Introduction & Situation Analysis
Joint ventures (JV) are a popular method of foreign market entry because they theoretically provide a way to join complementary skills and know-how, as well as a way for the foreign firm to gain an insider’s perspective on the foreign market. Since China began its market opening in 1978, joint ventures have been the most commonly used form of foreign direct investment (FDI), with about 70% of FDI in China in the 1980s and 1990s taking the form of joint ventures (Qui, 2005, p. 47). The Chinese company, as well as the foreign investor, has since 1978 been drawn to the joint venture form. Walsh, Wang & Xin (1999) note that from the Chinese perspective, “the joint venture form of governance was seen as a particularly attractive way of absorbing foreign capital, advanced technology, management skills and access to export markets, while at the same time, enabling some state control over the attendant negative influences that could accompany such outside influence” (pp. 69-70).
Notwithstanding the theoretical advantages of the JV form for both Chinese and foreign investors, and despite the attractiveness of the huge China market to Western investors, cultural and business differences between the JV partners have led to problems and failure in such ventures (Borgonjon & Hofmann, 2008, Qui, 2009). Indeed, in many cases, the potential Sino-Western JVs fail before they begin as a result of a breakdown during the negotiating process (Zhao, 2000; Sheer & Chen, 2002).
This paper provides a case analysis and case solution to a Harvard Business School case study on efforts to negotiate a joint venture (JV) between Pennsylvania-based Wyoff Corp. and Jinan, China-based China-LuQuan Chemical Ltd. (“CLQ”) (Sebenius & Qian, 2009). The proposed JV will be based in Shandong Province and produce and market specialty chemical additives from the AD and CE families of chemicals. The major decision makers/participants in the case are Robert Kwang, chief negotiator for Wyoff, and Bingtan Zhou, chief negotiator for China-LuQuan (CLQ). While the analysis takes into account the positions of both Wyoff and CLQ, the recommendations are addressed to Wyoff’s leadership.
The time setting for the case is June of 2007. CLQ, Wyoff and a third German-based foreign partner, chemical-maker Dekelwerke, signed a provisional agreement in December of 2006 giving the firms a 50%, 25% and 25% share, respectively. CLQ was to contribute its Rizhao complex’s “production facility, land, nation-wide sales offices and marketing channels, and skilled labor” (valued at US$300 million) while Wyoff and Dekelwerke would each contribute technology and US$150 in cash (Sebenius & Qian, 2009, p. 8).
Both Wyoff and CLQ have successfully worked with the German partner, Dekelwerke, in the past. Wyoff and CLQ, however, have a troubled history. Between January 2001 and August 2002, Wyoff (with Kwang then serving as the assistant to Wyoff’s chief negotiator) and CLQ (with Zhou as chief negotiator) engaged in protracted and often confrontational negotiations to form a JV to produce Caxtalene, a special chemical input invented by Wyoff. These negotiations, which CLQ had initiated, failed, and CLQ eventually partnered with a French chemical company to produce Caxtalene. Both Kwang and Zhou viewed the experience as a major blot on their respective careers. In this current round of negotiations, Wyoff, with the full support of its top leadership, approached CLQ regarding the formation of a JV in China to produce the AD and CE chemicals. Despite having come to a provisional agreement on the basic ownership structure and strategic objective of the JV, six months later Wyoff and CLQ were still at polar extremes regarding a number of key issues. Moreover, there appeared to be hard feelings and a lack of clear understanding on both sides regarding the other’s negotiating tactics and...