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Negotiating With Chinese Companies. Part III. No Frogs.

By Dan Harris and Steve Dickinson

This is part III in a completely unplanned series of posts focusing on negotiating with Chinese companies. Part I is here and Part II is here. This post (again) riffs on an Andrew Hupert post, this one from a post on his Chinese Negotiation blog, entitled, "US-China Negotiating Rule: Don't Kiss Frogs in China." If I had to summarize Andrew's post into one sentence, it would be that the most important negotiating choice you can make is with whom you choose to negotiate; in real life, frogs do not become princes:

In China, counter-party selection is more important than potential deal terms. Good partners don't necessarily lead to good deals, but bad partners always lead to disaster. The Chinese know this about themselves - that's whey guanxi and networking are so important here. Westerners have a different set of terms - due diligence and reputation - but the meaning is the analogous for business purposes.

Hupert then sets out the hard work you must do to make sure you are dealing with a reputable partner:

If you are dealing with an honest, competent guy then due diligence isn't particularly difficult. He has references, ongoing partnerships and relationships. But it's up to you to lay down the right ground-work and then ask the right questions. Those annoying banquets and drawn-out lunches aren't just for show - they are performing their due diligence on you. You should respond in kind - volunteering background information and sketching out general plans and priorities. They are getting to know you. Yeah, they are interested in how many kids you have - but what they really want to know is how stable and trustworthy you are as a partner. It's ok for you to ask similar questions - about their plans for growth, expansion and client relationships. Keep it general and comfortable at the early stages - but don't act like a buffoon talking ONLY about how developed Shanghai is or how much you enjoy Chinese food. They're working, and you should be too. If you are dealing with a dishonest, unreliable partner, due diligence is extremely easy. He won't be able to provide a single relevant reference, and your job should be done. Walk away and don't look back. It really is that simple.

100% true. In fact, I said the exact same thing, though perhaps less eloquently, just today to a potential client looking for legal assistance with an OEM Agreement to provide her company with protection in their China outsourcing. I have given this "speech" so many times, I know it by heart, and here goes:

You need an excellent contract with your supplier. It will greatly increase your chances of avoiding problems and greatly increase the likelihood of your being able to cheaply and successfully resolve any problems that do arise. We can write the world's best OEM Agreement, but that is not going to help you if your Chinese supplier refuses to sign it or if your Chinese supplier is a complete crook. I strongly urge you to make sure your Chinese supplier is legitimate before you pay us to draft your OEM Agreement for you.

Full post as published by China Law Blog on May 04, 2010 (boomark / email).