A French Joint Venture - Essay Example

A French Joint Venture –An Analysis Introduction: Due to globalisation, multi-national companies are showing keen interest to expand their operation either by operating a joint venture with the Chinese companies or starting their subsidiaries in China due to big size of the Chinese market, availability of cheap labour and raw materials. As such, China is witnessing with many complex and intricate ethical issues. It is strongly recommend that China has to build strong ethical guidelines in consonance with the world of international business ethics. In this research study , I am discussing how Lafarge , a well French construction materials company restructured the loss making state owned Huaibei Mining Company (HMC) by entering into joint venture in 1994 and turned the company as profit making company in 1999 by implementing various structural reforms in labour ,production , technology and marketing .(Goodall 103). Analysis Entering into joint venture will help to acquire innovative know-how and skills. When China opened its market in 1978, it has become most attractive land for foreign direct investment (FDI) in the whole globe. It is to be observed that three-fourth of FDI attracted by China took the shape of Joint ventures (JV’s). JV offers distinct advantages like reduction in costs. A foreign JV partner may offer capital by way of cash, technology, machinery, know-how where as the Chinese partner may offer factory land, building, skilled workers and machinery. Collaborating a joint venture with the state owned enterprises (SOE’s) in China frequently has raised issues for foreign companies as SOE’s are distinct form of business entity with diverse cultural setting. There is less freedom for foreign investors in JV’s as foreign partners have to operate in co-operation with the local SOE’s. By opening the doors for foreign investors, China is transforming to market economy from centrally planned economy or government controlled economy. Earlier to joint venture, the HMC Management had failed to keep its promise of granting financial rewards for good performance by employees. As the result, employees lost their faith in the management. HMC HR function was found to be disassociated from business goals and acted only as a policemen or administrative function. (Goodall 105). As such, in JV, Lafarge encountered higher extent of complexity due to socio-economic, cultural, political and institutional divergence involved. In cross-national setting, Lafarge should have ensured to develop socio-economic, institutional and cultural awareness in the initial years of Joint venture. For instance, in China, the authorities have administered a regulation that stated that foreign companies have to honour government guidelines concerning both minimum and maximum wage levels. This has resulted in higher pay disparity as MNC subsidiaries had to pay higher wages as compared to state-owned companies and collectively owned companies. For instance, in 1995, wages in foreign subsidiaries were 132% higher than in the state-owned companies and an increase of 190% in collectively owned enterprises. (Goodall and Warner, 1997). When Chinefarge was established by Lafarge holding a 51% in HMC in 1994, majority of the employees of HMC were demoralised and employees were of the belief that their future was doomed. Immediately, after the joint venture, Chinefarge minimised the workforce to 600 from 1300 to minimise the overheads and did not pay any retrenchment compensation to employees affected. (Goodall 114). Here, Lafarge had to look into institutional conditions including legal and political factors that would affect on the type of economic incentives and work arrangements that are possible. Here, workers were supported by local Chinese government and Chinese employees’ rights to exert influence on their work situation have been regulated by the local Chinese government policy. However, Lafarge management introduced severe labour reform measures like elimination of duplicating jobs, making employees responsible, to stress on work discipline and to introduce performance based wages and bonuses. (Goodall 109). Further, Lafarge found that majority of key workers did not have technical education and they were previously employed as farm labourers. Chinefarge realised that farm workers without technical education for technical jobs had not added any value addition to plants productivity. For example, Japanese joint ventures in Brazil experienced difficulty in introducing total quality management (TQM) as they were succeeded only half a way to disseminate their TQM due to low level of educational parameters. As the Brazil’s workers have lacked sufficient numeric skills and hence, it was not possible to perform the demanded range of work accomplishments that the TQM system demands. (Humphrey, 1995}. Further, German companies also witnessed functional flexibility impediments in nations where educational standards are comparatively lower than in Germany. Hence, Lafarge management was very firm to retrench excess, uneducated and unqualified workers to improve productivity. However, the retrenched employees were provided alternative jobs by Huaibei County government. One of the main issue in Chinefarge was communication issue between expatriate managers and Chinese middle managers, Chinese partner (government officials) and also with the Trade Union. Further, the relationship between foreign investors and Chinese managers were not harmonious as they distrusted each other. In Chinefarge, one employee had to assume charge of many positions and hence eight hour duty turned to be more intensive. Further, efforts to transform management processes in Chinefarge were countered by resistance. In HMC, all employees were paid performance bonus irrespective of their contribution whereas in Chinefarge, only top performers were paid high bonus to shore up their extraordinary performance. As the result, some employees resorted to sabotage to ventilate their disappointment. Since, Chinese economy is a protected economy, Chinefarge workers failed to appreciate how an enterprise operates in a market economy. Despite of having appointed a Chinese safety officer by Chinefarge, the number of accidents occurred had not decreased. Further, workers were aggrieved over the pay difference that existed in Chinefarge. A new college degree holder’s pay is more than the pay of workshop’s head who manages about forty employees and this had annoyed the workforce moral greatly. Chinese middle managers did not want to be strict with their employees as they knew from the Cultural Revolutions that being strict with the subordinates would end in adversity. Lafarge aware about the effect of local mix of skills on the utilisation or non-utilisation of teamwork is almost corroborate how German companies in some foreign countries have issues in fostering efficient in teamwork concerning functional flexibility, due to inadequate competencies among local employees. (Pennington and Edward, 2000:253). Further, Chinese employees functioned in a mechanical style, covering up issues and refusing to assume responsibilities. For instance, Japanese companies like Sony and Panasonic, though they are very strict in management but they do care for the employees by offering a feeling like that “this is my home “. They know well that retention of talented always act as an asset to the company. One another issue faced was that the Chinefarge plant was running at less than half of its capacity and since the market was so competitive, posting profit was very difficult. As far as organisational culture is concerned, expatriate managers were actually searching for ways and means in which Chinese cultural preferences and values might be integrated into the new JV namely Chinefarge. The biggest problem posed is that making employees to acknowledge their style of management and how to make them to trust the company. Despite of these hurdles and difficulties, Chinefarge was able to break even and posted its firs net profit in 1999. How Chinefarge was able to achieve this feat when at the start of JV in 1994, it witnessed workers was not only riotous but also engaged in sabotaging. Chinefarge was able to diagnose various issues like discipline, morale, environmental, performance issues that prevailed in the organisation. How turnaround was possible? Immediately after JV, Chinefarge focused its emphasis on safety and health status of the plant. (Goodall 113). It made massive investment for modernisation of plant and also paid close attention to employee’s health and safety issues. As a result, the number of accidents was considerably reduced to 104 in 1998 from 2200 in 1995. There has been a safety management structure in place including regular safety meetings and safety committee. One another issue was over manpower employed in HMU. Chinefarge reduced the manpower to 520 employees in 1998 from that of 1300 in 1994. So as to put full stop to sabotage and destructive attitude of workforce, Chinefarge introduced strict disciplinary steps in an attempt to transform work practices and attitudes. Employee handbook was introduced. Effective working atmosphere was achieved by introducing strict discipline measures, stern punishments and frequent communications which had very good results. (Goodall 115). Trade union was made to realize that it can protect only the legitimate rights of employees and to support the business goals of the company. The employees were given to understand that discipline was the fundamental of good performance and should be always stress. Chinefarge strengthened the positions of middle management as it is they who had created conduit of communications between senior management and Chinese workers and as the result, the Chinese workforce started to stabilise. Middle managers helped to act as link and communicated the top management goals to Chinese workers. Enough authority was given to middle managers including appraisal, reallocation, wages, work arrangements and labor contracts. Management started to espouse their decisions. Middle managers were praised and criticised now and then as a practice of motivation. Middle managers were asked to pay bonus only to performing employees and not to all. This was initially revolted by middle managers as they thought that workers would be displeased with that and however, top management forced the change through, leaving no room for compromise. However, middle managers found new system performing well later as it helped to manage the people easily. There was complete overhauling in human resources (HR) department. Due to this, there were effective feedback channels, open communications, localisation plans, careful recruitment, professional planning and career development. These initiatives were considered as some of the vital tools for improving motivation and managing performance. Further, job analysis was employed in Chinefarge since the well-built sense of individual job-ownership among workforce connotes that individuals are regarded as the basic units of the company. Job analysis led to meaningful splitting of work processes into distinct work assignments. One of the greatest issues in state owned enterprise in China (SOE) was that income is not corroborated with performance and both hard working employees and idle employees receive the same remuneration and bonus. In Chinefarge, wages are linked with the performance and contribution. This is one of the reason why Chinefarge was able to achieve net profits in 1999. The introduction of performance appraisal of workers and performance –related pay in Chinefarge had in fact worked very well as it had improved the productivity substantially. (Goodall 118). Though, there existed some initial objection from workers and from trade unions on performance appraisal and performance –related pay, later they had accepted the same. Introduction of workers appraisal system helped Chinefarge to great extent. It had enhanced the communication between the subordinates and the superiors, it had helped to find training requirements and outcomes of the appraisal are connected with remuneration and bonuses. Chinese employees started to witness the benefits of the culture transformation which had followed the introduction of performance appraisal. Further, corporate culture of Lafarge is to make the workforce to feel at home when they are working in the manufacturing facility. This Lafarge style fits well into the Chinese culture and is followed by Chinefarge. Chinefarge this attitude is one of the reason for its success. Cement industry not only demands huge investments but also needs long-term commitment. Further, to accomplish its strategic goals, Chinefarge has to have long-term strategic vision. Hence, Chinefarge gave more attention to the long run development of personnel and community relations. Further, Lafarge is committed to China may also act as a factor in both retention and recruitment. In the initial years of the joint venture, both Chinese and expatriate managers lacked mutual trust. Through communications, confidence was reposed between expatriate managers and Chinese employees. Employees were involved in discussions concerning strategy designing and future development of the Chinefarge. However, by 1998, Chinese managers had clear visions on the kinds of activity that had assisted to enhance relations. By effective interactions between expatriate and Chinese partners, mistrust slowly disappeared as Christmas parties or get-together helped to improve relationship and understanding between Chinese employees and foreign management. Due to interaction and close understanding, tension and misunderstanding were gradually decreased. Close relations and interactions between expatriate and Chinese employees were made possible due to organisation of anniversary parties of the JV, birth day parties of managers and this had helped to gain quiet good cohesion. Communications were spread through various channels like meetings, social activities like JV anniversaries or Christmas parties, suggestion boxes, bulletin boards and employee news magazine. In Chinefarge, selected employees and middle level managers were sent to France for a week’s training. In France, they had the opportunity to undergo training in Lafarge plant and in their R&D center. This training had given the knowledge that Chinefarge has to go long way to achieve the development what cement factories in Europe has achieved. (Goodall 123). Chinefarge also reduced the expatriate experts and local experts were given training and preference. Localisation has been perused on two ways. Existing junior managers were given extensive training and new Chinese managers were recruited from outside. Replacement of expatriate GM with that of Chinese General Manager was a move on this direction. Since, expatriate were having different cultures and environment, it would be arduous for them to adapt to the local demands. Chinefarge gradually localised its management. One of the main advantages of localisation was that it had facilitated easy communication. For efficient administration, Chinese language skills, awareness of Chinese business practices and culture, localisation could be considered more advantageous. More attention was paid to increase the profitability by addressing the issue of poor collection of debtors and by transforming the sales department. A sales person monthly wages is now tied to retrieving receivables and sales volume. Chinefarge had then focused on key customers as its top ten key customers were accounted for 90% of its total sales. Chinefarge extended its expertise to lower the cost of their concrete by employing less cement in the process to save cost by its customers. Chinefarge started to manufacture low alkali cement which will not cause cracks in the building for which there has been much demand. Chinefarge strategy was to manufacture high-quality cement at a higher price and to differentiate its product into a niche market. With the experience and success story in Chinefarge, Lafarge now started to look for next joint venture in China. Chinefarge joint venture not only involved matters concerned with workers and managers but also with outside bodies like political institutions, local body government either directly or indirectly. Many crucial business decisions have to be taken in consultation with many external and internal political bodies. Thus, expatriate managers used to peruse a non-political stand in the belief that not associating interested parties or agents will make sure no interference from them. Conclusion: Thus, to run a successful joint venture, it is essential that to foster cordial relationships between foreign partners and Chinese cooperative partners and between the parent company in abroad and JV company in China. It is to be noted that the majority of management issues are the outcomes of improper management of these relationships, which corroborates divergences in managerial style. It is to be remembered that though reforms have been introduced in China, it will take some time to get eliminated the old customs and habits. The Lafarge’s successful implementation of joint venture in China can offer valuable tips to mitigate future issues. However, there is a limitation for this study as the success story of the Chinefarge may not fully be complemented for future JV’s in China. The lessons learned from Chinefarge may be utilised for used for application for all future JV’s as it has been empirically examined. Thus, if foreign companies really want to share a piece of Chinese growing market, it must acclimatise to Chinese features or characteristics. They should be familiar to the special circumstances that are prevalent in China. Chinefarge is able to achieve success as it had adapted to the special scenarios by making prudent use of political institutions and personal networks. List of References Au, Alan Kai Ming, and Peter Enderwick. (1994) “Small Firms in International Joint Ventures in China: The New Zealand Experience.” Journal of Small Business Management 32, (2) 88+. Cyr, Dianne J. 1995. The Human Resource Challenge of International Joint Ventures. Westport, CT: Quorum Books. Goodall K and Warner Malcolm (put the year please) Lafarge in China: Cross-National HRM. Place of publication: Publisher’s name. GoodHall, K and Nordhaug O. (2003) International Management .Cross-Boundary Challenges .Oxford: Blackwell Publishing Mathur, Iqbal, and Chen Jai-Sheng. 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