What’s a contract? A legal act that creates obligations? Certainly! What’s the use of a contract in China? We often hear that contracts are not respected in China. Personally, in twenty years, I haven’t encountered this kind of situation. Am I lucky? On the other hand, the contract does not lock you in China; it can evolve according to the situation.
An excellent contract
Let’s start with a real-life example. In 2010, to the delight of a French company, a Chinese luxury group signed a 10-year exclusive distribution contract for the Chinese territory. The agreement has just been renewed. In the first two years, the business had flourished, Chinese sales generated 30% of the French company’s turnover, and the network was developing at breakneck speed in China.
The situation is changing
But at the end of 2012 saw the start of an alleged campaign against corruption and the luxury and high-end sectors suffered. Within a few months, sales slowed down, turnover per store dropped, and profits approached zero. The group, which was preparing its IPO, was very attentive to profitability. For two years, the Frenchman had enjoyed a comfortable income, given the size of the orders and the high prices he had charged (we learned much later…).
The contract changes?
The Chinese side, very lucid about the Frenchman’s profits, wanted to review the terms of the contract – royalties and prices. The speech was simple: “We are partners. When the market is easy, we all win together, but everyone has to make an effort when the difficulties come. »
Among my various roles, I was the messenger; I was the Chinese part as well. The leader of the South of France, whom we will call David, immediately brought out the scarecrow of the broken contract. I had to use arguments, and David quickly understood where his interest lay. It was better to give up a small percentage and keep the goose with the golden eggs, even though fewer eggs, especially as the European market was suffering. To convince, I had taken two elements from my Chinese “training”.
The 得失 déshī (get-lose)
What would the Frenchman have gotten from 得 by staying on his positions?
Maintaining his comfortable margins.
What would he have lost 失? The growth in turnover. With low profitability, the Chinese would have bought less from the Frenchman and would have found cheaper alternative sources of supply as allowed by the contract. In the end, the group would have been able to stop distribution. The loss of the best customer, who continued to account for a third of revenues, was possible. David was fully aware of how lucky he was to have such a right partner who paid for everything with a credit letter. Finding such a client is not easy in China.
David quickly realized where the balance of gains/losses in the event of a breach of contract tipped. I also had to explain how we have to adapt to changing circumstances. And what may seem beneficial is not necessarily helpful.
成语 chengyu proverb 塞翁失马 sàiwēngshīmǎ which corresponds to “A loss may turn out to be a gain; a blessing in disguise”. Literally, the old man of the border loses his horse.
A well-known story, which gave rise to a Chinese proverb, illustrates very well the awareness of change in Chinese psychology.
An old farmer lived near the border, so he was nicknamed the old man of the border. The horse was an essential element in the life of the farmers. One day he lost a horse. His neighbours came to console him. The old man replied, “Who knows if it’s good or bad? ” Later, the horse came back with a wild horse. His neighbors congratulated him on having a second horse. He replied, “Who knows if it’s good or bad? “His son loved that horse, and one day, while galloping, he fell off the horse and broke his leg. The neighbors came back and the old man answered again, “Who knows if it’s good or bad? “A few weeks later, as war broke out, all the young men were enlisted except for the son on one leg. The neighbors returned and the old man, calm as ever, answered again: “Who knows if it is good or bad? “A few weeks later, as war broke out, all the young men were enlisted except for the son on one leg. Many died, the son remained alive.
The story gave rise to a chengyu/proverb 塞翁失马 sàiwēngshīmǎ which corresponds to “Something bad is good”. Literally, the old man on the border loses his horse.
It’s always easy to get out of great generalities by saying that the contract is more binding in a western country. It should not be forgotten that the deterioration of the market can turn a good customer into a bad customer and this is a law that can be extended to many countries. At the same time, change is an unavoidable point in China; sometimes, it can be 180° if the situation requires it. It’s occasionally confusing, but you have to know it and be ready for anything!
22 July 2020