Guanxi in Jeopardy – Case Study
Case study on US and Chinese culture in business life and negotiations. Sales and negotiations class 2011 Guanxi in Jeopardy – Case Study Intercultural Research In order to find out in what way the American culture of Electrowide as opposed to the Chinese culture of Motosuzhou will influence negotiation attitudes and positions, some intercultural research needs to be done beforehand. In assessing these cultures at an informal level as well as a business or formal perspective, I need to become aware that not all actions or behaviours can be directly explained by cultural differences alone.
Sometimes it is a party’s incapability of correctly identifying its position or leverage points within the negotiation which causes rudeness or misunderstandings. Given that in this case (Electrowide VS. Motosuzhou) a linguistic barrier has to be overcome as well, makes finding the right conclusions even harder. Therefore I first need to have studied both cultures intensively in order to come up with a revised preparation for a new negotiation. China To start with I will talk about The People’s Republic of China.
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With its 1,300 million inhabitants, ancient history and innumerable traditions and customs it is perhaps the most difficult culture to study and to understand as a Westerner. Nevertheless it is a country that has intrigues us all over the course of history. Giving us many great inventions in the past and probably also in the future, as it is manifesting itself in becoming the world’s biggest economy. The question remains, how did China change so rapidly in the last 20 year considering their high level of Autarky it ones had?
But more importantly, with the country becoming more liberated and open, we want to know how much of their original way of thinking is still left in their culture today. First of all for the Chinese, the honour (or “Mianzi”) is the first thing to take into account when talking about their company culture. It’s upmost important for the Chinese to ‘save face’. Even in the middle of a successful negotiation, they can leave the negotiation table for a disrespect made by the other party, such as asking too personal questions or disrespecting a person’s social status or hierarchy levels.
These hierarchy levels are very clear in everyday life but even more in business; everyone has a clear understanding of its obligations, and individuals are not thanked for carrying out their duties or tasks. In addition they will not discuss about any issue they are not completely sure they can talk about. Instead of saying that, they may begin giving vague answers because they think it is impolite showing that they don’t have the position to talk about it. This preservation of honor and clear view on hierarchy or social status makes Chinese business men to be very reluctant against out standers.
Also the way that Chinese ‘make friends’ is very different from the Western way and shows that they are very careful in not losing face. They need to be very sure of your amount of goodwill and effort you want to put into the relation before they see you as ‘friend’. It sometimes takes them years to see that and let you in into their social circles. Therefore being invited for dinner at a Chinese business men’s home is a great deal for both parties and can be seen as the first step in establishing a good relationship.
Continuing this relationship needs to be done by upholding a pleasant and harmonious atmosphere at all time. This takes lots of patience for the Westerner but should never be over rushed. Once they see you as a friend they will treat you differently in a way that they want to care for you and feel embedded in you. They will trust you more and show their humbleness and gratitude and they will expect the same from you. This amount of devotion and responsibility to each other goes far beyond our Western level of friendship.
It is hard to put in words this intangible knowing of each other that you will always try your best and support if needed. This is what is meant by the Chinese as ‘Guanxi’. Therefore in doing business with them you will notice that they want to get to know you in order for them to know they can trust you. They can spend as much time as necessary until they achieve the “Youyi”, their way of seeing entrepreneurial friendship (a relation between two or more entrepreneurs where they respect each other and respect the needs of the other part.
It is also true that they focus the negotiation in this way because they have a long-term view of commercial relationships, intertwining personal and professional relationships in a “Guanxi”. In order to make the other person part of their Guanxi, they usually ask personal questions to the opponent. However they don’t like facing those kinds of questions in return, or at least too personal questions. It would be polite asking vague personal questions about his/her family, for example. A disrespectful way of negotiating with a Chinese person would be asking closed questions.
First of all, they don’t like giving “Yes” or “No” answers, basically because they are indirect and very thoughtful, and a closed question may mean closing doors. If you ask those kinds of questions, they may answer you with vague answers such us “We will see” or “We will think about it”, and it is very likely that you will never hear about that issue again. They are also very good practitioners in using silence: they respect the silent moments of thinking in order to see the reactions and the security of the other part, something that usually stresses Western negotiators, who think that they have to say something in these moments.
There are some others considerations to take into account when entering the negotiation room. They are very proud of their culture and their language, so trying to learn some of their words or showing that you are interested in their traditions (like greeting, doing a small reverence or just an inclination of the head) may be very respectful, and will be appreciated. Also giving presents should be dealt with carefully; as honor is so important for them, the actual present itself is not that important. They will most probably not open it immediately on the spot.
Therefore the enclosing of the present is much more important and the way you give it; a white enclosing is a sign of bad luck, while a bright color like red is a sign of good luck and good intention. ————————————————- Some other characteristics describe their loyalty to the government and communist party as well as their respect for the elderly and ancestors. But most importantly what should be understood is that the likelihood of accomplishing success in business or in negotiation with the Chinese all revolves around the presence of Guanxi or good personal relationships. ———————————————— United States Next off is the American culture or United States of America, which are nowadays still the biggest national economy and probably the most powerful country in the world (economically talking). This was partly due to their victory of the Second World War and the resulting commercial relationships they established all around the world. We can say that the culture of the USA is in many aspects quite the opposite of that of the Chinese.
To start with, the American culture expects that negotiations tend to be very short: they like going directly to the point, “let’s talk business” and even answering a direct “No” to a proposition is common. That is perhaps due to the fact that American time management is one the fastest and hastiest one of all. They figure they spend a lot of time of their live working and that bottom line it is always about the money; profitable result need to made, so wasting time should always be avoided.
The saying “Time is money” was therefore popularized by the sharks and brokers at Wall Street. This has as result that the American tends to be very punctual and direct. An important difference is also seen in the formality: American people are very informal in their normal lives, but once they enter the office or a negotiation room they change completely and adapt to the formality of the company culture, wearing suits with ties, talking very calmly and respectful and calling the people by their surname.
A foreign negotiator should do exactly the same until they are told to call them by their first name. The standard behavior for American people during negotiations is as follows: having an open smile, showing a little of their teeth (if not the smile could looks like a mock) and showing an opened appearance to any suggestion (even if at the end they can answer you with a direct no, as said before). They will try to get to know you as a company not as a person. This also indicates that they are very result oriented.
If we bring in Hofstede’s cultural dimensions we see that the American society is more individualistic than Chinese society. They tend to talk about their personal achievements in an opened way, and they don’t feel bad if the other part do that too. For that reason, they are also more result-oriented than relationship-oriented: they don’t really need to trust you completely or have a friendship with you beforehand to come to an agreement since they separate their private and their professional life and contract is contract. It is also acceptable for their culture to accept risks.
In distinction from many European cultures, they bet on ideas and new projects easily, and not only in established companies -> their uncertainty is avoidance lower than that of China. From this we can conclude that American negotiators have more similarities with Europeans than to the Chinese negotiators, so it would be easier for us doing this negotiation from an American person’s perspective. However, there are some barriers which are too big to overcome between Chinese and American culture, and those need to be taken into account in writing the revised preparation.
And we need to answer the question on what went wrong in the former negotiations and who’s to blame. To answer that we need to understand that a Chinese a negotiation can be very long lasting and sluggish, they can agree upon many things, and once you think you have reached an agreement, they begin talking from the beginning again. This is very confusing for the American for who the contract is the final agreement period. In addition he would like to see direct result and is very impatient and direct.
Overall, both American and Chinese people tend to seem nice and friendly, but actually only the Chinese need it for achieving an agreement, American only do that trying to push you to their side of the negotiation. These are the two main points of conflict that arose from the former negotiations and that happen all the time in Chinese VS United States negotiations. In writing my preparation I should also take notice of the fact that the American tends to get nervous and stressed easily when no direct result is made and that there view on genuine friendship is at the complete opposite spectrum as that of the Chinese.
Preparation Background We are supposed to be Tom Sherman, a 55 years old Mechanical Engineer that has been working for Electrowide, Inc. for over thirty years. There are also two more people involved in the negotiation in our part of the table: Barb Morgan (42 years old Psychologist) and Mark Porter (a 31 years old Financial director). Electrowide, Inc. is a $5B manufacturer of automotive electronics products that tries to become a $10 billion international enterprise in some years. At this moment, we are in Beijing (China) discussing the possibility of creating a Joint Venture with a local company called Motosuzhou in order to have a local supplier for expanding our company internationally. Motosuzhou is an automotive products supplier under the control of the Beijing government, with a very conservative and structured hierarchy (one of the highest bosses is Wang Yoo, the Minister of Finance). We have been in China for more than two months now, negotiating with Ai Hwa Chew (Director of Supply and Distribution) about the conditions and the features of the new Joint Venture we are thinking on creating.
After all that time, without seeing any direct result and having no clue about the final agreement, we decided to talk with a lawyer in order to create a contract that Ai Hwa Chew could agree on. However to our surprise he demanded us to leave his office and canceled all the meetings with us once we offered him the Contract. The thing is that we don’t really know what we did wrong. After spending a lot of time on dinners and trying to get to know each other we blew it in a few minutes. “ What went wrong…? After doing the Intercultural Research, we can easily see what went wrong.
Electrowide’s representatives were too hasty in discussing final agreements. By generating a fully prepared Contract and handing that to the Chinese clearly showed that they were trying to push them to accept something while they were not prepared to do that. This offended Ai Hwa Chew’s mianzi (honor) in such a way that he was unable to continue negotiation. What also played part was that the Americans did something behind his back without realizing that this would go against Guanxi’s unwritten rules. As a result Ai Hwa Chew did not only lose his honor that day, his trust and build up
Guanxi with the Americans of the last two months, was suddenly wiped out in one fell swoop. This move from Electrowide’s representatives is of course reasonable since what they think what matters are the results. And that long-term company relationship can be established by highlighting, or in this case; contracting, each party’s benefits from the final deal. Now we know better than that, Electrowide has to be more patient (even if we think that we are achieving nothing on the meetings and we miss our relatives) and above all we should always maintain a pleasant and harmonious relationship.
I came up with a little rhyme for this scenario, which was contemplating in my mind when writing this report. I think it will be a good motivation for the American to remain patient: Time is money yes indeed, But forget about time and forget about greed. As for the Chinese, time means friendship, and friendship is a need. Friendship takes time but will often lead, to a better outcome for both parties. For the American business man: By using our gained knowledge of both cultures in question we can now prepare a revised preparation in order to still achieve the so desired Joint Venture in China.
Which is upmost preferable since this company is the perfect candidate for opening our business to Chinese market, and later to others markets. BATNA Our BATNA would be doing a joint venture with another or several other Eastern Asian partners. As described in the case, Motosuzhou came forward as the best candidate for a successful joint venture. This means that if there is no deal we would have to do with a partner that does not have an established network and local ties to the government.
And this partner will have scores below all parameters used to examine the best possible candidate. Which are: Physical location in the country, size of labor force, ability to reduce operational costs. Considering that this Alternative partner also takes again months of our time to negotiate and build up personal relationships while we do not possess this time, we can say that we have a very bad BATNA. Therefore we are very keen to close the deal with Motosuzhou. Simply because they are the best option for Electrowide to open its markets internationally.
Although Tom and his team made some mayor mistakes in the former negotiations there is light at the end of the tunnel. Motosuzhou already indicated that they would like to do business with Electrowide in the future because they would also gain a lot from this deal (product development expertise and innovation in production processes). The fact that we are a very solid and worthy automotive company will provide us with enough possibilities to reach an agreement at the formal or business level. What’s more is that we have already established two months of personal relationship with Motosuzhou.
For above reasons we believe that Motosuzhou must also be disappointed that it did not come to an agreement. While both companies have a lot to offer on a business level it is, however, required for Motosuzhou to first build Quanxi and trust with Electrowide in order to start talking about numbers. Issues (ranked by importance) * Percentage of shareholding * Role of each company in the Joint Venture * Accounting system * Reinvestment of profits * Training, consulting and warranties ————————————————- Ideal Percentage of shareholding:
The ideal in this issue needs to be bigger than what is written in the case: a 60% share in the holding for Electrowide, 33% for Motosuzhou and 7% for the Beijing Municipal Government. The percentage given to the Beijing’s Government cannot be much smaller; simply because Motosuzhou desires a relationship with a company that makes them possible to maintain ties with local government policies. Knowing that we are talking about China (a communist country) this is one point we will not be able to discuss. The percentage of shares we are asking for is quite reasonable since we will be the one supplying the financial power.
The percentage Motosuzhou gains is reasonably small, but what must be understood is that the 33% given to them and the 7% given to the Beijing Government will be joined together when making decisions. They may have similar interests that could be opposite to ours in some situations. Role of each company in the Joint Venture: As outlined in the case, Motosuzhou will provide the manufacturing facilities, marketing efforts and labor units. Electrowide will in its turn provide controlling design, financial and technical management. Accounting system:
The difficulty in appointing this issue is that Motosuzhou uses a different accounting system than that of Electrowide. This may cause inconsistencies in Electrowide’s books and in the long term create disagreement regarding allocation of other costs and issues. If Motosuzhou continues the use of their accounting systems, we will also see a decline in our margins. This is something our company is not going to accept. Therefore our ideal is to completely implement our accounting system in the Joint Venture. Reinvestment of profits: Motosuzhou would like to see all profits to be reinvested in China.
Although our strategy is to be established in China at first, the long-term intention is to use the Joint Venture’s establishments to more easily jump into other markets at a later stage. Thus, as our ideal we would only accept 80% of profits to be reinvested in China in the first 3 years and around 50% in the three years after. After the first 6 years we would like to be free to reinvest 80% of the profits in whatever market we want. The resting 20% will be reinvested in the Chinese market which will be enough to refresh our position in that market every year.
Training, consulting and warranties: Since Motosuzhou already indicated that this will be a necessary expenditure for their part at the beginning of the negotiations, we have set our initial ideal to have training and consulting services to be accounted for Motosuzhou. However, after having done the intercultural research and understanding Chinese culture better (and also because Ai Hwa Chew said so), we consider that giving the above services to Motosuzhou for free would be a good way of saying; we are really concerned and involved in the succession of this deal.
Thus, we will offer free training and consulting services in the foundation year and free warranties for the first 3 years. ————————————————- Fallback Percentage of shareholding: As we said before, both Beijing’s Government and Motosuzhou’s share of the holding will be joined together at the time of making decisions. In order to be sure about the property of the Joint Venture we would establish our fallback in this issue in 51% for Electrowide, 10% for Beijing’s Government and 39% to Motosuzhou, or any distribution that make us achieve at least the 51% of the shareholding.
Role of each company in the Joint Venture: As our fallback we can take care of marketing efforts and if necessary supply 10% of the labor force as well. Also concessions in managing control designs of the product can be made to give Motosuzhou more influence in this department. Accounting system: This is a somewhat non-negotiable issue. As said in the case, seeing our margin reduced is a violation of Electrowide’s main motives for doing this Joint Venture. As a result we cannot accept them to implement their accounting system in the new Joint Venture.
The only issue we can make concessions on is providing them with the necessary technical assistance and training staff to guide them through the transition process smoothly. Reinvestment of profits: As our fallback, we accept to reinvest the JV’s profits in China for the founding 3 years. After the 3th year we will discuss new percentages in order to foster other market introductions. Here the aim will be at achieving a high enough percentage of profits to be able to fund our other market entries with the % of profits to be reinvested in China set at not higher than 80%.
Training, consulting and warranties: Knowing that this issue is important for them in their culture we already acknowledged to provide training staff, consulting services and warranties as long as we both own the Joint Venture. In the foundation year we will offer these services for free, we figured that this is also the right thing to do as compensation for the blunder we made in the last negotiation. ————————————————- Assumptions All the issues concerning the percentage of shareholding: We consider this issue the most important one.
Having a majority in the holding is a bond for the future, not only for this Joint Venture but for our company as well. Role of each company and Accounting system: We will take care of the financial resources for the Joint Venture. In addition we are a bigger and established company while they are a relatively small company. For that reason we assume that it’s not more than logical that they will have to adapt to our accounting system if they want to establish a joint venture. We ill do our best on explaining this issue in a kind and friendly way. Training staff and consulting service: If we have control over the technical management, we should be responsible for giving training and consulting service for that department as well. The important thing here is to have accurate calculations on the amount of service and training needed in this department and how much these will cost us in the end. In that way we avoid spending too much money on this issue which we promised to give them for free in the foundation year.
Reinvestment of profits: If we accept to reinvest the whole amount of the JV’s profits back into China in the founding years, some of that money should be addressed to training and consulting services needed in the mentioned departments at the time of starting the JV. In other words; the quantity we reinvest in China should be proportional to the training and consulting services we already decided on giving to Motosuzhou. ————————————————- Needs / Priorities Needs: * Coming to an agreement in order to start with the Joint Venture. * Use the Joint Venture to 1.
Study the Asian automotive market and 2. Further expand its business by exporting to other markets in Asia once the JV is established. * Building trustworthy personal relationships with Motosuzhou and ultimately achieve Guanxi. Priorities: * Restore the damaged personal relationship with Mr. Ai Hwa Chew * Spend some more time on personal relationships and building trust before talking numbers. * At all times maintain a harmonious atmosphere when addressing the allocation of functions and responsibilities of both companies. * Allocate the functions in such a way so that it’s effective and fair for both parties. Allocate the functions in such a way so it reflects each company’s expertise or specialisation * Assure the business prospect of entering new markets after the JV has been established. ————————————————- Strategies / tactics Since we now have a better understanding of the intercultural differences in Chinese and American culture, we have more confidence in facing the new negotiations. Nevertheless we should each time question ourselves when addressing issues if we do so in a fair and respectable manner towards the Chinese company and personal culture.
While talking about every issue we are going to try to have a relaxed and kind atmosphere, showing that we are really exited in doing the Joint Venture with this company. Not only for its numbers but also for the people we know are working there (like Ai Hwa). We will be patient and friendly, showing that we want to be part of Ai Hwa’s Guanxi and try not to infringe on his honour. If we achieve that, we will be able to use emotion in any issue and we will have half the negotiation done. When addressing the percentage of shareholding we will use logic reasoning in order to justify our share of 50+%.
State clearly that we are responsible for the majority of the financial resources, recruiting financial staff and make clear that we are taking a big risk already with the amounts of money at stake. On top of that we need the 50+ % to ensure good functioning of future operations in the Joint Venture. If this does not work, we will try to use emotion: Giving them your word to at all times try to assist Motosuzhou in endeavouring their own business opportunities with e. g. our expertise in the Automotive market IF they agree upon the deal where we will have the majority of shares.
Another way of using emotion can be done by saying; If we have the majority of shares in the JV, you can then completely trust us in doing our best possible job, as bad annual results will then badly influence us more than them. Role of each company in the Joint Venture: For this issue we will use logic reasoning too. It is more obvious and logical for Motosuzhou to manage marketing, staffing and labor force themselves because they already know the Chinese market and environments inside out as they have been operating in it for years. And it is also evident that we at Electrowide have great xpertise in design and technical management. We can also use bargaining as a tactics; saying it is a really good deal for them not having to recruit technical staff. In that way they will save a considerable amount of money which otherwise needed to be spend on training and educating their employees. Accounting system: Logical reasoning; we are a bigger and established company while they are a relatively small company. For that reason we assume that it’s not more than logical that they will have to adapt to our accounting system if they want to start a joint venture with us.
Reinvestment of profits: We will use emotion; we are also really interested on reinvesting profits into the Chinese market since we believe there are still many opportunities present. But we need the freedom to invest in other markets and export to other countries in order to let the JV continue growing stronger and not die against competitors. This is not more than a managing tool for growing the business in a sustainable way and is beneficial for both parties.
Training, consulting and warranties: for this issue we will first use compromising; If they accept in giving us the technical management and design departments we will feel responsible to deliver the needed amount in training and consulting. On top of that we will use Emotion when we announce that we want to make up for our blunder and impatience in former negotiations by stating that we want to offer them free training and consulting services in the foundation year in all departments and free warranties for the first 3 years. ——————————————– 1 ]. A Guide for Successful Business Relationships in China – James C. Chapman 2011 [ 2 ]. www. chinesenegotiation. com – Managing Conflict in Chinese Negotiation 2011 [ 3 ]. Chinese business customs, etiquette, negotiations and families – http://tinyurl. com/caya9pt [ 4 ]. Characteristics of the Chinese Culture – Harvard 2003 [ 5 ]. Business culture- China vs. US – www. umsl. edu/~fungh/ethics. ppt [ 6 ]. Business culture- China vs. US – www. umsl. edu/~fungh/ethics. ppt [ 7 ]. http://www. geert-hofstede. com/hofstede_united_states. shtml