By Robert Cain for China Film Biz
November 3, 2012
Back in September we looked at several tactics mainland Chinese negotiators use to get their way, and counter-tactics for dealing with them (see that article here). Now, courtesy of Dan Harris and his excellent series in China Law Blog, we revisit the topic with a few more examples.
As Dan points out, most experienced negotiators would characterize the techniques described below as fundamentally unfair, bad faith negotiation tricks. In a society like China’s where there is no consistent rule of law, where those at the top of the national power structure are widely perceived to have enriched themselves through deceit and abuse of privilege, it’s to be expected that many of those in business have been conditioned to operate at these same unfortunate standards.
My point here is neither to excoriate nor excuse mainland Chinese business people for their behavior. Nor am I suggesting that everyone you meet in China will employ these tactics. My goal is simply to tell it as I see it, in hopes that this will help equip you to better handle your negotiations with Chinese counterparts.
Here—mostly in Dan’s words with a bit of my own commentary added—are three important Chinese negotiating techniques that everyone should learn to recognize:
What if gravity stops?
Chinese companies are uncomfortable with well-written complete contracts that tie them down on most or all key issues. They generally prefer vague contractual commitments that allow for constant re-negotiating and clarifying of deal points as the transaction progresses. Of course, this is exactly what the foreign side seeks to prevent.
When confronted with the uncomfortable specter of a clear, concise, written contract, Chinese companies often retaliate by demanding “hyper-clarity.” Since they inhabit a world where good faith negotiation and commercially reasonable contract interpretation are unknown, they will insist that every contract provision be specified in minute detail. In extreme cases they will 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 then?” If the other party provides a solution, they will come back and say: “OK, now what happens if they are levitated exactly four feet from the ground.” The Chinese will keep repeating this cycle with the ultimate goal of bludgeoning the other side into submission.
What 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. They will simply provide a list of “what if’s”. Even worse, they will sometimes propose an obviously bad-faith and commercially unreasonable “solution” on the assumption that the foreign side is trying to maliciously “screw” them, and their only option is to counter with an equally malicious screw job.
Who’s the boss?
This technique is used in face-to-face negotiations conducted in China. At great trouble and expense, the foreign side sends a negotiating team over after preliminary negotiations have been completed, with the intention of finalizing the deal in a conclusive negotiating session.
During the negotiation, the Chinese side announces that none of their negotiators have the authority to make binding commitments. At the end of each day, they must return to the Chinese company and request permission from their “boss” to determine whether any major negotiated point is acceptable. This is often a shock to the foreign negotiators; for them it makes no sense to negotiate with people who cannot make decisions.
This tactic is not just a reflection of the poor way in which Chinese companies are managed. They use this technique to gain a negotiating advantage against the foreign side. In each round, the foreign side will make concessions in response to corresponding concessions from the Chinese side. 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 that accepts the foreign side’s concessions while reneging on their own previously agreed commitments.
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.”
Things are different here
The Chinese often will justify outrageous demands with the vacuous statement that “China is different.” And it’s true, of course, that China IS different from many countries—every country is different from every other country. But this is no reason to agree to nonsensical demands.
For example, when negotiating China Joint Ventures it is common 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 partner. The Chinese side will say: “sorry, but you cannot protect your IP. You must transfer everything to us at the end of the license.” When the foreign side resists, the Chinese side will then play the “Things are different here” card and state that Chinese law requires such a transfer. In fact, Chinese law does not make any such requirement. This is simply what the Chinese side wants out of the deal. And the Chinese government supports the Chinese side, since the free transfer of IP arguably benefits China. 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 IP. 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.
In the heat of battle it can be difficult to maintain perspective, particularly for a foreign negotiator who is unaccustomed to such bad faith techniques. The Chinese side will have the advantage of a lifetime of experience in deploying such tactics, so it is advisable to be prepared for them. Here are a few suggestions:
- When a foreign party senses the start of the “what if” trend in negotiation, they must step in very forcefully to stop it. It is dangerous even to entertain the first round of “what if” questions and proposals, because this only encourages the Chinese side to think of more progressively far fetched scenarios. The only reasonable 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. Things will not get better over time.
- “Who’s the boss?” 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. If the Chinese side is going to use this 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 companies’ 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 home.
- It’s shocking how many foreign negotiators fall for the “China is different” argument and accept onerous terms. In reality, China’s laws and regulations are not all that different from those of other countries, as they are based for the most part on foreign models. And as far as foreign investors are concerned, the content of Chinese law 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. When foreigners bend to Chinese claims about the uniqueness of China, it’s not Chinese law that is at fault. Gullibility in falling for the “China is different” argument is where the fault lies.
In many of these sorts of tough negotiations, things usually come to a point where the foreign side feels compelled 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.
In some cases, however, the Chinese side will back down and will accept restrictive provisions against which it has been vehemently negotiating. It will accept the challenge and “take it,” rather than walk away from the deal. In this situation the foreign side will congratulate itself on its negotiation skills and the fact that it “won” the negotiation.
The problem with this though is that the Chinese side often 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 deal. It will focus on taking revenge for its defeat on the contract issue, 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 do not matter. This attitude is quite foreign to most non-Chinese 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.
Next week we’ll take a look at the Chinese side of the equation, how they view foreigners and their motivations for behaving in the ways they do.
Robert Cain is a producer and entertainment industry consultant who has been doing business in China since 1987. He can be reached at firstname.lastname@example.org and at www.pacificbridgepics.com