Guanxi breakdown in BBT and American firm negotiations

Negotiations and Transactions Across Cultures: Across the Pacific

Executive Summary This paper identifies the major issue in the breakdown of the negotiations and business relationship between the Chinese firm BBT and the American firms Asia Pacific Consulting Group, U.S. Fortune, and NutriNex. It shows that a failure of the American players to fully appreciate the Chinese culture and the Chinese firm’s intentions and expectations led to a failure in guanxi—the quality of maintaining face, respect, honor, and appreciation for important values. This paper uses Hofstede’s theory of cultural dimensions to explain the cultural issues in the case and provides a solution and action plan for overcoming those issues.

Major Issue: Chinese Company vs. American Companies The major issue in the case of BBT and Asia Pacific Consulting Group (APCG) was that Bill Wright was at the heart of negotiation between an American firm and a Chinese firm, and Wright had no experience in dealing with Chinese companies, let alone a sense of Chinese culture. Bill had a client who could possibly facilitate the trade—a manufacturer of lecithin named NutriNex. NutriNex was eager to break into the Chinese market. Bill saw himself as the middleman between NutriNex and BBT—but BBT was not looking for a middleman: it already had one of those in Hong Kong. It was looking for a direct relationship with a supplier. Tang at APCG was responsible overall for the arrangement as APCG was the firm contacted by BBT for assistance. But Tank neglected to tell Ming Kuo about that reality of what Bill Wright was proposing. Tang rationalized the omission by arguing that BBT did not know the actual nature of the arrangement or that the real supplier was NutriNex and not Bill Wright of U.S. Fortune. This omission would cost APCG dearly as the Chinese firm, of course, would eventually find out and the issue of trust and transparency would become a major obstacle. In particular, Wright and Tang failed to develop guanxi with BBT. Contradictions and dishonor were a cause for a loss of face in the Chinese culture—a loss of guanxi. APCG made a major mistake in allowing Bill to serve as the middleman when Tang knew BBT was looking for a direct relationship with a supplier, and thus they violated the Chinese sense of guanxi and could not be trusted.

Theory of Hofstede’s Cultural Dimension Hofstede’s theory of cultural dimensions helped to advance the field of cross-cultural psychology by identifying half a dozen different criteria or value dimensions for understanding and evaluating the psychology of individuals from different cultures. These critera are: 1) power distance, 2) uncertainty avoidance, 3) individualism vs. collectivism, 4) masculinity vs. femininity, 5) long vs. short term orientation (Hofstede, 1998). These criteria have been found to be an effective way to make sense of how people from different cultures perceive the world and what their expectations are when interacting with others; and as a result of the theory’s utility, it is has been used in virtually every discipline, field and industry—from business administration to nursing—essentially any time managers are interacting with individuals or companies abroad or people are working with individuals of a foreign culture (Mazanec, Crotts, Gursov & Lu, 2015; Papadopoulos & Koulouglioti, 2018). The theory is useful in explaining why some businesses failed and others succeed either at opening in foreign countries or at incorporating foreign workers into their domestic business—or as in the case of BBT and APCG why some companies fail to connect in a meaningful way with their counterparties from other countries. Indeed, Orr and Hauser (2008) point out that “Hofstede’s seminal work has been the benchmark for cultural analysis for the last three decades” (p. 15). Hofstede showed that every culture has its own set of social values that can be broken up into those six categories, and the key to successful interaction between people and parties of different cultures is to understand these values and respect them.
Hofstede (1980) showed that by considering the culture of the individual one can implement more effective motivational strategies that appeal to the individual based on the cultural dimensions that have shaped his psychology, needs and expectations.
Hambrick, Davison, Snell and Snow (1998) show that in today’s globalized society, there is really no excuse for not having a cultural competency when it comes to managing business relations. People from all over the world are coming into contact with one another on a regular basis and thus managers have to be aware of how cultures differ and what expectations and assumptions people from different cultures will have. The use of Hofstede’s model in today’s globalized society can assist when dealing with business relationships.
Some argue, however, that Hofstede’s model is unrealistic and overly-simplistic; they contend that people from different cultures are shaped by more than the values of their own nation—particularly because it is a global society and regional/cultural values are also changing as a result of globalization (Beugelskijk, Kostova & Roth, 2017). Hambrick et al. (1998) argue, on the other hand, that while “individuals may have psychological characteristics that deviate from the central tendencies of their nationalities, we do not mean to imply that nationality imprinting is easily erased” (p. 184). Indeed, in spite of globalization, cultural imprinting still occurs often without people even knowing it. Thus, individuals may be influenced on a surface level by globalized values, but they will still have deep-rooted cultural leanings, for cultural imprinting happens on a person’s psychology and in many ways does not even become discernible until one is engaging with others of another culture and coming face to face with the problem of culture-clash. Culture-clash is what occurs in the case of BBT and the American firms: it is where cultural norms and expectations of two or more different people or groups come into conflict with one another. In today’s globalized business world, it is crucial that the risk of culture clash be reduced through the fostering of cultural competencies. Cultural Characteristics Involved in the BBT Case Power distance refers to the relation of people or groups to one another in a person’s society. For example, in extremely hierarchical societies, the power distance ranking is much higher than in societies where equality is considered an important ideal like in the United States. A person from a country like Saudi Arabia will have a psychology that is more informed by a strong power distance ratio because of the culture in which he has grown up. If such a person were to be inserted into a school or workplace in the West, he would have to adjust his thinking about how and when it is appropriate to communicate, what the pecking order is, and so on. The same goes for China. China has a high power distance score, meaning that in the Chinese culture people accept that power is distributed unequally: it is a hierarchically organized society with power concentrated in the hands of those at the top. In America the power distance score is much lower, with American society believing more in the equitable distribution of power (Hofstede Insights, 2019). This can be seen in the case of BBT, where Bill Wright has no problem inserting himself as middleman into the arrangement and Tang understanding the American mentality of everyone wanting a slice of the pie is willing to overlook it. The problem is that this is not what the Chinese wanted—and the complications of dealing with an unreliable middleman are born out shortly after the deal is struck when Bill fails to deliver because he fails to realize the complexity of supply chain management.
Individualism vs. Collectivism is another value and it refers to the extent to which the society has more respect for the freedom of the individual or for the collective. America, for instance, has a high individualism score, while China has a high collectivism school (Hofstede Insights, 2019). In this way, the two nations’ cultures are very different on this particular value. BBT’s leaders are less likely to be interested in or sympathetic to the individual’s needs—such as Bill’s lack of experience in managing a supply chain to Asia. BBT cares about the collective, which is why it is willing to sue for such a small amount—it is about making a point and holding people accountable when they fail the community.
In terms of masculinity, China and the U.S. have similar scores: both are devoted to working hard to achieve success. If there is one value point that the two cultures have in common it is this one. This should be where the BBT, Tang, and Wright all work to find common ground in sorting out their issues. They can all agree that what is in the best interest of everyone involved is to settle disputes and get back to business. This will be discussed further in the recommendations section of this paper.
China also has a low tolerance for uncertainty—lower at least than in the U.S. In the Chinese culture, the preference is to avoid uncertainty, which is why BBT was looking to deal directly with a supplier in the U.S. Dealing directly with a supplier eliminates the uncertainty about a middleman failing to obtain the necessary supplies and deliver them on time. The middleman, after all, has other issues to worry about and it is just one more factor that can go wrong for a company that is trying to reduce risk and still begin production on time. Tang and Wright should have understood this—especially Tang, since he has more familiarity with the Chinese culture than Wright. Tang should have explained to Wright the situation and that China was looking for a direct relationship—not another middleman, which is what Wright was being. The initial contract should not have been allowed as drawn up by Wright. That was the moment Tang should have explained the issue more fully and provided Wright with the option of a finder’s fee for setting up the deal with NutriNex. Wright was under the impression this would be a long-term deal for himself—and that was not what Tang was supposed to be negotiating nor what the Chinese firm was looking for.
The Chinese also have a very high long-term orientation score (Hofstede Insights, 2019). This means they focus on doing what is best for themselves in the long-term rather than in the short-term. Americans are a bit more myopic in that they tend to focus on the short-term, appreciating that events and factors can change over the long-term and that planning for the long-term can be too presumptuous. In the case of BBT and the American firms, all were thinking about a long-term deal, but only BBT was actually approaching a long-term deal in a way that made sense for them. Tang and Wright were looking at a deal as something lucrative for themselves and ignoring why BBT was actually wanting the deal in the first place.
As for the value of indulgence, China has a low cultural score here and is seen as a very restrained society (Hofstede Insights, 2019). The U.S. on the other hand is highly self-indulgent. This is another issue where the two cultures conflict and in the case of BBT it can be seen with Wright wanting to insert himself into a relationship where there was not supposed to be a middle man and in Tang’s indulgent attitude towards Wright, accepting Wright’s insertion without complaint. Being more restrained, the Chinese also take more time to deliberate, whereas Wright was frequently simply shooting from the hip and not taking the time to think all things through—which was why a failure to deliver occurred later on. BBT Solution and Action Plan Tang and Wright must admit their mistake, apologize to BBT, pay the sum requested, and then agree to get back to a working relationship. The players involved on the U.S. side should negotiate a better arrangement and sort out who will be working directly with BBT. If NutriNex is not interested in working directly with the client, Tang and Wright can manage that end of the relationship. If NutriNex is willing to work directly with BBT both Tang and Wright should be willing to step away from the project and accept a modest finder’s fee or some sort of compensation for bringing the deal to the table. If Wright and Tang are both looking to continue to benefit monetarily from the deal even though their services are not required (since BBT is looking for a direct relationship with the supplier), they should be advised that the culture of China does not look highly upon subterfuge. They should respect BBT’s desires and instead of trying to get a slice of the action they should be content at having facilitated a working relationship between BBT and an American firm and look for other opportunities to be of service to BBT in the future or to other Chinese firms. In this business, it is important to have good relationships, and one successful relationship will lead to another. Thus, by stepping aside if NutriNex is able to step up and deal directly with BBT, Tang and Wright would not necessarily be losing out on a deal but rather gaining the trust of an important Chinese firm, and their reputation would be like their weight in gold in the Chinese business community. They could leverage that reputation to facilitate future business deals. They are missing the forest for the trees.
The advantage of this solution is that it allows BBT to restore face and allows the American firms to re-establish guanxi. The disadvantage of it is that it also means the reputation of the American firms will take a hit. Regardless, their reputations are not going to be very high in China if they do not admit their mistake. Owning up to their failures is the first step in reconciliation. The other disadvantage is that it means Tang and Wright will not be benefiting in the long-term from a deal between BBT and NutriNex: there will be no cut for them other than an initial consultancy fee for Tang and a finder’s fee for Wright. But they should not be expecting more than that in all fairness.
The action plan for implementing this solution is simple: 1) Wright must first meet the demands of BBT and settle out of court immediately; 2) Wright and Tang must then issue a joint-letter of apology that explains where the two went wrong—but it should also provide the rationale for why they acted thus, using the culture of American business as a way to show what they were thinking. 3) Tang and Wright should arrange for BBT to work directly with NutriNex if possible and then step away from the deal so as to make things right. 4) If NutriNex is unwilling work directly with BBT, Tang and Wright should negotiate an arrangement in which they serve as middlemen in a way that is approved of by BBT.

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