Case Study:
A Breakdown in China
FROM Mike Graves's tall windows, which were draped in red velvet, the view of Shanghai was spectacular: the stately old Western-style buildings, the riot of modem skyscrapers, the familiar needle of the TV tower. But today Mike barely noticed it. Clenching a copy of his Chinese partner's proposal for another acquisition - it would be the company's fourth - he paced the floor and replayed in his mind that morning's unsettling phone call.
He had called his boss, Bill Windier, at headquarters in Ohio, hoping to get a nice quote to inject into the brief remarks he was to make at that day's banquet celebrating the joint venture's tenth anniversary. But as he gave Windier a quick rundown of what he intended to say - mostly about the joint venture's progress toward "world-class quality"- Mike could sense his boss's growing frustration. About five minutes into the call. Windier cut Mike off in midsentence, saying, "Don't throw your shoulder out patting yourself on the back."
Windier reminded Mike about the margins he was looking for across all of Heartland Spindle's businesses. "A 4% ROI is pathetic," Windier said. "We've been in there ten years, Mike. The numbers should look better by now." He said he was looking for a 20% ROI, adding that such a number could surely be achieved through greater efficiency and more automation. And in Windier's view, the company had at least 1,200 employees too many. "That needs to be fixed, fast," he said.
Mike knew his boss wouldn't take no for an answer, but he had also learned that his Chinese partners would never agree to drastic moves such as the layoffs suggested by Windier. It was beginning to look as though the five good years he had spent here as general manager might be destined to come to a painful end. Mike couldn't help but wonder if those harsh words from Ohio were a warning that his contract might not be renewed in six months.
Then, to top things off, just as Mike had extricated himself from the phone conversation, this latest acquisition proposal had arrived from deputy general manager Qinlin Li. The top executive on the Chinese side of the joint venture, Qinlin had been with the JV since its inception. As before, there would be almost irresistible pressure to go along with the deal. The Chinese side would make it clear yet again that the delicate partnership depended on Mike's support for continuous expansion and protection of jobs. The timing couldn't have been worse: The last thing Windier would want was more growth initiatives eating into the profits.
A knock on the heavy teak door snapped him out of his musings. Feng Chen, Mike's assistant and translator, informed him that his car was waiting.
Enhance Friendly Cooperation
As the car pulled up outside the Shangri-La Hotel, Mike forced himself to smile at the red carpet lined with dozens of lavish flower baskets sent by local government officials, business partners, suppliers, customers, and even competitors. A marching band in full uniform stood at the hotel entrance, and above it stretched a bright red banner that said, in Chinese and English: "Enhance Friendly Cooperation and Ensure Mutual Growth" and "Celebrate the Tenth Anniversary of Zhong-Lian Knitting Co. Ltd."
Mike exchanged greetings with Qinlin, who had been there for an hour already and was still seeing to last-minute details. In the ballroom, an elegant young woman in a red silk qi-pao, a traditional dress for formal celebrations, escorted Mike to the round table that was front and center. TXvo Chinese senior executives, Qinlin's immediate subordinates, stood up and nodded their greetings.
There was a burst of excited applause, and cameras flashed. Qinlin was accompanying three important government officials into the room. They approached Mike's table and politely bickered for several minutes over who should enjoy the most prominent seat at the table, as required by Chinese custom. At last, the eldest and most highly placed official accepted the seat of honor. Qinlin stepped up to the podium, above which hung a huge Chinese knot of red silk, the symbol of cooperation. There was an expectant hush as he tapped the microphone.
"Ladies and gentlemen" Qinlin began, "thank you for joining me to celebrate the tenth anniversary of Zhong-Lian Knitting Company Limited. Those who were with the company at the beginning remember the hardships we endured and the hard work we put in. Since the establishment of Zhong-Lian as a 50/50 joint venture between Suzhou First Textile Company and our U.S. partner. Heartland Spindle Company, Zhong-Lian has faced many difficulties and obstacles. But we succeeded" Mike was listening to the translator's words, but he could hear the passion in Qinlin's voice. "We turned a money-losing company into a money-making company, and we made great headway as a result of support from our government, efforts on the part of both parent companies, and all our managers and employees."
Mike hadn't been there during the early days, but he knew the stories. He was the fourth GM sent by Heartland in ten years. His two most recent predecessors had left before their three year assignments were complete, one for family reasons - his wife couldn't adapt to China-and the other for a better job offer (allegedly). Mike, a veteran manager with 20 years of international experience, had lived and worked in Japan, Hong Kong, and Australia before Heartland sent him to Shanghai.
Mike's toughest challenge at the outset was the language barrier. He wouldn't have survived without Feng Chen's help. It didn't take long for Mike to learn what cha-bu-duo meant: "almost okay." He hated that word! It was baffling to him: Even though his Chinese partners were intelligent and willing to work hard, they weren't exactly obsessed with quality. They cut corners and hardly ever followed operating procedures to the letter. Buttons often fell off sweaters before the garments were even shipped out of the factory. Cha-bu-duo is why Mike insisted on introducing total Quality Management to Zhong-Lian - and TQM was probably why the JV had been so successful. Mike had also felt a small sense of satisfaction when he taught his Chinese colleagues a new term: Six Sigma.
Cha-bu-duo wasn't the only expression Mike heard all too often. He also quickly got used ioyan-Jiu-yan-Jiu, which means "Let's review and discuss." When he proposed a new system to deal with sewage disposal three months after he started (he was astonished that his Chinese partner hadn't updated it already), his counterparts said, "Okay, yan-jiuyan- jiu." Two months later, after Mike's repeated prodding, the proposal made it onto a meeting agenda. But at the meeting, the Chinese managers seemed reluctant to discuss the matter, and no one wanted to assume responsibility for solving the problem. When Mike asked managers for feedback individually, they all had ideas, many of them excellent. He couldn't imagine why the managers hadn't spoken up at the meeting. It didn't make sense to him until months later, when Mike heard someone say, "Keeping silent in a group is safer. You won't get in trouble if you don't do anything. But you will get in trouble if you make a mistake. We are experienced under this system, and we know how it works." At any rate, Mike was relieved when the equipment was set up - even though it took two years and outside pressure from the provincial Environment Protection Bureau to make it happen.
There was another burst of applause. Qinlin's voice reverberated through the room. "We have acquired three money losing state-owned enterprises and managed to earn an annual profit of between 5% and 6%" he said. "The number of employees increased from 400 to 2,300 in the past decade. Given the slump of the textile industry in these years, Zhong-Lian's achievement is remarkable. In the coming years, we will further enhance the company and maintain our growth momentum."
Qinlin paused, and his eyes sparkled. "Let me tell you another piece of good news," he said. "We are preparing our fourth acquisition, which is expected to raise our production capacity by 40%. The number of our employees will grow to nearly 3,500. And all this will help us launch our next initiative: building our own national brand."
What little appetite Mike had for the celebration vanished. He had long been trying to quash that kind of talk. Heartland, he knew, would never support launching an apparel brand that would eat up resources and limit profits for years. Qinlin knows this well, Mike thought, so why is he raising expectations in such a public way?
Qinlin thanked the vice mayor and the other government officials without whose "wise supervision," in his effusive words, the joint venture would not have made such great progress. The vice mayor rose to speak and returned the compliments, praising Zhong-Lian's contribution to the local economy - especially to maintaining employment levels -and calling the joint venture a fiagship among the city's enterprises.
When it was Mike's turn, he too voiced the expected praise for the officials - it was a ritual whose airy forms and steely seriousness had become almost second nature to him. But throughout his little speech, he felt he was hardly doing more than going through the motions. He was preoccupied by Qinlin's plans and what they would mean for profitability.
Later, the lazy Susan at each table was filled with eight cold dishes, eight hot dishes, and two showpiece dishes: a whole suckling pig and a whole braised mandarin fish in the shape of a squirrel. Qinlin, as the host of his table, proposed a toast. Then he emptied his glass as a sign of his sincerity and joy. Glasses clinked; champagne and Coke bubbled. But Mike had become so attuned to the subtleties of these gatherings that he immediately noticed the response of the officials: Instead of emptying their glasses, they merely took sips. Mike supposed that they must have heard about his opposition, muted though it had been, to the expansion ideas.
Living in Style
Sitting in the backseat of the company car, Mike felt his tension ease when his river, Lao Li, turned into his neighborhood. The car slipped by a row of cypresses and passed a perfectly manicured golf course. Designed in European country style, the elegant Green Villa was an ideal residence for expatriates. Mike loved this village - its extensive recreational amenities, its first-class service. At very little cost, for example, Mike's family had hired a live-in domestic helper who happened to be a superior cook. His wife, Linda, played golf three times a week with her friends in the village, and she had recently taken up yoga. The company paid $7,800 a month to rent the family's home; it also paid for a chauffeur, a nanny, and the Children's EDUCATION AT Concordia International School (the best in Shangai). Life here was easy and comfortable - a world away from what it would have been like back in Ohio.
But Mike's tension returned when he thought about his meeting the next morning with the people at Hua-Ying, the potential acquisition. He wouldn't be living in Green Villa much longer if he signed off on that deal.
Over dinner, Mike told Linda about the conversation with Windier. "Don't they understand that the Chinese way of doing business is different from the American way?" Linda asked him sympathetically. "It's not all about squeezing the most out of your workers here. They value stability and long-term employment. You'd think Heartland would've been prepared for this sort of performance. It's not like you're losing money, like so many JVs here do. Just last week on the course, Christie and Maya told me that their husbands' businesses hadn't turned a profit yet."
"I know, but that doesn't seem to be good enough any more," Mike said. He recounted Bill's suggestions about layoffs and investing in more automated equipment. He knew that he would soon have to broach these subjects with his Chinese partners.
Mike's biggest problem was that he could see both sides. Heartland wanted to reposition itself in the U.S. market selling at discount stores wasn't profitable enough. But to enable Heartland to make the jump to high-end retailers, the joint venture would have to meet much higher standards of quality. Those old dyeing machines, for instance, would have to go; they had cost the company a lot of money over the last few years, not just in shipping and handling charges for returned products but also in terms of the company's reputation. New machines would fix that problem, but they'd create another one: Many jobs would disappear.
The Chinese partners were much more concerned with creating jobs and keeping government officials happy than with improving quality. They wanted to keep growing into new provinces and buying up unprofitable companies, even if turning them around took years. But expansion would require significant additional resources that Heartland Spindle clearly wasn't ready to commit. And now there would be pressure to create a new company to market a national brand, again a drain on cash.
"So what do you think you're going to do?" Linda asked.
"I'm meeting with executives from Hua-Ying tomorrow morning. Maybe they'll surprise me with an operation that won't take forever to turn around that'd be the best case," Mike said." After that, I'll have to talk to Qinlin and the others about Heartland's concerns. But I know how that conversation will play out. They'll say Heartland is being shortsighted and that the JV's history of turning around money-losing businesses should prove that we just need to be more patient.
"I wish Bill and the rest back in the States had a better understanding of how things work here. I was skeptical myself at the beginning. Remember when we first got here and 1 was fuming at the business expenses? Seemed like every executive on the payroll was wining and dining some key partner or contact. And Robert O'Reilly, our controller, came to me shouting that our Chinese partner spent money like water. But, gradually, we both figured out that those expenses were paying off for us. The Chinese ritual of sharing food-nurturing guanxi-is so powerful in making deals that it became one of our hidden assets. I'm afraid we won't get those kinds of results if we focus only on cutting costs and laying off workers, as Ohio wants us to do."
PowerPoint and Green Tea
The chief executive of Hua-Ying, Genfa Wang, sent his own limousine to pick up Mike and Qinlin as a symbol of his sincerity and hospitality. Genfa and his top managers were waiting at the gate when the car pulled up, and one of the men stepped forward to open the car door. Genfa greeted Mike, Qinlin, and Feng Chen with, "My honor! My honor! It is a great pleasure to have you here with us."
The first building they entered looked fairly clean, but the conference room carpet was pocked with cigarette bums. Not exactly a high-class operation, Mike thought. Up on the third floor, there was a disagreeable odor-no flush. He could just imagine the state of the plumbing. And hadn't leaky pipes been responsible for the initial spread of SARS into cities in Hong Kong? He was sure he had read something like that. His unease grew. What other hidden risks were lurking in this facility? There was no way he was going to be able to agree to this acquisition, he thought.
But he was pleasantly surprised to see seven cups of Bi Luo Chun tea, one of the best Chinese green teas, on an elegant redwood table. And a minute later, Genfa pulled out a laptop and began making his presentation using Power- Point slides. Mike was shocked. He hadn't expected such sophistication from a company this size, especially a company that seemed to lack modem sanitary facilities. Genfa, sensing Mike's reaction, said proudly,"My nephew gave me training on this high-tech stuff. He is a college graduate, a vice GM of our company in charge of technology and engineering."
Great, Mike thought with exasperation. There were probably a few relatives on the board, too. But his mood swung back during Genfa's 40-minute presentation as the CEO spoke precisely and clearly about the numbers-it was obvious he was shrewd about the market. Mike was intrigued.
At the second building, his earlier impressions were reinforced: The machines in here looked old and shabby. Some workers were busy, but others were idly waiting for a product delivery. Bales of goods were stacked high in one comer, and Mike stumbled over a box as he picked his way through the dim light. When he noticed that the record sheets on the desk and wails were handwritten, his heart sank: So much for high tech.
On his way home that night in his own company's car, Mike gazed out the window, trying to figure out what to do next. Should he recommend the acquisition to Bill? Should he propose rejecting the deal and thus probably bring an end to the partnership? The idea of buying out the JV had occurred to him, but it clearly wouldn't work, not with the Chinese partner dreaming of a national brand. When the Audi came to a stop outside Mike's house, he hadn't reached any conclusions. He knew he was going to have another sleepless night at Green Villa.
Can Mike keep the joint venture from unraveling?
Write your answer in 4 pages.