What is the most difficult aspect of completing a successful business deal? It seems that there are two answers to that question – the China answer and the non-China answer.
Experienced international deal-makers know that successful transactions in China require two negotiations – one to get the deal, and then another to actually do the business. Westerners who rely too much on written contracts often find that they have little to show for all their hard work but some expensive misunderstandings and a worthless piece of paper.
I recently ran two polls to gain insight into the challenges of Western-Chinese negotiations. To start, the negotiation process was broken down into five stages:
2. Agreeing to deal terms
3. Negotiating the contract
4. Implementing the deal
5. Post-deal compliance and quality control
I conducted the survey in two stages. First I asked international business people with no self-declared China commercial interest or specialty, "What is the biggest challenge in doing business?" Then I asked, "What is the biggest challenge doing business in China" (emphasis added) to business people who have experience or a stated interest in doing business in China. They were offered the same range of responses.
As can be seen from the results, there is a significant difference in how international deal-makers perceived the deal-making process in China versus other places:
When the question didn’t specify China, the biggest challenges came before the contract was negotiated and a meeting of the minds was (presumably) achieved. But in China our respondents indicated that the difficulties arose after the contract was signed and both sides had reason to believe they were in agreement.
Why is this happening?
There are three possible classes of explanations:
2. Wrong counter-parties
3. Bad communication – including negotiating for the wrong things
1. Cheats & liars, buffoons & idiots: When our lesser angels hold sway, Westerners accuse the Chinese of dishonesty and the Chinese conclude that Westerners are simply dolts. Fortunately this overly simplistic reaction doesn’t really stand up to serious scrutiny. If there were any truth to it, few respondents would stick around for a second try – and international trade in China would collapse. Anecdotal evidence and interviews revealed however that among experienced, successful Western business people in China, post-signing renegotiation was the rule and not the exception.
2. Wrong counter-party: The opportunities in China are so vast – and the culture and language so different – that some Westerners hook up with the wrong people. A good counter-party is both honest (on some minimal level), competent and engaged enough to see the deal through to the execution phase. The risk of choosing an inappropriate counter-party in China is exacerbated by the fact that many Westerners don’t take the time to perform proper due diligence or even check references. Westerners with limited China experience tend to hear what they want to hear in order to report good news to the home office quickly, and Chinese counter-parties tend to preserve harmony and gloss over problems by making promises they can’t always keep.
3. Bad communication: Phrases like “contract,” “long term,” “good quality,” “best efforts” and “relationship” are the poisoned chalice of international China business. They seem harmless and wholesome at first but can actually be deadly. Westerners who don’t know just how much they don’t know about China will assume that their own definitions and concepts are universal. An American sees a contract as a legal and commercial bond that can’t be broken or altered. To Chinese dealmakers, however, a written contract is often considered a written record of an agreement between two individuals at a particular time under specific set of circumstances. To relationship-oriented Chinese, everything is flexible between two honest individuals. To Westerners, the contract imposes obligations on both parties that cannot be altered after signing.
Are there any remedies for China’s post-negotiation stress syndrome?
1. Manage time differently. If you come to China with a firm timetable and a deadline for signing a contract, you are more likely to end up with a worthless piece of paper. The best negotiators in China know that you can hasten disasters but you can’t rush success. When your local counter-party asks you how long you will be here or when you need to sign a deal, your answer should be ”as long as it takes to get an agreement that’s good for everyone.”
2. Vet your counter-party carefully. Of course you want someone honest and reputable – but you also need competence and experience. Try to avoid being anyone’s first international deal, or you may find that his ability to finish the deal don’t always match his eagerness to start one.
3. Discuss the difficult details things early. Some inexperienced westerners are so sensitive about “building guanxi” and “not making anyone lose face” that they fail to nail down an enforceable agreement. Ask for references and perform thorough due diligence. Keep smiling – but keep drilling down for details until you get 100% transparency.
The final caveat is that even among successful, experienced US-China partners, there is almost always a second negotiation at execution. Make sure you are budgeting the time, expense and managerial bandwidth for the inevitable second round of negotiating – because it is often the one that really counts.