SAIC Volkswagen Negotiation Analysis

4184 words (17 pages) Essay in International Business

08/02/20 International Business Reference this

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Abstract

In the last 1970’s, China’s new leader Deng Xiaoping was seeking a joint venture with a European car manufacturer in the spirit of introducing his country to major economic reforms and begin the buildup to the world’s second largest economic powerhouse (Vogel, 2011). As Francis Bacon said “In all negotiations of difficulty, a man may not look to sow and reap at once; but must prepare business, and so ripen it by degrees” (Bacon, 1884). Due to Volkswagen’s (VW) success and trust with their vehicles in Brazil and Mexico, as well as their open-mindedness and rigorous regulatory mindset, a partnership formed, which stands as one of the most important deals on the backbone of the strong Chinese economy today (Albuquerque, 2013). China found itself benefitting with its foreign capital allocation, and industrialization expertise, whilst VW reaped the benefits of a strengthened reputation and corporate policy. Through an innovative strategy, the partnership blossomed, and led to over 3 million vehicles being sold every year, only 30 years on (Volkswagen Newsroom, 2018). VW was the first foreign overseas car-maker in China to have been making a profit over the past ten years. After six years of negotiations, involving at least seven parties on the Chinese side, and major contracts were negotiated, including a joint venture contract, a technology transfer agreement, articles of association, supply agreements, and a planning agreement (Volkswagen Aktiengesellschaft, 2017). With the unavoidable complexity of such a negotiation, comes an added element of inexperience for an introverted Chinese government, and law-abiding Germany, truly personifying the rigorous and complex deal, these parties struck, which still stands strong in today’s volatile economy. This essay seeks to explore the depths of this negotiation, by tapping into theoretical literature, in order to critically analyze the long-lasting impact, it has had ever since.

Case description 

In the last 30 years, the global economy has witnessed the rise of a financial powerhouse in the Asian continent. Behind China’s bullish performance lie several key decisions and negotiations which evolved their horse and carriage state, to the second largest economy in the world (Harvard Business Review, 2003). One of the leading success stories is headlined with Germany’s commanding and controversial Volkswagen car manufacturer. Before any of the emission allegations appeared in the early 2000’s, China looked for their first partner company to import vehicles for their customers in 1978. This decision was driven by China’s new leader Deng Xiaoping, as he aimed to introduce his country to major economic reforms and begin the revolutionary import-export business (Xiao, 2018). Xiaoping said; “We need large numbers of pathbreakers who dare to think, explore new ways and generate new ideas” (Xiaoping, 1978). China was progressively not able to manufacture to the quality standards in the complex manufacturing environment, and their automobile infrastructure were poor. To directly import these products, China had tariffs of up to 40%, meaning the cost was far too high for the benefits to be taken (Kiley, 2018). To put it into perspective, China did not have car batteries or sanding paper, and had the technological standards from over 30 years ago (The Economist, 2017).

With such a poor infrastructure, China could never sell their cars outside of the boarder, let alone China itself. This situation however allowed China to partner with a successful car manufacturer and indirectly create healthy competition in the Chinese market.

The Chinese were renowned for being a very closed off society, hard to penetrate, and little was known on how to successfully undergo business with them. They engulfed the standard strategy to keep a straight face, and not open to showing emotion, remaining calm, making it hard for businesses to compete.

Volkswagen AG was a company operating in a difficult geopolitical environment, with the separation of east and west Germany in the early 60’s, there was a lot of instability and unpredictability in the market. The company was operating on a command economy of the east, and the experience from the west. Volkswagens incentive was clear, to globalize their brand in order to enhance their global competition by beating their competitors in building their business base in the east (Muller, 2013). The German mentality spearheaded the company into being very aggressive with their marketing strategy and striving to be the world’s biggest car manufacturer. Their negotiation style remains incredibly uncooperative, by being highly structured, set to their standards, spoken in German, and a high level of detail and accuracy (Smyser, 2003). With the opportunity in the China partnership, Volkswagen was naturally welcoming of the proposition, as they had already learnt how to deal and negotiate with China in past situations such as Brazil and Mexico. Dealing with a German company implied that German was a business language, and facilities would be built and operated under a very westernized ruling, as the Germans saw it as a working system.

To ensure this negotiation was going to be mutually beneficial, Volkswagen had to find a way around the poor infrastructure and high tariffs of the Chinese environment, and the Chinese workers would have to learn the high standard working environment of the Volkswagen mentality (Shepard, 2017). After a successful partnership creation, Volkswagen Shanghai Motor Company (SAIC Volkswagen) went on to spearhead the Asian automobile market and go down as one of the most successful partnerships in history. Dr Deiss (CEO of VW) said; “The Volkswagen Group, its brands and their Chinese joint venture partners focus consistently on sustainable mobility and push the transformation of the automotive industry in China and worldwide.” (Diess, 2018) The successful negotiation encouraged the Chinese suppliers to replicate this concept with partnerships from international ventures and reap the mutually beneficial attributes. To circumvent the dispersion of standards between the two partners, categorized segmentation took place, in which Volkswagen would categorize Chinese suppliers into either A, B, or C, which in turn would mean they either created a product to export standard, domestic standard, or to be improved (SAIC, 2004). Whilst this was difficult for the Chinese workers to adhere to, Volkswagen in turn rewarded the suppliers generously for their work and created incentivized production. The quality standards for China increased over time and the costs for SAIC Volkswagen began to reduce at an exponential rate (McCulloch, 2005).

International Negotiations theory

Negotiating any business across nations, let alone continents, comes with a vast array of complexities. In order to incorporate all potential opportunities, mitigate the risks where possible, and generate a successful negotiation, the parties involved have several theoretical theories and frameworks to consider to best advise their strategy. What is evident from the SAIC Volkswagen partnership is that the crucial elements to their success was the cultural awareness and determined mentality.  The concept of power asymmetry was crucial for such a transnational negotiation as they illustrate the national disparities on international relations. It outlined the differences in risk perceptions and behavior and can spur into dangerous cycles of systematic misperception (Phillips, 2017).

As Edward Taylor explained; “Culture is that complex whole which includes knowledge, belief, art, law, morals, custom and any other capabilities and habits acquired by man as a member of the society” (Taylor, 1924). When looking into how culture spearheads a negotiation process, Ghauri’s framework of international business negotiations stands out as one of the most famous. In essence he outlines how it affects the process from pre-negotiation, face to face, and the closing of a deal, together with four core dimensions; Time having different importance, individualistic/collectivistic behavior and its variable effect on joint or personal gain, the patterns of Communication and whether they are formal or informal and director or indirect, and lastly the varying importance that personal relations has on the negotiation (Ghauri, 2003). Kennedy would argue that Gauri’s framework is far too lengthy, and sees the negotiation timeframe as very short, but more of a reoccurring dominance conversation (Anon., 1997). Whereas Michael and Wayne would outline the negotiation process to entail the elements of context, action, issues, and the relationship. (Schatzki, 1981)

The limitation to Ghauri’s framework is that he sees culture as one concept (Manrai, 2010), and hence it does not incorporate the true complexity it has on an international negotiation. Hofstede would support such a dimension, by segmenting culture into national, organizational and professional. Hofstede’s framework takes a far more binary approach to cultural understanding by incorporating a scoring system (out of 5), and using Individualistic/collectivistic, Masculine/Feminine, Uncertainty avoidance, Power Distance and Time Perspective as the key determinants (Corporate Finance Institute, 2019) (Appendix 1.2). This enables individuals, companies, and countries to assess a potential business venture with a comparative framework and envisage the potential adaptiveness. However, Hofstede’s framework has been proven to be inconclusive and limited in validity (Minkov, 2017). The model is seen as researching an outdated definition of culture and has not considered globalization. Fisher and Ertel would argue however that the deal closure is actually only the commercial element of the negotiation, with the implementation being a trivial element (Fischer, 1995).

Don Hutson and George Lucas (2010) outlines the Negotiation Strategy Matrix in ‘The One Minute Negotiator’ (Hutson, 2010), which outlines four strategies for a party in a negotiation, consisting of a mixture of assertion and cooperation (Appendix 1.1). Avoidance would entail a low cooperation strategy and limit the negotiation element (a trait humans are default to), and low assertion, avoiding the truth that the party simply does not wish to negotiate. The accommodation strategy is considered a reactive strategy which makes the negotiator very cooperative but comes with great risk. This is because if the negotiator tries to accommodate all demands to benefit the relationship than the core trust to not naturally build up, and the other party can take advantage of their stronghold. With a competitive strategy, the negotiator deals with great precaution. This strategy adopts the zero-sum game (Business Concepts 101, 2012), where the outcome is binary in that you win or lose, and there is no midpoint. This is applicable for parties who’s interests lie purely on business, but the superficial relationship surrounding it. Lastly, a collaboration strategy means that the negotiator is considered very proactive, and cooperative. This strategy allows the negotiator to incorporate all parties demands, and is communicative, and has a higher potential for a mutually beneficial arrangement, by welcoming the opportunity of growth. The crucial element to this strategy is that all parties must feel comfortable being open to sharing their thoughts and increase the chance for both parties needs to be met. There is of course a sweet spot between these strategies; compromise. However, it is far from sweet, and illustrates what should not be done in a negotiation. The strategy simply implies the parties meet halfway and isn’t always the fairest option. This strategy could be beneficial in minor financial tweaks to a negotiation, where compromising is not detrimental to the deal, however, is a difficult strategy to adapt with unmeasurable deal topics such as emotions. Horst sees the negotiation process similarly, in that collaboration, concession and competition drives the outcome of the negotiation, however he sees this as more of a continuum, as similarly draws on the binary negotiation traits which can pre-empt the outcome of a negotiation before it even begins. Alces and Frisch saw an alternative approach to the core negotiation defining attributes, in that the main element was the mixture of concealing and revealing (Alces, 1998). They argue that the process involves the expression of minimal and maximal expectation of the involved participants, and the adjustment of these to each other in either a hard or soft mannerism.

Case Analysis and Discussion 

The drive behind the SAIC Volkswagen partnership clearly stemmed from the German car manufacturers impeccable adaptation techniques to local demands, and long-term growth potential. The partnership still stands tall today as a strong and growing partnership, showing just how impeccable their deal creation was (Belleza, 2019). The biggest demand for the two parties was the mutual understanding of culture and procedural thinking. Volkswagen showed a clear and accurate understanding of the Chinese environment and business culture in order to respect their system, take advantage of the framework in place, and instate their expertise to optimal efficiency. What must be outlined is that this partnership occurred in the late 1960’s, in which much research and open information was not around about international business types. The chine’s difference in standards, tariffs, and working cycle was completely bipolar to what Germany had proudly based an economic powerhouse upon (Encyclopedia Britannica, 2019). Additionally, the language was in no way similar, but through strategic procedural planning, the local workers could learn the language and make the production line uni-lingual (Gregg, 2007).

Ghauri’s framework, outlining the clear procedural steps towards a successful negotiation timeline was evident in this partnership. The Chinese government took their time to analyze which motor vehicle company best suited their needs and structure, Volkswagen then adapted to the Chinese importance of being open and clear by allowing them to visit into west Germany, an unheard-of situation at the time (Passport to Trade, 2019). The post negotiation phase from both parties showed perfect execution, allowing for mutually beneficial results. As described above, Ghauri’s framework lacks the incorporation of culture’s true complexity in a negotiation, which is evident from the SAIC Volkswagen partnership.

Through the use of Hofstede’s model, it can be seen that both parties’ value certain criteria on complete opposite ends of the spectrum such as power distance. The German car manufacturer had just recovered from a complete political reform and was preaching an egalitarian mentality, whilst the Chinese (still today) were openly embracing hierarchy (Lake, 2017). However, on elements such as uncertainty avoidance, both German and Chinese personality scores very high on Hofstede’s scale. The Chinese workers reportedly would ask the German manufacturers repeatedly the same question as to be absolutely certain of performing to the right benchmark. In terms of collectivism, Germany could have probably adapted more to the Chinese way of being more collaborative, as the staff in the production lines were split according to the language they spoke, technical abilities were too dispersed, and foreign exchange was low (Benea, 2013). With a higher collectivism approach, this would have increased productivity and enhanced collaboration. Additionally, Volkswagen could have been more collectivist as a negotiating party, as the Chinese thought it crucial for the entire negotiating party to be represented as a collective, with the same level of understanding.

On Hutson and Lucas’ framework, Volkswagen was considered low on the collaboration scale and thus restricted to either competing or avoiding. This caused much distress for Volkswagen as they could have listened to the Chinese better understand their business priorities and decisions. By ruling out the collaborative element of the negotiation, Volkswagen lost out on the opportunity to take advantage of learning about the famous Chinese discipline and preparation, a character trait every organization is striving toward being (Joseph, 2019).

Joint ventures in Asia are incredibly complex, even though China is considered a very profitable economy. McKinsey outlines “China as the preferred way to take part in the world’s hottest growth story” (McKinsey, 2010). Peugeot tried to replicate Volkswagens success by partnering with Guangzhou Automotive Manufacturing (GAM) in 1985, in a USD 52 million joint venture (Brunet, et al., 1999). Their cars did not sell as well as required, due to the engine mechanics consuming high fuel levels, and making it unattractive for the targeted taxi industry.  SAIC Volkswagen showed its clear dominance when GAM was prioritized lower than SAIC Volkswagen by the government and thus struggled to operate in a rapid environment. After 12 years, GAM reduced its presence in admission to its competitor’s clear dominance (Luo, 2002).

In preparation for the negotiation, Volkswagen showed its immaculate preparation process, by scheduling banquets, sightseeing expeditions, and detailed insight into their firm, which played into the Chinese cards perfectly, as a core to their trust into a company was their attention to detail and visually invested effort such as tailored events (March, 2019). As mentioned above, their supplier segmentation of the existing Chinese infrastructure showed their clear attention to detail and clear apprehension.

Reflective Conclusion and Recommendations 

The SAIC Volkswagen venture still stands for one of the most successful and perfectly executed negotiations in the modern automotive industry (Brull, 1993). Given the political volatility at the time, with Germany being split by the wall into East and West Germany, and China implementing a revolutionary reforms to their infrastructure, a potential transatlantic venture seemed impossible so negotiate, however with shared core ideologies and values such as mutual trust, and high impact growth potential, the parties met eye to eye. What helped the situation of course, was the coincidence of Volkswagens Santana vehicle, which was generating poor demand in Germany, however Chinese consumers took off at its design and practicality (de Feijter, 2012). This mismatch in consumer tastes, created an ideal platform for the vehicle manufacturer, and enabled them a guaranteed successful start into the partnership. Once the Chinese government prioritized SAIC Volkswagen for their commendable efforts and impact on the infrastructure, labor force opportunities, and shared knowledge prospect, and awarded them by giving them the official governmental vehicle and taxi mandate, there was no stopping the powerhouse (Volkswagen Aktiengesellschaft, 2017). To such an extent that Peugeot and GAM’s partnership couldn’t even worry SAIC Volkswagen.

Ghauri’s three step framework tied in perfectly in the German’s existing operating standard and China’s desired business productivity goal and allowed the negotiation to have the required structure to ensure key success, and little space for failure. The framework by Hutson and Lucas outlines how the Germans from a theoretical standpoint could potentially have improved their negotiation with the Chinese by being more cooperative and allowed for a more successful collaboration. This would tie into the recommendation that the language barrier could have been aided by the Germans trying to learn some Chinese, as opposed to only speaking German, which would have helped the labor segmentation and increased productivity. Savage, Blair, and Sorenson add to this by recommending negotiators to consider both the relationship as well as the facts, to ensure the mutual adherence is optimized when implementing a framework or strategy effectively. For Volkswagen this would have taught them that Chinese consumers are commercial buyers, and far less price sensitive than generic consumers, with an emphasis on after sales servicing. Their servicing segment of the negotiation would have allowed for this environment, generated productive revenue, and given the Chinese a more trusted opinion of the German car manufacturer. Through the use of cultural understanding and critical procedural thinking by the German mentality, together with the rapidly growing and forward thinking Chinese government, the SAIC Volkswagen partnership was a well negotiated agreement, demonstrating the fundamentals to a successful negotiation who’s core still stand today, in the fast paced and competitive economy.

Appendix

1.1

(Hutson, 2010) 

1.2

(CFI, 2019) 

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