Presenting a live 90-minute webinar with interactive Q&A Business Negotiations in China: Navigating Chinese Systems, Laws and Cultural Differences in Structuring Deals WEDNESDAY, JUNE 4, 2014 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Robin Gerofsky Kaptzan, Senior Foreign Counsel, Haworth & Lexon Law Firm , Shanghai, China John Lee, Chief Executive Officer, LeeCore , Bothell, Wash. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Business Negotiations in China: Navigating Chinese Systems, Laws and Cultural Differences in Structuring Deals June 4/5, 2014 HAWORTH & LEXON LAW FIRM 北 京 上 海 重 庆 香 港 BEIJING SHANGHAI CHONGQING HONGKONG Part I - Understanding the Rules Part II – Technical China Issues of Engagement Presented By: Robin Gerofsky Kaptzan Presented By: John Lee Senior Foreign Counsel China Consultant 4
Business Negotiations in China: Navigating Chinese Systems, Laws and Cultural Differences in Structuring Deals Part I - Understanding the Rules of Engagement John Lee 5
The Conundrum 6
THE PROBLEM 7
Parallax Views The result of looking at the same end goals with vastly different lenses is that when two entities (with vastly different outlooks) try to collaborate in a business relationship it is bound to cause problems 8
Has This Happened to You? • During contract negotiations, there is: • Stalling (unnecessary waiting game) • Entertainment (after hours) which involves heavy drinking • Talking to various negotiators who may not have authority to negotiate • Always looking for better pricing/terms – sometimes outrageous requests • Asking for very liberalized credit and payment terms • Once the contract is inked, there is still a push for terms, conditions, and pricing changes 9
Has This Happened to You? • Introduction of other entities (affiliates or subsidiaries which were not included in contract) to benefit from contract pricing and/or terms • Missing deadlines for deliveries/payments • Payments may be partial (when it does come) • Quality (if supplier) is sub par versus what was represented originally and supplier is upset because you rejected the merchandise 10
Why? For all the trans-global migration and exposure, the Eastern and Western thinking (and ways of doing things) is still separated by a large gulf!! 11
THE CAUSE (ONE POSSIBILITY) 12
The Chinese Diaspora There has been waves of emigration throughout the world but concentrated in Asia which resulted in unusually powerful influences: • Chinese are inculcated as merchant class and government bureaucrats throughout most of Asia • As such, Chinese thinking and ways of doing business have permeated the Pacific Rim countries • Chinese ways of doing things in the mainland (PRC) have morphed because of communism and the Cultural Revolution • Deng Xiaoping is famous for “ black cat, white cat ” statement was game changer for code of conduct and so was the 1992 southern China tour in which he said “ kai fang ” (open up) their economy 13
Underlying Thinking • Immigrant thinking: vying for scarce resources • Life is hard so competitive advantage is always sought to give upper edge • Situational ethics apply – whatever works • “ Better to be the head of a chicken than the tail of the Phoenix ” • Seeking a better deal – ALWAYS!! 14
THE RESULTS 15
3 Key Differences Eastern Thinking Western Thinking • Relationships • Contracts • Win/lose • Win/win • War of attrition • Rule of law Note: this may seem distasteful for some to hear but when you strip the patina of “ political correctness ” these are the hard realities of the differences 16
Contract v. Relationship In Western cultures, the contract determines the relationship (type, terms, conduct, pricing, remediation) however in China the thinking is reversed: The Relationship determines the Contract 17
“ Guanxi ’ s ” Real Meaning Guanxi is Chinese for “ relationship ” but in business it is far from Western definition of the warm and fuzzy scenarios that we may think… On the contrary it is better envisioned as “ balance of terrors ” : Similar to the concept of M.A.D. or Mutual Assured Destruction If you show weakness then you will lose in this relationship! 18
Case Study 1 Situation: • One of the largest shippers of wastepaper to Asia (located in Los Angeles) has given me a chance to ship his freight (but at steep price discount) • 1,000 containers over 6 months! Problem: • One week (to the day) from signing Mr. “ Hu ” called to say that competitor matched my rate • I had to match the rate or Mr. “ Hu ” would not deliver on the contract Solution: • My father ’ s advice – do unto him as he did unto you 19
Win/Win v. Win/Lose Win/win thinking is a uniquely Western concept which is not observed in Asia or in most parts of the world. The thinking is totally foreign because most societies know that the rule of zero net gain applies. Usually it is the following: I win, you lose OR I win more, you win less! The following are some real life stories of this type of thinking put into practice! 20
Tilting the Advantage • Stalling for time – tunnel building contractors in Tianjin (contract negotiations that turn ugly) • ASMC Windtec Solutions v. Sinovel Wind (customer who turns ugly) • Huge US chemical company and rogue employees (employees who turn ugly) 21
Rule of Law v. War of Attrition In Asia , the absolute thing to avoid is: court/arbitration/mediation!! You will not win and even if you do “ win ” then the win usually is hollow ie., very little compensation,unenforceable “ cease and desist ” orders, and bad press of “ ugly foreigner ” “ Burden of proof ” standards and rights/responsibilities usually is heavily tilted against the foreign (US) firm or entities However when you do go to court or arbitration then go in loaded for grizzly bear! 22
Case Study 2 Situation: • Management and employees of US services company in China were shown to have participated in: kickbacks, fraud, embezzlement, extortion, and blackmail • Upper management discovered this and terminated these individuals Problem: • Lawsuit by terminated employees alleging non-compliance to labor laws • Insane standards/thresholds of proof for foreign company Solution: • Research done, strategy and possible outcomes thought through – countersuit for amounts of 10 x 23
THE SOLUTIONS 24
Notable Quotable “ The greatest victory is that which requires no battle ” - Sun Tzu from “The Art of War ” 25
How to Win Knowledge: • So if you are a foreigner, but you take the time to learn the Asian market ways (NOT just business culture) but really understand their societal culture, customs, family, respect issues then you will do well in navigating through the waters • Rules of etiquette and protocols are important but don ’ t get hung up on Asian- isms such as “ face ” . Giving “ face ” is shorthand for showing due respect and the various etiquette rules are varied and great in number. • However, often “ face ” is used as a device to create weakness in the foreigner (who has been trained in cultural sensitivity classes) • Giving “ face ” is fine but if “ face ” is used to your disadvantage (stalling, not getting straight answers, etc) then don ’ t lose your composure but be insistent in your cause 26
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