2 Conflicts in Sino-European joint ventures

International Management inChina Cross-cultural issues

Edited by Jan Selmer

London and New York

© 1998 selection and editorial matter, Jan Selmer; individual chapters,the contributors

First published 1998by Routledge11 New Fetter Lane, London EC4P 4EE

This edition published in the Taylor & Francis e-Library, 2003.

Simultaneously published in the USA and Canadaby Routledge29 West 35th Street, New York, NY 10001


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Contents

List of figuresList of tablesNotes on contributorsPreface

1 Introduction: cross-cultural management in ChinaJAN SELMER

PART IPartnership management

2 Conflicts in Sino-European joint venturesGUOLIE ZHU, MARK W.SPEECE AND STELLA L.M. SO

3 Team conflict managementZHONG-MING WANG

4 Learning modes in international joint ventures in ChinaNIKLAS LINDHOLM

5 Building trust for successful partnership in ChinaELIZABETH LI

6 Future Sino-Western strategic partnershipCHIANG-NAN CHAO, ROBERT J.MOCKLER AND DOROTHY G.DOLOGITE

PART IIHuman resource management

7 Human resource management practices in international jointventures versus state-owned enterprises in ChinaMALCOLM WARNER


8 Recruitment and retention of managerial staff in ChinaROBERT McELLISTER

9 Performance appraisal in ChinaCHERRIE J.ZHU AND PETER J.DOWLING

10 Reward systems for local staff in ChinaVIVIENNE W.M.LUK AND RANDY K.CHIU

11 Strategic human resource management: expatriate managersin ChinaJAN SELMER

PART IIIManaging communication, cooperation and negotiation

12 Effective management communication for ChinaWILLIAM B.CHAPEL

13 Interpersonal cooperation in Western subsidiaries in ChinaVERNER D.WORM

14 Confucian connections in ChinaROSALIE L.TUNG AND IRENE Y.M.YEUNG

15 Chinese and Western negotiator stereotypesGILBERT Y.Y.WONG AND RAYMOND J.STONE

16 Chinese negotiation strategies and Western counter-strategiesCAROLYN BLACKMAN

17 Sino-Japanese negotiations in ChinaMANTAKA KANAYAMA

18 Conclusions: current issues and emerging trendsJAN SELMER


Contributors

Carolyn Blackman is Director, Centre for International Business, Universityof Ballarat, Australia. She is serving as a member of the Australian-ChinaBusiness Council and Chamber of Commerce and the Committee forEconomic Development of Australia. She has consulted on themanagement of technology transfer and cross-cultural relationships toAustralian and global companies. Her book Negotiating China: CaseStudies and Strategies was recently published by Allen & Unwin.

Chiang-nan Chao is Associate Professor, Graduate School of Business, StJohn’s University, Jamaica, New York. He has established executivetraining programmes for Chinese high level managers and been invited tolecture to several Chinese corporations, government ministries anduniversities. He has published over eighty-five articles, books, bookchapters, conference papers and cases. His research interests are inperformance evaluation and international business. He is recently workingclosely with the China State Council to assist state-owned enterprises intheir operations.

William B.Chapel is Lecturer, School of Business and Economics, MichiganTechnological University, USA. His doctoral dissertation and researchinterests are in the area of international management communicationcompetence with an emphasis on US and Asian relationships. He is activelyinvolved in various professional organizations and is an interculturalmanagement communication consultant to international organizations,government units and publishers.

Randy K.Chiu is Head of the Department of Management, School of Business,Hong Kong Baptist University, Hong Kong. He has been working as apractitioner, educator and consultant in the HR field for sixteen years. Hisresearch areas include human resources management, personnelpsychology and cross-cultural management.

Dorothy G.Dologite is Professor of Computer Information Systems, BernardM.Baruch College, City University of New York. She has written ten booksand over 100 articles published in internationally renowned journals. She


has lectured and consulted worldwide, including in Argentina, Canada,China, Egypt, Germany, India and Russia, and has taught MBA courses atuniversities in Malaysia, Shanghai, Xian and Beijing.

Peter J.Dowling is Foundation Professor of Management and Executive Dean,School of Commerce and Law, University of Tasmania at Launceston,Australia. His current research interests include the cross-nationaltransferability of HRM practices and strategic HRM. He has co-authoredthree books: International Dimensions of Human Resource Management,Human Resource Management in Australia and People in Organizations: AnIntroduction to Organizational Behaviour in Australia. He has also writtenand co-authored over twenty-five journal articles and book chapters.

Mantaka Kanayama is a Professor of Business Information Management,Yokohama Soei College and a fellow at the International Asia Institute. Hehas written and edited six books in the areas of development andcharacteristics of Chinese management. He is an active researcher andconsultant to firms in ASEAN and other Asian countries.

Elizabeth Li is a consultant specializing in organization development andstrategic change management issues. She has been consulting in the PRCand has visited various government departments and enterprises in theprocess. She has delivered papers at conferences and seminars, and co-authored and contributed to books. She is currently researching for a bookon foreign investment enterprises (FIEs) in the PRC.

Niklas Lindholm is affiliated with the Research Institute, Swedish School ofEconomics and Business Administration, Helsinki, Finland. He is currentlyworking on his doctoral dissertation dealing with learning processes withinhuman resources functions in joint ventures in China. He has been workingfor a European MNC’s joint venture operation in Beijing, PRC.

Vivienne W.M.Luk is Associate Professor, Department of Management,School of Business, Hong Kong Baptist University, Hong Kong. She is alsoAssociate Director of the Business Research Centre (Consultancy andTraining) as well as Director of the Wing Lung Bank International Institutefor Business Development at Hong Kong Baptist University. Her areas ofresearch interest include women in management, cross-culturalmanagement, work-family interface and human resource management.

Robert McEllister is affiliated with the Asian and International Studies,Griffith University, Australia. The working title of his PhD thesis is‘Management Recruitment and Retention Strategies from Small to MediumForeign Enterprises in China’. He had worked in the Australian miningindustry for fifteen years before returning to academia.


Robert J.Mockler is Professor of Business, Graduate School of Business, StJohn’s University, Jamaica, New York, USA. He is Director of the StrategicManagement Research Group and its Centre of Knowledge-Based Systemsfor Business. He has authored and co-authored forty books andmonographs, some 100 case studies and over 200 articles, book chaptersand presentations.

Jan Selmer is Professor in the Department of Management and ProgrammeDirector of the Cross-Cultural Management Programme at the David C.Lam Institute for East-West Studies, Hong Kong Baptist University, HongKong. His research interest is in cross-cultural management with a specialfocus on China. He has published nine books and numerous journalarticles, book chapters and monographs. His book ExpatriateManagement: New Ideas for International Business was published in 1995by Quorum Books, USA. His new book Vikings and Dragons: SwedishManagement in Southeast Asia was published in late 1997. In August 1996,he organized and chaired the world’s first international academicconference on Cross-Cultural Management in China.

Stella L.M.So is Senior Lecturer, Chinese University of Hong Kong, HongKong, where she teaches marketing and advertising. Ms So gainedextensive experience in the marketing research and media industries inHong Kong and Europe before joining academia, and maintains contactsthrough consulting work. One of her main research and teaching areas ismarketing and advertising in China.

Mark W.Speece is Associate Professor, Asian Institute of Technology,Bangkok and Visiting Professor, Bangkok University, Bangkok, Thailand.He consulted from a base in Hong Kong for five years before moving toThailand in 1994. He has extensive experience working with Western firmson Hong Kong and China and helping Chinese firms with exportmarketing. Much of this work was with joint ventures in China.

Raymond J.Stone is Associate Professor, Department of Management, HongKong Baptist University, Hong Kong. He has over twenty-five years’experience in international human resource management. He has heldsenior positions in Australia, Hong Kong, Japan and Korea. He has taughtat universities in Australia, Japan and currently in Hong Kong. He is theeditor and co-author of several books, and has been quoted on negotiatingand doing business in Asia, expatriate selection and failure, internationalcompensation and industrial relations.

Rosalie L.Tung is the Ming and Stella Wong Professor of InternationalBusiness, Simon Fraser University, Vancouver, Canada. She is one of theleading experts on cross-cultural management in China. She is the author


of eight books and numerous articles published by the top scientificjournals of the world. Besides cross-cultural management in China, herresearch interests include various aspects of international management andorganizational theory. Her research has been cited in leading internationalnewspapers and news magazines, including the International HeraldTribune, Business Week and the Wall Street Journal.

Zhong-Ming Wang is Professor and Dean, School of Management, HangzhouUniversity, People’s Republic of China. Professor Wang is also the Vice-President of Hangzhou University. He is an editor, associate editor and memberof the editorial board for several leading Chinese, East-Asian and internationaljournals. His main research areas include cross-cultural organizationalbehaviour and human resource management, personnel selection/assessment,team dynamics, organizational decision-making, leadership, organizationdevelopment and international joint venture management. He has publishedseveral books and more than 100 articles at home and abroad.

Malcolm Warner is Professor and Fellow, Wolfson College and Judge Instituteof Management Studies, University of Cambridge, Cambridge, UnitedKingdom. He has written several books on management in China, such asManagement Reforms in China (1987), How Chinese Managers Learn(1992), The Management of Human Resources in Chinese Industry (1995),and China’s Trade Unions and Management (1998).

Gilbert Y.Y.Wong is Director, Research Degrees Programme, School ofBusiness, University of Hong Kong, Hong Kong. His main researchinterest is in the cross-cultural comparison of management and businesspractices in Asia. He has also undertaken extensive consultancy work forlarge corporations in Hong Kong and multinational corporationsinternationally. His specialities are in staff opinion surveys, organizationaldevelopment, management of multicultural work force and businessdevelopment in Asia.

Verner D.Worm is Research Assistant Professor, Asian Research Unit,Copenhagen Business School, Denmark. He has studied Chinese languageand philosophy and Chinese economics at the Peking University. He haspublished two books and co-authored and contributed to others.

Irene Y.M.Yeung is an MBA graduate of Simon Fraser University, Canada.Formerly, she was a personnel specialist at IBM China/Hong KongOperations, Hong Kong.

Cherrie J.Zhu is affiliated with the Department of Business Management,Monash University, Australia, where she currently is lecturing. She hadpreviously lectured in a tertiary institute in Nanjing, China. She is a


doctoral candidate at the University of Tasmania, working on the topic ofhuman resource management systems in China.

Guolie Zhu is the International Coordinator, Far East Advertising, Bangkok.He is a native of Shanghai, China, and has spent five years as a manager atthe major Chinese company CITIC, with responsibilities in the area ofinternational business. The topic of his MBA thesis at the Asian Institute ofTechnology was Sino-European joint ventures.


2 Conflicts in Sino-Europeanjoint ventures

Guolie Zhu, Mark W.Speece andStella L.M.So

INTRODUCTION

Since the early 1980s, global business, including major auto companies, haveviewed China as a very attractive emerging market. In 1993, China’s ratio ofauto ownership was the lowest of any major country in the region. There wereover 680 people per car, compared to 131 in the Philippines, 70 in Thailand, 7 inSouth Korea and 3 in Japan (Business Week, 1994). Not surprisingly, automakers from Europe, USA, Japan and Korea all flocked to enter the market.

As in other industries, equity joint ventures (JVs) became the prime vehiclefor entry. From the late 1980s until 1994, nearly two-thirds of contracted directinvestment projects have been joint ventures (China Statistical Year-book,1995). The Chinese government had a clear preference for JVs over the othertypes of foreign investments, such as contractual joint ventures and whollyforeign-owned operations. Foreign investors also often viewed equity JVs as alower risk means of market entry regardless of China’s requirements. SomeSino-foreign joint ventures have been very successful, but many have not donewell. For example, one-third of Japanese JVs responding to a recent surveywere not profitable (Hirano, 1993). The foreign business communityperiodically discovers that performance does not always match the hype of theChina market enthusiasts. Since 1979, there have been three cycles of optimismfollowed by pessimism. Recent literature has mentioned many problems,though much of it is optimistic and does not concentrate on problems(Baumgarten and Rivard, 1991; Wharton, Baird, and Lyles, 1991; Newman,1992a, b; Beamish, 1993; Glaister and Wang, 1993, 1994; Hirano, 1993; Huand Chen, 1993; Itoga, 1993; Woodward and Liu, 1993; Zhang, 1993; Pan,1994; Tsang, 1994; Imai, 1995; Speece and Kawahara, 1995).

Automobile joint ventures are often considered among the more successful.China has targeted the industry for rapid growth, and forecasts production ofpassenger cars in 2000 at over three times 1994 levels. Virtually all of thisproduction will come from JVs. Given these favourable conditions and strongsupport by the national government, have auto JVs been able to avoid commonproblems, or have they prospered despite problems? We used in-depthinterviews to look at operations in four Sino-European JVs. These four JVs


accounted for two-thirds of passenger car production in 1994, and are projectedto account for 71 per cent by 2000 (Table 2.1). In Europe, we talked to the topmanagement of European parent companies. In China, we met with the topmanagers of Chinese parents, and with European and Chinese managers in theJVs. The research took place at the end of 1994 and in early 1995.

THE CHINESE AUTO INDUSTRY

China envisions the automotive industry becoming one of the ‘pillars’ of theChinese economy. It may well become a very important industry, despite theslowing down and difficult conditions in 1996. The auto industry has grownrapidly from 1979, when it opened up to foreign participation. The share ofpassenger cars in auto industry output has also increased from almost nothing toabout 20 per cent of unit output in 1995. In 1981, total domestic production ofpassenger cars was only 3,000. By 1995, this had risen to 320,500, compared to755,000 trucks and 374,000 buses, or about 1.5 million vehicles totalproduction (Min and Sun 1989; Financial Times, 1996).

Several domestic passenger car models, produced in small quantities priorto 1979, were completely outdated and have mostly disappeared. China stillhas over 700 domestic producers, but few actually produce their own enginesor chassis. Most buy these from the smaller number of producers andassemble their own versions of vehicles. Nearly all passenger car output nowcomes from joint ventures with foreign auto makers. By mid-1994, onlyeight Chinese plants were allowed to make sedans. All were joint ventures, and

Table 2.1 Production of passenger vehicles by Sino-European joint ventures

SVW=Shanghai Volkswagen Automobile CompanyFVW=First Automobile Works (FAW)-VolkswagenGPAC=Guangzhou-Peugeot Automobile CompanyDCAC=Dongfeng-Citroën Automobile Company

Sources: Economist Intelligence Unit; DRI World Car Industry Forecast Report, April 1994.


included two Volkswagen plants (Shanghai, Changchun), Peugeot(Guangzhou), Citroën (Wuhan), Suzuki (Chongqing), Daihatsu (Tianjin),Subaru (Guizhou) and Chrysler (Beijing) (Min and Sun, 1989; China TradeReport, 1994; Zhang, 1995).

Some other plants which produce other vehicles, such as pickups, buses andtrucks, also include joint ventures, notably General Motors, which producespickups, and Daewoo, which produces buses. Many other major autocompanies are in China producing car parts in JVs. They want a part of theindustry, and China has made it clear that when the freeze on new plants isended, it will favour companies that already participate in helping Chinese autoparts producers upgrade. Even if not producing in China, many companies haveestablished service centres to service imported (including smuggled) cars (CTR,1994; Zhang, 1995).

Beijing maintains close watch over the industry. A ban on new car plantswas implemented in 1994, because Beijing wanted the industry toconsolidate around a few major groups. The ban was to end by 1997. In1996 China announced that only car companies that manufacture with atleast 40 per cent local content would be allowed to operate in China.Companies that continue to simply assemble kits will be required to close. Ithas been policy all along that auto makers should aim for this 40 per centlocal content, but the time period for achieving the goal and enforcementhad been somewhat unclear. Several major producers still rely upon kits,including Chrysler’s Beijing Jeep venture. However, the four Sino-European JVs discussed here have no problems under this new ruling (AsianWall Street Journal, 1996).

The passenger car industry is not yet based on sales to individualconsumers: 80 per cent of cars sold in 1993 were bought by stateorganizations, 19 per cent by non-state companies, and only 1 per cent byindividuals. Very few consumers can afford a car. In 1993, a Santana sedanmade at SVW cost about nine times the average urban worker’s salary. Someanalysts expect that prices will fall in the future as scale expands and as localcontent increases. (Others are not sure that local content will lower pricesbecause of high local costs to achieve required quality.) However, to copewith the problem now, car manufacturers have introduced leasing andinstalment purchase schemes (CTR, 1994).

In 1996, Beijing suspended instalment purchase schemes, as part of its driveto cool off the economy. This prevented consumer sales from getting off theground. A tightening of credit hit the ability of companies to buy cars.Exorbitant taxes continue to drive prices up, though these will gradually declineas China implements measures to conform to WTO rules. In addition, anestimated 100,000 to 200,000 cars smuggled in 1995 escaped taxes, and furtherdepressed the market for legal cars. As a result, car manufacturers in 1996 wereoperating about half capacity. Stocks of unsold vehicles were 116,000 cars inthe first half of 1996. For example, one of the Volkswagen plants (FVW inChangchun) scaled back production to 24,000 in 1996 from a planned 50,000


Jettas, though it also produces about 10,000 Audis. It is not clear that FVW cansell even this scaled back output (FT, 1996).

Sagging sales may retard plans to increase output of the automotive industryto 2.7 million units by 2000, including 1.2 million cars. The freeze on newplants, which was to have ended by 1997, may be extended, although there havealready been several exceptions made, by contract, if not yet in actualoperation. Most observers regard these setbacks as temporary, and view thegovernment’s attempts to achieve a soft landing for the economy as largelysuccessful. Thus, it is likely that the auto industry will be back on track within afew years. It remains a cornerstone of Beijing’s policy for upgrading Chineseindustry, bringing in modern technology and management expertise (Zhang,1995; FT, 1996).

THE FOUR MAJOR SINO-EUROPEAN AUTO JOINTVENTURES

In 1993, there were about 427,000 passenger vehicles sold in China (includingimports), of which 48.9 per cent were Volkswagens. Another 17.5 per cent camefrom the two Sino-French JVs discussed here. There are two separateVolkswagen JVs in China, which are located at Changchun (northeast China)and Shanghai. Two French JVs are also major players in the Chinese autoindustry. The French have preferred smaller ownership shares than theGermans. However, in terms of actual operations, they have implementedstrategies similar to those of Volkswagen. Technology transfer, extensivetraining, strong orientation toward quality control, and strong marketing,including service networks, have all been part of operations. By any standardmeasures, all four of these JVs seem to be doing quite well.

Shanghai Volkswagen Automotive Company (SVW)

The SVW was established in 1985, between Volkswagen of Germany (50 percent), Shanghai Automotive Industry Corporation (25 per cent), China NationalAutomotive Industry Corporation (10 per cent). Several smaller Chineseshareholders, including the Bank of China, hold the remaining shares. Theoperations include three plants, which produce VW Santanas and car engines.By 1993, production exceeded 100,000 cars, with sales of RMB 10.5 billion.According to one source, by 1995, production was up to 170,000, and theSantana had captured 58 per cent of the sedan market (AWSJ, 1996; FT, 1996).SVW is still expanding, and hopes to reach annual capacity of 300,000 cars andto set up a new engine plant soon.

SVW has established a widespread sales network and over 220 authorizedservice stations. In 1993 alone, sixty-two of these authorized service stationswere established. SVW works closely with suppliers so that, by 1994, local


content had exceeded 80 per cent. Rigorous quality assurance and frequentprogrammes to uncover problems and upgrade quality in SVW plants, amongsuppliers, dealers and in service stations, have all resulted in upgraded qualityand service. A key aspect of this has been extensive training throughout alllevels of SVW, suppliers, dealers and service stations. Evidence of strongcustomer satisfaction shows in the continued strong growth in sales in the lasthalf of 1993, a time when economic slow-down caused most auto producers toreduce production because of slow sales.

FAW-Volkswagen Automobile Company (FVW)

FVW is 60 per cent owned by First Automobile Works and 40 per cent byVolkswagen. Set up in Changchun, Northeast China, to produce the VW Jetta, italso produces some Audis now. FVW began production in 1991, with only 156cars, but production rose very rapidly to over 8,000 the next year, and anestimated 44,000 by 1994. However, as noted above, production was scaled backin 1996 to about 24,000 Jettas and 10,000 Audis due to poor economic conditions.

FVW aims at first class quality, first class service and competitiveness in cost,all while increasing local content. To achieve this, FVW is helping local suppliersupgrade to meet required quality standards. By 1993, FVW had already reachednearly 20 per cent local content. By 1994, it had signed approximately 100 lettersof intent with local suppliers, about ninety-five agreements for trialmanufacturing of parts, and more than fifty agreements for trial assembly of parts.FVW also has been setting up a strong after-sales service network, helpingestablish and upgrade service stations and spare parts distributors. Extensivetraining has been a key component of all of these activities. In the first two yearsof operation, nearly 3,000 employees went through training programmes ineverything from production to quality control to servicing.

Guangzhou-Peugeot Automobile Company (GPAC)

The company was launched in the mid-1980s by Peugeot (22 per cent) andGuangzhou Automobile Group Company (46 per cent). China InternationalTrust and Investment Corp holds 20 per cent, and French banks and financecompanies hold the remaining 12 per cent. GPAC manufactures 504 and 505Peugeot pickups and sedans. Production started off slowly, with only 940 unitsin 1986, the first full year of manufacturing. Production was only 5,666 cars by1990, but reached 30,000 units in 1993.

As did Volkswagen, GPAC set up its own network of after-sales maintenancestations. It also worked hard to upgrade local suppliers, and had achievedalmost 60 per cent local parts and components by 1993. To support theseefforts, Peugeot conducted extensive training in China, and sent many Chinesemanagers and technicians to France for training.


Dongfeng-Citroën Automobile Company (DCAC)

This second French-Chinese JV was established in Wuhan between China No. 2Automobile Works (Dongfeng Automobile Company; 70 per cent), and CitroënAutomobile Company (25 per cent). French banks own the remaining 5 percent. Dongfeng is China’s largest producer of medium-sized trucks (185,000vehicles in 1993; CTR, 1994), and regards this JV as a key component in itsefforts to upgrade technology and maintain a position as one of China’s majorautomotive companies. The company is licensed to produce 300,000 passengercars eventually, though the time frame for this target is unclear.

DCAC makes Citroën ZX cars, and produced about 6,000 in 1992, its firstfull year. Production has grown slowly, and stood at 25,000 in 1994, against apreviously announced target of 100,000, though the JV is also planning toproduce 200,000 additional car engines. DCAC claimed to have achieved localcontent in its autos of 75 per cent by 1993.

KEY CONFLICTS IN THE JOINT VENTURES

Despite relatively good performances by these JVs, there are a number ofserious conflicts between the European and Chinese sides. Most of the conflictsrevolve around four key issues: control of various functions in the JV andmethods of control; personnel management and quality of the labour force;technology transfer; and localization of content. Generally, there is agreementamong the German and French managers about issues, and among the Chinesemanagers, who usually differ from the Europeans about causes of problems.Most often, each side believes that it is the other side which causes most of theproblems.

Some Chinese regarded many problems as arising from the Europeanmanagement style and European attitudes about China. They contrasted theirexperience working with Europeans with perceptions they have about Americanor Japanese managers, who are the other main foreign players in the autoindustry. (These perceptions were usually not based on actual experienceworking for an American or Japanese auto producer.) They viewed the culturalgap between Europeans and Chinese as largest, between Japanese and Chineseas smallest, and between Americans and Chinese as somewhere between theseextremes.

Control

This was one of the most critical issues to both sides. One Chinese manager at aFrench JV felt that the company was ‘very weak in generating new ideas,improving the product and performance’. He believed this was because orderswere handed down from top management (which is mainly French), and did not


take into account lower levels of the organization, or shop floor employees, oreven customers. This, in his view, was the reason for poor efficiency and lack ofquality consciousness among workers. Some Chinese managers at theVolkswagen JVs also mentioned similar views.

There was a strong feeling among Chinese managers that the Europeanmanagement style was very authoritarian and rigid. Many also felt that theEuropean managers were quite arrogant, believing that the European way wasautomatically best. Chinese managers felt that the European managers alwaysjust wanted them to do things the European way, regardless of whether it fittedthe situation in China. Some of them contrasted this with their perceptions thatAmericans were more flexible, and that Japanese managers were somewhateasier to deal with. Another thought this might be because the Europeans haverelatively little experience in China compared to Americans or Japanese.

However, the Europeans did not think that they controlled much. OneGerman manager noted that the JV lacks any real authority over marketing. TheChinese government gave authority for marketing, including exclusive rights todistribute the JV’s autos, to a state company. He claimed that

‘it is true that we have our own marketing department, but we are just doingvery simple documentation for the company. We are not even allowed todeliver cars to some customers unless we get exceptional permission fromthe top.’

French managers similarly believed that real control resided with the state, andthat the European side had little real authority over marketing aspects such asproduct line, distribution or pricing. One manager explained: ‘In China, largecompanies are owned by the Government. Strategic decisions tend to be madeoutside the company itself, which is basically a manufacturing unit aimed atproducing a centrally determined number of items.’ Another French manageradded that ‘distribution is frequently regulated by…“guanxi”…[connections]and corruption’.

Even Chinese JV managers agreed that the JV sometimes had little control.‘Pricing is normally regulated and completely controlled by the ChineseGovernment, say Central Pricing Bureau’, one Chinese marketing managerexplained.

‘We can hardly make any decisions or changes regarding the productwholesale and retailing price by ourselves. Our responsibility and duty isonly how to upgrade the product quality and increase the productivity andoutput. Actually, we have suffered a lot from China’s traditional centralplanning economy.’

Corruption is a big factor which tends to reduce influence of the JV managers,because it substantially limits their ability to operate. One of the Frenchmanagers noted that Chinese bureaucracy often tends to be rooted in nonmarket


and culturally conditioned ways of behaviour. Personal connections andcorruption are more important than law, and the French partner has to either livewith that or stay out of China. According to him, this is all terribly costly in bothtime and capital during the period of JV planning, negotiation, initiating andlaunching. The extent of this problem was far greater than initial expectationand imagination had anticipated.

Personnel management

The European managers agreed that managing Chinese staff and workers wasone of the biggest challenges encountered in China. Problems werecompounded by the fact that this is another area where the JVs do not havemuch control, and where connections and corruption play a big role. Europeansthink that most workers are unskilled and lack education. Far too many areappointed to positions or delegated tasks for which they were not qualified andhave no prior experience. These unskilled workers have poor efficiency, lowproductivity, no motivation, poor discipline and they lack any qualityconsciousness.

One French manager summarized these views:

‘It is amazing that there are so many employees with terribly low educationand technical training…. According to local labour law and employmentregulations, we have little flexibility or choice in recruitment. …[Workers]are poor in discipline, weak in work motivation, and have little qualityconsciousness. We cannot easily hire good human capital or fireunqualified people. We face difficulties enforcing the company’s rewardand penalty system. Furthermore, the corporate recruitment system hasbeen heavily eroded by corruption and negative influence fromconnections.’

According to European managers, the problem is further compounded by thefact that there were too many unqualified Chinese managers assigned to thejoint venture, who generally oppose any change. They were typically partycommittee members recruited from rural, military and political organizationswhich were completely unrelated to the managerial needs of the JV. Becausethey know nothing about the industry or about modern management, theytended to be conservative and bureaucratic, resisting change and avoiding anydecision or responsibility.

Such personnel problems extend into all spheres. For example, Europeanfinancial managers regard managers trained in the Chinese accounting systemas essentially useless for modern financial and accounting needs. Local Chineseaccountants, on the other hand, regard the Western accounting system asdifficult. ‘We are not accustomed to extensive computerized calculations andcompilation, or the concepts which are in Western accounting books.


Obviously, under the Western accounting system, we need further training andeducation.’

On the Chinese side, the main personnel problem was that the European sidemainly sent technical people who did not know much about managing.However, even the European managerial people who came to the JV had noknowledge of China, and were not very quick to learn. Some Chinese said thatAmericans were much more managerially oriented, with less emphasis ontechnical people. Sometimes American managers did not know anything aboutChina either. However, they were quicker to learn because they regardedsmooth management as very important, and believed that making things worksmoothly would require some degree of adaptation to the situation in China.

Technology transfer

Technology transfer was a factor that was an important problem to both sides,but for different reasons. For the Chinese, the purpose of the JV is access toforeign capital, advanced technology, management know-how and state-of-the-art product and production process. However, some Chinese managers werequite dissatisfied. They complained that supplying blueprints and technicaldocuments and providing manufacturing machinery and assembly lineequipment was not sufficient. The most important part is organizing activitiesduring the transfer in an understandable manner. Without extensive instruction,it is quite difficult for Chinese technicians and shop-floor workers to graspbasic ideas regarding product and process in automobile manufacturingtechnology.

Several Chinese managers mentioned that European policy was to send onlya few Chinese back to the home plants in Europe for training. Then these peoplewere supposed to come back to China to train more people in the plants.According to some, the Americans sent more people to the US for training, andthey felt this was more effective in upgrading the skills of the Chinese. Theysaid that the Europeans were much more strict than the Americans in choosingwho to go. However, this may relate to language capability. Some mentionedthat Chinese preferred to go to the US for training, partly because more of themhave some English language capability.

Despite complaining that they have difficulty grasping the technologywhich has been transferred, many Chinese managers also complained thatEuropeans do not transfer the most advanced technology. One Chinesemanager who has worked in both Volkswagen JVs believed that it is basicallythe German side’s fault that the plants are not ready to compete ininternational markets. They do not have the most advanced technology andare not set up to produce a wide variety of models with state-of-the-arttechnology, so they cannot compete.

Chinese managers at the French JVs also want to introduce more models intothe market. One noted that China is no longer a homogeneous market, but rather


has many segments. He wants active product development and a wider varietyof models, as in Europe. The Chinese managers also want to move away frommass production toward lean production and shorter production lines, so theycan compete globally. They feel that the French partner has dumped massproduction technology onto China because it is becoming outdatedinternationally.

The Chinese generally believed that the Europeans want to controltechnology and prevent China from getting the most advanced technology.They said that Europeans are very inflexible in negotiations about the issue oftechnology transfer, and that the restricted training, mentioned above, keepstransfer slow. They believe the Americans are more flexible about transferringtechnology, and more willing to help the Chinese upgrade, but that the Japaneseare even worse than the Europeans.

The Europeans tend to think they are transferring technology as fast aspossible under Chinese conditions. One said:

‘We believe that we are quite strong in terms of technology developmentand management know-how. We really make an effort in teaching ourChinese partners. However, we confront many difficulties in technologytransfer because of communication problems, weak cooperation by localmanagers, different management style, and a large number ofunmotivated, poorly educated employees. Poor performance intechnology and management transfer directly affects efficiency,productivity, product quality, and the urgently demanded localizationprogramme.’

The sheer scope of what is needed in China’s auto industry caught some of theEuropeans unawares:

‘After we initiated this project, we found that the local automobile industrywas not only technically backward, but a complete mess: poor horizontalcommunication and coordination, barely usable machinery and productionfacilities, terribly few technicians, and a huge unskilled labour force. Worstof all, all these problems now belong to us.’

Localization of content

European managers view localization as a painfully slow process ‘because ofinability of the Chinese partner to upgrade quality of its parts and components’.Technical levels in the Chinese automobile, chemical, metallurgical,machinery, electrical, instrumentation and spinning industries are low, andcannot currently meet the standards of the JVs without substantial help. Themanagers think localization requires investment, planning and coordinationacross a range of industries. By one estimate, RMB 1.5 billion will be needed to


purchase licences, technical expertise, machinery and equipment from outsideChina which will allow parts suppliers to upgrade to meet quality standards.

One VW feasibility study estimated that the local content programme wouldhave to involve 181 projects at ninety different factories, sixty-three of whichare situated within Shanghai and twenty-seven scattered outside. Managing andcoordinating localization activities on this scale requires substantial supportfrom local and even central government. But European managers feel that theChinese side makes very little effort to support the programme. ‘We sometimeshave the feeling that the government does not care about it at all’, one managertold us.

According to one French manager, slow localization

‘is because of inability of the Chinese partner to upgrade the quality of itsparts and components. It results from many factors, such as poor localautomobile manufacturing equipment, machinery and plants; poorhorizontal cooperation and collaboration; an unskilled labour force withpoor quality consciousness. It does not necessarily mean that the Frenchpartner has not devoted its full efforts to the localization programme, forwhich the local Chinese partner always scolds us.’

Chinese managers do usually blame the Europeans for not moving faster inlocalization. Chinese managers at the German JVs admit that the Chinese sidehas been weak in supporting the programme. But in their view, this only makesit more clear that it is the responsibility of the German side if localization is tosucceed. They criticize using funds to buy imported components, claiming thateverything should be spent on upgrading the Chinese suppliers. And theGermans should commit even more venture capital and technology to supportlocalization.

One Chinese financial manager believed that ‘we need more and moreventure capital for project expansion and the localization programme. However,there are serious foreign exchange difficulties and capital shortages [in the JV]’.This respondent noted that the local and central governments have providedlittle loan and investment support after establishment of the JV. But henevertheless criticized the French side for not showing much effort andinvolvement in expansion or localization.

CONCLUSIONS AND RECOMMENDATIONS

To summarize, these four Sino-European automobile joint ventures all seem tobe doing very well. In terms of business objectives, they have rapidly expandedproduction to capture a large part of the passenger car market. Some of themactually return profits to parent companies, which is not very common in China.The JVs are helping to upgrade technology in the Chinese auto industry, andthey are achieving high levels of local content. On the surface, it might seem


that there is little room for conflict. Nevertheless, there are substantialdifferences of opinion between European and Chinese managers.

Conflicts seem to stem primarily from differing motivations whichinfluence how each side evaluates the situation. The Chinese partners seemto be involved in the JVs primarily because of government policy. On ageneral level, Beijing has encouraged economic reform and foreigninvestment. It has attempted to build good relations with Europe, whichgives European auto companies access. Some of the Chinese managers toldus that Chinese policy aims to balance Europeans, Americans and Japanese,because China does not want any one of these to gain too strong control overany Chinese industry. They regard the Americans as more flexible and morewilling to transfer technology than the Europeans. They regard the Japaneseas easier to understand and deal with. However, China must maintain astrong European presence, too, even if working with Europeans is moredifficult.

As part of economic development for China, the government wantsadvanced state-of-the-art auto manufacturing technology. This is part of a broadprogramme to diminish the technological gap between China and the West.Beijing also wants to rescue the big state auto companies as part of its overallplan to save the badly ailing state sector. It hopes eventually to make theChinese auto industry competitive internationally so that it can earn foreignexchange through exports. JVs are the main mechanism for achieving thesegoals. These policies translate into a number of incentives for Chinesecompanies to participate in JVs, such as preferential tax treatment, foreignexchange privileges and many other perks.

What seems to be missing from Chinese thinking, however, is anydetailed business analysis at the corporate level of why either side isinvolved in the JVs. The joint venture is an economic developmentmechanism for them, not a vehicle for corporate business. They arerelatively unconcerned about whether there is any return on investment forthe European partners or even for themselves. All they know is that China(and their company) needs capital, technology, training and that theEuropeans have agreed to supply this. The JVs are judged by most Chinesemanagers according to how much they contribute toward these goals, not byhow successful they are in a business sense.

The Europeans, on the other hand, are there to make profit in China’smythical billion-people market. The JV is a market entry mechanism for them,to help them share risk and deal with unfamiliar local markets. They want tomass produce with standardized production equipment and methods, andachieve economies of scale in the local market. They do not think the market isdeveloped enough to support very much product differentiation, with manymodels. Even if they become interested in using China as a base for exportproduction eventually, they have discovered that it is not possible to be verycompetitive internationally under current conditions.

Production is not as cheap as it might seem. Wages may be low, but labour


cannot currently produce anything which can meet quality standards oninternational markets. Managers do not understand modern management,accountants do not understand modern accounting practice, technicians do notunderstand modern technology which would allow the Chinese auto industry tocompete. The Europeans believe that upgrading will take years. It is not a matterof simply signing a contract and starting to use off-the-shelf state-of-the-arttechnology for export production next year.

In short, the Europeans are private business investors. They evaluate whetherpolicies make business sense, not whether they meet economic developmentobjectives. They see a huge and lengthy task in building up the Chinese autoindustry to world standards. While many of them want to help do this, it isbecause they see profit in it, not because they think it is their responsibility todevelop China. They apparently believe that the investment required to undulyspeed the process up cannot be recovered, and so they proceed at the quickestpace consistent with profitability.

No matter how successful the joint ventures seem, conflicts are unlikely todisappear. The Chinese side sees some conflict as coming from culturaldifferences, and contrast the Europeans with how the Americans or Japanese dothings. However, while it is true that the Americans and Japanese have differentmanagement styles, they seem to have similar problems. The differences inthinking we have discussed here do not come primarily from culturaldifferences (Hong Kong, Taiwanese and Southeast Asian Chinese firms facesimilar problems in China), but from differences in system and in motivation.Systemic differences give rise to the different motivations and thinking aboutthe role of joint ventures. These European auto JVs show that such differencesare not necessarily so great that they will prevent JVs from prospering. But theyalso show that success does not make differences disappear. These JVs havelearned to live with and progress in spite of conflicts.

Most JV partners in China are state companies. It is always useful, and oftennecessary, to rely upon the connections which these state companies have.However, companies that go into China must understand that, unless the JVpartner is private, the Chinese side will want very different things from JVs thanthe foreign private companies. To Chinese partners, the JV is primarily anelement of national development policy. It is for building China, not for makingprofit. The Chinese side wants the JV to bring in capital and technology, to trainlocal workers and managers, so that Chinese industry can upgrade itscapabilities. The JV is supposed to make China self-sufficient in the products ofthe JV, not require imported components forever. Eventually, they want Chinato be able to compete internationally.

At the individual level, the JV is also for building careers. However, statemanagers under the old system never got promoted for making theircompanies profitable. Market socialism under the reforms is still mostlysocialism, not market, for the state companies. Managers build careers in JVsby getting the foreigners to put in money, technology, and training to helpbuild a Chinese company. They get promoted for these things. There is little


reward for helping make profits which will partly go out of China to theforeign partner. Joint ventures in China can succeed, even by the profitabilitystandards of foreign companies. But success to the foreigner is not success tothe Chinese side.

Perhaps the Americans and Japanese are somewhat more clear than theEuropeans about the need to fit in with economic development goals. Forexample, Watanabe (1993), writing about Japanese auto company investment inChina, recognizes this fundamental difference in motivation between privatecompanies and the Chinese SOEs: ‘transfers of technology to China (byJapanese companies) have up until now often been decided on from aperspective totally divorced from pure business considerations’ (Watanabe,1993:7). This is fundamentally different from most other developing countrieswhere Japan is heavily involved: ‘The technological transfers made inSoutheast Asia all came as a result of careful consideration by individualcompanies which then decided to invest locally’ (Watanabe, 1993:10)

Kobayashi (1994) shows that Japanese companies have adapted verysubstantially to the Chinese viewpoint in order to do business in China. ‘Thefirst thing that is necessary in doing business or starting up an operation there iscommitment by the company itself to play a direct part in the development ofChina’ (Kobayashi, 1994:3). The Japanese company Kanebo responded bymaking these concerns its own:

Our basic stance in doing business in China has been, first, to contribute tothe modernization of China and the improvement of its level of businessmanagement and technology through joint ventures, technical tie-ups, andcompensation trade.

(Kobayashi, 1994:3)

Even so, Kanebo has faced demands, for example, to expand the product line.This need to adapt to Chinese development goals has also been expressed in

the American business press, for example:

As long as US firms recognize that economic liberalization in China isinstituted for the purpose of achieving the country’s economic objectives,there is ample room in which to find profitable areas of mutual interest. Thekey is to determine where a particular firm’s products or services can fit intoChina’s development plans.

(Miller and Speece, 1986:29)

Our interviews with Chinese JV managers seemed to show that Japanese andAmericans are somewhat more willing to adapt, but that the Europeans thinkmainly about business from the perspective of their private companies.

Foreign partners often just have to accept that there will be a certain levelof conflict. What the Chinese want is not always consistent with goodbusiness practice in the sense that most private companies view business. It


is important that foreign companies realize this. They must adapt to theChinese desire for rapid economic development, but not allow themselves tobe forced into providing so much to the JV that it can never return a profit. Itwould rarely be possible to provide the Chinese with everything they wantand remain (or ever become) profitable. However, the Chinese are quitepractical, if not always realistic about what the foreign side should provide.None of the Chinese we talked to in the Sino-European JVs ever mentionedthe possibility of closing the JVs. As long as the Chinese side gainssubstantial benefit and cannot get much more from other sources, the JV isnot likely to be closed down, even if the scale of the benefit is not quite whatthe Chinese would like.

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Documents

2 Conflicts in Sino-European joint ventures