homework 3

Introduction

For many Multinational Corporations, expanding their business into another country is a big decision, which means that the businesses need to learn a new whole style of negotiation (Volkema, 2010, p.1-2) and communication. Like it or not, culture plays an essential role in cross-border business negotiation and operation, businesses that are well-prepared before they start negotiation and operation will gain advantage and increase their odds to success in that particular market(s).

The American Bar Association actually recommends that businesses examine seven cultural factors and do background work in these cultural areas before attempting negotiations and business in a particular country, those seven factors are: language, environment and technology, social organization, contexting, authority, nonverbal behavior, and time concept (Jennings, 2012, p.216).

Feat Motor Company Background

Feat Motor Company is a major player in the world’s automotive industry; it was founded in 1920 and its headquarter stations in Detroit, Michigan. In the year of 2003, the Wall Street Journal reported that Feat Motor Company’s market share in the North America region was estimated at 15%, second place right after General Motor Company (GM), another American automotive company; Bloomberg reported in 2003 that global automotive manufacturer market share, Feat Motor ranked 8th with estimated 6% of the world’s market share.

Feat Motor initiated its global expansion and operation since 1975, and the first country the company chose was Canada, a neighboring state, then it gradually expanded and established its existences in Mexico, Germany, Russia, and Thailand over the course of two and half decades. China was always a market that the company wanted to appear to since 1990, with their economy blooming, middle class started surging, the opportunity and potential was just too great to ignore. However, the management of Feat Motor had very high level of hesitation and resistance to make a decision of entering the Chinese market due to high uncertainty of its political environment among other factors, which the Chinese government requires foreign automotive companies must work with a Chinese auto company, in a form of partnership, in order to gain permits to establish any manufacture plant within the Chinese border.

Before 2004, Feat Motor was trying to appear in the Chinese market by ship their products from its other manufacture plants, with extremely high distribution costs and tariff that imposed by the Chinese government, and the sales performance in the Pacific-Asia region was not good as the result. However, one of Feat Motor’s rival competitor—Volkswagen, a German auto company, took the risk and entered the Chinese market in 1988 by working with Shanghai Motors, a state owned Chinese company, the result of this partnership has stunned the industry. With the help of Chinese government in promoting, zoning, and other aspects of the operation, the Chinese market contributed Volkswagen’s global sales of 13% in 1990, the first year of the manufacture plant in action, and the success continued in the years after.

With Volkswagen’s story of success, many other major players of the industry started to follow the path—Suzuki, Toyota, and Honda, Japanese auto manufactures entered the Chinese market in 1992, 1993, and 1995 respectively; Citron, the French auto company stared its operation in 1999—all in forms of partnership with at least one Chinese automotive company, and all achieved levels of success in terms of profit. Feat Motor and other American companies like GM, were still holding back their operation in China because of their concerns over intellectual property protection, among other political issues.

In September 2004, Feat Motor’s sales stalled for several consecutive years, the management was looking for new ways improve their sales performance, and with long desire of sharing the Chinese market, William Vince, the CEO of Feat Motor made the big decision that starting the preparation to enter the Chinese Market.

Preparation

Because of the high uncertainty, Feat Motor’s management decided to do a thorough background study before taking any actions, regardless how other competitors performed and experienced in the same market. Feat Motor formed a team to do the background and cultural study of Chinese market, and initiate their negotiation and operation based on those studies. The study team followed the recommendation of the American Bar Association, did cultural research on seven aspects: language, environment and technology, social organization, contexting, authority, nonverbal behavior, and time concept (Jennings, 2012, p.216); and also especially studied China’s political environment due to the high level of government/political involvement in business operations.

Negotiation

The decision of thorough preparation and study of the culture paid off in both negotiation and operation. With better standing of Chinese culture and its political structure, Feat Motor started off in a good place.

At first, Feat Motor management decided to choose Chang An Automotive Company (CA) to partner with for several reasons: CA has long history that is similar to Feat Motor, CA’s headquarter is located in the central south of China, a city called Chong Qing, where is in the middle of the world’s third largest river—Yangtze River, a major hub with convenience in water, air, and road transportations; and also, Chong Qing is municipality that directly under the central government, the city government is at the same level of other province governments, which can eliminate some level of political and bureaucratic barriers. With good understanding with China’s political structure and environment, Feat Motor initiated their negotiation and proposal to the central government in Beijing, the nation’s capital city, instead of went to the local government because the management knew and understand how much power and influence the central government has in decision making, and also as shown of respect of the political hierarchy.

In prior to the actual negotiation, with the understanding of that Chinese culture is very long-term focusing compare to the American culture, high-contexting culture that values relationship building, and the culture is very self-conscious, has high value of “looking good”, and the customers are very brand driven. Therefore, in the proposal, the task team considered those factors as much as important as many other realistic aspects, such as the increasing of employment and revenues. March 1, 2005, the negotiation starts. William Vince, the CEO of Feat Motor Company arrived at Beijing to meet with government representatives, as shown of respect because he understand that China has high power distance; also in the proposal, Feat Motor focused on its brand value, and all the benefits come out of it, also a 10 year and 20 year plan that focus on the long-term operation in China and show willingness of building relationships.

The meeting in Beijing went well, with the blessing and the “go ahead”, Feat Motor moved the negotiation down to the city of Chongqing. In this round of the negotiation and proposal, the management focused on the actual figures, like the employment and revenue contributions, which can help the government “look good” among other provinces and to the central government, as well as Feat Motor’s well-known brand and its value also make the government look good and as shown of capability.

With the success negotiation in government level, the rest fell into place naturally, because the company that Feat Motor want to partner with is stated owned, with the agreement Feat made with central and city governments, the partnership was formed in the end of 2005 as 50/50 joint venture, the management of CA did not really have much to say in the decision.

Communication

With government’s helps in zoning and regulation, the partnership begins, and the actual operation then took place. Feat Motor and Chang An (FMAC) had the ground breaking of their first manufacture plant in March 2006, and first car off the assembly line in January 13, 2008. Although the increase in sales was expected, but the reality was even better: the actual sales of China market was 25% higher than the projection in the year of 2008, and the sales continued increase of 20% in 2009. With the profit this attractive, Feat Motor started its rapid expansion at the beginning of 2010 in China: one transmission plant and one engine plant break the ground in 2010, another assembly plant was under construction in 2011, and Feat Motor started another transmission and engine plants in 2012, and all of them are located in the same city—Chong Qing.

Understanding of the culture and effective communication helped Feat Motor in the process of expansion and day-to-day operation. With the understanding of highly centralized management style in China, Feat Motor made compromises on many aspects of the operation, followed many other companies footsteps of “this is how the business has always been in China”, for example, Feat Motor let CA in charge of the construction bidding, but has the management closely monitoring the process and financial aspects of the construction project; Feat Motor also adopted Chinese standard of safety regarding the construction process. In order to promote effective communication and eliminate cultural barriers, Feat Motor hires employees who have cross-cultural background that have experiences in similar type of work in China.

With effective communication played one part, and the huge market potential and profit played another, this partnership is growing stronger and stronger as the sales increasing every year. And as benefited from and knowing how important government relationship played in the operation, Feat Motor’s public relations strategy also pays great attention to maintain good relationship with government officials in various levels.

Results and What’s Next?

As of the third quarter of 2014, Feat Motor’s market share in China was estimated 6.7% percent, 1.7% increased from 2013, and ranked 3rd in the foreign company category right after Volkswagen and Toyota; sales increased in China also helped Feat Motor’s global market share rise to 9% and ranked 7.

With promising sales projection in the next five years, Feat Motor management needs to decide what is their next move. As until know, the large amount of revenue Feat Motor received was used in investments of new plants, but when the certain level is reached, Feat Motor will stop its expansion in China, how the company is going to take the money out of China? As business people well known that Chinese government is closely monitoring and regulating the businesses activities, and China does not have a free capital market. Will the next round of negotiation with high level of government officials be the terms of moving the revenue money out of China? This is the problem that Feat Motor is facing or will be facing in the near future.

References:

Jennings, M.M. (2012). Business: Its Legal, Ethical, and Global Environment. (9th Edition, p. 216-220). South-Western Cengage Learning: Mason, Ohio.

Volkema, R.J. (Dec. 2010). Understanding Initial Behavior in Chinese Negotiations: An Examination of Distinctions across Three Regional Subcultures. International Negotiation 16(2011), p. 229-248.