“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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