Three Steps to Negotiating Joint Ventures in China

  

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Three Steps to Negotiating Joint Ventures in ChinaDEALMAKERS HAVE HISTORICALLY approached joint venture negotiations in China as a martial arts bout, where the objective is to “win” against the adversary, using technique, power, and speed.

This approach may work in one-off business transactions. But it is not an appropriate strategy for doing JVs in China, which can take years to negotiate, and involve numerous counterparties and decision makers who have to support the joint venture after the deal is done. Instead of planning for an intense, zero-sum fight, dealmakers need to plan for a long-term battle of wits with a patient counterparty.
The purpose of this note is to advise dealmakers on three things they should do to prepare for such a battle: 1) “situate the partner;” 2) ask a set of gating questions to ensure the deal is worth doing and its purpose is clear; and 3) understand the implications of Chinese culture and translate them into the negotiations.

1.    SITUATE THE PARTNER

The negotiating approach needs to be tailored to the individuals across the table representing the counterparty. In China, these individuals may represent the government, a state-owned enterprise, or private business. They may be highly Westernized, or not. Their level of seniority and decision power may not be apparent. But all these aspects are crucial in tailoring the pitch and negotiation tactics. In “situating” each individual on the other side of the negotiating table (Exhibit 1), dealmakers should understand their personal background (e.g., are they from the less-developed Western region?), their affiliation and influence (e.g., do they have connections to the Communist Party?), and their internationalization (e.g., do they have any experience negotiating with foreigners?). Answers to these questions will help gauge their level of interest in the negotiation process, and in a mutually viable outcome.


Exhibit 1: Preparing for Negotiations

2.    ASK GATING QUESTIONS EARLY

Deals can take years to negotiate, followed by 6 to 18 months to gain approvals. Given this investment in time, it’s important to ask a set of gating questions up front, (Exhibit 2) which will inform the deal terms, vision for the JV, structure of the negotiating team, overall approach to the counterparty, and other elements critical to getting to a “quick no” or a “good yes.” Sometimes, asking these gating questions will lead to killing a deal concept, or shifting to another counterparty. Better to do so early rather than late.


Exhibit 2: Key Questions Before Initiating Negotiations

3.    UNDERSTAND THE CULTURAL IMPLICATIONS

A “clinical” approach to deals in China, however factually perfect, will miss one of the most important challenges – dealing with a culture – i.e., norms, values, expected behaviors – that is quite different than that of the West. Approaches that work elsewhere may not work well in China. Agreements that are reached may not be agreements. Preliminary discussions about possibilities may harden into firm expectations by the local partner. Deals that are close to being “done” may be ripped open as new stakeholders weigh in, or when a Chinese government entity issues a key ruling. Every deal team needs a guide who is an insider, understands the Chinese culture, and has appropriate connections. No amount of “quick-study” can substitute. But it is also important to appreciate some of the key dimensions of the Chinese culture, and build those into the negotiation game-plan. Based on empirical work by Hofstede, and many other assessments of Chinese culture, there are four key areas where China’s culture is different than the cultures of other emerging markets and the United States: 1) Importance of the group versus the individual; 2) Comfort with and respect for very large amounts of “inequality” and hierarchy; 3) Comfort with ambiguity; 4) Long-term orientation. Each of these differences has implications for approaching the deal negotiations. Western dealmakers should be ready to embark on negotiations that take a long time, involve many (sometimes unknown) decision makers on the other side, where the counterparty may be seeing the initial deal as a stepping-stone to something broader, and where seniority and hierarchy are critical to success (Exhibit 3).

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An oft repeated saying goes, “Joint ventures in China are always a win-win, meaning one partner wins twice.” With the right approach to negotiations, that saying might just be turned on its head.

Learn more about Cross-Border Joint Ventures in our latest blog on Confronting National Differences in Board Culture.