Bargaining Price with the Chinese

Overview

K. G. Marwin Inc. developed a particular technology in the 1980s, called the Trilliamp Process, that the Chinese government sought to integrate into an ethylene facility in Lanzhou, the capital of Gansu province. It signed a contract with Marwin, which in 1985 invited inquiries from U.S. and Japanese manufacturers for production of the machinery.

Marwin recommended the Japanese company Auger-Aiso as most capable of producing the turbines, while the Chinese invited two U.S. companies—Federal Electric and Pressure Inc., which manufactured through the large Japanese trading company Mitsubo—to compete for the multi-million-dollar contract.

The Scene

To undertake the negotiations with the three prospective suppliers, six Chinese officials and three representatives from the Bank of China were selected.

The Auger-Aiso chief negotiator was Todman Glazer, the company’s Japan branch manager from the United States who resided in Tokyo and was assisted by his Japanese colleagues. Glazer remembered the tight deadlines he had faced on previous trips to China; now positions had been reversed, with the Chinese facing the pressures and deadlines. He realized the value of thinking like one’s opponent—seeing things as they do. This was the first potential deal with China in the ethylene market, and Auger-Aiso faced stiff competition from Mitsubo, which had already cornered the Chinese oil-processing market.

At the first negotiation meeting in Beijing, the Chinese insisted that custom required the visitor—Glazer—to make the first presentation. This he did, even though he was accustomed to allowing his opponents to speak first.

Glazer began by addressing the excellence of Auger-Aiso technology, explaining that the manufacturing would all be done in Japan to ensure product excellence. When the Chinese offered no indication of their position or price, Glazer felt obliged to quote an upper-range price that would allow flexibility. The Chinese still made no comment.

In the afternoon, the Chinese heard offers from the combined Mitsubo-Pressure team, then Federal Electric. By the end of the day, Federal Electric had dropped out of the race, accepting that it could not compete.

Revolving Doors, Changing Moods

During the first week of negotiations, a pattern emerged. The Chinese would meet with Glazer and his colleagues in the morning and ask for a price, saying that their competitors had already bid such-and-such a price, which was invariably lower than the last Auger-Aiso bid. They would meet with Mitsubo-Pressure in the afternoon and use the same approach, causing the latter to drop its price. Moreover, each meeting would end with the Chinese saying, “We will call you tomorrow.”

But, because they never called, both prospective vendors became panicky and visited the Chinese office without notice to present an even lower bid. As the Chinese kept the vendors guessing and in the dark, Glazer understood how the Chinese had earned a reputation as master negotiators.

At the second meeting, tactics changed and there were different people representing the Chinese side. An antagonist would suddenly burst out in loud Chinese and harangue the Auger-Aiso side for some fifteen minutes, complaining about the quality of the machines they were offering. A protagonist would then intervene and, apologizing for his colleague, would say he had been upset about the current situation.

Glazer regarded these outbursts as no more than arranged role playing, designed to make the protagonist (the good guy) appear more trustworthy to the foreigners. But, Glazer realized, all the participants were play-acting.

Then there was yet another change. The Chinese located the Auger-Aiso and Mitsubo-Pressure teams near the meeting room, in adjacent rooms. Mitsubo-Pressure would be called in and asked for its best price.

After the team had returned to its room, Auger-Aiso would be called in, told the latest price, and asked if it could beat this. When the prospective vendors could drop their price no lower, they would add something to the package. Auger, for example, added oil gauges for its turbines, effectively a three-percent add-on. Even so, the Chinese still would not commit to placing an order.

When the Price Is Right

Glazer could hardly believe that he had lowered his price twenty per-cent that week; to do so would have been out of the question in the United States. On the final day, Auger-Aiso made another offer—and, for the first time, the Chinese made a counter offer. Auger-Aiso accepted, and agreement was reached. A few hours later, Mitsubo-Pres-sure came back with an even lower price, but the deal had already been struck.

Glazer spoke later about how difficult it was to compete with Japanese trading companies, explaining that U.S. companies had so many factors to bear in mind, including insurance and a variety of liabilities. Meanwhile, Japanese trading companies, which had vastly different legal parameters [within which] to operate within, could more easily focus on getting contracts and closing deals. He believed that Auger-Aiso had been awarded the contract because it had been the preferred supplier right from the start.

Commentary

In most respects, the Chinese negotiating style for big-ticket items has changed little over the past twenty years or so. Vendors still go to China and submit to the pressures of intense bargaining, while the good guy/bad guy routine remains a tool of intimidation. Although Glazer saw through the tactic, it could be the undoing of less-experienced foreign negotiators.

Glazer’s suspicion that Auger-Aiso was the preferred supplier from the beginning is plausible. Consider the case in chapter 3, involving the Japanese packaging printing press manufacturer Kumi-Chantdung, in which the successful vendor turned out to be the initially preferred supplier. The clever Mitra was able to intuit that his company was preferred, and so gained the upper hand. One can only wonder whether, had Glazer guessed that Auger-Aiso was the preferred vendor, he would have been less willing to drop his price toward the end.

No mention is made of socializing or banqueting because more than one team was competing, as in another chapter 3 study—which the present case most resembles—involving Benjamin, who was invited to submit a proposal for a huge Guangdong brewery.

It is also interesting to note that, compared with the Benjamin case, the one above places less emphasis on the technical package and specifications, including installation and engineering support. This may be because, over the years since 1985, the Chinese have become more sophisticated in terms of quality requirements, whereas in the past price was the dominant factor, and its reduction the best way of giving face. In the 1980s and 1990s, the Chinese bought a great deal of technology that could not be applied and machinery that was inoperable. From this the Chinese learned how to get the best package at the best price.

This negotiation case study appears in Dr Bob March's excellent book 'The Chinese Negotiator' and is republished with his kind permission.