Liu in case study

Order Description

Focus on Issues with Liu in case study attached

• German standards towards safety must be maintained.
• U.S law obligations towards no bribing.
• Incorporate theory (Ethics)

<Analysis and critical thinking>
– Case study analysis
– Theory application
– Evaluation/presentation of alternatives
– Integration/synthesis of main points of the study and the OB topic (ethics)

HBR.ORG
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.
EXPERIENCE
September 2011 Harvard Business Review 129
1271 Sep11 Xin Layout.indd 129 7/29/11 2:31:01 PM
bribing of foreign government offi cials by
U.S.-listed companies.
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, in 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 fi rsthand.
Years before, when he was working for
another Chinese chemical company, an
affi liate’s chlor-alkali plant had suff ered 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 fi nance director
for the joint venture. Ho looked fl ustered.
“Are you all right?” Liu asked in English.
Ho was from Hong Kong and didn’t speak
fl uent Chinese. He held a unique position:
He reported to the general manager of the
joint venture but also to the fi nance 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 off ered 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 can
get 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 set
up 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.
EXPERIENCE
130 Harvard Business Review September 2011
1271 Sep11 Xin Layout.indd 130 7/29/11 2:31:12 PM
HBR.ORG
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 profi tability target when
our expenses are so high. We want to
choose the fi nance 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 Liu
Peijin do?
See commentaries on
the next page.
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WHAT WOULD YOU DO?
SOME ADVICE FROM THE HBR.ORG COMMUNITY
Xu Shuibo is the former CEO of TNT
Mainland China’s subsidiary TNT Hoau.
The Experts Respond
I EMPATHIZE with Liu and the others in
this case. Devising an operations strategy
that is suitable for, and successful in, the
Chinese market is diffi cult. At TNT Hoau we
are up against several of the same challenges:
Many of our competitors have dubious
business practices, such as off ering
kickbacks. As a globally traded company,
should we follow suit? Can we still get
orders if we don’t? How can we respond to
the pressures on our salespeople?
We have learned two lessons that Liu
might heed. One: There is no room for
compromise on ethics. Two: Creating standardized
processes allows you to outperform
the competition.
In regard to ethics, we accept that we
may lose some clients because of our
refusal to give kickbacks. But we also know
that ethics can be good for business. In
fact, one of our clients asked our Shenzhen
branch for a 10% kickback. The branch
general manager declined, saying, “We are
now wholly owned by TNT, a Fortune 500
company. We will never off er bribes.” The
client excitedly responded, “At last I’ve
found a company that refuses.” He then
placed an order worth millions of yuan.
Almond should focus, as we have, on
gaining target customers, such as large
international fi rms, that share its values,
and not go after companies that insist on
bribes and commissions.
The second lesson for Liu is the role
of standardized processes in beating the
competition. He was right to fi ght for
higher safety standards. We have succeeded
in large part because we implemented
processes that have long been
used in Europe and the United States but
are still relatively uncommon in China.
For example, very few domestic roadtransportation
companies guarantee timely
delivery. We are able to do that because
we adopted time standards for each step
in our process: loading, client notifi cation,
and so on.
Almond needs to lead the way by setting
the standards for safety and ethics. A
company may achieve short-term success
if it bows to hidden rules, but in the long
term it will eventually fail. The business
environment in China is very diff erent
from what it was 30 years ago, and it will
continue to evolve. Over the next 10 years
we can expect to see more regulation and
the development of new criteria for doing
business in China. It will pay to be ahead
of that curve.
To resolve this specifi c confl ict, Liu
needs to identify other areas of compromise.
For example, if the joint venture’s
products are for export, the high German
standards should be upheld. But if
the products are for domestic sale only,
guidelines that comply with Chinese law
may suffi ce. Or, if SAP is too expensive, the
joint venture can implement cost-eff ective
software as long as it is compatible with
the global Almond system.
Both sides are right in these debates.
The Chinese should not be faulted for their
pursuit of profi ts, and the Germans should
not be faulted for standing up for their
values. Both profi ts and values matter. The
key is to fi nd a solution that compromises
neither.
IF GIFT giving is an integral part
of Chinese business practice, why
shouldn’t Almond embrace it? Liu
should reconsider his stance. Perks
like golf games, fi shing trips, and
foreign getaways don’t constitute
bribes when they are separate from
the negotiation or sales process.
Participating in this practice will
strengthen Almond’s local identity,
and exceeding China’s safety and
environmental standards will
safeguard its global one.
Sartaj Anand, junior fellow,
Melton Foundation BMS
LIU NEEDS to remember that
decisions made at the local level
could have negative consequences
for the larger company. His job
is to further the interests of the
company’s shareholders, not
to secure deals by any means
necessary. Compromising Almond’s
ethics or safety standards may
aff ect its ability to secure contracts
in the future.
Jose Di Geronimo, V-22 stress
engineer, Boeing
THE VENTURE should market itself
as holding high ethical standards.
It can then use its reputation as a
clean company to woo customers
that respect and appreciate those
standards. To do this, Liu will need
to convince his sales team that
sacrifi cing short-term targets for
long-term gains is worthwhile.
Tanmay Pandya, cofounder,
Bridgedots
Almond should focus
on gaining target
customers that share
its values and not go
after companies that
insist on bribes and
commissions.
EXPERIENCE
132 Harvard Business Review September 2011
1271 Sep11 Xin Layout.indd 132 7/29/11 2:31:20 PM
HBR.ORG
JOINT VENTURES are never easy and need
to be set up properly from the start. The
kind of misunderstanding and mistrust that
have erupted in the Chongqing venture can
be avoided by establishing reasonable expectations
of future investment and return
early on.
Liu fi lls an important role as the president
of Almond China. His position requires
him to serve as a liaison and interpreter
for the two sides. He can help both parties
to the joint venture better understand
their diff erences of opinion. As a Chinese
national, he should clearly explain to
Schulman what is behind the Chinese
side’s thinking, while making it explicit to
the Chinese what underlies headquarters’
insistence on German practices.
Both the Chinese and the foreign managers
need to be more open-minded about
the other side’s perspective. Their problems
will not be solved if everyone focuses
on what his side stands to gain. The two
sides should fi gure out together what is
best for the venture as a whole, over the
long term.
The business environment in China is
changing fast. Many Chinese manufacturing
companies have begun to standardize
production processes, but most of them
still think standardization is unnecessary
when it comes to safety. However, as Liu
remembers well, only one mishap can undo
a company. Now there is greater pressure
on companies to consider environmental
protection and safety issues. I think companies
like Almond are right to adopt higher
standards than Chinese law mandates,
because in the long run the costs will be
much greater if problems become serious.
Environmental protection is a necessity in
China. And without adherence to safety
protocols, China’s economic success cannot
be sustained.
Ethical issues should be treated the
same way. In China, because there are
no explicit laws regarding bribery, foreign
companies typically have three choices:
They can do what domestic companies do;
they can strictly adhere to Western rules;
or they can navigate the gray areas by
off ering a variation of the typical kickback.
In deciding which route to take, joint ventures
need to impose higher standards on
themselves. Since the 2008 fi nancial crisis,
surveillance over foreign-listed companies
has become stricter, and China, like most
other countries, has paid greater attention
to business ethics. Liu must be sure
that the Chongqing venture does not gain
short-term benefi ts at the expense of its
long-term reputation.
To move forward, Liu needs to help
the parties communicate better with one
another. Because they come from diff erent
cultures, they have distinctive approaches
to work and cooperation. The Chinese
believe in “emotion, reason, and law,”
whereas the Europeans tend toward “law,
reason, and emotion.” The Chinese establish
relationships by getting to know one
another’s families, for example. Europeans
believe work relationships are limited to
work. Neither side knows how to relate effectively
with the other. Liu can advise the
Germans to build up personal trust with
the Chinese before talking about the reasons
for the standards. In order to establish
a functional relationship, each party needs
to communicate in a way that makes the
other feel respected and comfortable.
If Liu remembers that he must persuade
the Chin ese side with emotion and the German
side with reason, his job of mediating
a resolution will be far easier.
HBR Reprint R1109L
Reprint Case only R1109X
Reprint Commentary only R1109Z
Zhang Tianbing is the global vice
president and the director of the China
Research Center at A.T. Kearney.
If Liu persuades the Chinese side with emotion
and the German side with reason, his job of
mediating a resolution will be far easier.
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