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China and lose-lose negotiating

By Dan Harris in 'China Law Blog'

There's an old joke about a Frenchman, an Englishman and a Russian who are told they have only one day until the end of the world. The Frenchman says he will spend his last day with a bottle of Bordeaux and a beautiful woman. The Englishman says he will take his favorite sheepdog for a walk across the moors. The Russian says he will burn down his neighbor's house.

A couple years ago I told a Chinese attorney friend of mine who runs a Shanghai law firm what my firm looks for in all our hires. His response was that he does not like to hire attorneys "that good" because they will end up wanting to start their own firm because he will not pay them enough. My response was to suggest he pay his people more. His response was to look at me like I had two heads.

In "Sub Zero-Sum Game Negotiations in China," Andrew Hupert, a professor of Chinese negotiating at NYU, tells of how foreign businesses need to be prepared for burn your neighbor's house down lose lose negotiating in China. Andrew's post begins by explaining the more familiar "win-lose" and "win-win" deals:

Classic negotiating theory divides all transactions into two categories – Distributive (Win-Lose deals), and Integrative (Win-Win).

Traditional competitive deals are referred to as Distributed because the two parties split (or distribute) a fixed pool of assets. Integrative deals are often referred to as Win-Win or collaborative because the two sides cooperate to ‘enlarge the pie’ or increase the total value of assets beyond the initial scenario.

In China, however, where non-economic factors, such as "face, guanxi, or lately, nationalism" can be important factors, "it is common to experience a third scenario: Lose-Lose negotiation." According to Hupert, "in China your counterparty will sometimes opt for a situation where he loses a little if you lose a lot over an outcome where you gain a lot and he gains a little." This is most likely to be the case in dealing with a representative from a State Owned Entity (SOE) because that person may not "benefit directly from positive outcomes – but may be penalized for a negative outcome. As trade tensions rise between China and the West, Win-Win deals will be regarded with increasing suspicion. Chinese negotiators consider it increasingly advantageous to see you fail."

"Chinese negotiators are often working off a different time-frame and valuation model" than their Western counterparts. They are usually much more willing to wait to achieve a deal that gives them greater control and exposure to technology and because brand names matter less in China, they are also willing to engage in behavior that could damage their reputation. "Finally, nationalism is playing an increasingly important role in Chinese negotiations – as real or perceived slights, insults and challenges impact on deal-making."

Hupert sets out five factors Western companies must consider to avoid "damaging sub-zero sum game outcomes":

1. Learning curve. Some negotiations are not really negotiations; they are "educational opportunities for the Chinese side." Beware of "negotiations" that "are really new-product development exercises."

2. Competitive factors. Joint Ventures (JVs) and cooperative arrangements start out just fine when they focus on production and product development, but when it comes time to access the Chinese market, the deal often falls apart.  "Many observers consider the DANONE – Wahaha negotiation to be a case in point. The JV was quite effective when it was exporting to foreign markets, but things got rocky when it came to the Chinese market."

3. Timing. Sometimes the problem is about timing. The Western side wants to move fast – the Chinese side doesn’t.

4. Differing valuations of the Chinese market. China "has a long and unfortunate history of Westerners benefiting economically from Chinese resources. Chinese policy-makers and managers have become very sensitive to losing control of the domestic market or resources."

5. Risk profile. Chinese and Western negotiators view risk differently. "Westerners tend to see uncertainty and risk of loss as two sides of the same coin. Chinese negotiators, however, have a much greater sensitivity to uncertainty – and tend to freeze up and stop deal progress if they can’t see what the risks are."

Hupert then explains the "value" to Chinese companies of "destroying your China business."

Last but not least, many Chinese entities see a real value in destroying your China business. In some cases there are policy considerations – such as Youtube, Twitter and Facebook. But sadly, there actors on both sides of the Pacific who consider it patriotic to scuttle deals that may yield profits to ‘foreigners’. In the US this is generally a regulatory matter that takes place away from the deal table. But in China where you may be sitting across the table from an SOE or policy-driven manager the issue of patriotic hostility is a negotiating matter. Determine the likelihood of executing the deal (not just signing a contract) early in the process – before you reveal sensitive technologies or business practices.

What do you think?

Dan Harris is founder of the Harris & Moure law firm, a boutique international law firm focusing on small and medium sized businesses that operate internationally. China is the fastest growing area for the firm. Dan writes as a source of China legal and business information.

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