Looking through the bamboo curtain – when a contract is not a contract (by Christina Kwok)

The ability to adopt an international style of communication and demonstrate deep cultural understanding when participating in cross-cultural business negotiations can make the difference between a successful outcome or one of failure, with resultant effects on reputation and competitive positioning. As companies continue to look east for new business, the lure of the Middle Kingdom’s exploding economy and ballooning consumer demand can exert an irresistible pull. Below is a recount of an interview I conducted with the Managing Director of a manufacturing firm in Shanghai after they had signed a sales contract with a Chinese company.

Case study

Two years ago, I interviewed the Managing Director of a British-owned subsidiary firm Jupiter Ltd (name changed) that manufactures conveyor belting in China for coal mines. With  factories located in Shanghai, sales offices in the north and northwest of China and 300 personnel, this company boasts a small annual turnover of  RMB 400 million (USD 65 million) for its Chinese operations. Most of its customers are state-owned coal mining companies in inner Mongolia, ShanXi, Anhui and Shantong. With 100 competitors worldwide, Jupiter has positioned itself successfully as a boutique supplier of precision engineering solutions customized to the safety needs of dangerous and demanding work conditions.

Managing Director, Ben, an overseas Chinese, leads a small management team of well-educated professionals. Ben related that Jupiter once signed a contract with a state-owned customer to sell goods and services for RMB 40 million (USD 6.5 million) over a year’s duration. The terms of the contract were rather vague and the customer did not make any purchases during the year.

Questions to think about: 

  1. Why would the Chinese sign an ambiguous contract like this?
  2. Why would Jupiter agree to signing a vague contract that does not lay out precisely what equipment the customer would order, and when?
A deeper analysis suggested that for the Chinese, the contract merely signaled the intention of having a business relationship and it was up to Jupiter to develop the relationship so that the customer was ready to buy.  In other words, the ‘real sale’ was to come after the sale, a test of how skilfully Jupiter builds and develops ‘guanxi’ (a serious network of relationships) to ultimately result in a sale.

Although a new supplier had been chosen by Procurement, Production continued buying from the incumbent supplier who had built  strong ‘guanxi’. After doing a lot of informal questioning, Jupiter found a suitable intermediary to help launch an appropriate campaign of successful ‘guanxi building’. Needless to say, the intermediary was handsomely paid. Resorting to legal action would only have backfired and would be seen by the Chinese as lack of mutual trust and goodwill, the foundation stone for any strong business relationship.

The lesson learned from my interview was that in order to have success with signing contracts with the Chinese, it is necessary to build a serious web of connections, and to navigate these connections by doing a lot of informal digging. When things are not going well, building guanxi will remedy the situation, as will asking for favors, reciprocating favors, and occasionally, even buying guanxi to find your way around. The role of intercultural competence in negotiating business contracts with the Chinese becomes essential in realizing that having the best product at the best price alone doesn’t guarantee a successful conclusion to a business deal even with a signed contract. The signed contract is just a formality and other dynamics of guanxi building need to be at play for things to come to fruition. The Chinese want to do business with people they like and trust, which is not sufficiently evidenced in a signed contract alone.

Christina Kwok is an intercultural skills, Global Leadership Trainer and speaker. She helps diverse teams weld radically different perspectives into a unified team effort. She has worked with diverse organizations such as Zurich Insurance, UBS, and industrial firms to develop key communication skills for a global business environment. Her company is called www.cross-culturalsynergies.com.

Sharing is caring