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Give Me One Hour - And I Will Give You a Surprisingly Quick Recipe for Negotiating Franchise Relationships in China

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Guanxi is in the news again.  Last year, three high-profile businessmen - Neil Heywood , Sheldon Adelson and the former railways minister Liu Zhijun were considered Masters of the Guanxi Universe at one point, but are now grabbing headlines for all the wrong reasons. Heywood is the unfortunate expat fixer who died at the hands of Gu Kailai (wife of Bo Xilai) after close relations with the ruling family of Chongqing went horribly wrong.  

Adelson, CEO of the Sands Casino, is the can-do American mogul who helped build Macau into the Vegas of Asia, but is now under investigation in Beijing for massive bribery.  The year-long trial of former Ministry of Railways boss Liu Zhijun has just concluded with 6 guilty charges against him and some close associates involved in a complex, long-running network of kickbacks and corruption.

Now, "Chinese investigators said Thursday that executives from GlaxoSmithKline, the British drug giant, had admitted to using bribes, kickbacks and other fraudulent means to bolster drug sales in China."

Western negotiators in China should take note of one very important similarity in each of these three cases: at their peak, these men were held up as prime examples of the benefit - some have said the necessity - of relying on guanxi when doing business in China.

If you are arranging business deals in China, it's just a matter of time before someone tells you that A) everyone does it, and B) it's the only way to get things done in China.  

How can negotiators in China draw the line between cordial relationships and graft?

 

Guanxi and negotiation - build relationships, but state your goals and your limits early.


When the baijiu is flowing and the conversation is still light-hearted, do like the Chinese do.  Know your goals, steer the conversation where you want it to go, and establish a framework for the negotiation.  In China small talk isn't empty talk. A good Chinese negotiator starts staking out positions, assessing your assets and maneuvering for advantage from the very first meeting.

You have to do the same. Use your guanxi-building time to declare your goals, inventory their resources and capabilities, and establish limits.

Conversation in China is never as light or casual as it seems. When they ask about your family, reciprocate - and find out where their child is going to school. When they talk about travel, find out where they spend time.  If someone is a civil servants but his child goes to school in California and summers in France with Mom, then you have to do the math and draw conclusions about his source of income.  Make judgments about potential partners and associates early - and stick to your decision.  

No one gets more honest when the amount of money on the table goes up.   Westerners frequently let promises of  quick riches in China cloud their judgement and put them into bed with wrong counter-parties  (both literally and figuratively).

 

It's only guanxi until you get caught.


If you don't know what the FCPA (Foreign Corrupt Practices Act) is, get up to speed right away. When you get caught paying bribes, either in the PRC or the US, saying, "but the Chinese middleman I just met in Beijing told me it was OK" is an admission of guilt - not a legal justification. You may not get caught, but if you do the results can be devastating to your company and to you personally. If your company has a policy on gift-giving and bribery it is your responsibility to know it and abide by it.

If your company doesn't have a policy, then you need to clarify your position with the relevant people at HQ BEFORE you get into trouble. This is a conversation to have with your own people early.

 

Good guanxi and bad guanxi.


Guanxi translates as relationships or networks - not corruption. It is possible to build strong connections without bribes. The key is to select the right partners early, and communicate honestly and thoroughly. The wrong Chinese partner is going to get you into trouble by soliciting or facilitating bribes and graft. The right partner will steer you away from individuals and transactions that will cause problems.

China is much more relationship-oriented negotiating culture than the West, and it's difficult to do normal business without getting to know your counterparty on a personal level.

But there's a big difference between paying for dinner and paying a bribe. All corruption in China starts as a guanxi relationship - but not all guanxi ends up as corruption. You have to know what you are getting into and establish boundaries.

 

Guanxi may not help, but getting it wrong definitely hurts.


Should honest businessmen avoid guanxi and personal relationships completely? Some experienced expats have recently started suggesting that Westerners in China are better off dispensing with guanxi and relationship-building efforts since foreigners don't get the same benefits as Chinese do, but can run into more problems.

While this may be true, it is still a bad idea to ignore the importance of establishing cordial business relations. Good guanxi may not help you - but failing to establish a solid guanxi foundation will definitely hurt you.

For a discussion of Guanxi for Western professionals, take a look at the ChinaSolved ebook: Guanxi for the Busy American.

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3 Comments

Properly briefed on the FCPA, an American franchisor has more negotiating power because he or she is constrained in the business deals that can be legally entered into.

This is another example of Thomas Schelling's powerful concept that having less options sometimes leads to greater bargaining power.

Just because some enterprising Chinese intermediary tells you that Payola is okay and expected, you now know not to believe them.

I always tell students and clients -- guanxi will rarely ever help Westerners, but if you mess it up it can hurt you. A lot.

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About this Entry

This page contains a single entry by Andrew Hupert published on July 15, 2013 11:03 AM.

Do You Know the 6 Warnings Signs of an Impending FLSA Lawsuit? was the previous entry in this blog.

Do You Make These Mistakes with an Angry Public? is the next entry in this blog.

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