Managing Conflict in Chinese Business for Westerners: Slideshows

Chinese and Western business-people  have very different approaches to contracts and relationships.  Experienced Westerners say that the real negotiation begins AFTER the contracts are signed.

The Fragile Bridge: 3 Approaches to Managing Business Conflict in China   


Managing Conflict in Chinese Business for Westerners – Sources of Conflict 


Conflict Management in Chinese Business, Part 3: Paths to Reconciliation

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Managing Conflict in Chinese Business Negotiation

An excerpt from the new book, The Fragile Bridge

Managing Conflict in Chinese Negotiation
– Structure Deals for Success

Disagreement is part of normal  business.  At its best, it can take the form of an honest exchange of ideas and opinions that leads to constructive solutions and a closer relationship.

The Fragile Bridge -- Managing conflict in Chinese business relationshipsAt its worst, conflict is an express lane to lose-lose outcomes and value destruction.  Western and Chinese take a different approach to conflict, but that doesn’t necessarily mean you should try to suppress disputes and paper over disagreement at all cost.  It does mean, however, that you have to manage Chinese negotiation conflict more deliberately and proactively than you would at home.

In China, conflict avoidance is a function of finding the right partner (or counter-party) ,   conflict mitigation is a matter of preserving mutual trust  , and  conflict management is a result of proper deal structure.

Structuring deals to manage conflict.

If you are an American or European doing business in China, then your Chinese counter-party is going to outgrow you long before you outgrow him.  The Chinese side is actively pursuing the knowledge, technology and skills to run the business without you from the first meeting.      Westerners, on the other hand, are notorious for spending years in China without developing the ability to “go it alone” and operate independently of their Chinese partner.  Western managers call it “delegation” or “specialization”.  Chinese call it dumb.  This situation often presents even the most honest Chinese negotiator with a conundrum — they have to choose between being smart and being honest.  It is a tough choice if they like you and see a profitable future in your partnership.  It’s a good deal simpler for the Chinese side if they think you are trying to cheat or exploit them.   That’s where good deal structure comes in very handy.

Conflict as Exit Strategy – The Lost Face Shuffle

Let’s  role-play for a moment.  You are a Chinese manager or business owner, and you have been doing business with an American partner for 6 months.  Maybe you are manufacturing his product or supplying his raw materials.  Maybe you are distributing his brand in China.  Whatever the deal, you have been doing your best to absorb the technology and processes to run the business on your own, and now you think you know enough to get started.   What do you do in the following scenarios?

  1.  Your profit margin is less than 5% – and dropping.  Even though your operating environment is deteriorating due to inflation and regulations, your American partner resists any and all cost adjustments.  The only time you hear from him is when he complains about quality or asks for something special.
  2. You are earning 60% of the profits from the JV or partnership, and the American side is actively engaged in new product development, technology upgrades and marketing.

Now, at the start of Month 7, you and your American counter-party have a disagreement about some relatively minor issue.

If you are like most rational, profit-oriented businessmen, you are going to work much harder to keep arrangement #2 intact.  The problem will be dealt with quickly and quietly.  You will be proactive, creative and resourceful about finding a good solution, and your relationship will probably be strengthened by the amicable resolution.

For managers involved in arrangement #1, on the other hand, the disagreement provides a very convenient “last straw”.  You had been looking for a way out of this entanglement ever since you mastered the technology, and now the Americans have provided you with an exit vehicle.  This seemingly minor problem can easily be spun into a face-robbing insult that makes all further interaction impossible.

Just because polite Chinese negotiators don’t like giving a flat “no” doesn’t mean that they accept any situation or offer.   If there is dissatisfaction with deal, then small conflicts will quickly get blown out of proportion.  Good deal structure tends to be much more successful at controlling conflict than contract documents.

Structuring Deals to Manage Conflict

  • Plan for success.  American negotiating teams tend to be headed or influenced by lawyers, so they have a bias towards limiting loss and protecting against the downside.  Chinese negotiators still have an engineering bias, which means they are concerned with process and technology.   When Westerners present the Chinese side with thick contracts full of penalty clauses and performance requirements, all the trust that they worked so hard to build tends to go out the window.  As soon as the Chinese side acquires the know-how and technology they need, they’ll try to get out of the partnership.   The Chinese exit strategy of choice is relationship-destroying conflict.
  • Watch for timing differences where you pay now, and they perform later.   Avoid deal structures where it makes financial sense to force a conflict after you hand over cash, intellectual property, molds, designs, etc.
  • Over-compromise early.  Learn from Mickey Mouse.  When the Disney folks wanted to set up shop in Shanghai, they knew that there was a lot that could go wrong after the deal was signed, so they picked the right partners (Shanghai-based State Owned Enterprises) and gave them a majority stake (roughly 60%) in the project.  That payout gives the Shanghai side of the deal a tremendous incentive to keep the partnership going through thick and thin.
  • Walk away in such a way that you can come back.   Letting him know you have alternatives is the single best option you have – but just make sure that if you do walk away you do it with a smile on your face and a harmonious word on your lips.  “Unfortunately it doesn’t look like things will work out for us this time,” is good.  “You are a thief and I am going to sue you into oblivion,” is not.
  • Conflict management begins at home.  Internal negotiation is a must if the people coming to China to arrange deals are reporting to bosses back at HQ.   Your own management team may inadvertently spark conflict by trying to apply western best practices to Chinese deals.  Nothing undermines trust faster than being unable to deliver on promises – or springing new terms & requirements on an unsuspecting Chinese partner.
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The Fragile Bridge: Managing Chinese Business Conflict for Westerners

Understand Your Chinese Negotiating Counterparties

The Fragile Bridge -- Managing conflict in Chinese business relationships

Order on Kindle or other Ebook formats today

China is a paradox when it comes to conflict and disagreement. Local Chinese talk about harmony, but seem quick to enter into disputes. They put a premium on “preserving face” but don’t seem to care about their reputation… or your opinion. Chinese say that relationships are key to their society, but are willing to betray a partner for pocket change. The number of conflicts is much lower than in the West, but a much higher percentage of them seem to spin out of control and undermine profitable partnerships. The Chinese culture values hospitality and graciousness, but it’s also fertile ground for blunders, faux pas, and accidental insensitivity.

This book is about managing conflict – not resolving conflict – for a very good reason. Because of the way Westerners and Chinese approach relationships, business, and conflict, disagreements in China have a very good chance of being unresolvable. This book aims to help you avoid conflict when you can and minimize the damage to your bottom line when you can’t.

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Mitigating Conflict in Chinese Business Negotiation

When you are negotiating in China, small conflict can actually strengthen your relationship – but the key is to keep mutual trust alive.

Controlling Conflict in Chinese Business Negotiation

You can avoid unnecessary business conflict  in China by picking the right counter-party.  But once you have identified a good candidate, you have to manage two opposing tendencies.  On the one hand, many westerners try to suppress all forms
The Fragile Bridge -- Managing conflict in Chinese business relationshipsof disagreement or difficulty, no matter how minor.  This kind of manager is afraid that the tender shoots of a new business relationship are too vulnerable to survive the slightest   conflict, and he would rather concede a few deal points  than risk a confrontation.  One of the worst things you can do in connection-oriented China is to base your relationship on dishonesty – and that includes false expectations.  Don’t agree to terms you dislike or don’t fully understand.  If your plan is to build a cordial relationship by agreeing to big-picture issues that you will change or clarify later, you run the very real risk of looking dishonest and unreliable.

On the other hand, some negotiators try to make hay while the sun shines and want to use this rare face time to take care of all the details – no matter how unpleasant or awkward.  These strike-while-the-iron-is-hot negotiators tend to sign favorable contracts but never seem to do profitable business.  A signed document doesn’t carry the same weight in China as in the US or Europe.  Many mainland managers will find it easier to scuttle an unattractive deal by forcing a “face-losing” dispute rather than try to renegotiate terms.

The best conflicts in China are small, relaxed, and solvable.   You cannot avoid all confrontation, but successful western negotiators learn how to keep disagreements low-level and impersonal.   Once you show anger or insult the other side then the chances of settling the issue amicable drop to practically nothing.

So how can you mitigate conflict with a partner or customer in China without giving away the farm?

Be yourself.  Some westerners are so determined to cross every cultural barrier that they become a completely different person – one is more patient, tolerant and magnanimous than the one they are back home.  Don’t be so desperate to be liked that you become someone who isn’t respected.   Chinese know how to flatter and compliment without making promises, and you have to learn from their example.  Go into each meeting or negotiation with a list of issues you need to address.  Be sensitive, friendly and polite – but do the business.

Small Is Beautiful – when it comes to business conflict.  The ideal conflict in China surfaces quickly, gets solved completely and helps the two parties develop a manual for managing future conflict.   Build an atmosphere of trust by establishing a track record of small successes at different levels of the organization.

Keep trust alive.  Once a conflict undermines mutual trust, the relationship won’t survive.  Make sure that you keep the channels of communication open, and are prepared to over-compromise if you want to keep this connection.  Chinese negotiators tend to believe that their pool of potential counter-parties is limitless, so they have an inflated view of their own bargaining power.  When a Chinese counter-party feels that he has been insulted, betrayed or deceived, he usually finds it easier to terminate the relationship and wait for the next contestant.

Got to be in it to win it.   Much of Chinese business still depends on strong relationships.  Western managers dream of repeat business that requires next to no maintenance, but Chinese business people still like the personal touch.  Westerners are frequently criticized for not doing the required relationship maintenance – instead only calling to complain or ask for special favors.   If you only get out to China a couple of times a year, it is natural to want to resolve a lot of issues at once, but leave the laundry list at the hotel.   If you always show up with a folder of problems, discrepancies and issues, then you are the problem guy.  People don’t like volunteering or sharing with the problem guy.  Maximize your face time by building trust.

Guanxi and You.  Once your Chinese counter-parties start talking about guanxi, harmony or face, the situation has to be handled VERY carefully.  It’s rarely a good sign.  Beware the “guanxi trap” where you are expected to make real concessions right now for some vague promises of profitable relationships at some point in the future.  Chinese negotiators know that Westerners are very sensitive but unfamiliar with cultural issues like guanxi and face and are willing to exploit your fear of sabotaging the relationship that you think is key to success in the mainland.  Once you start responding to this line of discussion it can seriously undermine your negotiating position and lead to deal-ending disputes.

When it comes to controlling conflict and keeping disputes manageable, the key goal is to keep trust alive and growing.  Once your Chinese counter-parties feel betrayed or duped, nothing you do can rebuild the relationship.  In the US or Europe we’ll use contracts, arbitration and other legal options to insure that everyone respects the terms of the deal, but in China the institutional solution is usually not a good option.  The whole point of Chinese relationship-building procedures is to perform a kind of personal due-diligence investigation on you and your team.  If you fail that test due to dishonesty, emotional outbursts, or neglect, then the Chinese side feels that their system has worked the way it is supposed to – and saved them from a potentially dangerous association with the likes of you.

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10 Signs That You Are Heading for Conflict in China

Warning signs that your China business is at risk of conflict

  1. You have a single counter-party — ie No Plan B.  If the Chinese side feels like they have you locked in, there is a higher chance of conflict  and value-grabbing behavior.
  2. You are discussing technical, operational or marketing solutions before you have nailed down your strategic relationship and goals.  The Chinese have their own agenda for the partnership, and it might include some specific problem solving and coaching.  If they think you’ll work for free, you won’t ever get paid.
  3. You are solving their existing problems with proprietary knowledge or technology.  (Ie:  pricing, workflow, commission rate, production)Negotiate the deal you need, then start doing the work.  If they have issues that you need to fix, incorporate that into the deal or swap for something of value right then.  If you really can’t figure out any way for them to add value then something is wrong.
  4. You are constantly proving yourself and demonstrating your capabilities – particularly to decision-makers who are not present.  Don’t give away the milk just to prove you are a cow.  Talk about party or government officials = red flag.  A tried and true Chinese negotiating tactic is to keep asking for more and more information.
  5. No one on their side seems to be in charge.  The players keep changing.
  6. The general form of the partnership has grown very large, ambiguous, or convoluted.
  7. Your engineering and technical people are called in to explain basic facts about your product or technology.
  8. You are talking about the next, next deal before you have worked out this deal.
  9. You spend more time micro-managing relationships but still don’t have a product, price, or process.
  10. Some of their key operational people seem to be working for other companies or have unusually close relationships with clients or firms that you aren’t involved with.
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Goldilocks and the Chinese Partner

Relationship-building and Conflict in China    

Conflict avoidance is the other side of the coin from relationship building.  Those that take the time to build substantial and mutually beneficial networks and relationships find that they have serious conflict less often.  Those who cut corners on the relationship building—working with paid consultants to make introductions or jumping into exclusive relationships too fast – are the ones that never seem to get clear of damaging, expensive business disputes.

The relationship-building phase of the negotiation is when Chinese parties emerge the issues that they feel are important,  even if they don’t come right out with a list of demands.  Whether its technology, IP, control, cash or other assets, the earlier you can bring up the issues that you care about, the better.  You may not decide on anything definitive for a while, but the idea is to find out how the Chinese side measures success and failure.   Ask a potential JV partner to describe what your successful business will look like in 5 years, and you might be surprised to learn that you don’t play a big part in his plans.  It’s important to make sure that you are all on the same page as far as a definition of success, because that can be the most stressful situation facing a Western-Chinese partnership.  Failures can be dealt with amicably, but healthy sales and big profits are worth fighting over.

Goldilocks and the Chinese Partner

During the relationship-building phase, you have to decide how you are going to raise significant issues.  Many Westerners come off as too weak – fearing that any objection or disagreement will make someone lose face and destroy guanxi.  Others become their own worst enemies by making big, open-ended promises that they don’t seriously plan on honoring .

The Goldilocks guide to building conflict-free relationships in China

Too soft

–       Don’t accept adverse terms in the relationship-building phase of the negotiation, thinking you’ll correct things later.

–       Don’t drink the Guanxi / Face Kool Aid and treat your counterparty like fussy little girls who will have temper tantrums if they don’t get exactly what they want.

–       Be careful not to cede too much operational control too early.

–       Don’t make promises about positions or divisions of responsibility until you are prepared.

–       Don’t give away exclusivity

–       Careful with promises about bonuses, tech transfers, manpower planning — once you say maybe, they hear definitely

–       Don’t avoid serious issues and confine yourself to fluffy small talk.  It’s true that Chinese negotiators don’t like to decide on deal specifics right away, but you can ask about their business philosophy and long term goals from the beginning.   Find out about his history, experience, and expansion plans.  Find out if you play a role in his big picture future.

Too big

–       Don’t offer exclusivity, technology, co-branding or market access unless you are serious about it.

–       Don’t accede to open-ended agreements that lock you in to specific obligations but don’t require the Chinese side to perform according to any definitive benchmark.

–       Avoid best effort marketing, sales and R&D plans.

–       Be cautious talking about broad expansion plans or ambitious ramp-ups.

–       Don’t offer exclusivity, technology, co-branding or market access unless you are serious about it.

–       Don’t get lured into businesses, industries or services that you don’t understand.

Too hard

–       Thick contracts with penalty clauses tend to undermine trust.

–       Penalty clauses

–       Negotiators who start out with tough guy attitudes, risk-limiting agendas and lawyers – but think that relationships will grow out of successful transactions – often miss the chance to build healthy relationships and raise the chance of catastrophic conflict.

–       Thick contracts with penalty clauses tend to undermine trust.

–       Find a diplomatic way to say, “we’ll see how the first transaction turns out”.  You are better off talking about most-likely estimates for the first year (or several years), “assuming we can align our systems”.

Just right

–       You are friendly, open and forward-looking.  You are speaking in terms of mid-term or long-term success.

–       You are raising your significant issues in a non-confrontational but serious way.

–       There is an exchange of optimism and a frank discussion of concerns.

–       You are talking about your business philosophy and asking about his.

–       You know your goals and business principles before you go.  You are not too rigid and inflexible — but you aren’t making things up as you go along.

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