Reference no: EM133313051

Question: Why was each of the partners interested in forming the Beijing-Lufthansa International Joint Venture? What was their motivation to form an International Joint Venture rather than trying to execute the project independently?

Case Study: Beijing-Lufhansa Center Co. Ltd.

The joint Venture

When in 1978 the People's Republic of china opened its frontiers to foreign investors, the need for modern hotels, apartments and office space that could meet western requirements became obvious. Deutsche Lufhansa AG together with the Beijing city government decided to cooperate in the establishment of a multi-functional service center. This was supposed to provide logistical basis for international business travelers for whom China was an unknown territory at the time. The joint venture contract as signed in 1986, and in May 1992 the Beijiing-Lufthansa Center Co. Ltd. was opened as one of the largest Chinese-German ventures.

Requirements for the selection of the management team

According to the legal requirements of joint ventures in China, the management team of a joint venture is composed with equal representation of both parties. For the selection of the German members, their technical abilities and industry as well as management know-how were of major importance to ensure acceptance by their Chinese counterparts. Furthermore, an understanding of Chinese culture, combined with the ability to accept ad cope with decision-making structures and the lifestyle of the foreign country were important in creating an environment of cooperation and learning. Learning opportunities were a major motive in the Chinese decision to work in a joint venture.

Another important aspect was language. As many of the older Chinese were not able to speak English at the time, there was often a need for an interpreter. All documents had to be translated either into English or Chinese. For all important meetings there were interpreters. German managers took into account that this was time consuming and that not all information was consistently transferred. Consequently, it would be useful for the cooperation and the atmosphere within the joint venture if the Germans also had Chinese language capabilities. The German management team members were told that they if were able to influence the section of their Chinese counterparts, they needed to understand that status and important contacts, as well as informal relationships with the administration and government played an important role in ensuring an important contribution to the joint venture's success.

Collaboration

Although all parties should have a common interest in the success of the joint venture, different perspectives on specific topics can lead to conflict. This can have an impact on the choice of suppliers (foreign versus Chinese instead of quality considerations) or on the use of company cars representing important status symbols. The use of foreign consultants was favored by the Germans for quality considerations, while the Chinese voted for local consultants for cost reasons. The same was true in discussions concerning the need for expatriates. Chinese manages tried to avoid expensive expatriates while the German counterparts were convinced that they needed people with specific qualifications, which , according to them, could only be provided by expatriates. Again, the negotiations about these issues were very time consuming.

With respect to decision-making, the joint venture stated that the general manager is responsible for daily business and that this person be supported by a Chinese deputy. These regulations ensured that the Chinese legal and cultural environment was sufficiently respected within the decision-making processes. However, in practice, this meant that the general manager could not decide anything without the Chinese deputy and decision processes became slow and complicated. This led to a change in the decision-making relationship between the general managers and the deputy, which gave more power to the deputy and ensured that the general manager could take only a limited number of decisions without the deputy.

Loyalty

In many situations, strong loyalty to the parent company presented a problem because the managers did not put the common project at the center of interest. For example, the Chinese managers did not want to make decisions without consulting with their parent firm, which, again, led to a very slow decision making process. Here, the high degrees of power distance and uncertainty avoidance of the Chinese partners may have influences this behavior. However, this approach endangered the loyalty to the joint venture and such delays also discouraged local employees and management from both sides. Another issue which led to difficulties involved the way in which expatriate managers viewed their jobs at the joint venture. For them, their position in China was often just another step in their careers which could possibly lead to a higher position after their assignment. In this case, loyalty to the parent company was higher than loyalty to the joint venture.