Managing Across Chinese Culture Additional Case Red Dragon Enterprises

NEGOTIATING vilhthe CHNESE

ADDITIONAL CASE RED DRAGON ENTERPRISES

Rex Adams is about to leave China and may never return. He has experienced difficulties that he never imaged he would find in a foreign joint venture. His company, Batrionics hoped that China would provide a source of lower cost manufacturing; however, what he found was corrupt government officials, dishonest managers, and poor quality products.

China

The Chinese called their country the “middle kingdom,” meaning that

_ China was at the center of the world. For centuries China was in fact the world’s

leading civilization and sought to keep foreigners out by building a wall thousands of miles long. Although China is officially a communist state, since 1979 the country has been moving towards a capitalistic economy and now eagerly invites foreigners into its economy. The “iron rice bowl,” where all workers in China were guaranteed a job, is being replaced by a market-driven system. Although China still has many state-owned enterprises, economic reform is moving rapidly as China becomes a major player in the global marketplace. China became a member of the World Trade Organization in 2001. Having the largest population of any country, with over 1.3 billion, China is often seen as a country with enormous market potential. The cost of labor in many parts of China represents some of the lowest labor costs in the world. China represents the fasting growing economy in the world and many foreign companies have invested in the country in recent years. The large population, and the hope of tapping into

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that market, as well as those who are looking for a low cost manufacturing location lure many investors. While many investors have found success in China, a number of foreign investors have experienced great difficulties. Batrionics was one those companies which experienced difficulties.

Batrionics .

The company was established in 1984 by two Australians as a small manufacturer of laptop computer batteries. Batrionics produced replacement laptop batteries at a cost lower than the original manufacturer and quickly became successful. The batteries were first produced in Australia, and then in Taiwan. When one of the founders died of a sudden heart attack, the remaining founder, Rex Adams, took total control of the business. He expanded the product line into a number of different types of industrial batteries. The industrial battery market is a very competitive one; a market where small price differentials make all the difference. Early in the business the founders learned that if they hoped to be competitive, they would have to move their manufacturing operations out of Australia. Taiwan proved to be a good choice, having much lower production costs and an ability to produce a quality product. The wholly-owned operation in Taiwan was satisfactory for a number of years, however, increased price sensitivities in the market caused Rex to consider other manufacturing locations. An obvious choice was China. Rather than completely shutting down the manufacturing operations in Taiwan and moving them to China, Rex decided to enter into a joint venture agreement with a Chinese manufacturer, and to gradually reduce the company’s operations in Taiwan.

Red Dragon Enterprises

After doing some investigation, Rex discovered a small manufacturer of batteries and related industrial products in China called Red Dragon Enterprises. In addition to producing small batteries for the consumer market, Red Dragon also manufactured automotive batteries, watch batteries, switches, timers, electrical cords, smoke alarms, and air purifiers. The company was eager to find a foreign partner who could provide capital for expansion and help the company improve its quality. Red Dragon was considered a quality producer in China, but its products were not of a high enough quality to be sold outside China, with a few exceptions.

The owner of Red Dragon was Tsang Wai. Tsang was a self-made man. After the death of Mao Zedong in 1976, Tsang saw an opportunity in China. With the death of the communist leader he began to manufacturer small electrical products at home, using scrap material from the state-owned factory where he worked. Although this practice was strictly illegal at the time, Tsang did not let that stop him. He moved his manufacturing operations out of his small home when the Chinese government began to allow small businesses to operate legally. At that point he was able to hire workers and expand the product line. Tsang’s sales and profits grew rapidly, and being very frugal, he was able to put much money back into the business and grow the company even more. Red Dragon was a respected brand in China but the company had not been successful in exporting its products to the United States and Europe. Some of Red Dragon’s products,

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such as the smoke detectors and water purifiers were sold in some Southeast Asian countries. The company’s batteries, however, were not seen as being competitive against international brands.

Rex Adams heard about Red Dragon and was interested in the company because of its experience in producing some of the batteries his company sold. While he was aware of the problems of poor quality, Rex felt that he could install new procedures in the company and improve the company’s ability to produce quality batteries. He wanted to find a company that was struggling, and where improvements could be made, because he felt that he could leverage his company’s knowledge and skill against the joint venture partner. When Rex approached Tsang, he found a highly motivated and energetic man who was very interested in expanding his operations and becoming a global player. Rex at first referred to Tsang Wai as Mr. Wai, forgetting that in China, the family name comes first and that Tsang Wai would really be Mr. Tsang. The two men got along well, even though Tsang’s English proficiency was limited. Tsang had a _ young assistant who spoke English and who helped him to communicate with Rex. The young assistant would never make eye contact with Rex, and at times, Rex wondered if he was really translating correctly. At one point Rex put his arm around the young man and asked if he was being fair in his translating. His level of discomfort made Rex wonder even more about the translation.

An Agreement is Reached

After a number of trips to China, and many days spent negotiating, the terms of the joint venture were agreed upon. When Rex asked Tsang to sign a contract, he refused. He told Rex that the entire relationship should be based upon trust, and that a contract only represented “paper trust,” and would be meaningless. Rex was going to be investing a significant amount of money in the joint venture and felt very uncomfortable doing so without a formal agreement. He told this to Tsang and finally Tsang replied, “OK, we put dragon blood on paper.” Not really sure what he meant, Rex felt that this implied that a contact would be created. After still more discussion, and at times argument, the two men agreed to have a simplified document drafted, one which was much more general and open-ended than Rex had planned. He had heard that the Chinese did not like contracts, and that business relationships in China were based on trust and “face” more than legal documents. Although feeling very uneasy about the lack of a detailed formal contract, Rex nevertheless signed what amounted to a general letter of intent. Tsang told Rex that he had recently visited a fortuneteller and that she told him that the joint venture was going to be a “big success.” Tsang told Rex that his future in China was bright and that the joint venture would bring both of them good fortune.