Case Study

Chinese Water Selling Negotiation

bottle water - CHINESE WATER SELLING NEGOTIATION

Summary

Negotiation training lessons on selling water in China are presented in this negotiation case, published with permission from Dr Bob March's excellent book "Chinese Negotiator".

by Dr Bob March

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Overview

Acqua International (AQ) is a Europe-based multinational company that has interests in water and other environment-related businesses.

In China, the company has joint ventures with medium-size and large municipalities to produce and sell  potable water. To increase its investments in China, the AQ Group arranged, through its local subsidiary Pacific Acqua International (PAQ), to enter into a strategic alliance with Tak Foy and Co., a Chinese conglomerate with strong roots in China and Hong Kong in the service industry (mainly leisure-related). The venture is called Haoyu China Limited (HCL).

The Scene

These negotiations concerned an urban water supply system providing potable water to around one million people. Through an agent in the province, the China subsidiary PAQ had secured a sales negotiation contract to construct a water treatment plant for the system. In negotiation training on selling skills in China, we share how having Chinese team members and a local agent can make the difference in securing a sales contract.

Some time after the completion and commissioning of the plant, PAQ learned from the same agent that the municipality was short of funds for some urgent development projects. One of its options was selling off or privatise the municipality’s water supply facilities.

The selling price value of the facilities was set by the municipality, and bidders were sought from within its jurisdiction; there would be no recourse to the central government for selling approval.

HCL, located in the municipality, submitted a purchasing proposal to buy the facilities, to set up a joint venture with the municipality’s water company on a 3:1 ratio, and to operate the facilities on a twenty five-year contract.

The unresolved issues when bids were called for were:

  • Initial water charges. The only things that had been agreed on up to this date were how much would be invested in the facilities and spent on improvements.
  • The demand for water. To make the business financially viable, a take-or-pay selling mechanism would have to be introduced, and local wells would have to be closed.
  • The formula to calculate annual water selling tariff revisions. Devaluation of the yuan would affect foreign exchange sales–based investment.
  • The new company’s structure. Who would be the shareholders, board members, and those responsible for its day-to-day management?

Selling Negotiations Begin

At the request of the Chinese, a memorandum was signed by HCL and the municipality to record the negotiation selling issues still outstanding.

It was only then that PAQ—and through it HCL—was informed by the local PAQ agent (who was supposedly very close to high levels in the municipality) that other international competitors had also visited the municipality in connection with the same selling project.

After meeting high-ranking officials in the city, the PAQ team was advised to lower its starting price for water supply if it wished to remain the preferred partner.

In a bid not to lose the municipality’s interest, PAQ organised visits to PAQ operations in other provinces for a group of municipal officials, whose reaction was positive. Then, believing it a good time to start selling negotiations, PAQ submitted a revised proposal, which it followed up by visits requesting negotiation selling discussions.

The mayor’s office arranged a selling negotiation session to be attended by representatives of all the municipal departments concerned, at which PAQ and HCL were represented by four people: John King, Hans Christian, Cheng Peng Li, and Xu Jing.

For several weeks the unresolved selling issues and other negotiation matters were discussed, and every evening the municipality hosted a formal banquet, which lent ambiance to the talks. Cheng and Xu were the representatives on these social occasions, while King and Christian remained in the background.

Strategy Applied

PAQ did not begin negotiating using the water rates as the deciding factor in the belief that, were its selling ideas not well accepted, the entire selling project might be placed on hold. Instead, it picked secondary selling issues with noncritical impact to give both parties some wins to balance the losses.

Discussions started with water demand. Municipalities are generally optimistic about development and, therefore, ready to accept or propose relatively high demand levels where the take-or-pay selling mechanism is applied. Moreover, PAQ believed the municipality would not be in the joint venture if it were not ready to enforce the selling laws concerning wells. So consensus on water demand was reached quite quickly in their selling negotiation agreement.

Next in the selling agreement to be negotiated was the tariff adjustment formula. Both parties agreed to an inflation-adjusted tariff, while the provincial government representative insisted that foreign exchange should represent less than five percent of investment and be used for no more than ten years.

Due to PAQ’s favorable reputation, post agreements on the post selling shareholding structure and management were reached without too much difficulty.

Last came the water rate negotiations. PAQ impressed on the municipality that, as an old friend, it was right for the project, being technically and financially sound with a good track record in China. PAQ’s sincerity was demonstrated by the number of Chinese staff on its team – a point clients learn more about on sales negotiation courses.

Coup de Face

A Selling Agreement was reached in two weeks, with the mayor himself voicing his support. Wishing to give face to their lead negotiator, and aware of Chinese sensitivity to pricing of the sale, PAQ then offered to reduce the starting water rate. In return, to give face to PAQ, the municipality offered preferential tax treatment over a five-year period.

In Retrospect

Later, PAQ managers described some of the problems commonly faced by foreigners in selling negotiation situations, and how they might be resolved:

  • Most foreigners without Chinese sales training and new to China do not know how the Chinese perceive them, nor does it bother them.
  • Many Chinese see foreigners as cheats, motivated only by the desire for profit.
  • The Chinese point to history: relationships with foreigners are short term, the foreigners leaving after attaining their short-term sales negotiation goals.
  • China has a high-context society. Who you and your associates are is more important to success than the mere excellence of your product or your competitive selling price.
  • The Chinese may renegotiate a selling contract even after it is signed. They believe in people—not legal packages.
  • China has a haggling culture; there are no ethics where sales price is concerned, and they will stop at nothing to get you to lower your selling price.
  • Time is not money in China, although this is starting to change.
  • The Chinese will not sign on the dotted line until they feel intuitively that the time is right, even if all points have been clarified.
  • Chinese negotiators are not decision makers; the CEO or the government is the ultimate boss.
  • Language is a big barrier in Chinese-foreign business sales negotiations.

Solutions

  • Be patient. In China’s family-centered society it takes time to build trust with non-family members.
  • Local Chinese employees can help establish trusting selling relationships.
  • Once the Chinese trust you, negotiations are less troublesome.
  • Identify the negotiators. They may be top leaders at central and local levels.
  • It is important to be honest and sincere with the Chinese.

Commentary

As a supplier of potable water facilities in many Chinese municipalities and cities, PAQ had a good performance record that brought with it and reinforced personal relationships, friendships, and trust.

The idea of leaving discussion of the water rates until after the easy to agree on selling issues had been tackled proved a good negotiation move. The principal sign that negotiations were in PAQ’s favor was the number and high level of officials invited to the negotiation meeting arranged by the mayor’s office. That it still took some weeks to craft a final selling agreement is not, however, surprising, since there would have been numerous selling issues outstanding.

Most important of all, when the final agreement was reached, a gesture was made to give the Chinese face within their community.

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