(The peculiarities of marketing strategy development in China)


(The peculiarities of marketing strategy development in China)

-

THE PECULIARITIES OF MARKETING

STRATEGY DEVELOPMENT IN CHINA

:

402

:

2003

ONTENTS

1.Introducing3

2.Lobbyng5

3.Budget offer..8

4.Technical discussions...9

5.Final offer10

6.Formal negotiations.11

7.Managerial implications..13

8.Conclusions.15

INTRODUCING

Since the 1970s,when Chinas 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 1980s ,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 firms 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 buyers

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 sellers

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

capitalismand 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 capitalismrise 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 Peoples

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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