Busisness Report: NES AG

“To the Chinese, the contract is the starting point to a relationship that

will evolve” – Tom Stipanowich, president and CEO of the International

Institute for Conflict Prevention and Resolution

Executive Summary

This report analyzes the issues directly and indirectly relating to the submission of NES AG

holding company in China. This report begins by considering possible alternatives for NES AG in

establishing a central unit to provide employment issues for NES given the difficulties

experienced thus far and the subsequent time frame. On consideration of alternatives, it is

concluded that a holding company, although requiring significant capital investment and practical

disadvantages for NES, provides the mode for NES AG to establish its central administrative

business unit. The report then analyses the submission process itself, identifying whether the

difficulties experienced by NES thus far, may have been an error on the part of NES in failing to

meet the requisite formal and informal procedures required. It is concluded that not every

assurance necessary was taken on behalf of NES whereby the original submission should have

been executed in conjunction with a Chinese attorney familiar with the process, questioning the

time of the appointment of Chen by NES and the replication of documents. We analyzed the

current state of decentralization and its influence in impeding the control mechanism of NES AG,

and concluded that more autonomy must be granted to NES AG with regard to internal decision making.

The effectiveness of the decentralization of NES AG was determined to be dependent

also on the staffing approach adopted by NES. In order to effectively respond to local

considerations we determined that Chinese nationals must fill key positions in the NES AG.

Imperative to this is the adequate training of those managers with the goal of achieving NES

headquarters objectives. Therefore we constructed a model conducive to training and learning and

where reciprocal learning is paramount. While it was concluded that a tolerance towards gift

giving should not be established, an appreciation for the role of relationship building must

become apart of the corporate ethos of NES AG. A hierarchical structure conducive to such an

environment was therefore developed for NES AG. A hierarchical structure will be advantageous

for NES AG in implementing the strategic objectives of the organization.

1.0 Purpose of the report.

JR-consulting has been hired from NES to assist the company in reaching its strategic

objective to establish a holding company in the region of Beijing. Moreover, our

consultation group in this assignment has been hired to provide assistance and

recommendations regarding the establishment of the holding company and its subsequent

consistent dismissal of its application. Based on our analysis we will identify problems,

which have been impeding the approval process. In addition to this, our report will aim to

bridge the existing differences between NES and the Chinese central department to

ensure and maintain harmonious and long-term business relations. Based on our

extensive knowledge in dealing with foreign investment in the Chinese market we

proclaim that this report will aid NES in becoming a strategic leader in its industry by

providing the essential insight into the indirect and direct mitigating problems in light of

he recent events and providing our recommendation for future success. Thus endeavor to

streamline the structural and systemized processes in the light of a long-term strategic

business relationship.

1.1 Scope of the report.

In this report we have included an in depth analysis and consideration of

establishing a holding company in the framework of a Chinese culture. This analysis

compares and contrasts advantages and disadvantages with engaging in this type of

business activity. The report further considers the strategic motivational factors such as

administrative governance and finance allocation relating to the establishment of NES

AG’s holding company.

The second part of the report critically assesses the validity of the submission of

application. Due to consistent rejections of previous submissions this part of the report

will aim to highlight strategic options for NES and of how your company will effectively

reach this goal. We will address this problem by acknowledging cultural differences, and

provide recommendations of how to bridge this gap.

The third and final part of this report will address issues, which have either

directly or indirectly compounded problems associated with the unsuccessful approval.

Thus, subsequently highlighting cultural differences on both an operational and

systematic level, with the support of empirical literature research, will emphasize these

issues.

It was determined that this report will not incorporate additional environmental

factors such as competitors of NES within the German domestic market and how this

might impact on the obtainment of the submission for NES AG. In addition we have

excluded aspects such as how German nationals within their home country would

perceive NES business dealings within the Peoples Republic of China, specifically the

ethical concerns that have arisen within NES. Moreover this reports jurisdiction does not

encompass the review of any statistical data that might influence relevant decision

makers.

2.0 Overall identification of problems

This report has found valid implications that after conducting our analysis the

following problems were identified and subsequently addressed. First we identified

possible problems with establishing a holding company and posed the question whether it

is the most optimal business strategy. Subsequently we considered alternative strategies

and concluded that a holding company would be the best solution for NES. Following

this, the second issue raised in relation to our analysis related to the effectiveness of the

application procedure of NES AG. The third issue identified by this report related to

cultural differences and their impeding nature upon the business relationship between

NES and the central department of China. Finally the report acknowledged the problems

relating to structural and staffing policies of NES AG.

2.1 Analysis of Holding company

In light of the most recent submission of application by the Beijing Representative

Office and the subsequent rejection by the central department for approval of a holding

company, we determined it was of utmost importance to analyze the use of a holding

company as the most ideal strategic decision for NES. In our analysis of establishing a

Chinese Holding company, we considered the business and tax advantages as well as the

disadvantages associated with establishing a Chinese holding company. Furthermore we

considered the possible alternatives available to NES AG in its strategic decision and

have made recommendations upon our analysis.

Fundamental to the strategic choice was NES’s recognition of integrating training,

distribution, finance allocation and marketing through an administrative center, and

where imperative to this the issue of control does not remain contentious. For NES, while

it is noted that the company requirements for establishing a holding company are

significant, specifically regarding capital requirements, the establishment appears to be

advantageous for the organisation. Particularly given the holding company will enable

administrative and financial functions to be performed at the holding company level

(Dietz & Zhang 2004). Moreover the holding company status will give NES a high

profile in China as its investment position is substantial and is clearly established under

the framework of a holding company. (Abrahamson 1995) Of further consideration to

NES which we believe maybe of benefit in future decision making is the possibility of

obtaining full tax refunds for reinvestment in certain technologically-advanced

enterprises.

Where we see a serious disadvantage in establishing a holding company is the

local regulators consideration of what is believed adequate capital for the company. Dan

Harris notes (2006) that the local regulator will use his (her) discretion in determining

what are adequate capital requirements for the company. Even more alarming for NES is

that the statutory minimum for capital required (USmillion) is rarely used as a guide

for determining this capital. Consequently by performing the due diligence required and

contacting the local regulator to determine this capital requirement, a firm may forego

many of the prevailing problems with application approval.

The problems associated with Chinese holding company approval suggest

alternative strategies may need to be considered. In considering the strategic motivation

for NES to gain greater administrative control and organizational guidance, we feel that a

Branch Office would strategically fit. Unfortunately given the issues of control associated

with a Branch Office, the Peoples Republic of China do not allow them to operate (Invest

Beijing). Establish a holding company would therefore strategically accommodate the

requirements of NES and providing due diligence is performed; the establishment is

advantageous for the organization.

3.0 Holding company submission and application

3.1 Beijing representative team

While we have determined that the strategic decision to adopt a Holding company

was advantageous for NES, its success is dependent on its subsequent approval.

Therefore in considering the recent failure for approval we have analysed the submission

process which was handled directly by the Beijing Representative Office. Further

consideration was also given to the provisional regulations (discussed in section 2.1)

determining the applications rejection and have concluded our analysis proposing

significant changes and recommendations to occur in light of the rejected submission.

In conducting our analysis of the Beijing Representative Office we have

acknowledged the team was severely disadvantaged by the illness suffered by Kai

Mueller and it is from our analysis that we believe that many of the problems regarding

cultural differences that the team experienced would not have been so pronounced.

However two implications have arisen from this. First the team’s ability to correctly

administer the submission process is questioned. Following this, while Mueller’s

experience in working with co-operative projects may have alleviated many of the

problems experienced, his absence does not account for the inadequate measures taken by

NES AG.

In considering NES AG’s Beijing Representative teams impact in the submission,

the appointment of Chen to the Representative Office in June in an advisory role was

long delayed. Chen’s appointment following the submission by NES AG meant that Chen

was unable to provide NES AG with essential advice regarding their pre-submission

process but was limited to overseeing the submitted application. The timing of the

recruitment of Chen indicates NES AG’s confidence in their initial submitted application

but their reliance on expert knowledge in hiring a consultant during the process indicates

an avoidance of uncertainty (Hofstede 1980).

The decision by Chen in June 1997 to contact former colleague Zhu and

furthermore her recommendation that NES AG ‘quickly’ begin gift giving to speed the

approval process was, in our opinion premature. The time consideration given by the

Beijing Representative Office for approval was three months. However we have found

that the complete application process will likely take six months (Abrahamson 1995).

Chen’s hasty recommendation for speeding up the process was based on Chen’s

acknowledgement that she was working within a high individualist culture, where

patience is not highly valued (Triandis 1995). Furthermore, Harris (2006) notes that in

larger cities such as Beijing the process tends to be even slower than in smaller cities.

This further suggests that such a small time frame of three months was unjustly burdened

upon the approval process due to a cultural emphasis on short-term achievement and as

such has had dire implications for the remainder of the business conducted by the Beijing

Representative Office (Baker & Ingleshart 2000).

Specifically, Steinmann’s recommendation to Chen that a formal meeting be

organized with Chinese Officials in order to negotiate changes required in Sixteen

clauses. Steinmann and Dr Perrin’s strong preference for achieving this task through

negotiation without considering the value of harmonious relationships in Chinese society

is based on individual and company beliefs that negotiation can always be used (Altson

1989). We have considered that Steinmann and Dr Perrin’s dismissal of the importance of

Guanxi may have been due to Chen’s persistent association of gift giving in Guanxi and

their ethical concerns for the association of gift giving with bribery.

However we have acknowledged that having prior awareness in this concept and

more importantly the significance of relationships in Chinese business would not have

lead to this erroneous conclusion. Of further consideration was the use of another

company’s successfully submitted documents in drafting the application for a holding

company. Dan Harris (2006) notes that government approval is very much dependent on

the location of the project as well as its size and scope. Dr. Perrin’s role as legal advisor

for NES AG would indicate that the articles of association included in the submissions

would need to truly reflect these specific differences. Consideration must also be given to

the application prior to submission.

From empirical findings the Chinese regulator will not approve a project (holding

company) that looks risky or under-funded (MinterEllison). It is therefore problematic to

submit an application for a holding company approval where NES has expressed doubt

over the adequacy of funding for the holding company prior to the application

submission. Thus we have assumed that such information was not made available to NES

AG or NES Head Quarters when the decision to establish a holding company was being

considered. Adequate staff in the legal affairs of establishing a holding company would

have overcome this problem.

3.2 Recommendations

From our analysis we conclude that significant importance was not given to the

pre-submission process and this led to many subsequent issues arising. Specifically,

subsequent team difficulties would not have arisen if the importance of contacting a local

regulator in determining capital adequacy were not overlooked. Therefore, we

recommend NES AG engage a Chinese attorney familiar with the establishment of

holding companies, to ensure that all the requisite procedures are executed in accordance

with both NES AG’s position and the relevant laws applicable. However we have also

considered the team’s implications on the submission process and these have been

acknowledged in the following sections (4.2, 6.3 & 7.0).

4.0 Cultural differences

4.1 Long term relationship v Long term orientation

The profit and growth potential of NES AG is primarily dependent on the firms

long-term commitment. In order for NES to maintain a long-term commitment within the

Chinese community it is important to recognize underlying cultural and philosophical

values and beliefs. Hofstede, Van Deusen, Mueller, and Charles (2002) suggest that

establishing a long-term relationship is imperative within the Chinese society. However

adding to the complexity of this notion is the similarity and hence often

interchangeability of the terms long-term orientation and long-term relationship

(Hofstede 2002). For our analysis we have made a distinction between these terms as

evidenced by the distinction made between NES AG and that of the Chinese officials. For

NES the established operations in Beijing since 1908 and the significant capital invested

in business projects since 1979 suggests that from NES’s perspective future commitment

is evident. It is from NES’s task orientated perspective therefore that greater importance

is subsequently placed on business achievements as a measure to the perceived long-term

commitment (Hofstede 1980).

However where the importance of NES’s task orientation is less valued, as is the

case in Chinese society, the effects of maintaining task orientation will result in an

impeding relationship development. Fiske’s (1992) relational model theory states that

where there exists a deep need to belong to social groups and a desire to build and

strengthen relationships are essential, reciprocal relationships’ building becomes

imperative. The need to therefore explicitly cultivate interpersonal relationships is made

apparent by the events leading up to and including the latest rejected submission in April

1998.

Where in July 1997 Chen, a member of NES for only one month, had been

assigned to meet with Chinese officials without the support of Dr. Perrin and Steinmann,

interpersonal relationships with government officials were not being established. The

subsequent meeting organized by Dr Perrin and Steinmann in November with Chinese

officials was indicative of a negotiation and hence task orientated structure adopted by

NES AG. Where the negotiated meeting was considered a ‘failure’ is primarily a result of

the differences toward orientation (Hofstede 1980). Had Steinmann and Dr. Perrin

recognized this importance of relationship building in Chinese society prior to the formal

meeting, negotiations would not have been used.

4.1.1 Recommendations

We acknowledge that NES has made great efforts in establishing relationships

within China through the strong commitment of initiating scholarship programs for

Chinese nationals, signifying their commitment beyond the requirements expected by

most multinationals to forge harmonious relations. However previously where NES

business transactions have been concerned with Joint Ventures, negotiations and

contracts to establish business, the relationships founded were contractually driven. NES

was able to maintain this relationship on a contractual basis as the superior technology

and expertise that NES has developed has been much sort after and valued by Chinese

local industry. However, the strategic decision to move the organization under the

framework of a Holding company signifies a shift in the organizational relationship NES

plans to develop within the Chinese local industries as well as the broader Beijing

community (Alston 1989). This shift must be supported by an organizational commitment

to cultivating relationships with the focus on sustaining the relationship for the long-term.

It is fundamental for NES in order to develop this relationship, to adopt the notion

of Guanxi (discussed further in Appendix A). Understandably Dr Perrin and Steinmann

cynicism and reluctance towards nurturing Guanxi is due largely to its association with

crony-capitalism, which has flawed state-owned enterprises throughout China (Nielsen &

Soloman 1998). We endeavor to overcome this problem by developing with NES a

tolerance towards informal relationship building, and maintenance of its high ethical

standards which will flow throughout the organization and in turn translate into a

competitive advantage for NES.

4.2 Guanxi v Gift giving

From our analysis we believe that both Dr Perrin and Steinmann overlooked

Chen’s persistence on the importance of Guanxi, largely due to the high perceived

uncertainty with informal relationships (Hofstede 1980). Furthermore, Western business

exchanges do not necessitate a need for close business relationships while Chinese

business practices do (Chenting 2003). The perplexing notion of Guanxi is further

clouded for individual societies when issues of gift giving arise.

After discussing the notions of gift giving within Chinese business further with

Allan H. Lee, senior accountant of assurance Price Waterhouse Coopers, he indicated that

‘today in China it is not acceptable for multinational firms conducting business to engage

in practices such as gift giving’. From our discussion we concur with the sentiments

expressed and we do not recommend that NES forego its high ethical standards for the

sake of gift giving. However we believe that adopting the concept of interpersonal

relationships is imperative to promote the building of long term relationships while

discouraging gift giving.

We recommend therefore that, for NES to build trusting relationships, adopting a

similar approach to that taken by Motorola in China will be beneficial to the

organizations success. We have found from our analysis of Motorola in China, that most

Chinese government officials complete executive MBA programs (Executive MBA

China). Therefore it is our recommendation that NES support an MBA executive

program with Peking University in Beijing enabling NES AG’s key positions holders to

attend the same program offered to government officials, allowing relationship building

to take place, whilst developing a better understanding of Guanxi (Dunfee & Warren

2003).

5.0 Decentralization

We have found that there is a preference amongst German MNC’s to centralize

strategic decisions to the German Head Quarters and decentralize the host country

subsidiary to enable it to respond to the host country conditions (Hodgetts & Luthans

2003). Thus it is important to consider the preferences of the local conditions with regard

to the subsidiaries structure. NES AG has taken this approach, with strategic decisions

centralized to the German Head Quarters and operational decisions decentralized to the

subsidiary of NES AG. Furthermore, in determining where inefficiencies have impeded

the approval process, we have assessed the relationship which exists between NES AG

and NES Germany as well isolating and assessing the organizational structure of NES

AG in determining the degree of decentralization within that organization.

5.1 Decentralization: Relationship between NES AG and NES Germany

While NES AG ‘s decentralized structure has allowed decisions concerning

operational objectives to be made directly by Dr Perrin, Steinmann and Chen it has not

allowed the organization to fully benefit from the use of decentralization. Key decisions

regarding the use of negotiation in relationship development were made directly by Dr

Perrin, Steinmann and Chen allowing the operational development of NES AG to

function with greater autonomy. However, it appears that NES Germany was reluctant to

relinquish strategic decision-making to NES AG which seriously hindered their ability to

make localized decisions (Chakravarthy & Perimutter 1985). The required approval by

NES Head Quarters of any modification of documents for the Holding company resubmission

had diluted the empowerment of the Beijing Representative office. We regard

NES Germany’s control efforts as a natural consequence of a company wary of a young

subsidiary and where risk avoidance is paramount. However, as Li Degang (CFO Asia

2006), deputy general manager of Beijing-based RAC China-Japan Business Consulting

notes, ‘Companies that insist on tight controls over subsidiaries and a hierarchical

reporting process will miss many opportunities.’

5.1.1 Recommendations

Our recommendations to NES is to permit more autonomy within NES AG

Chinese holding company to ensure, as the local subsidiary, that they are able to make

more decisions directly affecting the host country, effectively removing some of the

layers impeding the efficiency of NES AG which require issues and decisions to be made

in NES Head Quarters, Germany. Specifically the issue of modification of documents and

subsequent approval of these modifications by German Head Quarters would not arise if

greater autonomy were granted. Provisional upon autonomy being granted to the NES

holding company in China is for NES Germany and NES subsidiaries in China to have

confidence in NES holding company to be able to make effective decisions regarding

their administration (Distefano, Distefano, Imon & Lee 2004). We recommend for NES

AG to effectively administer their duties it will require the parallel execution of an the

effective staffing policy from NES, by implementing and providing ongoing training and

support to enable staff to make proficient decisions, as well as adequate resources for

NES AG (discussed in greater detail in section 6.1). This would instill a stronger sense of

confidence with NES AG holding company and cultivate more efficient management

practices within NES subsidiaries in China (Hodgetts & Luthans 2003).

5.2 Decentralization within NES AG

In order to determine the degree of decentralization within NES AG and moreover

the impact of Chinese culture, we have analyzed specific occurrences which reflect the

organizational structure and highlight the need for structural adaptability.

The practice of decentralization adopted by NES in all of its subsidiaries

irrespective of whether the market fosters such a structure is connected to the concept of

universalism (Hamped-Turner & Trompenaars 1996). This concept of universalism is not

bound within NES Germany, as it is a national cultural trait and is consistent within many

western firms’ structures. However the implications of such an approach are evident in a

culture where the acceptance of inequality regarding power are high (Hofstede 1980).

The degree of flexibility found in Chen’s role when making decisions and referring

recommendations to Dr. Perrin and Steinmann indicate a lack of authority and defined

roles. This appears to have caused conflicts within NES AG representative team in which

Chen’s personal recommendations were conflicting with NES’s business ethics.

Furthermore the importance of established authority in guiding the decisionmaking

and interaction between business relationships is highlighted where there is a

disparity in the value of power distance in cultures. Our analysis of NES AG highlights

the distinction between the structural guises of German Firms operating in China.

Specifically, where NES AG has valued greater equality amongst employees and where

emphasis on accorded status is not evident, in contrast to the greater value placed on

authority and interpersonal relationships in Chinese culture (Hwang 1987). As NES AG

is so decentralized the roles of the team was not clearly defined and importance was not

placed upon such titles.

The preliminary meeting with government officials, which was not attended by

Dr. Perrin and Steinmann demonstrates the distinction in the importance of authority in

their roles. Their roles as authority figures for NES AG were seen as important by the

Chinese officials yet this significance was neglected by Dr. Perrin and Steinmann largely

due to low value of status symbols in German culture (Fang 2003). Therefore the

importance of Hierarchy in Chinese society and its influence upon organizational

structures must be considered and furthermore the significance of high power distance in

Chinese culture emphasizes the need to adopt a structure which will encompass these

traits. Traditional forms of hierarchical structure appear to overcome the short comings

faced by NES AG.

However we note that traditional hierarchal structures are readily associated with

the structures of state owned enterprises in China where many levels of authority

characterize these structures (Jain, Malik, & Cruickshank 2006). As NES AG is a new

holding company it is important to adopt the optimum management structure, which

reflect the contemporary nature of the company and distinguish it away from

authoritarian and bureaucratic business models, thus creating an environment where

employees thrive (Westerhuis 2004). Such a practice complements the evolving nature of

NES in China as a business leader over the last 100 years. Furthermore, the Chinese

economy is at a transitional stage and it is thus important to recognize these factors and

create a structure, which does not resemble the levels of authority of ‘traditional China’

(Westerhuis 2004).

5.2.1 Recommendations

Therefore we recommend from extensive consideration of these factors that NES

AG adopt a ‘pseudohierarchical’ structure. A pseudo-hierarchical structure will

encompass distinct levels of control where the organizations levels are obvious but

importantly not extensive (Triandis 1995). Important to note, within a vertical culture

such as China and where ethical codes may not be evident or not enforced, ethical

dilemmas may become realized. However the maintenance of NES’s high ethical

standards and a further cultivation of these standards with those Chinese managers

identified and trained by NES Head Quarters will overcome the ethical dilemmas of

cronyism which regularly flaws hierarchical structures. Thus the structure we have

adopted for NES is referred to as pseudo-hierarchal. Ideally the key position holders will

maintain and coordinate a level of control above those administrative employees of NES

AG, ensuring a sense of authority is developed. Developing a pseudo-hierarchal

arrangement will enable a structural revitalization of NES AG and recognize the cultural

distinction signifying the companies’ commitment for long-term success.

6.0 Staffing Approach

6.1 Ethnocentric

Our analysis has further identified a relating problem to the structural

impediments within NES AG, which has adversely influenced the applications approval.

Moreover if not resolved, it is our opinion that this problem will hinder the establishment

of a harmonious long-term business relationships.

Our analysis has found that NES are engaging in a staffing policy referred to as

an ethnocentric approach. Specifically NES AG key position holders are of German and

French origin. Moreover the 2000 trained Chinese engineers since 1979 have been

trained within a German culture, adopting the nationalistic philosophy and values

inherent in the NES headquarters. For a deeper explanation of ethnocentrism, see

In further support for the notion of an ethnocentric approach, our analysis found

valid implications regarding NES AG where the key positions are held by German and

French expatriates and where the remaining nine business units are operated in the same

manner. From NES’s perspective this would facilitate the process of maintaining a

constant corporate culture where business ethics are highly valued (Chakravarthy &

Perimutter 1985). In contrast however, we believe this approach to be shortsighted due to

a lack of diversity and critical thinking, and has directly impeded NES AG to gain

leverage in relationship building. While Dr. Perrin possessed adequate legal

understanding of Chinese business his dismissal of Guanxi and his efforts in negotiation

suggest that this approach his hindering NES AG ability to effectively function.

Moreover where a critical dependence on government-business interaction is noted as

essential by the Ministry of Foreign Trade and Economic Cooperation, the current

staffing system appears to adversely affect NES (MOFTEC).

6.2 Solutions

We have identified three possible alternatives to NES’s current staffing approach, which

are identified in Appendix C.

6.3 Recommendations

We recommend that key management positions in NES AG be filed by both host

country nationals and German nationals. This is pursuant to a polycentric approach but it

considers the transitional period by blending the current ethnocentric approach to

overcome short-term costs of high failure rates of either host country nationals or German

nationals. This combination of the two approaches is a short-term approach and the

implementation will be over an eight-twelve month period. Critical to the success of NES

AG is for the implementation of a staffing policy which identifies Chinese nationals that

will fill key positions in the subsidiary and where in-house internship at NES

headquarters will provide those Chinese Nationals with the required training and an

adoption of NES corporate culture. NES will develop the competencies in relationship

building when working with Chinese managers.

The approach is similar to the training program designed by NES to develop

Chinese engineers. However, the important difference is that it is cultivating Chinese

managers and reciprocal learning will take place. We have designed a model which

incorporates these functions, known as the ‘Cultural Reciprocal Learning Model’. In

essence this would lead to managers trained in German culture but whom encompass the

fundamental and unique Chinese cultural values based on Confucianism ideology and the

notion of Guanxi. For a more in depth analysis of this ideology we refer to Appendix B.

A long-term approach would be to ensure the continued effective training of host country

nationals in order to implement a geocentric approach whereby the best person for the

positions are filling the jobs.

These managers will offer a competitive advantage and have the ability to operate

as effectively as possible within the Chinese market. In addition by harnessing the

connection between German headquarters and the Chinese holding company, corporate

culture will gradually reach a common ground and in a long-term perspective signal to

the Chinese market that NES has the willingness to adapt to and adhere to local values,

beliefs, and traditions (Kali, Lovett & Simmons 1999).

7.0 Recommendations & Implementation

The following recommendations are primarily founded on the conclusion that the

strategic implications for establishing a holding company are determined to be

advantageous for NES AG when adequate funding exists and where due diligence is

performed. We therefore recommend that for the short term where submission approval is

imperative that NES review its financial position, specifically regarding the concerns

raised for its ability to maintain the capital required for financing. This financial

consideration must be performed with the acknowledgment that the statutory minimum

required for the establishment of a holding company is rarely used by the local regulator

in determining capital adequacy. Consideration is therefore given by the local regulator to

the location of the proposed holding company along with its size and scope of business.

We strongly recommend therefore that NES engage the services of a local Chinese

attorney, knowledgeable in the provisional requirements and whom we recommend

contact the local regulator to determine capital requirements.

It’s our recommendation that consideration also be given to the size and

significance of NES AG establishing a holding company in Beijing. We recommend that

it is imperative for NES AG to recognise the significance and size of the investment in

Beijing thus far in order to support their objectives for a long-term commitment in China.

By recognizing this commitment, an essentiality and desirability for establishing

relationships beyond a contractual obligation will thus be realized.

Therefore considering the long-term commitment that NES AG has in Beijing, we

recognise it is imperative that this commitment be aligned with the structural and staffing

approaches to support the local conditions and a local responsiveness within Beijing. At

its current state, NES AG’s decentralized structure does not reflect the Chinese

environment in which it operates and if maintained, will hinder NES AG’s long term

commitment. We have determined that NES AG therefore adopt a structure which

recognises the importance of hierarchy in Chinese business and the influence of this

confucianist culture while also remaining decentralized to effectively administer control.

We have proposed a pseudohierarchical structure which incorporates these differences

and will allow the firm to respond to the transitional state of economy in China (section

5.2.1). A pseudohierarchical structure will also enable NES to continue maintaining its

high ethical standards by cultivating these standards within Chinese managers. However

we have concluded that it is problematic to maintain these high standards where effective

business practices are constrained.

From our analysis the maintenance of these high ethical standards has impeded

the ability of Dr Perrin and Steinmann to function within the framework of the broader

Chinese culture, particularly where building interpersonal relationships was concerned.

We recommend therefore a staffing approach which maintains these high ethical

standards and also reflects the Chinese environment in which NES AG operates. In order

to do this we recommend that the parallel execution of two staffing approaches be

implemented. First, we recommend an identification program be designed to determine

those prospective Chinese managers within NES AG to fill key positions along side

German nationals in the Beijing Representative Office. We have presented a model in

which Chinese managers are trained at NES Germany to foster a greater understanding of

NES’s culture and organizational objectives. This model is known as the ‘Cultural

Reciprocal Learning Model’ whereby NES also gains a greater understanding of Chinese

culture (Section 6.3 – Figure 1.0).

While this cultivates and ensures a greater understanding between the two

cultures for future managers, it does not resolve the current relationship difficulties by the

Beijing Representative Office. It is therefore our recommendation that NES support an

MBA executive program with Peking University, Beijing which will enable current

management to establish a relationship with those government officials attending the

same program (section 4.2). This approach has been adopted with success by Motorola

in China and we believe it is fundamental in harnessing a greater understanding for

relationships.

Through consideration of the factors affecting NES AG in China we have

concluded that through the successful implementation of our recommendations, NES AG

will be more effectively equipped to successfully gain approval of a holding company

and ensure NES has continued future success within China. However, critical to the

implementation of our recommendations is for NES to embrace the notions we put forth

in this report to strategically reach the desired objectives within the expansive Chinese

economy. It must be met by a total organizational commitment where the organization

does not deviate from the objective of harnessing greater interpersonal relationships

within the Chinese community, as only then will the success of NES in its long-term

commitment be realized.

The closest meaning for Guanxi is ‘connection’. Guanxi, however, does not only mean

connection; rather, it defines the mutual obligations and reciprocity of relationships with

others in Chinese society. It’s been argued that Chinese when conducting business they

do not differ between business and interpersonal relationship (Cheen, 2001). Guanxi is

also related to a long-term perspective and could be linked with Hofstede’s (2002)

dimension of long-term v short-term orientation. In this context the Chinese business

environment value long-term relations.

Confucianism – The Chinese way of life and all its aspect are strongly influenced by

deeply rooted philosophical theories and constructs. Confucianism advocates

benevolence, righteousness, harmony, loyalty, humility, and learning (Bell, 1999). This

concept relates to a general welfare of society and its members.

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