Case Study-AW-Q289

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The Experts
Case Study Katherine Xin is a professor of management, an associate dean at China Europe International Business School (CEIBS), and the editor of HBR China. Wang Haijie is a senior editor at HBR China.
Xu Shuibo is the former CEO of TNT Mainland China’s subsidiary TNT Hoau.
 
Zhang Tianbing is the global vice president and the director of the China Research Center at A.T.Kearney.
 
ILLUSTRATION: AGATA NOWICKA
 
Culture Clash in the Boardroom Should a German-Chinese joint venture follow the ethical rules of the parent company or the country of operation? by Katherine Xin and Wang Haijie .The room was already packed when Liu Peijin walked in. His fl ight from Shanghai to Chongqing had been delayed,and he had fretted about missing the training. But fortunately he’d gotten there in time. Liu knew his presence was important.As the president of Almond China, he
wanted to show his Chongqing colleagues how much he cared about the topic under discussion: ethical business practices.
 

Taking his seat, Liu nodded at the head of HR, who was running the training. The two went way back: Both had
been with their German parent company,Almond Chemical, since 1999, when it fi rst established operations in China. Since then Almond China had set up two joint ventures with local partners—the only way foreigners could do business in chemicals in the country. Almond controlled 70% of the stock in one of them. The other was a venture with Chongqing No. 2 Chemical Company, in which Almond had a 51% stake and the Chinese directors were very
active.
 

Liu sat next to Wang Zhibao, the vice president in charge of sales for the Chongqing joint venture. Wang looked skeptical.He was good at his job, having closed several key deals that had kept the business afl oat during its early years. But he was also at the center of a confl ict between the venture partners:
 

The Chongqing executives were increasingly vocal about how diffi cult it was to operate according to European standards, particularly the rules against gifts and commissions. Such incentives were commonly accepted in China
and routinely employed by Almond’s competitors. Trying to do business without them, Wang argued, was foolhardy. “This
is China, not Europe,” was his refrain.But the line between these practices and breaking the law was a fi ne one. Almond was headquartered in Munich and listed on the New York Stock Exchange as well as the Frankfurt Stock Exchange,
meaning it was required to adhere to the U.S. government’s Foreign Corrupt Practices Act, which specifi cally forbade the HBR’s fi ctionalized case studies present dilemmas faced by leaders in real companies and off er solutions from experts. This one is based on a teaching case at China Europe International Business School in Shanghai.
 
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Liu kept an eye on Wang as the HR director explained Almond’s ethics regulations and the legal consequences
of business bribery. Liu knew the rules made sales more diffi cult, but Almond’s policy was clear, and he wanted to make sure that every member of the sales team understood it.
 
He had taken the same hard line on safety and environmental practices. The production facilities in Chongqing had been built according to German national standards, and all the safety equipment—helmets, shoes, and protective clothing—had come from Europe. The Chinese partners had called these investments “wasteful” and “frivolous”—“luxurious expenditures” that the young venture couldn’t, and shouldn’t, aff ord. But, with backing from the head offi ce, Liu had stood fi rm. Similarly, he’d insisted that the factory’s MDI (methylene diphenyl diisocyanate) waste be treated as a dangerous substance and processed with a special cleaning agent, n accordance with European standards, even though Chinese law didn’t mandate it. His partners had been dismayed at the millions of yuan this would cost. But Liu refused to compromise,because he had witnessed the consequences of lesser standards firsthand.
 

Years before, when he was working for another Chinese chemical company, an affi liate’s chlor-alkali plant had suffered an explosion, injuring 200 staff members and residents of the surrounding area and halting
production for more than a month.The training was reaching its end, and the HR director signaled to Liu that it was
his turn to speak. Liu hesitated slightly as he looked at his Chongqing colleagues. “At Almond, ethics are nonnegotiable,” he said.“We need to remember these laws as we go about our business. We are not just a Chinese
company; we’re a global one.” Solemn,.
 

blank faces stared back at him.As he left the room, he couldn’t help feeling that his remarks had fallen on
deaf ears.“We Cannot Concede”
 

Two weeks later, Liu was back in Chongqing for the second-quarter board meeting.As he walked into the lobby of the Hilton,he ran into George Ho, the finance director for the joint venture. Ho looked flustered.“Are you all right?” Liu asked in English.Ho was from Hong Kong and didn’t speak fluent Chinese. He held a unique position.
 

He reported to the general manager of the joint venture but also to the finance director at Shanghai headquarters.
“I’m worried about this meeting, Liu,”Ho said. “I had a disturbing conversation with Wang last week.”Liu nodded, not surprised.
 

Ho continued. “Wang is close to making a huge sale—30 million yuan—but the customer’s purchasing manager is insisting on a 1% commission. He says that’s what he’s being offered by other companies.”“We can’t do that,” Liu said.
“That’s what I said. But Wang was insistent. He said that if we can’t do that,we should at least be able to off er the manager a trip to Europe, a visit to Almond headquarters.”
 

“What did you say to that?” Liu asked. “No—of course,” Ho replied. “But he accused me of jeopardizing the venture.
He said that we ‘foreigners’ have so much money, we don’t care about the performance of the business.”
“You did the only thing you could do,”Liu said.
 

“I can’t believe Wang thought that suggestion would fl y, especially after the training,” Ho said. He walked down the hall toward the boardroom. Liu followed. The meeting had barely begun when Chen Dong, the chairman of the joint
venture and a Chongqing No. 2 Chemical executive, raised the commission issue.(His leadership position was one of the
many concessions Almond had made to lure his company into the joint venture.)That was fast, Liu thought. He sat
quietly while Dolf Schulman, the vice chairman of the venture and Almond Chemical’s senior vice president of business
development, fi elded the question.“Chen, we cannot concede on these issues,” Schulman said. “There are no
exceptions to be made. Almond must be a law-abiding corporate citizen—as should every Almond employee.”
 

Ho looked up and nodded at Liu. But Chen was not ready to end the discussion.“To the best of my knowledge,” he said,
“many foreign-owned companies reward Chinese customers for their business.Some companies organize overseas visits,
some provide management training, some arrange golf outings. This is good business practice in China. We need to be fl exible in order to compete. If we can’t provide the commission, let’s at least consider a visit to Munich headquarters.”
 

This was typical behavior for Chen. He had a tendency to develop very strong opinions but keep them to himself until
the board met. Schulman waited for the translator to fi nish; then he hesitated, trying to come up with a suitable response.Liu knew he needed help.
 

“Commission or trips, it’s all the same thing: business bribery,” Liu said. “We canget orders without these tactics.”
Chen picked up the Q2 fi nancial statement that had been distributed at the beginning of the meeting and said,
“Orders? What orders? We made only 60% of our target for this quarter. When we setup this joint venture, we assigned our very best people to it—our best technicians, best salespeople, best managers. Why? Because we believed we could manufacture some of the best chemical products in the world and, in turn, get more orders.
 

But look at this.” He threw the statement down on the table. “Our performance is sinking fast. This joint venture has done “We are not just a Chinese company,” Liu said. “We’re a global one.” Blank faces stared back at him.
 

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nothing but hurt us. We have yet to see any return at all.”
Chen paused to let the translator catch up but then thought better of it. “All you do is make us spend, spend, spend—on German goggles, unnecessary waste processing, and ridiculously high salaries.” He turned to Ho, who looked bewildered.“And now I hear rumors that you are planning to launch SAP’s ERP software to synchronize with headquarters. When will the spending stop?”
 

Chen continued, his voice rising. “We need a tighter control on costs. We can’t possibly meet our profitability target when our expenses are so high. We want to choose the finance director going forward,so we can give this venture a real chance at succeeding. We see no other option.”He sat back in his chair and crossed his
arms. Schulman was squirming in his seat.Ho was pale with shock. Liu wasn’t sure what to say. He was astonished that Chen had brought up the safety standards—he’d thought that issue was settled long ago—and astounded by the slap at Ho. But he needed backup if he was going to oppose the joint venture’s chairman.
 

Finally Schulman spoke. “Chen, thank you for being honest about your concerns,”he said. “At this point I think all these issues are still open for discussion.”Liu almost choked. What was Schulman thinking? Seeing Liu’s expression,
Schulman looked at his watch and said,“Should we take a 15-minute break?” With that, he stood up.“This Venture Is Critical”
 

As Liu walked out of the room, Schulman grabbed his elbow and steered him toward a smaller meeting room down the hall.Once the door was closed, Schulman’s shoulders slumped.“Liu, what should we do?” he asked. “Do you think we should concede to these demands?
This venture is critical for us—you know that.”
 

Liu did understand how high the stakes were. China accounted for only 3% of Almond’s current business, but the company was depending on the country for future growth. The Chongqing operation was supposed to prove that Almond could expand further in China, and the company was already planning additional acquisitions.But Liu was shocked that Schulman would even consider bending the company’s standards regarding ethics and safety.“We need to stand strong,” Liu said, “not give in.” He was thinking about Almond’s reputation as well as the future in China.
 

He had joined the century-old German company not only because it boasted the world’s leading chemical-production
technology, but also because of its values,management approach, and safety ethic,which he’d hoped would serve as a model for Chinese industry.
 

“But we shouldn’t annoy them,” Schulman said. “We need Chen. And he’s right about the numbers. We could be in trouble
without Wang’s sale. Besides, where do we draw the line? Is a golf game bribery? We do that in Germany all the time.”
 

Liu realized that Schulman wasn’t asking for his opinion. He was asking for permission to give in. Suddenly Liu felt like a kid stuck between two warring parents.The break time was almost up. They needed to get back to the meeting and respond to Chen’s demands. QWhat should LiuPeijin do?

 

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