China’s operating environment is one of the toughest ones in the world, and too often foreign companies fail to grasp the root cause of business failures in this commercial giant. In the preparation of a business trip to China, most Westerners know that they have to arm themselves with the basic knowledge about Chinese etiquettes and language. They go at length to hire a Chinese language expert and research about the best way to get their idea across to the other party. However, what most of them fail to understand is the art of long-term negotiations that would pave the way for a fruitful business venture in China.
In fact, a huge amount of contracts are being drafted for foreign companies that are licensing their technologies and concepts for use in China. While this kind of licensing was mostly used in industrial affairs in the past, a majority of the work consists of licensing contracts in the services sector in China these days. Most of this licensing is for operations in China prohibited to foreign companies, like media, publishing, insurance, telecom, and finance. In addition, the majority of foreign businesses prefer this licensing tactic, despite becoming a part of a Chinese Joint Venture.
Granted, industrial license bargains are hard. However, this bargaining is identical to every commercial negotiation. In the services sector, it has been observed that the Chinese side work hunts for much harder deals. This usually astonishes other customers, since it is naturally expected that the service side would be softer than the industries.
As part of this system, in service sector licensing agreements, it is being noticed that the Chinese side dusts off negotiating tactics which were very common in the early ’90s or ’80s at the time when the Chinese were negotiating their well-known dysfunctional joint venture contracts.
In negotiating service sector licensing contracts with Chinese firms, some of the tactics are explained as follows from the Chinese side:
A Horde of Endless Issues:
One of the most generally exercised tactics by the Chinese establishment is figuring out the way to ‘wear the other side down’ with endless issues. This tactic is based on two variants. In the first variant, the Chinese raise a horde of issues. As these issues get resolved, the Chinese side raises a series of new issues and the cycle goes on and on. The second variant deals with the Chinese side making a list of irrational demands, all the while not making any attempt to help resolve these issues.
In both these variants, no discussions take place by the Chinese side to address the interests of the other side. This is done to wear down the foreign side so that it is left with no choice but to simply concede to the other party’s demands. As the foreign side allows or concedes, the Chinese side then adds provisions in the contract which are favorable to the Chinese side, under the notion that the foreign side has no objection. The achievement of this tactic relies on the negotiators of the foreign side having not enough time to carry the burden, whereas the negotiators of the Chinese side are officials having no other work other than engaging in endless demands.
In the initial stages of the negotiating system, the Chinese side sets a fixed date for enforcing the agreement. After that, it sets up a public signing event on the said date. At this ceremony, high-level representatives of the two sides will participate as well and play their parts. A date in the future is set in advance to make sure that the negotiating parties sign the contract in good faith and are able to fulfill it.
After the date is set, the Chinese side refuses to sign the contract. This is done for two purposes; to ‘wear the other side down’ and secondly, in an attempt to pressurize them to concede to their demands. When the other side does bow down to the Chinese side’s demands, the contract is signed with the conditions which benefit the Chinese entirely.
Revisiting the Deal without Lawyers:
The last tactic of the Chinese side is to come back to the main issues in the absence of the lawyers. This policy also includes the Chinese side signing an agreement, yielding on the main issues. By virtue of the signed agreement, Chinese advisors, the negotiators, and most significantly the international lawyers get busy in dealing with the other assignments. Afterward, the Chinese side waits for some time and start working on the project. After the commencement of the project, the foreign side starts investing in the project.
Once this happens, the Chinese side triggers the committed parties of the foreign side related to the project and make an announcement of altering certain provisions of the signed agreements. The Chinese side mostly calls such changes by saying that it is recommended by law, insurance companies, banks, or government regulators.
How to Deal with the Tactics
All the three techniques always provide an expected and obvious output which are favorable to the Chinese people, which is why Chinese corporations do not hesitate to frequently apply them. But, the good news is that there are ways of dealing with these negotiating tactics as explained below:
When the Chinese side exercises the “endless issue technique,” the foreign side should not take part in it. The foreign side should strongly hold its position and must not bend until and unless the Chinese side comes closer to the interests of the foreign side.
b)Avoid signing on a fixed date:
The foreign side should not approve the fixed signing date. Make sure that the signing event must be conducted after the completion of the final negotiations of the agreement. Don’t permit the Chinese side to use a deadline as a weapon. This is because most of the Chinese corporations like signing ceremonies and foreigners fall into the same trap over and over again.
c) Avoid the Alteration in provisions of the signed agreement:
The foreign side must ensure that no changes shall be made after signing a contract with a Chinese company. Otherwise, it shall be treated as a breach of the law, heading towards a lawsuit for damages and termination of the contract. Chinese corporations are famous for practising the signing of an agreement as to the initiative of a fresh negotiating program, not the termination. If the foreign side agrees to it, it should at least have a clear picture of restoring their lawful and Chinese advisory crew.
The Last Word:
Conducting a successful business in any foreign country is not easy. This is evident from the cultural and linguistic differences across boundaries. China is no less difficult when it comes to setting up a business in the country. Although negotiations take place in every business venture, some negotiations are more difficult than others and require a more careful approach to be executed. By executing negotiations successfully, one can be sure of setting up a business in this commercial giant for a long-lasting profitable business.