China has turned into the second largest economy in the world after its rapid economic growth since the reform and opening-up policy from 1978. Such achievements, to some extent, shall also thank to active foreign capital in Chinese market. Riding on this rising tide, Chinese enterprises show up in more and more outbound investment activities and play more and more important roles in cross-border transactions, either as buyers or as sellers1. Therefore, in order to strike deals with Chinese investors more efficiently, foreign parties2 may need some tips in negotiation with Chinese parties.
Regardless of some universal negotiation standards, Chinese entrepreneurs may still be inclined to stick to their own "Chinese way" in doing business. Thus, it is necessary for foreign parties try to respect, understand and take advantage of Chinese common practice, thinking mode and legislative custom. In certain situations, such factors may determine whether to reach or break a deal. However, we should still always keep caveats in mind that you negotiate with individuals, not average3; and stereotyping your opponents from another country may be detrimental to business negotiation.
I. Chinese Culture, Business Philosophy and Corresponding Negotiation Tactics for Foreign Parties
As known, China is a country with nearly 5,000 years' history and has over 2,000 years' feudal empire ruling period based on Confucius ideology. Chinese society features a strong vertical hierarchy, even at present. It leads Chinese people would weigh title, ranking, power of decision-making; and often prioritize their own "faces" (Mian Zi i.e. reputation and image in front of public or counterparty) when negotiating. It would be more obvious when Chinese people dealing with foreign-related business. The following methods may be helpful for foreign parties in such circumstances.
1. Sending Respect to Chinese Government Officials
Cross-board M&A deals are usually subject to various Chinese government approvals. Chinese sellers often invite Chinese government officials to supervise large inbound transactions during negotiation phase so as to facilitate government approval process.
With rare exceptions, the social status of government officials would usually be higher than business entrepreneurs, which may directly or indirectly influence the process of negotiation. When a government official is invited to attend negotiation, he/she usually will give an opening speech of the meeting and provide high-level guidance to the transaction. Such speech and guidance should be paid big attention, as they indicate critical government requirements, implications, and/or government's attitude to this transaction; at least, the Chinese entrepreneurs think so.
Foreign parties should stay prudent when they decide to challenge government officials, especially in front of other parties, even if the officials' attitudes sometimes don't seem to be as neutral as expected. A more efficient and appropriate approach for foreign parties would better to address their concerns to government officials privately rather than publicly to save their "face". It is also a more efficient approach when communicating with government officials.
2.Appointing Proper Negotiation Representative
Historically, Chinese people tended to deem job title as a social identification. They would weigh the title of the counterparties' representative before getting into the substantial negotiation. They usually expect foreign parties to assign representatives with equivalent or even higher titles than the people from their own side, which makes them feel being enough respected.
Therefore, it will help the foreign party to have a good start in the negotiation if knowing the negotiation representative of the Chinese side and his or her job title in advance and then appointing proper representative(s). When a foreign party assigns representative(s) with higher title(s), Chinese party will appreciate it for being "lifted", which may smoothen the negotiation process and let the foreign party have a more friendly counterparty.
3. Familiar with Background Information of the Chinese Key Person
In most Chinese enterprises, there is a key person who has big influence in the company and usually is the final decision-maker. Depending on the nature of the Chinese enterprises, such key person could be the founder, the major shareholder or a representative appointed by government (in case of state-owned enterprises). Therefore, knowing well about the background of this key person is critical to the success of the deal.
Sometimes, the key person is at an elder age and has experienced difficult economic times in before 1980. In this situation, the key person tends to be more conservative, risk-avoiding and slower in making decisions4. He or she will take his or her personal reputation, dignity, as well as responsibilities to employees and public opinions into account integrated. Foreign party must have special patience when negotiating with this kind of key person. The negotiation tactics is to show sympathy and understanding to personal experience of struggle with adverse, emphasize the long-term benefits of the deal and the positive contributions to society and local community.
Where the key person is relatively young in his/her thirties or forties, who had better education background or comes from a rich family, it is not difficult to tell that this kind of key person tends to be arrogant, sharp, risk-taking, and cares much more about investment return than social benefits5. The positive aspects for negotiating with such people are that they usually understand global norms to do business, are willing to compromise on non-monetary issues, and make decisions effectively and rapidly. Foreign party should devote sufficient time and energy to demonstrate the rationale and profitability of the contemplated transaction in such cases.
4. Putting up with Nationalism
Chinese people's nationalism comes mainly from: (i) proud of China's 5,000 years' history, (ii) humiliation to western powers in the past 150 years, and (iii) China's recent rise to strong economic and military status in the world. The sense of nationalism will arise especially when Chinese party cannot fully understand or get accustomed to the international business common practices if conflicting with Chinese tradition. They will easily ascribe the difficulties to western power's so called imperialism. For example, a typical western-style Share Purchase Agreement normally contains long and exhaustive representations and warranties to guarantee the target company's past operations. If the Chinese party is the seller, they usually will be annoyed by this kind of long paragraphs with legal jargons, and they will tell the foreign party that the legal document is too complex and unfair to execute. We recommend foreign parties to keep patient to interpret the global standards in the industry, explain the fact that such requirements are not only for China, but also applicable in other countries so as to mitigate irrational nationalism.
5. Reading between the lines
Unlike western countries with a relatively "low context" culture, China is of a typical "high context" culture. While low context cultures tend to be explicit, individualistic and goal-oriented, high context cultures are more implicit, group-oriented and relationship-building. They also use face-saving techniques to avoid embarrassing overt capitulations6. Therefore, foreign party should pay special attention to the non-verbal communications given by the Chinese party when their attitudes appear to be ambiguous, which may indicate that they have other concerns that cannot be discussed on the table (e.g., political concerns, internal conflicts, etc.). Under this circumstance, foreign party should refrain from pushing Chinese party to give a clear answer on certain questions in the meeting; instead, they should rather hold the questions to a private discussion.
High context culture also prefers a structure agreement with general principles and some key business terms rather than a bunch of specified provisions. Chinese people's mindset is to concentrate on key business terms such as price and payment, and not to spend much time on minor issues (it is reasonable to some extent). They are usually reluctant to review a contract of more than 15 pages; while a standard western style Share Purchase Agreement may have many more pages. Therefore, it is important for both parties to make some concessions on the contract formality issues. Practical experience shows that a contract of 20-30 pages may be more acceptable to both parties.
In addition, as Chinese people prefer building a long-lasting relationship before doing transactions, foreign party should be patient with the process of the deal. In western business mindset, time and efficiency is vital in transactions; but in Chinese business mindset, time is a testing water of faith and trust, and "patience" is valued as a good characteristic. As such, foreign parties sometimes do not need to insist on a rigid deadline, or to express too much concerns about the timing pressure, which may become leverage to Chinese party.
II. Practical Tips for Negotiation with Chinese Party
Besides narrowing the gap regarding culture and mindset issues, foreign parties shall also obtain some practical tactics in arranging negotiation meetings. Oversight on these issues may result in troubles.
1. Site Selection
Although Chinese party would usually request the negotiation meeting to be arranged in its venue, it is not a wise choice for foreign party to accept such proposal; otherwise it may create a home-turf advantage for Chinese party. Psychologically speaking, hospitality provided by Chinese parties may create an implication to foreign parties feeling compelled to make excessive concession. Foreign party should be very careful of not violating unfamiliar local customs, or committing a faux pas7.
A moderate suggestion is to select a metropolitan city close to mainland China such as Hong Kong or Singapore as the site for negotiation meetings, ideally at the office of foreign party's external legal counsel. Several advantages for foreign party include: (i) these cities usually have direct flights to major international cities thus can greatly reduce the travel duration, alleviate fatigue and jet-lag so that foreign party can be better prepared for the meeting; (ii) these cities are more business-oriented and international, and the business environment may influence Chinese parties to conduct the meeting better in line with international practice rather than local way; (iii) Chinese party may have much less home turf advantages; (iv) usually it will not be too unwilling for Chinese parties to accept such proposal because of Chinese speaking environment.
2. Team Composition
Team composition is critical to the success of a negotiation. As abovementioned, foreign party's team leader should have at least an equivalent title to the leader of the opponent Chinese party. Such principle of equivalence also applies to the whole team composition. It would be better for the foreign party to get a list of Chinese party's attendees before the meeting and organize a negotiation team matching with the size of the counterparty's team. Sometimes foreign party will dispatch a taskforce of negotiation stuffing all functions of the company, but this may cause adverse effect on the negotiation, because Chinese party may feel they are outnumbered and become cautious, conservative, over-protective. Under this circumstance, Chinese party may likely delay the decision-making process or even suggest postponing the meeting.
It is also important for foreign party to engage its own China counsel in the team, because China counsel usually will act as a bridge between the western mind and eastern mind, and try to eliminate misunderstandings resulted from language gap. Foreign parties are recommended to engage experienced China counsel who has solid local M&A practices, nice western legal education background and proficient English language skills.
3. Agenda Setting
Chinese people get used to discussing all issues simultaneously in apparently haphazard order – emphasizing the whole package over details, which means nothing is settled until everything is8. Therefore, it is very important for foreign party to draft a meeting agenda beforehand and have it agreed by Chinese party. However, sometimes Chinese people will not stick strictly to the agreed agenda. Foreign party shall try the best to guide and control the discussions in the right direction in given time; otherwise the parties may not be able to finish the topics as scheduled.
Moreover, even for the seemingly closed topics on the agenda, foreign party should not take it for granted that they are finally settled. It is not uncommon for Chinese party to request re-negotiating the closed items if they encountered difficulty or reconsideration in negotiating other terms. Foreign party who encountered this problem should remember to demand reciprocal concessions from their Chinese partners9.
In general, Chinese people follow the global standard protocol and deportment in negotiation. However, there really exist some special Chinese etiquettes that foreign party should take care of or at least not to misunderstand them. Take shaking hands for example, unlike western businesspersons, Chinese people may likely not hold other people's hands firmly when they shake hands. Instead, they usually prefer a symbolic hand-shaking, i.e. shaking other people's hands briefly and gently. However, foreign party shouldn't mistake Chinese party's brief hands-shaking as an expression of weakness or snub, and thus become over-aggressive in the negotiation, which may unexpectedly annoy Chinese party.
Another special etiquette issue is gift. It is common for foreign party and Chinese party to exchange gifts at the beginning or end of the negotiation meeting. Such gift should not be too expensive or too cheap in value; usually in an appropriate range of $30-50. A gift from the foreign party's home country, with a beautiful symbol or logo, and suitable to display, will send a sincere and friendly message to Chinese counterparties. Chinese people also have some taboos for gifts, for example, you shall never give a green-color hat to a Chinese man as a gift (implying cuckold). Foreign party should consult their public relationship counsel in advance for gift issues.
Even though stereotyping Chinese businesspersons may not be effective to all negotiations with Chinese parties, it is still advisable for foreign party to pay attention to the culture, mindset and legal differences between countries, and equip with certain negotiation tactics to achieve successful closures of transactions with Chinese business partners.
*With special thanks to Chenyi Li, an Associate at Zhong Lun, who has made significant contributions to this article.
1 According to PRC Ministry of Commerce, in 2016, China attracted US$ 139 billion inbound investment and made US$ 170 billion outbound investment
2 To avoid being over-broad, in this article, foreign party refers to western business entity or individual.
3 Folberg, Golann, Lawyer Negotiation: Theory, Practice and Law (2006), at 239
4 Claude Cellich, Practical Solutions to Global Business Negotiation, at 37
6 Cohen, R., Negotiating Across Cultures, 1991, at 56-61
7 Charles Craver, Effective Legal Negotiation and Settlement, 2012, at 294-295
8 John Graham, Mark Lam, The Chinese Negotiation, Harvard Business Review, October 2003
9 Charles Craver, Effective Legal Negotiation and Settlement, 2012, at 319
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.