BizChina

Andrew Hupert over at the Chinese Negotiation blog did an interesting and helpful post on negotiating strategy in China in a post entitled, US-China Variation of Prisoners Dilemma -- The Factory Game. In his post, Andrew, who teaches at New York University's (NYU) Shanghai campus, discusses in detail the experiment he did with his students and the results of that experiment.

More importantly, he then sets out five good lessons American businesses can learn from relating to their business negotiations with Chinese companies:

What lessons can US negotiators in China draw from this exercise?

1 – Set the stage for trust, or you will poison the potential relationship from the start.
Test orders are an American concept while systematically building relationships is Chinese. Americans assume that the relationship will grow from successful transactions. Chinese assume that successful transactions will grow from relationships. The result is that Americans tend to under-promise (“we’ll have to see how well you do on the first order before we discuss raising the volume”) while the Chinese over-promise (“oh yeah, we can definitely do what you want at the right price and quality level” – even if they don’t know what they are doing – yet). Both behaviors tend to undermine trust in the early stages of a US-China business relationship.

2 – Penalties and missed bonuses are often interpreted by Chinese actors as ‘cheating’ behavior – and a betrayal of trust.
Americans often employ the ‘carrot and stick’ technique of using potential bonus payments and penalties to enforce positive behavior. Unfortunately, Chinese counter-parties often view this as dishonest and manipulative. It is human nature to count the bonus and ignore the penalty during the pre-execution phase of the deal. Once trust is lost, it is very difficult to restore. A missed bonus – regardless of how justified the American side feels it to be – often triggers negative behavior from the Chinese side.

3 – Guanxi-building activities like dinners, tours and meetings are the Chinese method of vetting partners.
You should be doing the same. Use your banquet time to talk about how you and your counter-party define success. What are your goals? How can you work together? American negotiators are often shocked at how much time the Chinese waste on relationship building. Chinese negotiators are equally shocked at how much opportunity the Americans waste by not building proper relationships.

4 – Overly picky contract terms tend to be counterproductive.
Your corporate lawyer thinks you can write-out the risk of overseas deals, but in China this can be counter-productive. Detailed contracts with penalties and financial stipulations can make the Chinese side feel that you are not a suitable long term partner. Contract terms that seem normal in the US can trigger the “cheat” switch in China — since they think you are already pulling fancy tricks.

5 – Relationships are not organic in China.
Americans tend to feel that close relationships are the product of positive experience and time. Chinese negotiators are a bit more transactional, and expect partners to ‘work at the relationship’ in the early stages. Don’t blow an opportunity by paying lip-service to your Chinese counter-party. When they say, “we want to have a good relationship” it isn’t necessarily a pro-form business platitude. Use the opportunity to define slippery terms like ‘trust’, ‘success’ and ‘long-term’. Assumptions can be lethal in a cross-cultural negotiation.

My experience concurs with all these suggestions and I am going to speak to Andrew's Nos 2 and 4 because those relate most directly to my role as lawyer on foreign-Chinese transactions. My experience is contractual bonuses are frequently misunderstood and oftentimes do create unexpected problems. For whatever reason, Chinese companies frequently seem to be of the view that if a contract provides for a bonus for achieving a particular goal, getting close to that particular goal warrants the bonus, or at least a strong request that it be paid. I also agree with Andrew on the penalty front, but with a pretty big caveat. Our experience has been that they can be quite effective, not so much in their enforcement, but in their keeping the Chinese factory or counter-party's feet to the fire and, when things go wrong, as a leverage piece to force a quick discussion of how things will be resolved. In other words, their strength lies not so much in their enforcement, but in their availability as a leverage tool to get things done.

I also agree with Andrew's view on what he calls "overly picky contract terms." I have always had the sense that the typical Chinese company views the length of the contract as being inversely proportional to the strength of the relationship and though it is important that the contract have all of the critical terms, this is a big incentive to keep it as short as possible. One other thing Andrew hints at here is that Chinese companies typically do not interpret contracts as technically as do Americans. A great example of that is joint venture contracts. If an American holds 51% of a venture, it assumes it pretty much controls everything, whereas the Chinese company might well view that split as simply giving the American the right to 2% more of the profits.

Let's hear your China negotiating stories. What are you seeing out there?

Whenever I get together with tech people who have been doing business with China for a few months, they seem to throw out expressions about China like "next Silicon Valley" or "going to be even bigger than Silicon Valley." But whenever I get together with tech people who have been in China for years, they never say such things; they talk about how much China needs to change if it is ever going to have its own Silicon Valley.

So which is it? Why or why not?

Please weigh in.

"And the papers want to know whose shirts you wear...."
Space Oddity, by David Bowie

I love technology and I am constantly on the road. I definitely fit the definition of "early adapter" and my friends are constantly asking me what technology they should be buying, oftentimes for travel. I just got an email on that and I figure I might as well just write about it here.

Here's what I use, have used, and wish I used.

1. My laptop is a 14.1 inch Lenovo t400 with a solid state hard drive. I picked the lenovo T400 because it was well priced and because I like how I can remove the DVD drive and replace that with another battery, which is what I typically do. I also like how its power cord is smaller and lighter than most other laptops. I went with the solid state drive because it weighs less than a regular hard drive and is also much less likely to crash. I beat the heck out of my laptops and usually have to replace them every 18 months or so and I have been known to have hard drive issues. Plus, since it is made in China, I figure repairs and spare parts ought to be easy there, though that is probably true of every laptop. I once found myself in Dalian without the power cord to my dell and it took me all of thirty minutes to find a replacement.

When my laptop is docked at my office, it is supposed to back up to my firm's network. But because I am out of the office so much I also back up online via Carbonite and I also every once in a while backup to a Seagate Go portable hard drive.

I sometimes wish I had something even smaller, but then I would have to deal with the hassle of having to do file transport. Right now I have everything I need on my laptop and that would be much more difficult if I were to get something smaller. I bought a netbook a few months ago before a China trip and I absolutely hated it. I actually bought it for my eleven year old daughter so that she would not keep asking to use my laptop, but it was not even adequate for her. The keyboard was just too small and everything just seemed so slow. Many many years ago, I bought an HP Jornada, whose claim was that it worked well for 95% of what one needed for a computer. I found out though that it was the other 5% that drove me crazy and I vividly remember trying to send an email from a hotel room while doing a cost benefit analysis between throwing the Jornada against the wall and reveling in watching the smash or selling the damn thing as soon as I returned to civilization. I sold it.

Still, I covet the Toshiba Mini NB205 http://www.pcmag.com/article2/0,2817,2349053,00.asp Toshiba Mini NB205 and the
Sony P. The Sony P is absolutely gorgeous and it weighs only 1.4 pounds, but since I have an iPhone, I cannot justify it.

2. I use an iPhone, but with trepidation. This is actually my second iPhone and I will be getting the 3GS version very soon. I just love it. One can never be bored with an iPhone. My trepidation stems from two things. First, it is not as good as a Blackberry for email. Second, it is not nearly as good as a blackberry for international use. I was a Blackberry user for years and for years I would marvel at being able to respond to emails while standing in line at customs after having landed in China or wherever. But because my iPhone's mail is pulled off the internet and because international roaming is incredibly expensive, I bring my backup phone with me to China these days, leaving my iPhone at home.

3. My firm's phone system allows me to use my computer to receive and dial out as though I am in the office, but I find it easier and about the same cost to just use Skype. My home phone system is OOMA and I could do the same thing with that, but again, I just do not bother. I have Skype rigged on my iPhone, but I also pay AT&T Mobile a bit extra per month to reduce my international long distance charges and I virtually always make my iPhone calls through AT&T rather than through Skype.

4. Onebox.com. I signed up for this service during the dot.com boom and it was free for years. I used it then and I still use it now (but far far less often) as a virtual fax machine. It costs only $9.95 a month and I also use it as a voicemail box to which my cell phone and my office phone are transferred when I am out of the country. I then pull my voice-mails off the internet. Again, I am sure my office phone system has this same capability, but since I have been using onebox for this for years, I see no real reason to change. My firm's faxes all come in digitally and I can check those from China as well.

5. Tripit.com I am addicted to this service. You reserve your hotel, rental car and airline at your normal website and then forward you email confirmation on to tripit, who then takes all that info and sets it up in the form of a killer itinerary with the key phone numbers and maps that is both online and on my iPhone. It really is amazing. I have the FlightPro app on my iPhone, but I find myself using it way less than I expected.

6. Noise canceling headset. I use a Sony in ear model I bought at Narita airport a few years ago when I forgot my regular pair. I know the quality is not that of a Bose, but its size and weight is considerably less than an outside the ear model and that is most important to me.

7. Booking sites. In addition to the old standbys like Orbitz, Expedia, and Travelocity, I also use Divamboo for my initial hotel check and then I typically go to the hotel's own website to book. I often use ATA to search for flights. When in China, I, like just about everybody else, use eLong and cTrip.

What do you think? What are you using that you like or dislike?

At least once a week, I will sarcastically say, "I'm from the government and I'm are here to help you." I love blaming the government for just about everything. But even I have my limits.

In its post, "The iPhone debate: what can Apple do?" China Herald has a nascent debate going on regarding Apple's China foray. On one side, Shaun Rein, who believes Apple's less than stellar start in China is its own fault and believes it needs to do the following to succeed in China:

1. Listen to local consumers
2. Pick China Mobile as a partner rather than China Unicom
3. Treat China as a part of the global market, not as a separate one

On the other side sits PTaylor, who blames the Chinese government for Apple's alleged woes.

To which Rein has this to say:

I always like it when people say it is all the government's fault and there is nothing companies can do to get around it. That is sometimes true but smart companies will evolve business plans for local conditions to factor in local regulations and market conditions. Apple did not do that well enough.

When people say that, they just don't know enough about how to get things done in China or, as is often the case, local execs do know what to do but they can't get buy-i from the home office.

For instance, eBay failed in China more because of meddling from the home office than from folks in China -- they were actually quite good but just ignored.

So, Ptaylor, my advice -- learn how to deal with obstacles rather than just
complain about them.

Who's right?

Well, of course, they both are to an extent, but I overwhelmingly side with Shaun on this one, despite being an Apple shareholder and massive fan of the company.

But let me start out by stating as clearly as possible that I do NOT think Apple is failing in China. I do not know exactly how well or how poorly it is actually doing there, but the reason I am certain it is not failing there is because it has not been there nearly long enough for anyone to say it has failed, or even that it is failing. Apple is a big company and I am quite certain that it plans on being in China for the long haul and until the long haul is over, one cannot ascribe failure to it. Apple is still in the "getting its feet" wet stage in China and it is not fair to pass anything close to final judgment on it until it has gotten well past this stage. I again urge everyone to read the book, Chocolate Fortunes, to better understand how it can take a long time and a lot of money for a big company to establish a consumer foothold in China. Let's just say Apple's conduct in China has not caused me to even think about selling even one share of my stock.

But I side with Shaun nonetheless because it is not right to blame the government for Apple's alleged shortcomings in China because the responsibility rests with Apple to know of government issues before entering into the China marketing and to have a plan for dealing with them. If Apple did not know of the governmental issues it would face and did not have a plan in place for dealing with them, and if those issues are going to prevent Apple from succeeding in China, long term, then Apple should not have gone into China. My guess is that Apple did know of most of the major hurdles the government would be throwing up against it, does have a plan for dealing with them, and does (and almost certainly will) know how to succeed in China despite them.

Again, my response here is based largely on my own experience with assisting other foreign companies in going into China. In the typical situation, the smart company knows and plans for most (though certainly not all) government obstacles to its doing business in China. The smart company also knows whether those government obstacles are likely to fall disproportionately on them or whether they are going to be spread around fairly evenly among both them and their competitors.

It is the very rare situation where I would be willing to blame the government for my clients' failing in China. In fact, it is the very rare situation where any of my clients have even sought to blame the government for their own failures in China and even rarer still where I would agree with them.

We had one client who set up a factory in China only to discover that it would need environmental approval to import one of the key component for its product. This client made a mistake in not checking this out first, but it did not blame the government for this; it merely went through the somewhat arduous process of getting that component approved.

We had one client who was fairly hard hit by a change in China's tax laws that caused it to make sense to restructure its business entities a bit. This client did the restructuring and talked often of how its having done this so quickly would actually give it an edge over some of its slower moving competitors.

We have had a million clients who have had issues with the government regarding countless things (zoning, labor issues, tax issues, etc.), but virtually all of them worked these things out and virtually all of them acted as though these sorts of things are just par for the course in doing business anywhere.

We have had clients who have invested money into China and/or started businesses there that were later declared illegal for foreigners. These businesses had to close down and in these cases, it would not be fair to blame my clients entirely for their situation. But is this really any different from the risk any business faces of its business being declared illegal or becoming obsolete. When Seattle banned all smoking within a business, a couple of cigar bars had to shut their doors. As people move to the internet, newspapers are shutting down. Though I certainly do not entirely blame the impacted businesses for their plight, I do think that any business runs an existential risk and that is life.

The truly nimble business will nearly always survive, no matter what the external conditions.

Blame the business or blame the government? What do you think?