Case Study 7

594 Part 5 Strategy Implementation for Multinational Companies

C H A P T IE R C A S IE

Cross-Cultural Negotiation:

Americans Negotiating a Contract in China

MARKUS PUDELKO, TUBINGEN UNIVERSITY

( T )his comprehensive fictitious case covers the essential aspects and facets of a cross­ cultural negotiation, in this case between an American and a Chinese company. The difficul­

ties, problems, and misunderstandings both sides are facing are particularly stressed. In addition, the case's unique contribution is in presenting cross-cultural nego­ tiation from both perspectives, the American and the Chinese. The presentation of both perspectives is structured in the same way, facilitating a direct compar­ ison. This multi-perspective approach is rather distinc­ tive in so far as cross-cultural negotiation tends to be regarded in most texts of Western origin exclusively from the angle of the Western side. However, it is only through a better understanding of the respective "other" party that performance in cross-cultural negoti­ ation can be significantly improved.

In order to facilitate group work, the various aspects covered in this case are clearly divided into various sections. This allows the class to be split up into different groups, which can each discuss specific sections in more detail and subsequently present their results to the entire class.

The case should be useful in all courses that cover cross-cultural negotiation, that is mainly in Manage­ ment Across Cultures and International Business courses. The case has been written primarily for busi­ ness students at the MBA level and for participants in executive education programs. However, students in advanced undergraduate classes should also benefit substantially from this case.

Introduction

Mr. Jones: I had just come back to our headquarters in Alabama from two months of negotiations in Shang­ hai. We hoped to set up a Joint Venture (JV) with a Chinese state-owned vehicle component company. It was our intention to outsource some of our production to China to reduce our costs. When Iwas assigned to

lead our negotiation team, I realized this could sub­ stantially boost my career and I was determined to bring these negotiations to a successful end.

Of course Iwas aware of the fact that the Chinese are known for being tough negotiators, but so what I thought, we Americans are certainly tough as well when it comes to business. And I was probably cho­ sen because I have a reputation for my no-nonsense, straightforward, and sometimes even aggressive way of negotiating. What I had subsequently to discover

· however was that the Chinese are not tough, which would have been fine with me, they just don't know how business is done these days and they just try to cheat and play unfair games wherever possible. They still have a lot to learn if they want to be successful on the world markets. Anyway, we decided to pull out of the negotiations. You just can't trust them.

Mr. Wang: We were negotiating over the last two months with a major vehicle component company from Alabama, USA. We hoped to set up a JV which would have allowed us to improve substantially our techno­ logical knowledge base. Of course we knew about Americans always being direct to the point of rude­ ness and indeed we had to put up with a lot of just uncivilized behavior. Anyway, we did our best to build up a long-term relationship. And after many difficulties we were almost there, but then the Americans lost their nerve and pulled out. You just can't trust them.

Preparing for the Negotiations

Mr. Jones: Before flying over to Shanghai we did our homework very thoroughly. We made inquiries about the Chinese company and had a pretty good picture about their production facilities , product quality, and their amazingly low production costs. We thought about each little detail and knew exactly what specific information we needed. So, all that we wanted from our Chinese counterparts at the start of the negotia· tions were specific answers to specific questions and once we had all the missing numbers we could have

simply put them into our equations and come up with a

proposal which would be fair for both sides.

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I stress fairness because successful negotiations are essentially a positive sum game. You learn that in every MBA program. We should all know each other's interests and viewpoints and as adults we should be able after some tough negotiations to come to a mutu­ ally satisfactory solution. All that it takes is a little bit of trust, openness, frankness, and transparency. But, as it turns out, these are terms which apparently don't exist in Chinese.

Mr. Wang: Before the Americans came over we

had done our homework very thoroughly. We made inquiries about the American company and had a pretty good picture about their overall business philos­ ophy, their corporate culture, the people running the company, and their sophisticated production technol­ ogy from which we could learn much. We were keen to get to know them and hoped to enter a long-term partnership built on mutual trust. We prepared their arrival carefully, arranging meetings with everyone whom they should meet. Business is in the end about people and for people to get to know each other it takes time and we were willing to invest this time. But as it turns out, Americans don't care for peo­ ple and trust, all they care about is the bottom line.

Upon Arrival

Mr. Jones: Upon arrival we were very impressed and positively surprised by the reception we received. A delegation was waiting for us already at Pudong Air­ port and once we arrived at the company's headquar­ ters a huge banner across the gate was put up to welcome us. In the consecutive days, we had many meetings, not just with people from the Chinese com­ pany but even with local government officials. So, we felt greatly honored. And in the evenings we had one banquet after the other.

While appreciating the hospitality of our hosts, we were kept completely ignorant about the schedule and agenda: we had no idea what we would be doing the next day, whom we were going to meet and talk to, or even when the official negotiation would start. And we became increasingly impatient, also because my boss back home called me every day to find out where we were with the negotiations and every time I had to tell him that we hadn't even started yet.

Then we noticed that during all this friendly chit­ chat with our hosts, they dropped from time to time and in seemingly casual ways questions about our business plan. In order to maintain the good atmo­ sphere we were quite willing to answer openly. But

whenever we asked questions the topic quickly changed again to the quality of Chinese food or the "long-established" friendship between China and America.

Mr. Wang: In order to show our guests how much we valued their visit, we invested a lot of time and effort to make them feel welcome. We took them out to lavish dinners, organized meetings with government and party officials, so that they could report home that they were treated with great honor. Being introduced to·people with high rank and influence increases your own status and opens doors and what matters more than status and access to important people?

In their ignorance and short-sightedness, all they could think of was their business presentation and kept asking when we would start the negotiations, and even got quite annoyed by some changes of agenda, without any understanding that sometimes we ourselves didn't have the detailed schedule either. This was decided by our bosses. By openly showing their annoyance and asking us questions about the agenda we didn't know the answers to, they made us lose face. How rude!

And what was this talk about when to start nego­ tiations? As far as we were concerned the negotia­ tions started with the first handshake. By the time we formally sat down for formal discussions we had already learned a lot about them and their actual inten­ tions. But for the Americans only facts and figures pre­ sented in formal presentations or written down in documents seem to count. And if they felt increasingly under time pressure, which they naively even openly admitted, well that's part of the game.

General Principles

Mr. Jones: Fortunately, after more than a week the first real business meeting was scheduled. It was with the CEO, Mr. Chen, of the company. He is of a much higher rank and may be twenty years older than I am so I rehearsed my entire presentation carefully, in order not to make any mistakes. But then again, the whole meeting didn't touch upon any material content of our contract, instead we wasted time discussing the history of Chinese civilization and the promising busi­ ness environment in China.

Finally the CEO stressed the important purpose of this meeting was to reach an agreement upon the general principles between both partners. And when I tried. to raise some detailed issues, Mr. Chen just laughed and referred to Chairman Mao's meeting

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596 Part 5 Strategy Implementation for Multinational Companies

with U.S. Secretary of State, Henry Kissinger. At Kissinger's mere mention of political issues, Chairman Mao stopped him in courtesy, saying "You can talk about any detail with Prime Minister Zhou later on, but with me only about general principles."

I didn't quite understand what this talk of "general principles" was all about, but I just went along. So, Mr. Chen highlighted the importance of mutual understanding, good-will, trust, a long-term relation­ ship, the importance for the Chinese side to learn from us technological know-how, and so on and so forth. I said yes to everything, but also mentioned our interests. Later on a communique was even drafted. I noticed that our interests were hardly men­ tioned, but in the interest of keeping a good atmo­ sphere I was happy to sign the document, after all it was just a legally non-binding statement of some intentions.

As I found out later, that was a huge mistake. Much later on in our negotiation of concrete details, when­ ever we refused to make any more concessions, the Chinese would refer to these general principles, point­ ing out our failure to understand the spirit of those general principles which were clearly spelled out and warned us not to jeopardize our mutual understanding. How they managed to build up the connection between every detail of the contract and these non­ binding wishy-washy general principles was just far beyond any of us.

Mr. Wang: After one week we invited Mr. Jones and his delegation to see our CEO, Mr. Chen. We were not overly impressed that the American CEO did not fly over for this meeting. After all this was_ the meeting where the "general principles" for the JV were to be agreed upon: the most important part of the negotiations. This was for us a sign of disrespect and insincerity, but in order not to spoil the atmo­ sphere we didn't mention it at all.

Apparent ly, Mr. Jones yet again failed to understand the importance of this meeting and foolishly agreed to everything we suggested. And when he refused to make concessions later on in the negotiations and we referred back to what he himself agreed upon when discussing the "general principles," he made it clear to us that he didn't care much about them. But these mutually approved principles constituted the foundation of our entire cooperation. How can you trust someone who ignores general principles which are based on trust? All that mattered for the Ameri­ cans were the details of the actual contract. Only those with bad intentions hide behind paragraphs of some contract..

Patience

Mr. Jones: When it finally came down to negotiating the details of our contract, it appeared that our Chi­ nese counterparts always controlled the pace of the negotiations, using delays very purposefully to put us under pressure. The Chinese never missed any chance to ask for concessions, and it seems the only thing they're willing to sacrifice is time. Whenever we thought we had made some progress, the Chinese had to double-check with their superiors and even government and party officials and that could take for­ ever. And when we asked to resume the talks, they replied that consistent with the general principles of "mutual understanding," we should make more efforts to understand the slowness of Chinese bureaucracy.

However, whenever we had to get advice from our headquarters back in the States and the response took a bit longer than foreseen, then this was unac­ ceptable to the Chinese. They thought that, as we were from such an efficient and advanced capitalist country, there could be no other reason for Jelys than some malice intentions. So much for the principle of mutual understanding!

Mr. Wang: We actually felt quite annoyed and almost insulted by the insistence of the Americans on discussing specific details, coming to an agreement, and moving on. What is the point of hurrying and dis­ cussing some details of a contract if you haven't even got to know the people well with whom you will actu­ ally have to implement the contract. That matters much more than some details which would need to be adapted over time anyway, because things just develop and change. And how can you adapt if there is no mutual understanding?

Also we can't just take decisions at the negotiating table,as we often need approval, not only from our supe­ iors but also from certain government agencies and this takes time. Of course we can't always admit to this openly, it makes us lose face, but they should have under­ stood that negotiating teams in China don't have the autonomy Americans have. Decisions in Chinese compa­ nies are often taken by people in the background.

Friendship, Trust, Harmony, and Contracts

Mr. Jones: One thing we felt really strange about was the constant insistence on friendship and long­ term trust relationships between the two sides throughout the negotiation process. Whenever the Chinese "offered" something we considered as a ma­ ter of course anyway, they made a big story out of it,

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implying that it was only because of our friendship that they "offered" us this "favor." And whenever they wanted something we considered as out of question they tried to pressure us with the hint that refusing would endanger our friendship. As far as I am con­ cerned, I never considered these Chinese (or for that matter any other persons I ever negotiated with) as friends. We have common interests to start negotia­ tions, during the negotiations themselves we certainly have more opposite interests and to sort this out is a question of professionalism, not of friendship.

Another of their constantly repeated buzzwords is harmony. In the beginning we were always very polite, soft spoken, and even tolerated some attempts from the Chinese side to take advantage of us. But the more we gave them, the more they wanted and so we became increasingly direct in communicating where our limits were. And at times that included some out­ burst and door slamming. But the next day it was all forgotten and we moved on.

With all their talk about trust, one thing the Chinese never seemed to fully trust was what has been written in a contract. They constantly asked to whom they should turn if something went wrong. But if "something went wrong," that can only mean that one of the two parties broke the contract, and that should be solved by required legal procedure. But the Chinese insisted on adding some clauses about arbitration through a third party into the contract, again with the emphasis on mutual understanding and trust. But how can you trust someone who apparently already thinks about breaking the contract before it is actually signed?

Mr. Wang: We Chinese do business on the basis of personal relationships, friendship, and trust and not on the basis of some written document. We give our­ selves a long time before doing business with some­ one, but once we believe we can enter a business relationship, then we stick to it and we would never give it up, only because, say, someone would offer us for some deal a better price.

Although it didn't seem at all a problem for the Americans, they behaved at times quite rudely. Even if you don't agree with the other side, you should always control your anger and maintain harmony. How can the Americans still get along when they just had a furious argument the day before? To keep harmony is our way to express intention to build up long-term relationship. We wouldn't mind taking more time and patience when problem arises, so long as both sides remain calm and discuss in a peaceful way. However, the Americans only cared for speed in the negotiation.

Then the Americans who were always so interested in the specifics of the contract, were very reluctant to introduce arbitration clauses in case some changes occur which need to be taken into consideration. They said: "If something goes wrong, we have to go to court." How can you trust someone who wants to sue you if a problem comes up? If you really are interested in a long-term business relationship, no contract in the world can foresee all eventualities. It's like a marriage. Its success is based on trust, not on a contract.

Guanxi

Mr. Jones: If one thing is known to Westerners about Chinese business culture it is the concept of guanxi. Of course all over the world connections and networks do matter in business, but the Chinese take it to an extreme and apply it to virtually every aspect in society. In order to get planning permission for the plant we intended to build, our Chinese partner encouraged us to take the senior officials of the local planning approval commission out for a luxurious dinner. Build­ ing up good connections might shorten the application process from several months to just a couple of weeks. However, what our Chinese business partners labeled as building up connections sounded to us very much like corruption. It is our company's strict policy not to engage in any kind of such activities, no matter where in the world.

Apparently, also the recruitment and promotion pol­ icy of our Chinese business partner was mainly deter­ mined by guanxi. Sons and daughters of business partners and influential bureaucrats clearly received preferential treatment. Once engaged in the JV we would have had to make an end to all that to make sure that only the best candidates got recruited or promoted. What a mess, to clean all this up!

Mr. Wang: As always the Americans only thought about business in terms of abstract concepts. We don't dispute the validity of these concepts, but we take a more holistic approach and don't forget that business is done in the end by people, and people have to get along with each other. Everything comes down to give and take and what matters is that in the end there is a balance between the favors you receive and do. We like to do someone a favor, as we know the person will feel morally obliged to return the favor at one point. Therefore we also like to repay a favor as soon as possible, so that we don't feel indebted anymore.

Moral obligations are much smoother, flexible, and adaptable than contractual obligations. We don't like