A large toy company located in Canada is considering a business arrangement with the government of

China (PRC). Although company representatives have not yet visited the PRC, the president of the

firm recently met with their representatives in Ottawa and discussed the business proposition. The

Canadian CEO learned that the PRC government would be quite happy to study the proposal, and the

company's plan would be given a final decision within 90 days of receipt. The toy company now is

putting together a detailed proposal and scheduling an on-site visit.

The Canadian firm would like to have the mainland Chinese manufacture a wide variety of toys for

sale in Asia as well as in Europe and North America. Production of these toys requires a large amount

of labor time, and because the PRC is reputed to have one of the largest and least expensive

workforces in the world, the company believes that it can maximize profit by having the work done

there. For the past 5 years, the company has had its toys produced in Taiwan. Costs there have been

escalating recently, however, and because 45 percent of the production expense goes for labor, the

company is convinced that it will soon be priced out of the market if it does not find another source.

The company president and three officers plan on going to Beijing next month to talk with

government officials. They would like to sign a 5-year agreement with a price that will not increase

by more than 2 percent annually. Production operations then will be turned over to the mainland

Chinese, who will have a free hand in manufacturing the goods.

The contract with the Taiwanese firm runs out in 90 days. The company already has contacted this

firm, and the latter understands that its Canadian partner plans to terminate the arrangement. One

major problem is that if it cannot find another supplier soon, it will have to go back to the Taiwanese

firm for at least 2 more years. The contract stipulates that the agreement can be extended for another

24 months if the Canadian firm makes such a request; however, this must be done within 30 days of

expiration of the contract. This is not an alternative that appeals to the Canadians, but they feel they

will have to take it if they cannot reach an agreement with the mainland Chinese.

Questions:

1. What is the likelihood that the Canadians will be able to reach an agreement with the

mainland Chinese and not have to go back to their Taiwanese supplier? Explain with reasons.

(10 Marks)

2. Are the Canadians making a strategically wise decision in letting the Chinese from the PRC

handle all the manufacturing, or should they insist on getting more actively involved in the production

process? Defend your answer with reasons. (10 Marks)

3. What specific cultural suggestions would you make to the Canadians regarding how to do

business with the mainland Chinese? (10 Marks)