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SME Entering China

SME Entering China. A Mission Impossible?. Equity Joint Venture in Zhejiang Province. Finnish partner medium-sized private enterprise garment industry 25% Chinese partner state-owned enterprise (SOE) chemical industry 75%. People’s Republic of China. The Path of the Joint Venture.

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SME Entering China

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  1. SME Entering China A Mission Impossible?

  2. Equity Joint Venture in Zhejiang Province • Finnish partner • medium-sized private enterprise • garment industry • 25% • Chinese partner • state-owned enterprise (SOE) • chemical industry • 75%

  3. People’s Republic of China

  4. The Path of the Joint Venture • Start-up Phase 1993-1995 • 1993 Negotiations and establishment • 1994-1996 Construction, training in Finland, installation, test drives • 1996 March, full production • Operation Phase 1996-1999 • Termination Phase 1999 • Wholly foreign-owned enterprise 2000-

  5. Motives • motives, partner selection and JV negotiations typical to Sino-foreign JVs and also internationally • motives: • FI: low labour cost • CN: new technology and management, new jobs, large Chinese market

  6. Partner selection • mutual ignorance - consultants used (Finnish and Chinese) • mutual visits • guanxi related to the selection of the location

  7. Negotiations • long according to Finns • short if compared with the average – less than one year • difficult to set the price on intangible assets (technology) • negotiations resembled an epsilon • eating and drinking • big celebrations when the company was established – building local guanxi

  8. Negotiation Styles Epsilon and Knot Rope ∞ In the beginning A few years later ∞

  9. Control • 25/75% ownership • Finnish partner satisfied because of a smaller investment (SME approach) • the interests of the minority partner were secured by the partner contract • minority partner could control the ”life and death” assets, i.e. prices and customers • nomination of the chairman of the board

  10. Construction and Operation Phase • greenfield operation, first in the county • construction of the factory JV’s responsibility (Finns involved) • one factory was closed down in Finland and shipped to China in fifty containers • operations supervised by Finns

  11. Conflicts • efficiency and work ethic • language and communication • hierarchy • opportunism, cheating, colonial attitude or negligence of the workers’ welfare were not reported, unlike in many other JVs

  12. Efficiency and Work Ethic • efficiency, salary system – strike • sleeping • taking responsibility difficult • young managers • unclear chain of command • horizontal communication non-existent • fear of punishment • ”traffic lights”

  13. Language and Communication • direct – indirect communication • concept of a lie • communication patterns • six shades of an agreement • interpreters both useful and complicative • language loops • middle management as cultural shock reducer

  14. Communication Patterns, example Resolution desired by Finns Overruling Backstage meeting Compromise Direct order from Finns Compli- cation Solved by mutual consent Giving excuses Finns as backup Resolution desired by the Chinese Giving up Silence

  15. Six Shades of an Agreement Acts as agreed Resolution Acts as agreed but complicates other issues Acts as agreed but starts negotiating again later Agreement Problem solving continues Acts as agreed at first but returns to the old behaviour later on Acts differently No action

  16. Language Loops Finnish-English Finnish Finnish-English- Chinese English-Chinese Chinese

  17. Cultural Shock Reducers Board of Directors Finnish Chairman of the Board Chinese General Manager Chinese Vice General Manager Finnish Vice General Manager Finnish managers Chinese middle management Chinese supervisors and group leaders Chinese workers

  18. Termination • Termination untypical to Sino-foreign JVs • reason: modernisation of the Chinese partner, not poor performance • initiated by the Chinese partner • negotiations in mutual consent mainly by email or phone

  19. Wholly Foreign-owned Enterprise • 100 % Finnish control + almost 100 % of delegation of decision-making power to the Chinese -> significant improvement of the operations -> significant improvement in communication and taking responsibility • Transfer of high technology (wearable technology i.e. intelligent clothes) to China

  20. Some Guidelines for the Future • Know the country, laws and customs • Make friends, build guanxi • Be patient and calm • Using chopsticks makes life much easier • Moving into central and western provinces • lower labour costs • better government incentives • a small company can be important • bigger problems with culture and infrastructure • China looks for high technology • not the best target for basic production

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