Case Study- Cross Culture

ASIAN CASE RESEARCH JOURNAL, VOL. 12, ISSUE 2, 233–248 (2008)

ACRJ

This case was prepared by Margie Parikh of the BK School of Business Manage- ment at Gujarat University, as a basis for class discussion rather than to illustrate either effective or ineffective han- dling of an administrative or business situation.

Please address all correspon- dence to Margie Parikh, BK School of Business Manage- ment, Gujarat University, Ahmedabad – 380009, Gu- jarat, India. E-mail: margie_ [email protected].

© 2008 by World Scientific Publishing Co.

Dilip Roy at Itsun Heavy Industries India Pvt. Ltd. (IHIIPL)a

On a hot summer morning in 2005 in Delhi, India, Dilip Roy evaluated whether he should stay in his job as Country Head of Itsun Heavy Industries India Pvt. Ltd. (IHIIPL) or quit. Would he have joined IHIIPL in the first place in 2003 if he knew what was in store for him, he wondered. He was driving home and had just seen the email alert announcing that he was selected as one of the 30 recipients of the Certificate of Honor issued from the China headquarters. “They never communicated directly with me before,” he commented wryly later.

When Dilip was offered the position at IHIIPL, he thought it had been the embodiment of all his expectations. IHIIPL was a wholly owned subsidiary and a startup of Itsun China (IC), a construction equipment manufacturing company. In India, IHIIPL was to start as the trading and equipment support arm of the Chinese parent. Hu Jian, the Chinese representative of IC and an interface with Dilip, had brought back approval for almost everything he asked for — the designation, money, and autonomy. But as Dilip started working, he realized that this was a tough ordeal in his otherwise successful career as he liked to call it. In the last two years since Dilip joined IHIIPL, Hu had been fired, Dilip’s autonomy was severely limited and he felt more and more humiliated in a series of events, though his earnings

aThe author gratefully acknowledges the support and comments from Prof. M. R. Dixit (IIM Ahmedabad), Prof. S. Manikutty (IIM Ahmedabad), Prof. Lau Geok Theng (ACRJ), the anonymous reviewers of this case as well as the protagonist of this case study whose name is changed along with several other identities.

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were his lifetime’s high and the performance of IHIIPL had zoomed. The announcement of the Certificate of Honor informed him that he and his wife would attend a gala ceremony at the headquarters in China, whereupon he will receive a cash prize and a certificate by the Chairman. This news sent Dilip into a journey through his time at IHIIPL.

DILIP ROY

Dilip Roy — 47, married and father of two daughters — 19 and 13; was born and brought up in Delhi, India. A recipient of the National Science Talent Search Scholarship, he graduated with honors in Mechanical Engineering from Delhi College of Engineering. He started his career as a Graduate Trainee Engineer (GTE) at the Marketing (Construction Equipment) department of Larson and Toubro (L&T), a highly respected Engineering and Construction company in India. L&T enjoyed a virtual monopoly in the controlled economy of India and Dilip soon realized that there was little marketing effort required. He disliked routine and predictable work and hence took up difficult, unsolved, problematic cases pending with his department. In 1995, after 23 years of working with several Construction Equipment companies in India, changing for better prospects and twice fired due to conflict with top managers, Dilip had become a VP (Sales and Marketing) at Indian Infrastructure Equipment Ltd. (IIEL), an Indo-American joint venture. The industry circles knew him as an aggressive problem solver, a person with an eye for detail and highly skilled in equipment service, parts management, organization of project task force, and effective off-site project control.

ITSUN CHINA (IC) EXPLORING THE INDIAN MARKET

Sales at IC had been growing at an average rate of 50% each year since its establishment in 1988. This made it China’s largest construction equipment manufacturing company in the private sector. This growth had mainly been caused by

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war-like pace of construction ahead of the 2008 Olympics. IC has products for machinery building, road building, and hoist machinery. Its products fit into eight categories with more than 50 kinds of specifications.

At the time of creation, IC found that all its competitors were foreign companies. Choosing to build a domestic brand, IC has been consistently investing 5% of its turnover each year for R&D. Through its offices in the western world, IC keeps itself updated of the development in technology and at the same time through operations in Asia it keeps its own manufacturing costs down. “Our investment on technical research and development has achieved double-digit growth in recent years,” says its Managing Director. IC now has more than one hundred authorized patents and many key technologies.

By now, IC has established itself as a competitive, quality producer of construction equipment and its concreting equipment especially enjoys a market share of 70% in the home market. (Annex 1: IC Profile)

Post 2000, however, the construction activity faced a slow-down in China as major deals for the construction projects were already frozen. Additionally, the government had decided to slow down the overheated economy by controlling the growth of chosen sectors, so the number of large construction projects was under tighter regulation. Hence, the IC top management headed by Mr. Wei, the Chairman, decided to explore the overseas market. Wei was attracted by the prospects in India — an emerging market with liberalized market economy and a booming construction industry piggybacking the infrastructure development throughout the country.

Wei decided to send Hu, his nephew to lay the groundwork for IC’s operation in India. Hu spent one year between 2001 and 2002, studying India, specifically the Indian construction industry and gathering intelligence on the potential clients in India.

During the exploration, Hu once visited Indian Infrastructure Equipment Ltd. (IIEL), the Indo-American joint venture. Hu’s objective was to promote IC equipment to the president and the major decision maker Mr. Paul at

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IIEL and see how his line of Quipo equipment could be complemented by IC products in the field. Paul asked Hu to discuss technical matters with Dilip Roy, his VP (Sales and Marketing). Hu and Dilip immediately found themselves immersed in discussing various technical issues threadbare. Encouraged by Dilip’s depth of knowledge and vast experience, Hu raised many more questions. He even asked Dilip to compare and contrast IC equipment with available Indian options, or his comments on the prospect of setting up Itsun operations in India, the Indian market and its characteristics. Dilip and Hu decided to meet once again.

Two days later in July 2002, Dilip was asked by Hu if he would consider joining Itsun as its future country head. IC at that time only had a liaison office in Bombay and the Indian company has yet to be incorporated.

ITSUN HEAVY INDUSTRY INDIA PVT. LTD. (IHIIPL)

Dilip was very excited about the new offer, now that he faced the prospect of heading a company’s operation for the first time.

Dilip was required to obtain the incorporation of the company as a Rental Business Operator with the Registrar Of Companies (ROC) in India. At that time the Ministry Of Finance (MOF) that regulated the company affairs, did not have a specific category “Rental Equipment” and the case of IHIIPL was being considered as leasing (financial) business because of the similarity between the two.

Since Hu had been trying in Mumbai through his consultants and had not yet got any headway, Dilip decided to register the company with the ROC office in Delhi where he was stationed, with the help of different consultants. This idea was accepted by Hu, who made a commitment that upon the receipt of registration papers, Dilip’s job as Country Head will start.

Dilip, now describing the Indian business environ- ment, the liberalization process in India, and the operational aspects of the proposed business; suggested to Hu that IC float IHIIPL as its 100% owned subsidiary with initial

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activity of renting construction equipment. According to Dilip, this move would offer a viable alternative to the builders and contractors, who were fed up of existing rental solutions, but were averse to investing serious money in fully owned line of construction equipment, let alone a Chinese product. Additionally, machines on rental will be maintained by Itsun, who could demonstrate various well- running machines and their maintenance management to the prospective clients, too.

This suggestion immediately appealed to IC officials and in October 2002, they asked Dilip what salary expec- tations he had from IC. Dilip was then drawing Rupees Twelve Lakhsb per annum, and considering a 20% bonus, asked for fourteen and a half Lakhs as the expected annual salary at IHIIPL. Waiting period followed and in December 2002 Hu told Dilip that people in China found his expectation too high. Dilip felt disappointed that so much of involvement from his end had not led to any concrete development. However, after three months in March 2003, he again heard from Hu that IC had agreed to give Dilip his expected salary provided Dilip looked after the incorporation of Itsun India and took care of the business, while the Chinese representatives would communicate with IC (refer to Annex 2 Itsun India when Dilip joined and at the end of 2004). Dilip agreed. Hu and Dilip together drafted Dilip’s letter of appointment and printed it, and within 20 days Dilip obtained the necessary approval and documents from MOF in order to register the company.

INDIAN CONSTRUCTION EQUIPMENT INDUSTRY

The Indian construction equipment industry at that time was divided into two segments:

a. Equipment manufacturing companies engaged in selling and after sales support to construction companies directly or through their dealers.

bOne Million = 10 Lakhs.

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b. Equipment hiring companies buying from (a) above, and hiring the equipment to construction companies.

The equipment rental business in its present form, suffered from the following shortcomings:

1. In the absence of any national player, construction companies had to choose a new set of hirers at every project location. Multiple contractors greatly increased management burden of construction companies and quality and time schedules of project suffered.

2. Construction companies could not take advantage of good rental companies in another project in a far away different location as the local hirer did not want to move beyond 200 km or so.

3. Unethical practices were not acceptable especially to the companies of foreign origin.

4. Construction companies were inconvenienced during the mid-project to look for a fresh hirer, as often the existing hirer was unable to repair equipment in time due to fund shortage. This affected the project schedule and resulted in cost overruns.

5. Project staff often complained that they could have performed much better had the equipment being owned by them rather than hiring from unprofessionally run shops.

A clear gap in the industry existed for a professionally managed and nationally spread player with sound financial background as Dilip understood the industry through his experience with construction equipment selling and rental activity. Construction equipment manufacturing companies with their nationwide operations and in-house service and parts management, though thought to be best suited for this job, were very reluctant to enter this business because:

1. Hiring and managing equipment operators and helpers was a tedious task (each machine requires at least four such persons). Moreover, executive staff dedicated to running rental business was also in short supply.

2. Moving equipment across state borders was a huge challenge. Having correct registration and identification

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papers were no guarantee of smooth movement of equipment.

3. Misuse of the equipment by construction companies was another major concern. Hired equipment was generally used in worst applications whereas construction companies deployed their own equipment in easier applications. More often the hire charges were not reflective of the deployed job requirements.

4. Construction equipment manufacturers were keener on upgrading their manufacturing facilities and updating their products. If funds were available, capital intensive rental business was not their priority.

5. Safety of equipment on site, proper on-site running and maintenance were also major issues which equipment manufacturing companies were not comfortable with.

6. Smaller rental companies pulled hire prices down and fearing their larger overhead, equipment manufac- turing companies were not sure of desired return on investment.

Equipment Manufacturing Companies

A number of world-famous equipment manufacturing com- panies (EMC) with their facilities are present in India:

1. Caterpillar, USA 2. Komatsu, Japan (partner L&T) 3. Hitachi, Japan (partner TELCO) 4. Volvo, Sweden 5. Atlas Copco, Sweden 6. Schwing Stetter, Germany 7. Putzmeister, Germany

8. Greaves Limited, India ( JVs)

9. Terex, USA 10. JCB, UK 11. Tatra, Czech Republic 12. Ingersoll Rand, Sweden 13. BEML, India 14. Sandvik, Sweden 15. Metso, Australia

There are various other smaller and lesser known manufacturers qualifying as EMC, but the above mentioned companies are known as the large and reputed construction equipment manufacturers.

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THE CONSTRUCTION EQUIPMENT RENTAL ACTIVITY IN INDIA

Liberalization of the Indian economy was profoundly changing the face of the construction industry in India, and with it the rental business for construction equipment. The construction equipment rental industry so far was characterized by sole proprietary form of ownership, small size, limited geographic coverage by the firms, and absence of professional management of business. As the liberalized economy grew faster, construction activity picked up momentum. Foreign firms were allowed to participate in the now increasing number of mega projects exceeding Rs.200 crores in value. The developments were constantly contracting the time frame for project execution apart from emergence of quality benchmarks that were matching the best in the world.

Such shifts drove the Indian bidders’ orientation from manual to automated work at the construction sites with increase replacement of manual mode. A trend of 70% owned equipment and 30% hired equipment emerged. The equipment rental companies basically bought equipment from the manufacturers and hired them out. Annex 3 shows the growth of construction equipment rental industry.

DILIP AT IHIIPL — A TIMELINE

Dilip had got everything he wanted in the form of offer from IC — the top position at an international firm, nationwide playing field, and an industry that gave him all the scope to fulfill his need for achievement and non-routine work. He could now work autonomously at the salary he named. On 15 April 2003, he joined Itsun on a very positive note.

The Teething Troubles Are Tackled by Dilip

Dilip had worked in the equipment rental business in his previous jobs, and he immediately set about garnering business. Within four months, Dilip had incorporated

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IHIIPL, located an office, hired an accountant, and deployed the first 11 machines received from IC as rental machines. Most of his current site staff had moved from his previous organizations to join IHIIPL.

IHIIPL in the pre-incorporation time had Hu operating out of the Mumbai liaison office where he had employed Vishwas, who printed his business cards announcing Manager — India. Hu being totally focused on marketing and customer relationship had not really worked on issues concerning general management, norms, and hierarchy. Additionally, Hu had not explained to Vishwas that he was to report to Dilip, the Country Head. Vishwas continued to act autonomously and often at cross-purposes with Dilip’s plans. Dilip could not understand how such problems could arise when he had clearly been appointed to run the Indian business as a Country Head and why did Hu not give any clear instructions to Vishwas ahead of Dilip’s joining. Dilip followed up on this issue several times with Hu to tell Vishwas to work under Dilip and follow the business plan. Hu relented after several incidents and Vishwas came around. Dilip brushed this issue aside and focused his efforts on work.

He needed catalogues, spare parts, and technical literature from HQ and wondered how he was to get by without those and transact business. He made several attempts to contact IC for the supply of these items, but received no reply. Without catalogues it was nearly impossible to make any impact on clients and shoddy photocopies presented a poor picture of the organization. He commissioned one of his friends, a graphic designer and had the catalogues printed. At this stage, he sensed that he was relying on his personal relationships and network increasingly for getting his work done.

In June 2003, early one morning two good-looking Chinese girls in their early 20s arrived, unannounced. Hu told Dilip that as per IC directive Mu was going to be cashier and Xiang the finance head. Within 15 days it was clear that both had no relevant qualification or experience. The work of the Chartered Accountant (CA) in the accounting and finance area badly required a functioning

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assistant, whom Dilip could not employ as according to IC there were already three persons in that department. After two months the frustrated CA left. Dilip employed a new CA with explicit caution that he had to bear with the Chinese staff without complaints.

At the end of the first six months of operation at IHIIPL, rental revenue of Rs.20 Lacs was generated, which Dilip remitted to HQ against the equipment imported from IC. The following week Hu told him that five Motor Graders were arriving at the Bombay port and IC was not sending any money toward custom duty payment. IHIIPL did not have Rs.55 Lacs, in just four months of operation, due as duty. Dilip had been a VP (Finance) with a leading Non Banking Finance Company five years ago. He contacted a couple of his ex-colleagues in the equipment finance channel and raised Rs.55 Lacs just in time for payment to customs. But he was very upset why IC could not convey such important news to him well in advance.

One of the IC products, Motor Graders, required frequent replacement of the wearing parts that were heavy and uneconomical to order by air. Dilip had been telling Hu to ask IC to ship these by any container loaded with equipment for IHIIPL, as there was ample space around the equipment inside the container and the freight charges remained unchanged. This would have been the best way to get the bulky and heavy wearing parts from China free of freight charges. Months passed and the customers’ complaints mounted as parts failed to arrive. Initially, Dilip simply got the wearing parts welded and managed the situation. Getting no answer and help from IC, he commissioned one of his known suppliers to fabricate those items locally and within a month had sufficient inventory of spares at a price lower than IC for comparable quality. “For other parts I and my Indian engineers located sources and over a short period we were nearly independent of IC,” Dilip recalled. “But how IC never wondered about the lack of need of any spare part in India continued to baffle me a lot.” He wished to pick up the phone and talk to someone in IC, but the language barrier stopped him. At least the

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situation was manageable and he could satisfy his clients. More importantly, the business was picking up and now he began to receive sales inquiries.

In August 2003, Yong, the International Sales Manager of IC visited India for three days. Dilip had worked very hard on his presentation to Yong, and was keen to discuss his detailed notes on issues hampering smooth operation in India. After breakfast, however, Yong announced that he was off to Goa, and would talk to him later. Dilip never saw him after that. He was left wondering whether these people were really interested in resolving issues that hampered the growth of business in India.

In September 2003, Hu drew Rs.15 Lacs from IHIIPL. This created unexpected fund shortage disrupting EMI to the Kotak Bank from whom IHIIPL borrowed money to pay import duty. In order to avoid the cheque bouncing back, Dilip put in his own Rs.8 Lacs as Hu simply did not refund the money. Of course, Dilip recovered his money next month, but decided not to pledge his money again. He wondered if anyone at IC was even aware of this and other major issues that bothered Dilip.

The rental business had picked up in full speed by now. Of the two equipment introduced, the Concrete Pumps proved to be a roaring success but the Graders had more than their fair share of problems. Dilip managed Grader problems by localizing the spare requirement and his major Rentals clients were contemplating purchase for their next projects. By the end of 2004, Itsun as a brand name became known to clients who mattered and Dilip was looking forward to shifting gears in 2005 from being a predominantly Rental company to equipment seller status. (Annex 3: Pump sales in units and revenues at IHIIPL)

Dilip is Joined by Lei

In December 2004, Lei and his wife Yu Wan walked into his office at 8 pm straight from the airport. Yu Wan spoke in an imperious tone heard by everybody that her uncle was the owner of the company and now her husband was the boss.

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She advised everybody sternly to spend less, earn more revenue for the company, and work 24 hours a day.

Lei immediately set about taking out all the past records of expense made and spent a week with his wife poring over all vouchers. A week later Dilip was called and grilled insolently on small matters. While he was explaining reasons for the expense, Yu Wan told him angrily that she knew that Indians were taking a minimum of 10% kickbacks on all transactions. Dilip left the discussion by saying that they could take charge of purchasing to compare the prices they could get from the suppliers and check with suppliers if 10% kickbacks were possible.

He was now thinking that his company had given him a very different impression in the beginning. As an employee he had to face the ground reality now; whether palatable or not.

In the meantime, news started filtering from IC grape- vine that Hu had misappropriated a lot of money from IC Dollar account, sold spare parts in cash after showing them as warranty replacement, and was being fired after the assessment of pilferage was complete. Consequent to that three separate audits of IHIIPL account were carried out. To Dilip it appeared as if they were his personal audits as he was requested to remain available at all times for 10 days to answer queries. After hundreds of questions on minute detailing of business operations conducted by Dilip till now, no irregularities were found. The Leis did briefly appear embarrassed for their suspicious attitude towards Dilip, but Dilip felt deeply discomforted. The Leis now terminated the auditor on the grounds of his suspected cover-up on malpractices. A new auditor was hired, but Dilip was not involved at any stage in the recruitment.

A typical feature of rental equipment business is that construction companies resort to hiring for short durations and to meet peak load requirement. Thus, the equipment is shifted every six months or so, and transportation occupies the largest expense in rental business. Especially, the Motor Grader transport is an expensive one as it requires flat bed 40 feet trailer and one way transportation can cost anywhere between Rs.60 to 90 thousand. The Leis now suspected

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malpractices in dealings with the two transporters used for the last two years. The Leis asked the transporters to reveal malpractices in their dealings with IHIIPL or face cancellation of their contracts. The transporters denied any malpractice whatsoever, and opted for canceling their contracts instead. The Leis did cancel their contracts, but were forced to reinstate them after three months, as they could not get the same terms, rates, and service for the given volume of business with IHIIPL.

The transport activity had barely returned to normalcy and Kotak Bank informed Dilip that the EMI cheque had bounced. When Akash, the CA could not explain it satisfactorily, Dilip warned him that if it happened again, he would have no option but to fire him. At this, the Leis immediately countered Dilip and told Akash, that nobody could fire him without their permission, and that from then on he was not reporting to Dilip. A few days later one Chinese privately told Dilip that Akash had been promised an increase in salary and promotion if he could reveal any misappropriation that the Leis were looking for.

By March end, no malpractices were found within IHIIPL, and the Leis now turned to interrogate the suppliers. Some suppliers stopped transacting business with IHIIPL claiming unprofessional behavior and unacceptable attitude of the Leis.

The new financial year 2005 had started and the brand name was reasonably established and products accepted by Indian clientele. “Then I was told that the direct sales and marketing will be an overall responsibility of Lei. I was extremely surprised to hear that and then Lei explained that Hu had reported to IC that I was looking after only rental business and all sales were the fruit of Hu’s effort only. When I countered that claim, Lei told me to give a list of equipment I had sold by so that instead of giving commission on sales to Hu, IC could pass that money to me. But I never got the commission. At that moment it struck me that money had been the only consistently good thing here — I was making much more than my counterparts in the industry. Despite all the cacophony, it seemed a good enough reason to stay at IHIIPL. I needed the money badly,

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my daughter was studying Engineering (Rs.2.7 Lacs/year), and I was making a house of which a housing loan of Rs.30 Lacs was outstanding.”

In the beginning of 2004, IHIIPL was fourth in ranking in concrete equipment and had become number two within a year. Dilip had sold machines worth US$6 million, which was more than was expected. IHIIPL had more Motors Graders in the field than any other more famous suppliers. In spite of the shortage of inventory and service personnel, Dilip had managed to keep the show going.

Dilip compiled the financial performance result of last year and PBIDT (Profit Before Interest, Depreciation and Tax) and presented to Lei to demand his bonus of five months basic salary amounting to Rs.3 Lacs, as per the terms of employment. After waiting for one month for bonus and no talk of increment in salary, Dilip wrote his resignation letter, put it on Lei’s table, and went home. Three days later, he received a call from the office that his cheque was ready. He collected his cheque and resumed work, but made no attempt to recover his resignation letter. Tickets for two to attend the grand ceremony of awarding the certificates of honor to all the 30 awardees by the Chairman himself, at the headquarters, were lying on his table, but he had decided to open the couriered letter after he returned from his interview with a German company that intended to enter the market next year.

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Annex 1. Itsun China: A Brief Profile*

Full Name: Itsun Heavy Industry Limited (known in the industry circle as Itsun China)

Year of Establishment: 1988

Registered office: Wuxi, China

Spread of operations: China, India, Thailand

Activity: Manufacturing and selling of construction equipment

Products: Concrete pumps, rollers, excavators, Motor Graders, Pavers, Placing Booms, Mixers and equipment for batching plants among others

Turnover: % Growth in last five years

Assets: US$613 million in June 2005

Employee Strength: over 5000

Distinction: In 2003, the company was ranked among the “China 2003 Top 50 Operation Performance Corporations” with main business income up 112.08% year-on-year; net profit up 54.77% over same period of the year before last.

*Profile details have been altered in order to protect the idenity of the company.

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Annex 2. Itsun India

(a) When Dilip joined

(b) Itsun India by the end of 2004

Hu Dilip, Country Head

Vishwas, Manager — India

Itsun China

Dilip Roy, Country Head Hu, Regional Manager

Sales Manager, Mumbai Dealer North Delhi Accounts Officer Managers, Various

Sites

Annex 3

Year Schwing Greaves Putz CMC 2004 300 100 50 10 2005 350 120 100 135

(A) Pump† Sale in India (Unit Sale)

(B) Revenue at IHIIPL

Year 2003–04 2004–05 2005–06 (Amt Rs.) (Amt Rs.) (Amt Rs.)

Sales 4,645,191 20,343,071 124,519,972 Rental 13,042,614 24,748,337 31,749,728 Other income‡ 247,000 972,568 15,529,310

17,934,805 46,063,976 171,799,010

†Pumps constitute a major source of revenue for IHIIPL. ‡Other income excludes commission on business which goes to CMC directly for payment through LC. This does not reflect in IHIIPL books as turnover.

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