Although most Americans treat those they know differently than they treat strangers, Chinese behavior towards insiders and outsiders tends to be more extreme than in the United States – and therefore more important in negotiations in China than many Americans understand. Relationship building in China is very different than in America.
A guiding principle in Chinese society is guanxi – personal relationship building with people from whom one can expect (and who expect in return) special favors and services. Family ties are paramount, but friends, fellow students, and neighbors can also join the inner circle. As a foreigner, a savvy business negotiator can cultivate guanxi (关系) either by hiring people with close ties to her counterpart or by developing her own relationships with key contacts (see also, How to Negotiate Better Business Deals).
The Chinese often go to great lengths in relationship building to open doors for those within their social network and trust them to a degree that would surprise many Americans. When making pay allocation decisions, Chinese study participants treated insiders much more favorably than did American subjects, Michael Bond of the Chinese University of Hong Kong and Kwok Leung of City University of Hong Kong found in their research.
The value that Confucianism places on interpersonal obligations underlies this focus on relationships. Your Chinese counterparts will trust you to fulfill your end of a deal, not because you signed a binding contract, but because guanxi obligates you to do so.
Relationship Building in Negotiation: The Reality of Negotiations in China
The fact that China’s legal system is underdeveloped and weakly enforced explains why relationships typically are valued more than laws. In a study of arbitration in China, professor Randall Peerenbloom of UCLA found that the courts often fail to enforce awards against government-owned companies – and many Chinese companies are under direct or indirect government control.
Similarly, in Mr. China: A Memoir (Collins, 2006), Tim Clissold, the British manager of a venture capital firm that bought and turned around Chinese businesses during the 1990s, describes his attempts to get the unscrupulous factory manager of a Chinese company to resign. The fact that Clissold’s company had a legal right to fire the manager was irrelevant; the manager, Shi, stayed put, and employees followed his orders, not those of the newly appointed boss (see also The Importance of a Relationship in Negotiation).
“As we drove into Zhongxi Village at dusk, with [the new manager] and his team,” Clissold writes, “we saw that Shi had gutted the factory … The entire management team had been ripped out and sent down the valley.”
Relationship Building in Negotiation: The Risks of Guanxi
China’s legal system is improving, but you may find that relevant laws, contracts, or tax policies are nothing more than a starting point in your negotiations in China. Your contract may stipulate a price per part of 15 RMB (renminbi), but if the supplier decides to charge you 20 RMB, you’ll have little recourse.
The safest approach is to ensure that you know and trust your negotiating partner. Guanxi is essential for business negotiations in China, but maintaining an advantage can be difficult.
To manage risks, conduct periodic guanxi audits to ensure that your negotiating team has maintained multiple ties with the other side, advises Eric Tsang of Wayne State University in Michigan. If your guanxi comes from just one person, your deal could collapse if he quits.
Moreover, because your guanxi as an outsider may be no match for a better offer from an insider, be sure to develop your BATNA (best alternative to a negotiated agreement – for more information, see also BATNA and Other Sources of Power at the Negotiation Table).
Finally, don’t forget that guanxi cuts both ways – your business partner will expect you to return any favors granted.
What are your thoughts on relationship building with China? Leave us a comment.
Related Article: The Negotiation Process in China
Originally published in 2013.