Navigating culture differences in Western deals in China

A business intermediary can add value within a team through their specialist skills, knowledge, competencies, and experiences to deliver greater organisational outcomes. When considering multinational company activities — negotiating contracts, for example — managers need to consider that any interaction with a potential foreign company will require compliance with the local laws and also a certain meld of cultures.

It is also a challenge for enterprises working across borders to combine resources and operations to handle the cultural differences. In the West, people pay attention to information, institutions, and networks. On the other hand, the Chinese put a premium on individuals' social capital within their family and friends, and between business partners. From a Chinese perspective, meeting with strangers is viewed with suspicion and distrust. An intermediary or type of business partner — Zhongjian ren — has an important role to help Western companies earn trust and achieve business deals in China. Having a talented go-between is particularly indispensable at a time when many companies face business disruptions caused by COVID-19.

Here are some points to consider in relation to intermediaries. They can:

• Help with complicated regulations and legal processes and deal with the government or relevant local authorities.
• Set up a negotiation strategy that is suitable for a potential client.
• Operate a business review from customer, social media, PR, former employee, and other key stakeholder perspectives.
• Understand the local market and find an innovative solution.
• Help Western and Chinese companies learn to collaborate more efficiently with mutual respect and achieve successful business deals.

The 21st century is an era of economic globalisation, yet despite this, business is experiencing great challenges in cultural differences. China has experienced exponential growth over the past few decades, with a resulting GDP of $14.4 trillion in 2019 — second only to the US. The proportion of its population living in urban areas — its urbanisation rate — has reached nearly 60%. China's broad market prospects attract many Western investors seeking opportunities to form joint ventures or participate in mergers and acquisitions in the country. Here are contract negotiating tips to keep in mind when the West meets the East.

Make company checks

Running company searches and credit checks is crucial, as it provides an insight into the company's financial situation and trustworthiness. The basic information — company name, address, establishment date, ownership structure, and financial information — for a registered Chinese company is normally available publicly. People can obtain company information in Chinese by on-site searching at the local Administration for Industry and Commerce (AIC) registry.

An effective business intermediary can offer company searches and provide detailed information, including additional information that is not included in the official database. However, be aware that the Chinese government takes a strict view of data privacy breaches, and the punishments are severe. For example, under the criminal law, illegally providing, selling, or purchasing personal data can result in up to a seven-year prison sentence with a fine.

Carefully conduct due diligence

Conducting due diligence is less common in China than in Western countries. Cultural sensitivities play an important part for many Chinese companies. Trust is important in China. Even with a pre-agreement and the due diligence team performing professionally and cordially, leaders of a Chinese company may still feel offended if a team of lawyers or professionals arrives at their business premises, scrutinising documents and interviewing their employees.

The business intermediary can suggest the Western company eliminate certain seemingly offensive aspects from the process of due diligence on the Chinese company at the preparation stage of the negotiation. For example, depending on the circumstances, the Western company can substitute the employee interviews by running a credit check with an independent third party; conduct interviews (with permission) with long-established customers or suppliers; and use other approaches that will not cause any direct conflicts.

Keep contracts short

Contracts should be kept simple and short. In the West, standard contracts are generally thorough and long. Western businesses draft contracts with the purpose of leaving no open loopholes that could expose the contracting party to risk. Additionally, Western companies tend to conduct negotiations in a formal way — the review process of a lengthy contract can be exhausting. In contrast, businesses in China sometimes rely heavily on good faith and value personal connections (the concept of guanxi) more than the preciseness of contracts.

Having a business dinner with the Chinese company employees is one of the typical processes of Chinese deal-making. Companies can obtain information that is not provided in reports — for example, family situation, personalities, and the level of company or personal financial distress. However, bear in mind, the Chinese shy away from saying "no", especially in a face-to-face situation. The following behaviours can indicate a negative response from a Chinese business person:

• They change the subject and ask another question.
• They turn silent.
• They start using ambiguous words, for example, hai xing (fairly passable), hai hao or hai bu cuo (fairly all right, not bad), xiang xiang (let's have a think), or kan kan (let's wait and see what happens).

An effective business intermediary can read and explain facial expressions, moods, and body language during face-to-face meetings or even videoconference meetings.

The Chinese focus more on the process than the goal. If strong trust and a good impression can be established over time, Chinese companies will pay less attention to contract clauses. The final version of the contract may only be one or two pages long, and the Chinese companies may not even review the contract before signing it.

In this case, the intermediary can suggest that Western companies provide the Chinese companies with contracts between five and ten pages long and which state only the important and necessary clauses. These would include, for example, the terms and conditions of the transaction, the rights and obligations of each party, the consequences of a breach, payment terms and dispute resolution, and language conflict and contract termination circumstances.

Use a good translator with a legal background

Apart from the cultural differences, language is another barrier in cross-culture business activities. In the contract, the precise translation of some of the clauses in English might be completely different from the Chinese meaning, and vice versa. The discrepancy in the translation may expose the companies to risk. The two parties ought to be informed about the translation discrepancy because they have to agree and fully understand the rights and obligations before committing to the business deal.

An effective business intermediary will be able to recommend a reliable, neutral translator (not a recent graduate without a legal background) or an international law firm that provides translation services (both English and Chinese). Of course, the business intermediary should also suggest that parties explicitly state in the contract which language prevails in case of dispute.

Negotiate with the right person

Companies and the lawyers representing them from common law jurisdictions should double-check which person at the Chinese company should be negotiated with and who has authority to bind the company in contract. They also need to ensure the Chinese company representative is authorised in writing by the company.

It is worth noting that it may be offensive if you directly ask the representative his or her authorisation status at the first meeting. You may obtain some information by asking for their business card and through general conversation, or the business intermediary can investigate the information — for example, the business licence — and review the authorisation near the conclusion of the negotiation.

Avoid cybersecurity risks

According to Chinese laws, contracts duly agreed through emails and other electronic methods are valid. However, sufficient evidence is needed to indicate that the sender or recipient of an electronic contract made in this way is the contracting Chinese company or its authorised representative. The check is especially important during the pandemic — COVID-19 is a gift for cybercriminals. Working from home can make online systems more vulnerable than ever, and hackers send phishing attacks to steal and amend company information and documents.

To avoid any future issues, the business intermediary should suggest exchanging the printed original contract executed by both companies after the contract is agreed electronically. The business intermediary can also provide up-to-date information for the clients via an online platform — for example, Microsoft Teams, Zoom, or WeChat.

In terms of the payment, it is strongly recommended that the company should always confirm the bank details with the Chinese partner in multiple ways — for example, by email, online message, phone call, video call, face-to-face meeting, and written document.

Ultimately, company leaders in the West who pursue deals in China will have the best chance of success if they pay careful attention to cultural differences that can stand in the way of an agreement. By finding common cultural ground with their Chinese counterparts and working through competent intermediaries, Western business leaders can develop the trust and goodwill necessary for an agreement that is productive for everyone involved.

Steven Swientozielskyj, FCMA, CGMA, is CEO of Business Partnering Global Ltd. and a past CIMA president. Xihui Chen, Ph.D., is a lecturer in accounting and finance at Teesside University Business School in the UK. To comment on this article or to suggest an idea for another article, contact Oliver Rowe, an FM magazine senior editor, at Oliver.Rowe@aicpa-cima.com.