October 2012 Archives

China Inc. is getting introspective again. Experienced international negotiators know that Chinese self-perception has two settings: "emperor of the world conquering the barbarians" and "backwards peasant humbly learning from the sophisticated cosmopolitan." Anything in between is just a transition phase.

But as the economy slows and State Organized Enterprises, SOEs, continue to make life hard for private businesses, the mood in China is shifting from predestined victor to cursed victim. Gone is the front-page speculation about China overtaking the US as global economic leader -recent headlines fret over soft vs. hard landing and capital fleeing to Western havens.

1. Chinese negotiators are adept at winning from weakness

Faced with tough times at home and pressure from a US government fired up with election year fury, SOEs and party spokesmen will get angry - but private businesses will play the victim card. Weakness, however, does not mean loss to a Chinese negotiator. In the last post we talked about the risks facing Westerner negotiators who act too tough.

Today we look at the dangers posed by Chinese counterparties who are good at winning from weakness.

2. Warnings and red flags (the caution kind - not the PRC national kind)

Chinese negotiators are at their best when conditions are at their worst. A tried and true tactic is to purposely place themselves in a subordinate position and humbly allow Western experts to fill in blanks of their business plan or international marketing strategy. Tough gritty American managers feel embarrassed for counterparts who confess ignorance or weakness - your impulse will be to help out and offer guidance. Many American and European managers have trained their own competitors this way.

While they are tugging at your heartening they are also loosening your purse-strings.

Guard your IP, product designs, and business processes from deferential "pupils." Chinese make great students - in the classroom - and the meeting room.

A favorite Sun Tzu maxim is to "look weak when you are really strong" and the modern application for Chinese negotiators is to look dumb when they are really too smart for your own good. Be particularly wary when you have to bring in engineers, technicians or other experts to explain how your products or processes work. And yeah - it will be your idea to help out.

Don't be glamoured by flattery, compliments or helplessness. Any tough-guy American manager can handle being called a son of a bitch or told to go to hell without losing his head.

Your kryptonite is being told how smart you are - or how handsome and youthful you are (for all my boomers out there). Flattery is the go-to move for a Chinese negotiator who feels that you are relatively rich but dumb. They are dusting this one off again after a few years in storage.

Flattery - particularly from attractive young women - is how Western negotiators miss details, fail to press their advantage and squander valuable time. Right now you convinced that this won't work on you, but be warned - it's effective.

Lao Tzu foresaw the downfall of many Western negotiators in China in the Tao Te Ching, "The hard and strong will fall; the soft and weak will overcome them", and then again in Verse 78: "The weak can overcome the strong; the supple can overcome the stiff." Be careful out there.

3. Five ways Negotiate to Win with a "Weaker" China

They can win from weakness, so start off by being prepared to not lose. Knowing what to be careful of is great, but negotiating to win in China means leveraging on your strength as well:

1. Play the threat card. Chinese media - both official and popular - are running away with the meme of anti-Chinese regulators out to ruin mainland businessmen and investors. On the other hand, successful Chinese entrepreneurs and owners want to hedge their bets by expanding overseas - and America is one of the top destinations.

This can make you a very valuable partner if you play the angles properly.

Don't deny that America has gone anti-China - talk up the benefits of having a savvy Western partner with a strong network who understands the regulatory landscape.

If this sounds familiar, it's because that's the line Chinese negotiators have been taking for twenty years with Western businesses entering China.

2. You are hot again - but for different reasons. In the early 2000s I saw more copies of the Harvard Business Review in Shanghai than I had in my entire life previous- including my years as an MBA student. I don't know if any of those Chinese commuters or networkers actually read the magazine - but it made them look like they were right on the cutting edge of modern business thought. That stopped being a good look after the financial crisis punched holes in the myth of American management.

Now that China is stumbling and the US is showing signs of life again (fingers crossed), you are looking better. Not great, mind you, but when it comes to branding, product development and international marketing, you are credible again.

Work your resurgent "expert" status - just don't give away the know-how.

3. Don't make the same rock-bottom mistakes again. Don't always negotiate down. The "race to the bottom" in China is over, and Westerners lost. Those who come to China looking for value will find opportunities to build it. Those who come looking for bargains will find cheap, low quality garbage that will undermine brands, destroy opportunity, and end up costing you a fortune in the long term.

Negotiate smarter in China by paying a little more and getting a lot more.

4. This time Chinese counterparties have money. They are a market, investor and client. They have more to offer, and smart negotiators are putting together more complex, multifaceted deals. Start looking at deals that involve multiple markets for different ranges of products and end users.

5. The pendulum will swing back. China is down - but certainly not out. There are already signs the economy has hit bottom and may start recovering. What will they do when the tables turn and they have bargaining power again?

In 2010 I was talking to a lot of purchasing managers in Asia who had driven hard bargains with Chinese suppliers when markets were slow - only to face shortages and price spikes when the market tightened.

Negotiate to win the supply chain- not to gouge the supply chain.

Structure China deals that will provide value to both sides - no matter what the economic environment. Start incorporating that into your negotiation plans now.

Burger King's supply chain contracts probably do not have an explicit clause that state that dairy suppliers must treat their cows humanely, but it seems as though there is an implicit clause.

An animal activist group went undercover at Bettencourt Dairies to video employees beating, kicking, and jumping on cows.

A perhaps unanticipated result is that representatives from Burger King said the company had temporarily suspended Bettencourt Dairies LLC. from its suppliers.

This raises a couple of contracting issues:

1. Burger King, as a mass retailer, suffers a reputation loss if customers believe Burger King is indifferent to these issues. They could suffer real losses if this keeps enough customers away. Bettencourt Dairies does not deal with final consumers to the same extent and may not suffer a similar loss.This leads to a possible conflict in acceptable business practices, or at least the diligence with which firms are expected to monitor employees for violations.

2. I could be wrong, but this is probably not an eventuality that negotiators thought they would have to include in the supplier contract. (How would one determine the level of severity that leads to a breach?) Contracts cannot cover all possible contingencies. Knowing this, buyers in the relationship try to include some all-encompassing clause to cover the unanticipated. However, this leaves suppliers open to possible holdup opportunities. Suppliers do not want to be left exposed to the possibility that their customer will claim a breach of contract in order to take advantage of them.

A good contract must balance all of these concerns.

A recent Italian judgment in the Tribunal of Palermo has offered an insight into how the Italian courts will assess whether a franchisor can validly terminate a franchise agreement for delayed payments by the franchisee.

Background

The parties entered into a franchise agreement in 1998. The terms of the agreement provided the franchisor with a right to terminate immediately in the event of breach by the franchisee of certain specified contractual obligations, including the franchisee's obligation to pay for products purchased from the franchisor within 90 days of the invoice date.

During the term of the agreement, the franchisee began to fail meet its payment obligations under the agreement. Despite the fact that a termination event had been triggered under the agreement, the franchisor accepted the franchisee's delay in making payments. This eventually led to the accumulation of significant debt.

Some of this debt was reduced by a payment plan which was agreed between the parties in June 2004. In spite of the payment plan, the franchisor then terminated the agreement in July 2004, citing the franchisee's failure to make payment for the products within 90 days of invoice as agreed.

The franchisee disputed the termination on the basis that the franchisor had been accepting the delayed payments. It was argued that the franchisor had therefore waived its right to terminate and implicitly agreed to vary the payment terms of the franchisee agreement.

Decision

The Court followed a decision of the Italian Supreme Court (Cass. No. 3964 of 18/3/2003) and held that, whilst the tolerance of repeated breaches of contract is consistent with the fairness and good faith principles of the Italian Constitution and Civil Code, such tolerance does not justify the breaches by the franchisee of its contractual obligations and should not be regarded as a waiver of the franchisor's contractual rights nor an implied variation of the agreement.

The franchisee was therefore unsuccessful in its claim.

In the current difficult economic climate, it is common for franchisees to fall behind with payments to their franchisor and it is only fair and ethical for a franchisor to assist and support its franchisees.

However, such support and tolerance of late payments can cause uncertainty when the franchisor decides that it can no longer support the franchisee and the relationship needs to be terminated.

This case helps to clarify the position under Italian law

The British Columbia Law Institute (BCLI) has an announcement, relevant to all those in the franchise industry, with special focus on the legal profession.

British Columbia does not have franchise legislation, being one of the last provinces in Canada to look at the problem. Here is the announcement.

"The British Columbia Law Institute (BCLI) has begun a new project on franchise legislation for British Columbia. The project will examine whether there is a need for franchise legislation in British Columbia and, if so, what features it should have.

There is typically an inequality in bargaining power between franchisees and franchisors in negotiating complex legal agreements, with franchisees at a significant disadvantage in terms of disclosure of information and control of business decisions.

"Unlike some other provinces in Canada, BC does not have any legislation to regulate franchises and provide legal protections for franchisees," noted BCLI executive director Jim Emmerton. "Through this project we hope to address this concern by reviewing the Uniform Franchises Act and making recommendations on whether this Act is an appropriate model for BC".

Key features of the Uniform Franchises Act, a prototype statute developed by the Uniform Law Conference of Canada, are provisions dealing with disclosure, the duty of fair dealing, rights to rescission, damages for misrepresentation, and dispute resolution.

BCLI aims to promote and contribute extensively to an informed discussion on the question of franchise regulation in BC. BCLI will publish a consultation paper with tentative recommendations, which will be used to consult broadly with the public. BCLI will then produce a report with final recommendations and draft legislation. A backgrounder on the project is available on the BCLI website

BCLI strives to be a leader in law reform by carrying out the best in scholarly law reform research and writing and the best in outreach relating to law reform."

For Further Information, Please Contact:

Greg Blue, Q.C., Senior Staff Lawyer
British Columbia Law Institute
Email: [email protected]
Tel: (604) 827-5337