DiligenceChina

Here’s an interesting way to avoid making expensive mistakes on your first deal in China – enter your first negotiation KNOWING you plan on not buying (or signing, as the case may be). Chinese have been using this tactic… well, pretty much forever. You engage in negotiations without the pressure and stress of worrying that your ignorance will work against you. Ask basic, naïve questions, probe for information, and make unreasonable demands. Do as much as you can by phone and email, but by all means – GET OUT TO CHINA AND DO YOUR OWN LEGWORK. Once your counter-party has made his proposal, drive the price lower. And lower. When have you reached his bottom price? When he gets angry.

I learned to do this in the old XiangYang market – Shanghai’s famous collection of stalls where hundreds of Chinese merchants all sell pretty much the same assortment of clothing, house wares and souvenirs. (Unfortunately closed down to make room for another HK real estate development.) They knew the tourists were coming, so they marked up their prices by 300 – 500%. You’d go to buy a fan that the bicycle cart guys will sell for rmb 15, and the XiangYang merchants would start off at 180. You say – 50 (having read that you should pay 25% of the first offer in one of the tourist guides), and you’d end up at 90 or 100. You bargained them down by almost 50%! Tai ban le! And how do you know you got ripped off? They are smiling at you as you leave. Come again! Bring your friends! Bring your money, is more like it.

So you need to learn to do this: Start off at the first stall, bargaining for the fan to determine your first benchmark – maybe 90 rmb. Then walk away. They will yell for you to come back and lower their price. Don’t go for it. Keep walking. The next stall that sells the fans is close by. Now start at half or a quarter of your benchmark price. It doesn’t matter. You are probing for the bottom price, and will keep moving on until you have that information. How do you know when you’ve reached it? They fold their arms and look away. If they don’t answer you, you’ve gone below their cost and it’s not worthwhile for them to engage.

NOW you’re ready to really negotiate. You’ve been to a few different places, and you have a pretty good idea what the REAL cost to them is. At 25 they still smile at you, at 20 they are still making eye contact but not smiling so much, at 10 they cross their arms and look away. 15 is your price. You can apply these same principles to your own B2B negotiations.

Westerners are easy marks in China because they are under time pressure and don’t know the market. Chinese sellers play to this by over-scheduling western buyers, running down the clock and building in fat margins. They are also masters at non-price negotiation – factors such as quality, materials, scheduling, etc. So find out early what is on the table by engaging in non-negotiations with your first counter-party. Ask about EVERYTHING. Assume nothing.

Once you have your basic research, now you are ready to really negotiate. Open negotiations with at least 2 other sellers simultaneously – and let them all know. You want to have 3 negotiations going at the same time – playing one off the other. (If you feel really guilty about wasting the first guy’s time, you can include him in the bidding pool). Remember – Transparency helps you. Tell them what you’re doing, and what other prices you are getting. Don’t go into details about WHO you’re dealing with. (They will want to know if they are local, and where they are located. Use your judgment.) But definitely let them know you are talking to others. (Don’t worry about Face, guanxi, etc. If you are the buyer, it’s not your problem. Only sellers have to worry about this stuff.)

AVOID TRICKS AND TRAPS: If you are selling into the Chinese market, you will have to jump through hoops – like the banquets and the endless series of pointless meetings. But if you are spending, then you can call the shots.

Look out for these traps:

Over-programming you. Picking you up at the airport, arranging you hotel, packing your schedule full of meetings. They are trying to prevent you from seeing anyone else, and will use this to run down the clock. Maintain control of your own schedule. Pick your own hotel. Shanghai, Beijing and Shenzhen are business centers – you can get around on your own without TOO much hassle (relatively speaking). And don’t let them assign you a translator. You can arrange one through your hotel or via the internet before you arrive, if you know that your counter-party doesn’t speak English.

No pre-meeting information. If you are buying, make sure they send you photos, samples, or whatever else you need to make intelligent decisions. Find out where their factory is. Go to their website. Get references. Do as much legwork from your own home-base as possible.

Road to nowhere. You want to see their facility – but find out were it is and how to get there. Don’t let them put you in a van and drive for 3 hours without knowing the destination. Pin them down to a specific place BEFORE you get in their car. No, nothing bad will happen to you (I think). The odds are that you will end up in a fairly nice facility in an industrial park in Zhejiang or on the outskirts of Suzhou. The problem here is that you will be on your own, unable to terminate the meeting, and unable to make useful judgments or decisions about what you are seeing. (Hint: Take a quick photo of the name on the building, so you can find out if your new friends even own it. Remember – Assume nothing,)

If they start talking about guanxi or relationships too early, it’s a bad sign.

DiligenceChina hint: If your counter-party is unwilling to send you information by email, it’s not necessarily a bad sign. Locals tend to prefer faxes, so be ready. If they won’t send you a fax, email or pick up their phone – THEN you have a potential problem.

But I don’t have time for this!

Messing up your first deal in China will be the most time-consuming, money-wasting mistake you’ll ever make. And once the money has been transferred, you have almost no practical legal recourse. Yes, you can sue, and you may even win something – but you will never recoup your lost time, reputation, and opportunity cost. And most cases of first-deal-gone-bad, your counter-party is guilty of nothing more than being shrewd enough to take advantage of you naiveté.

You’ll find that negotiating with three sellers simultaneously doesn’t necessarily take more time than negotiating with one – if you are willing to cut out some of the pointless meetings. Remember – they will try to over-schedule you at the beginning.

Are Chinese Sellers going to rip me off?

I don’t know. Are US sellers going to rip you off? There are honest and dishonest businessmen everywhere. Standards here are a lot more ‘flexible’ than in the States, and we’re definitely in caveat emptor territory. So do your homework, be prepared, and find professional help in China (there are plenty of value-added sourcers, lawyers, and business entry consultants in the major business centers. See www.ChinaSolved.com for some profiles and a directory.) But standards in China have risen remarkably in the last few years, and you can find plenty of sophisticated, capable and honest counter-parties if you are willing to put in the time to conduct an intelligent search.