Preparation for International Business Negotiation Chapter 3

Preparation for International Business Negotiation

Chapter 3


Key Points1. Information collection in international business

negotiations2. Organization and preparation for international

business negotiations3. Methods for making international business

negotiation plans4. Physical preparation in international business

negotiations


3.1 Collecting Information

3.2 Forming the Negotiation Team

3.3 Planning for International Business

Negotiation

3.4 Physical Preparations

3.5 Simulated Negotiations

3.1 Collecting information (case P55)

(1) Qualification and credit status

(2) Negotiation representative

(3) Market quotation

(4) Laws and cultures

Qualification and credit status

① The history and status quo

② Economic and political power

③ Corporate reputation

④ Capital quantity

⑤ Operating capability

⑥ Bank credit

Preliminary Discussions on Setting up Joint Ventures in ChinaIntroduction: A potential foreign investor, who is new to the Chinese market, is making enquiries about the possibility of setting up joint ventures in China. The following is the dialogue between the foreigner (A) and Mr. Zhao (B).

A: Mr. Zhao, I'd like to have your expert advice. You see, I've been contemplating making investment in China. What kinds of foreign operation are allowed in your country?

B: Well, I can't say I'm an expert in anything. But I certainly can give you some rudimentary ideas about foreign direct investment in China. First of all, let me give you an overview briefly. Foreign investment is welcome in priority industries and designated investment areas. And tax incentives and other preferential treatments are available at local and industrial levels.

A: So the government policy is to encourage foreign investment, isn't it? Are there any screening criteria?

B: Yes, there are. A: In which industries are foreign participation and involvement encouraged, permitted, or even prohi

bited? B: Foreign participation and ownership are encouraged in priority sectors in terms of industry, and in

export-oriented and technologically advanced projects. Restrictions are placed on foreign involvement in certain industries, such as retailing, media, and the practices of foreign professional firms, although in certain areas these restrictions are becoming less rigid. To assist investors, the Chinese government has adopted a lot of new measures recently to create a more favorable investment environment.

A: And what are the possible business structures or entities by which foreigners can operate in China?

B: Well, China allows various forms of foreign investment, including Sino-foreign joint ventures and wholly foreign-owned enterprises. The forms of foreign involvement in China are barter trade, compensation trade, processing arrangements, joint ventures, including equity joint ventures and cooperative joint ventures, and wholly foreign-owned enterprises. Foreign companies may also set up representative offices for liaison purposes.


A: I'm interested in the business structure of Sino-foreign joint ventures. You have mentioned two types of joint ventures: equity joint ventures and cooperative joint ventures. What are the differences between them?

B: Let me deal with the similarity first. What is in common between them, and between them and wholly foreign-owned enterprises, is to attract foreign investment and to introduce advanced technology and managerial expertise. The emphasis of our policy is placed on foreign participation in production ventures that are export-oriented or technologically advanced.

A: So these are the priorities, right? I'm so glad---the projects I have in mind are of the production type with advanced technology and export potential.

B: So much the better! Now let me finish what I have to say before you tell me what projects you're interested in. OK? You see, there are a few legal distinctions between an equity joint venture (EJV) and a cooperative joint venture (CJV). First, in an EJV, profit distributions and management responsibilities of the venture are determined by the proportion of total registered capital contributed by each party.

A: So profits are distributed according to each partner's investment ratio. B: That's right. The CJV, which is also referred to as a contractual joint venture, however, is an investme

nt vehicle in which profits and other responsibilities are assigned to each party according to the joint venture contract.

A: In other words, profit distributions among partners to a CJV need not be in strict proportion to their registered capital contribution.

B: Exactly. Also, a CJV may distribute profits both in cash and in venture output, while an EJV is restricted to making cash distributions.

A: So a CJV has more flexibility. Am I getting it right? B: Yes. That leads me to the next point. A CJV can adopt a non-legal person status, which distinguishes i

t from an EJV. This allows foreign CJV partners to contribute less than 25% of the total registered capital of the joint venture.


A: You mean in an EJV the foreign partner has to contribute at least 25 % ? B: That's the minimum for the foreign party in an EJV. The third difference is that CJVs are not requir

ed to survey Chinese sources before importing supplies or raw materials from abroad, while EJVs must give first priority to Chinese suppliers.

A: I see. There's also a difference in the sourcing of raw materials. If I understand correctly, the EJV is very rigid and the CJV is much more flexible. If I have to choose between them, I'd prefer the CJV format.

B: Well, it depends. Now tell me what projects you have in mind. A: Well, as you know, we're a dynamic company based in Canada. We're pursuing joint ventures in China because we think we can bring foreign exchange and advanced technology to Chin

a while cashing in on its vast market potential and low labor cost. B: That's fair enough. What kind of manufacturing you want to go into? And would you like to enter in

to cooperation with us? A: Simply put, the business operations I've been considering are two fold. On the one hand, we want

Chinese factories to manufacture PCs for us. Of course, we can supply the technical know-how and the essential equipments. And we undertake to sell the products in North America. On the other hand, we intend to import parts of fax machines from Japan to be assembled in China. The parts to be imported can be SKD---Semi-Knocked-Down-Kits or CKD---Completely-Knocked-Down-Kits. Of course, we want to sell the finished products on China's market. And you may be interested to know that for both projects we'd like to have your organization as our partner.

B: Thank you for your interest in us. The projects you've just proposed are interesting. But we don't have time to go into details today. Can we meet again tomorrow?

Cultural Barriers

Language Eg. Cool, intelligent, fat, tight, fa

ce, politician, strange, varied…

Color terms P96-97 Animal terms Plant terms Numbers Religion Thought patterns

Stereotypes (P111) Prejudices Discrimination Ethnocentrism Culture shock

Taboo topics……

3.2 Forming the Negotiation Team (case P60)

3.2.1 Size of the negotiation team

3.2.2 The staffing of the negotiation team

3.2.3 Collaboration and support from the

outside members

Forming the Negotiation Team

3.2.1 Size of negotiation team

(1) The number of the negotiation team members of your counterpart

(2) The complexity of the negotiation

(3) The need for technical experts

(4) The number of the associates in the project


3.2.2 The staffing of the negotiation team(1) Principles for team building• Complementary knowledge• Complementary character• Clear-defined roles (2) Organizational structure of the team: leading person

nel, business/commercial personnel, professional and technical personnel, financial personnel, legal personnel, interpreters, secretaries


Principles for team building

① Complementary knowledge

② Complementary character

③ Clearly- defined roles.


Organizational structure of the team

① Leading personnel

② Business/ Commercial personnel

③ Professional and technical personnel

④ Financial personnel

⑤ Legal personnel

⑥ Interpreters

⑦ Secretaries


3.2.3 Collaboration and support from the outside members

(1) Related personnel in other functional departments

(2) Administrative personnel

3.3 Planning for International Business Negotiation (case P65)

3.3.1 Gist of a negotiation plan

3.3.2 Targets of a negotiation plan

3.3.3 Negotiation strategies

3.3.4 Negotiation agenda

Planning for International Business Negotiation

3.3.1 Gist of a negotiation plan

(1) Requirement towards the key points of the negotiation

(2) Requirement towards the thoughtfulness and flexibility of the plan

(3) Requirement towards the predictability of the plan

(4) Requirement towards the negotiation time

(5) Requirements towards the negotiation atmosphere


3.3.2 Targets of a negotiation plan(1) The highest target, or the maximum expect

ation or target(2) Acceptable target, or expected target(3) The lowest target, or limited target, basic ta

rget or must- be- realized target

ZOPA – Zone of Possible Agreement

BATNA best alternative to no agreement


3.3.3 Negotiation strategies

(1) Factors that need to be considered in designing business negotiation strategies

(2) Forms of negotiation strategies


(1) Factors that need to be considered in designing business negotiation strategies

① Will the negotiation take place at the host court, the guest court or a neutral ground?

② What are the advantages or strengths each party has?③ Which party will be affected more greatly by the outcome of t

he negotiation?④ What are the strengths (rank and composition) of the counter

part team and the character of their chief negotiator?⑤ Which party will be affected more greatly by the length of tim

e the negotiation takes?⑥ Is it necessary to build up long- term cooperative relationship?Case P69



① Thorough negotiation strategy

② Sketchy negotiation strategy

③ Tacit- agreement negotiation strategy


① Thorough negotiation strategy For medium- and large- sized projects Negotiation gist and objectives The advantages and disadvantages of each party Negotiation steps Staffing and the structure of the negotiation team The chief negotiator Opening strategy Countermeasures in case of emergency Bottom concessions


② Sketchy negotiation strategy For usual business negotiations The negotiation subject Personnel and structure of the negotiation team the highest target/ the lowest target The acceptable target Key points worthy of attention


③ Tacit- agreement negotiation strategy

For routine business with regular clients


3.3.4 Negotiation Agenda• Scheduling of the negotiation (when/ how/ what)• Negotiation site• Negotiation issues• Open agenda and restricted agenda• Key points that need attention when making the ne

gotiation agenda for one’s own side• Points that need attention when the other side desi

gns the negotiation agenda P72

3.4 Physical Preparation

3.4.1 The Choice of negotiation places

3.4.2 Decorations of the negotiation sites

3.4.3 Arrangements for board and lodging

3.4.4 Visiting and sightseeing

The Choice of negotiation places

(1) Negotiation location

(2) Negotiation sites

Decoration of the negotiation sites

(1) Setting of rectangular tables

(2) Setting of square tables

(3) Setting of round tables

(4) Other facilities and equipment

Arrangements for board and lodging

(1) Lodging

(2) Board

Visiting and sightseeing

(1) Factories, equipment and places of origin related to the negotiation subject

(2) Famous and symbolic local scenic spots

(3) Worldly well- known restaurants and shopping centers with local characteristics

(4) Other places of interest or entertainment that guests get interested in

Business card

Dining etiquette

Proper dress, reservations, punctuality.

Western Dining Style

3.5 Simulated Negotiations

3.5.1 Necessity of simulated negotiations

3.5.2 Contents of simulated negotiations

3.5.3 Forms of simulated negotiations

ExerciseIntroduction: Janet Smith, Managing Director of Cecil Parkes Ltd., a manufacturer of women's woolen clothes, is negotiating with Donald Macgregor of the wool supplier Highland Wool over a purchase transaction of the mill. A = Cecil Parkes B = Highland Wool

The Dialogue

A: Now, as we discussed on the phone previously, our company is interested in buying Highland Wool, and I was wondering how you feel about that.

B: Well, in principle the mill is available to buy. However, I've had to make certain promises to my workers. There are certain conditions you would have to fulfill if you wanted to take over the mill.

A: Yes. I see. Er... could you tell me a bit about these conditions, Mr. Macgregor?

B: Well, I've had to promise that there will be no redundancies as a result of the takeover.

A: Yes, I think we can agree to that---we can take over the mill with all its staff and skilled workers. We will continue to employ them on the same conditions as before, but we're not prepared to raise their wages.

The Dialogue: A = Cecil Parkes, B = Highland Wool

B: …and that each employee is able to retain his position in the firm. We have a very small, isolated community here, and since this is an old mill with a history of a hundred and fifty years, we'd like you to guarantee that the system of production, the machinery, the hours of work and management will not be changed to any modem methods. All the people at Highland Wool want life to go on quietly as before. And, in order to ensure that, I suggest that I myself retain a controlling interest of 51% of the company for the next five years. After that, Cecil can buy the remaining shares. A: Sorry to butt in, Mr. Macgregor, but do you mean that each employee would be able to retain his position for life? The size of the mill can remain the same, but there will be a lot of modernizing and general streamlining necessary to bring it up to the highly efficient standards that Cecil Parkes expect from all its enterprises. One of the objects of this streamlining is to reduce staff eventually, while maintaining the same output.

B : That's more or less of the strength of it, yes. A: Well, I see.., but I don't think we'll be able to agree to that. Perhaps we can work this out l

ater on. We could talk about the price perhaps? B: Yes, certainly. Our accountant estimated the value of the firm at €2,000,000 in the last au

dit. A: So this is the sum you are asking for? B: Yes. If this is the value of the firm, I think it's appropriate if you pay this price, don't you?

The Dialogue: A = Cecil Parkes, B = Highland Wool

A : Well, it is much more than we were prepared to pay. Of course, this is something we'll have to go into with our own accountants.

B: Yes, certainly. Our accountant estimated the value of the firm at €2,000,000 in the last audit.

A: So this is the sum you are asking for? B: Yes. If this is the value of the firm, I think it's appropriate if you pay this price, d

on't you? A : Well, it is much more than we were prepared to pay. Of course, this is somethin

g we'll have to go into with our own accountants. B : Certainly. A: Well, I can't see any insuperable obstacles. David Barkworth is coming to Scotl

and to talk to your representative, and I hope we'll be able to work out a satisfactory deal together.

B: Good. Fine. A: Well, it's been nice talking to you, Mr. Macgregor. I hope we'll arrive at a satisfa

ctory arrangement. B: Fine. Thank you for coming. Goodbye. A : Goodbye. ( Adapted from English for Negotiating by Jim Brims)

Case simulation

Directions: Suppose you are David Barkworth and you are discussing the details of the takeover bid with Jonathan Snodgrass, engaged by Highland Wool Ltd. Read the following 1) information sharing and 2) brief for negotiating carefully so that you know yourself and try to learn the other by tactful probing questions.

Information Sharing

You are: David Barkworth, Deputy Managing Director of Cecil Parkes Ltd. Details of Cecil Parkes" needs Cecil Parkes already have several lines in woollen clothes. They are now thinking

of establishing certain lines in the “classic” style on a permanent basis. This means that a regular supply of wool would be necessary. Because of the present irregular method of supply from various companies, they want to establish a definite provision of wool on a permanent basis, in order to ensure this regular output of woollen clothes. This output depends almost entirely on the amount of wool available, as there is a steady market for this kind of product.

Because of Cecil Parkes' good reputation for high quality, only the best types of wool would be suitable. They are particularly interested in wool produced in the Shetland Isles. They are also interested in wool that is milled with great expertise and on top-quality machinery. The personnel of the mill would therefore have to be skilled and experienced operators using modern machinery. The management of the mill would also have to be extremely expert, using the most modern methods of line management and personnel management. There would also have to be an efficient transport system available to bring the wool to the factory in London.

Instructions

Find out from Jonathan Snodgrass (the representative from Highland Wool) all you can about the following:

the mill's staff the management the method of supply the transport the value of the company the machinery the quality of the wool they produce This is not a bargaining session. Your object is to find out and give

information, and then report back to your group.

Information Sharing

You are: Jonathan Snodgrass, solicitor, engaged by Highland Wool Ltd. to represent them.

Details about Highland Wool Ltd. Highland Wool was established in 1830 by Angus Macgregor, and is now owned by

his great-great-grandson, Donald, who is also Managing Director. The company owns the mill and three lorries. At the last audit, the accountant set the value of the whole company at €2,000,000. The personnel consists of seventeen skilled operators, two drivers and the Managing Director. The mill is the main source of employment for a small, isolated Highland community. Three of the workers are due to retire within the next five years. The attitude of the management to the workers is paternal, and the way of life in the community seems quaint and old-fashioned to outsiders. Some of the equipment and methods used also seem old-fashioned to outsiders, but are regarded as perfectly adequate by the people at Highland Wool.

The provision of the wool is controlled by the Wool Board. This is a government body responsible for the distribution of all the wool produced in Great Britain. The Board compulsorily buys all the wool produced by British farmers, determines price and quality, and then sells it to firms such as Highland Wool. Highland Wool receives mainly wool produced on the Shetland Isles and the local mainland, specializing in milling the better qualities of wool.

Instructions

Find out from David Barkworth (the representative from Cecil Parkes Ltd.) all you can about the following:

the kind of wool they are looking for the amount of wool they want whether they would be likely to want any changes to

your present staff or system of production.

This is not a bargaining session. Your object is to find out and give information, and then report back to your group.

Brief for NegotiatingYou are: David Barkworth.

Cecil Parkes Ltd. have done a certain amount of research into Highland Wool Ltd., and have decided that the mill is ideal for their purposes. The size of the mill can remain the same, but there will be a lot of modernizinq and general ‘streamlining' necessary to bring it up to the highly efficient standards that Cecil Parkes expect from all their enterprises. One of the objects of this 'streamlining' is to reduce staff eventually, while maintaining the same output.

As representative for Cecil Parkes Ltd., you have to negotiate on the following points. n You want to buy the company. n Your accountants have established that the mill and the lorries are in fact worth more to you than t

heir accountant's estimate of €2,000,000. However, Highland Wool don't seem to know this, so you might as well try to get it for a little less if you can.

n You want to take over the mill with all its present staff of skilled workers. You are not prepared to raise their wages, but you will continue to employ them on the same conditions as before.

n You are planning to reduce staff eventually, so you are not prepared to make any guarantees about the security of jobs in the future. (This is, of course, a very delicate issue, and you will have to be very careful when talking about it.)

n You want the firm to be run according to the most modern management methods. You will therefore appoint your own manager. There is no possibility of Donald Macgregor, who is very old-fashioned, staying on as manager.

You will have to negotiate on all these points. First, get together with all the other Cecil Parkes representatives, decide how far you are prepared to compromise on all these issues, and decide what your upper and lower limits are. Then meet with Jonathan Snodgrass and try to make a deal.

Brief for NegotiatingYou are: Jonathan Snodgrass.

The staff at Highland Wool have heard rumors about the proposed takeover by Cecil Parkes Ltd. For the first time in the 150-year history of the company there has been a dispute between the workers and the management. Donald Macgregor, the Managing Director, has promised that if the takeover takes place, none of the workers will lose their jobs.

As representative for Highland Wool Ltd., you have to negotiate on the following points: l You are quite happy to sell the mill, as Donald Macgregor, who is 65, wants to retire, and has no so

n or daughter to take over the running of the mill. l You want the auditor's estimated value of €2,000,000 for the firm. l You want a guarantee that no workers will lose their jobs. l You want a guarantee that the system of production, the machinery, the hours of work and the man

agement will not be changed to any “modern” methods. All the people at Highland Wool want life to go on quietly as before.

l In order to ensure point 4, you suggest that Donald Macgregor retains a controlling interest of 51% of the company for the next five years. After that, Cecil Parkes can buy the remaining shares.

You will have to negotiate on all these points. First, get together with all the other Highland Wool representatives and decide how far you are prepared to compromise on all these issues, and decide what your upper and lower limits are. Then meet with David Barkworth and try to make a deal.

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Preparation for International Business Negotiation Chapter 3