Negotiation in China
by: Diego Gilardoni, Associate Partner of Hofstede Insights
Why should I read this document?
Negotiating across borders requires a high level of cultural intelligence, even more so when dealing with Chinese companies or institutions. This is because the Chinese negotiation processes and style are shaped by very specific cultural traits that are very different from the one of the West. Even more than that, in China the overall meaning of negotiation itself takes a whole different dimension. Whereas the Western negotiation concept is to create a one time agreement between two parties, the Chinese view negotiation as a process for creating a framework for long-term cooperation.
Important!
The pre-negotiation phase is essential in China more than anywhere else, because it is then that a foreign business person has the opportunity to create the right conditions and relational frameworks that will come in handy later on when problems and disagreements arise. In this phase, two golden rules need to be followed.
First, in China, relationships come before business and not the other way around. This means that, before rushing into the details of a deal, the Chinese want first to build a personal relationship and create an adequate level of trust between the parties. There are many foreign businessmen who go to China to meet their counterpart for the first time, expecting to get at least a commitment to move forward or even to have some kind of formal document signed. But this usually does not happen. Even if the general framework of the potential business deal has been prepared through a local advisor, and the potential counterpart has expressed interest in discussing it, it is not enough. Before moving forward, the Chinese want to have the time to establish a personal connection with their direct counterpart.
The second rule is that the Chinese do not do business with your company, but with you. Therefore, even if the Chinese counterpart has developed a good working and personal relationship with the local advisor of the foreign company, it is with the company’s leaders that they will do business and it is with them that a relationship needs to be built.
First, in China, relationships come before business and not the other way around. This means that, before rushing into the details of a deal, the Chinese want first to build a personal relationship and create an adequate level of trust between the parties. There are many foreign businessmen who go to China to meet their counterpart for the first time, expecting to get at least a commitment to move forward or even to have some kind of formal document signed. But this usually does not happen. Even if the general framework of the potential business deal has been prepared through a local advisor, and the potential counterpart has expressed interest in discussing it, it is not enough. Before moving forward, the Chinese want to have the time to establish a personal connection with their direct counterpart.
The second rule is that the Chinese do not do business with your company, but with you. Therefore, even if the Chinese counterpart has developed a good working and personal relationship with the local advisor of the foreign company, it is with the company’s leaders that they will do business and it is with them that a relationship needs to be built.
Therefore, a foreigner, even more than a Chinese stranger, must go a long way to show that he can be trusted. Sometimes, for example, doing a personal favour that is completely unrelated with the business at hand can produce amazing results. In most cases, though, there is no such opportunity, and for a foreigner it is therefore essential to be patient and take the time to let his Chinese counterpart get to know him and build a personal connection.
In any case, if one is really serious about doing business in China, it is essential to take the time to follow up on the first meeting by going back to China more than once in order to establish a relationship with the counterpart, especially outside of the business setting. Participating in social events is actually essential to building a personal connection. The Chinese are very good and generous hosts and take pride and pleasure in inviting foreigners for dinner or for social activities. It is not just about business. They really want to get to know their counterpart as a person first. Therefore, it is always very important to accept any invitation. Declining it is seen as an insult that will make them lose face and could actually affect the whole business. Besides, a very good way to build a relationship is to invite the Chinese to visit your country and your company and reciprocate with as much hospitality and generosity.
Short Introduction
The choice of the right negotiating team is essential. Normally, Chinese companies send a big group of people to the business meetings, and often outnumber the foreign delegations. When possible, send a big delegation, because it conveys status and importance.
However, not all companies can afford to send as many people as the Chinese counterparts do, so it is essential to focus on quality and send the right negotiators. It is important that the delegation be led by a chief negotiator who has the right “soft” skills and the cultural intelligence to engage in a productive way with the Chinese counterpart.
It is also very important to consider that, since the Chinese value experience and seniority, too young a manager, no matter how competent and brilliant, might not be taken as seriously as an older one. Most importantly, given the value that the Chinese put on hierarchy, it is essential to know the hierarchical position of the Chinese counterpart, and send managers to China who are at a corresponding hierarchical level. If the Chinese team is led by the CEO of the company, sending a manager with a lower rank would be seen as a serious offense and insult.
Once the negotiating team has been chosen, it is very important not to change it along the way, especially the chief negotiator. Since the Chinese do not do business with an organization but with its people, if they have established a good relationship with a specific person, his successor will not automatically inherit his guanxi and this could be an issue affecting the negotiation process.
When it comes to the style of negotiations in China, it is true that the first meetings with their vague and ritual formulas can be very annoying and frustrating to many Westerners. But it is absolutely essential to hold back and to control emotions because an open display of anger, irritability, frustration or aggression at the negotiating table can be disastrous to negotiations.
If there is an important and critical point that needs to be discussed, it is really important not to raise it in a blunt way, but to use a more indirect form of communication and politely ask the Chinese counterpart for their opinion and advice on how to deal with the matter. Also, if the discussion gets jammed by a contentious issue, instead of insisting and forcing the hand of the Chinese counterpart, it is better to show patience, and propose to look at the matter later and focus on other points. In these cases, a good option would be to wait for more informal situations to raise unresolved issues, like a dinner or around some drinks when the atmosphere is more relaxed.
During the discussions, the Chinese usually speak with only one voice through a “spokesperson” and respect the hierarchy in terms of whom can or cannot speak and when. The foreign team should act accordingly with the chief negotiator leading the discussion and giving the word to another member of the team when necessary, for example when special technical expertise is required to answer some questions that the counterpart might have.
When meeting with a Chinese counterpart, small talk is an essential part of the game and it would be a shame to spoil the atmosphere by bringing up topics that could create embarrassment or even offense such as Tibet, Taiwan or the human rights situation in China. Instead, it is always a good thing to ask questions about family and children, to praise the amazing accomplishments made by China in the last few decades, and to show interest and curiosity about their history, culture, and food.
As for the structure of negotiations, the Chinese, because of their non-linear conception of time, don’t follow a fixed and sequential agenda but can easily move cyclically between issues and handle multiple issues in parallel. Because of their holistic perspective on things, they can also easily jump from one subject to the other and talk about everything all at once. To them, the different details of a project cannot be separated into single entities, but must be seen as part of something bigger. It is important to reach an agreement on the general objectives of the deal without being obsessed by the single items of the potential deal.
This is why the opening statement of the foreign company (which should also be translated into Chinese) should focus on the general objectives of the business that must be framed within the context of a long-term commitment towards the Chinese market and the advantages that the foreign technology or know-how can bring to China’s development.
Since the negotiations start with the general principles and then move to the details, it is important not to force the Chinese’s hand by trying to rush from general to specific. Many foreign companies tend to fill the documents with too many details and the Chinese are often put off and stall. Most importantly, putting too much focus on legal provisions and binding documents at the early stage of the negotiation might be perceived by the Chinese as a lack of trust in them and therefore undermine the process of relationship building.
Patience is really the most important asset one needs to have when negotiating with the Chinese. Fast and smooth negotiations in China, if they ever happen, are most definitely the exception to the rule.
Anyone who is starting a negotiation with a Chinese company must be prepared for a long process that can wear down even the most skilled and experienced negotiator. Sometimes carrying out long negotiations can certainly be a tactic to extract concessions when getting closer to the deal, but many times the reason for protracted negotiations is due to the decision making process within Chinese companies, especially if they are state-owned or indirectly linked with the government.
Often the real decision-makers are not even in the negotiating room until the very end of the process, and their subordinates do not want and cannot take personal responsibility and therefore go back and forth to consult with their bosses. This is why it is very important to understand from the outset, through one’s local advisor or through other informal channels, who the real decision-makers are and try to establish direct communication with them in order to understand whether they are really interested in the business or they are simply trying to extract information without any real commitment.
As for negotiation on prices, it is essential for any foreign company preparing for a negotiation with a Chinese counterpart to include in their strategy from the outset a clear framework allowing for a flexible and effective haggling process that can preserve both the company’s interest and the counterpart’s face.
When preparing to negotiate prices with a Chinese company, it is essential to bear in mind two important facts. On the one hand, if the foreign company reduces its price too much the Chinese counterpart might get suspicious and the foreigners would lose face and, with it, their credibility. On the other hand, if the foreign company did not build a flexible margin for negotiation and refuses any price reduction, the Chinese could feel insulted. It is therefore very important for a foreign company to always add a buffer to its price that allows for a price reduction.
More generally, it is always important to leave sufficient room for concessions at many different levels and prepare several alternative options, because for the Chinese conceding something is part of the trust building process. This is why if a foreign company makes concessions, it is expected from the Chinese side to reciprocate. However, it is important not to make significant concessions in the early stages of the negotiation, because the Chinese will certainly try to extract further concessions along the way.
To sum it up, for the Chinese nothing is settled until everything is settled, and they focus more on the whole package than on the details. Therefore, it is important not to invest too many resources and energy on individual details at the outset of the negotiation and to focus instead on the bigger picture.
Contracts and post-negotiation
What is really different between the West and China is the role and importance of contracts. While in the West the signing of a contract is seen as the end of the negotiation, in China it is merely an act that states the beginning of a long-term relationship. And, most importantly, while most Westerners view contracts as a list of legally binding rights and obligations, Chinese see them only as a list of terms that need to be respected depending on the context; if the context changes it is normal to ask for renegotiating them.
This is why Western contracts usually tend to be quite lengthy and wordy in order to cover every possible contingency, leaving as little ambiguity as possible. Chinese contracts are much less legalistic and therefore their business contracts are often specified in legal terms yet implemented on the basis of personal trust and relationships between the parties involved. Many Chinese still feel very uncomfortable about the expression “legally binding”, seeing it as a sign of lack of trust, and when push comes to shove the discussion could stall and even stop if a good personal relationship able to offset the legalistic part of the negotiation has not been established.
Within this context, a foreign company needs to be able to play a balancing act between the need to protect its interests and the necessity to play by the Chinese rules. Therefore, it is certainly essential to work with good lawyers to protect a company’s interests by including the appropriate clauses in the contract, while being flexible and open to renegotiate the deal in suitable terms in order to show goodwill, respect, and trust.
This is why it is really important to have a contingency plan that includes a predetermined method for resolving any dispute that might arise and a provision specifying eventual damages in case of renegotiation.
In any case, the best way of managing conflicts and solving disputes in China is to avoid them. The Chinese tend to use indirect ways to avoid direct and open conflict. If it becomes unavoidable, they prefer to resolve it through negotiation and compromise usually with the help of an intermediary. If neither negotiation nor mediation work, it is essential to have a good team of Chinese lawyers and, most of all, to have a clause of arbitration in every contract signed in China.
Short case study
In conclusion, negotiating with a Chinese company is a long and difficult process that requires cultural intelligence and a huge amount of patience. In any negotiation with the Chinese problems, tensions, surprises, and setbacks will most certainly arise; it is simply part of the game. And in order to be able to play the game and win it, it is absolutely essential to turn the legalistic and task-oriented Western perspective into a more China-compatible way of doing business that include a serious and genuine commitment to developing long-term personal relationships with the Chinese.
As we have seen, credibility and trust need to be established early in the game. Therefore, priority must be given from the beginning to create the appropriate relational framework with the Chinese counterpart. Once trust and friendship are part of the picture, it will be much easier to overcome any problem that might arise and close the deal.