Chapter 3: CONTROLLING NEGOTIATIONS Who’s Calling the Shots?

CHAPTER 3

Controlling Negotiations

W HO ’ S C ALLING THE S HOTS ?

NEGOTIATING INVOLVES the recognition and assessment of a counterpart’s bargaining position. Overestimating can be as disastrous as underestimating. Your counterparts will only reveal that which they believe is necessary and beneficial to their own plans. Trade strategies, and a good deal of tactics, will be dictated by which side is buying and which selling. This also applies to investment, since an investor is technically “buying” into a company (or market) that’s “selling” a piece of its equity. The adage “the customer is always right” seems to put the buyer in the position of strength, as does the golden rule of business (The person with the gold makes the rules!). Unfortunately, reality nullifies both axioms.

Buying and Selling Power

THE POWER OF THE NEEDY The relative “needs” of the buyer and the seller are really what determines who holds the upper hand. Added to this mix are the restrictions that governments establish to protect their domestic markets from “economic colonization.” As many large companies have found out when investing in the emerging markets, even when offering to invest billions, they’re still expected to transfer technology, train local management, and pay outrageous real estate costs. Here, the seller is driving a hard bargain above and beyond the actual investment strategy— controlling the supply (e.g., cheap labor, natural resources, consumers), and taking advantage of the buyer’s need to expand into the new market. Haggling has taken on market-sized proportions. This is in stark contrast to the policies of 19th-century business, wherein “commerce followed the flag” and nations such as Japan and China opened their markets under threat of military force. It should be noted, however, that even today certain commodities, such as petroleum, are subject to “forceful” negotiation. On a smaller scale, this type of power play takes place in every negotiation.

The asking price is only a starting point; discussions and concessions are won or lost based on either side’s belief in what is “fair.” In order for negotiators to function, whether it be on a small or grand scale, they must be aware of their own strengths and those of their counterparts.

Perceived Economic Power

First and foremost, negotiators must understand where the company they represent stands in terms of international commercial perception. The

representative of a Chilean industrial chemical facility will be viewed as part of an agriculture-based market when visiting Japan. Meanwhile, a Japanese grains representative trying to negotiate a deal in Chile will be perceived as being part of a great technological power. The relative power (and perceived need) that each of these negotiators brings to the table will be colored by the level of economic development in their home market without regard to the product their company offers.

It’s a natural part of assessing a counterpart to work from generalities to specifics. Even after very specific company research is complete, a counterpart will still tie the perception of need to stereotypes about economics. While this may be a clear case of bias, there are some substantive issues connected to the relative development of a company’s national economy.

EMERGING ECONOMIES Negotiators from emerging economies come to commercial discussions with handicaps that are readily turned into strengths. Their economies are considered to “need” virtually everything—from cash to food to clothes to roads to telephones. They used to be taken as inexperienced and uneducated negotiators with little to offer except a polite “thank you” to their benefactors. A century ago, such countries would have been unceremoniously colonized. Nowadays, they bargain from the standpoint that, while they can use all the development they can get, they also have a lot to offer. Undeveloped resources, hardworking populations, and untapped consumerism all make these emerging economies attractive markets for buyers and sellers. But often, there’s an unforeseen price. Large companies may find that the raw products they seek are not for sale unless they allow local companies to “add value” to the materials first. Investors find that there is a two-tiered pay scale for labor—one price for domestic manufacturers, another higher one for foreign companies. Sellers of consumer products find that distribution is expensive and not open to foreign operators. Contracts that appear simple are difficult to enforce. All of this is foreseeable with proper research and planning. Negotiators must come to the emerging markets with a vast array of bargaining chips and be prepared to relinquish far more control than they would in other markets.

INDUSTRIALIZED ECONOMIES Industrialized economies have the unenviable position of needing to invest internationally while still vying for foreign investment to advance their own domestic market. Emerging markets view them suspiciously as exploiters that wish to use lesser economies to feed their own growth. Technological economies view industrialized powers as economic “wannabees” that imitate (or steal) technology but refuse to invest in expensive financial and information services or hardware. Many of these industrialized economies are not too far removed from colonial status, and they still harbor fears of becoming retrograde. Their negotiators see emerging markets as opportunities, but they concede as little as possible “at the table” in order to protect limited assets. The technological economies, on the other hand, are treated as future rivals and legislated out of controlling roles. Negotiating with a company from an industrialized economy

requires a recognition of their belief that they’ve fought their way out of one economic status and feel they’re being held back from entering another.

TECHNOLOGICAL ECONOMIES Companies from technological economies are always perceived as being arrogant, even by members of their own fraternity. At times, it’s a well-deserved assessment. Much of this perception comes from the exuberance of believing that

“anything is possible.” Negotiators from these cutting-edge societies can be very frustrated with the pace of activity in less developed nations, and their attempts at patience often seem patronizing. Because they’re affluent, any attempt to reduce their own expenses is viewed as cheapness rather than astute frugality. It’s very important that these “first worlders” treat their less developed counterparts as equals. This will limit resentment and increase the chances for success. Negotiating across the table from a “technological superpower” often creates a desire to “drive a hard bargain” for fear of seeming too obsequious. This may lead to failure, since it may appear that risk and profit aren’t being distributed proportionally.

Breaking Into a Market

Selling a product or investing in a new country will be met with some suspicion by locals even when the target nation has a high demand and everything to gain by the deal. Varying levels of xenophobia will confront the newcomer before, during and after the market is breached. Entrants must not give the appearance of planning to “exploit” their new found market; creating such fear is hardly a motivator for meaningful discussion. This fear of exploitation is inversely proportional to the level of economic development, while the ability to quash potential exploiters is directly related to the affluence of the target market. NOTE: It’s always best to enter a market quietly and then to build on successes over a period of time.

Creating an atmosphere of “equality” is all-important to early negotiations. This is true even when the deal is severely lopsided. The concept of “enough” must be on the table from the beginning of discussions. The outsiders must feel they’re gaining enough to make entering the market worthwhile, just as the hosts must feel they’re retaining enough to make the deal palatable. Here are some tips for setting up early discussions.

■ MAKE INITIAL CONTACT AN INTERGOVERNMENTAL PROCESS Business works within a framework devised by local and national governments. Often, perfectly good deals are scuttled by officials and politicians who feel they’ve been kept out of the process. Cries of violating “national sovereignty” or “the good of the people” have been the death knell for thousands of potentially lucrative contracts and investments. Even large companies with seemingly unlimited resources can fall prey to the political process. Trade officials (national or local) from a negotiator’s home market and those from the target market can advise upon or actually make the initial contacts. This lends a certain amount of credibility to the deal and keeps those in charge of eventual licensing (import or export) apprised of developments. Don’t underestimate how much damage a

government can do to a deal nor minimize their ability to assist during legal wranglings. NOTE: Hell hath no fury like a bureaucrat shunned.

■ INVESTIGATE A MARKET THOROUGHLY THROUGH

RECONNAISSANCE Putting people “on the ground” to research a market is mandatory if success is to be assured. Preferably, these researchers will be eventual members of the NT and they’ll be able to bring their firsthand knowledge to bear on the discussions. Their job will be to make contact with a variety of potential partners/targets and make current assessments of the marketplace. Political and market conditions are changing far too quickly these days to rely on last year’s assessment or another company’s experience. Research is expensive but not as expensive as failure.

■ PLAN AHEAD AND FORECAST CONTINGENCIES If the success of your deal demands that you enter a market and set up production or a distribution chain by the end of the next fiscal quarter, be prepared to fail. Establishing international deals, even between technological powers, can take years before the dust settles.

At a minimum, a year will be needed from the time the decision is made to enter a new market until actual operations commence. Even the simple trading of goods can be held up by nontariff barriers such as extensive preimport testing. While negotiations are proceeding the market is evolving and conditions are changing, so be prepared to make alterations to the original plan.

■ MAKE YOUR MOVE WHEN THE MARKET CONDITIONS ARE MOST FAVORABLE A number of political, economic and social conditions dictate whether your plans for market expansion will succeed. Negotiations will hinge on proper timing. Your team must be prepared to move when events take a sudden turn. The move by international mining companies to negotiate new contracts in Zaire turned on the sudden military advances of (what proved to be victorious) rebel troops.

Negotiating mineral rights with a new, cash-strapped and battle-weary government is significantly easier when done quickly. Waiting only changes the balance of power at the table. When the balance tips in your favor, move decisively.

Breaking Out of a Market

Many emerging market companies face significant problems when attempting to expand beyond domestic marketing. Their negotiators are faced with tiny budgets, restricted research, and self-doubt as to whether they can be players on the global stage. Many of these companies labor under government-imposed travel restrictions and limits on the ability to spend hard currency in foreign markets. They have very limited experience in dealing with foreigners and harbor fears of appearing hopelessly behind the times. Much of this is easily remedied by the following.

■ FORM TRADE GROUPS AND POOL RESOURCES Deals can be negotiated on an industrywide basis rather than by one company at a time. This is especially true in countries that are still experiencing central planning. Foreign companies

are just as happy (and anticipate) buying products from a co-op as they are from a single manufacturer. Financial resources can be pooled along with the best negotiators in order to bargain from a position of strength. Money becomes less of an issue, as a significant sum can be collected in small increments from a large group.

■ PETITION THE GOVERNMENT AS AN ECONOMIC OR POLITICAL

BLOC Sometimes, the first part of international negotiations begins in the domestic market with governmental departments. Governments are very susceptible to group demands; even the most stringent socialists have come to see the value of international markets. A trade group or citizen’s organization arguing for more jobs and increased income will be much better received than a sole company demanding to increase its market share. ■ BRING THE RESEARCH TO YOU Political or economic travel restrictions may limit the ability to do market research but don’t eliminate it. It’s not unusual for foreign companies to visit potential partners upon invitation. A company or trade group can hold expositions or individual meetings where foreign firms are asked to attend and offer proposals. Some countries even require that a foreign firm be

“invited” before their personnel are permitted to cross the borders—this is done regardless of who is buying or selling. During these visits, a great deal of information can be communicated that will play a significant role in future deals.

Experienced foreign firms recognize this, and they’re prepared to exchange a great deal of cultural and economic data.

The Host/Guest Relationship

FAMILIAR TERRITORY Much has been made of the sports analogy of “home court advantage” as it applies to business. The theory is that the team that’s operating on its home turf will hold a psychological advantage over visitors, who must deal with unknown territory. This analogy holds true for the most part during negotiations, although it may be difficult to ascertain just what home turf is. For while it’s true that visitors to a country may be disadvantaged by the rigors of travel and the unfamiliarity of the cultural surroundings, they may in fact be more at home at the negotiating table than their hosts. Savvy teams with years of experience can be dropped into any country, culture, or business and excise concessions for which their hosts were wholly unprepared. Regardless of the locale, these teams are always “at home.” This is a powerful reason to keep a team together for as long as possible. Another area in which experience overwhelms residency is technical detail.

Visitors can put their hosts on the defensive early in negotiations simply by being more knowledgeable about the subject matter. This will be particularly true in high-tech, manufacturing, or transportation. Visitors will use their ability to obtain real-time information that may be completely unavailable to host businesses but essential to negotiations. This is why timely research plays such a big role in international business. Never has the phrase “knowledge is power” been more applicable.

SUPPLY AND DEMAND Buying and selling also affects the host/guest relationship. A host who is in a buying position wields enormous power at the table, even if technically uninformed.

Major international telecom and construction companies repeatedly find themselves on the receiving end of a “hard bargain” when dealing with emerging market governments. Some of these countries are moving directly from the 19th to the 21st century in their infrastructure and do so by playing one seller off of another. By relying on the visiting seller’s need to maintain (or establish) market share, the host/ buyer will usually adopt a “we only want to see your best” stance. Visiting buyers can maintain a similar attitude as long as the deal isn’t based on a scarce resource. Visitors with an eye to long-term investment will also offer very good terms in the hope that future negotiations will be seen in a favorable light when the stakes are higher. This can be very important in countries where the central government has a hand in every business deal. Military and political leaders may refuse to sign off on a major deal (which could mean thousands of jobs and tax revenues) simply because they feel that the results of earlier negotiations were too “exploitive.” Once again, the wrath of the bureaucrat has been roused, and caveat venditor replaces caveat emptor.

CONTROLLING THE PLAYING FIELD One of the advantages that hosts have, regardless of the buy/sell relationship, is the ability to make the arrangements for visiting teams. This can involve locale, facilities, hotels, food, and transport. Making your “guests” comfortable can be just as disarming as making them uncomfortable. As will be seen later (Chapter 5), some hosts use this particular form of control as a major part of their strategy and tactics. Returning to the sports analogy, in any competition, it’s always advantageous to keep the other side off balance.

Using Financing as a Lever

THIRD -PARTY PURSE STRINGS The control of financing is also a key part of negotiations. Oddly, the team that is in the “buying” position isn’t always putting up the money—at least up front.

Many emerging market business deals are financed by foundations, development banks, venture capitalists, and even sellers. Many basic infrastructure and education-related projects are funded by such organizations as the International

Monetary Fund (IMF) or the Asian Development Bank (ADB) in order to bring these developing markets into the mainstream. Here the visitor/seller finds little resistance from the host/buyer, who is either receiving the goods and service gratis or at extremely low interest rates. The host is almost extraneous to the negotiations, and the visitor need only meet the usually undemanding terms of the funding organization. Although it’s a simple process, it’s wide open to corruption, as has been the case in many of the tumultuous nations of central Africa.

ADVENTUROUS CAPITAL The involvement of venture capitalists (VC) is another way for negotiators to maintain control of the deal. These financiers will, in many cases, come from the home

country of the visiting side. The use of VC is very popular with American and British companies when working overseas. Japanese and German companies can actually solicit VC-type funding from their own government organizations for global projects. Regardless of whether it’s private or public VC financing, the visitors can be much more demanding, since the VC equity stake will (for the most part) be tied to them.

SELLER BUYS ALL Many projects are done on a build-operate-transfer (BOT) basis, whereby the seller actually pays for the entire project (usually infrastructure) with hopes of recouping costs and profit over an extended period. Many transportation, telecommunications, and energy projects are conducted in this manner in developing countries, where financial resources are scarce. After several years of cost recovery and profit taking, the project is turned over to the buyer at a nominal cost. Plainly, the seller is in a very strong negotiating position in a BOT project, although the wrathful bureaucrat must still be attended to if success is to be had.

What’s on the Table?

Everything is open to negotiation when skilled practitioners are involved. Thousands of details are open to discussion and it’s essential to learn to differentiate between the important and the trivial. Many important and profitbusting terms are slipped through on “laundry lists” of concession demands while opponents argue fervently for meaningless demands in an attempt to distract. Listen and read carefully before and during discussions, as concentration is a key element in every successful negotiator’s style.

DO NON -NEGOTIABLES EXIST? Demands should always be viewed simply as strong requests and the term nonnegotiable should be construed as “We’re not prepared to negotiate this point at this time.” Majority ownership, land usage, and profit repatriation rates are the usual targets of the designation non-negotiable. There’s no reason to accept this limitation if the topics in question are of great importance to your deal. Often, the term non-negotiable is applied simply because there’s no belief that favorable terms could be granted. At other times, political or cultural sensitivity may not make public discussion possible. Willingness to succeed brings success. Negotiators must decide what the important issues are and whether the opposition’s supposed non-negotiable topics are among them. They must also decide if a suitable counteroffer can be proposed to keep the topic on the table.

Another consideration is the practice of “back channel” or nonpublic negotiations. Making a concession non-negotiable often backfires on the practitioners, as they’re eventually forced to be more generous on other topics, lest they appear unreasonable.

Chart of Negotiables

Below is a list of major negotiation issues that should be considered for international trade and investment contracts. TRADE Correspondent banks Letters of credit Product lines Currency rates Freight forwarders Ground transport Arbitration rights Taxation Inspection policies Tariff rates Distribution rights PRODUCT LINE Quality control issues Technological transfer Suppliers Domestic content Patents, copyrights and trademarks Licensing REAL ESTATE Acquisition Construction Contractors Leasing and ownership Government liaison FINANCING Equity relationships Debt acquisition Currency considerations Exchange rates Taxation rates Repatriation of profits Payment schedules Working capital Banking choice Stock transfers Loan guarantees Reinvestment plans Exit strategies Accounting practices Auditing procedures Stock valuation MARKETING Local versus foreign Advertising Product development Distribution channels OPERATIONS Equipment procurement Utility contracts Service contracts Hours of operation MANAGERIAL DUTIES Accounting procedures Accounting cycle Reporting procedure Organizational chart Policy development CONTRACT ENFORCEMENT Language of enforcement Jurisdictional rights Veto process Government approval process Antitrust regulations Articles of incorporation Dispute settlement process Arbitration LABOR SELECTION Recruiting Union relationships Training Supervisory contact Wage rates Benefit packages Government compliance