Why China plays hardball
Recently, A Gippsland-based business was planning to embrace the export dream. To enter the Chinese market, it had started negotiating with a Chinese company to create a joint venture. There were 12 negotiating sessions over 2 years but the Australians found it just about impossible to pin their would-be partners down.
The Australians would spell out exactly what they wanted in clear and precise terms. But their counterparts would skirt around issues like pricing – they would talk about quality, labour costs and material costs, anything but.
Sometimes the Chinese would change the topic and focus on what seemed to be less important issues and there were also moments where they would get a phone call in the middle of negotiations, disappear for a while and come back talking about something else. This went on for over a year.
Finally, the company managed to land a memorandum of understanding. Of course, an MOU is just that, it’s not an agreement. So they spent another year going through the same process negotiating an agreement.
Finally, they struck a deal. Just one little problem: the agreement did not have many details. Three years after they started, the company is still negotiating the nuts and bolts of the agreement. Until it’s in place, they can’t do any business in China.
China is Australia’s largest export market but for many family businesses it’s a giant no-go zone.
According to the latest KPMG-Family Business Australia survey, based on research conducted by the University of Adelaide, only 23 per cent of family firms believe they perform better than their competitors in overseas sales. When it comes to global expansion, Australian family businesses just don’t cut it.
China is a case in point. Ian Campbell, the former managing director of GUD, the company behind such household brands as Ryco filters, Sunbeam, Davey Pumps and Lock Focus, says much of it comes down to the different negotiation styles of the Chinese as suppliers.
“In Davey Pumps, if we were sourcing plastic injection moulding parts locally, I would think that would be a far more civilised negotiation than with the Chinese. It’s very tough,” Campbell says.
“The great concern in dealing with the Chinese is if you get to price and there’s a sticking block and you say ‘no we are not going to pay your price’, they will literally just stop delivery. They will hold deliveries until they get their way, whereas I don’t think that happens here.
“Suppliers here would be far more concerned about the relationship and would want to know there is ongoing business whereas with the Chinese, and particularly when you’re not their largest customer, they tend to play hard ball.
“There have been lots of instances where Chinese factories have substituted components into a production run. They’ll put someone in the car and go buy something whether it meets the specification or not. I don’t think domestic suppliers would take that risk.”
Deakin University lecturer, business consultant and China expert Mona Chung who wrote Shanghaied: Why Foster's Could Not Survive China says Australian businesses find China a hard market to crack because they don’t read the nuances. In a market where Chinese companies don’t give yes or no answers, Australians often fail to read what’s being said between the lines.
And she says it’s not a market where you negotiate hard.
“It’s not a preferred method to use the hard approach,’’ Chung says.
“It’s a culture where people simply do not like conflict. So in negotiations, if people see the potential for conflict, the general method is avoidance. They would much rather not do business than have a conflict and argument.”
“That could be at a cost of profit as well. The fundamentals of the market economy are that if there is a profit to be made, you go for it. The Chinese could forgo profit in order to avoid conflict.”
She says many western companies don’t understand that China, for all of its impressive growth, is not a market economy. China is the leader in state-directed capitalism, it’s a planned economy. The Chinese think they have redesigned capitalism to make it work better and they see it as a sustainable model that provides stability and growth.
In this model, the Chinese government will allocate capital and that will flow through the various levels of government, with every level making its own regulations. State Owned Enterprises do the government’s bidding and while private companies might say they’re not controlled by the state, they have to keep an eye on government policy.
“When you look at a company and the degree of influence the Chinese government has, it’s certainly a lot more than our government would have over business,” Chung says.
She says Australian businesses can’t do it on their own – they need Chinese partners. And not just locals either, she says. Australians need people who have worked with both western and Chinese businesses.
“The important thing is to have people who understand how the system works, otherwise there will be a lot of wasted time and capital,” she says. “You need people who understand the importance of both sides of the business because locals don’t really understand where the Australians are coming from. They don’t know what your strategies are because they operate in a totally different business environment.”
The problem is those sorts of people at the moment are few and far between. But as China continues to expand internationally, there will be more in around five years’ time. Until then, China is likely to remain a difficult market for family businesses to crack.
Business in China: How to do it better
· Get a Chinese partner. Not just a local but someone who has worked with western and Chinese businesses and knows how both sides operate.
· It can take many long meetings before progress is made. Be patient, give it time.
· It is difficult for the Chinese to say no. When you strike an agreement, look at it carefully. Has an agreement actually been reached? Does it have all the required details? It might need renegotiation. Again, be patient.
· Do not negotiate too hard or negotiate to win. The Chinese do not like conflict. Nor do they appreciate being humiliated.
· Do not be too direct. The Chinese will often talk around issues so strive for diplomacy.
· Gift giving and receiving cements the relationship. Put some thought into what you’re selecting and importantly, wrap the gifts. The gifts are rarely opened in front of the giver.