International Business Case Studies For the Multicultural Marketplace

Robert T. Moran,David O. Braaten Ph.D.,John Walsh, D.B.A.

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136012655
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This comprehensive guide presents specific, real-life examples of the strategies and tactics used by some of the world's most successful international businesses and organizations to excel in the global marketplace. Divided into six major sections, this important book features more than 30 case studies that span critical issues of international business--globalization; negotiation; marketing; product/service quality; joint ventures and strategic alliances; and culturally diverse workforces. Each case study focuses on a particular company, region, or management style to clearly illustrate proven techniques for capitalizing on the cultural diversity of people, products, and markets. With contributions from more than two dozen business executives and professors, spanning the globe from Japan, to Germany, China to Mexico, this casebook provides a broad spectrum of current and future approaches to acheiving international and cross-cultural business success.

GLOBAL STRATEGIC ALLIANCES

Chapter 1 The New China Hotel in Beijing

Yuen Ching Karen Lee and Su-ging Wang

DOI: 10.4324/9780080511306-1

The New China Hotel

Spring 1987 in Beijing, China was unusually cold, ironically appropriate considering the icy state of relations between Peter Morris and his company, the Asian Development Corporation (ADC), and its Chinese joint venture partner, the Yellow River Tourist Service (YRTS) for the New China Hotel (NCH) project. After years of futile attempts to salvage the alliance, Morris, vice-chairman of the board of directors of the New China Hotel in Beijing, had just settled an agreement with his Chinese counterparts to withdraw ADC’s equity investment in the hotel.

Close to a decade later, he still vividly recalled the day the Foreign Investment Commission in the People’s Republic of China broke the news of the venture to the Asian Wall Street Journal. In December of 1979, the commission announced its informal approval of the New China Hotel alliance between ADC and YRTS. Ecstatic upon receiving permission to pursue the project, Morris considered this a major success, because it was one of a rare handful of large joint ventures allowed in the early days of China’s “open-door policy.” By 1985, however, soon after the hotel unofficially opened, ADC reluctantly opted to relinquish its interest in the project. Two years later in 1987, the company finally ended a series of long, bitter negotiations with YRTS and reduced its investment to a mere 10% from its original share of 51%.

Stealing a last glance at the glittering glass wall facade of the hotel before departing for Los Angeles, Morris remained convinced that the joint venture had been a sound strategic decision for ADC, one in line with the company’s desire to enter the Chinese market. He was at present, however, reevaluating the decision-making and negotiation process to identify any miscalculations and false expectations that may have contributed to the grave problems ADC encountered, particularly those related to the deeply implanted Chinese bureaucracy.

China's Open Door Policy

The end of the 1970s marked a significant change in China’s economic strategy with the government’s implementation of a new “open-door” policy. Prior to this, the nation adhered to a strict program of import-substitution. Few goods and services were imported, and international trade was severely curtailed, except limited trade activity with Western Europe. Trade between the U.S. and China was, for the most part, non-existent. Foreign investment was discouraged, the economy was centrally-planned, and little, if any, private ownership was allowed.

In the late 1970s, China announced a new open-door policy that welcomed and actively sought foreign capital to finance modernization projects. Foreign investments were evaluated and approved based upon their ability to attract the foreign currency, Western technology, and management skills the Chinese needed to revamp the economy.

In the early stages of this relatively liberal policy, joint ventures emerged as the most common structure of foreign investment projects, because this form allowed Chinese partners to gain management skills and access to new technology. However, the Chinese government severely restricted long-term and permanent foreign ownership. Generally, joint venture agreements ranged in duration from ten to twenty-five years, and foreign investors were prohibited from holding a majority interest.

Hotel Industry in China

Tourism ranked as an important sector of the open door policy due to its ability to generate foreign currency earnings to finance development of other industries. Existing hotel and tourism facilities, however, were underdeveloped and incapable of meeting the demands of growing numbers of tourists and business people. In response to the need for more and better hotels, several hotel chains rushed to China to propose projects.

New China Hotel

The New China Hotel, among the first world-class hotels in Beijing, the Chinese capital, opened in 1984. Prior to this, many guest houses and inns were available to local travelers; however, relatively few were equipped with facilities capable of accommodating foreign visitors according to Chinese government standards. Beijing Hotel, despite its poor amenities and limited services, was the best available. The Diaoyutai Hotel, which surpassed the level of comfort and service offered by other lodges, was reserved for government and foreign officials.

To be jointly constructed and managed by ADC and YRTS, the NCH project was designed as a 1,000-room luxury hotel with seven restaurants and delicatessens. Located within a ten-minute drive to the city center and situated on the road to the airport, the hotel was built to attract both tourists and business travelers.

The Asian Development Company

The Asian Development Company (ADC) was owned by the Asian Investment Corporation (AIC) and Webb International Corporation, both U.S.-based companies. AIC, formed in April 1979 and owned by the Bergel Group of Companies and Eastern Construction Company, specialized in consortium joint ventures and compensation deals in China. The Bergel Group, a pioneer with more than thirty years of experience in project development in the former Soviet Union and Eastern Europe, extended its business into China in 1978. When the deal with YRTS to construct the New China Hotel came to fruition in 1979, AIC engineered a consortium to establish ADC, the entity that eventually entered into the 49% equity joint venture with YRTS for the New China Hotel.

Peter Morris, executive vice-chairman and general manager of ADC, participated as a member of the negotiation team involved in the initial meetings with YRTS. Reflecting later upon ADC’s enthusiasm in the early stages, Morris noted the company’s expectations of an excellent return on its investment due to considerably lower construction costs, cheaper labor, and forecasted inflows of hard currency immediately upon the hotel’s opening.

The company was confident that it could draw on its previous success in similar hotel projects in such socialist countries as Hungary, Rumania, Cuba, and the former Soviet Union. In fact, its experience, acquired through years of dealing with the business practices and mentalities ingrained in planned economies, constituted the company’s greatest competitive advantage in the bidding process.

Project Negotiations

The Bergel Group, neither large nor an international hotel chain, won the right to pursue the project amid strong competition from several competitors, including Hilton and Inter-Continental. According to the Foreign Investment Commission, which approved the YRTS-ADC joint venture, size factored only nominally in the decision; instead, the terms a foreign partner set forth were crucial.

Project Team

In late 1978, ADC assembled a project team comprising several members with expertise in diverse areas related to the venture. The crew consisted of Peter Morris, several experienced negotiators, a project manager, a construction manager, several design experts, a project finance expert, and, most importantly, two China experts. Most team members possessed extensive experience in project management in Eastern Europe, and many spoke Chinese and were familiar with Chinese culture. Of the two experts, both overseas Chinese-Americans, K.C. Tung, chairman of the Eastern Construction Company, was born in China and educated in the U.S. The other, David Chen, born and educated in the U.S., lived in China for several years prior to liberation.

Morris later commented on Tung’s and Chen’s negotiating skills: “We understood that the Chinese regard modesty as a virtue, and that many Americans are often arrogant when conducting international business. They don’t realize that aggressive salesmanship does not work in China and, therefore, seem unable to comprehend why negotiations invariably stall. Be a Roman when in Rome; that’s why we tried our best to adapt to Chinese customs, regulations, methods and requirements.”

The China experts, through excellent connections in the government, soon found themselves acquainted with officials of YRTS, a state organization charged with promoting and regulating travel nationwide. Because of China’s dire need for additional, modern hotel facilities to develop its tourism sector, YRTS and the Beijing municipal government aggressively sought foreign investment and participation in hotel construction projects.

By February 1979, a few months after the ADC team initiated preliminary attempts to enter the Chinese hotel market, the company succeeded in securing letters of intent from both YRTS and the municipal government. According to these documents, ADC retained responsibility for administration of the financing, design, construction management, and foreign procurement activities. The Chinese partners agreed to provide the site, necessary Chinese government approvals, certain project materials, and hotel construction and operations labor.

Morris was thrilled about the letters of intent, until discovering that YRTS and the municipal government had signed similar documents with other hotel groups. In the U.S., these agreements constituted a commitment that both parties would work together until a deal was consummated or abandoned. To ADC’s dismay, in China, letters of intent were neither binding nor exclusive. A Chinese ministry might, as it appeared that YRTS and the local government had done, sign a similar letter with several companies.

Slow progress in moving forward to the next stage of the negotiations after the signing of the agreement spurred ADC’s realization that both YRTS and the municipal government were continuing to discuss proposals with other prospective partners. At this point, the importance of negotiating directly with the key decisionmaker and of structuring an extremely appealing offer struck the team. Tung and Chen immediately began delving into the layers of the Chinese bureaucracy and ultimately succeeded in identifying the general secretary of the YRTS as the official who held the true decision-making power.

Keys to Success

Acknowledging that a principal weakness in China’s attempts at modernization stemmed from an acute shortage of foreign currency, the ADC team focused on its ability to circumvent this problem. By designing its offer to successfully address this issue, ADC believed it would greatly enhance the probability of securing approval of the project.

In most centrally-planned economies, the central bank acts as the prime guarantor for repayment of loans to foreign lenders. However, as elsewhere in the socialist world, China’s hard currency reserves were quite limited. Thus, the Bank of China had proven unwilling to offer financial guarantees for joint ventures. In fact, numerous foreign companies had expended significant amounts of capital to develop, bid for, and secure projects in China, only to ultimately fail because they were incapable of gaining approval for foreign loans due to the bank’s refusal to act as guarantor.

Morris knew that the key to the project’s success involved ensuring ADC’s ability to secure financing, a lesson learned through the team’s collective experience in the former Soviet Union and Eastern Europe. Based upon previous joint venture proposals accepted by East European governments, the team’s initial plan emphasized the point that financing for the project would not involve guarantees from the Bank of China. Under the company’s plan, lenders would be assured that the partners would be held jointly liable for repayment of loans and that a steady stream of hard foreign currency earnings would be immediately directed toward debt service upon the hotel’s opening. These earnings would be received by customers who would be required to pay in foreign currency or “foreign exchange certificates,” a special form of exchange in China.

Furthermore, during an April meeting with the secretary of YRTS, the ADC team presented a unique proposal concerning interest rates to its prospective Chinese partner. To counter YRTS assertions that the prevailing world commercial prime lending rate was too high to attain governmental approval, ADC offered YRTS a lower fixed interest rate than the prevailing 8–8½%. The difference between this fixed rate and the variable global rate would be paid by ADC.

A crucial final decision remained at this point: selecting a partner for the project. In a centrally-planned economy, an influential and powerful partner offers significant advantages to a venture, including facilitating procurement and government approvals. After extensive consideration, ADC selected YRTS based upon the belief that, as a nationwide ministry charged with promoting and regulating travel in China, it would offer greater benefits than the municipal government. This view was later substantiated; YRTS swiftly obtained the required approvals from more than 25 various government departments, bureaus, and ministries.

The Joint Venture Contract

ADC’s efforts were rewarded in May 1979, at which time it signed a formal joint venture agreement with YRTS. Although binding, the document was subject to the terms of a final contract to be negotiated within five months. The size, class, and site of the hotel, as well as the method of cooperation, division of profits and losses and period of joint operation, were outlined in the agreement. The duration of the project was set at ten years; at the end of this period, ADC would be required to relinquish all rights of ownership to YRTS. The contract also described promises made by YRTS concerning certain guarantees related to the repayment of loans and the repatriation of profits.

In the early stages of the open door policy, China had not yet developed a comprehensive commercial law. Thus, a procedure to be followed in the case of a dispute between the two parties was also set forth in the joint venture agreement. The Chinese partner insisted, and ADC acquiesced, on the exercise of the principle of “mutual discussion and agreement” to resolve future conflicts. This meant that all disagreements would be settled in China under Chinese law.

The absence of an established commercial law fueled foreign skepticism concerning the methods that the Chinese would use to enforce “mutual discussion or agreement” However, ADC, enthusiastic about concluding negotiations and beginning the project, dismissed its reservations about the clause and proceeded to finalize the contract. At the time, Morris never dreamed that one day he would be haunted by the Chinese principle of “mutual discussion” to which he so easily agreed.

In October 1979, the final joint venture contract was signed. YRTS and ADC drafted contracts in both Chinese and English, both of which were binding. ADC employed its own lawyers and translators to ensure that the English contract was identical to the Chinese one...