A CHINESE VENTURE

The Durby Company is a medium - sized communication technology company headquartered on the west coast of the United State. Among other things, Durby holds a patent on a mobile telephone that can operate effectively within a 5-mile radius. The phone does not contain state-of-the-art technology, but it can be produced extremely cheaply. As a result, the Chinese government has expressed interest in the manufacturing and selling this phone throughout their Country. Preliminary discussions with the Chinese government reveal that some major terms of the agreement that it would like include:

1. Durby will enter into a joint venture with a local Chinese firm to manufacture the phones to Durby's specification;
2. These phones would be sold throughout China at 100 per cent markup, and Durby will receive 10% of the profits.
3. Durby will invest $35million in building the manufacturing facility, and these costs will be recovered over 5-years period; and
4. The government in Beijing will guarantee that at least 100,000 phones are sold every year, or it will purchase the difference.

The Durby management is not sure whether this is a good deal. In particular, Durby executives have heard all sorts of horror stories regarding agreements that the Chinese government has made and then broken. The company also is concerned that once its technology is understood, The Chinese will walk away from the agreement and start making these phones on their own. Because the technology is not state-of-the-art, the real profits are in the low production costs, and the technological knowledge is more difficult to protect.

For its part, the Chinese government has promised to sign a written contract with Durby, and it is agreed that any disputes regarding the enforcement of the contract can be brought by either side, to the World court at The Hague for resolution. Should this course of action be taken, each side will be responsible for its own legal fees but the Chinese have promised to accept the decision of the court as binding.

Durby has 30 days to decide whether to sign the contract with the Chinese. After this time the Chinese intended to pursue negotiations with large telecommunication firm in Europe and try cutting a deal with them.

Durby is more attractive to the Chinese, however, because of the low cost of producing its telephone, in any event, the Chinese are determined to begin mass producing cellular phones in their country." our future is tied to high-tech communication," the Chinese minister of finance recently told Durby's President.

"That is why we are so anxious to do business with your company, you have quality phones at low cost," Durby management is flattered by these kind words but not sure if this is the type of business deal in which it wants to get involved.

Question 1:

1. Briefly explain with two reasons, the important of the political environment in china for the Durby company.

b. If a disagreement arises between the two joint-venture partners and the government of China reneges on it promises, how well protected is Durby's position? Explain.

c. Indicate with two (2) reasons whether or not the economic and technological environments in China are favorable for the Durby Company.