Wyoff and China-Luquan: Negotiating a Joint Venture

Joint ventures (JV) are a popular method of foreign market entry since they theoretically provide a method to join complementary abilities and knowledge, along with a way for the foreign firm to acquire an expert's viewpoint on the foreign market. Because China began its market opening in 1978, joint endeavors have actually been the most typically pre-owned type of foreign direct investment (FDI), with about 70% of FDI in China in the 1980s and 1990s taking the kind of joint ventures (Qui, 2005, p.

47).

The Chinese company, along with the foreign financier, has actually since 1978 been drawn to the joint venture kind. Walsh, Wang & & Xin (1999) note that from the Chinese viewpoint, "the joint venture type of governance was viewed as a particularly attractive method of absorbing foreign capital, advanced innovation, management abilities and access to export markets, while at the exact same time, enabling some state control over the attendant unfavorable impacts that could accompany such outside influence" (pp. 69-70).

Regardless of the theoretical advantages of the JV kind for both Chinese and foreign investors, and despite the appearance of the big China market to Western investors, cultural and organisation differences between the JV partners have actually resulted in problems and failure in such ventures (Borgonjon & & Hofmann, 2008, Qui, 2009).

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Certainly, in most cases, the potential Sino-Western JVs stop working before they start as an outcome of a breakdown throughout the negotiating process (Zhao, 2000; Sheer & & Chen, 2002).

This paper supplies a case analysis and case option to a Harvard Company School case study on efforts to negotiate a joint venture (JV) between Pennsylvania-based Wyoff Corp.

and Jinan, China-based China-LuQuan Chemical Ltd. ("CLQ") (Sebenius & & Qian, 2009). The proposed JV will be based in Shandong Province and produce and market specialty chemical additives from the AD and CE households of chemicals. The significant choice makers/participants in the event are Robert Kwang, primary negotiator for Wyoff, and Bingtan Zhou, primary mediator for China-LuQuan (CLQ). While the analysis takes into ccount the positions of both Wyoff and CLQ, the recommendations are addressed to Wyoff's leadership.

The time setting for the case is June of 2007. CLQ, Wyoff and a third German-based foreign partner, chemical-maker Dekelwerke, signed a provisional agreement in December of 2006 giving the firms a 50%, 25% and 25% share, respectively. CLQ was to contribute its Rizhao complex’s “production facility, land, nation-wide sales offices and marketing channels, and skilled labor” (valued at US$300 million) while Wyoff and Dekelwerke would each contribute technology and US$150 in cash (Sebenius & Qian, 2009, p. ).

Both Wyoff and CLQ have successfully worked with the German partner, Dekelwerke, in the past. Wyoff and CLQ, however, have a troubled history. Between January 2001 and August 2002, Wyoff (with Kwang then serving as the assistant to Wyoff’s chief negotiator) and CLQ (with Zhou as chief negotiator) engaged in protracted and often confrontational negotiations to form a JV to produce Caxtalene, a special chemical input invented by Wyoff. These negotiations, which CLQ had initiated, failed, and CLQ eventually partnered with a French chemical company to produce Caxtalene.

Both Kwang and Zhou viewed the experience as a major blot on their respective careers. In this current round of negotiations, Wyoff, with the full support of its top leadership, approached CLQ regarding the formation of a JV in China to produce the AD and CE chemicals. Despite having come to a provisional agreement on the basic ownership structure and strategic objective of the JV, six months later Wyoff and CLQ were still at polar extremes regarding a number of key issues.

Moreover, there appeared to be hard feelings and a lack of clear understanding on both sides regarding the other’s negotiating tactics and positions. Problem Statement Notwithstanding the considerable advantages and opportunities in forming a joint venture (JV) to manufacture and market the AD and CE families of chemicals in China, Wyoff and China-LuQuan’s negotiations are not progressing well and are currently deadlocked on four key issues.

If Wyoff wants to avoid a repetition of the failed negotiations on the Caxtalene JV, Kwang and the other members of Wyoff’s negotiating team must find a way to reach mutually acceptable solutions on the product slate, product marketing, management structure, and staffing issues. Problem Analysis Lessons from the 2001-2002 Caxtalene Negotiations The 2001-2002 failed Caxtalene joint venture negotiations between CLQ and Wyoff provide important lessons on how to avoid failure in the current negotiations over the proposed AD/CE JV at CLQ’s Rizhao complex.

In the Caxtalene negotiations there were critical substantive differences which prevented the parties from even reaching a preliminary agreement on ownership structure. Wyoff and CLQ were at polar opposites on both the equity split and the terms of technology transfer, with Wyoff demanding 80% and CLQ not prepared to go over 50%, Wyoff anxious to limit any substantive technology transfer and wanted to charge a substantial licensing fee for any technology that was transferred and CLQ expecting a free transfer of technology as part of the JV agreement.

There were legitimate and rational reasons each side took the position it did on these initial issues. Based on their study of other Sino-American deals, Wyoff felt that a major ownership position would be necessary to get the management control they felt they needed. They took a hard negotiating line for an 80% share, in anticipation that CLQ would “bargain them down” to a more mutually acceptable 60% (Sebenius & Qian, 2009, p. 3).

Wyoff’s reluctance to transfer technology reflected Wyoff’s not unreasonable fears (given the sketchy status of intellectual property rights in China) about intellectual property right infringement and their hard-line position on technology licensing fees reflected investors’ pressure for quick returns on the venture. Wyoff probably also figured it went into the negotiations with a strong advantage, given its clear technological superiority, its status as the inventor of Caxtalene, and the fact that CLQ sought Wyoff out as a JV partner, not vice versa.

For its part, CLQ’s view of Wyoff’s 80% equity demand as outrageous is understandable given (then) Chinese laws prohibiting major equity ownership by a foreign party in a Sino-foreign JV. Nor was CLQ being irrational or unreasonable in its expectation of significant technology transfer from Wyoff during the course of the JV. After all, technological expertise was (besides cash) supposed to be Wyoff’s primary contribution to the venture, while CLQ was contributing the land and infrastructure, as well as labor.

While each party’s position could be viewed as reasonable (or a least rationale), negotiations between Wyoff and CLQ on Caxtalene soon turned confrontational, quickly limiting any possibility of compromise between them on the substantive issues. Neither party was able to perceive the other’s perspective. For their part, the Zhou and other representatives of CLQ perceived the Americans at Wyoff as incredibly arrogant, impatient, disrespectful and condescending. The Chinese also took Wyoff’s selection of a young negotiating team as a further sign of disrespect.

Wyoff’s negotiating team was fairly insensitive to CLQ’s perceptions and instead focused on their own desire to limit exposure to intellectual property violations and to guarantee a quick return on investment. As to the decision to deploy a young negotiating team, Wyoff apparently either did not understand the importance of age and seniority in Chinese culture (Sheer & Chen, 2003) or decided that it wasn’t important in this case (or that their own preference for selecting a younger team based on their knowledge of the industry and the expectation that negotiations would go on for a long time) (Sebenius & Qian, 2009, p. ).

The fact that CLQ chose to abort its negotiations with Wyoff and enter into a JV arrangement for Caxtalene with a French partner who was no match for Wyoff on either a technological or management demonstrates just how dissatisfied CLQ was with Wyoff as a potential partner. Wyoff’s belated attempts at salvaging the deal (firing lead negotiator Bernier, other measures to repair the relationship) could not move CLQ away from a partnership with the French company. Reliving the Past: The AD/CE Negotiations

Anxious to tap into the opportunities in the Chinese chemical market as well as build synergies throughout Asia from a Chinese production base, still bruised from losing Caxtalene market share in China to CLQ, and aware of CLQ’s strong position in the Chinese market, Wyoff approached CLQ for the joint venture to produce AD/CE chemicals. But Wyoff did not exactly come to CLQ with hat in hand. In placing Robert Kwang – ethnically Chinese but culturally and nationally American – in the position of lead negotiator, Wyoff may have thought it was doing all that was necessary to bridge the considerable cultural gulf between these two firms.

Given the CLQ’s strategic importance to Wyoff, and the multiple opportunities present in the Chinese market, it is remarkable that Wyoff did not consider how cultural differences, and more particularly, the American negotiators’ cultural insensitivity, derailed the Caxtalene negotiations. Had Wyoff bothered to analyze the reasons behind the failure of the 2001-2002 negotiations with CLQ, it would not now find itself on the verge of another set of failed negotiations. CLQ was in fact better prepared than Wyoff for the AD/CE negotiations, having investigated Wyoff and its personnel (Sebenius & Qian, 2009, p. 2).

At the same time, CLQ can be taken to task for its failure to take into account cultural differences. Given the fact that CLQ had experience with Wyoff’s negotiating style and its proclivity for hard-line positions and impatience, Zhou and the CLQ team seemed to have unrealistic expectations about Wyoff’s willingness to make concessions, as well as Wyoff negotiators’ willingness or capacity to adapt to Chinese business styles. It is true that CLQ and Wyoff are at polar extremes on the four substantive issues of the product slate, product marketing, management structure and staffing.

Compromise and/or agreement on these issues seems highly unlikely unless the negotiating teams resolve their conflicts related to negotiating styles, business practices, attitudes and cultural differences. As was the case seven years ago, the CLQ Chinese negotiators are shocked by what they perceive as the incredible arrogance of the American negotiators. They are affronted by the Americans’ rude disregard for building relationships. Zhou and his team of CLQ negotiators see the Americans as short sighted and incapable of taking the long-term view.

For its part, Wyoff’s negotiating team views what it sees as the Chinese preoccupation with social events and “building relationships” as a waste of time at best and as unethical instrumentalism (using people) at worst. Wyoff’s team does not see the need to defer to CLQ on any issue since their (Wyoff’s) ready cash and technological expertise would appear to give it license to dominate the relationship. Walsh, Wang & Xin’s (1999) study of working relationship in Sino-American joint ventures uncovered a persistent pattern of antipathy and misperception between the Chinese and American partners.

Walsh et al. (1999) explain: An old saying in China, ‘same bed, different dreams,’ may foreshadow the kinds of sentiments we discovered in this research. The two partners in the joint venture ‘bed’ have very different dreams. These different dreams my fuel the kinds of negative perceptions that we found here... the Chinese typically want foreign capital. . . and both technological and managerial expertise. The Americans want a foothold in what they see as an enormous emerging domestic market and, of course, profit (pp. 84-85). Walsh et al. 1999) found in their research that “the views that the American and Chinese managers hold of each other are rather negative” (p. 74). In the case of the Americans’ view of the Chinese, this seems to be a gross understatement.

The American managers in Walsh et al. ’s (1999) study appraised the Chinese managers very harshly: …the Americans view their Chinese partners as lazy (or hard working with dubious motives); self-interested and undereducated; unable to make a decision, assume responsibility, take a risk or delegate; unaware of what quality means to contemporary business practice; and narrowly focused on the short term… (p. 4) There are some echoes of these attitudes in the Wyoff negotiating team’s view of their potential Chinese partners. During both the Caxtalene and the AD/CE negotiations, Wyoff’s team rapidly grew impatient with the Chinese preference for socializing prior to getting down to business.

Kwang observed that “while we were acutely aware of the need for some socializing, we wondered whether it was necessary to have so many social activities before any substantive meetings... e became increasingly impatient as days were passed in ‘leisure interactions’ with our Chinese hosts while our headquarters was calling every day to check on our progress” (Sebenius & Qian, 2009, p. 10). In addition to these complaints, it is apparent that the Wyoff team sees the Chinese as risk-aversive, self-interested, indecisive, enigmatic, and, in many practical areas related to business, inexperienced. Contrary to the findings in Walsh et al’s (1999) study, there is no indication that the Wyoff team viewed the Chinese as focused on the short-term – indeed, this was one of the chief complaints the CLQ team had about the Americans.

Walsh et al. ’s (1999) findings on the views of the Chinese managers toward the Americans also has some parallel in the CLQ-Wyoff negotiations: The Chinese…seemed to appreciate that their American collaborators bring valuable technological and managerial expertise to their country but recognize that they can be arrogant and condescending when they do so…they worry that the time horizons of their partners are too short… (p. 74) The chief complaints that Zhou articulated about the potential American partners were that they were arrogant, condescending, impatient and focused on short-term profits (Sebenius & Qian, 2009, pp. 2-13).

The Chinese negotiators were also exasperated over the Americans’ failure to appreciate the value of building relationships. It is apparent that the Wyoff team dismissed the value of building guanxi (the Chinese word for personal bonds or connections), despite the fact that “researchers tend to agree that it is essential to establish guanxi with Chinese businesses” (Zhu & Zhang, 2007, p. 385). Overall, many of the problems in the Wyoff-CLQ negotiations (both in 2001 and now) stemmed from problems in communication and cultural differences.

Edward Hall’s (1976) concept of “high-context” and “low-context” cultures is useful for understanding the cultural gulf between the Wyoff and CLQ negotiators. As Zhao (2000) explains, In high-context cultures such as China, the social context (personal relations and nonverbal behavior) that surrounds a formal, written document is far more important than the written, legal documentation…When members of low-context cultures [such as American] communicate with members of high-context cultures, they need to be especially aware of the cultural context and such concerns as harmony, tatus and showing respect. When members of high-context cultures communicate with members of low-context cultures, they need to pay special attention to the words and what the words actually say, not what may be implied by the words or inferred from the words (pp. 212-213).