The Role of Negotiations in Commercial Contracts (A Case Study of China)

The Role of Negotiations in Commercial Contracts

Introduction

China has in the last two decades experienced exponential growth in its economy and this is partly influenced by the continued investment partnerships that it has made with various countries. Africa is home to a number of fast growing economies and China has invested a number of resources in the continent which has increased trade relations between Africa and China. Ting-Toomey and Chung (2012) say that trade between Africa and China will continue to grow in the coming years. Unfortunately, scholars have been quick to notice that the trade relations between China and Africa are hugely skewed in favor of the former. Africa risks missing out on the potential opportunities that come about with the China-Africa trade unless they adopt favorable negotiating techniques. This paper seeks to demonstrate the role played by negotiations and the negotiating tactics and skills that are used by Chinese corporations in closing high value contracts in Africa. The paper relies on South Africa as a representative for the African continent owing to the fact that it is Africa’s largest economy and the fact it is one of the few African countries that have made forays into the Chinese market.

Contracts

Despite that the fact that the Chinese population presents one of the world’s largest markets, many corporations have found it difficult to do business in China. This has often been attributed to the fact that the Chinese way of doing business is highly tied to their cultural values. China hosts some of the world’s oldest civilizations which are based on ancient philosophies thus differentiating the business traditions from any other in the world. Despite its unique business culture, China has made tremendous progress in learning the cultures in various parts of the world and this has helped its growth in Africa as well as in the western world. Before getting in to any contracts, negotiations have to be carried as they set the terms of that agreement and this is not just for the Chinese but also in any other business setting. The trick with negotiations is that they are shaped by the cultural backgrounds of the parties to the agreement. Most Africans have followed the western style in business negotiations while the Chinese have retained their civilization. This makes the process of negotiating in China to be complex as cultural differences enhance the risk of negotiations failure due to cultural misunderstandings (Robbins et al., 2013).

There has been an increase in the research available on contract negotiations as academic scholars seek to solve the problem of failing negotiations. A majority of the existing academic thinking has looked at negotiations in a commercial setting in China without looking at the subgroup cultural factors such as age of the negotiating parties, or whether it is employees or corporations involved in the negotiations. For purposes of this study, the negotiations will be researched from the perspective of the corporations since they are the ones that have commercial and more detailed contracts when compared to the perspective of the employees. In order to understand negotiations in the high value projects, it is important to understand the negotiations strategies that negotiating parties use as well we the impact of culture in these negotiations (Duan, 2012).

Liu and Low (2009) say that there are two negotiation processes which include symbiosis and predation. The two processes can also be referred to as cooperation and competition respectively. The cooperation/symbiosis process of negotiating is informed by the theory of social exchange. The theory asserts that relationships are best established through open communications, revealing all the underlying interests that inform the various positions, and through fulfillment of mutual gain solutions. On the other hand, the competitive process does not consider meaningful relationships as a priority when it comes to negotiations. The approach involves the use of power as opposed to interest on a particular issue which means that the outcome in a negotiation has an outright winner and a loser. These processes will work differently depending on the cultural context. Chen, Zhu, Ao, and Cai (2013) say that culture is set of shared and lasting meanings, beliefs, and tenets that identify a particular national, ethnic, or any other group of people. Parties in a contract are always people who have a certain cultural background. This means that the parties may also have differing assumptions, differing perspectives and thoughts, as well as differing different behavioral models. Failure to comprehend these cultural undertones sets the negotiation process up for failure. In the event that a South African from was to establish a commercial contract with a corporation in China, there would be two world views given that the South African party has its own conception of the negotiating process and business practices while the Chinese party would also have their own. The trick that many foreign corporations have failed to master in their forays in to China is that the Chinese society is still hugely influenced by the Confucian principles not just in their social and political philosophy but also in their way of doing business (Brouthers, and Bamossy, 1997).

The behavior of the Chinese people in negotiations can be deduced through a thorough identification of the unique aspects that shape their cultural identity. Some of the unique aspects include the communist political ideology, the wide geographical size of the country which is inhabited by a wide population, and an institutional bureaucracy in the running of the legal and economic frameworks. Lai, Liu, and Wang (2004) says that the socioeconomic and political culture makes them averse to risks and will be unwilling to accommodate any contract that exposes them to risks. They are also very careful not to make mistakes and will want to negotiate every aspect of the commercial contract leaving no room for errors. At the very foundation of their belief is moral ethics. The Chinese are highly skeptical about outsiders and are slow to rust anyone who is not family to them. The foundation of the commercial relationships in China is founded on social capital as opposed to the legal framework and this is also explained by the fact that the Confucian philosophy does not a have as much regard for legal systems as it has for self-regulation. Individuals are expected to be honorable so as to save their face and protect themselves from shame. Shame and face are highly regarded in China (Feng and Lu, 2013).

Selection of Contractors

The Chinese are very careful when deciding on a contractor who will deliver on any projects and this is even more significant when it involves long term contracts. The choice of a contractor is China is informed by a number of factors including the reputation of the contractor, the price agreement, the schedule for completion of the project, among other factors. This means that in the Chinese setting, the concern is not just the ability to complete a project but proof of similar successful projects carried out by the contractor. Having a good record and having a fair price is likely to result in the award of the contract as this is aimed at ensuring the award of tenders and contracts is done on merit and in a manner that does not accommodate the corrupt elements.

The process of selecting the right contractor is regularly reviewed in Chinese law in order to increase efficiency in project procurement. However, the general trend is to pick the contractor who has the lowest price as well as confirmation of the ability to complete the project within the required time length and in the highest possible standards. The ability of the contractor is measured using the assets base, the level of expertise in the firm, the management skills used at the company, as well as a positive reputation. Selective tendering is also common in the long term and high value tenders. In this type of tendering, the client invites a number of well reputed firms for a competitive tender (Richards 2014, 77).

Ordinarily, the tender bidding is done in such a manner that the project goals are explained in the tender documentation which is then followed by the contractors submitting tenders that align with the requirements in the tender documents. The bids submitted by the contractors are usually intended to serve as a distribution that details how the contractor will get the assets needed to complete the project, thus providing contractors with an opportunity to prove their competitiveness (Firth, Lin, and Zou, 2010).

Law Regulating Tendering and Bidding of Contracts

China has a comprehensive tendering and bidding law which is divided into five chapters. The laws as currently constituted have been in effect since 2000 having been adopted on August 30, 1999 at the 11th session of the Standing Committee of the Ninth National People’s Congress. The law is divided into six chapters; General Provisions, Tendering, Bidding, Opening, evaluation and winning of bids, Legal Liabilities and Supplementary provisions. The law makes virtually no mention of foreign participation in local bids, aside from a provision in the chapter 6 (supplementary provisions) which allows projects that are being funded using funds from international organizations or governments to proceed if they comply with regulations of concerned organizations or governments. China’s bidding and tendering laws shows remarkable similarities to universal standards applied in other countries, with provisions on neutrality, technological expertise and capability, and ethical conduct being the main focus of the law. Chapter 2 (tendering) requires the tenderer to engage the services of a tendering agency of their choice. As is common in most states, inclusion of details in the tender document with the sole purpose of discriminating a specific party or parties is prohibited. Chapter three (Bidding) touches on the qualifications of the bidder, contents of the bid documents as well as details regarding deadlines and subcontracting.  Qualifications for bidders are ascribed by the tenderer as well as state provisions. The tenderer is required to reject any bid received after the stipulated deadline. Additionally, they are prohibited from opening bid documents until after the deadline. If the tenderer receives less than three bids, they are required to run the tender again. The bidder is required to mention in the bid document any intention to subcontract part of the project.

 Contract Issues

If the process of contracting and negotiating is not well understood, there is the risk of issues arising after the contract has been signed. To avoid such issues, it is expected that the contract is well explained especially when dealing with contract novices or if the contractor is foreign to the processes in China. The contract should be well explained, simple, precise, and flexible but detailed, while at the same time it should be conclusive (Stark et al., 2005). If the terms of the contract are not well documented, there is the risk that the parties may take advantage of each other and create misunderstandings that make implementation difficult. Some of the issues that often arise when South African companies are dealing with Chinese partners include language barrier, different legal framework, and regulation.

Commercial Relationship Issues

The tensions that have characterized Chinese commercial relationships with western economies tend to spill over into business relationships between non-state parties. Shi and Wright (2003) argues that Chinese businessmen are easily affected by national feelings of dignity and pride in handling individual-to-individual business relationships. Although it is a highly subconscious effect, it is a very strong factor and the authors encourage western negotiators to divide the relationship into the micro and macro dynamics. The micro section would encompass short-term social aspects of the relationship while the macro section would include aspects touching on the wider national good. . Chinese business transactions and relationship are generally built on the handshake principle, known in Chinese as ‘Guanxi’. Westerners are more inclined towards legally binding agreements and this disparity often leads to conflict in Sino-western business transactions (Shi and Wright, 2003; Ghauri and Fang, 2001). The demand for legal by western investors is often misconstrued as a sign of distrust by Chinese counterparts who are used to informal setups. The Chinese principle of conflict avoidance means that emerging issues are easily ironed out as they arise through incremental concessions that may see both parties lose significant ground on their initial bargaining stance.  On the other hand westerners tend to maintain a rigid stance, and aggressive legal redress is an often followed course even for minor conflicts (Ghauri and Fang, 2001).

Commercial Negotiation

Chuah, Hoffmann and Larner (2014) cites negotiating contracts with Chinese business partners as one of the most daunting challenges that foreign businessmen can face. For westerners, the stark cultural disparities pour into business negotiations and overcoming the associated challenges requires a good understanding of these disparities (Chan and Shing, 2016). The first challenge that needs to become is the obvious language barrier. Even in the presence of a competent translator, there exists a real danger of meaning being lost in translation. Ghauri and Fang (2001) recommend the use of more than one communication channels by having more than one person in the negotiating team who can speak Chinese. When delivering a speech or presentation, it is wise to use straightforward language, as jokes or dramatic presentations may fail to come out clearly in the translated delivery (Ghauri and Fang, 2001). A distinct quality about the Chinese and Eastern culture in general is that friendship and business tend to overlap seamlessly (Chuah & Hoffmann, 2014). As such, the “friendship first, business later” approach that is almost taboo in the West is the natural course of business transactions in China. During meetings, especially early ones, a lot of seemingly irrelevant discussions touching on issues like family, leisure and home towns tend to come up quite frequently. Rather than skirting such discourses, it may be beneficial to encourage them as they begin the process of forming commercial connections in Chinese business culture. Moreover, successful negotiations are followed by prolonged sessions of socialization. Despite this seemingly casual approach to business negotiation, negotiations tend to be very fast as singular issues are not given too much time. Chinese negotiators tend to focus more on the whole package than on the details. Rather than dwelling on unresolved issues, they prefer to move ahead and come back to polish up on these later. The Chinese prefer to begin the project as swiftly as possible and any unresolved issues are usually catered for by a memorandum of understanding (Chan and Shing, 2016). Social hierarchy is an important aspect in Chinese culture (Stark et al., 2005). As such, the working level of the negotiators sends an important message to Chinese businesspeople regarding the other party’s regard for the transaction. It is therefore wise to send at least a few high level executives as part of the negotiating team and to make sure that negotiations are carried out with top decision makers (Ghauri and Fang, 2001). Bargaining and tough negotiation is a part of Chinese business approach. However, harmony is a very valuable concept among the Chinese and negotiators take special care to avoid conflict. Concessions from both sides are usually encouraged as part of the process to smooth things over and stay on good terms. Disputes rarely deteriorate into legal action and where this does happen, legal redress tends to be a protracted and often biased process that is best avoided. Mediation through third parties is a more common course of action in China (Stark et al., 2005).

The use of gifts is a common way to show appreciation in China as is the case in most Asian cultures. Gifts that are representative of the interests of both the giver and the Chinese recipient are usually highly appreciated. Chuah, Hoffmann and Larner (2014) recommend giving items that are synonymous with the givers country of origin but customized with Chinese characters. However some items are associated with bad luck such as clocks and the number four. The authors also mention the spirit of reciprocity as a core principle of Chinese giving, therefore expensive gifts are discouraged as the recipient may suffer embarrassment if they are unable to respond in kind.

Partnerships and Partnering

Business partnering with foreign investors in China is a fairly recent development in China. Until the amendment of the Chinese Partnership Law in 2007, Chinese individuals had to be part of foreign invested business partnerships within the country. Foreigners seeking partnerships in some industries may require special approval from relevant government agencies aside from the usual process that involves registering with a local branch of the State Administration of Industry and Commerce (Chan and Shing, 2016). Whereas they were previously frowned upon under the protectionist Chinese economic policies, foreigner-invested partnerships are now actively encouraged by the government particularly in cases where the foreign party possesses advanced technology or management experience. A 2015 study by PWC paints a grim reality for foreigners seeking partnerships in China, with 58% of alliances failing to reach their objectives (PWC, 2015). This hurdle is attributable to a raft of challenges identified in the study. First, Chinese respondents express displeasure at the perceived reluctance among foreign investors to share resources and capabilities. Such reservations were less common with the non-Chinese partners but it often lead to a breakdown of trust early in the partnering process. Secondly, selecting a partner particularly in restricted industries presented a huge challenge. Factors such as good reputation, legal standing and alignment of strategies and goals are critical universal qualities that are sought after when selecting a partner. For investors in the automotive industry where partnerships are restricted to state owned entities, such qualities may be extremely limited among legally qualified parties.  Another major challenge involves running of the joint venture. Shifting strategic alignment, control agreements, profit sharing and termination present significant hurdles to the longevity of Sino-foreigner partnerships (PWC, 2015). Firth, Lin and Zou (2010) encourage foreign partners to be involved in operations, manage diversities in culture and values, and to be open to conflict resolution early in the process in order to make headway in their Chinese partnerships.

Conclusion

Cross-cultural business present a challenging hurdle to all parties involved. Owing to vast cultural and value-based disparities, western investors approach business negotiations in a very different manner to their Chinese counterparts. While the Chinese value patient and non-confrontational negotiations, western negotiators are used to a more aggressive and incentivized approach. Without proper understanding of these disparities, foreign investors looking to score contracts and partnerships in China are unlikely to succeed. Chinese laws on bidding and tendering have changed dramatically in recent years to reflect China’s increasing openness to foreign input in the economy. Various subtle negotiating techniques such as conflict resolution, concession making and incentivization are particularly effective when negotiating with the Chinese.

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