The Fragile Bridge: Conflict Management in Chinese Business

By Andrew Hupert

Conflict management in Chinese business. Negotiating in China means dealing with conflict.
China is a paradox when it comes to conflict and disagreement. Local Chinese talk about harmony, but seem quick to enter into disputes. They put a premium on “preserving face” but don’t seem to care about their reputation... or your opinion. Chinese say that relationships are key to their society, but are willing to betray a partner for pocket change. The number of conflicts is much lower than in the West, but a much higher percentage of them seem to spin out of control and undermine profitable partnerships. The Chinese culture values hospitality and graciousness, but it’s also fertile ground for blunders, faux pas, and accidental insensitivity.
This book is about managing conflict – not resolving conflict – for a very good reason. Because of the way Westerners and Chinese approach relationships, business, and conflict, disagreements in China have a very good chance of being unresolvable. This book aims to help you avoid conflict when you can and minimize the damage to your bottom line when you can’t.

• Language: English
• Publisher: Andrew Hupert
• Release date: Jul 11, 2012
• ISBN: 9781476474045

Andrew Hupert

Andrew Hupert is founder and CEO of Best Practices China Ltd., based in Hong Kong. Since 2003 he has been advising training, and coaching executives and managers in multinationals to improve their deal-making and negotiating skills with Chinese counterparties. He is a sought after speaker at corporate events and EMBA tours. During his time in Shanghai he served as an adjunct professor at New York University (Shanghai campus) and lectured at Strathclyde University’s EMBA program. Andrew first came to Asia in 1990 after receiving his MBA in Finance from New York University Stern School of Management. He gained extensive senior sales and management experience in Taipei, Hong Kong, Kyoto and New York before settling in Shanghai as a consultant and lecturer. He has published articles in business journals such as, Business Forum China, Shanghai Business Review and the China Economic Review. Companies around the world follow his discussions about negotiation tactics in China on ChineseNegotiation.com. He can be reached via email at [e-mail] or online at www.AndrewHupert.com

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The Fragile Bridge

Conflict management in Chinese business

By Andrew Hupert

Published by Andrew Hupert

Smashwords Edition

Copyright 2012 Andrew Hupert

Also by Andrew Hupert on Smashwords.com:

Guanxi for the Busy American

I would like to thank all the friends, family, and colleagues who were so generous with their time and knowledge. In no particular order, I would like to thank:

Alison Atwood, Edward Adamski, Ben Bleicken, William Dodson, Jon Lavelle, Frank Mulligan, Andy Clarke, Tien Yu Sieh, Emily Bauman, Arlene & Gerald Hupert, and everyone else who volunteered or was pressed into service to help make this book a reality.

Educators, trainers, and HR departments that wish to use The Fragile Bridge for classes or training sessions should contact me for slides, cases, links and additional reference materials: [e-mail].

Table of Contents

Preface

A Case Study in Conflict

Chapter 1: A Primer on Chinese Conflict

Chapter 2: Factors Leading to Conflict

Chapter 3: Conflict Avoidance

Chapter 4: Post Negotiation Conflict

Chapter 5: Fighting Words – A Lexicon of Conflict

Chapter 6: Conflict Mitigation

Chapter 7: Conflict Management

Chapter 8: Paths to Reconciliation

Chapter 9: Risk Management, Deal Structure, and Exit Strategies

Chapter 10: Best Practices for Conflict Management in China

Case Study: The New China Deal

Preface

I look for trouble. During the early 2000s, when the rest of the international community was excited about China as the new El Dorado – full of unlimited opportunity, rock-bottom prices, and vast untapped markets – I was going around asking people what was causing problems or difficulties. I surveyed Americans, Europeans, local Chinese, returnees, Taiwanese, and other Asians about the frustrations and friction points they encountered when making business deals in China. There were plenty of problems… and a few surprises. Many people were finding that, while it was relatively easy to sign contracts, it was much harder to get business done. When deals in China failed, recrimination and bitterness often followed. Negotiations did not just collapse – they blew up.

China is a paradox when it comes to conflict and disagreement. Local Chinese talk about harmony, but seem quick to enter into disputes. They put a premium on preserving face but do not seem to care about their reputation… or your opinion. Chinese say that relationships are key to their society, but are willing to betray a partner for pocket change. The number of conflicts is much lower than in the West, but a much higher percentage of them seem to spin out of control and undermine profitable partnerships. The Chinese culture values hospitality and graciousness, but it is also fertile ground for blunders, faux pas, and accidental insensitivity.

This book is about managing conflict – not resolving conflict – for a very good reason. Because of the way Westerners and Chinese approach relationships, business, and conflict, disagreements in China have a very good chance of being unresolvable. This book aims to help you avoid conflict when you can and minimize the damage to your bottom line when you cannot.

Good luck out there – and watch your back.

A Case Study in Conflict

(Disclaimer: Stan Smith, Jimmy Chan, Albert Chan and all other people and companies described in this case are fictional, and not meant to represent any real individuals or businesses. This is a simulation intended for educational and training purposes only.)

It’s October 2010 around 2:50 PM on Friday afternoon. Even though the Mid-Autumn Festival has just ended, the weather is still uncomfortably warm and the sun is high. An American in his mid-twenties, dressed in a business suit, walks into a nondescript teahouse in the Pudong section of Shanghai and looks around. A Chinese man, about the same age, glances up from his laptop and waves him over. They both smile as the American approaches – they obviously know and like one another. A casual observer would assume they were friends or colleagues. There are no signs that a battle is brewing – that a deep and potentially bitter conflict has already begun. But that is exactly what is happening.

Jimmy Chan and Stan Smith met when they were both students in New York in 2006. Jimmy was originally from Zhejiang, a wealthy coastal province of China just south of Shanghai. He applied to study computer science at NYU. Stan was also attending NYU, majoring in international finance and studying Mandarin Chinese on the side. Both shared a conviction that there were huge opportunities helping multinational companies and investors bridge the culture gap between China and the West. When they graduated in 2008, they decided to start a consulting and software firm helping Western companies manage payroll, benefits, and HR expenditures in China – where tax and payroll deductions were completely different from American or European systems. They took a few months to do basic research and put together a business plan, and by January of 2009, they were ready to set up International Financial Consulting (IFC). The initial business agreement, hastily drawn up in a downtown NYC coffee shop weeks before their graduation, described a Joint Venture (JV) that divided ownership equity sixty–forty to reflect Stan’s contribution of ninety percent of the initial start-up capital, thanks to a recent $45,000 inheritance. They, however, would share decision-making authority fifty–fifty, as reflected by their equal position on the company’s board. They decided to start by establishing a limited partnership in Hong Kong, where business registration was simple, inexpensive, and straightforward. They immediately began the process of registering the firm in China as a WFOE – Wholly Foreign Owned Enterprise – based in the Pudong section of Shanghai. Setting up a WFOE is an involved process that takes a minimum of six months (though it can be much longer) and requires multiple government and bureaucratic approvals. Since the two partners both wanted to start right away, they decided to begin doing business with a Hong Kong (HK) entity and move as quickly as they could to a full People’s Republic of China (PRC) business license. Working without a proper PRC business license was technically illegal, but Jimmy taught Stan a popular Chinese business aphorism: In China, everything is possible but nothing is easy.

IFC provided businesses with software and advice about Chinese taxes, government welfare deductions and other payroll related issues. Chinese companies were required to follow the same rules, but dealt with them in a more local fashion. Small firms tried to get away with the lowest level of compliance that they could manage, and haggled informally with local regulators and bureaucrats when they were caught doing something wrong. Larger Chinese firms – often either owned directly by the state or directed closely by the regulatory bureaucracy – had roomfuls of accountants and staff whose job was to comply with the letter of the law. Western firms, however, were subject to greater scrutiny by regulators but had few sources of expert opinion available to them on questions of policy or regulatory compliance. IFC had a simple but powerful business model – they would decipher the byzantine and often contradictory set of rules and regulations and create a user-friendly software package that would help payroll departments or accountants determine precisely what the proper deductions should be for every paycheck.

Jimmy Chan was in charge of the software development and coding, while Stan Smith took responsibility for general management, marketing, and sales. They shared product development between them – Stan working from an end-user perspective while Jimmy took his product ideas and converted them into functional software and simple user interfaces. They had plans to hire their own team of HR experts, lawyers, and ex-bureaucrats to compile HR and tax regulations, but for now they had to be satisfied outsourcing the research work to a local Shanghainese law firm run by Jimmy’s uncle, Albert Chan. Uncle Albert was also handling their local Chinese registration. Until the paperwork for the Chinese WFOE received final approval, they would have to bill from their HK office, though they had already discussed the possibility of using Albert’s company for that service as well. IFC was renting out office space in an investment property owned by one of Albert’s clients, since it was difficult get a lease for office space without a fully licensed business.

Rather than compete directly with industry heavyweights who were already well established in China, Jimmy and Stan decided to focus on small and medium sized businesses and entrepreneurs. Their ideal target profile was a foreign invested business or WFOE that had been operating in the Shanghai area for one year and was now expanding and showing positive revenue growth. New startups were too worried about just surviving another day to focus on payroll software, and companies booking solid profits for years already had some kind of system in place or would soon be upgrading to major global systems.

After a year of uphill battles, IFC was finally starting to look like it just might actually succeed. They had three steady clients, one of which was Fundamentally Fit – a rapidly growing and high profile chain of restaurants and cafes. Stan Smith was able to leverage off the success with Fundamentally Fit to arrange meetings with over a dozen other F&B (food and beverage) management teams, and he had some great ideas for new services tailored specifically to their unique needs. There were, however, new problems to deal with.

First, the company’s business registration was still in administrative limbo. Albert assured them that there was no problem – things just took a little longer sometimes. He occasionally made vague references to red envelopes – bribes – that might speed up the process. Stan felt that this was a terrible idea and Jimmy agreed that this was one tradition that IFC should ignore. After almost a year of delays and waiting, however, there was a new urgency to the business license situation.

Fundamentally Fit had recently hired a new law firm that was asking why IFC was being paid offshore and not issuing local receipts. The same issue was coming up regularly at Stan’s client meetings. It was hard to tell clients that IFC could help them navigate the intricacies of Chinese bureaucracy when they themselves didn’t even have a business license.

Stan and Jimmy also had to make some tough decisions about their own internal staffing issues. Instead of getting more efficient and productive, the size of their programming team and office staff seemed to be growing exponentially.

Problems were also popping up with the core product: China Payroll Calculator v1.2. The basic Shanghai version was fine for manufacturing and service-oriented businesses, but as new cities and industries were added, the results could be inaccurate or inconsistent. Clients were starting to complain that the basic software was becoming outdated or failed to deduct the proper amount for certain obscure social and health benefits. IFC was contracting with Albert Chan’s office to provide legal researchers to make sense of China’s complex payroll taxes so that Jimmy’s team could code them into user-friendly, bilingual software, but the reliability of the research had been falling off considerably lately. Instead of figuring out a process to improve quality, Albert’s solution was to hire more staff and pass the increased costs on to IFC.

Stan and Jimmy had a regular management meeting with department heads every Friday at 3:00 pm. As Stan was heading back to the office after a lunch meeting, he got a text from Jimmy.

How about just the two of us meeting at the teahouse on the corner? We’ve got a few things to discuss.

You read my mind. C U @ 3, Stan texted back, as he boarded the subway that would take him across the river to Pudong.

Chapter 1 A Primer on Chinese Conflict

This book is about managing conflict in China, which is seldom the same thing as resolving conflict. That’s because for many Westerners, conflict in China is an all-or-nothing situation. They either completely repress disagreement to avoid any direct disputes with their Chinese counterparty, or they have a relationship-shattering clash that permanently undermines the business.

Conflict serves a different purpose in the West than it does in China. Americans in particular believe in the idea of creative destruction. They think that controlled conflict can be an important communication tool. It is a great way to surface new ideas, argue for your point of view, and resolve lingering disagreements. Chinese will tell you that harmony is the way to go and that disputes are unnecessary – and they may well believe it. Conflict, however, actually serves an important role in relationship-oriented Chinese business. It is often the fastest and most efficient way of terminating a partnership that is not paying off or has already served its purpose.

Western models of conflict management

Traditional Western models of conflict management usually focus on improving communications between participants and finding ways to allocate value fairly. Using the language of win-win negotiation, Westerners focus on how to best divide the pie of potential gains and remove roadblocks. These tactics are designed to improve interaction, spark ideas for joint problem solving, find compromise, and maximize mutual benefit. While there is nothing wrong with any of this, international managers should understand that several obstacles make these common ground techniques less effective – or even counter-productive – in China. First, these are tactical responses designed to keep existing negotiations on track, whereas many Western-Chinese business conflicts are structural in nature and require a more strategic response. In other words, you don’t need to tweak the engine or adjust the speed – you need a new locomotive on a different track. Furthermore, a last-minute burst of communication and friendliness can strike the Chinese side as confusing or crass, since they may very well feel that the Westerner side has been refusing their earnest attempts to build a relationship since the very first meeting. The most significant shortcoming of traditional international conflict management, however, is that it takes as its starting position the assumption that both sides are committed to preserving the deal or partnership. All too often by the time the Western side becomes aware of a conflict, the Chinese party has already begun extricating himself from an arrangement that he feels has already either failed or outlived its usefulness.

*****

One of my first inter-office disputes in Taiwan back in 1991 demonstrated that the rules of conflict management are not universal. I was working at a local investment bank in Taipei, and as the only foreigner on the team was given responsibility for all international banks and hedge funds in