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“JIAO PENGYOU”—A Guide for Successful Business Relationships in China.

By: James C. Chapman
Last updated 3/7/2011

U.S. companies have had more than 30 years of experience in business relationships with Chinese companies since the opening of China to the world in the 1970s. During that time, many lessons have been learned— often the hard way.

Regardless of the type of business relationship desired, there are a number of best practices to be followed to increase the likelihood of success in China. Outlined below are 12 such practices. These practices do not work in every situation or every deal. They also vary depending upon a number of other factors. However, they are a good start for U.S. companies just entering China for the first time or for seasoned companies that need a reminder of the best practices.

1. Understand the objectives. Avoid rushing into relationships without thinking through the objectives. It is also critical to understand what the Chinese party wants to accomplish. Since the Chinese view “direct” speech as rude, this is not easy, and Americans will need to look for clues and piece together such objectives over a series of many meetings.

2. Do not leave common sense at the border. Do not stop using or implementing the business practices that have made the U.S. company successful just because it is now dealing in China.

3. Select the appropriate business “partner.” Selecting the wrong Chinese business partner is the number one mistake made in dealings between U.S. and Chinese companies. Any potential Chinese partner should be subjected to thorough due diligence. Even when the U.S. company is familiar with the Chinese party, certain basic steps should be taken to investigate the party and verify prior assumptions.

4. Always have a strong legal foundation for business relationships. The Chinese commonly use the phrase, “we know the law, but that is not how things are done in China.” This approach is a “no lose” situation for the Chinese partner and a ticking time bomb for the U.S. company. It is common for a Chinese party to use the failure to comply with the law as leverage to get more concessions from the U.S. company later or even force the U.S. company out of the lucrative business arrangement.

5. Register intellectual property in China as soon as possible. This includes patents and trademarks. Otherwise, the U.S. company will discover that its intellectual property has been registered in China by the Chinese party or others who now claim ownership.

6. Understand the role of contracts. In China, contracts tend to be used as one tool in building a relationship between parties. They are not an end in themselves. As a result, they are continually being renegotiated after they are signed. Americans must be prepared for the on-going dialogue. The best practice for responding to the on-going negotiations is to work very hard at maintaining an alignment of interests between the parties.

7. Use strong contractual protections. A Western party should seek to protect itself through open negotiations. In this regard, strong contractual provisions are essential in creating clarity, setting initial expectations, and building the relationship. Negotiations over these provisions are often grueling. However, in addition to setting expectations, these negotiations are an important relationship-building process.

8. Develop a government relations strategy. The Chinese government is involved in every aspect of business in China and is a key constituency. As a result, a U.S. company doing business in China must seek to develop relationships with key government officials. Introductions to these officials are often made by the Chinese partner, intermediaries, lawyers, or others.

9. Develop “guanxi.” China is not a place where individuals function alone. As a result, personal relationships in China are critical. “Guanxi” is a Confucian concept of relationships and connections that is at the heart of all business dealings in China. It encompasses a set of complex values including hierarchy, respect, mutual benefit, and “face.” In developing guanxi in China, there is no substitute for humility. A U.S. company that enters China with the attitude that it is sophisticated and will show the locals how business is done is likely to fail. In addition, one should look to benefit those with whom one seeks to develop relationships. It is a matter of giving in a powerful way as opposed to taking or expecting benefit.

10. Build the personal relationship with the Chinese party on a day-by-day basis. Like guanxi, “youyi,” or friendships, are critical for success. The better the personal relationships, the more likely the venture will be successful. A U.S. company must work on this everyday, and company managers should seek to develop friendships with the Chinese personnel with whom they are working. This process is commonly referred to as “jiao pengyou.” The basis for Chinese friendships historically has been through family contacts, schools, and work contacts. This is different than the Western approach of friendships based upon shared interests or shared experiences.

11. Actively participate in and supervise the duties and obligations of the parties. Managing a relationship with a Chinese party from a distant geographic location is impossible. The stronger the local presence the U.S. company has, the greater the chance of success in China. This active participation is not only essential for building the personal relationships but also for accountability and avoiding being manipulated. A U.S. company with no office in China that enters into agreements with manufacturers, suppliers, or distributors in China should consider hiring a third-party consultant to represent the interests of the American company.

12. Appreciate the Chinese negotiating style. The Chinese negotiate differently than Americans. As a result, Americans need to understand how the Chinese negotiate and some of the common tactics. This understanding will allow the company to avoid the frustration and animosity that often characterizes U.S.-Chinese business negotiations. It is important to note that generally speaking, the Chinese use negotiations as a means of evaluating the other party and building a relationship. The lengthy and grueling negotiations are often just a means of testing the American party to determine if it is worthy or just another fool to be taken advantage of. Rarely will the Chinese offer a fair deal.

Building and maintaining successful business relationships in China is a challenge. In addition to the significant language and cultural barriers, the environment is rapidly changing. The above best practices are designed to assist companies in navigating the obstacles encountered in business relationships in China and increase their success.

About the Author(s)

James C. Chapman is a partner in law firm Foley & Lardner's Silicon Valley office, where his practice focuses on mergers and acquisitions, venture capital and securities law. He has been involved in over 200 mergers, acquisitions and financing transactions. Mr. Chapman assists U.S. companies in acquiring China-based companies and structuring investments in China, as well as Chinese companies in public and private securities offerings in the U.S. He is a frequent speaker at China-focused events and can be reached at jchapman@foley.com.