americans negotiating in china_guanxi

8/8/2019 Americans Negotiating in China_Guanxi

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counter-productive throwback to the bad old days of a lawless, chaotic China where personal influence trumped

laws and regulations.

So which view represents the reality in China? Is guanxi a real force that all business-people in China need to have,

or is it a shortcut to scammers, cheats and regulatory hot water?

The Truth About Guanxi

Guanxi is extremely useful and powerful as an information network. A broad, active web of plugged-in

connections can alert you to people who are willing and able to help but who have no idea how to find you and

no other way of being found by you. A good guanxi network is like a combination road map and address book

that will enable help you engage exactly the right resource or decision maker. As a research tool, a good guanxi

network is extremely effective and powerful.

As a skeleton key that will magically unlock doors, it is problematic. Yes, guanxi can open doors, but there are three

problems: 1 it wont necessarily open the door you need unlocked. 2- When all you have is a key, all problems

look like locked doors. You may end up rewriting your business plan because your guanxi connection leads you to a

single type of resource or decision maker. And 3 that door may lock behind you. Westerners who encounter

problems in China are rarely suffering losses at the hands of complete strangers. The people gutting you of your

investment, assets and IP are the very same ones who lured you in with promises of powerful connections and

influential friends.

In short, guanxi can play a role in your Chinese negotiating, but you will have to monitor and decide what that role

will be. Guanxi networks are great as information and networking resources. However, if you plan on using

connections to open doors or knock down walls then you are going to encounter some major difficulties down

the line. When you use guanxi as a shortcut in China commerce, the destination is usually business failure.

Part II: Guanxi for Foreigners 10 Caveats

After our last discussion of foreigners and relationships in China, you may be tempted to dismiss guanxi as

another word for corruption or at least a quick road to disaster. Unfortunately, nothing involving international

business in China is ever quite so black & white. While it is a bad idea for westerners to rely too much on guanxi,

remember that your Chinese partner or counter-party may be a firm believer in it.

When the literature talks about cultural barriers between China and the West, be aware that the key differences

are not fork & knife vs. chop sticks superficialities they are deep-seated core beliefs like guanxi vs. due

diligence. When you tell your Chinese associate that guanxi is an archaic custom, it is like HIM telling YOU that

checking references and analyzing financial reports are silly wastes of time.

If you plan on working with Chinese, the issue of guanxi is certainly going to come up.

Here are 10 rules for dealing with Chinese partners who believe in guanxi:

Caveat #1: Do not be overly dismissive.
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Guanxi may or may not have real benefits but what really matters is that the Chinese people you are speaking to

genuinely believe in it. When I am doing business with Chinese counter-parties who are too quick to disregard my

advice about performing due-diligence or market research, it sends me the wrong messages about their general

competence and respect for American methods. Likewise, when you dismiss their advice about guanxi, you may be

correct but in the wrong way. You may mean, I dont want to engage in corruption or shortcuts but they mayhear I dont understand Chinese methods and dont have much respect for your opinion. The first conversation

you have with a Chinese counter-party about guanxi is the perfect time to discuss the approval process of your

deal or business. It is also an appropriate time to take the moral and ethical temperature of your counter-party,

industry, and general practices in your new business.

Caveat #2: Chinese really believe, not only in guanxi, but also in its uniquely

Chinese characteristics.

The only thing worse than saying guanxi doesnt exist is to say, every business culture has some form of

networking and relationship building. Many Chinese particularly those not experienced with internationalbusiness find this insulting. (A later post will deal with the issue of Face not to be confused with western

notions of pride, status or reputation). Westerners tend to look for common ground, but Chinese may consider it a

swipe at the integrity of the Chinese culture.

Caveat #3: If your new partners only contribution is guanxi connections, you

had best be on your guard.

Chinese consultants and counter-parties know that you have read that guanxi is vital to business in China. In other

words, your counter-parties may believe that building guanxi is a short-term goal of yours. When I was in Beijing in

the early 90s, it was a sure bet that every foreigner gathering or junket had at least one guy who offered to

connect you with the right people. In those days, it was a real job because doing business in China was so opaque

and convoluted. Nowadays the rules are much more straightforward for good or ill. You should not need special

connections to get most approvals and if you do then you should take it as an indicator that your business plan

has flaws. In 2010 China, most experienced Chinese managers should either have the necessary connections or

know how to develop them as needed.

Caveat #4: Guanxi is a rental, not a purchase.

Guanxi does not transfer. When your guanxi guy goes, so does the relationship.

As ChinaLawBlog points out, your guanxi relationship is with a person at the organization not the organization

itself.When your special relationship at the ministry, regulator, supplier or distributor moves on you have to start

all over.

Caveat #5: Guanxi cuts both ways.

It places obligations upon you and you do not always control how you will pay back a guanxi debt. Examples have
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included pressure to accept low quality production, delays, inferior materials, IP theft, material theft, corruption,

nepotism, etc. Remember guanxi is a series of favors, and you have to give to get. The problem is that you have

only the most limited control over what you will be asked to do, and how it will be valued. That is the side of

guanxi that people do not talk about with Westerners much, but Chinese understand well.

Caveat #6: It is not the same as corruption, but it can be close.

The regulatory standards are higher for Westerners in China both among Mainland bureaucrats and those back

home. Even the appearance of corruption can come back to haunt Western dealmakers and it is definitely your

responsibility to monitor and control the activities of your employees, partners and agents. Business as usual for

local Chinese is too weak a standard for foreigners. You need to have rule & procedures and prepare for different

contingencies. If a Chinese businessperson appeared in a US court and said, but someone I just met told me that

everybody ignores that local zoning regulation, he might appear dishonest, arrogant and/or clueless but

extremely liable. Well, youll come off the same in a Chinese court when your new guanxi connection goes awry.

Caveat #7: Foreigners cannot really build it up the same way that locals do.

Consider the difference between a business proposal from your high-school buddy or college roommate and a

Chinese businessperson that youve had dinner with a few times. Both constitute a connection but your

relationship with your former roommate has completely different characteristics. You can be more honest with

him about his ideas, make suggestions and possess a deeper understanding than you ever would with the Chinese

counter-party. The danger isnt necessarily that your Chinese associate will try to cheat you he may kill you by

being overly polite and sensitive to your feelings.

Caveat #8: Distinguish between everyday guanxi and special relationships

.

If your counter-partys guanxi is rooted in familiarity with standard operating procedure at the ministries,

regulators, supply chain and distribution channels -then the situation is fine. It is a normal business competence

that weighs in his favor but is more of a basic requirement than a game-changer. But take note of special

relationships like a close relative of an official or executive at a customer or supplier. These are the

entanglements that get messy quickly.

Caveat #9: China has laws now.

Chinese have a very high regard for bureaucracy, procedures and regulations. Guanxi is not as important as it once

was, and low-level transactions and routine approvals should not require special connections. In fact,

circumventing basic rules can cause BIG problems later on. Remember that it is much easier for foreigners to get

money into China than getting it out. It is easy to find fixers who can speed your investment through but getting

the licenses and permissions to actually sell goods, repatriate profits and move money may be a different story.

Caveat #10: Guanxi may be able open some doors but it can also close and

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Strangers are not generally ripping off westerners who lose investment, IP and assets in China usually. 9 times out

of 10, the very people assured them about the power of their guanxi connections that turn around and use them

to lock out the westerner once the assets are transferred.

Part III: The Guanxi Joint Venture A Case Study in Truth or Consequences

Two parties recently met to discuss a new business venture in China. On one was Bob an American small

business owner looking to expand into China, and the other was Cindy a Chinese entrepreneur who wants to

partner with him.

The first meeting was textbook cross-border business courtship both sides were chatting about big-picture

business plans, impressions about China business and their own personal views and experiences. It was typical of

the relationship building session that many American and Chinese expect in the early stages of a partnership

negotiation. Bob then did something very smart and very significant. He said, So it will be an equal 50-50

partnership between the 2 of us, right? Cindy answered, Well, I have family connections in XXXzhou who have

guanxi with the local government, and they may want a percentage. The conversation then resumed course.

2 points make this conversation a very important case study for Americans doing deals in China:

1) The American side broached a substantive business issue without breaking context. It was still light, big-picture

and friendly, but the westerner made the decision to discuss REAL business. Furthermore, instead of just making

an assumption based on what seemed obvious to him, Bob asked a nave question about the basics and then

shut up.

Many novice American dealmakers erroneously believe that the early-stage discussions are all lightness and

touchy-feely platitudes. Not so. But when Americans talk about business there is a tendency to get overly formalist

and lawer-y. Chinese arent squeamish about touching on business terms early as long as it is handled in a light

and non-threatening way. They probably wont make the first move and they definitely get spooked when things

turn adversarial or are couched in legalistic, contractual language. You should talk about real issues, but look for

common ground first you can iron out differences later. Chinese prefer to start with the easy stuff Americans

sometimes like to tackle the big issues early to figure out if its worth it to stake in the discussion.

2) The Chinese side brought up a very significant point that may turn out to be a deal-breaker down the line. The

local partner is a very real factor. There are important considerations here.

a. A local family member is going to be involved. This is a double-edged sword. The local connections are going to

come in handy in fact, Cindy may view her family connections to be her main contribution to the new

partnership. The family relationship, however, is being packaged as a new partner instead of as part of Cindys

half of the business. This weakens Bobs position and opens the door for corruption, mission -creep and a variety

of other worst-practices. It shouldnt kill the conversation (necessarily), but likewise Bob shouldnt disregard thiscasual statement just because he doesnt like or understand it. This is part of the deal, and the Chinese side was

honest and forthright about it. Now it is up to Bob to manage it before it turns into a crisis.

b. This is new deal-point and a significant one. Bob has gone from being one of two partners to being a minority

shareholder. He has to digest this new information, incorporate it into a new business plan and negotiate

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Americans tend to view a family relationship as a negative to be avoided a cost to the new business. It is the

Chinese sides responsibility and should come out of their pocket. Chinese view the family connection as a rare

commodity that they are contributing to the venture one that will benefit the entire organization and should be

borne by all beneficiaries equally.

Whichever view you take, it is best practices to deal with this issue early. If it turns out that after meeting number

3 or 4 that the new silent partner issue ends up scuttling the deal, then no one is out much and we can walk away

as friends. If they dont deal with the issue until much later as is the case in many US-China deals then the costs

in terms of money, time, resources and opportunity skyrockets.

c. This challenge may be best addressed with a creative business structure. American lawyers would handle this

with contractual clauses and penalties but this is like daring the Chinese side to find a way to outwit you. The

best way to handle the silent partner may be structure this as a multi-phase deal, with the silent partner playing a

role in only the first part. Or the answer may be a sunset clause, or Bob may want the rights to set up an

independent operation in different city, or some other new option. The existence of a third partner is a structural

issue not a contractual one. When Americans try to solve guanxi problems with contractual clauses, trouble

usually ensues.

The point is to surface the key issues early and to recognize potential deal-breakers before you have too much

skin in the game. The Chinese sides position is that guanxi isnt free and the western side is expected to pay for it.

Now it is the westerners turn to make the decision. He can A) accept the deal structure the way it is and negotiate

about the cost and terms of the new partner, B) compromise by adjusting or limiting the role of the new partner,

or C) back out of the deal. Unfortunately, for many American negotiators in China there is also an F) option

ignore the real cost of the guanxi relationship until it threatens the partnership and undermines the business.

americans negotiating in china_guanxi

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