Right now, the power balance is in your favor.  Smart purchasing managers, however, will take care not to alienate their network of suppliers.  In the future, there may be shortages and technological breakthroughs that will give the seller more power in the relationship.

Here are a few ideas for handling the deal-renegotiation call with a western or MNC supplier:

1. Be as direct as you can.  They are expecting the call.  Don’t make it worse by dragging it out.  I know that if the counter-party is Chinese you may be a bit more polite and round-about.  When the counter-party is Western (or has Western bosses) then you are being kinder by being quicker.  Start out with, “I’m afraid I’ve got some bad news.  We have had new orders from the very top to cut costs and review all existing contracts…”.   You can take it from there.
2. Show a little transparency.  Give your suppliers a little information about your situation – particularly when you expect to be big buyers again.  If you are in financial trouble, be as honest about the situation as you feel is appropriate.  Chinese buyers can very tight-lipped at times – and it often serves them well.  This is not one of those times.  Share a little info and learn more about the seller’s situation as well.  
    
3. Don’t let it get ugly.  You remember when the situation was reversed and you were begging for reasonable prices and the other guy showed you no love.  Now is your chance for revenge, right?  Wrong.  Now is the time to secure your future relationship with key suppliers and strategic partners.  You want to come out of this global recession in a stronger position — not just see your suppliers fail.  

Go to www.ChineseNegotiation.com for their take of how Western sellers are handling the renegotiation call.

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Please help with a research project by taking a brief, simple & anonymous survey about US-Mainland negotiation. 

Click here to open online survey:

http://app.icontact.com/icp/sub/survey/start?sid=6256&cid=355149

My name is Andrew Hupert, and I’m a teacher and writer in Shanghai. I am now working on a project for my International Negotiation class at New York University’s Shanghai campus (in cooperation with East China Normal University). 

Thanks very much for your cooperation in my research. I would be happy to share raw data with any participants who wish to see it, and will publish my findings on ChinaSolved.com , ChineseNegotiation.com and DiligenceChina.com .

Click here to take online survey:

http://app.icontact.com/icp/sub/survey/start?sid=6256&cid=355149

Purchasing managers in China can expect to meet up with 3 kinds of overseas suppliers.  Some know China well and have good experience operating here.  Others are new to China, and don’t know much about doing business here – but they know it.  This is a great opportunity for building a solid relationship and securing a key supplier.  But there is a third group that doesn’t know China at all – but believes they do.  This is trouble.  Whether it’s a manager with experience in Korea and Japan or a young overseas Chinese who knows a few words of Mandarin, these guys are going to give Chinese purchasing managers a lot of grief.  Make sure the business justifies it.

Dealing with the 3 kinds of western counter-parties.

• They Know China.  Don’t make problems where there aren’t any.  Deal with this guy in a professional, businesslike manner, and you’ll win the day.   You be a pro and he’ll be a pro.  He doesn’t want to hear how good his Chinese is or how he’s been her for so long.  He probably knows the market and can judge how reasonable an offer is, so make sure your expectations are reasonable and you don’t go for too much at the beginning.
   
• They Don’t Know China.  This can be a great contact – if you handle it the right way.  Is this guy a new hire or transfer with one of your long-term suppliers, or is he cold-calling for the first time.  When dealing with a China newbie, your first job is to figure out how long he’ll be around.  If he works for a small firm and is just testing the waters with a few sales calls, then you don’t have to invest too much time or energy into teaching him too much.  But you can expect to see more and more expats and overseas managers ‘cycling through’ Shanghai for a few years.   As China becomes a more developed market, you can expect to see more young management-types put in time here in order to round out their global management skills.  These can be valuable contacts, so take the time to orient new suppliers and salesmen to the way you do things – and to the way things are done in China.
   
• They don’t know China but think they do.  The problem here is suspicion and inexperience.  If your counter-party ‘thinks he understands’ your situation, then it usually means that he is skeptical of your claims and suspicious of your motives.   Your best bet with these guys?  Be their second deal.  They’ll be fine – once they make their mistakes with someone else.  But if you have to deal with a skeptic, go right to the issues he cares about:  price, payment, scheduling and referrals.   If you can make a new Western counter-party comfortable with your firm in those areas, you are well on your way to a successful deal.

One thing is certain:  As businesses around the world try to access the China market, there will be a wider range of sellers trying to convince Chinese purchasing departments.

One of my main points was this:

 “Don’t continue negotiating with someone if you know it won’t end up in a transaction.  If there is a “deal-breaker” on the table, then that should be the first thing you deal with”. 

 The example we discussed was credit terms.   If your company has a policy of only giving a maximum of 45-day credit terms, but the customer insists on 90 days, I say that you should try to reach an agreement on that point first.  If not, it will ultimately kill your deal and waste everyone’s time.

A participant of the seminar disagreed.  His logic was that if you agreed to all the other points first and saved your major SPECIFIC point of disagreement until last, you improved your chances of reaching a final agreement.  He felt that if you reached a compromise on all the other points first, it would put a great deal of pressure on both sides to find a solution to the last disagreement.

 We went back and forth for a while, and I understand his point of view.   BUT…I think his way will only work under the following conditions:

1)      Both sides agree that the potential “deal-breaker” exists.

2)      Both sides agree to deal with it last.

3)      You acknowledge that by investing time in this negotiation — which has serious   problems – you are passing up the opportunity to do other business.

The pitfall here is that your counter-party might not understand that you consider a specific point to be a deal-breaker.  If I am engaging in drawn-out discussions over many months and the other side suddenly comes back to me with a proposal that contains what I feel to be a deal-breaking point, I am going to be very angry if I think he has just wasted my time.

Look at this example.    We are negotiating for sales training services, and I have the responsibility for finding a sales trainer in Shanghai.  My company policy –set by the New York HQ — is to pay all service-related expenses 90 days after completion of the contract.  I am negotiating with a sales trainer who wants to be paid in advance.

IF he tells me that we have a significant disagreement with the payment terms BUT he thinks we should “shelve” that issue – or delay dealing with it until later, maybe I will agree.  Then we can discuss all the other points, and if we find that our companies are a very good fit, we may be able to work out a special case.  I will have my boss contact the head of HR in New York and we will find a compromise – maybe pay him 20% up front, 50% within 30 days of the training, and 30% after 90 days. 

BUT – and this is important – if we meet 5 times and I reveal a lot of sensitive information about my company and THEN he tells me about his company policy on pre-payments for the first time, I may feel he is not honest or competent.  I may feel that he has wasted my time – or tricked me into telling him too much about my company.  We have a special term for people who do this – we say they negotiated in “bad faith”.    Not only will they not get this deal, but we will never discuss any future business with them. 

Western negotiators tend to be very sensitive about wasting time in drawn-out negotiations that don’t result in a deal.  Sometimes this can be useful to Chinese negotiators – it can put pressure on western counter-parties to reach an agreement or grant concessions.  But it can also cause problems if the other side assumes you are negotiating in bad faith and are therefore not a suitable business partner.

Like:  L is what you would like to get from the negotiation.  This is your opening position.  If everything goes really well and you score a big success from your negotiation, L is what you are going home with.  Make sure you start off asking for enough — but not for so much that the other side thinks your are crazy, naive, dishonest or all three.   If your L is too high, then you may not get a second chance at negotiating — particularly if your counter-party is a MNC sales or purchasing department that works with a ’short-list’ system.  The goal of their first round negotiations may to set a short-list of 3 – 5 counterparties, and then conduct the real negotiations only with members of that group.  Set your LIM too high, and you may find yourself out in the cold — or forced to offer a price concession just to get to the second round.   

Intend:  I is what you can reasonably expect from the negotiation.  This is industry average or your existing arrangement.  I changes over time as international business cycles and prices shift.  You have to know what your I is likely to be — and to make sure that your boss agrees with you.  Figuring out I can be easy if you work with a stable, deep market that has many buyers and sellers.  If you are selling a unique or new product, figuring out I can be tricky.  For most of us, I is an established industry benchmark, price of a major local supplier or the price you are already getting (or giving).  Watch out for inflation-indexing schemes that can change your I as the economy changes — and make sure the terms are favorable to you.

Must:  M is the point at which you say ‘take it or leave it’.  M slots in just above your BATNA, which we talked about last week as your Best Alternative To No Agreement.  Professionals know not to do the “walk-away” too often — but they also know that sometimes a slow walk to the door is the best negotiating technique in China.  When the other side says, ‘no deal’ to your last offer then you have no choice but to leave the table.  

Make sure that everything is cordial and professional,however, since there’s a good chance that they will try to call you back to the table.   Try this:  “I’m sorry, Bob, but it just doesn’t seem like we’ll be doing business this time.  Good luck, and if your situation changes please get in touch.  I’d love to be able to do a deal in the future.”   It’s much better at keeping the door open than saying, “Go to hell you lying, cheating bastard”.  Just a thought.  

M is relatively easy to set.  It’s marginally above your BATNA.  If your BATNA is maintaining the arrangement you have with an existing supplier or client, then you can figure it out to the 3rd decimal point.  If your BATNA is bankruptcy, unemployment and ruin — then you had better know that walking in and set your targets accordingly.

 So much of what gets written about negotiating with Chinese managers and bureaucrats usually refers to the last crop of managers that either made the transition to free market competition or were reporting to people who did.  That’s where the buzzwords really come into play:  guanxi, preserving face, banquets & toasting, red envelops etc.  This style of negotiation – socialist bureaucracy meets 21st Century commerce – still goes on, but it is starting to give way to more modern approaches.

In newer or re-organized Chinese companies and China-based MNCs, however, you’ll encounter a younger type of Chinese counter-party who works in an operating environment similar to yours.  For him, deal-making is a structured process that must be governed by rules, logic and profit.  He has probably received formal training in negotiation, team management, and sales or procurement – depending on which side of the table he sits.  He answers to superiors and committees about specific price and delivery issues.  This guy isn’t asking for pay-offs or drinking parties – he wants the paperwork filled out properly and a rock-bottom price.

That’s not to say that New Chinese negotiating is any easier or more pleasant than Old Chinese negotiating.  You still won’t meet the boss and you may not be sure who really decides anything.  Payment schedules and quality issues still take a lot more time and energy than you think they should, and there’s absolutely no guarantee that language or cultural issues still won’t sink the deal.    But the process of negotiating in China has changed a great deal in the last 5 years, and you should be using that to your advantage.

1) Know what age group makes the decision.  Young Chinese use polite key-words like “this company is still very traditional” or “Mr. Chen is quite conservative” to indicate that the decision-making structure is going to be opaque and indirect.  If your contact refers to his company as very “international” or “modern”, you MAY be looking at an RFP or other structured system.  It’s ok to ask your new contact about the best procedures for submitting a bid or dealing with proposals. 

2) You have more choices now.  If you want to negotiate directly with the boss, you may be able to do that – but only if you select an organization that works that way.  40-something traditional managers haven’t changed their style much, and they’re not going to.  But now there is plenty of competition from newer or more international organizations.  Shop around for your counter-party, and you’ll be much happier in the long run.

3) Beware of mixed messages.  Lots of traditional Chinese companies and state-owned enterprises have brought in consultants and trainers and slapped a modern whitewash over their convoluted, cob-webby operating systems.  If you’re sitting in a giant board room waiting for the tea leaves to sink with a couple of bright, eager young grads who seem happy to see you but don’t  know much, then you are probably talking New China but walking Old China.  On the other hand, don’t be quick to write off giant state-owned giants – many of them have taken modernization and efficiency to heart, and you may be surprised at how quickly things move.

I was introduced to one bright young guy and we chatted briefly about general issues before I tossed him one of the easiest pitches in the world for a smart entrepreneur to hit out of the park.

“So what do you do in Shanghai?” I asked.

“Well, I’m doing a few different things. I’m working with some friends to look for opportunities in software development, and I also do a little management consulting for businesses entering the China market, and I work with a partner to do sourcing for US manufacturers…”

In fact, he may still be going on about the menu of services that he willing to offer. I don’t know – and don’t really care. As far as I’m concerned, if a guy does two or more completely different, unrelated things, it means that he isn’t really all that good at anything. At least that’s the message he’s sending.

Young entrepreneurs – particularly in China – see endless opportunities and potential in the world. That’s great. But no one is going to hire you or invest in you if you seem like an uncommitted flake. Investors and buyers need to have confidence that their targets are reliable experts who are deeply involved in their own business.

If you need to buy an office telecom system, and the consultant you speak with tells you he integrates telecom systems – and also writes software – then he sounds like he might be an expert in what you need.

If another consultant tells you that he integrates telecom systems – and acts in TV commercials and is a management consultant and a logistics expert – then you are probably going to look elsewhere.

People trust experts and specialists – whether they are hiring or investing. If you can’t decide what your own strengths are, then prospective clients or investors won’t be able to either. Develop a powerful, simple message that explains EXACTLY what you will do for your clients. Sure, you may pass up a few opportunities in unrelated businesses that you might be interested in. But specializing in something – be it a product or service or a market – is the only way you will ever get deals and build a track record that inspires confidence and trust.

]]> http://www.smartshanghaiteam.com/2008/10/13/chinese-negotiatiors-need-to-know-what-your-business-is-and-what-it-isnt/feed/ 0 http://www.smartshanghaiteam.com/2008/10/13/connections-and-guangxi-%e2%80%94-do-foreign-investors-understand-the-value/ http://www.smartshanghaiteam.com/2008/10/13/connections-and-guangxi-%e2%80%94-do-foreign-investors-understand-the-value/#comments Mon, 13 Oct 2008 04:54:15 +0000 Andrew http://www.smartshanghaiteam.com/?p=7 Dear Smart Shanghai Team -
I am the owner of a company in the Shanghai area, and am looking for a foreign JV partner to help me expand my factory. During my negotiations with one US investor, I told him that my company had a tremendous advantage – NO COMPETITION. I have personal connections with the local government, and was able to get a license to sell a certain kind of product that no one else has. It is a great opportunity, but he still said no! I don’t understand. What do you think happened? –
CKL

Dear Mr. L

We understand your confusion. You have used personal connections to gain a competitive advantage – exclusive rights to produce or sell a product in a certain area. But for some investors, that is less of an advantage than you may think. There are two reasons for this.

• It is a temporary advantage. Other people in China have personal connections as well. In addition, there are other market forces at work. China ’s investment laws and regulations are changing rapidly – and usually becoming more liberal and open. This is a very positive trend – but it means that there will be more and more competition. Your investor may be worried that in a few months, your exclusivity will disappear, and then you will be faced with more competition

• Scalability or Expansion. You may have great personal connections in this city or province, but what will you do next? How will you expand your business? What happens after you satisfy this market? If you main advantage is your personal connections and exclusive arrangement with the local government, you have no clear advantage in other markets. Investors are always interested in knowing about your strategy for the future. Some overseas investors think that personal connections are more of a strategy for the past.

You should talk about operational advantages – things like distribution channels, market recognition, product design, technology, production methodology, etc. Overseas investors like to hear about profitable operations and market strategy. Your personal connections are a great asset – but you probably have others, too. Focus more of your conversation on PROFITABILITY and MARKET GROWTH.

]]> http://www.smartshanghaiteam.com/2008/10/13/connections-and-guangxi-%e2%80%94-do-foreign-investors-understand-the-value/feed/ 0 http://www.smartshanghaiteam.com/2008/10/13/chinese-negotiators-should-have-more-transparent-pricing-strategies/ http://www.smartshanghaiteam.com/2008/10/13/chinese-negotiators-should-have-more-transparent-pricing-strategies/#comments Mon, 13 Oct 2008 04:51:17 +0000 Andrew http://www.smartshanghaiteam.com/?p=5 Chinese negotiators should have more transparent pricing strategies

A Chinese negotiator I know recently met with a potential buyer from overseas, and then called me with a question. The Chinese salesman had explained his product offering, and then quoted the potential buyer a price. The buyer merely nodded his head and said, “Ok, I understand”. The Chinese negotiator, however, had expected the prospect to come back with a counter-offer or a new proposal. Instead, the overseas buyer merely asked a few polite questions about the industry, said goodbye, and left. The client was never heard from again.

The negotiator in question asked me if the buyer was serious, and if so, why he didn’t come back with another offer.

“How high was the price you offered him?” I asked.
“Pretty high, but I would have come down if he pressed me,” was the Chinese salesman’s answer.
“How much would you have come down?”
“65 – 70%. But he never even tried to bargain with me.”

This leads to the question of PRICING STRATEGY. There are several ways of approaching the initial price question.

Many sellers like to start out very high, and then “allow” the other side to bargain them down to a much lower price. This approach works best when you have a unique asset for sale (such as property), or have a very high volume of potential customers. In truth, it works best when the buyer is not very knowledgeable or sophisticated.

Other sellers try to make their first offer so competitive that they immediately engage the buyer’s interest. The works best in high-volume sales where competition is high and price is the key factor. Many Chinese manufacturers set prices based on this model. The margins may be very thin, but volume is high and buyers have the ability to compare prices easily. This approach works best when you have a cost-advantage over your competitors. Many Chinese companies start with this approach, and try to climb the “value-chain” by offering more services or higher-margin products later.

A third approach that is rapidly gaining favor in China is the “package” approach. The initial price is often quite high – but includes a variety of value-added services or features. The basic product offering is relatively low-margin, but the salesman makes his real money from services and “extras”. Anyone who has every bought a new car is familiar with this approach. Typical extras & add-ons include service contracts, custom design, warrantees or guarantees, faster delivery, training, or other types of service and consultation. Buyers will bargain for a lower price by deciding how much extra value they require from the seller. This approach requires that the seller actually have the ability to deliver value-added services and features that are worth the extra money.

Chinese marketers have been very successful with the high-volume, low margin approach. More and more Chinese companies are switching to the third approach of adding value for higher prices. The first approach of quoting very high starting prices and then bargaining down is becoming less effective with international B2B clients for 3 reasons.

1) Better transparency in the market. Overseas buyers are growing more sophisticated about doing business in China. Services like Alibaba.com and professionals sourcing consultants have made it possible for relative “outsiders” to learn about costs and competitors more quickly than they could in the past.

2) DMU or Decision Making Units are becoming more common. There was a time when a salesperson in China could meet the single decision-maker from an overseas company and build a relationship. Nowadays the visitor to China is probably just one representative of an organization that has a sophisticated buying process, and they come to China to visit a long list of potential suppliers. If the initial offer does not meet a pre-set criteria, that company will not be considered for further meetings.

3) Even though the Chinese seller may be very honest and have the most honorable intentions, if his offer is two or three times that of his competitors for the same product, he will appear dishonest and disreputable. The China market has gotten more and more sophisticated, and overseas buyers have learned that there is no shortage of reputable, honest trading partners here.

It really doesn’t matter whether you choose to compete based on price (option 2) or value (option 3) – you still must be able to defend your first offer. If your initial price proposal is unreasonable or uncompetitive, you probably won’t get a second chance to win the business.