by Andrew Hupert
Negotiating with Chinese counter-parties is getting easier all the time, but there are plenty of situations to look out for. Many westerners who enter into a negotiation with a Chinese counter-party are so sensitive to cultural and interpersonal issues that they lose sight of business issues. Big mistake.
Deals in China can go off the rails easily and early. The key to success in China is to walk away from bad deals and find good ones. I know – that sounds simple. The fact is that many newcomers to China business have trouble spotting the red flags and danger zones that indicate a deal is about to fall apart. The result is that they hang in there and keep negotiating with inappropriate counter-parties until they und up with a bad compromise and a disastrous deal.
China deals can grow out of control in a hurry.
One thing that you’ll find in China is that deals that start out very simple get incredibly complex very fast. It’s not accident. Your counter-party may use complicated structures and drawn out timetables to insert advantageous terms or conditions that get lost in the shuffle.
Here are 10 warning signs that a deal is about to get too complicated too fast.
1. Terms that will change at unspecified times or circumstances in the future. This is particularly true of price, cost, product line or technology. As in “we’ll sell you the existing technology at price X, and when the new product line is ready we’ll lower the price to Y”. May also include: “when we move to the new facility…”, “when we get the approval from the government…”, “when we develop the new product…”, “when we hire the new engineer…”, “when we tie up with our sister company…” It’s not that they’re necessarily lying – but you can grow old waiting for the conditions to become reality.
2. New technology or connections to be introduced later – but priced now. Many Chinese companies will assure you that they have the ability to develop new products or technologies in the near future that will meet the needs you have now. Your big concern is that the first iteration of new technology won’t work – but will satisfy the terms of the contract. Your other concern is that they never hold up their end at all.
3. Asymmetrical payouts. You pay now – they deliver at some unspecified time in the future. This one was one of the big problems with all of those JV horror stories we used to read about.
4. Open ended liabilities or unsettled valuations. Every deal you do should have very specific valuations and timetables. You wouldn’t sign a contract with blanks – don’t do a deal until you’ve clarified all the terms.
5. Best effort sales / marketing. Another big red flag in China. If you are investing or supplying technology and relying on your local counter-party to market your product, make sure that they have a solid network, good references and specific experience in your industry. Make sure you have a way out and a Plan B. Chinese distributors are notoriously sketchy when it comes to fulfilling best-effort sales agreements.
6. Anything involving connections, relationships or trust. If they say “I have guanxi” you say “I have to go”. Seriously.
7. Mysterious new players enter – particularly decision makers – and change the terms. This can happen to anyone in any country, but in China it means you are starting over from scratch. This is a common tactic here, and it doesn’t bode well for your partnership. If you can’t meet the people you are really negotiating with then it is bound to end badly. This may be a deal-killer, so be careful about proceeding.
8. Deals escalate into long-term, multi-transaction JVs too quickly. If you want to buy or sell something, then you can start with a few test orders and develop the relationship over time. Don’t believe any noise about Chinese only working with long-term relationships. Reputable Chinese counter-parties work with test orders and short-term deals all the time.
9. They want you to do anything without a contract. Usually this takes the form “the owner/accountant/treasurer is away on vacation and we can’t stamp the contract until he’s back but if we don’t get the deposit now we won’t be able to make the deadline…” No. Just plain NO.
10. They tell you that something is too complicated to explain. They’re right. Walk away now.