What if the success of a negotiation in China did not only depend on the signing of a contract? Philippe Vigoureux shares practical advice to help you succeed when you negotiate in China.
Dealing with the Chinese: Letter of intention
Any company who has made an investment in china will tell you the same. The first contact with a Chinese partner is crucial. However, foreigners often have one obsession before engaging in a partnership, to sign by all means the best contract with the Chinese.
And that’s where the rubber hits the road. Are you sure that you should first sign a contract? To help you understand, listen to Philippe Vigoureux, who is a former industrialist and longtime consultant for Akteos.
Learning From the Field: A Contract is Not Enough
I remember one situation that I encountered during my time in china. A big french energy company had a plan to setup a business unit in the country. Although they knew very little about the country. One day the boss of the company gave me a call and told me that he knew about me, and explained to me the situation.
He had made a contract proposal with his Chinese partner. And that he met with some difficulties. But he didn’t really know the reason why. I asked what kind of contract. And he told me that it was simple. He has a very good team of lawyers, they have prepared a contract that covers all the aspects of the deal that goes into many details. A perfect agreement from a legal from a point of view. However, it may not be so acceptable by the Chinese.
It was too complicated. It was not pragmatic. You could not change anything. You could not adapt any clause of the contract to the actual situation. And eventually, the boss realised that he should have signed a letter of intention in the first place. So he was trying to offset this letter in a weird way. He and his superior were going to china regularly to meet the Chinese boss to have restaurant meals with them and organise banquets.
Although it was going pretty well, he was wasting a lot of time and spending too much money. When I followed this company a few years later, I realised that they had wasted almost a year and a half. But the good thing, after all, is that they made other deals by signing a letter of intention before the contract.
Now you see that in china, a letter of intention is the framework prior to the signature of a contract. Let’s see what is the content of that letter.
What’s in the Letter of Intention?
So what is the basic principle of the letter of intention? Well, it’s the fact that it is signed by the highest ranking officers, by the chairmen of the two partner companies who have met and trust each other. The letter protects the contract which is then managed by operations.
Let’s use an image. The letter of intention is like a cloud formed by all things that the two partner chairmen want to achieve together. We can say that it’s a cloud because the content is quantified, but not too much. For example, you shall not specify that the return on invested capital will reach 10%. Instead, you would write that both partners will together be the most profitable producers in the region. If the aim is not reached, the two partners can easily meet and take stock of the situation.
And that is the crucial point of the letter of intention. You will write that everyone shall always deal with potential conflict in a friendly manner before filing a lawsuit as a very last resort. The letter is here to fix how you settle any dispute amicably. It is conceived in order to prepare the next step, the contract. Thus the letter is written with the help of lawyers.
The Letter of Intention can Protect You
Within the letter of intention, there is friendship and trust. Once the letter is signed, the partners should celebrate. Because it’s the momentum that marks the beginning of the business relationship. Afterwards, that letter will stay as a protecting envelope for the contract.
Let’s again use the image of the cloud. The letter contains the contract, it allows the contracts readjustment. One should know that to the Chinese, a contract is not the end story. In china, a contract can be renegotiated according to circumstances. There are always difficulties here and there. The Chinese partner might always want to discuss again and go beyond the terms of the contract. But he will never go beyond the limits of the letter of intention. Why? Because he doesn’t want to lose face in front of a foreign partner.
By signing the letter of intention, he engaged his honour. If the contract doesn’t work, if it’s causing permanent conflict, the letter of intention is an excellent rescue parachute. Thanks to which the business relationship can survive or stop by mutual agreement.
Resetting Your Business Mind: Friendship First
Actually, there are two different words. In Europe, you start a business relationship with a contract. That relationship will develop on a legal basis. If everything goes well, the partners may become friends. In China it’s the contrary, you need to spend a lot of time to build a friendly relationship. As the partners are friends, they will develop business within a friendly logic and eventually they’ll sign a contract.
For sure, if you want to do business in china, start with friendship and trust. Otherwise, you will meet with difficulties that will need a lot of time and money to be overcome.