Negotiating With Chinese Companies: Death By a Thousand Cuts

This is the third in a series of posts in response to emails and comments asking us to expound upon how Western companies can better negotiate with Chinese companies on technology deals.

In part one, Negotiating With Chinese Companies: Be The Rabbit, we talked about using the Zen technique of “being the rabbit,” which in Western terms translates mostly into just being patient, hanging back and letting the Chinese side start negotiating with itself. In part two, Negotiating With Chinese Companies: Walk, Don’t Look Back, we talked about how Western companies must 1) convey a willingness to walk away from the deal and 2) actually be willing to walk away from the deal. In this third part, we again emphasize the need to patient, this time when facing the common Chinese company negotiating “death by a thousand cuts” tactic.

Chinese companies, both SOEs and privately held, are in a mad dash to purchase foreign technologies on the cheap. And when I say technologies, I mean just about every technology possible: health care, internet, Internet of Things, computer hardware, software, manufacturing. It is truly endless. I feel like I am in the middle of a gold rush. A severely flawed gold rush.

What are the flaws?

The biggest flaw is that the default option for these Chinese companies is usually to try to get the technology for literally nothing or next to nothing. And far too often, the foreign company goes along with this.

Let me explain.

The media covers the massive China tech deals. Deals like Midea Group’s $5 billion bid for Germany’s robotics specialist Kuka AG. Those are not the deals my firm is seeing. Not at all. The deals we are seeing involve — at least half the time — second and third tier technologies held by foreign companies on an economic precipice. The China company swoops in and offers a lot of money for the technology. The foreign company then retains us and we then explain why what looks like such a good deal is, in reality a terrible deal. The foreign company then tells us (and far too often the Chinese side) how if it doesn’t make this deal it may have to “downsize” or even shut down. Some of these companies are quite large and quite well known, but their ability to secure additional funding is marginal.

And then over the next few months the two sides negotiate and during that time the Western side reveals — either intentionally or unintentionally, its desperation to get the deal done. And during that time, the Chinese side constantly and unremittingly seeks to exploit that desperation, using the following tactics.

Death by a thousand cuts. The Chinese company starts out saying it will pay $20 million for the technology, as though that is the extent of the deal. Then it drafts some vaguely worded MOU that mentions $20 million in passing, but is nothing like a straight up deal and when analyzed either makes no sense, is clearly not achievable under Chinese law, or will almost certainly lead to the Western company never getting paid. When the Western company complains about this, the response of the Chinese company is usually to go silent for a few weeks and then to suggest to the Western company that it modify the  nonsensical/unworkable MOU. Our advice is to seize that moment by presenting a carefully drafted and realistic Chinese and English language contract that actually reflects the parties’ earlier discussions. The Chinese company usually will wait a few weeks and then respond with a reasonable number of objections to the contract. The foreign company and the Chinese company negotiate on these issues and reach resolution. The foreign company quite naturally then assumes that the negotiation process is complete and expects the next steps will be to execute and then implement the contract.

Instead, the Chinese company puts forth a brand new set of contract objections. The parties again negotiate and again reach resolution. The foreign company again assumes that the next steps will be to execute and implement the contract. But the Chinese company returns yet again with a new list of contract objections, including objections to some of the matters already decided on in the previous rounds of negotiation.

If the Chinese side has been forced to concede on important matters, this death by a thousand cuts tactic will likely continue until the Chinese side gets most of what it wanted from the beginning.

In negotiating the initial objections from the Chinese side, the foreign side will usually have made concessions that weakened its position, all as part of the normal negotiating give and take and all done on the assumption that both sides would be making concessions to consummate the deal. However, when the Chinese company comes back with new demands, it has already extracted concessions from the foreign side and it is now seeking additional concessions.

The Chinese company engages in this tactic to wear down the foreign company to that point that it concedes on important points to get the deal done. The Chinese negotiators are often quite clever at mixing important issues together with trivial issues and hiding important changes with seemingly minor changes in wording. Fatigue and changing negotiation staff from the foreign side can allow these matters to slip through at the very end of the negotiation process.

In the last year or so, we are seeing a new tactic, where the Chinese company will send back a revised contract in just badly written English, and without any redlining that would allow us to quickly see the changes that have been made to it. This new tactic has all of a sudden become quite common and it is an ideal way for the Chinese side to throw yet another cog into the negotiations, especially since Chinese is usually the official language of the contract and especially since their written English is almost never clear enough so that we can understand everything and it is virtually never clear enough so that we can use it in a real contract. When this happens, our typical response is to say, “no.” If you don’t have the time or the ability to put it into two languages, send us just the Chinese and send us a redline version showing all of your changes. We are not going to charge our clients lawyer rates trying to parse out what you have given us.

You can usually avoid the death by a thousand cuts tactic by being firm with the Chinese side. One good counter-tactic is to make clear (preferably in writing and in Chinese) that your Chinese counter-party has only one chance to comment so it should make sure that all of its comments and objections are included in its first communication. The Chinese side typically ignores this rule and will still come up with additional comments even after having been told that they will be ignored. The way to deal with this is to live up to your own commitment by telling the Chinese side to “take it or leave it.”

More to come….

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.