The China Venture

experience in operating production facilities outside Europe before it entered into joint
venture negotiations in China.
Planning for the foundation of a production joint venture started in 1993 and progressed
rapidly, even though CGC's management did not have any relevant experience of doing
business or negotiating in China. The goals of the company were straight forward. It wanted
to penetrate the market quickly, starting with sales in China's most promising city, Shanghai.
Plans were short-term with expectations of breaking even in the second year of operations.
During the planning and build up phase, no consideration was given to the eventuality of a
failure. No exit strategy was therefore discussed.
The company decided quickly to enter the market via a joint venture agreement with a local
partner. Negotiations were swift as both partners wanted to start doing business quickly. The
contract was considered very favourable to CGC, giving it 60% of voting rights, as well as
management authority. The partner, a state -owned business, contributed land and buildings.
During the negotiations the partner had insisted that the joint venture would take on people
from the partner company if they had appropriate experience for their new jobs.
The newly formed joint venture company achieved a satisfactory product quality very quickly
through the utilisation of European machinery. Even more successful were the marketing
efforts of the company. According to their own estimation, CGC achieved a brand recognition
rate in Shanghai of over 90% within two years of operation.
These marketing efforts and successes, however, were not mirrored in similarly impressive
sales figures. This was mainly true because distribution did not work at all. Like what
happened to so many other foreign companies, CGC's partner did not live up to expectations.
At the beginning, the joint venture company relied mostly on the partner's distribution
channels which proved to be so inadequate, that demand could not even be met in the city of
Shanghai. Further expansion to other regions seemed completely beyond the capability of the
company.
Apart from distribution, the company also faced major cost problems. Production turned out
to be much more expensive than originally planned. Personnel costs were much higher than
forecast. The reason for the high personnel costs could be traced bac k to the hiring of too
many and too inefficient workers from the partner company. CGC hoped that changing the
general manager, who had the ultimate authority over hiring people, would cure the problem.
However, the partner company continued to exert pressure on the new general manager to hire
more and more employees.
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