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Third Edition
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A role-play simulation designed to teach
cross-cultural negotiation strategies
Senior Editors
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For most of us, role-playing, like acting, does not come naturally. It can make
us uncomfortable, self-conscious and awkward. But in this exercise, you will
not be standing alone before a judgmental audience. You’ll be working
alongside several other people and you won’t have to memorize a script.
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The best way to play your role in this simulation is to read, re-read, and
immerse yourself in the background material, country information, character
descriptions and suggestions provided in your role chapter.
You should read the pages once without underlining anything. Then, after a
day or so, read through them again. This time, underline important points;
write comments and annotations in the margins. You may even find it useful to
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outline your character role and his or her goals and motivations.
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better you know your role packet, the more prepared you will be during the
simulation.
In terms of what you want to achieve, this is up to your team. You will be
meeting together twice: the first meeting will occur with your U.S. team
members in order to establish a working strategy and a set of goals for your
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company. The second meeting will be with the Chinese representatives in
Shanghai, China.
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2. Company & Context for the U.S Team: Olin Life Insurance Company
Olin Life’s History. Founded in 1977 by David Louis Olin, Olin Life Insurance
Company (Olin) is a financial services company, providing a portfolio of savings,
retirement, pension, health and life insurance products and services to
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individual and corporate customers. From its headquarters in Columbus, Ohio,
Olin operates almost everywhere in the United States and has two overseas
outposts in the Philippines and Indonesia. In all these geographic areas, Olin’s
business is primarily life and health insurance products.
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Wesleyan University. He is responsible for expanding Olin’s operations into 47
states, Puerto Rico, the Philippines, and Indonesia. His success has resulted in
Olin’s healthy bottom line over the last ten years, and its reputation as a solid
and reliable insurance company.
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Now Terence has ambitious goals for his company: He wants to lay the
groundwork for expanding into Asia, particularly India, Vietnam, and China.
Some colleagues are against further Asian expansion; the global economy in
2011 remains fragile and uncertain. But Terence claims these countries are
fast-growing economies with enormous populations, huge ambitions, and
unlimited potential for strong middle classes in the next decade.
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Terence is excited about entering the Chinese life insurance market. He likes to
quote a number and an acronym—1.3 billion and WTO. The number, of course,
refers to China’s population. Even with the one-child policy established in
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1980, China continues to grow. It has the largest population on earth; in fact,
China is home to 20 percent of the world’s population. The acronym, WTO,
refers to the World Trade Organization, the Geneva-based international
organization that regulates how global trade is governed. The World Trade
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For nearly fifteen years, China tried to join, first, the General Agreement on
Tariffs and Trade (GATT). When GATT became the World Trade Organization
(WTO), China was denied entry because its markets were considered too closed.
However, in February 2000, The People’s Republic of China and the United
States reached an agreement on important issues related to entry. Regarding
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the insurance industry, the countries agreed that after China officially joined
the WTO, it would
1
http://www.wto.org/english/thewto_e/whatis_e/whatis_e.htm
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• Award insurance companies operating licenses solely on the basis
of reasonable and equitable criteria. Companies established for
over 30 years with at least $5 billion in assets could apply for a
license from the China Insurance Regulatory Commission (CIRC),
the industry’s watchdog organization in China.
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Eliminate all geographic limitations for foreign insurance
companies by 2004. In 2006, foreign insurance companies would
be able to set up branches and offices anywhere in China.
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joint ventures with Chinese companies.
Now, in 2011, all these obligations have reportedly been met by the Chinese
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government. Today James Terence believes that 1.3 billion plus WTO equals
endless opportunity. Olin’s profits from both the Philippines and Indonesia
have been acceptable, with slow but steady growth. He claims, “This area of the
world shall help us grow for decades.” He assigned the Vietnamese and Indian
markets to separate teams of Olin researchers, but Terence wants to deal with
China himself.
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Terence visits China. Terence’s first trip to China took place in 2005 when he
accompanied his wife, Marilyn, to China. She owned a small import store in
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Columbus, and had always wanted to visit East Asia. To his surprise, this
paradoxical land of Confucian values, Communist government, industrious
workers, and extraordinary history and culture captivated him. He was amazed
at how huge areas of the country, especially the coastal cities, were changing so
quickly. Construction was going on everywhere, even though most buildings
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were still unoccupied. One tour guide joked that “the national bird of China is
the building crane.” 2
His second trip occurred in 2010. He was invited as a member of a select group
of American business leaders to visit multinational companies in China,
including Coca Cola and Proctor & Gamble. They also visited a few successful
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joint ventures between U.S. firms and state-owned companies. The American
group was given royal treatment. The group stayed at luxurious hotels in
Beijing and Shanghai, dining lavishly and frequently at banquets, and even met
with the Premier. At one of the banquets, the Premier declared, with great
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animation, that the U.S. and China were “true friends.” He encouraged
American companies to invest in China.
2 Smith, Kennedy
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remarkably friendly to the Americans. They talked continually of forging
stronger U.S.-Sino business ties, and actively urged the business leaders to
arrange future visits.
One evening over drinks, Terence met and spoke with Chen Ji Ping, a manager
of the China Insurance Regulatory Commission (CIRC), the governing and
decision-making body responsible for issuing insurance licenses. Mr. Chen and
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Terence got along so well that Chen invited Terence for a return visit to
Shanghai. Terence immediately accepted and suggested a date in the near
future. Chen beamed, exclaiming, “We will have an enduring friendship.”
Just to verify that Chen’s invitation was sincere, Terence called Chen’s office
the next day. Terence asked if, indeed, Chen would welcome a return visit by
Terence and his staff to discuss the possibilities of opening an insurance
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branch in Shanghai. Chen assured Terence that he was very serious and would
consider it an honor to again host his new friend.
During the 2010 trip, Terence often had tried discreetly to find out the process
for obtaining a license to sell life insurance. None of the Chinese were
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forthcoming, however, not even Chen. Terence decided to extend his tour
another week so that he could explore Shanghai, which hosts “…hundreds of
financial institutions, including commercial banks, securities companies,
insurance companies, fund management companies, trust companies, futures
companies and financial leasing companies. At that time, there were 787
financial institutions, of which 170 were foreign-invested.” 3 Chen was not
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available that week, so Terence instead arranged for courtesy calls at several
U.S. and British offices.
Terence spoke with many people about the licensing process to sell life
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insurance in China. He met with American Chamber of Commerce
representatives in Shanghai. He again met with officials from the China
Insurance Regulatory Committee (CIRC), and referred to his recent friendship
with their colleague, Chen Ji Ping. The Chinese responses were hopeful yet
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ambiguous: “This can be done; the process is hard, but for good friends of
China, it can be done.”
The more research Terence did, the more excited he became. He read in the
International Insurance News blog of July 18, 2011, where CIRC claimed
“…that the Chinese market is fast becoming one of the most lucrative in the
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Everyone Terence spoke with assured him that China will be a “growth engine
for every multinational insurer for the next few decades.” 5 He discovered that a
Swiss Reinsurance Company (one of the world’s largest reinsurers) study
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determined that “…China represents the sixth largest insurance market in the
world and will become the second largest, behind America, within the next ten
3 http://en.wikipedia.org/wiki/Shanghai
4 www.globalinsurance.com/blog/circ-post-chinese-insurance-profits-395120.html
5 Smith, Kennedy
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years.” 6
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venture companies meanwhile involve 18 property and casualty insurers, 28 life
insurers and six reinsurance firms.” 7
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Through his research, he also discovered any foreign life insurance company
that wanted to open a branch office in China would probably be required to
participate in a joint venture operation. In the American Chamber of Commerce
study, Terence read that “…over half of companies responding [to the study]
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said foreign enterprises cannot obtain the same licenses as domestic
competitors or the process is more complicated or takes longer…..The chamber
said banking, insurance and finance are heavily restricted, and foreign
companies are allowed little access.” 9 Apparently, Western companies cannot
get a license to establish a wholly-owned office.
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He spoke with AIA managers in Shanghai, who were friendly but not
encouraging. AIA is an offshoot of AIG, the first Western company to sell
insurance in China. They insisted that entering China would take a long time
because that was the nature of doing business with the Chinese. They pointed
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out, “AIA’s success is not only attributed to its good management and
operations, but to its persistence and longtime presence in China.” 10 In fact,
AIG has been in China since 1919. As a result, its “life insurance operations
have the largest market share of any foreign firm…a trivial-sounding one
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percent.” 11
6 www.globalinsurance.com/blog/circ-post-chinese-insurance-profits-395120.html
7 Ibid
8 Ibid
9 MacDonald http://www.chinapost.com.tw
10 Adler
11 “Where the state…”
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Terence convinces his colleagues. On his return to Ohio, Terence explained
his China proposal to his senior staff: May Terence, his daughter and Senior
Vice President of Olin Life; Erin Solomon, the Director of Marketing; and
Thomas Taylor, Chief Corporate Counsel.
May completely agreed with him about China; Solomon and Taylor needed
convincing. Neither one had been enthusiastic about entering the Philippines
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and Indonesia; they considered those areas too politically and economically
volatile, and saw a possible drain on company resources. Yet they were both
pleasantly surprised at the results of the last six years, especially that growth at
least had been steady. They were also glad to see many management positions
filled by indigenous Filipinos and Indonesians in the last year. But, as everyone
knew, China was different.
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Finally, Solomon and Taylor tentatively agreed to the project, but Taylor
remained particularly skeptical. Having secured the agreement of the senior
staff, Terence then outlined solid evidence regarding the Chinese market to
Olin’s Board of Directors. During his presentation, Terence provided the
following facts:
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interviews with
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PricewaterhouseCoopers completed “a survey based on 1,200
[insurance] chief executives in 69
countries…China tops the list of attractive markets, followed
closely by Brazil and India.” 12
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• Insurance growth in the U.S. is becoming saturated in some areas,
with over 1,700 companies selling just life insurance alone.
•
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“China’s current insurance penetration rate (as a percentage of
GDP) is only around 3.8 percent and is expected to increase by 18
percent within the next five years.” 13
• China has 1.34 billion people who live long (average 74.68 years).
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• Unlike Americans, the Chinese save a lot. “The gross savings rate
[the percentage of GDP that is not consumed immediately] is
around 50 percent. By contrast…the savings rate in the U.S. is
the lowest of any major country --roughly 10 percent of GDP.” 14
The U.S. personal savings rate as a percentage of disposable
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income stood at about 4% at the end of 2009. The last time the
savings rate exceeded 10% was in 1984. Compared to most other
countries, the US has the lowest personal savings rate in the
world 15
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12 Belz
13 www.globalinsurance.com/blog/circ-post-chinese-insurance-profits-395120.html
14 Shiller
15 http://seekingalpha.com/article/200676-household-debt-gross-domestic-savings-china-vs-other-countries
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• China “has a mind-boggling 960,000 millionaires…[which] was a
jump from 825,000 millionaires two years back [2009]. The China
Daily reported that 960,000 millionaires have personal wealth of
10 million yuan ($1.5 million) or more. 16
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insurance. But evidence shows that the middle classes are
increasingly spending more on insurance. 17
• Since opening its markets to the western world in the early 1980s,
China has grown at a healthy annual rate of 8-10 percent. Unlike
other East and Southeast Asian countries, China is less
dependent on exports and information technology, and its
domestic demand remains strong.
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• China’s low life insurance rate combined with the high savings
rate creates what Yale economist Robert Shiller calls a “virtuous
circle: rapid economic growth leads to high savings, which in turn
sustains rapid growth.” 18
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Terence made his position clear to the Board: If Olin can make headway earlier
than other European and American insurance companies trying to obtain
insurance licenses, it could capture a good-sized chunk of the Chinese market.
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He also warned the Board that Olin would have to seriously compete for this
business. Other American insurance companies, including New York Life,
MetLife, and John Hancock, are already in China. Additionally, Canadian and
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European insurance companies were competing daily to enter the huge Chinese
market.
workers’ children.
16 http://www.ndtv.com/article/world/china-has-960-000-millionaires-and-still-counting-
17 Cui 2001
18 Shiller
19 Quanyu 3
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For decades, the system has been called the “iron rice bowl.” This phrase
means that the arrangements for taking care of all aspects of people’s lives were
provided by these SOEs. The “iron” connoted that the system was unbreakable
and lasting. When a person began work for a company, that job came with a
host of amenities, including housing, access to health services and retirement
pensions. This “cradle-to-grave” system was run by the government, and
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workers could rely on this system.
Granted, the SOE jobs were not easy, and the amenities were spartan compared
to anything offered in the United States or Europe. Yet under this system,
unemployment had been almost nonexistent in China. When the “iron rice
bowl” was the norm, it offered security and stability to Chinese families. That all
began to change after Mao Zedong died in 1976.
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Decades of Mao Zedong’s policies had resulted in economic disaster. “The
political madness of [Mao’s] Great Leap Forward in 1958 and the decade-long
Cultural Revolution…begun in 1966…destroyed the country’s economy and tore
apart the fabric of Chinese society.” 20 Millions of Chinese died from famine or
were executed.
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In 1980 China was backward, hungry, and totally uncompetitive. Instead of
providing the overall economy with stability and steady prosperity, the SOEs
had created an unstable, uncompetitive, and bloated system of corruption.
China lacked materials, energy sources, transportation and communication
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infrastructure, and human capital needed for steady growth.
Chinese standard of living, and benefit from the wealth being generated in the
West. Deng wanted to incorporate the principles of a market economy while
gradually moving away from the centrally planned economy established by Mao
Zedong.
Deng further announced that encouraging foreign direct investment into China
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The dramatic result has been an incredibly reinvigorated and booming China.
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20 McGregor 33
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living standards rising for hundreds of millions of people at a rate
that is unprecedented; it is a country that still, more than 20
years after Deng said getting rich was glorious, has extraordinary
momentum. China is growing at eight percent a year, on the back
of vibrant exports and strong domestic demand. It is inhaling
foreign direct investment--$66 billion last year alone. After years
of hype about the riches to be earned in a nation of 1.3 billion
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people, the conviction has taken hold in executive suites that
China’s economic traction will endure. 21
Even further proof that entering China was a no-brainer came from some
“attention-getting raw numbers.” 22 For example, China has more internet
users than the entire population of Japan, but that only amounts to a
penetration rate of 10.5 percent. 23
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Terence wins approval. The Board approved his plan. Exhausted, Terence
walked back to his office. He felt slightly dizzy, so he sat down, turned off his
phone, and shut his laptop. He told his secretary not to bother him for an hour
so he could nap. Instead of sleeping, though, he recalled another incident from
his group trip to China.
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During his week alone in Shanghai, Terence lunched with a woman from the
American Chamber of Commerce. She sketched a slowly unfolding, but bright
picture of the current Chinese insurance market. With fewer and fewer state-
owned enterprises (SOEs), the Chinese government must reduce those “cradle-
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to-grave” social benefits. But the Chinese people still need health insurance,
life insurance, property insurance, and private pension systems. Indeed, the
social security net in China is almost bankrupt. 24 Chinese workers and
families affected by these dramatic actions desperately need some sort of safety
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net. And since China is still relatively new at developing sophisticated
insurance products, foreign insurers will be able to help them create that
expertise.
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She told him that a few state-owned insurance companies control nearly all of
the current Chinese insurance market—close to 93 percent. Although half of
all insurance firms in China are foreign, their penetration in the market is less
than three percent.
Under the WTO regulations, China will grant licenses to operate insurance
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companies based according to standards that are more reasonable than in the
past. These standards, called “prudential criteria” in insurance circles, state
that a company must have been operating for at least 30 years as an insurer
and hold a minimum of US$5 billion in total assets. It also eliminated all
geographic restrictions for foreign insurers throughout the country, so a
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21 Powell 132
22 Plafker 10
23 Ibid
24 Lauffs
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met the 30-year criterion in 2007.
The AmCham woman told Terence that joint venture requirements in life
insurance are being liberalized. Government standards for foreign life
insurance joint ventures (jvs) will now allow a 50 percent partnership; non-life
insurers, such as automobile, disability, property and pensions, are allowed a
51 percent partnership.
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Too good to be true? “There’s got to be a dark side to this picture,” Terence
had said aloud to the AmCham rep. She had responded with a hearty laugh.
“Oh yes, there is. Just hire the best attorneys you can afford before you come
over here, and prepare for a long march!”
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Business people aren’t allowed to have input into drafting business laws, even
when they know precisely what their industry needs. No one really knows the
rationales for what laws do exist. There are multiple levels of government rules
and regulations in China; some aren’t consistent between levels; some are
redundant, but worded differently. Defining terms can be expensive and time-
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consuming, and it takes more time and more money than most foreign
companies can afford to commit. There’s a lot of risk involved because you
can’t predict or anticipate the changes in personnel, laws, or policies. You can
develop good guanxi with people in a certain department, and then, whoosh,
they’re gone!”
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She went on, “It’s a completely natural phenomenon in China to over- inflate
growth rates and stock values. It is a well-known fact that statistics lie in
China. There’s so much more to be gained, both personally and collectively, by
falsifying figures.” 25
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“What’s gwanshee?” asked Terence. She looked at him for a moment, and then
leaned forward, close to his face. “In China guanxi to business is like water to
life…you cannot live without it.” Terence had listened intently for hours that
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night. When he returned to his hotel, he stayed up until almost dawn, writing
down notes of everything he learned that day.
After reflecting on this conversation, Terence decided his excitement about the
Chinese market was absolutely justified and the Board’s decision was correct.
Now he and his team would begin this exciting “long march!”
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25 “How” 45
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3. Background Information: U.S. Team
Each of the three characters on the U.S. team has a specific chapter to be read
by that individual character only. However, this section provides the common
background for all team members, including 1) a brief description of each Olin
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team member, 2) the time frame within which your visit and goals should be
accomplished, and 3) the primary points you will negotiate with the China
Regulatory Insurance Commission (CIRC) representatives in Shanghai.
Olin Life CEO James Terence had planned to travel to Shanghai and initiate
this meeting and negotiation himself, but health matters have kept him in
Columbus. He’s been having dizzy spells recently. His doctor diagnosed an
inner ear problem. His wife and daughter refuse to let him drive or travel until
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he can have further tests, and hopefully some treatment, to end these spells.
The doctor banned flying because of possible damaging effects on inner ear
conditions.
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In unusual circumstances, your team might be able to extend your trip, but no
one expects to need the extra time and the possibility has not been seriously
discussed. In fact, once Terence realized he could not go, he extended the
team’s trip from a week to ten days.
The insurance business is in her blood. As a teen, May worked for her father
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during summers and holidays. She graduated from Boston College with a
degree in Business Administration, and then completed her MBA at Babson
College while her husband completed his doctorate at Harvard University.
While living in Cambridge, Massachusetts during their graduate school years,
May worked at John Hancock Insurance Company in Boston. When she and
her husband moved back to Columbus, she began working for Olin Life. She
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has progressed rapidly in the organization, landing the position of Senior Vice
President in 1998.
While whispers of “nepotism” have occurred within the company, May hasn’t
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paid any attention. She knows her father would never have promoted her
unless she was absolutely qualified; no, more than that, overqualified, for the
position. Terence demands high standards from his management staff. She
always works hard, just like her father. A major difference, however, is that
May is quieter than her father. Her demeanor is usually serious, and she is
known as a good listener with colleagues.
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Terence relies on his daughter as a sounding board and close advisor. Like her
father, she loves challenges and tasks that appear, at first glance, impossible.
She is 100 percent behind Terence’s ambition of expanding into China. She
has never traveled there, but has been to the Philippines several times.
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and 16. She is a woman of great energy, discipline, and strong opinions. She
received her B.S. in Political Science from Rutgers University and her MBA from
the Stern School of Business at New York University. Solomon worked for years
at New York Life Insurance Company until she was lured away by Olin Life in
1999. Solomon figured the lifestyle in Columbus, Ohio would be less difficult
than Manhattan’s, and she was right.
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One year after moving there, she asked her mother, a retired widow, to move in
with her and the girls. The move has worked out well for everyone. The girls
have their beloved grandmother-- who loves organizing, cooking and taking care
of her only grandchildren--at home. Erin feels secure in knowing the three
people she loves most in the world are together and safe.
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This arrangement also frees her to concentrate more intently on work, where
she thrives. In seven years at Olin Life, Erin has advanced steadily, finally
serving as Director of Marketing for the life insurance division. Her genius is
looking at a situation and a marketing concept from a cool distance; she can
listen to a specific idea, mentally map out its weak points and strengths, and
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then develop a balanced analysis. She expresses her opinions bluntly. Even
though colleagues often dislike Erin’s straightforward assertions, she never
takes it personally. She believes deeply that her candor is the real value she
adds to the company. James Terence and Solomon get along very well; he
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values her judgment highly.
Solomon’s work habits are efficient. Although her work hours are long, she
feels no guilt because her kids have their grandmother when they return from
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school. Her mother does most of the cooking, so when Erin comes home, she
can focus exclusively on her family.
Chief Corporate Counsel Thomas Rainey Taylor graduated from Pepperdine Law
School. He is an easygoing man with a penchant for irony and fine wines. He
prefers to be called Thomas rather than Tom by friends and associates. “People
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who dislike me call me Tom,” he tells new acquaintances. After law school,
Taylor worked for several years as a bank attorney in Seattle. He grew tired of
the dreary weather in Seattle, however, and longed to return to California.
Instead, one of his old law professors at Pepperdine called, telling him of an
ideal position at Olin Life in Columbus, Ohio. He applied and was hired after
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his first interview. Five years later, he became Chief Corporate Counsel.
Taylor doesn’t like the Ohio weather either, but this job has placed him on a
first-rate career track. He knows he will eventually return to California, if only
at retirement. He envisions one day buying a vineyard in Sonoma County and
engaging full time in viticulture. He is unmarried, but has an active social life.
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Taylor is a habitual crossword puzzler, anagram and Scrabble player. Known
as a highly articulate man, he borders at times on eloquence. He can draft a
legal document that is flawless in capturing nuances and shadings. This
ability to use language makes him a formidable negotiator.
Taylor has traveled a great deal with Terence, who has marveled at another of
Taylor’s gifts: he rarely seems to need more than three or four hours of sleep at
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a time. Jet lag does not affect him, even on excessively long flights on which he
indulges in reading and crossword puzzles.
Time Frame. Your team will arrive in Shanghai, China on June 2nd. Your
return flight leaves Shanghai on June 12. You will have 10 days to conclude
negotiations and obtain some kind of signed agreement. James Terence believes
this is enough time to accomplish your goals.
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Primary negotiation points. In the order listed below, your team will begin the
negotiation process with representatives of the China Insurance Regulatory
Commission. You wish to obtain a contract covering most, if not all, of the four
stipulations.
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1. A license to open a wholly-owned branch office of Olin Life
Insurance Company in Shanghai. (The precedent is AIG, which
has been allowed to wholly own their operations in Shanghai for
decades.) If CIRC refuses to agree on a wholly-owned license, then
a joint venture with either a state-owned or a small private
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company would be acceptable. There are benefits to either a state-
owned or a privately owned company. For example, with the
latter, you assume that Olin would have quicker access to the
Chinese market and a more experienced management team with
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which to work.
3. For the first five years, you will insist that Olin Life maintain
26 Lauffs
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management control over all aspects of the company’s operations.
During those first five years, Olin will set up a training center
whereby promising Chinese candidates will be extensively trained
in all aspects of managing the operations. This will demonstrate
good will toward the Chinese and convince them that Olin is in
China for the long term. This is the same way you set up
operations in the Philippines and Indonesia.
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4. A Chinese contribution of land and a building in the Pudong
area of Shanghai. The Pudong area is essential because of its
prime location and proximity to other multinational corporation
headquarters. The building should be capable of providing office
space for at least 15 people initially, and up to 60 over the next
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five years.
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4. Strategy Session: U.S. Team
Your team will have 90 minutes (more or less, depending on what the facilitator
has told you) during which you will
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upcoming Shanghai meeting: what is the minimum that you can
return home with?
¾ Prepare thoroughly for questions you believe the Chinese will ask.
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The most obvious question: What’s in it for China?
When the actual negotiation session begins, May Terence will perform the
introductions and the closing statements of appreciation and gratitude. One
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member of your team should take notes and prepare a working draft to use at
the negotiation session in Shanghai. Use your time in this session efficiently.
Olin Life’s first geographic choice to set up operations is Shanghai. The reasons
are fairly obvious, but you all need to be able to explain them in case
representatives want to know why you selected this city over the many other
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large cities in China.
First of all, a larger percentage of the new Chinese millionaires are located in
Shanghai. And Shanghai is fast becoming not just a wealthy city, but also a
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place of the future. According to Doug Guthrie, author of Dragon in a Three-
Piece Suit: The Emergence of Capitalism in China,
overall [in China]...has landed more foreign contracts and has had
more foreign capital…invested [in it] than any of the other major
[Chinese] cities…Shanghai’s GDP [is] significantly higher than that
of other major cities…[with] the highest rate of consumption and
the highest average annual salaries…[The] legal system is
probably more developed here than anywhere else in China..[It is]
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the best place for cultured and educated people, for economic
development…an excellent place for doing business. 27
You all agree on Shanghai as Olin’s first site choice. The challenges Olin Life
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faces as an organization--the need for educating the Chinese public, the need
for adapting to different provincial cultures, and the ability to use traditional
means of advertising--all these factors would be far easier and less risky in an
27 Guthrie 13-14
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established and modern city like Shanghai.
Certainly, other cities might offer some of the benefits of Shanghai, such as
Beijing or Tianjin. However, your goal is to focus on Shanghai since it would
offer the least risks for Olin Life. You do not want to locate in any other
Chinese city. James Terence has been adamant about this point.
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The population of Shanghai is about 22.3 million people. Other major industrial
cities in China include Beijing (pop. nearly 20 million), Tianjin (pop. 12 million),
Guangzhou (pop. 15 million), Chengdu (pop. 10 million), and Chongqing (pop.
30 million). You should all be able to locate these cities on a map of China. 28
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28 http://en.wikipedia.org/wiki/List_of_cities_in_the_People%27s_Republic_of_China_by_population
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5. U.S. Roles: Erin Solomon, Director of Marketing at Olin Life
(for her eyes only)
You are excited about this trip, not only because it’s a great opportunity for Olin
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Life, but because you’ve always wanted to see China. Since his return from
China, Jim Terence has been obsessed with establishing a branch office there,
and you share his enthusiasm. You do feel some dismay that he has appointed
his daughter, May, as the leader of your group. It’s understandable and she’s
obviously smart, but you sense a feeling of insecurity from her, as if she isn’t
quite as confident as she acts. You’ve never been close to May and you wonder
to yourself (not out loud) whether she can be effective in Shanghai.
First, the important points your group will attempt to secure in a legal contract
O
while in Shanghai: Olin Life wishes to obtain some kind of signed agreement
covering most, if not all, of the following four stipulations:
C
Insurance Company in Shanghai. (The precedent is AIG, which
has been allowed to wholly own their operations in Shanghai for
decades.) If CIRC refuses to budge on a wholly-owned license, then
a joint venture with either a state-owned or a small private
company would be acceptable. There are benefits to either a state-
owned or a privately owned company. For example, with the
T
latter, you assume that Olin would have quicker access to the
Chinese market and a more experienced management team with
which to work.
O
On the other hand, a state-owned enterprise (SOE) would have the
protection of the Chinese government. The assumption here is
that the government would not want the company to immediately
fail, thus it would help keep it alive. This would give Olin
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3. For the first five years, you will insist that Olin Life maintain
D
29 Lauffs
18
in all aspects of managing the operations. This will demonstrate
good will toward the Chinese and convince them that Olin is in
China for the long term. This is the same way you set up
operations in the Philippines and Indonesia.
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prime location and proximity to other multinational corporation
headquarters. The building should be capable of providing office
space for at least 15 people initially, and up to 60 over the next
five years.
May also asked you for a SWOT (strengths, weaknesses, opportunities, and
threats) analysis of the China insurance industry. It certainly has significant
O
strengths. According to the China Insurance Report Q3 2011,
• The size of the insurance sector is huge.
• The key growth driver of the life segment—huge personal savings and few
attractive alternatives—will be in place for the foreseeable future.
•
•
C
The number of older people is increasing, which should increase the
need and demand for retirement income products. 30
China’s GDP has been growing at 8-10 percent annually for the past 20
years. The population of China’s “economically able” 31 groups—those
who can invest in products like life insurance—exceeds 300 million (close
T
to our entire population in the U.S.!) By economists’ accounts, this
number will most likely double in the next ten years.
The weaknesses and threats all involve the unpredictable actions of the
O
government and the non-transparent regulatory environment. But the
opportunities remain enormous. 32
You also have been asked to summarize the Chinese marketing environment
and landscape, especially in Shanghai. Where to start? First of all, the richest
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cities in China are Shanghai, Beijing, and Guangzhou. For now, the population
is relatively young. These young people are far more consumer-oriented than
their parents.
Television advertising heavily influences the population in Shanghai, so that
can be a useful tool to use when you set up offices. Television is the preferred
medium through which Olin Life has advertised for decades. Virtually everyone
O
You’ve also found out that multinational corporations like Olin Life can succeed
19
in a place like Shanghai, whether or not they adapt to the specific culture or
maintain standardized marketing practices. 34 That’s good news. In 2006, more
than 330,000 foreign investment projects were operating in Shanghai. In fact,
some estimates indicate approximately 80 million “middle class” consumers
exist, mostly in cities like Shanghai, Beijing, and the other big cities. 35
Of these “middle class” consumers, more than half use credit cards. “They’re at
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the beginning of a credit cycle, not the end” 36 of one like the U.S. They spend a
great deal of their income on nonessential items such as fashionable clothing,
travel, leisure activities, and private insurance. Most of them wish to live a
good life, working hard, but also playing hard. They have a lot of faith in the
future; most want to ensure they have enough savings (and insurance coverage)
to deal with difficulties they may encounter as more and more state-provided
benefits disappear. 37
So, those at the top of the economic ladder are a growing and substantial target
O
market, all of which is good news for Olin.
May asked you and Thomas to figure out the minimum you think you can
return to Ohio with… the minimum that Olin can return with after negotiating
in Shanghai is an equity joint venture (ejv) with a small private insurance
C
company. You also want to push for 51 percent ownership.
34 Cui
35 Ibid
36 Belz
37 Ibid
38 Plafker 63
39 Chadee and Qui 133
20
6. Negotiation Session in Shanghai: U.S. Team
(for their eyes only)
You’ve been in Shanghai for three days now. A pair of English-speaking tour
guides has taken you on sightseeing tours of the famous cultural and historical
places in the city. You’ve seen the Yu Yuan Gardens, the Temple of the Jade
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Buddha, the old Shanghai neighborhoods, the Jade Carving Factory, the Art
and History Museum, even the Carpet Factory and the Children’s Museum.
You have been taken to multiple brand new shopping malls. You’ve all eaten so
much that you each feel like you’ve gained five pounds. Thomas is suffering
because the air is so polluted, the humidity is so high, and his allergy medicine
isn’t working. All of you are fatigued and anxious to sit down, not in a minivan,
but at a table, so you can begin the work you came to do.
O
You’ve met about four or five different China Insurance Regulatory Commission
(CIRC) and Shanghai city officials at the banquets you’ve attended the last two
nights. Yet you still have not met Chen Ji Ping, or the principal negotiators of
CIRC. Before you left Ohio, May faxed a polite list of the points you’d all like to
C
accomplish on this trip to the CIRC secretary who’s arranging the talks. The fax
was simplified from your list of points because you obviously don’t want them
to know all your thoughts before you even meet them. The fax as sent is below:
You each have a copy of your objectives as listed in the four points. What
follows are some arguments you can use when you discuss these points with
the Chinese CIRC representatives.
D
Point 1. You know that American International Group (AIG) has established the
only wholly-owned foreign operation. Of course, AIG is unique in its history
with China, having been there since 1919. But your argument will be that Olin
Life is, like AIG, a company with a solid financial history that wishes to embrace
opportunities in Asia. While China still has a limited number of foreign
21
insurance companies, the entire industry will need all the help it can get in
order to cover the huge population of China. Olin Life can offer such assistance
and is more than willing to do so. Fast tracking Olin Life is what your team will
push for with the CIRC officials. Whether or not the Chinese officials will see
this as too aggressive—well, as a team, you will have to gauge that carefully and
adjust accordingly. Jim Terence has put his trust in your collective instincts.
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You will also point out how well Olin Life’s outposts are doing in the Philippines
and Indonesia. (You cannot go into more detail than those general assurances,
on the orders of Jim Terence.)
This is your opening position, and although it would be nice to win a wholly-
owned branch, the likelihood is remote. After arguing this point as hard as you
can, you can bargain your way back to a position more likely to succeed; i.e. an
O
equity joint venture (ejv) with either a state-owned or a private insurance
company. You’re aware that a foreign company may choose its own partner
with CIRC’s approval. You suggest that Olin Life partner with an automobile
insurance company.
C
Point 2. If Olin cannot get a license for a wholly-owned operation in Shanghai,
you would like a list of references of reliable Chinese automobile insurance
companies with whom you could establish an equity joint venture. An ejv has
substantial benefits for both the U.S. and China. With an ejv, China would get
both the capital that Olin brings to the project as well as modern management
tools and concepts to develop their insurance industry.
T
For example, the level of expertise Olin Life can provide is priceless. It is widely
known that China lacks experienced managers, nor does it have an up-and-
coming group of fresh MBAs ready to take over converted state-owned
O
enterprises (SOEs). As the Chinese insurance and capital markets become less
regulated by the government, they will need experienced managers to handle
the transition from SOEs to private enterprises. An ejv would allow China to
acquire the latest methods of technology, i.e. computerized database systems,
N
Of course, there are qualifications to this offer. Olin Life needs enough
company control in order to adopt the best practices for motivating potential
O
So, with this in mind, Olin must have at least 51 percent ownership of the ejv.
There are just too many risks involved in running a company as complicated as
the insurance industry with inexperienced managers. With dominant control,
for example, you will be able to devise effective plans for salaries. This, too, will
clearly benefit the Chinese.
22
With 51 percent, you’ll be able to consider a whole range of incentives to
motivate Chinese employees to work hard and remain loyal. Olin will consider
different kinds of housing options for workers, depending on the level of
employee. Olin will offer to create a sales training center that will attract the
best young Chinese minds, as well as assign more responsibilities to older
workers who want to advance. The details of this training center will have to
be worked out with the Chinese. All of these offers will help both Olin and the
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Chinese, so it’s a win-win situation.
From Olin’s perspective, an ejv will create an easy and immediate access to the
Chinese market.
Point 3. Once CIRC provides a building in Pudong, Olin can set up the state-
of-the-art sales training center. This step will offer substantial proof that Olin
O
Life is in China for more than quick profits. Your company did this, on a much
smaller scale, in the Philippines, and the results have been excellent. That
operation now has a significant indigenous management component and many
expats (American workers living overseas) have been able to return to the
United States. (Again, specifics should not be discussed if the Chinese ask.)
C
As for timing and numbers, you will offer to set up a sales training center
within the first six months to accept up to 10 promising Chinese candidates.
(No more than 10; more would mean higher costs for translators, instructors,
materials, space, real estate--a variety of factors about which you know nothing
right now.) Both Olin and CIRC will jointly decide upon the criteria for those
T
participants. You will agree to increase that number to 20 in year two. After the
contract is signed and the Pudong building is agreed upon, CIRC and Olin Life
can create a timetable for either a wholly-foreign-owned enterprise or an equity
joint venture.
O
With a branch office in Shanghai, you will be able to provide high quality life
insurance products and services to the Chinese consumers. You’ll be raising
public awareness about the need for life insurance while simultaneously
N
providing excellent job opportunities for local Chinese. Those job opportunities
will only increase in the future as the Chinese middle classes grow and expand
the entire life insurance market.
Point 4. You’d like the CIRC officials to recommend a real estate agent or
agency through which you could view some properties in the Pudong area. Jim
O
has informed your team that good office space is now available, but the prices
are soaring as dozens of companies and foreign firms line up to enter Shanghai.
The WTO has opened the door, and the pricing structure on all real estate is
rising. The real estate issue should be accomplished on this trip, not at a later
date. But again, Jim does not anticipate this being a problem for CIRC.
D
23
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