Navigating China Licensing Contract Negotiations: Tactics and Countermeasures
We have been drafting an increasing number of contracts for foreign companies licensing their brand name, concept, or technology for use in China. In the old days, this type of licensing was primarily in the industrial sector. These days, much of our work has involved licensing agreements for companies that want to capture China business without having to actually set up a company in China or even go there.
This post describes the negotiating tactics my law firm’s China lawyers so often see from the Chinese side in these sorts of deals, and it also sets forth how foreign companies can counter the most commonly employed tactics.
China’s Licensing Landscape
The Chinese government is internally conflicted on how to treat this new form of licensing. In industrial sector licensing, the Chinese government is eager for the technology transfer to occur. The same is not true in the service sector. On the one hand, the Chinese government formally welcomes the transfer of Western expertise in the service sector. On the other hand, the Chinese government fears foreign participation in China’s service sector will lead to unacceptable control of the Chinese system.
This ambivalence is mirrored by many of the potential licensees our law firm deals with in the service sector. Industrial licensees bargain hard, but the bargaining is similar to any commercial negotiation. In the service sector, we are finding the Chinese side is usually relentless in playing tough on striking a deal.
As part of this process, in service sector licensing contracts we are starting to see the Chinese side dust off negotiating tactics that were common in the 80’s and 90’s, back when Chinese companies were negotiating their famously dysfunctional joint venture agreements. In negotiating service sector licensing agreements with Chinese companies, we are frequently seeing the following tactics from the Chinese side.
Common Negotiating Tactics and Counterstrategies
1. Endless Issues
The most common tactic is for the Chinese company to seek to wear the foreign side down with endless issues. This tactic has two variants.
In the first variant, the Chinese side raises a series of issues. As these issues are resolved, the Chinese side then raises a series of unrelated new issues. The list of issues is endless, and the process never stops.
The second variant is for the Chinese side to make several unreasonable demands and then refuse to address any of the concerns of the foreign company on the other side. All this is done to wear down the foreign side in the hopes it will simply concede. When the foreign side concedes, the Chinese side then inserts provisions in the agreement beneficial to the Chinese side, under the assumption that the foreign side is too tired to object. The success of this strategy depends on the foreign side negotiators being busy people with a lot to do, while the negotiators on the Chinese side are functionaries with no other job beyond endless negotiation.
The Endless Issue Counterstrategy: If the Chinese side uses the “endless issue technique,” you should refuse to participate. You should firmly state your position and not bend until the Chinese side moves closer to your position.
2. Artificial Deadlines
This is our favorite tactic because it is such an obvious manipulation of the foreign side, and yet it often works. At the very beginning of the negotiating, the Chinese side sets a fixed date for executing the contract. It then claims to have arranged a very important signing ceremony on that date, at which high-level government and/or Communist Party officials will participate.
The date is set far enough in advance to ensure that parties negotiating in good faith can reach agreement on the contract. The Chinese side then ensures no agreement is reached. This results in panic on the foreign side, since failing to get an agreement the bosses will sign is seen as a loss of face. The Chinese side then uses this concern to extract concessions from the already exhausted foreign side negotiator.
This tactic also has two variants. The first variant is the crude approach. The Chinese side simply refuses to concede on key points assuming that the foreign side will crumble when faced with the fixed signing deadline.
The second variant is much more subtle. In this variant, the Chinese side initially concedes on key points, while still holding its ground on numerous minor points, consistent with the “wear them down” tactic. Then, a day or two before the signing ceremony, the Chinese side announces that the contract must be revised on one or more key issues in a way that entirely benefits the Chinese side. The Chinese side usually justifies this by referring to the demand of a “government regulator” or an outside source such as a bank or insurance company. The plan is to use the pressure of the impending signing ceremony and the general fatigue of the negotiators to extract crucial concessions favoring the Chinese side.
The Artificial Deadline Counterstrategy: Never agree to a fixed signing date. Make clear that the signing ceremony should be scheduled only after the contract has completed final negotiations. The Chinese have contempt for suckers, so refusing to go along with this obvious technique will not cause offense; it will instead earn you the respect of the Chinese side.
3. Revisit the Deal Without the Lawyers
The final technique is to come back to the key issues after the lawyers have left the room. This tactic involves the Chinese side signing a contract where it concedes on key issues. By virtue of the contract having been signed, the key negotiators, China advisors, and most importantly, the international lawyers, are off working on other projects.
The Chinese side then works to get the project started. Once the project is started, the foreign side is then invested in the project. This gets certain key people on the foreign side committed to the project. Once this happens, the Chinese side goes to the committed people on the foreign side and announces it must change certain key provisions of the contract. The Chinese side usually claims this change is mandated by law, government regulators, or banks and insurance companies.
The only people left at this point are the “committed parties” with a strong incentive to allow the change so the project can proceed. These people often do not fully understand the history of the negotiations or the changes the Chinese side is now demanding. The foreign side then presents the change to busy upper-level management as a minor technical revision, and the revised agreement gets signed. Everyone remembers how the initial negotiation was so troublesome and nobody wants to bring in “legal” to start the process again.
The Revisit the Deal Without the Lawyers Counterstrategy: Make clear there will be no changes to the contract after signing, and any attempt by the Chinese side to change the contract will be treated as a material breach, leading to termination and a lawsuit for damages. Chinese companies are well known for using the signing of a contract as the start of a new negotiating process, not the termination. If you accept this approach, you should at least be sure to get your China legal team involved in this new round of negotiations.
Conclusion: Mastering China Licensing Contract Negotiations
Entering China’s market with your brand, concepts, or technology means stepping into a distinct negotiation arena. The tactics deployed by Chinese companies—from relentless issue-raising to imposing artificial deadlines and renegotiating post-signing—present a formidable challenge.
Yet, the countermeasures I’ve detailed can provide you a robust defense. Firmly resist the “endless issues” trap, reject artificial timelines, and lock in contract terms before signing.
By understanding and adeptly countering these strategies, you can protect your interests and convert Chinese negotiation tactics into opportunities for your China business.
