your Chinese supplier to fix things.

On the government front, if you are operating legally and paying your taxes, you can and should introduce yourself to the appropriate Chinese government authorities so that they know who you are before you have any problems so that if and when you have any problems, you have people who already know you who can assist.

What would you have said if given two minutes?

We started a China Law Blog Group on Linkedin with the goal of creating a spam-free source for China networking, information and discussion. We now have nearly 8,500 members and, more importantly, a number of lively discussions.

We have had some absolutely terrific discussions, both based on the numbers (a number of the discussions have received around 100 comments and some have gone over 200) and on their substance. Our discussions have ranged from practical (such as, how do I open a China bank account or what are the best practices for a China Joint Venture or what is the most important thing to do for doing business in China) to deep think (such as, what is the future of rule of law in China? or what are the differences in how Chinese companies and French companies are run).

What also boosts the group is its diversity of membership. We have a large contingent of members within China and without. Some members are China lawyers, but the overwhelming majority are not. We have senior personnel (both China attorneys and executives) from both large and small companies and a whole host of junior personnel as well. We have students and we have professors. This mix only contributes to the high level of discussions.

I am most proud of how (at least as far as I know) no spam item has yet lasted on the site for anything even approaching 24 hours.

If you want to learn more about China law or business, if you want to discuss China law or business, or if you want to network with others doing China law or business, I suggest you check out our China Law Blog Group on Linkedin and join up. The more people in our group, the better the discussions.

We will see you there. Click here and join us.

I spoke last year at a doing business in China conference where the keynote speaker stressed the need for companies doing business with China to adjust their China business plans to China’s Five-Year Plan. If you want to know where China is going over the next five years, read its Five-Year plan, as China has and will continue to hew closely to it. If your China business plan coincides with China’s Five-Year Plan, your likelihood of success will be considerably greater than if it does not.

The other day my friend Greg Anderson, who also just happens to be one of the most knowledgeable people around on China’s auto industry and the author of the highly acclaimed book, Designated Drivers: How China Plans to Dominate the Global Auto Industry, left the following Facebook post:

If Tesla understood the purpose of China’s green car incentives, they wouldn’t be wasting time on this futile quest. It’s all about pushing Chinese automakers to develop their own proprietary green technology. Reduction of auto emissions is only secondary.

I do not know if Greg is right about Tesla in China, but I do know that I instantly saw in that small post what has happened with so many of my law firm’s environmental clients in their quest to sell into China. When we first started this blog way back in 2006, we were really gung-ho about American companies profiting off China’s proclaimed desire to clean up the environment.  We believed that our clients that possessed the best and the cheapest clean-up products and services would thrive in China, but few of them did.

We attributed their failure to thrive mostly to the various governments in China favoring local companies due to payoffs. After seeing Greg’s post, I have to think China’s technology goals might also have been a factor, cause when doing business in China, the policy matters.

What do you think?

When we first started this blog, the media was obsessed with “doing business in China stories.” Nearly every week there would be a good first person account from someone recounting what it is/was like to do business in China. I often found those pieces quite helpful as they tended to deal with on the ground specifics and I always feel like I am channelling Ronald Reagan by taking the example of one business and extrapolating it to a massive and diverse country.

For those who like such things, here is a partial list of some of those posts:

Most importantly, we always love it when someone with real on the ground China business (not China law) experience sets forth some of the same China maxims as us.

I am in a writ large mood today because I just read a very helpful doing business in China article, entitled, An Architect’s Guide to Working in China. The article provides ten tips for doing business in China and must of those tips apply to any sort of company seeking to succeed at business in China, particularly any service companies that are doing business with Chinese companies.  Here are my three favorite tips, with my comments in italics.

  • Make sure that your client is able and willing to pay for your work. Insist on being paid up-front, if possible, and never agree to do any unpaid work. A very good tip. If the Chinese company is not willing to pay you a large amount upfront, there is a very good chance you will never get that large amount ever.  
  • Many projects may have, at least initially, more to do with ‘market research’, ‘branding’, ‘image’ or ‘positioning’ and not actual design. In other words, do not let yourself get sucked into giving away so much advice that you essentially do the work for nothing.  
  • Don’t assume that as a Westerner you could somehow override and ignore Chinese planning law, Chinese building regulations or any unwritten Chinese rules and standards, even if they seem entirely unreasonable to you. This applies to whatever business you have in China. China is not going to change its laws for you, no matter how unreasonable you may find them to be. 

All good advice, don’t you think?

I urge you to read the full article.

I am about to heartily recommend a book that I have not read, nor even seen.

The book is The Big Four and the Development of the Accounting Profession in China (Studies in the Development of Accounting Thought, by Paul Gillis. And despite not having read the book, I am quite certain it will make for a helpful read. I am certain of this because Paul Gillis knows as much about the big picture China accounting issues as any other English language speaker out there. Paul has written extensively and well (both on his blog and elsewhere) about the Big Four in China and about China big picture accounting issues and if his book were nothing but a compilation of previous writings (which it is not), it would still be well worth the read. Paul is to whom I refer journalists and others seeking answers to China accounting questions because he is the guy with the answers.

So if China accounting is your thing, read the book.

For a pretty comprehensive list of recommended English language books on China (with a slant towards those that are instructive for doing business in China or practicing China law) check out A New China Book List.

One of the tougher issues we as China lawyers face is what we call the Home Office/China Office tension. These situations are tough for us because we are so often put smack dab in the middle.

Let me explain.

On the one side you have the US home office, often replete with well trained in-house attorneys and accountants and businesspeople. On the other side you have the China office, often replete with foreign and Chinese employees who have been hired based on their knowledge about doing business in China and for their ability to figure out how to get things done in China. The US home office has very little knowledge about China and the China office has very little desire to follow every rule in China when doing so will lead to increased costs and/or decreased sales/profits.

That puts us in the uncomfortable position of being the buffer between the two offices, explaining to the US office why it must do xy and z in China and then having to fight off the China office who does not think xy and z are really necessary.

One of our China attorneys wrote me the following email regarding one of these situations and because it is so typical, I thought it would be good to share, with all identifiers stripped from it:

In case you have any doubts, Mr. Y. [the American who heads up the China office] will get along perfectly with ____________ [a China consultant whom we believe to be corrupt]. They see the world in the same way.

However, CleanCo [the made up name for our client] has told me that it wants to obtain venture funding from real people in the United States. You can imagine what a connection with ________ [corrupt China consultant] would do to that plan. Mr. Y runs the China office in the way that is typical of _______[the China city in which it is located]. In that sense, Mr. Y. is right that we don’t understand how China works.

However, he is wrong. We understand very well how China works because we know full well that the way China works is not going to be acceptable to any legitimate VC group.

This is the problem in CleanCo. Mr. Y says this is the way it is done in China and when he says that, he is absolutely correct. That is probably what the advisors to GSK said to them and look what happened there. The same will happen to CleanCo if it keeps relying on a guy like Mr. Y. to determine how it conducts business in China.

When I talked to _______ [at CleanCo’s US office], he said: I want a China operation that will pass muster according under Wall Street due diligence standards. This is what we are tying to give them. However, Mr. Y. does not understand that and he has no intention at all of delivering that. So, at this time, CleanCo needs to decide what kind of China operation it wants.

No matter what, CleanCo needs to realize that if you run a crooked ship in China, you can be run out of town in just one day. That is their risk and that risk is very real.

However, this is a classic case where their ENTIRE China operation rests on Mr. Y. So they cannot easily get rid of him. It is a very difficult situation. This is a serious matter and it requires careful consideration by CleanCo. Considering what anybody can read on the web in about one hour as to what is happening these days to American companies, it is quite incredible that we are even having this conversation. At any rate, I will say it again that the issue is how CleanCo intends to operate in China. As long as it works through Mr. Y, the straight way will never work and he seems incapable of understanding that the China in which he did business twenty years ago has changed drastically. More troubling, he may be right that the [key] product cannot be manufactured in China “the straight way”. It’s a big deal and it cannot be swept under the rug at this point.

I am quite sure that many of you are quite familiar with the above tensions and we would love to hear what you think.

Had a great discussion with a bunch of our China lawyers the other day regarding how so many of our clients are expanding in Asia beyond China and of how so many of them have an Asia strategy, of which China is just one large part and usually initial part.

We then talked of how this has changed the work we do as their lawyers, especially in IP.

Five years ago, our typical manufacturing client would call us for legal help in starting a factory in China or for outsourcing their product manufacturing to a Chinese factory. With the former, we would help them set up a Chinese entity (either a WFOE or a Joint Venture) and with the later, we would draft an OEM Agreement. In both cases, we would discuss their intellectual property and typically help them file for a trademark or a patent in China, occasionally a copyright. Most of these companies were new to Asia, though some had operations in Europe.

Things are very different these days.

Many of our manufacturing clients have been making product in China for years and they are now calling us to add some other Asian country (usually Vietnam or Indonesia) to their manufacturing mix or because they now want to sell their China-manufactured product in China and/or somewhere else in Asia. These companies either have an Asia strategy or are seeking our help in formulating one. Whereas five years ago, a common question for us was “Shenzhen or Suzhou,” today we equally often hear “Hanoi or Jakarta?” Five years ago, we would get asked what we knew about “exotic” places like Yantai. Today it is exotic places like Da Nang.

Needless to say, it is not just manufacturing companies that need to guard their IP in China. Software companies, gaming companies, food and beverage companies, and consumer goods companies are registering their IP in Asia at what feels like a record pace. Balancing all the talk of a China manufacturing slowdown is the year by year increases in disposable income.

The “China-plus” strategies of our clients means that our IP discussions need to go well beyond China to include pretty much all of Asia. Five years ago, only around twenty percent of our clients needed to consider trademark or patent or copyright registrations in a country other than China. They were new to doing business in China and so they needed IP protection there. We would ask about their IP needs for the US and for Europe, but they had been in both places for so long that they were invariably covered.

Today, about half of our clients need IP protection in an Asian country other than China. Fortunately, most Asian countries (Japan, Korea, Vietnam included) have IP regimes quite similar to China’s. The real key for foreign companies expanding beyond China with their products is to be sure to recognize that whatever IP you registered in China probably provides you with little to no protection outside of China. In other words, in most cases, you must register your IP in whatever Asian country in which you are doing business. Also note that in your IP analysis, you must treat Macau and Taiwan and Hong Kong as countries completely separate from the PRC.

Got it?