Case Analysis

Case Analysis

Case: Negotiating with Chinese Business Partners. 

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This case requires you to develop a negotiation strategy in a complex cultural context. While you may never be in a negotiation with a Chinese partner, the concepts and techniques can be applied to other negotiating contexts. The following are the companion articles:

a)  Graham & Lam (2003) The Chinese Negotiation, Harvard Business Review.

b)  Fang, T. (2006) Negotiation: The Chinese Style, Journal of Business and Industrial Marketing.

Please upload your case response (1000 to 1500 words total for all questions) to Canvas. Use 12-point, readable font (i.e. Times New Roman). Use double spacing and 1” standard margins.

Question:

1. Graham and Lam describe the importance of the Zhongjian Ren, or intermediary, in addition to a translator, in all negotiations with Chinese business people. Nowhere does the case mention that the EDC director had developed a Zhongjian Ren, or intermediary, to act as their go-between and guanxi manager for this case.

Was hiring Anne Cheung as a translator enough to ensure the deal progressed successfully? Why or why not? How would you improve the preparation and the handling of the meeting?

2. What should the EDC directors do now? Provide support for your response.

W16666

NEGOTIATING WITH CHINESE BUSINESS PARTNERS: WHAT ARE YOU GOING TO GIVE US? Stephen Grainger wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright © 2016, Richard Ivey School of Business Foundation Version: 2016-10-17

Europa IT Design and Constructions (EDC) was an international joint venture that took on design contracts and, in some cases, oversaw the installation of computer software and facilities for supermarkets, office blocks, hotels, apartments, villa complexes, and, in general, large buildings in Europe and North America. The directors of EDC were American Bob Michaels, Neil Fortheringham from England, and Pierre Truson from France; they had formed the information technology (IT) architecture, construction, and design company in June 2005, after having worked successfully together on two projects in Saudi Arabia. Since then, they had done all their contracting in Western environments, attracting a steady stream of work, mostly in the design and sometimes in the construction of IT systems for shopping centres and a portfolio of office buildings. After several years of growth, they had noticed an increasing number of their competitors venturing into the growing China market and, as a result, they had decided at a board meeting to direct some of their sales and new contracts staff to keep a watch on requests for tenders in China. Eighteen months later, in 2013, they had found themselves in a stalemate negotiating a contract in China that they thought had been finalized, settled, and ready to put into action. What mistakes had they made to arrive at this impasse? How could they have prepared better, and was there any way they could still generate a successful long-term outcome after coming so close to sealing the deal? BACKGROUND In June 2012, the designated EDC staff watching the market in China had seen a shopping centre project advertised in Hubei Province on a construction tender site on the Internet, and had enquired through the advertised online site to seek more details about the associated IT project, such as size, facilities to be included, materials sourcing, timetable for completion, managing authority, computer specifications, and so on. The Hubei government informed them that the project would be for three shopping centres in their province, with the target date for opening the third and final shopping centre in June 2015. Five months later, EDC had submitted some introductory drawings and specifications and received a favourable response from Wen Diao, minister for development in the Hubei provincial government. By

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This document is authorized for use only by Monika Thapa in SP20 Int. Business-1 taught by ASAD AZIZ, Colorado State University from Mar 2020 to Sep 2020.

 

 

Page 2 9B16M170 telephone, in broken English, he had introduced his assistant, English-speaking Zhang Gan, who was to be EDC’s official contact from then on. Zhang would source all of the information and specifications required by the tenders, meet all of their requests for more information, and be their contact point over the next six months. The EDC design slowly progressed with regular communication between both parties and several enquiries from the directors seeking confirmation as to when Zhang could confirm that their estimated costs were acceptable and whether they had won the contract. After eight months, they stopped work to await confirmation and were told by Wen three months later that the Hubei government wanted them to do the design, and that they would draw up a contract in the next few weeks. Michaels, Fortheringham, and Truson were pleased to receive confirmation of their first IT project in China, and they immediately placed two of their best subcontract designers on the project, restarted work, and had their lawyer forward the Hubei government a detailed copy of the standardized international contract they regularly used. This contract included timeline details, an account for a US$100,0001 deposit to be paid within three weeks, payment specifications detailing the next $450,000 installment to be paid when the IT construction began, the $450,000 to be paid after six months of commencement, and the final $450,000 upon completion. The total project was estimated at $1,450,000. Zhang replied to the contract after two weeks and said that before the Hubei government paid any part of the contract, they wanted the EDC team to come to China for the signing of the contract, and they wanted the EDC directors to meet the Hubei government consortium behind the project. This was a first-time venture for Truson in China, the second for Fortheringham, and the fifth for Michaels; they were confident that this trip and the associated meeting would merely entail signing the contract, having photographs taken by the media and government officials, and a request that the Hubei government present them with the first payment at the contract-signing ceremony. The EDC directors knew they would need a translator, and after searching online and through their network of business contacts, they hired Anne Cheung, a Hubei local with international experience, to be their translator. Cheung was an English teacher at one of the local universities and would translate for them during their visit. PREPARING TO SIGN THE AGREEMENT The final signing of the agreement was to take place at the government office in Wuhan, Hubei, by a small lake in the city. The signing was scheduled for 9:30 a.m. on October 18, 2013, with Jinyu Zhu and Tengan Tung, two officials they had not previously met, representing the Chinese government consortium (CGC) overseeing the project; the EDC directors were told the CGC’s role was to ensure all parts and conditions of the agreement were undertaken ethically and legally. The EDC team was advised to be there early, so they sent Cheung down at 9 a.m. to meet with the officials and prepare the meeting for them. Cheung arrived and was surprised to be refused entry to the building by the security staff that were at the gate. She explained that she was representing EDC and that the EDC directors would soon be there; however, the guards told her to move away. It was cold, and there were no restaurants or coffee shops near the government building, so she tightened her sweater and went for a brisk walk around the lake to keep warm. She arrived back at 9:30 a.m. to meet the EDC team. The guards at the gate were now very apologetic, as they had seen she was a part of the international team. If she had looked like a foreigner she would have 1 All dollars amounts are in U.S. dollars unless otherwise stated; US$1 = ¥6.1375 on June 30, 2013.

For the exclusive use of M. Thapa, 2020.

This document is authorized for use only by Monika Thapa in SP20 Int. Business-1 taught by ASAD AZIZ, Colorado State University from Mar 2020 to Sep 2020.

 

 

Page 3 9B16M170 been treated much better, but such was the mood in this part of China. She was a local, so her status was not as high or well-respected. The government representative met the four-person EDC team of Truson, Fortheringham, Michaels, and Cheung; invited them in to sit down; and brought them green tea. Many people were in the nearby vicinity; however, there was no sign of Zhu or Tung. The EDC team was informed they would be arriving shortly. Finally, at 10:25 a.m., Zhu and Tung appeared—two well-dressed gentlemen in suits and ties. After a number of introductory handshakes, ni hao,2 and acknowledgements, Cheung began to talk about how pleased the EDC team was to be awarded the IT contract and how they looked forward to working together. Tung and Zhu acknowledged the introduction and then asked Cheung whether the EDC team had brought anything to offer, or whether they were prepared to confirm the deal and sign the final contract. Cheung said she understood that everything had been finalized and that this meeting was just to sign the agreement and take some photographs for the local media. Zhu said a number of issues still needed to be finalized with them (party A) by the foreigners (party B) if the contract was to go ahead. He said that, as a result, they would have to leave the official government building, and they would all need to go to a restaurant for lunch to talk about this further. Cheung told the EDC team what they would need to do and hinted that she thought Zhu and Tung wanted them (the foreigners) to give them something as a gesture of friendship to confirm the deal. Zhu and Tung stood up, ready to leave, pointed at their driver, made some comments to their assistants, and left. The EDC directors were surprised, but then thought that the signing would take place at the restaurant, and everything would be fine. They asked Cheung about what Zhu had meant by, “What are you going to give us?” She replied that perhaps it meant some kind of gift. Truson was shocked and in disbelief, while Fortheringham and Michaels looked questioningly at each other and wondered what was going on. They thought they were here to finalize the deal worth $1.45 million and to collect the first $100,000 payment; however, they now found themselves being directed into their car and asked to follow the Chinese delegation’s car. Before leaving the car park, they noticed the number plate on the Chinese delegation’s black limousine had been covered with a sign reading, “Welcome to Wuhan.” They drove across to the other side of the city, following the black limousine, which seemed to cut a clear path through the traffic. The EDC team was unsure of what was happening; however, one of the directors, Michaels, who had some experience working in China, said they should be patient and wait to see what would happen. They arrived at the restaurant and noticed that the “Restaurant Open” sign had quickly been changed to “Closed,” that those enjoying lunch in a small room adjacent to the main dining room were moved to the central part of the restaurant, and that after they had entered this room, all the doors were closed and the window shades lowered. The EDC team was confused and began to worry; however, after another 15 minutes, Tung and Zhu entered the room. They sat down and called for the menu and a large ashtray, so they could smoke and prepare for lunch. They explained to Cheung in their local dialect that the foreigners were guests in China and needed to give the Chinese officials something in order to have them consider signing this contract. She explained to the EDC team how Tung and Zhu represented a large Chinese business conglomerate whose task was to ensure all of the foreign business done in China was done correctly, and how this contract would need their approval to be ratified. 2 Ni hao means “hello” in Mandarin Chinese.

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This document is authorized for use only by Monika Thapa in SP20 Int. Business-1 taught by ASAD AZIZ, Colorado State University from Mar 2020 to Sep 2020.

 

 

Page 4 9B16M170 The bottom-line message was, “What were the foreigners going to give us?” After being informed of this message by Cheung, the EDC team spoke among themselves for an extended period to buy more time. They wanted to go back and check through the agreements and dialogue they had made previously and perhaps find an appropriate gift. Before the food arrived, they asked Cheung to convey the message to Tung and Zhu that they needed more time to check the details. They suggested that perhaps a second meeting in a few days would give them time to check everything. After some considerable discussion among the Chinese officials, Cheung reported back to say that unless this situation was decided now, there would not be a second meeting of the two parties. The EDC team was surprised by these developments, as they thought everything had been finalized. The directors could see their significant deal slipping away; they had thought the officials were present only to sign the contract and hand over the deposit. Nobody had hinted that this might happen; Truson was disgusted and said they should pack up and go home. Fortheringham thought it must be a minor problem. He remembered that he had purchased three bottles of fine Scotch whisky from London’s airport duty- free store. He said he would go back to the hotel to get the bottles, and when he returned, he would present them as gifts. Michaels thought it was worth a try. Fortheringham left for the hotel while the room began to fill with smoke, and the Chinese officials waited for lunch to arrive. Michaels and Truson sat down with Cheung and the CGC delegation and asked Cheung whether she could tell them anything more about what was going on. What was the norm? Whom should they talk to about getting some more information? Cheung said she was not sure, as she had only been asked to do the translation. Did they have someone from their side, perhaps a Zhongjian Ren (intermediary) they could call? Michaels and Truson looked even more perplexed and sat back to await Fortheringham’s return. Forty minutes later, Fortheringham arrived back with the Scotch whisky as a gift; however, by this time, the banquet was in full swing with all of the Chinese officials enjoying a wide range of dishes and drinks. It seemed that whether or not the agreement was going to be signed, they were still going to enjoy themselves. Fortheringham sat down and asked Cheung to find out when would be an appropriate moment to present the whisky. She went to speak to Zhu, who immediately called for silence so that the EDC team could present their gifts. Fortheringham stood up and in English said that as a gift of friendship, they would like to present one bottle of this fine Scotch whisky to Zhu and one bottle to Tung. A nearby official took the third bottle and asked whether they should open it for a toast. At 1 p.m., the EDC team thought it a little early; however, the Chinese officials thought it was a great idea. From then on the Scotch drinking complemented the number of cigarettes smoked after the banquet was complete. The Chinese team was looking quite content, and they let Cheung know that they would call a second meeting the following week to discuss what the EDC team would give them to secure the contract. Fortheringham, Michaels, and Truson were again surprised and realized that the Scotch was not enough. They knew they needed to discuss this situation further before meeting again. The Chinese officials, party A, said they would notify Minister Wen and Officer Zhang (who were in Laos) about what had happened and would call the EDC team the next day to notify them when the next meeting would take place. THE SECOND MEETING Two days later, the EDC team received a telephone call at their hotel to say the meeting would take place five days later. The EDC directors asked why it would take so long; they would have to wait in this city where they did not know anybody, and their hotel bill was climbing. They began to wonder whether winning the $1.45 million contract was worth trying to sort out or wait for. Why were the contacts they

For the exclusive use of M. Thapa, 2020.

This document is authorized for use only by Monika Thapa in SP20 Int. Business-1 taught by ASAD AZIZ, Colorado State University from Mar 2020 to Sep 2020.

 

 

Page 5 9B16M170 had worked with from the beginning, Zhang and Minister Wen, nowhere to be seen? What were Zhang and Wen doing in Laos when the directors thought they were going to be here? They tried to contact them several times over the next few days but found it complicated to make contact in Vientiane, Laos. They hoped that the next meeting would be easier. They discussed what additional small gifts they could bring to pre-empt the meeting. Five days later, the directors and their translator were asked to assemble at another restaurant where they went through the same process of arriving on time and then waiting for more than an hour for Zhu and Tung to arrive. After presenting Tung and Zhu with some silk scarves from India, a long discussion began between Zhu, Tung, and Cheung. After 20 minutes, Cheung told the EDC team that to gain the Chinese officials’ approval, they would require something more. They said that a number of Zhu and Tung’s friends had spoken to them about a holiday in the Maldives and that such a trip would be an appropriate gift. The EDC team of directors was stunned and said they needed to discuss this suggestion and think about it. They all thought this trip was excessive, but as a last resort, after coming all this way and waiting all this time, they would consider it. They were quickly doing some calculations and thought they could transport and accommodate Zhu and Tung for a five-star, week-long holiday for approximately $5,000. Cheung told Zhu and Tung that EDC would be prepared to fly the two of them there and provide five-star accommodations for a week if they were prepared to sign the final contract that day. THE MALDIVES Another lengthy discussion in Mandarin took place between Zhu, Tung, and Cheung. At the end of the conversation, Cheung took a deep breath and began to translate what Zhu and Tung had said. They wanted the EDC directors to provide flights and accommodations for their entire 18-person CGC team. Cheung later added that she thought that by flying the 18 Chinese officials together, nobody would be left out, which would avoid anyone exposing how the trip had been arranged. It would look as if the trip had been a gift rather than a forced corrupt payment or bribe demanded from EDC, in return for having the contract finalized. The EDC team was shocked again. The three directors looked at each other. What should they do? They thought of giving the officials the choice of flying to Paris, London, or New York, as those trips would cost much less, and they could use their own social capital in those locations to negotiate significant discounts on the cost. After another lengthy discussion between Cheung, Zhu, and Tung, Cheung said the Chinese officials did not want to go to those destinations, as they could not speak the language. The EDC directors wondered why this same rule did not apply to the Maldives, as surely they could not speak the language there either. In an act of desperation, the directors asked Cheung if she, as translator, would be prepared to take the Chinese delegation to Europe, the United States, France, or even the Maldives. She said that she did not want to go with this Chinese delegation, as they were too demanding and disrespectful. After coming all this way and wasting all this time, what were the EDC directors to do?

For the exclusive use of M. Thapa, 2020.

This document is authorized for use only by Monika Thapa in SP20 Int. Business-1 taught by ASAD AZIZ, Colorado State University from Mar 2020 to Sep 2020.