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10/17/2017



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Negotiating with the Chinese: A Case Study

By Cindy Wolf


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China is the U.S.' second largest trading partner, yet many Americans are stymied when negotiating with the Chinese. Lawyers call it getting "localed" and it is not unusual for even experienced international business people to get caught up by their own ethnocentrism. The fact is that Western and Eastern cultures are based on different foundations. Westerners, and particularly Americans, value individual success, while Easterners value the community and relationships. Americans like direct speech and action. Chinese use subtext to communicate indirectly. Both sides can end up thinking the other side is lying or rude.

Other writers have described and analyzed how cultural differences impact Chinese and American communications. But, in the midst of a negotiation, particularly during a dispute, lessons on cultural communication can be forgotten as ingrained responses take over. Hindsight is crystal clear as the cliché goes. In this article, I will use an actual construction contract dispute between a local Chinese contractor and a US based manufacturer to illustrate how cultural differences led to misunderstandings and lawsuits.

How It All Began

A US manufacturer (called "USM" in this article) had been doing business successfully in China for a dozen years. When it decided to build a second manufacturing plant in one of the foreign enterprise zones, its global engineering group based in the US initiated the design and build process. The lead engineer, Bill, had been managing global projects for many years including a few in China. Bill wrote the specifications (US style), contacted some local connections to get recommendations for contractors for this project and was assigned a US based lawyer to draft bid documents. As the US lawyer, I took the standard company contract (based on AIA forms) and sent it to Chinese counsel to have it reviewed for issues under Chinese law. Based upon the advice from a top tier international law firm, some minor changes were made to the terms and an RFP was issued. After considering four bids, a local company (called "CC" in this article) was awarded the bid. Few legal issues were negotiated up front although there was some haggling over the price. CC presented a 10% performance bond as required and work commenced. The contract called for lump sum payments based upon progress.

What Went Wrong

Although based in the US, Bill visited frequently, staying for a month at a time until there was an organizational change at corporate headquarters and the global engineering group was disbanded. Bill retired. No one from USM was on hand locally (and definitely not from corporate) to take his place until the project should have been substantially completed. The plant manager at the existing plant, Dave, tried to take on that role but had another full time job. He thought the Chinese supervisor was looking out for him. Due to Chinese legal requirements, another local Chinese company was hired to supervise the project. They did not really supervise construction, but occasionally ran interference with various government agencies. Payments were being made regardless.

Finally, USM hired Jerry as plant engineer for both the existing and new plants. Jerry was not pleased with the quality and progress of the construction. He managed to bring the project back on track for the most part, but some significant mistakes had been made: the elevator was under powered and would not hold the load it was required to carry; and the roof leaked horribly causing both cosmetic and structural damage. There were also a significant number of minor defects.

USM started withholding payments and holding defect review meetings with CC. In all, over a dozen defect review meetings were held where CC did not argue that the defects existed or that they should be fixed. They agreed to send workers to fix them. But, if the workers actually showed, they didn't fix the problems. The elevator would require a total rebuild which was never attempted. Eventually CC argued that the elevator, which was used in the manufacturing process, worked fine even though it could carry material on only one third of the surface area of its floor without unbalancing and shutting down. Hay and tar were applied to the roof leaks which would wash away as soon as it rained. Eventually realizing CC was not going to fix the building, USM tried to execute on the performance bond so that it could use the funds to make the repairs themselves. CC sued its bank to stop payment and sued USM for payment under the contract. The matter was referred to CIETAC (China International Economic and Trade Arbitration Commission) for resolution per the contract terms. The parties eventually agreed to a confidential settlement.


Negotiating with the Chinese: A Case Study by Cindy Wolf




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The Negotiator Magazine  (March, 2012)