CASE STUDY: BARGAINING PRICE WITH THE CHINESE

Overview

K. G. Marwin Inc. developed a particular technology in the 1980s, called the Trilliamp Process, that the Chinese government sought to integrate into an ethylene facility in Lanzhou, the capital of Gansu province. It signed a contract with Marwin, which in 1985 invited inquiries from U.S. and Japanese manufacturers for production of the machinery. Marwin recommended the Japanese company Auger-Aiso as most capable of producing the turbines, while the Chinese invited two U.S. companiesFederal Electric and Pressure Inc., which manufactured through the large Japanese trading company Mitsuboto compete for the multi-million-dollar contract.

The Scene

To undertake the negotiations with the three prospective suppliers, six Chinese officials and three representatives from the Bank of China were selected. The Auger-Aiso chief negotiator was Todman Glazer, the company's Japan branch manager from the United States who resided in Tokyo and was assisted by his Japanese colleagues. Glazer remembered the tight deadlines he had faced on previous trips to China; now positions had been reversed, with the Chinese facing the pressures and deadlines. He realized the value of thinking like one's opponentseeing things as they do. This was the first potential deal with China in the ethylene market, and Auger-Aiso faced stiff competition from Mitsubo, which had already cornered the Chinese oil-processing market. At the first negotiation meeting in Beijing, the Chinese insisted that custom required the visitorGlazerto make the first presentation. This he did, even though he was accustomed to allowing his opponents to speak first. Glazer began by addressing the excellence of Auger-Aiso technology, explaining that the manufacturing would all be done in Japan to ensure product excellence. When the Chinese offered no indication of their position or price, Glazer felt obliged to quote an upper-range price that would allow flexibility. The Chinese still made no comment. In the afternoon, the Chinese heard offers from the combined Mitsubo-Pressure team, then Federal Electric. By the end of the day, Federal Electric had dropped out of the race, accepting that it could not compete.

Revolving Doors, Changing Moods

During the first week of negotiations, a pattern emerged. The Chinese would meet with Glazer and his colleagues in the morning and ask for a price, saying that their competitors had already bid such-and-such a price, which was invariably lower than the last Auger-Aiso bid. They would meet with Mitsubo-Pressure in the afternoon and use the same approach, causing the latter to drop its price. Moreover, each meeting would end with the Chinese saying, "We will call you tomorrow."

But, because they never called, both prospective vendors became panicky and visited the Chinese office without notice to present an even lower bid. As the Chinese kept the vendors guessing and in the dark, Glazer understood how the Chinese had earned a reputation as master negotiators. At the second meeting, tactics changed and there were different people representing the Chinese side. An antagonist would suddenly burst out in loud Chinese and harangue the Auger-Aiso side for some fifteen minutes, complaining about the quality of the machines they were offering. A protagonist would then intervene and, apologizing for his colleague, would say he had been upset about the current situation.

Glazer regarded these outbursts as no more than arranged role playing, designed to make the protagonist (the good guy) appear more trustworthy to the foreigners. But, Glazer realized, all the participants were play-acting. Then there was yet another change. The Chinese located the Auger-Aiso and Mitsubo-Pressure teams near the meeting room, in adjacent rooms. Mitsubo-Pressure would be called in and asked for its best price. After the team had returned to its room, Auger-Aiso would be called in, told the latest price, and asked if it could beat this. When the prospective vendors could drop their price no lower, they would add something to the package. Auger, for example, added oil gauges for its turbines, effectively a three-percent add-on. Even so, the Chinese still would not commit to placing an order.

When the Price Is Right

Glazer could hardly believe that he had lowered his price twenty per-cent that week; to do so would have been out of the question in the United States. On the final day, Auger-Aiso made another offerand, for the first time, the Chinese made a counter offer. Auger-Aiso accepted, and agreement was reached. A few hours later, Mitsubo-Pres-sure came back with an even lower price, but the deal had already been struck. Glazer spoke later about how difficult it was to compete with Japanese trading companies, explaining that U.S. companies had so many factors to bear in mind, including insurance and a variety of liabilities. Meanwhile, Japanese trading companies, which had vastly different legal parameters [within which] to operate within, could more easily focus on getting contracts and closing deals. He believed that Auger-Aiso had been awarded the contract because it had been the preferred supplier right from the start.

Task

Individual written Assignment

Material:

1.Case titled "BARGAINING PRICE WITH THE CHINESE" (Rob March)

Answer ALL the following questions:

1."The Chinese insisted that custom required the visitorGlazerto make the first presentation. This he did, even though he was accustomed to allowing his opponents to speak first" What are the advantages and drawbacks of making the first offer?

2."Glazer could hardly believe that he had lowered his price twenty per-cent that week": What does this tell you about Glazer's ZOPA?

3.Name three tactics the Chinese used in the second meeting. Evaluate briefly how Glazer dealt with them.

4."For the first time, the Chinese made a counter offer. Auger-Aiso accepted, and agreement was reached" Why do you thing Auger Aiso agreed at this point?

5.How does the case relate to understanding the difference between distributive and integrative bargaining?

Supply a brief heading for each answer and use the Define-Exemplify-Reflect pattern wherever possible.