cdp guide for negotiation in china

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Not to be replicated without authors permission

A guide to understanding the challenges in Chinese and

Western negotiations.

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Forward

China is our largest two way trading partner but there is some mystery around how that occurred given

the poor state of cultural understanding that exists between commercial negotiators here and in China. I

know from my own experience and from my formal studies in cross cultural psychology, that much better

commercial outcomes can be achieved if we engage with the Chinese in a way that is culturally informed.

Negotiations are social interactions where people make decisions about the allocation of resources. They

can result in one party winning and one party losing, but in my mind really good negotiations result in

win-win outcomes. These are nearly always achievable when negotiators focus on interests, and create

or expand benefits to both sides.

However, this “interaction” can be very difficult to achieve when the people involved don’t understand

each other’s culture. So if you want to do business in China and achieve win-win outcomes, then I

recommend you get culturally informed. This paper will start to take you down that road.

Culture is a way of thinking, and it grows from a country’s history, so it is worthwhile considering the

different histories of the Chinese and the West. I will give you my views on this. I will also review with you

one of the most significant cultural differences between us and China - our individualism and their

collectivism.

For you the reader, once you understand the background, you will also understand the tables that I have

compiled that explain key negotiation style differences. You will then be much better prepared to

negotiate with the Chinese and achieve a “win-win” outcome. And of course my business would be

delighted to help you with this journey.

Tony Palanca Managing Partner

[email protected]

mailto:[email protected]

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An historical perspective

Chinese philosophy is based on Taoism – you might know it in other terms like “ying and yang”.

It’s most basic premise revolves around an acceptance of self generated change from opposing

internal forces.

Western philosophy grows from a European history which has its roots in Ancient Greece where

our modern democracy was born with the likes of Socrates, Plato, and Aristotle. At its core is a

more scientific approach to thinking and deductive reasoning. Where does this lead us? To

somewhere very interesting actually!

The Chinese philosophy embraces paradox and contradiction and this shapes Chinese thinking.

The Chinese use a “dialectic” logic which basically means that meaning is created by looking at

the world as a collection of opposing forces. European philosophy on the other hand is based

on classical Greek thinking and embraces a deductive approach where things are seen to occur

in clear (and often linear) steps. This is also known as “formal” logic.

So we think in terms of steps – “formal”, the Chinese think in terms of opposing forces

“dialectic”. Stay with me, the insight is coming!

Our different histories underpin a central cultural and psychological difference. With Western

formal logic a thing can be one or another, but not both at the same time. There is no

contradiction in this logic, and ambiguity is not well tolerated. The world is viewed in terms of

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distinct and separate entities. You either meet the contract terms or not – it is all there in

BLACK AND WHITE!

Dialectic logic on the other hand, embraces ambiguity. There is ying and yang working in

opponent fashion to drive change. The world is viewed as being more interconnected and less

well ordered. This is how the Chinese think.

These underlying differences contribute to the culture and can be seen in what has been

observed as collectivism and individualism.

The collectivist Chinese and the individualistic Westerners

Collectivism is a situation in which people belong to in-groups or collectives which look after

individuals in exchange for loyalty. Its opposite pole is individualism, a situation in which people

look after themselves and their immediate family.

Individualists believe the self is the basic unit of survival, while collectivists hold the view the

unit of survival lies in a group or several groups.

When you talk to a psychologist they will always look at what your underlying motivators are.

After all according to the psychologist the only reason you do anything is because you have a

drive to do it. When I completed my research on collectivism it was very clear to me that there

are very different motivational paradigms for Chinese people.

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In Chinese collectivism, behaviour is regulated by in-group norms and the self is defined as an

appendage of the in-group, rather than a distinct entity.

This is quite different to my motivators as a Westerner. For me as an individualist, behaviour is

regulated by my own attitudes as an individual. So self reliance in collectivists means “I am not

a burden on the in-group” whereas for me as an individualist it means “I can do my own thing”.

This becomes a big difference in a commercial setting when you start to look at task motivation.

In an individualistic society, task comes before relationship. Anyone who has been involved in a

Western project management meeting would know this in spades : “Tony have you completed

this milestone – yes or no!”. However, for collectivists, the relationship has precedence over

the task.

Guanxi in China – the importance of relationships

In a dialectic logic paradigm the greater ambiguity and acceptance of interconnectedness is

more supportive of group behavior and you see this clearly in China. For Westerners, formal

logic means less ambiguity, and perhaps this supports individualism and a stronger reliance on

the self over the group.

In China, the importance of relationships has been formalized in what is called guanxi. “Guan”

means a door or to close up with those who are inside a group, and “xi” can be interpreted to

mean a joined chain. Guanxi is a web of personal connections and relationships especially

important in business, with a history dating back to the “sixteen commandments of good

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business” codified by Tai Chu Jung in the 5th century B.C. (amazing hey!). The importance of

guanxi is further enhanced by the weak legal and institutional support systems in China. In a

country with a weak legal system, relationships become more important. Commercial

transactions could not be supported in China without guanxi to provide the trust base to allow

it to occur.

While relationships are also important here, they are far less important for individualists than

for collectivists. If you don’t believe me, think about relationships in business when they are

tested by conflict.

Individualistic westerners are likely to manage conflict in a group by placing individual gain

above group harmony. I have also seen many professional people engage in competitive

behaviours in group conflict situations, and I am sure you have too.

In China it is different. With guanxi comes an implicit need to maintain harmony within the

guanxi network. This means avoiding personal conflict and any situation which may cause an

individual to look incompetent to the group. Chinese rely on harmony to smooth over conflict

to protect social face.

What I have been trying to share with you is that the differences between our cultures are very

real. The Chinese culture is dialectic, centered on the collective and the group, and group

practices are formalised and supported by the environment. Western culture is formal,

centered on the individual, and resides in an environment that supports competitive

behaviours. These are big differences and should shape the way we think about negotiation.

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The impact on negotiations

Bargaining is an interactive process in which the communication style of one negotiator affects

those of the other, and visa-versa. If you have ever negotiated with a “slick” computer sales rep

with a shiny suit you will know what I mean.

The way parties interact in China is the critical success factor for successful resource exchange.

Culturally informed negotiators will be more successful.

There are three factors that affect negotiations:

trust between the parties,

the negotiation process itself,

and time horizons .

So now that you have a “sense” of where the Chinese think differently to us, let us take a little

journey through these three factors. To help, I have put some tables together to show in vivid

tabular style what the Chinese will be thinking and what you will be thinking in the negotiation.

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Table 1. Cultural factors that are related to trust development

Contributors to trust Chinese Westerns

Credentials Status determined by

guanxi, relationships, and hierarchy of those relationships.

Status determined by individual achievements and relationship with brand identities.

Behaviour regulation Behaviour regulated by group norms and hierarchy.

Behaviour regulated by attitudes of the individual.

Relationship orientation Interdependence encouraged, relationship oriented. Favours between parties are given and expected.

Independence encouraged and task oriented. Favours between parties given or expected create conflicts of interest.

Judgment bias Group serving bias – what is fair is good for the group.

Self serving bias – what is fair is good for the individual.

Personal styles Formal. Informal.

Face (image) maintenance Mutual and other face maintenance.

Self face maintenance.

Primary negotiation strategy Integrative – maximize the amount of resources available. Co-operative orientation.

Distributive – divide resources among the parties. Competitive orientation.

Sources: Gelfand et al., 2002, Palich et al., 2002, Salacuse, 1998, Weingart et al.,2007.

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Given these differences do you think there might be scope for mistrust to occur in

negotiations? Be clear that the Chinese are unlikely to trust Westerners purely on expertise or

the brand of the company they represent. And you may easily misunderstand the importance

of hierarchy and power in the networks you are negotiating into. As an informal Westerner you

may easily misread the Chinese group norm behaviours and inadvertently ask or disclose

personal information which is against that group’s behavior. This could be misinterpreted by

the Chinese as being rude or disrespectful.

Mistrust can also occur through differences in orientation. Westerners are known to strive hard

to achieve a result that is individually satisfying and short term. The Chinese however will strive

hard for group orientation, they will be more value creating and therefore more long term.

So what do you need to do? When you are in China you need to give more time early on in the

negotiations to understand the group’s power dynamics and behaviors. There is a strong need

to get the relationship context right first and understand the group behavior and motivation.

This involves an understanding of how to give “face”. It is not that hard. Giving face is simply a

way of respecting the power and competence of the Chinese party. It is important to recognize

the competence of the Chinese negotiator. The hardest thing for you will be patience.

Establishing the right relationship context doesn’t happen in a few minutes, and indeed it never

stops in China.

What you are really trying to do is to ultimately develop a level of guanxi. This is very important

for trust in China, and research correlates guanxi with a range of benefits. Guanxi based

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business transactions show transaction cost advantages (Standifird & Marshall, 2000), guanxi

networks help to get access to and expand markets, find new customers (Tai, 1988), enhance

competitive advantage (Thorelli, 1986), contribute to sales growth (Kao, 1993), improve firm’s

performance (Luo & Chen, 1997), and eventually attain long term business success in China

(Yeung & Tung, 1996).

So message 1 for westerners – focus on building trust.

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Table 2. Cultural differences related to negotiation processes

Negotiation elements Chinese Westerns

Contracts Contract is seen as the

starting point of the relationship.

Contract seen as the end point in the relationship.

Development of terms Ambiguity tolerated and welcomed as it is considered a natural element in relationships.

Ambiguity not tolerated and seen as a threat or risk to be managed.

Negotiation management Challenges and opportunities addressed in any order and at any time.

Challenges and opportunities addressed according to well defined timelines.

Conflict management Outward conflict avoided. Conflict managed according to group norms. Primary importance to preserve harmony as a goal in itself.

Conflict managed directly and outwardly. Primary importance to resolve the issue.

Remedies In practice based on trust and relationships.

Based on contracts and terms.

Authority to execute Hierarchical. Large power

distances.

Often devolved, with authority and hierarchy not related. Low power distances.

Sources: Ai, 2006, Hofstede, 1984 & 2000, Palich et al., 2002, Salacuse, 1998, Wong et al.,2007.

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The Chinese dialectic logic embraces ambiguity and tension and this is very difficult for us to

deal with. I get frustrated sometimes by that lack of detail and ambiguity in China and everyone

who works there does. I am part German and the Germanic in me wants everything on a

timeline with clear milestones. While the Chinese can work like this, there will always be a level

of ambiguity.

On the other side I know that the Chinese get frustrated by the Westerners view that contracts

and terms should have precedence over broader relationships. They are mystified by our

obsession with contracts.

Frustration often leads to conflict, and in managing conflict a Westerners more direct approach

could easily cause the Chinese negotiators to lose face, unsettle harmony, and put negotiations

under strain. Also Westerners may not understand the importance of hierarchy and power

concentration in Chinese culture, and may not place enough emphasis on managing negotiation

at the right levels and with the correct power protocols. There is no point screaming at a

telephone in China.

So what should you do? The first thing is to manage your own expectations. For one thing

building trust is more important than building contracts. Being prepared to continue

negotiations beyond the written agreement is necessary because great value is generated post

contract in China. That is why in China you never simply write an agreement and walk away.

You have to be there, engaged in the relationship to really drive value.

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There is also something that borders on “kung fu” logic in China and that revolves around

learning how to use tension and ambiguity to achieve outcomes. This often works a lot better

than trying to achieve outcomes through formal project management protocols.

For most Western businesses we are actually quite formal, but the more I have engaged with

China the more I see the strengths in their approach. And it may be that their model of doing

things isn’t as bad as it sounds. Recently I read about the Linux software development

community – a community that was born in the heartland of corporate America. Teams work

co-operatively on development. Over time certain developers build a reputation for

competence. Favours are given and taken. Profit is not taken out of the product, but rather

comes from building a reputation which may lead one into other commercial ventures. This

system of operating is called “negotiated order” and is the opposite of “legal order”.

Now I am not suggesting that we throw away our Western approach. But there are other ways

of organisation based on exchange and collective action that work extremely well. These occur

through networks of people, coupled together out of shared interest. The linux community and

their “negotiated order” sound very Chinese to me. I raise it as an example simply to show that

in global commerce there are new adaptive systems that emerge.

So message 2 for Westerners – be prepared to adapt.

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Table 3. Culture related to concepts of time

Defining time Chinese Westerns

Timeframes Long term orientation

focused on relationship.

Short term orientation focused on the transaction.

Milestones Ambiguity tolerated.

Accepted to have periods of no apparent forward movement.

Milestones are established and identified as being met or missed . Visible forward movement is essential.

Sources: Ai, 2006, Hofstede, 2008, Palich et al., 2002, Salacuse, 1998, Wong et al.,2007.

The Chinese have a long term orientation, and a more ambiguous approach to defining and

meeting timed deadlines. Westerners are much more formal in their definitions of time and

have a much shorter time horizon when considering negotiated outcomes.

When you think about time as a Westerner, it is quite a formal and separate entity that has a

value associated with it. Now doesn’t that sound like something from Ancient Greece? Perhaps

“formal” logic?

But for the Chinese, time only has context in how it interacts with building relationships and the

natural tensions found inside of them. It is not recognized as an important separate entity. It

like everything else is “dialectic”.

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The solution for Westerns is to allow more time in negotiations with Chinese. If trust is

established, if you can be adaptive, then any conflicts related to time pressures can be resolved

within a relationship context.

Summary

When I was raised in Australia the most exotic thing we had in our suburb was a Chinese

restaurant . I remember the honey prawns, which were literally battered and fried, and then

simply covered in honey. I have never seen honey prawns in my travels in China, so I can only

imagine now that this “exotic” dish was adapted to our tastes.

We take “exotic” for granted these days in food terms, but the truth is that in commercial terms

global trade at this scale is still relatively new – it still is exotic.

Now exotic is exciting and can certainly open up great opportunities, particularly for early

movers. But if it is too exotic it can also feel a bit strange and at times even nauseating. I hope

that what you have read here is a little better than the honey prawns in terms of its

authenticity, but sufficiently digestable to make you more adaptive to the way things are done

in China.

I also hope that it will act as food for thought as you consider negotiating with the Chinese and

allow you to ask some deeper questions about the possible strengths, weakness, opportunities

and threats involved in taking the journey into China.

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Tony Palanca is the managing partner and co-founder of China Direct Partners. China Direct Partners has been

operating since 2005 and has helped many clients engage effectively with China. Tony previously worked for IBM in

a regional role and prior to that at other major corporates. He holds a bachelor of commerce and a bachelor of

psychology. He is married with two children, 48, and lives in Sydney.

cdp guide for negotiation in china

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