How To Negotiate With Chinese Companies (Part II)

This is Part Two of a four-part series on How to Negotiate with Chinese Companies. Part One is here. In this post, I discuss three more negotiating techniques commonly used by Chinese companies when negotiating against foreign companies.

Death by a thousand cuts. The Chinese company is presented with a carefully drafted written contract. The Chinese company responds with a reasonable number of objections to the contract. The foreign company and the Chinese company negotiate on these issues and reach resolution. The foreign company naturally assumes that the negotiation process is complete and expects the next steps will be to execute and then implement the contract.

Instead, the Chinese company puts forth a brand new set of contract objections. The parties again negotiate and again reach resolution. The foreign company again assumes that the next steps will be to execute and implement the contract. But the Chinese company returns yet again with a new list of contract objections, including objections to some of the matters already decided upon in the previous rounds of negotiation.

If the Chinese side has been forced to concede on important matters, this death by a thousand cuts tactic will likely continue until the Chinese side gets what it wanted from the beginning.

In negotiating the initial objections from the Chinese side, the foreign side will usually have made concessions that weakened its position, all as part of the normal negotiating give and take and all done on the assumption that both sides would be making concessions to consummate the deal. However, when the Chinese company comes back with new demands, it has already extracted concessions from the foreign side and it is now seeking additional concessions.

The Chinese company engages in this tactic to wear down the foreign company to that point that it concedes on important points to get the deal done. The Chinese negotiators are often quite clever at mixing important issues together with trivial issues and hiding important changes with seemingly minor changes in wording. Fatigue and changing negotiation staff from the foreign side can allow these matters to slip through at the very end of the negotiation process.

The foreign negotiator can usually avoid death by a thousand cuts by being firm with the Chinese side. At the beginning of the negotiations, the Chinese side should be told in writing and in Chinese that it has only one chance to comment so it should make sure that all of its comments and objections are included in its first communication. The Chinese side typically ignores this rule and will still come up with additional comments even after having been told that they will be ignored. The way to deal with this is to live up to your own commitment by telling the Chinese side to “take it or leave it.” Many times the Chinese side will will abandon a deal that would be good for both sides just because it cannot tolerate not forcing the last remaining concession from the foreign side of the deal. The foreign side has to conduct its own rational analysis of the situation and determine whether it makes sense at this point to achieve final resolution by conceding on several minor issues, giving the Chinese side the impression that it has won the battle.

What if gravity ceases? Many Chinese companies are uncomfortable with well-written contracts that tie them down on most or all key issues. They much prefer vague contracts that permit constant renegotiating and clarifying of points as the transaction progresses. This basic attitude often produces an odd result when a Chinese company is forced to deal with a clearly written contract. In response to clarity, the Chinese company often demands “hyper-clarity.” Since Chinese companies inhabit a world where good-faith negotiation and commercially reasonable contract interpretation is uncommon, they will insist that every contract provision be specified in minute detail. In extreme cases they demand a provision for every possible far-fetched and unreasonable circumstance that could affect the transaction.

At the extreme, they will come up with highly improbable scenarios and if you provide a solution to those, they will come back with yet another round of “what happens then if….” This then goes on in an endless sequence, much like death with a thousand cuts. What makes this technique nearly impossible to counter is that the Chinese side hardly ever proposes a reasonable solution to any of the fanciful problems it raises. They simply provide a list of “what if” questions and sometimes propose obviously bad-faith and commercially unreasonable “solutions.”

If you are sensing the start of a “what if” trend in your negotiations, you must very forcefully stop it by refusing to participate. You have to say something like the following: “If you think that [crazy hypothetical] is our intention with this provision, and if you think a court would enforce that kind of bizarre interpretation of our perfectly standard language, we have no basis for moving forward on this contract.” If the Chinese side does not come back to reality, you should pack your bags and go home, as I can assure you that things will not get better over time.

The headless horseman. Several of our clients have expressed their frustration with the “headless horseman” negotiating technique. This technique is used in face-to-face negotiations conducted in China. At great trouble and expense, the foreign side sends a negotiating team to China after the sides are close to finalizing their deal. During the in-person negotiation, the Chinese side suddenly announces that none of their negotiators have authority to make binding commitments for the Chinese side. At the end of each day of negotiation, the Chinese negotiators must return to the Chinese company for permission from their “boss” on all major deal points.

Chinese companies use this technique to gain a negotiating advantage against the foreign side. In each round of negotiation, the foreign side will make concessions in response to corresponding concessions from the Chinese side. The Chinese side then takes everything back to the office and returns the next day by revoking all or nearly all of their concessions as not having been approved by their “boss.”

You should not tolerate headless horseman negotiating. Since this technique is so common in China, you should confirm in writing in Chinese before you send anyone to China that your Chinese counter-party’s team will be authorized to make all contract decisions. If the Chinese side will not commit to this, you should either send your own team to China that also does not have authority to make binding decisions or you can walk away. If the Chinese side agrees to using a team with full authority and then changes the rules during the in-person negotiation, you should terminate the negotiation and take the next flight out.

Source: Above the law  Mar 30, 2015 at 10:06 AM

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