Planet China

Doing business in the Middle Kingdom: effectively managing relations between representatives, customers, suppliers and employees.
Starting with this issue, ItaliaImballaggio will offer a series of reports and analyses by Alessandro Zaccarini - an Italian expert in China-Italy business relations - examining the main negotiation tactics and typical relations models among “local” managers and entrepreneurs. And advice on how to better approach negotiation in China.

Premise: the Other’s point of view
Of the many questions that Italian concerns (especially SMEs) encounter when trying to take advantage of the extraordinary business opportunities offered by the Chinese market, which negotiation approach to take and, more generally, how to build relations with Chinese customers when discussing a project, are definitely among the most difficult and pressing.
Before delving into the thick of things, it is necessary to bear well in mind certain fundamentals concerning the mentality of Chinese business people and the “reasons” behind their behaviors, as only then can one ascertain how to negotiate effectively.
Firstly, it’s important to remember that the Chinese context is one with an extremely high number of suppliers, and this number is increasing yearly in the wake of sustained economic growth. Potential Chinese customers can therefore always count on a variety of suppliers to choose from as their need arises, depending on who can offer the most advantageous commercial and technological conditions.

Agressiveness. This on the other hand leads to an aggressive attitude on the part of the Chinese buyers, who know perfectly well that they can easily find a supplier willing to accept conditions in their favor.
Furthermore, arriving at a deal according to “win-win” criteria – in which both parties are satisfied and believe they have achieved their goals – is not what the Chinese aspire to when they enter e negotiation. Far more often what is sought is a win-lose scenario, in which one has secured the best possible outcome to the detriment of the other side: in other words, it’s normal and acceptable to do whatever necessary to convince the other party to accept unfavorable conditions, both commercially and technically.

Experience. An important role is played by the fact that, generally speaking - excepting the large, state-controlled companies with roots in Mao’s administration - many Chinese companies are extremely young, born for the most part in the ‘90s or later. This entails a relative lack of experience: a group of Chinese managers, when buying a particular type of machinery for the first time, is unlikely to have a clear idea of its cost or cost/performance ratio.
In particular, it may be that until that moment they have only used Chinese made products, and as a result have local prices and equipment performance as their only reference point, completely unaware of the costs and features of similar products in Europe. It’s also possible that they are already using imported European machines, but most likely these will be second-hand, bought from Chinese agents specialized in selling piecemeal decommissioned Western plants. Also in this case, their only standard for comparison will be very old machinery – often from the ‘70s - and thus very far from current offerings in every way.

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Points of reference. It’s useful to remember that Chinese citizens are not generally aware of the price and value of foreign goods, and that western manufacturers have often used this to their advantage: in China, cars, clothing, computers, brand name electronics and restaurants and services are much more expensive than in Europe. But now, with an increase in travel and opportunities for interacting with foreigners, consumers are beginning to see the extent of this disparity, as shown by the recent backpedalling of Apple, which was forced to publicly apologize when it was discovered that its product warranties were shorter lived in China, and this in spite of the fact that the prices are among the highest in the world.
It’s no surprise, then, that lacking any point of reference, compounded by the awareness, or the perception, of being taken advantage of when buying foreign products (not only are the goods more expensive, but also often disproportionately high performing in relation to the user’s actual needs), that the Chinese team often approaches negotiation with targets, such as price, completely outside European market logic and focuses - often to what appears an unreasonable degree - on securing discounts and commercial conditions that can seem totally groundless to the European supplier.

Now that that’s cleared up, let’s examine a few of the bargaining tactics most commonly employed by a Chinese team.

Tactic number 1. Exaggerate, positively or negatively, the characteristics of the project under discussion
This tactic consists in describing a project in a way that strays from reality, either by inflating certain numbers to make it more appealing, or by understating the actual scale, only to re-scale at a later time, asking even more favorable conditions. Here are some examples:
a) the potential customer requests an estimate on the basis of a supply of 200,000 pieces per year, when in reality their needs will not exceed 50,000 units per annum;
b) they ask for a discount, claiming that they will be willing to pay a higher price for subsequent orders, when in reality no more orders will be placed;
c) they ask to buy some machinery at a discount price, promising that the difference will be made up in purchases of replacement parts, but in fact these will be purchased at low cost from Chinese suppliers;
d) after numerous negotiations concerning the supply of a small number of products or a single machine, during which the Italian company has been obliged to reduce the price and make technical or commercial concessions very near their bottom line, the Chinese customer informs them that they wish to buy not one but four machines, expecting even more concessions (almost impossible to make since the Italian partner has already made every possible concession;
e) the partners discuss a simple product (an unsophisticated machine), but once the bottom line has been reached, the customer requests a more high tech solution, refusing to pay more.

Countermoves
In assessing these behaviors, one must first of all keep in mind that a mischaracterization of the project or the customer’s actual needs does not necessarily indicate a desire to take advantage of the supplier. Oftentimes it is the result of a top-down approach in Chinese management, in which the board of directors or local government that sets the company’s strategies has set unrealistic goals corresponding to optimistic data values.

Listen and learn. Generally speaking, the correct approach to these negotiation approaches is to ascertain as much information as possible about the nature of the project, not only from the customer, but also and especially from third parties, such as agents, competitors, market studies and consultants’ assessments. If in the end one believes the other side’s aims are unrealistic, it is in any case important to carefully avoid showing any doubts, or, worse yet, openly challenge the Chinese counterpart’s good faith. On the contrary, one must always project a positive and engaged attitude and a commitment to closing the deal: an aggressive (or even worse arrogant or presumptuous) attitude is not understood as confidence in one’s professional competence, but as a desire to overturn the traditional roles of supplier and customer.
It is in this positive atmosphere that it becomes possible to refuse to accept certain conditions with a friendly disposition, or to maintain that one’s offer is based on the customer’s indications, when in reality (although this doesn’t mean it’s appropriate to say so) it has been developed on the basis of more realistic parameters.

Margins. Provided these fundamentals, it is essential to maintain, throughout the course of the negotiations, a margin to safeguard profitability, or at least interest, even in a worst case scenario and after having already made a number of concessions. As addressed above, the Chinese buyers are not often disposed to leaving profit margins to the supplier, but rather seek the greatest possible benefit for themselves, even when this means compromising long-term relations with the supplier. Therefore, the latter should be well aware at which point and under which conditions the project stops being in their interest.

In the next future: how to confront the opaqueness of Chinese enterprises, their organizational structure and the division of responsibilities within.