This is the first in a four-part series on how to negotiate with Chinese companies.
In part one, I will describe common negotiating tactics we often see from the Chinese side, and how to counter those tactics. Though my focus will be on service sector licensing deals, the negotiating tactics and respective counters are universal.
The China lawyers in my firm have been drafting an increasing number of agreements for Western companies licensing their IP for use in China. Many of these licensing agreements have been in service industries like publishing, film, telecom, and finance. Foreign company participation in these industries is restricted and our clients are frequently choosing to license their way into China instead of entering into a China Joint Venture. However, when negotiating these deals, the Chinese side typically uses the same tactics as in joint venture deals, including the following three classics:
- Wearing the foreign side down with endless issues. This tactic has two components. First, the Chinese side raises a series of issues. Second, as the initial issues get resolved, the Chinese side then raises unrelated new issues. This tactic is designed to wear down the foreign side until it concedes on key deal points.
- Scheduling a formal signing ceremony. At the beginning of the negotiating process, the Chinese side schedules a public signing ceremony a few months out at which high-level officers from both sides will participate amidst much pomp and circumstance. Then, a day or two before the signing ceremony, the Chinese side announces that the contract must be revised on one or more key issues in a way that entirely benefits the Chinese side. The Chinese side typically claims that a “government regulator” or an outside source such as a bank or insurance company requires these changes and they must be made right away so as not to have to call off the signing ceremony. Using the pressure of the impending signing ceremony, the Chinese side is able to elicit favorable concessions.
- Renegotiating key issues after signing. The Chinese side signs a contract, but when the project is ready to start (or even after it has started) it announces that certain key provisions of the contract must be changed for legal reasons or because some government regulator requires it. The lawyers are gone by now, leaving only the “committed parties” who too often agree to the changes so the project can quickly proceed. These committed parties then present the changes to busy upper-level management as a minor technical revision and the changes get made. Everyone remembers how the initial negotiation was so troublesome and nobody wants to “bring in legal” to start the process over again. In our experience, these changes are virtually never required and virtually always problematic.
If the Chinese side tries to wear you down with endless revisions, refuse to participate. Firmly state your position and do not bend unless and until the Chinese side agrees to your position or at least moves closer to it.
Never agree to a fixed signing date. Make clear that no signing ceremony should be scheduled until after the contract has completed final negotiations. The Chinese have contempt for suckers, so refusing to go along with this may even earn you the respect of the Chinese side.
Make clear that there will be no changes to the contract after it is signed and that you will treat attempts to change the signed contract as a material breach, leading to termination and a lawsuit for damages. Set up a clear procedure to bring back your China legal and advisory team if the Chinese side starts waffling on the contract to ensure these people have input on change decisions.
Do not fall prey to the negotiating tactics discussed above.
Source: Above the lawMar 23, 2015 at 10:06 AM