SME Entering China A Mission Impossible?

Equity Joint Venture in Zhejiang Province Finnish partner –medium-sized private enterprise –garment industry –25% Chinese partner –state-owned enterprise (SOE) –chemical industry –75%

People’s Republic of China

The Path of the Joint Venture Start-up Phase –1993 Negotiations and establishment – Construction, training in Finland, installation, test drives –1996 March, full production Operation Phase Termination Phase 1999 Wholly foreign-owned enterprise 2000-

Motives motives, partner selection and JV negotiations typical to Sino-foreign JVs and also internationally motives: –FI: low labour cost –CN: new technology and management, new jobs, large Chinese market

Partner selection mutual ignorance - consultants used (Finnish and Chinese) mutual visits guanxi related to the selection of the location

Negotiations long according to Finns short if compared with the average – less than one year difficult to set the price on intangible assets (technology) negotiations resembled an epsilon eating and drinking big celebrations when the company was established – building local guanxi

∞ Negotiation Styles Epsilon and Knot Rope ∞ In the beginning A few years later

Control 25/75% ownership Finnish partner satisfied because of a smaller investment (SME approach) the interests of the minority partner were secured by the partner contract –minority partner could control the ”life and death” assets, i.e. prices and customers –nomination of the chairman of the board

Construction and Operation Phase greenfield operation, first in the county construction of the factory JV’s responsibility (Finns involved) one factory was closed down in Finland and shipped to China in fifty containers operations supervised by Finns

Conflicts efficiency and work ethic language and communication hierarchy –opportunism, cheating, colonial attitude or negligence of the workers’ welfare were not reported, unlike in many other JVs

Efficiency and Work Ethic efficiency, salary system – strike sleeping taking responsibility difficult –young managers –unclear chain of command –horizontal communication non-existent –fear of punishment ”traffic lights”

Language and Communication direct – indirect communication –concept of a lie –communication patterns –six shades of an agreement interpreters both useful and complicative language loops middle management as cultural shock reducer

Communication Patterns, example Compli- cation Direct order from Finns Solved by mutual consent Backstage meeting Finns as backup Overruling Giving up Silence Resolution desired by Finns Resolution desired by the Chinese Giving excuses Compromise

Six Shades of an Agreement Agreement Acts as agreed Acts as agreed but complicates other issues Acts as agreed but starts negotiating again later Acts as agreed at first but returns to the old behaviour later on Acts differently No action Resolution Problem solving continues

Language Loops Finnish Chinese Finnish-English English-Chinese Finnish-English- Chinese

Cultural Shock Reducers Board of Directors Finnish Chairman of the Board Chinese General Manager Chinese Vice General Manager Finnish Vice General Manager Chinese middle management Finnish managers Chinese supervisors and group leaders Chinese workers

Termination Termination untypical to Sino-foreign JVs –reason: modernisation of the Chinese partner, not poor performance –initiated by the Chinese partner –negotiations in mutual consent mainly by or phone

Wholly Foreign-owned Enterprise 100 % Finnish control + almost 100 % of delegation of decision-making power to the Chinese -> significant improvement of the operations -> significant improvement in communication and taking responsibility Transfer of high technology (wearable technology i.e. intelligent clothes) to China

Some Guidelines for the Future Know the country, laws and customs Make friends, build guanxi Be patient and calm Using chopsticks makes life much easier Moving into central and western provinces –lower labour costs –better government incentives –a small company can be important –bigger problems with culture and infrastructure China looks for high technology –not the best target for basic production