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 five 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 five-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 two 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.
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.
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.
3. What specific cultural suggestions would you make to the Canadians regarding how to do business with the mainland Chinese?