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«THE PECULIARITIES OF MARKETING
STRATEGY DEVELOPMENT IN CHINA»
Èñïîëíèë: Òîðï Àíäðåé
Ãðóïïà ÅÒ 402
Ïðîâåðèë:Øïèë¸â Àíäðåé
Ò À Ë Ë È Í Í 2003
ÑONTENTS
1.Introducing…………………………………………………………………………3
2.Lobbyng……………………………………………………………………………5
3.Budget offer………………………………………………………………………..8
4.Technical discussions……………………………………………………………...9
5.Final offer…………………………………………………………………………10
6.Formal negotiations……………………………………………………………….11
7.Managerial implications…………………………………………………………..13
8.Conclusions……………………………………………………………………….15
INTRODUCING
Since the 1970s,when China’s foreign trade policy was liberalized ,many
Western firms have been very enthusiastic about capturing this market of
over one billion consumers.
On average ,throughout the 1980’s ,China was visited by one Western
government ad-
visor every week.This interest of Western authorities and businesses can
be compared
with Western interests in Japan,a far more important trading
partner.Western busines-
ses’ interest in China decreased somewhat after the Tiananmen Square
incident in 1989.
However,interest from trade and industry continued ,and increased even more
in the
1990s.Lately,West European governments and businesses have also shown the
interests
in China.The picture is not much different where American interests in this
market are
concerned.In 1980s the trade between USA and China rose to more than US $ 5
billion
In these years,there was great demand in American goods.The trade relations
between
the USA and China received a serious set-back after the 1989 incident.But
the interest in China,both from the authorities and the business sector in
the USA revived again when
it was given the ranking of most-favoured nation (MFN) in the mid-1990s.
Since 1979,when the new regulating joint ventures was introduced by the
Chinese government ,there has been a tremendous increase in joint-venture
agreements with
agreements with foreign investors.In 1984,China signed 741 equity joint-
venture agreements with foreign investors.By the end of 1987,the number of
enterprises with
foreign investment in China exceeded 10,000 with a total coctract value of
almost
US $ 22billion and paid-in value in excess of US $8.5 billion.In October
1984,the government declared that central planning would no longer be used
and that a system of interfirm contracts would be utilized to
facilitate the distribution of raw materials and goods.During the same
period four special zones Economic Zones (SEZs) were established to
encourage foreign investment.As a result,foreign direct investment
increased and attained real momentum in 199-1991.By 1995,it had reached
more than
$ 30 billion.
In spite of this revived interest and fact that the Western companies have
been dealing
with Chinese for almost two decades,these firms are now facing difficulties
in negotiating
business deals with China.We believe that, basically,the problem is one of
understanding
Chinese culture and perculiarities in behaviour .Such an understanding
Chinese culture
is essential to do business in China and to maintain business relationships
in the long
run.
We all know that negotiation process is considered as an interaction
process of reaching agreements to provide terms and conditions for the
future actions of the parties involved.
Being a process,it can be divided into distinct stages.For the purpose of
this study
and consistent with earlier studies the process of negotiations between
Western firms
and their Chinese counterparts is divided into six stages: lobbying ,budget
offer, technical discussions,final offer,face-to-face negotiations and
implementation.
LOBBYNG
The negotiation process starts with early contacts with the Chinese
authorities,in which
customer is trying to establish whether or not the selling firm has the
technology or
capabilities to deliver the particular project.The Western firms are
normally expected to
China and present their technology and products.The firm has to conduct
presentation
session for the number of people and groups.In these sessions the firm has
to convince
the Chinese that it has a technology they want and that it is competitive
as regards technology recources and realibility.At this stage,the firms
should realize following:
Contents of deal:The first point to consider consists of identifying the
implications of project;i.e,that the contents and objectives of the deal
match of the firm.Questions such as
„what can the firm gain or lose in both tangible and intangible terms?“ or
„what is at stake?“ should be answered.
The preparation and planning of negotiations takes a lot of time and the
more information
a firm can gather at this stage,the better the of success it will the later
stages.
The firm should gather information on both customer and the competitors,and
on which
other alternatives are available to the customer.And the firm has to
compare its strengths
and weaknesses,for the particular project,with that of its competitiors..If
the competitors
are stronger,in one way or the other,the firm has to develop arguments to
expose their
weakness.If the firm knows that a Japanese firm is also competing for the
same project
and that the Japanese offer is cheaper than the firm is own,it has to
develop arguments
explaining why the offer more expensive.For example,in one of the projects
this was actually the case and the Swedish firm was also able to convince
the Chinese negotiators
that althogh its price was higher,the capacity of its machines and that the
technology
was better in terms of quality as well as its technolgy which would
facilitate future
expansion.This argument was accepted by the Chinese as they do always rely
upon
the best technology.If the company is able to convince that its technology
is the best
one and up-to-date as regards precision and future development,negotiations
become
easier.
In larger scope, the counter trades are quite common in China.The reason
for this demand
is that the Chinese tend to save on the foreign exchange.Thus it is quite
common for Chinese to demand that a percentage of the products to be
produced by the project in question by the selling firm into its home
market or into the third market.This is one of the objectives behind free
zone policy.Despite the difficulty it also is considered as important .This
step also helps to evaluate the effect of buy-back in monetary terms
and its effects on the firm’s own production and marketing activites.It is
quite possible
that the buy-back or counter trade demand is just a bluff ,so that the
seller,seeking to avoid the expenses of buy-back,may offer a major cut-back
in the price.
Find the costumer:In China ,foreign firms have to present themselves and
their technology to several authorities.One has to endlessly repeat the
same things to
different negotiators who suddenly,without any explanation,are replaced by
another team.
Quite often,however,the first team reappears after after some weeks having
„forgotten“
everything ,and one has to start explaining to them again ,from the
beginning.It is,thus
very important for the Westerners to find out which team and who in a
particular team
has the authority to decide.
The engineers and officials asking the most vigilant questions often turn
out to be subor-
dinates with no decision-making authority.Finding the customer is therefore
is quite
difficult.In lobbying stage ,a firm should try to find out who is
responsible for what or
does one has the authority to take the decisions.
Presentation of capabiliteies:In this stage,the firm has to present
itself,its technology
and its products.The presentation material and the presentation itself,very
important.
The material should be professionally prepared and presented.The Chinese
are very
particular about the details and the idea behind presentations is to
convince them
of the quality and trustworthiness of the technology and the firm.It is
advisable to present
all the technical specifications in English as well as local one.Most
Chinese authorities
do not speak English and sometimes only one interpreter is not enough to
get the real contact.Swedish Ericsson provided all the material in English
and Chinese,and spent a lot
of time on correct translation.Having difficulties with duplications there
was noticed that
it is quite difficult to get hold of good ,up to date office equipment and
stationary and
that concerns to many cities,at that.
Build up trust:It is commonly known that the Chinese give sufficient
importance to this trust and to individual relationships.Although the
Chinese always stress on the importance of friendship ,it is quite
diffilcut to develop a social relationship with Chi-
nese.They seldom invite anyone to their houses.In spite of
this,“friendship“ and „trust“
are common aspects of Chinese culture, rather not only in China ,but
throughout Hong
Kong,Singapore,Taiwan and other countries.The impressions and trust that
developed
through the mutual relations and social activities will be return a
hundredfold later.
BUDGET OFFER
After all the presentations,questions,answers,and discussions a budget
offer is prepared.
The purpose is to provide the customer with an idea of general
principles,technology,
equipment,price and the terms and conditions as a whole.Usually a client
gets a lot of
offers,many of them are similar to each other.Then the offers and the
budget undergo
comparison .As this offer has to include a rough price,the firms should be
very careful
in calculating all the possible expenses as it is very difficult to change
the the total sum later.And the price for training,taxes,and other expenses
should be included .Otherwise,
the company would lose its credibility.
TECHNICAL DISCUSSIONS
All the firms are invited for the technical discussions after the customer
has studied all
budget offers and technical characteristics from different competitors.Here
the firms
represent their technolgy and technical specifications,but strictly with in
the framework
of budget offer.At this stage the firms which are dealing in Chinese market
should try to get more information on the particular project,the
priorities of the government,the buyer’s
budget capacity and the general opinion as regards dealing as a whole .
It could be desireable for investors to invite the Chinese to visit their
country just to let them observe the techical system ,which are being
offered in operation.This kind of opportunity is also used for friendship
developing and trust.
This stage is considered as the only chance to take the advantage of being
host.
Generally,the Chinese are used to be an initative part of negotiations when
the ones take place at home.
Pye explained that in the following way:
„As hosts,the Chinese take advantage of their control over the pace of
negotiations.
First they set agend,then they suggest that the Americans start the
discussions.This
makes the guest show their hands-their proposals become the starting point
from
which compromises follow.In order to keep the process going ,the Chinese
expect
the visitor to make the next concessions,for what the Chinese easily press
for.
FINAL OFFER
After the technical discussions mentioned above,the firm knows what exactly
a potential
customer needs.Based on this,they arrive at the final offer with all
detailed specifications.
Chinese customers are very particular about details,therefore it is
advisable to have all
instructions and references to be translated into Chinese.The firms also
have to detail
all the cost and benefits to prevent misunderstanding in future.The minimum
and maximum limits for the different issues should be also calculated and
conveyed to all
members of the team. The unexpected costs and expenses should be taken into
consideration.Ideally,the negotiators should have several alternatives to
facilitate the
process of negotiating.
FORMAL NEGOTIATIONS
Due to the recent decentralization process,foreign firm can directly
negotiate with
Chinese firms.Although most of these are still state-owned.Their desicion
making
policy is various.For example ,some of these companies have their own
foreign exchange
while others depend upon the government allocations.
Some firms may have some projects approved while others have to apply for
it.
We know that various executives take part in negotiations even
politicians.On the Western side ,the negotiators are: technology
managers,area managers,technical support,
and an intermediary(liasion officer).The Chinese use different tactics to
get the informa-
tion they are really need ,using many tricks which are quite invisible for
beginners.
Tactics such as flattery,embarrasment,and usage of historical facts to
their advantage are the good examples. It also quite normal that the
Chinese set up the competitors againist
each other so that that enables to hook out information .
Technology Foreign firms are quite concerned about measures to protect
technology
and parents.For Chinese,the acqusition of technology by a state-owned
enterprise,through
licensing and joint –ventures means as the profileration throughout the
country.
According to one Western executive,it is very difficult to make the Chinese
understand
the total cost of research and development incurred by the selling firm
with respect
to a particular technology .
The Chinese are also quite concerned about the Western firms willingness to
transfer
the techology and the following process of training .
Terms of payment and financing In the formal session,the financial issues
such as terms
of payments,counter-trade,and how it would influence the terms of
payment.If a part of the production is to be imported into the seller’s
country,the percentage or amount has to
be agreed upon.
Implementation Our observations reveal that the real problems begin after
the formal
negotiations and during the contract fulfilment.As a rule the Chinese want
to adhere to broad principles and general policies and keep the details
rather ambiguous.
During the negotiations they tend to be flexible and leave the matter half-
settled whereas
the Western companys want the issues sharply defined make the mutual
responsibles
clear.
During implementation of the contract there are the problems that may crop
up .
For example,in one case where a Swedish firm entered a joint-venture
agreement with Chinese there had been the case of misunderstanding for the
Chinese refused to provide
a Swedish managing director with the Western-standart office.The Chinese in
its turn just offered a common Chinese-standart residence equal to other
Chinese executives .Western standart for the office was stipulated in the
contract so the Chinese got out of the contract.
The conflict was so serious that the firm started to calculate the
consequences of nonful-
fillment.
MANAGERIAL IMPLICATIONS
Priority In the late 70s and early 80s,when a number of Western firms were
negotiating
with China due to newly spread „China fever“,many of them were greatly
disappointed.
After negotiating for months or years,they realised that foreign was not
available for firms.Even for the Chinese authorities it was a great problem
as they were losing face
and credibility among the investors.As a result ,as long ago as in August
1985
the Chinese authorities announced four categories of priority projects to
attract foreign
investors:Energy and mineral recources ,high technology,medical equipment
and food-
processing,and construction projects.
During this spell of „China fever“-1993-1994 things improved in China.The
decentralisation of decision making and the independence were given to
provinces facili-
tated business activities and the process of negotiating.
Basically the Chinese government selects the projects carefully and the
priorities change
from time to time.But the culture of standing by agreement leaves much to
be desired.
Even the authorities are enable create obstacles such as unnecessary
delays.
On the other hand,if the project goes with the categories mentioned above
the firms are
in the better position in negotiation and implementation.As a rule the
foreign exchanges
are approved by financial authorities.It is also important to gather
information of
Chinese negotiators .
Time and patience is the most important assets of foreign firms exercising
negotiating
process in China.Many potential investors get frustated since the Chinese
,sometime,are slow in signing of a contract even if the everything has been
settled.The Westerners
get impatient waiting for final agreement .Probably it is rather
incommodious participating in many stages of negotiating processes for
several months.
For swedish Ericsson it took more than two years to conclude an agreement a
telecom-
munication contract while for Otis it took 5 years to establish a joint-
venture.And the story of the French businessman who went insane is quite
well known:
After about one year of discussions and travelling back and forth between
different
departments ,he was told by the Chinese that they were willing to buy his
technology.
He telegraphed his office that the contract of $500 million has been
concluded.
The chief executive wired back immediately that he was on his way to sign
the
formal contract .And the next morning a high ranking official from the
Ministry
of Foreign Trade and Economic Relations approached to him and said,“Now
that
we are willing to buy your technology we can start negotiations“.
The negotiators,therefore should have a plenty of time,patience and strong
nerves.Many
of the negotiators have tried to set deadline and give other ultimatums to
Chinese negotiators,but it normally does not help.
Price The Western firms should be very careful in calculating the price
for their technology.It is the most difficult and cruicial factor.If a
foreign firm reduces its price
radically,say by 15-20 percent ,the Chinese negotiators get suspicious and
there is a
risk that the firm will lose its credibility.The Chinese get more convinced
of “evils of
capitalism”and would try to press the firm even more.
The concessions given on price should be remained behind the all stages of
negotiations except for the last one.The timing of such concessions is important as,if
given too early,
they can have too early.The Chinese do not like to pay for the personnel of
selling firm.
When they hear the costs of the foreigners,they get very sucpicious,and
allegations about
the “evils of capitalism”rise again.Therefore it is advisable for the
Western firms should
hide these costs in their offers and include them at the cost of
production,technology
development or project administration cost.
CONCLUSIONS
Having tried to describe the process of project sales negotiation between
Western firms
and their Chinese counterparts we reveal that the common course of
negotiation implies
its specifications that have not been known before for investors.
The issues that are most sensitive in the negotiation process are the
equity shares management control.These two issues have also been a great
concern while investing to China since the Westerners do usually rely on
Chinese counterparts when dealing with
the local governments and environment .But it is not so.The control over
the process of management should be in their hands.Chiefly ,the Chinese
want a local chief executive
while foreign firms want to send their own staff.
In most the deals in China, buy-back and export is the matter of lengthy
period with many stages.While foreign firms are entering China due to the
size of its market,
the Chinese,in its turn see the foreign firms as the source of technology
and foreign exchange earnings.
The pace of negotiation in China is very slow .The presentations are formal
and orderly.
The third part such as government still plays a major role in the
negotiation process,
since the people there are still collective minded and it plays a large
role.
RECOURCES
1.Easson,A The incentive for Foreign Direct Investment in the People’s
Republic in China.Paper presented at The International Conference on
Management in China Today,
June 20-21 ,1988 Leuven,Belgium.
2.Ingmar Bjorkman The management of human resources in Western Companies in
China To match or not to match with the environment .1992.Stockholm.
3.Henrikki Tikkanen.Marketing and International business.1998.Turku.
4.Kerin.A.Rodger &Peterson.Robert. Perspectives on Strategic Marketing
Management. 1983.Boston .
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