Business Negotiations in China: Navigating Chinese Systems, Laws and - - PowerPoint PPT Presentation

Business Negotiations in China: Navigating Chinese Systems, Laws and Cultural Differences in Structuring Deals

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WEDNESDAY, JUNE 4, 2014

Presenting a live 90-minute webinar with interactive Q&A Robin Gerofsky Kaptzan, Senior Foreign Counsel, Haworth & Lexon Law Firm, Shanghai, China John Lee, Chief Executive Officer, LeeCore, Bothell, Wash.

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4

HAWORTH & LEXON LAW FIRM

北 京 上 海 重 庆 香 港

BEIJING SHANGHAI CHONGQING HONGKONG

Business Negotiations in China: Navigating Chinese Systems, Laws and Cultural Differences in Structuring Deals

June 4/5, 2014

Part II – Technical China Issues Presented By: Robin Gerofsky Kaptzan Senior Foreign Counsel Part I - Understanding the Rules

• f Engagement

Presented By: John Lee China Consultant

John Lee

Business Negotiations in China: Navigating Chinese Systems, Laws and Cultural Differences in Structuring Deals Part I - Understanding the Rules of Engagement

5

The Conundrum

6

THE PROBLEM

7

Parallax Views

The result of looking at the same end goals with vastly different lenses is that when two entities (with vastly different outlooks) try to collaborate in a business relationship it is bound to cause problems

8

Has This Happened to You?

• During contract negotiations, there is:
• Stalling (unnecessary waiting game)
• Entertainment (after hours) which involves heavy drinking
• Talking to various negotiators who may not have authority to

negotiate

• Always looking for better pricing/terms – sometimes
• utrageous requests
• Asking for very liberalized credit and payment

terms

• Once the contract is inked, there is still a push for

terms, conditions, and pricing changes

9

Has This Happened to You?

• Introduction of other entities (affiliates or

subsidiaries which were not included in contract) to benefit from contract pricing and/or terms

• Missing deadlines for deliveries/payments
• Payments may be partial (when it does come)
• Quality (if supplier) is sub par versus what was

represented originally and supplier is upset because you rejected the merchandise

10

Why?

For all the trans-global migration and exposure, the Eastern and Western thinking (and ways of doing things) is still separated by a large gulf!!

11

THE CAUSE (ONE POSSIBILITY)

12

The Chinese Diaspora

There has been waves of emigration throughout the world but concentrated in Asia which resulted in unusually powerful influences:

• Chinese are inculcated as merchant class and government

bureaucrats throughout most of Asia

• As such, Chinese thinking and ways of doing business have

permeated the Pacific Rim countries

• Chinese ways of doing things in the mainland (PRC) have

morphed because of communism and the Cultural Revolution

• Deng Xiaoping is famous for “black cat, white cat”

statement was game changer for code of conduct and so was the 1992 southern China tour in which he said “kai fang” (open up) their economy

13

Underlying Thinking

• Immigrant thinking: vying for scarce resources
• Life is hard so competitive advantage is always

sought to give upper edge

• Situational ethics apply – whatever works
• “Better to be the head of a chicken than the

tail of the Phoenix”

• Seeking a better deal – ALWAYS!!

14

THE RESULTS

15

3 Key Differences

Western Thinking

• Contracts
• Win/win
• Rule of law

Eastern Thinking

• Relationships
• Win/lose
• War of attrition

Note: this may seem distasteful for some to hear but when you strip the patina of “political correctness” these are the hard realities of the differences

16

Contract v. Relationship

In Western cultures, the contract determines the relationship (type, terms, conduct, pricing, remediation) however in China the thinking is reversed: The Relationship determines the Contract

17

“Guanxi’s” Real Meaning

Guanxi is Chinese for “relationship” but in business it is far from Western definition of the warm and fuzzy scenarios that we may think… On the contrary it is better envisioned as “balance of terrors”: Similar to the concept of M.A.D. or Mutual Assured Destruction If you show weakness then you will lose in this relationship!

18

Case Study 1

Situation:

• One of the largest shippers of wastepaper to Asia (located in Los Angeles) has given

me a chance to ship his freight (but at steep price discount)

• 1,000 containers over 6 months!

Problem:

• One week (to the day) from signing Mr. “Hu” called to say that competitor

matched my rate

• I had to match the rate or Mr. “Hu” would not deliver on the contract

Solution:

• My father’s advice – do unto him as he

did unto you

19

Win/Win v. Win/Lose

Win/win thinking is a uniquely Western concept which is not

• bserved in Asia or in most parts of the world. The thinking

is totally foreign because most societies know that the rule

• f zero net gain applies. Usually it is the following:

I win, you lose OR I win more, you win less!

The following are some real life stories of this type of thinking put into practice!

20

Tilting the Advantage

• Stalling for time – tunnel building contractors in Tianjin

(contract negotiations that turn ugly)

• ASMC Windtec Solutions v. Sinovel Wind (customer who

turns ugly)

• Huge US chemical company and rogue employees

(employees who turn ugly)

21

Rule of Law v. War of Attrition

In Asia , the absolute thing to avoid is: court/arbitration/mediation!! You will not win and even if you do “win” then the win usually is hollow ie., very little compensation,unenforceable “cease and desist”

• rders, and bad press of “ugly foreigner”

“Burden of proof” standards and rights/responsibilities usually is heavily tilted against the foreign (US) firm or entities However when you do go to court or arbitration then go in loaded for grizzly bear!

22

Case Study 2

Situation:

• Management and employees of US services company in China were shown to have

participated in: kickbacks, fraud, embezzlement, extortion, and blackmail

• Upper management discovered this and terminated these individuals

Problem:

• Lawsuit by terminated employees alleging non-compliance to labor laws
• Insane standards/thresholds of proof for foreign company

Solution:

• Research done, strategy and possible outcomes thought

through – countersuit for amounts of 10 x

23

THE SOLUTIONS

24

Notable Quotable

“The greatest victory is that which requires no battle”

• Sun Tzu from “The Art of War”

25

How to Win

Knowledge:

• So if you are a foreigner, but you take the time to learn the Asian market ways (NOT

just business culture) but really understand their societal culture, customs, family, respect issues then you will do well in navigating through the waters

• Rules of etiquette and protocols are important but don’t get hung up on Asian-

isms such as “face”. Giving “face” is shorthand for showing due respect and the various etiquette rules are varied and great in number.

• However, often “face” is used as a device to create weakness in the foreigner (who

has been trained in cultural sensitivity classes)

• Giving “face” is fine but if “face” is used to your disadvantage (stalling, not getting

straight answers, etc) then don’t lose your composure but be insistent in your cause

26

How to Win

General Guidelines:

• Never deal from a position of weakness – if you have weakness in your pricing,

coverage areas, etc then be ready to address them should it be asked of you

• Never show your motives and plans - pretend you are slow to catch on (due to

language or understanding) and a foreigner as they assume you to be

• Always prepare to walk away from a deal (any deal) if not then you will constantly

lose in negotiation NOTE: A deal is NOT the final deal, it is a beginning of a discussion and can be amended as situation changes even after the contract is signed

• Always have potential alternative partners, so that if situation turns ugly then

the current people or firm you are working with will know you have other

• alternatives. Fear of alternatives or options is KEY!

NOTE: That is also why you should not sign contracts with volume levels or have them easily attainable

27

How to Win

Dealing with Vendors:

• Always check out their plants and facilities looking for capacities, quality controls,

“tightness” of operations, remediation process and procedures should product or service not be acceptable, credit terms, etc

• Always talk to their customers – the list they give you and ones that you know they

service

• Check everything that is delivered, and expect at least 10-15% will be faulty,

broken, or not up to quality standards

• Spend some time with middle and lower levels (peer to peer) - if you show them

respect, they may help you navigate around their boss and his/her organization

• Always look for alternative vendors at anytime, NEVER put all of your "eggs in one

basket” - remember the first slide’s traffic jam picture?

28

How to Win

Dealing with Customers:

• Work hard to learn their “cannot retreat beyond position” as early as possible
• Let them know your “cannot negotiate beyond position” at the last minute
• Do not bring the ultimate decision maker to the negotiation table. They won’t, but

they will insist that you must

• Repackaging what you want done in the way the Chinese can move through their
• system. They will even tell you how if you know how to ask and then what to listen

for….

29

Endgame

When working with Chinese or in China: what should the endgame strategy be?

30

31

John Lee john@leecoreconsulting.com http://www.leecoreconsulting.com

32

HAWORTH & LEXON LAW FIRM

北 京 上 海 重 庆 香 港 BEIJING SHANGHAI CHONGQING HONGKONG

Presented by: Robin Gerofsky Kaptzan Senior Foreign Counsel June 5, 2014 (Shanghai)

Business Negotiations in China: Navigating Chinese Systems, Laws and Cultural Differences in Structuring Deals

Part II – Technical China Issues

33

What we will cover today!

How to Control Your China Business . . . from the Beginning

1. Protecting the Company 2. Protecting the “End Game” 3. Using an Attorney in China – Must Knows!

Haworth & Lexon

34

来源：Transparency International 2012

Corruption Perceptions Index 2012

Haworth & Lexon

35

Protecting the Company Operations . . . from the beginning Cross-Border Contractual Relationships

Haworth & Lexon

36

“Guanxi” = Social Concept

Relationships that

• pen doors and . . . ?

Example: Home Displacement

Influence

Cultural ~ 1

Haworth & Lexon

37

Cultural ~ 2

Relationship Options & Approach

 Handshake!  Letters of Intent – MOU  Contracts

Haworth & Lexon

38

Cultural ~ 3

Drafting Approaches

 Detail vs. General Orientation  Translation must be Accurate

• even though the Chinese

version will likely prevail  Form vs. Substance

• respect the Chinese

Most Chinese know what is a good contract! If not, educate!

Haworth & Lexon

39

Deal Breaker ~ 1

Non-Disclosure Agreement or Terms (a/k/a NDA)

 Confidentiality  Non-competition  Non-solicitation  Non-circumvent

When and how to use them?

Example: Doll Manufacturer Potential Distributor Relationship

Haworth & Lexon

40

Deal Breaker ~ 2

Intellectual Property Right Terms (a/k/a IPRs)

~ Foreign vs. PRC IPRs

 What can be licensed in China?  What about Brand Usage Rights?  What about Proprietary Information?

What can be protected?

How want you protect IPRs?

Haworth & Lexon

41

Deal Breaker ~ 3

Liability Terms

 Risk of loss  Indemnification  Insurance

What differences must you understand?

Example: Supplier to Japanese

Haworth & Lexon

42

Protecting Company Operations . . . from the Beginning Company Set Up

Haworth & Lexon

43

Security Measures

• Lock Up Chops (& Information)
• Passwords & Codes (For Must Have Staff Only)
• Company Protocols (Established & Written)

“John Hancock”

Haworth & Lexon

Chops vs. Signature

What is the difference?

44

Corporate Structure

 A Company’s Goal is Balance

 Compliant Operation (under USA and PRC law)  Cross Checks in Operations

 Balance Officer Appointments

 Example: Joint Venture

• vs. WFOE

Haworth & Lexon

45

Intellectual Property Protection

 PRC vs. USA

Understanding the IP Thief’s Mind!

 Registration

Try to be one step ahead!

 Litigation

Examples: American Domain Name European Electronics Products

Haworth & Lexon

46

Employment Issues

Haworth & Lexon

Labor Contract Law

 Who does it protect?  What obligations are imposed?

Protective Documents

 Employee Handbook

• a/k/a Rules & Regulations

 Confidentiality

• During & After Employment

Background Checks?

47

Officer vs. Employee Status

Company Law Protections

What are the legal differences in China? What are Officer Credentials (or legal limitations)? Legal Obligations – Trust!

 Fiduciary  Confidentiality  Non-Competition  Avoid Fraud  Avoid a Conflict of Interest

48

Protecting the “End Game” . . . from the beginning

Haworth & Lexon

49

What You Need to Understand ~ 1

Profitability

 Cross-Border Deal

 Foreign Exchange Laws  Inspection Rights  Final Payment = Bonus

 Company Set Up

 How to Get Money Out of China  Overseeing & Cross-checks  Routine Inspections [Operations & Financials]  Termination

Haworth & Lexon

50

What You Need to Understand ~ 2

Dispute Resolution

 Friendly Discussion  Choice of Law  Jurisdiction = Enforcement  Legal System Example: Informal Mediation

Haworth & Lexon

51

What you Need to Understand ~ 3

Evidence laws

 PRC vs. USA  Types of Evidence Required & Available  General Assumptions Example: GM who lost face

Haworth & Lexon

52

Using an Attorney in China

Haworth & Lexon

53

The Rules:

PRC vs. USA

Credentials for Working in China:

In-house Counsel vs. PRC or Foreign Law Firm

 Client & Former Client

Example: Anti-Dumping Case

Confidentiality & Attorney-Client Privilege

Haworth & Lexon

 Conflict of Interest Check

What is the Office Protocol?

 Handling a Conflict of Interest

 direct vs. indirect relationship  waiver of conflict of interest

Handling Conflicts of Interest

Haworth & Lexon 54

55

When Negotiating a Deal in China …

Reminder . . .

• 1. To Understand & Respect Differences

Peel the layers of the onion away!

• 2. It is a Game!

The Players have distinct roles!

Haworth & Lexon

Business Negotiations in China: Navigating Chinese Systems, Laws and Cultural Differences in Structuring Deals Strafford Webinar ~ June 4/5, 2014

HAWORTH & LEXON LAW FIRM Presented by: Robin Gerofsky Kaptzan Office: +(86-21) 6385-9090 China Mobile: +(86) 13501873594 USA Cellular: +1 (516) 508-1084 (limited) robinkaptzan@hllawyers.com

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THA THANK YOU! NK YOU!