Chapter 17 – How to Conduct the Negotiations

After you have learned some basics about the two aspects of Guanxi and Mianzi and studied the “Thirty-Six Strategies”, you are ready to get into action and start your business negotiations with your Chinese business partner.

Differences Between Hong Kong and Mainland

Business negotiations with Chinese business partners in Hong Kong could be different from comparable negotiations in Mainland China cities such as Shanghai, Guangzhou, or Xiamen.

The Cantonese tend to be more westernized due to the influences of Hong Kong and constant contact with Western traders for hundreds of years. They are more accustomed to doing business with foreigners and are more efficient. However, Cantonese business people can often be more adamant about having things their own way and so foreigners should be firm about their position during negotiations.

In Hong Kong, there may not be any language barrier and their more Western way of thinking makes business negotiations perhaps a little bit easier than in Mainland China. You will find this out very quickly and need to adjust your business negotiations accordingly.

Let’s enter the conference room or showroom now and begin with our business negotiations. 

Inside the Conference Room

Meetings are conducted in a formal manner. You will be led into a room in which the Chinese are already present.

If it’s a larger company, you may be shocked at how many staff members have been assembled for your arrival but they may not all participate in the negotiations. The company wants to impress you and showing all that they have is one way of doing it.

Chinese usually greet one another with a slight bow or nod of the head. In business and with foreigners, a handshake is common upon greeting and departure.

When meeting someone for the first time, short handshakes are typically followed by the Chinese greeting of ,“ni hao” in Mainland China  or, “Ne ho ma” in Cantonese, in the Hong Kong and Guangdong provinces. Both translate as, “How are you?”

The Chinese pride themselves on holding their feelings inside, therefore, they may not smile at a first greeting or as often as people do in some other Asian countries (Thailand for instance). The Chinese typically have a “blank” facial expression during introductions. This is not a sign of unhappiness, dissatisfaction, or unfriendliness, but reflects the belief that there is virtue in concealing emotions.

It is also time to exchange your business cards and to be seated. The principal guest is usually seated to the principal host’s right on a sofa, or chairs opposite the door.

If there are windows in the room, visitors will always be seated with their back to the windows to avoid being blinded by bright sunlight.

Tips for Small Talk

By all means, avoid any temptation to immediately begin business negotiations or to disclose your strategy. In the beginning of a meeting, “small talk” is essential. Talk about the weather, family life, travel, art, or of your positive experiences in China and of its people. Business should be addressed after people feel comfortable with each other.

When talking, always address the senior Chinese representative.

It is interesting to know that casual conversation topics in China differ from that of English speakers. With the Chinese it is not impolite to ask about:

  • A person’s job
  • Annual salary
  • Marital/dating status
  • Age

The willingness to answer questions is the important take-away from the conversation. Questions about family tend to be deflected or avoided which is nearly the direct opposite of Western culture.

Your answers do not have to be extremely specific, but avoiding direct questions will be viewed with wariness and suspicion.

In Western style business, we focus on the deal, the possibilities, and the risks and so on. There is less focus on the people we are doing business with.

In China it is the opposite. What sort of person you are is more important than what you are doing. A good deal of time is spent exploring people’s characters. People want to know your background, your family situation, your likes and dislikes.

In Chinese culture, the question “Have you eaten?” or “Where have you been?” is the equivalent to “How are you?”. It is just a superficial inquiry that does not require a detailed answer.

In our Western society we tend to search for direct eye contact with our negotiation partners during business negotiations. The Chinese however will often avoid eye contact during conversations, especially when talking to the opposite sex or to strangers.

Traditionally, it was considered impolite and aggressive to look directly into another one’s eyes while talking, and is seen as a sign of disrespect. The Chinese sometimes lower their eyes slightly when they meet others.

Let Them Smoke

There are 350 million people who smoke in China. They consume 1.8 trillion cigarettes each year, or one third of cigarettes smoke worldwide.

Many Chinese consider smoking, usually among men, the right thing to do in a business environment. Opposite from most Western countries where smoking is banned in more and more areas, you better let your Chinese business partners smoke, especially if the meeting lasts for several hours.

Rude Gestures to Avoid

Many common Western gestures are considered rude in China.

  • Avoid making expansive gestures and using unusual facial expressions
  • The Chinese do not use their hands when speaking, and will only become annoyed with a speaker who does. Some hand gestures, however, are necessary. For example, to summon attention, turn your palm down, waving you fingers toward yourself and use your whole hand rather than your index finger to point.
  • Showing the soles of shoes should not be done
  • Do not beckon someone with the index finger – use the hand with fingers motioning downward as in waving instead
  • Whistling to get someone’s attention is not appropriate
  • Finger snapping is rude

Chinese communication is ambiguous, indirect, and highly contextual. In conversation, the real meaning, especially if it’s negative, is often implied rather than stated. What is not said is often more important than that what is said.

The Important Thing to Know about Chinese “Yes” and “No”

Chinese people would rather say what they think you want to hear, rather than tell you the truth. They therefore do not like to say “No” in a business meeting or admit they do not understand something. Be aware that maybeorIll think about itusually meansNo.

In order to avoid problems, questions should not be phrased as: “Can you do this for us?” A better way of phrasing it is: “How will you do this for us and when will it be done?”

The same applies to your answers. Instead of plainly saying: “No”, you are better off using an expression like: “I will have to look into that” or “I am not sure we could do that”.

Don’t take your Chinese counterparts’ saying “Yes” literally to mean affirmative. Chinese people have a habit of saying “Yes”, or nodding their heads, to show that they are paying attention or that they’re following what you say. In such a context, the word “Yes” does not mean that they agree with what you say or with your terms.

In order to avoid misunderstandings, get as much in writing as possible and structure meetings so there is a short review at the end of the meeting to confirm everything.

You will be surprised to find out how many details have been misunderstood or not agreed to. In chapter 25 there is more information about the importance of contracts.

Be precise and never leave anything open for interpretation because it will come back to haunt you when you least expect it.

Use Visual Aids if You are Making a Presentation

I have found that using a flip chart helps a lot to draw your counterpart’s attention to the details and important items of a meeting. Besides overcoming the language barrier, it gives the Chinese side a chance to make corrections or interpretations that remain visible during the entire meeting.

Some companies have electronic flip charts that can print out the written information. However, you will find that for the most part only larger companies use them because they are quite expensive.

PowerPoint presentations can also be helpful as long as the content is clear and related to your business negotiations.

English as the Business Language

Internationally, the English language is being spoken more and more. It is now considered the lingua franca of business in many countries including China.

That does not however mean that business people in China will speak English at the same level of competence as you do; it is probably their second or third language. Accents and speech patterns affect clarity, even for native speakers. Remember that your audience may have learned British English (Hong Kong) rather than American English, and that their instructor was most likely not a native speaker.

Speak slowly, in short sentences, enunciate, and pronounce words clearly. If you use slang and colloquialisms it is unlikely you will be understood.

Chinese often pause when speaking. Do not become agitated because it is one of their customs. The pauses are a sign of measure and considered thoughtful in Chinese culture. Get used to it and try not to interrupt your Chinese counterpart when he is making a point.

Have an Exit Strategy

Before you go into any meeting (not only in China) you must consider your options for an exit strategy. What are you going to do if things don’t work out as expected?

In one of my other eBooks, How To Settle Factory Claims In China More Successfully I suggest you call it a day and leave the supplier if an hour-long negotiation has gone nowhere. That is always an option that you have, but it is also the last resort, because there is usually no way to gracefully resume negotiations.

If the going gets tough, you may let the Chinese side know that they are not the only game in town. Competition between Chinese producers is increasing. There may be other sources in the country for what this supplier has to offer. Let the Chinese side know that failure to agree is a preferred alternative to making a bad deal.

Talk to a Decision Maker in Private

Sometimes it is a good strategy to talk to one of the key decision makers in private. Chinese people do not tend to express what they have on their mind in public. But when they are with you in a “one-on-one” situation, without other people around, they are direct and straightforward.

In that way, you may also learn what the real problem is instead of listening to their excuses. When I am walked around at new factories, I always take the opportunity to ask the “tour guide” questions that he would not have answered during meetings.

Helpful Tips for Your Negotiations

Always try to find out what the real story is behind everything.

Often with the Chinese, there is both a cover story and the real story which no one wants to tell you. Only by asking many questions will you be able to determine what is really going on. A typical story for production delays is a “broken mold” that prevents production from progressing. In many cases the “broken mold” will evaporate if you ask to examine it. The problem lies somewhere else, which you need to find out.

Solutions can be only discussed and found after everyone knows all the real problems. Focusing on fabricated issues is meaningless and a waste of time.

White face/black face or good cop/bad cop strategy.

Both Chinese and foreign negotiators will employ this strategy during their business negotiations. The Chinese like to have the boss be the white face (good cop) and the manager to be the black face (bad cop). Foreigners mostly reverse these roles but for the Chinese boss, his face is more valuable, and it is important that he can keep options open.

We have used this strategy many times in our negotiations and in most cases it worked quite well. In one case, the Western company owner stood up and yelled at his son, who was conducting the negotiations, questioning how he could accept such treatment by the Chinese supplier. They were shocked but since it was not directed at them, they did not lose their face and finally made some more concessions.

Sometimes it is all a big show and you act accordingly without breaking the rules.

The sacrificial lamb

This is a fairly common strategy in China. Cutting an employee loose is often easier than making face-losing issues, the responsibility of a top decision maker.

I have seen this strategy used several times and it is usually the sales manager or QC manager who will be blamed for the problems. Replacing him or her is much easier in China since there is an abundance of labor available. The sacrifice also sends a signal to the customer that the factory is really willing to make significant concessions.

How to Avoid Price Increases

In times of ever-increasing raw material and components costs, VAT refund reductions, and higher energy costs, price negotiations will continue to be at the top of the priority list.

You as an importer will face the problem, that you sold your products to homeland customers based on a fixed buying price and have no way to renegotiate your selling price. Your supplier will tell you that he cannot keep the agreed-to-price because his increased costs do not allow it. You are caught in the middle.

For these negotiations, it is very important that you know as many details as possible about the cost structure of your products. You need to make a breakdown of the costs that will prove that the higher oil prices (plastic parts) that your supplier is claiming as his main reason to raise prices, is only marginally affecting the total cost price of your product. Without these facts, you will become involved in endless price negotiations.

If your supplier is trapped in a lie, it is not the time to gloat. Instead, offer them a way out. Give in on something that you can afford and something that costs less than a damaged relationship. It will also give you leverage for your future negotiations because you can always refer to the fact that you previously accepted a compromise.

How to Negotiate Price Reductions

All price quotations in China are calculated based on the individual BOM (Bill of materials) list, which is a document used by a manufacturer or other business to authorize a set of purchases to be made or to request materials to be pulled from inventory in order to fulfill a customer order.

Here is an example of a real BOM for a PCB (Printed Circuit Board) of an electronic item.

PCB Assembly

PartDescriptionVendorVendor Part#QuantityPriceSubtotal
1N5231Zener Diode, 5.1VMouser78-1N5231B1$0.04$0.04
1N5234Zener Diode, 6.2VMouser78-1N5234B1$0.04$0.04
1N5819Schottky DiodeMouser625-1N58191$0.14$0.14
2N3904NPN General Purpose AmplifierMouser625-2N39041$0.05$0.05
MAN6940Seven Segment LED Display, CCMouser512-MAN69409$1.84$16.56
CapacitorCeramic Capacitor, 0.1uF 50VMouser21RZ31012$0.08$0.96
CapacitorElectrolytic Capacitor, 100uF 16VMouser140-XRL16V1001$0.06$0.06
CapacitorTantalum Capacitor, 10uF 16VMouser80-T350E106K0164$0.48$1.92
ECS-ZTT20MHz Ceramic Resonator, with CapsMouser520-ZTT2000MX1$0.40$0.40
L78M05CPPositive 5.0V Voltage RegulatorMouser512-LM78M05CT1$0.36$0.36
LEDRed LED, 3mm (T1)Mouser606-4303F16$0.21$1.26
LM317T1.2V to 37V Voltage RegulatorMouser512-LM317T1$0.51$0.51
LM393ANLow-Power Dual Voltage ComparatorMouser512-LM393AN3$0.33$0.99
M74HC238B1R3-to-8 Line DecoderMouser511-M74HC2381$0.50$0.50
M74HC4316B1RQuad Bilateral SwitchMouser512-MM74HC4316N2$0.50$1.00
M74HC573B1ROctal Latch w/ 3-State Non-InvertingMouser512-MM74HC573N3$0.54$1.62
PIC16F876AFlash 8-Bit CMOS MicrocontrollerMouser579-PIC16F876A-I/SP1$4.53$4.53
Resistor1/4W 5% Resistor, 1K OhmMouser660-CF1/4L102J6$0.05$0.30
Resistor1/4W 5% Resistor, 10K OhmMouser660-CF1/4L103J24$0.05$1.20
Resistor1/4W 5% Resistor, 100K OhmMouser660-CF1/4L104J2$0.05$0.10
Resistor1/4W 5% Resistor, 1.5K OhmMouser660-CF1/4L152J1$0.05$0.05
Resistor1/4W 5% Resistor, 220 OhmMouser660-CF1/4L221J1$0.05$0.05
Resistor1/4W 5% Resistor, 56 OhmMouser660-CF1/4L560J1$0.05$0.05
Res Iso DIP16Resistor Array, 150 OhmMouser652-4116R-1-1503$0.49$1.47
SwitchMountain Tact SwitchMouser101-062123$0.30$6.90
UDN2983A8 Channel Darlington Source DriverDigikeyTD62783AP-ND3$1.23$3.69
ULN2803A8 Channel Darlington Sink DriverMouser511-ULN2803A3$0.44$1.32
PCBDRO-350 Bare PCBShumaTech#11$17.95$17.95
Total     $64.14

Bills of materials are of course only one part of a product’s cost. Other costs such as factory operations, labor, and administrative costs all go into the net cost of a product. Finally, the supplier adds their profit margin before quoting their selling price.

When you negotiate prices with your supplier, the BOM plays an essential part in your supplier’s calculation – actually the most important part, because most of the other costs cannot be changed. The factory cannot significantly reduce the labor costs, otherwise workers will flee to other employers. The equipment the factory owns and the cost of energy for manufacturing are relatively set factory operation costs.

That leaves the BOM as the only negotiable cost. Just like most things in the world, this is accomplished by substituting cheaper materials from other vendors or outsourcing part of their production to subcontractors who are likely taking quality short cuts that your supplier does not.

You might point to the profit margin as a good place to trim the price. In reality, the profit margins are so thin that if they were further reduced it would not make much sense to even open the factory doors for business. Certainly, they do not want your purchase order if it means they will lose money on the deal.

I highlighted the total BOM cost in red color at the bottom of the form to draw your attention to it. 

Sourcing cheaper components or materials usually means inferior parts or materials. Otherwise, the factory would already be using these less expensive components.

The Difference a Switch Can Make

Consider this example of what could happen.

A factory receives a large order for 200K electric hair dryers. They face the situation where the customer’s requested price is too low. They scrutinize the BOM and find an electrical switch purchased from a reputable switch maker can be substituted with a lower cost switch made in-house.

The savings is only US $0.05 but when multiplied by the 200K dryers it becomes a US $10,000 cost reduction.

Now for the real quality issue. The switch from the specialized switch maker was lab approved and had its own approval certificate. The in-house produced switch does not have its own certificate. Rather, the supplier covers it with the exiting certificate for the hair dryer.

You may think that an approval is an approval and it is a good way to cut costs. However, if something happens later and the hair dryer starts burning because of a faulty switch, the lack of proper approval will become a big deal.

A component with a stand alone approval is always an advantage, but it does cost more money.

You can now see the direct relationship between negotiating cost and the effect it can have on quality. The more you squeeze your supplier the more likely it becomes that he will reduce the BOM cost by substituting good components or materials with inferior ones.

There is always the option of substituting A-grade components with B-grade or even C-grade ones. It is nearly impossible to discover these changes but the result will be lower performing products. This is especially true of consumer electronics that need ICs, capacitors, and resistors in A-grade quality to perform properly.

If you have a good long-term relationship with a factory, you may have some reassurance that your factory will not use this cost cutting method, but there is no guarantee of it.

Time is On Their Side but You Can Also Play That Game

This is definitely something that China has learned that the West has not. The longer they wait, the more desperate we typically become. The classic Chinese tactic is to have meaningless meeting after meaningless meeting to overwhelm you with nothing.

The solution? First arrange a meeting with someone that is important and has other business to do – e.g. a factory owner or high-level manager. Like you, they have little time to waste doing nothing. Second, a couple of days is not really a long time – learn to wait. Third, if you need to, sit them out. They cannot put you off forever and they will be increasingly uncomfortable the longer you hold them to their promises of “the boss will be here soon”.

This strategy then extends to meetings as well – they may be long, but keep your points and get what you came for. I have seen foreigners leave China with less than what they wanted on a project, worth hundreds of thousands of dollars, because they had a two thousand dollar flight to catch to get back home.

Here is an example that earned me the respect of a company owner. I had a meeting in China with one of our audio factories because they wanted to delay all of our orders for weeks and months and we needed the goods urgently for our customers’ promotions during the peak season.

After several hours of unsuccessful negotiating in the factory, they switched off the lights (around 6:00PM) and told me that they and their workers have to go for dinner now. They expected me to leave, since I was not invited for dinner. Instead of leaving, I just kept sitting and forced the company owner to continue with our negotiations and later that evening we found an acceptable compromise.

I actually had no choice, because our company had a large booth at the Berlin consumer electronics fair and the company owner needed to inform our customers about the outcome of my negotiations.

I want to emphasize again, reserve enough time for your negotiations. You will not be back in China soon and must make the most of negotiations while you are there.

There is Not Always a Second Chance

One thing that I believe that Chinese factories do not or will not understand is that sometimes you cannot fix a mistake. Maybe the window of opportunity has passed. Maybe the money is gone. Maybe the buyer has moved on, cutting their losses for a better supplier. Whatever the case, my experience is that Chinese factories honestly believe that “with a little more time we’ll get it right”, or “if you just give me another week we can fix it.” It seems near to impossible to get suppliers to understand that buyers do not want fixed or late products.

The difficulty is often in the fact that money is at stake – not just a deposit that may need to be returned but time invested in a product that is now most likely worthless.

Realize the Limits of Your Chinese Supplier’s Capabilities

There are limits to what can be done financially, emotionally, and physically. This is just the reality of life. There are only so many “additional” workers that can be added to a production line to increase the production capacity. There are only so many pieces per day you factory’s injection machine can produce. There is only so much money that a factory can spend at any one time on any single problem.

There is only so much arguing that is tolerable before it is just not worth it any more. Despite what your contract has committed you both to, physical realities are often less optimistic. You may be frustrated that your supplier is just not cutting it for you. But maybe they honestly cannot meet the standards you have set. If you are willing to accept the reality, you will be able to refocus your frustration or negotiations to meet the physical or financial capacities of the supplier. Of course, do not just take their word for it – check it out.

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