16 Practical Chinese Negotiation Tips and General Strategies (compiled)

GENERAL STRATEGIES AND 16 PRACTICAL TIPS IN THE THREE STAGES OF BEFORE-DURING-AFTER NEGOTIATION IN CHINA
by Vincent F. Yip, PhD MBA, Management Consultant, and Lecturer, Stanford Continuing Studies ( Palo Alto, California)

Note from Foreign Entrepreneurs in China:  I´m planning to share this very good article in some social media forums so this is a compilation of  part I & II that you have probably read in my previous two posts)

For companies in Fortune 500 or even Small and Medium Enterprises, entry into the lucrative China market is a highly desired process that begins with identifying potential Chinese partners and entering into all-important negotiation. Other than generalities such as maintaining “guanxi” and “face”, any western team intending to go into China for business and commercial negotiations should have as many practical tips on the “dos and don’ts” of negotiating in China. I shall be teaching the Stanford Continuing Studies course “Doing Business in China” we will spend half a session on this important issue of negotiation during the six-week duration. This course begins in late June and the description of the course is in this link:

https://continuingstudies.stanford.edu/courses/course.php?cid=20114_BUS+202

Based on this author’s 30 years of experience travelling, living and working inside China, here is a list, not exhaustive by any means, for use in the three stages of before, during, and after the actual negotiations.

(A) PREPARATIONS:
1. Pick a neutral large city & location;
Background Fact: Do not give into pressure to conduct all negotiations in the small city of the Chinese partner, and suggest doing it in a larger international city with modern conveniences and security. There have been cases where the Chinese side can and has resorted to unethical practices to illegally obtain information from you.

2. Do background research on subject and personalities using Chinese sources;
Background Fact: China has no Moody’s, Better Business Bureau or any trustworthy rating agencies on the track record of a company. Best you find several other local Chinese sources to cross check the reputation of your Chinese partner or opponent in negotiation.

3. Pick your own team (age, seniority, sex, attire) carefully. Be consistent from meeting to meeting;
Background Fact: The Chinese prefer to maintain personal relationship from beginning to end, so keep the team intact. Also, youth and women among your team are not frowned upon in today’s China, but make sure your top leader has a title (make up one if needed) that commands respect from their side.

4. Be realistic about your strengths and weaknesses;

5. Bring gifts for your host, bring your own personal effects/medicine;
Background Fact: Most Chinese cities are quite modern and medical facilities are effective and reasonable, but not all your western medicine is readily available.

(B) ACTUAL NEGOTIATIONS:
6. Pick a neutral venue and a convenient time avoiding the eve of long national holidays of both countries, and allow “float” for overflow of schedule or the Chinese may use time pressure against you;
Background Fact: They tend to wait till the last day to raise critical issues and demands, and force you into making concessions because you are pressured to leave.

7. Stay at an international hotel, watch your belongings and intellectual property;

8. Know the wants and needs of your Chinese side, remember Sun Zi’s premier advice of “know yourself and know your enemy, and you will win a hundred battles”.

9. Do not fall prey to food, wine, & women; do not negotiate when tired or pressed;

10. Speak in your native tongue, use your own translator, write it down when it comes to numerals and figures as mistakes are commonly made right here;
Background Fact: Best to hire your own translator/interpreter and when it comes to numerals and magnitudes, insist on writing them down. Because of the difficulty in translating numbers/magnitudes, gross errors can occur even to the best VIP translators and the consequences are horrific of course!

11. Remember such Chinese negotiation tactics as:
– accusing you of violating guiding principles, guilt trip;

– asking for the moon, outrageous demands;

– threatening to go elsewhere for the better offer;

– divide and conquer & outlasting your patience;

12. Remember national and cultural sensitivities, avoid discussions on human rights and Tibet, for example, and always keep face and give face. Jokes seldom work across culture so best not to crack them openly.

(C) POST NEGOTIATION
13. Thank and praise host, take photographs, exchange souvenirs;

14. Redraft final agreement (must be in both languages), check for accuracy, go over details, and always have a scribe/secretary take care of all documents;
Background Fact: Remember that Chinese is a much more flexible and opaque language, but yet the Chinese copy is the one that prevail in their courts. Make sure then those details you had written down in the English version is correctly reflected in the Chinese version, and submit Appendices if needed.

15. Win or lose, happy or not, a farewell banquet (speeches, toasts and gifts exchanged) is definitely required;

16. A contract is valid only if it continues to be serviced, it is only the beginning of a difficult long road towards a successful project.

General Strategies
Many often ask if it is useful to study Mandarin and the Chinese language before going and my answer is normally to persuade them to instead spend their valuable time reading up on China’s history, culture and psyche. One of the most successful China experts is Dr. Kissinger, the legendary diplomat who helped open up US-China relationship in 1972, and he is not known to speak any Chinese. It is much more important to understand what drives the Chinese, their fears, concerns, and wants and needs, and China’s own “pride and prejudice”.

In general, some knowledge of Confucius teachings that are the underpinning of Chinese culture is certainly useful before hopping on the plane to China. But I would definitely recommend spending a week or two to browse through articles and business/military books on the famous Sun Zi “The Art of War”, as many of its strategies and tactics will surface during the long course of negotiations with the Chinese side.

Here is a parting comment that may surprise you. In the west, wars and military efforts are about display of bravery and valor, but Sun Zi said a successful militarist is never short of treachery and cunningness! Then there is also the Chinese saying that “the business field is just like a battle field”, now combine the two saying and you know why negotiation in China is not for the faint-hearted and unprepared!

By Vincent F. Yip, PhD MBA
Management Consultant,
and Lecturer, Stanford Continuing Studies
Palo Alto, California
Email: vyip101@hotmail.com
Cell: 415-860-0660

What do you think?

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16 Practical Chinese Negotiation Tips and General Strategies (Part II)

GENERAL STRATEGIES AND 16 PRACTICAL TIPS IN THE THREE STAGES OF BEFORE-DURING-AFTER NEGOTIATION IN CHINA
by Vincent F. Yip, PhD MBA, Management Consultant, and Lecturer, Stanford Continuing Studies ( Palo Alto, California)

This is the second part of guest post by Mr Vincent F. Yip. You may read the first part here.
Remember that he will be teaching the Stanford Continuing Studies course “Doing Business in China”.  This course begins in late June and the description of the course is in this link:
https://continuingstudies.stanford.edu/courses/course.php?cid=20114_BUS+202

 16 Practical Chinese Negotiation Tips and General Strategies (Part II)

(C) POST NEGOTIATION

13. Thank and praise host, take photographs, exchange souvenirs;

14. Redraft final agreement (must be in both languages), check for accuracy, go over details, and always have a scribe/secretary take care of all documents;
Background Fact: Remember that Chinese is a much more flexible and opaque language, but yet the Chinese copy is the one that prevail in their courts. Make sure then those details you had written down in the English version is correctly reflected in the Chinese version, and submit Appendices if needed.

15. Win or lose, happy or not, a farewell banquet (speeches, toasts and gifts exchanged) is definitely required;

16. A contract is valid only if it continues to be serviced, it is only the beginning of a difficult long road towards a successful project.

General Strategies
Many often ask if it is useful to study Mandarin and the Chinese language before going and my answer is normally to persuade them to instead spend their valuable time reading up on China’s history, culture and psyche. One of the most successful China experts is Dr. Kissinger, the legendary diplomat who helped open up US-China relationship in 1972, and he is not known to speak any Chinese. It is much more important to understand what drives the Chinese, their fears, concerns, and wants and needs, and China’s own “pride and prejudice”.

In general, some knowledge of Confucius teachings that are the underpinning of Chinese culture is certainly useful before hopping on the plane to China. But I would definitely recommend spending a week or two to browse through articles and business/military books on the famous Sun Zi “The Art of War”, as many of its strategies and tactics will surface during the long course of negotiations with the Chinese side.

Here is a parting comment that may surprise you. In the west, wars and military efforts are about display of bravery and valor, but Sun Zi said a successful militarist is never short of treachery and cunningness! Then there is also the Chinese saying that “the business field is just like a battle field”, now combine the two saying and you know why negotiation in China is not for the faint-hearted and unprepared!

By Vincent F. Yip, PhD MBA
Management Consultant,
and Lecturer, Stanford Continuing Studies
Palo Alto, California
Email: vyip101@hotmail.com
Cell: 415-860-0660

What do you think?

Subscribe to this blog:


 

16 Practical Chinese Negotiation Tips and General Strategies (Part I)

GENERAL STRATEGIES AND 16 PRACTICAL TIPS IN THE THREE STAGES OF BEFORE-DURING-AFTER NEGOTIATION IN CHINA
by Vincent F. Yip, PhD MBA, Management Consultant, and Lecturer, Stanford Continuing Studies ( Palo Alto, California)

For companies in Fortune 500 or even Small and Medium Enterprises, entry into the lucrative China market is a highly desired process that begins with identifying potential Chinese partners and entering into all-important negotiation. Other than generalities such as maintaining “guanxi” and “face”, any western team intending to go into China for business and commercial negotiations should have as many practical tips on the “dos and don’ts” of negotiating in China. I shall be teaching the Stanford Continuing Studies course “Doing Business in China” we will spend half a session on this important issue of negotiation during the six-week duration. This course begins in late June and the description of the course is in this link:

https://continuingstudies.stanford.edu/courses/course.php?cid=20114_BUS+202

Based on this author’s 30 years of experience travelling, living and working inside China, here is a list, not exhaustive by any means, for use in the three stages of before, during, and after the actual negotiations.

(A) PREPARATIONS:
1. Pick a neutral large city & location;
Background Fact: Do not give into pressure to conduct all negotiations in the small city of the Chinese partner, and suggest doing it in a larger international city with modern conveniences and security. There have been cases where the Chinese side can and has resorted to unethical practices to illegally obtain information from you.

2. Do background research on subject and personalities using Chinese sources;
Background Fact: China has no Moody’s, Better Business Bureau or any trustworthy rating agencies on the track record of a company. Best you find several other local Chinese sources to cross check the reputation of your Chinese partner or opponent in negotiation.

3. Pick your own team (age, seniority, sex, attire) carefully. Be consistent from meeting to meeting;
Background Fact: The Chinese prefer to maintain personal relationship from beginning to end, so keep the team intact. Also, youth and women among your team are not frowned upon in today’s China, but make sure your top leader has a title (make up one if needed) that commands respect from their side.

4. Be realistic about your strengths and weaknesses;

5. Bring gifts for your host, bring your own personal effects/medicine;
Background Fact: Most Chinese cities are quite modern and medical facilities are effective and reasonable, but not all your western medicine is readily available.

(B) ACTUAL NEGOTIATIONS:
6. Pick a neutral venue and a convenient time avoiding the eve of long national holidays of both countries, and allow “float” for overflow of schedule or the Chinese may use time pressure against you;
Background Fact: They tend to wait till the last day to raise critical issues and demands, and force you into making concessions because you are pressured to leave.

7. Stay at an international hotel, watch your belongings and intellectual property;

8. Know the wants and needs of your Chinese side, remember Sun Zi’s premier advice of “know yourself and know your enemy, and you will win a hundred battles”.

9. Do not fall prey to food, wine, & women; do not negotiate when tired or pressed;

10. Speak in your native tongue, use your own translator, write it down when it comes to numerals and figures as mistakes are commonly made right here;
Background Fact: Best to hire your own translator/interpreter and when it comes to numerals and magnitudes, insist on writing them down. Because of the difficulty in translating numbers/magnitudes, gross errors can occur even to the best VIP translators and the consequences are horrific of course!

11. Remember such Chinese negotiation tactics as:
– accusing you of violating guiding principles, guilt trip;

– asking for the moon, outrageous demands;

– threatening to go elsewhere for the better offer;

– divide and conquer & outlasting your patience;

12. Remember national and cultural sensitivities, avoid discussions on human rights and Tibet, for example, and always keep face and give face. Jokes seldom work across culture so best not to crack them openly.

Coming soon, post negotiation tips and general strategies.

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Chinese Negotiation: Do not interrupt me! And six reasons why you should not

Image via Wikimedia Commons

A lot of the tips that we share here on how to negotiate effectivelyin China are obviously not China-specific, but well-known negotiation tips or tactics. The reason why I choose to write about them for you is because, in some way, they are specially relevant to the China context.

Do not feel offended if it is not your case, but we have a distinct tendency to interrupt each other when we are negotiating or discussing. This is not only a big mistake but it is also culturally inaproppiate.

This is an anecdote shared by a Western businessman in China on this topic:

Once, while we were on the process of setting up our company, we were waiting at the notary´s office. There was a meeting going on inside and the discussion got quite heated. There was huge shouting coming from the office but there was also one detail that struck me. Not even at the peak of the argument did they interrupt each other. The dynamic was a heated argument in which each party would take turnsto shout and curse at the other, and then stopped and waited for the other part to react in a similar way. I had never witnessed something like that in my life”

So these are six reasons why you should not interrupt your business contact while negotiating:

In general:

1.If you are interrupting, you are not listening. And listening is thekey to effective negotiation.

2.You may prevent the other party from sharing information that may be helpful for you later on in the negotiation

3.It may be perceived as rudeto interrupt somebody who is talking to you

In China, particularly,

4.Chinese are good at listening and they do not interrupt the other negotiatorwhile talking.

5.It does not help you build the relationship, and relationship-building is vital to business success in China.

6.They just can´t understand why you asked a question if you are not going to let them answer.

What is your negotiation experience? Tell us your story!

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 If you are interested on this topic you may also like to read the following posts:

* 36 Tips on How to Deal or Negotiate with your Chinese Suppliers
* Sourcing from China: Who are the Happy Buyers?
* Quality Control. Can you Hear me Loud and Clear?
* 4 Tips to Succeed in Times of Silence

Going to War with your Chinese Supplier and 4 Ways to Prevent it

Todays post is an aggregation of two post I read last week that work well together:

1st Post
Last week I read an article on China Law Blog about a worrying trend that they are witnessing:
-In the past, when a Chinese factory provided bad product, they would usually admit it, and blame it on either a subcontractor or a supplier.
-Now they deny it and threaten to sue you if you do not pay whatever is still “owed”.

The explanation for current quality problems is the economic downturn and the fact that factories need to cut costs relying on lower quality components. But the key point in the article is the strategy shift on how to deal with serious quality problems with your Chinese supplier: (Read the full article here)

Today, the tactic is to threaten to prevent the American company from “ever doing business in China again” or, more specifically, to seize the American company’s product at the border. We take these threats very seriously and they have altered our approach to these sorts of cases.

In the past, if an American company was seeking $200,000 in damages from a Chinese company for bad product, we would most of the time seek to dissuade them from even bothering to pursue litigation. []

But the strategy changes if the Chinese company threatens to close you down. We have dealt with cases where US companies were unable to buy from any Chinese supplier without paying 100% upfront because their alleged failure to pay had caused China’s export insurance agency to refuse to insure payments from the US company. We have also dealt with way more than our share of cases where someone or something from our client was held hostage in China to secure payment.

If a US company is facing the situation above, our advise is that they sue the Chinese company somewhere, usually in the United States. Being able to show the Chinese insurance company, the Chinese police, or the Chinese border patrol agents, that you have sued can be invaluable. Your complaint against the Chinese company shows that the situation is not as simple as the Chinese company is making it out to be. Your complaint shows that the Chinese company is not necessarily owed anything at all and that you are not clearly someone who does not pay your debts.

Of course, if your company has no intention of continuing to do business with China and your personnel will not be going there again, then the best strategy probably would be to just walk away, just as in the old days.

2nd Post

When I read the article I left a comment with what I thought was the best (and obvious) advice you can give to anybody sourcing from China: “Quality Control ALWAYS, even with good suppliers”

And right afterwards, I read another article at the Quality Inspections Tips blog entitled “The 4 ways of checking product quality before shipment”. As preventing a problem is always better than having to fix it, I thought this post was a good extension to what we have previously read.

These are the 4 ways Renaud Anjouran describes in his blog (you can read his complete post here)

1.Inspections by external inspector(s) in the factory
Pros:
The final random inspection is the “standard” way of checking quality. Suppliers are used to it.
It is easy to set up and relatively inexpensive, even with many different suppliers in many different places.

Cons:
The supplier might interfere in several ways: only showing a part of production (usually because they are late), bribing the inspector, or shipping other products if the inspector does not stay until the container is sealed.
If the purchaser only sends an inspector after production is over, and if the inspection is failed, the supplier might refuse to rework the goods. He might wait until the purchaser is obliged to deliver his own customers’ orders.

2.Final inspections on a platform
This solution is popular with some large buyers.
Pros:
Inspectors are more productive (no need to travel), and the goods can be shipped immediately after acceptance.
No risk of supplier interference.

Cons:
Suppliers often resent this solution. If the inspection is failed, they have to pay for the transport back to the factory, sort & re-work the goods, and submit them again.
Not suitable for small and irregular volumes.

3.Piece-by-piece inspection in the factory -If you want to check 100% of production
Pros:
The defect rate in the shipment is very close to zero after this 100% check.
The manufacturer sees what is rejected and needs to re-work it.

Cons:
Suitable only for large and regular volumes in one geographical area.
Can be expensive, depending on the number of inspectors to station in the factory

4.Training & auditing internal inspector(s) in the factory
Pros:
Much lower cost than sending third-party inspectors
In addition to controlling the products’ quality, the inspector can report on production status

Cons:
You need a high level of cooperation from the manufacturer (no interference at all)
There might be many complications if you purchase through a trading company

What is your experience? Is it getting tougher to negotiate quality problems with your suppliers? Do you always check quality before shipment?

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10 Tips for Doing Business in China

Anne-Laure Monfret, author of “Saving Face in China: A First-Hand Guide For Any Traveler To China” published last month an article entitled “10 tips for doing business in China” at That´s Shanghai.
I reproduce here the ones that I´ve often heard from business people with substantial China experience:

3. Resist the temptation to jump in if your Chinese counterpart remains silent.
Silence is the true friend that never betrays.

4. Make an effort to speak a little bit of Chinese.
Learn to use and understand the basic Chinese survival vocabulary.

She also includes the following tips under “speaking a bit of Chinese”:
a) Don’t say an abrupt “no” to your Chinese staff or counterpart, but instead say “I will consider it.”

b) Usually understand “mei wenti, no problem” is “you wenti, there is a problem,” and “yes” is “yes, you are the boss,” not necessarily “yes, I agree with you.”

c) If you don’t want to say “yes” or “no,” which may cause a loss of face, simply answer “maybe.”

d) Make sure that what you say is not completely misunderstood: state, ask your listener to restate, ask information questions rather than yes-no questions, confirm, clarify, check.

e) Try to understand everything. It’s just impossible. Accept that sometimes there are things you cannot explain. Instead, just move on and keep your eye on the ball.

I would personally group them under “Effective Communication” rather than speaking Chinese, as it is all about what your Chinese contact really means and about the potential cultural inadequacy of some of our own comments/reactions.

6. Adopt a positive attitude.

7. Spend time giving face. You can be sure it will be returned one day.

9. Don’t think for a minute you can do it all by yourself.

10. Make your negative remarks and comments in private, one-to-one, discreetly, not publicly, behind the scenes, internally, away from eyes and ears, when there’s no one around… have I emphasized that enough?
This is the number one rule in China!

You may read the rest of her tips here.

Would you like to add yours?


 

Arbitrating your China Disputes

via Wikimedia Commons

China Law Blog published this month a series of three posts about “Arbitrating your China disputes”, by China arbitration expert Dr. Clarisse von Wunschheim. The posts discuss the current debate about where to arbitrate your China disputes, with two main schools of thought:
-Arbitration in China: in order to improve your chances of enforcement
-Arbitration outside China:in order to improve your chances of winning.

This is a summary of some key points in her posts: (but I recommend you read this very interesting series: post I, post II and post III)
-On the two schools of thought, Dr. Wunschheim believes that both of these approaches miss the point, and that the question of where to arbitrate is intimately linked to the parties’ expectations and needs and should therefore depend on a series of case-specific factors.

-Some legal context:
a) Under Chinese law only parties to a ‘foreign-related contract’ may choose a foreign dispute resolution forum.
b) For a case to be considered foreign-related, at least one of the parties involved must be of foreign nationality.
!! Foreign companies too often overlook the fact that their Chinese subsidiaries, including joint ventures or wholly owned entities, are considered to be Chinese entities established under Chinese law.
c) Under most modern arbitration laws, the law applicable to the arbitration clause is the law chosen by the parties (in the absence of an explicit choice, it is the law of the place of arbitration)
!! But, Dr Wunschheim states that enforcement of a foreign award rendered based on an arbitration agreement which disregards the forum selection restrictions runs a serious risk of being refused enforcement.

-So, what to do?
Dr Wunschheim does not believe this means you should refrain from entering into such arbitration agreements. She states that the key questions are: ‘What do the Parties want?’, and then ‘Which option is more likely to give them that?
She believes that lawyers focus too much on enforcement issues.
Studies show that in most cases, there is no need to resort to enforcement. The same seems to apply in China, where less than 10%of the total volume of arbitration cases are believed to result in enforcement proceedings.
There are a lot of other positive ‘endings’ to arbitration than enforcement, including amongst others:
-Amicable settlement before rendering of an award, (25% according to Queen Mary/PWC Survey 2008- and, with regard to China, 20-30% CIETACandBAC reports);
-Voluntary compliance with the award (50%, according toQueen Mary/PWCSurvey 2008 , and ‘high’ with regard to China according toCIETAC’s Secretary General);

Various studies conducted in recent years reveal that the parties firstly seek a fair and neutral process entitling them to resolve their dispute in a way that is acceptable to both of them. Sometimes, the parties just want a decision on a dispute:
-In order to move forward, and the expression of this dispute in monetary terms is more a ‘tool’ rather than an aim in itself
-A determination of the facts and liability for insurance or other similar purposes
-To create a basis for renegotiation of their business arrangements

So, it seems the expert feels there is no right or wrong.And I will finish with Dr. Wunschheim initial statement: the question of where to arbitrate is intimately linked to the parties’ expectations and needs and should therefore depend on a series of case-specific factors.

 What are your views?

 

 

Chinese Negotiation: 4 Tips to Succeed in “Times of Silence”

By Matthias M. via Wikimedia Commons

Have you ever been in a Chinese negotiation where suddenly everybody goes silent? It is not uncommon and it does not happen by chance.

One of my interviewees, an expat who had gone through a substantial amount of negotiation while setting up a manufacturing plant, observed on the topic of Chinese negotiations:

“Silence plays a very important role in negotiation. Our Chinese business contacts know we tend to feel very uncomfortable with silence. We become uneasy. Hence they use silence during negotiations to strengthen their position”

This conversation came back to my mind recently while I was reading a newspaper article about recruitment tips “Listening skills a winner for job hunters” (Waikato Times, Saturday January 14, 2012) based on insights by Jeffrey Kurdisch in the Washington Post.

One of the tips in the article reflects that very same comment. I reproduce it here because it is as valid for job hunting as it is for negotiation and life in general:

“Be comfortable with silence
Several recruiters have told me they use silence as a tactic to see how job-seekers respond. Negotiations research suggests that people who are uncomfortable with silence tend to share information that may put them at a competitive disadvantage. Savvy job seekers accept silence during a conversation and are careful not to talk about things that will reduce their employability. They also use silence moments as an opportunity to check on their own non-verbal communication (sit up straight, project self-confidence, no distracting mannerisms). If you feel the need to break the silence, try asking questions.”

Silence is also used in a range of situations in which you need the other part to open up and share information. One of my relatives, who was a marriage counsellor till retirement, says “we often used silence during a counselling session to allow people the time and the opportunity to share things that they needed to bring out”.

So, silence is widely used to bring information out. And, in a business negotiation, information is power. So be aware of your reactions to silence and follow in your own negotiations the advice Mr Kurdisch was giving to job hunters- that we could translate here into negotiation tips:

Tip#1. Be comfortable with silence

Tip#2. Do not feel pressured by silence into talking about things that will put you at a competitive disadvantage

Tip#3. Use silent time to review your negotiation strategy/tactics

-Tip#4. Break the silence with questions, if you feel the need to talk (this way you will not give away information)

By the way, my interviewee was very relaxed about silence. His tip was aligned with the ones specialists suggest: “Just take silence as a brief break in your negotiation. Take that time for reflection and thinking about how the negotiation is going and how to take it forward”

What do you think? Have you ever faced a silent room in your Chinese negotiations?

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Related Posts:
36 Tips on How to Deal or Negotiate with your Chinese Suppliers
Sourcing from China: Who are the Happy Buyers?

A China Joint Venture Survival Guide. 22 Facts and 22 Practical Tips (III)

This is the third post of the series entitled “A China Joint Venture Survival Guide” based on Mike Smith’s experiences as his company’s representative in a Chinese joint venture. If you have not read our previous posts you can read them here:
A China Joint-Venture Survival Guide (I)
A China Joint-Venture Survival Guide (II)

A Joint-Venture Survival Guide (III).(Tips 16-22)

“Watch Out for the Money Holes”
16. Money Hole #1: Company employees & Social Security.
There are a couple of “black holes” that are often used to suck your money away: the stated number of employees in the company and the payments to social security. You need to get two proofs here:
– Proof of the total number of employees in the company
– Proof that they are paying Social Security forthose employees.
Do not accept their word for this.
Experience: Our partner kept swearing that the company had 74 employees. My calculation was that there were no more than 50 employees in the company. I asked them to prove their claim but there were no contracts to be seen. When I asked for the bank transactions to assess the amount of money we were investing in overheads I was told it was paid in cash. When I asked for the receipts signed by the employees they said there were none.
I was not alone in this situation. I encountered other companies facing exactly the same challenge.
! Tip: You need to check this when you are negotiating and you still have bargaining power. If you discover this when you have already invested several million dollars you will be helpless. Do not accept their word on this. In China they file Social Security online. They have a website where they can access, through their company name and password, all their social security, accounting and fiscal (tax) data. Request to have access to this while still negotiating.

17. Money Holes #2: Stock Control
Companies often do not have good stock control in place and this is another big “black hole” your money will slip through.
Experience: You are told they bought 10 units of a product and they just purchased 5. When you try to investigate in detail they tell you there are not stock control systems in place, or the switch off the computer, or they tell you it does not work …
! Tip: Make sure you have access to all the policies and procedures manuals before you sign a deal. And once you have access, make sure you assess whether the policies and procedures are really happening or not. It is also quite possible that they do not even exist
The people from the purchase department should be “your people”. If that does not sound possible it is better to create the department from scratch and hire a local purchase manager of your choice, that you can trust, to ensure proper control.

18. Money Hole #3: Accounting
How many accounting books is your partner keeping? Make sure you keep a tight accounting process.
Experience: I always used to work late. One evening I happened to walk through the accounting department and somebody had forgotten to lock away the accounting books. To my surprise, the number of accounting books was higher than what I thought our company was keeping. I did not need to be too smart to figure out what was happening. Our partner was using fake purchase orders to divert money into his own personal accounts. Our accounting team was also keeping the books for his own company, which by the way was not supposed to exist any longer but should have merged into the J-V.
! Tip: Make sure you have unrestricted access to all cabinets and locations where information is stored.
!!Tip: Keep a very strict monitoring of the accounting. All expenses must come with proof of purchase,authorised and signed by you or your team.Fa piao (we could translatefa piao as “super-receipts – receipts that are hand-stamped and recognised for tax and other purposes) are difficult to audit as they usually come without a description of the expense.
!!!Tip: Develop a good relationship with the CFO
!!!!Tip: Purchases should come with double signature (CFO and your representative) on set days (probably not necessary more than three times a week as purchases are planned in advance)

Other things that could go wrong
19. Technology Transfer – IP Risks
A fact you should be clear about is that your partner is likely to end up copying your technology.
Experience: Our target market was China, so our J-V was supposed to manufacture a product more sophisticated than the existing competition in China but not as technologically advanced as our products in Europe. In order to do that, we needed to transfer some know-how to our Chinese partner. I strongly suggested against it but at that time, it would have been equivalent to giving up the project and I still did not have physical evidence of what was going on.
My fears were soon proved right and I caught them copying our electronic cards … And later on I found out about them copying machinery and tooling.
!Tip: Well, you have no way to control it. Fingers crossed and good luck (do not forget we are talking “deep China” and not main business hubs). If all steps have been taken correctly things are more likely to go better.
Most business people I´ve met in China share a view that the new generation of Chinese business people who have studied abroad understand how to do business for the long term rather than for immediate and dishonest gain.

20. Company Seal- Always with You.
In China documents can be signed and stamped with the company seal. Back home contracts would not be valid unless you have signed them. Here the company seal is enough to make a contract valid … so
!Tip: Never leave your Legal Representative seal with somebody else. If you absolutely need to, be sure you can trust that person 100% as that seal is equivalent to your own signature.

21. Be ready to test your endurance
Experience: My Chinese partner was responsible for my house utilities. Once I was left without power for several days, another time I had no running water for three days. I also got internet connection discontinued.
People around me also suffered. I went through three finance managers who left the company shortly after I hired them. I remember the case of one of them who would systematically arrive at the canteen to be told there was no food for him. These are highly paid professionals who have no interest in going through that hell when they can have a nice well paid job somewhere else.
!Tip: I think when you have reached this stage, things are going really bad. In this case, it could be safest to control your house contract and utilities directly (probably through somebody you trust).

22. Beware of direct communication between your partner and your headquarters.
When you start proving to be a “damned nuisance” in your partner’s life he may try to get rid of you in different ways. He may contact your headquarters and try to make you look like inept or make them believe you complicate your life (and everybody else´s) with non-existent problems and issues.
Experience: In my case the Chinese partner kept calling my company’s president and emailing the board of directors in order to undermine their trust in me. I was very lucky because in the end I managed to get access to all sort of documents that proved we were being ripped off. But I’ve later on met other people who lost their positions due to pressure from the Chinese partner.
!Tip: Invest in “Educating your Headquarters” before you start operating in China. Headquarters don’t like to hear bad news. And some of the stories you will tell them are so unbelievable that they may end up thinking you have gone China-mad.

So what are your tips and experiences in Chinese joint ventures? You can leave a comment or contact me to share it in a longer form!

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A China Joint Venture Survival Guide. 22 Facts and 22 Practical Tips (II)

This is the second post of the series entitled “A China Joint-Venture Survival Guide” based on Mike Smith´s experiences as his company’s representative in a Chinese joint venture. If you have not read our previous post with the first set of facts and tips you can read it here:
A China Joint-Venture Survival Guide (I).

A Joint Venture Survival Guide (II).(Tips 9-15)

“The Danger Zone”
9. Your Potential Partner is Well Connected … Maybe Good, Maybe Bad
Experience: It is quite common to be taken on the “big tour”, introduced to the city mayor, the bank’s president, and all sorts of top-end contacts. Your partner will put especial effort into making a great impression and showing you how easy doing business in China is going to be if you deal with him.
! Tip: Do not be dazzled by your partner’s connections …They will not necessarily be used for your benefit.
The fact that your partner is well connected is good (you obviously don’t want to end up with a nobody), but it is also a fact that at times those connections are only used for their own benefit.

10. Financial Reports: “I can’t live with or without you”
Financial reports: you need them, if only because when things go wrong you will be the first one fired if you did not order a financial report. But just be aware that reports can easily be falsified, and a lot of relevant information may be missing.
Experience: I will not get into too much detail but let’s say that I have even seen the falsifying process in action. Do not believe everything you read, and be aware that there will be facts/realities that are not reflected in those reports.
! Tip: There are things you will only get the feel for if you base yourself at your potential clients´ workplace. My recommendation would be to place your trusted person (who by the way should be China-knowledgeable and understand what he/she is looking for) at the company´s site . You need to see how the factory works, how many workers there are, their accounting, their stock control ….

11. Tax Planning: “Tax Breaks. Do not believe all you hear”.
While you are negotiating the joint venture you will be promised a lot of benefits. Tax breaks are a common tool to lure you into a location that needs to be developed. A lot of companies start operations in a location partly because they have been offered corporate income tax exemptions or reduced/zero import/export duties. It is also common to find that the day you to try to apply for them, you are told that the central government has changed the regulation and they can no longer grant you the benefits they promised.
Experience: We were promised tax exemptions on all those tools and parts required for our product manufacturing. It did not happen. Not even once.
! Tip: As mentioned in tip number 5 , it is essential to get the support of a good consultancy firm. Your investment should also make sense regardless of the tax exemptions or other promised benefits.

12. Let me guess: your Chinese partner wants to contribute the land to the joint venture.
Experience: The Chinese partner always wants to contribute his own properties to the joint venture. But, can he give you actual proof of the real land value? These are common situations to encounter:
– The real value of the land, does not correspond to what your partner is claiming.
– The audited value presented and paid by your Chinese partner has been (easily) falsified.
– All sorts of excuses to justify the absence of a purchase document stating the real value they paid: “Government does not give invoices. We got a good deal …” . Do not fall for them.
In our case, we got an independent valuation of the land. It was worth 30% less than what our partner claimed.
! Tip: Do not fall for excuses. A land purchase should be properly documented. Beware if is not.
Experience: We wanted to buy land for the JVC. Our Chinese partner finally presented what he deemed was the best possible location and the required size(we felt it was too big). The land value would be considered capital contribution by the partner. He presented an alleged Government document stating the land value. The document had no seal so we suspected something was wrong and requested an independent valuation. The land value estimation was 200,000 € cheaper than the value presented by our partner. Our company´s President trusted the partner so they decided to take his word on this (by that time MD was already suspicious about the partner). The land was purchased, the invoice was never seen. He showed us an ownership title and the land became his capital contribution. Later on I managed to located the real purchase documents and the deal had been sealed at a 400,000€ cheaper prize.

13. Does your land have a license to have a factory built on it?
You need to watch out for this one. Chinese companies often ignore this step. You may find sizeable companies operating (100 employees, tax bureau number, social security …) without the license to legally operate a factory/company on their land. That may not be a problem while you stay together (they will surely have their ways to ensure there are no problems). But in the event of a split you may face one of these two situations:
– You want to sell it but you can’t because there is no licence for the construction done.
– You want to operate it alone, but being a foreign company you will find the government inspection at your doorstep day one. And they will close it due to lack of permits.
! Tip: Make sure you know all the licenses the business needs to operate legally. If your partner claims to have the license for that land already, you need to see it. If licenses are pending have your expert/consultant involved in that matter.

14. Building the Factory- Oh Nightmare
This is another potential source of conflict. You will probably trust your partner to lead the factory construction works.
Experience: “…a workshop building would not progress and when I inquired I would get “We have run out of money”. Digging into the contracts details I would find a lot of irregularities like missing contracts, unsigned contracts …”
! Tip: “If your project involves building a factory, I would recommend to budget for 15% to 20% extra cost vs. agreed amounts. Timewise, I would build in an extra 40% as a buffer. Penalties should be included and quantified in your contract. And as mentioned before, always use the China or Hong Kong Arbitration Court”.

15. Check Company Operational Manuals.
Very often there is nothing written on how operations should function. When you land there and try to organise things you do not even know where to start. And what is worse, your Chinese partner is not interested in changing anything as he feels it has been working for him for years before you arrived.
! Tip: The trusted person I advise before to place in your prospective partner´s operation should check out the operational manuals and whether the company works in compliance with them. If there are no manuals in place, you should request them to record their existing processes so that you can discuss them and negotiate before the deal signature.

Coming soon the final post of this series: “A Joint Venture Survival Guide (III)”. More interesting and useful tips to help you navigate a joint venture negotiation.

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