With the US economy finally growing at a faster pace globalization has also accelerated. As international trade continues to grow, America Inc. must shed the "Ignorant American" label that plagues it. The arrogant and naïve belief among business leaders that "the rest of the world speaks English, so we don't need to learn their languages" needs to change. American companies are at a tremendous disadvantage when negotiating abroad without a US decision maker who speaks the language of the country they are operating in. This problem is compounded when companies don't understand the culture of that country. Two examples from my life in China show how speaking the local language and understanding the culture can dramatically improve the outcome of a dire business situation.
Contractual Conundrum
In 2006 a large US based retailer was going through a product recall on an item they bought direct from a Chinese factory. The retailer had a contract stating that the factory would be held 100 percent responsible for all costs in the event of a product recall. They asked their contractually bound partner to abide by the terms of the agreement. The factory refused, claiming that because they had no legal presence in the US, they could not be held responsible. Unfortunately for the retailer, the factory was right. This was reinforced when they tried and failed to sue the Chinese company in US courts. The retailer, contract in hand took the fight to China where they mounted a lawsuit in local courts. They arrived at the factory gate to find it locked and shuttered. They eventually got their day in court, however they may have wished they hadn't. Halfway through the legal proceedings they were informed that the factory was 51 percent government owned. The courts were quick to make their judgment. The factory was not responsible, and to add insult to injury the retailer would pay the legal expenses of the factory.
The retailer made the mistake of relying on American business practices in a country that relies much more on a relationship than a contract. When negotiating abroad a businessperson must always remember the culture that they are working in and make appropriate adjustments. If they had someone in China, building a relationship with the factory in addition to the contract they could have avoided this scenario. Had they employed even one Mandarin speaker they would have known early on that this was a government owned facility and at very least could have avoided a lawsuit they were sure to lose. This is an example of arrogance and ignorance combining for a nightmare outcome.
Contract or a Bull's Head Dinner?
A few years later the company I worked for faced a similar situation. In our case, we had no contract. Knowing what had happened to the retailer we were nervous. As a small business a recall could be catastrophic. I was at the factory the day we made the decision. It was early on; we hadn't received two customer complaints. There were no safety issues, but the product didn't function as intended. In doing an actual use test it was clear to me, that as painful for us as it would be, the decision had to be made to begin the recall process.
I sat down with the factory owner, nervous that we had no contract to fall back on. As always, during the meeting I spoke Mandarin with the owner. I told him why the recall needed to happen and asked for his support. Over the coming months, as the costs of the recall became clear ($2.7 million) I kept him informed of the mounting pressure we were under. There wasn't a single trip to the factory during the three months leading up to final negotiations that I didn't worry that when we pulled up to the gate, we'd find it locked.
The pressure was intense when our senior executives came to meet with the owner. The show of force underscored the gravity of the situation, but the meeting was mine to negotiate. Our dream scenario was to get $500k back within three months, then get the rest back within 12 months. Knowing what happened to the retailer anything would have been a win. Despite his prior cooperation, there was tension in the room. It was hot, they claimed the AC was broken but I'm sure this was deliberately done to make us uncomfortable. We were in for a long drawn out battle in a hot, dark, smoke filled room.
During the negotiations the owner pushed back. I was surprised by his intensity and his refusals to share in 50 percent of the costs, which he had previously agreed to. He was animated, intense, shouting at times. We needed the $500k up front for cash flow purposes; he refused not believing that we had already paid out over $1 million. He had a warehouse full of finished goods, he was the one needing help he screamed! Our CEO was kicking me under the table, "what the hell is going on?" he'd ask several times. It looked as though we would not get the help we needed to survive this.
We were five hours into the negotiations, lungs full of several packs of second hand smoke, shirts wet with sweat and minds filled with defeat. Suddenly the owner stopped, looked at me and said, "Here is what I can do. I will give you $500k upfront. I cannot get it done within 12 months...I need 15." I was stunned; I had to ask my Chinese colleague if I had heard that right. Five hours of intense negotiation ended in the blink of an eye. We agreed, shook hands, I refused the US team's request to put a contract together solidifying the agreement. We went to a Bull's Head Dinner to solidify it instead, then to Karaoke to celebrate with him, both painful but also part of the culture.
Conclusion
I had always known that contracts were nothing more than a sheet of paper in China. I knew that the relationship was what mattered. I had never imagined though that a tightly written contract by a leading US retailer was worth less than a relationship I had built while representing a small US manufacturer. That relationship could never have grown without the ability to speak Mandarin. It wouldn't exist without an understanding of the culture. It saved us well over $1.3 million and helped us avoid a potentially critical blow. The owner lived up to every word he said that day and paid us back in full. The defiance during the meeting was to show his employees that he was standing up for the company, to illustrate how hard he fought, and that we really did need what we were asking for. That is also part of the culture. Our relationship with this factory has never been stronger; the same goes for the relationship with our customer. Those relationships cannot be built through a third party; cultural understanding and the ability to speak directly are necessary. The sooner more US businesses realize that the sooner they will reach their full potential internationally.