This case was written by Charlotte Butler, Research Studies Manager, Anne-Marie Cagne, Research Assistant at EAC-INSEAD and Henri-Claude de Bettignies, Professor at INSEAD. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
"I really don't know why I'm here. Kondo and I meet twice a week, and all we do is shout at each other. I'm supposed to be responsible for technology and quality but I have absolutely no power to do anything". As Hans Röller, the Deputy General Manager, at the Chinese joint venture company Anqing, TP, Goetze Piston Ring Co. Ltd (ATG), left the weekly meeting, he reflected on his posi-tion at ATG. His relationship with the Japanese General Manager, Mr. Kondo, was deteriorating ra-pidly, and his inclination was to quit and return to Germany. But if he did, then everything he had achieved so far would be lost. On the other hand, how could he continue under such conditions? Kondo and Mr. Zhang, the Chinese Deputy Manager, were running ATG between them (trad. : Kondo et Zhang… géraient la firme tous les deux), so any final decisions on the technological in-vestment Röller felt was critical would be made at Board level, where he was powerless. At least, he comforted himself, the factory workers supported him, and that was important in an ex-State Owned Chinese Enterprise. But was it enough to make up for his continued frustration? "When I came out here I expected difficulties", he thought to himself, "but not to this extent."
At the beginning of 1997, the three-way joint venture between the Chinese firm, Anqing Piston Ring Co, the UK-based, T&N plc and the Japanese Teikoku Piston Ring Co Ltd, had been running for just nine months. Unlike most Chinese joint ventures, on paper it was a success. The factory was breaking even (trad. : devenait profitable) and it looked as though a royalty would be paid at the end of the financial year. Behind the factory walls, however, it was a different story. Röller was not the only one who was unhappy about the way the factory was being run, the Chinese workers were also uneasy about how the new regime was affecting their working conditions.
T&N plcT&N, the Manchester-based T&N group was one of the world's leading suppliers of high technolo-gy automotive components, engineered products and industrial materials. The group had a long bu-siness history, having operated as one of the world's largest asbestos (trad. : amiante) producers since 1922 in its previous incarnation as Turner and Newall. T&N had finally withdrawn from this business, and the litigation surrounding it, in 1996. Although the removal of this albatross (trad. : alabatros… il faut comprendre “la marque visible du crime”) was welcomed by analysts, there was speculation that the group might now make an attractive takeover target.
By then, T&N had refocused its activities round two core businesses, Ferodo brake linings (trad.: plaquette de frein) and Coopers Payen gaskets (trad. : joint). These activities were augmented by key acquisitions that took the group into the piston products business, and expanded its scope worldwide. In 1996, T&N was structured into five global product groupings and had over 200 ope-rations in 24 countries and customers in over 150 countries. Although the UK and mainland Europe and North America were its biggest markets, sales to the automotive industry worldwide accounted for over 80% of the group's turnover, which in 1996 was almost £2 billion. The group employed 31,000 people, mainly in the UK, mainland Europe, North America and Southern Africa (Exhibit 1). However, a year later, developments in the automotive industry it served were about to impose radi-cal change on the components industry, and so on T&N's future.
GlobalizationBy the mid-1990s, the North American and European automobile markets had reached maturity, forcing the major auto manufacturers to look outside their home bases for growth. Globalization became the order of the day and, to achieve the necessary size to enter and dominate the attractive auto markets of Eastern Europe and Asia, they embarked on a series of acquisitions and strategic alliances. The result was the rapid integration of the auto industry.
These developments naturally influenced their suppliers, forced to follow these ever more deman-ding masters into the new markets. Already, the move towards the greater use of common parts in new models had put economies of scale and global coverage at a premium in the components indus-try. Further pressure had also come from the manufacturers' demands for lower prices, higher quali-ty and greater flexibility, leading to the Japanese manufacturing system of "just-in-time" becoming the norm. The globalizing moves of the auto giants reinforced these trends and increased the pres-sure on the parts makers as, to comply with the manufacturers' demands for shorter lines of com-munication with their suppliers, they too were forced to 'go global'.
The combined effect of all this was to accelerate the consolidation of the components industry. Clearly, only the largest and most efficient parts producers would be able to supply these powerful auto giants and so smaller suppliers, unable to meet the financial and managerial demands of globa-lization, either went bankrupt or were taken over by one of the larger groups. The industry was then further consolidated as some of these larger components suppliers were themselves taken over. By the autumn of 1997, US companies alone, had acquired 100 European manufacturers - among them T&N. True to the prophecies of the industry analysts the group, an attractive target given its high tech product base and global spread, was the subject of a successful £1.5 billion (US$2.4 billion) takeover bid by the US-based Federal-Mogul Corp., creating the world's largest engine systems ma-nufacturer. In 1998, Federal Mogul had total assets of US$9.94 billion and employed 54,350 people (Exhibit 2).
Prior to its acquisition by Federal Mogul, T&N had already begun to explore opportunities in newly developing markets worldwide. Some of its most successful forays (trad. : incursions) had been made by the largest of its five product groupings, the Piston Products Group.
The Piston Products GroupIn December 1986 as the result of a hostile bid, T&N acquired Associated Engineering (AE) plc, then one of the leaders of the British car industry and as big as T&N itself. Among AE's activities was the manufacture of piston products via its AE Goetze automotive companies. This well known branded business was later enlarged by T&N's 1993 acquisition of a German piston ring manufactu-rer, Goetze AG. Together, these two formed the foundation of the Piston Products Group (PPG), which was based near Birmingham in the UK.
In 1997, the PPG operated through its chain of AE Goetze companies, located in the UK, France, Germany, Italy, US, Argentina, South Africa, India and South Korea. Along with its associates and licensees, the PPG had over 30 focused manufacturing facilities, supporting all major engine and compressor manufacturers worldwide. It ranked number 2 in the world to Mahle GmbH, the Ger-
man Pistons manufacturer, and the Goetze brand was a strong one, known throughout the world for the quality of its piston products. This was in turn due to the fact that AE Goetze designed and built its own specialized machinery for producing its piston rings and other products, believing that this both was cost effective and an added source of competitive advantage.
New Opportunities and Developing MarketsLike many other European groups at that time, when it came to expanding outside its traditional markets T&N had neither a world strategy, nor even an explicit Asia strategy. Rather, the emphasis was on granting licences as a means of gaining extra revenue, without thought to any long-term de-velopment or planning on a global basis. However, the AE acquisition had brought the PPG a joint venture with a South Korean firm that had run successfully since 1984, and by 1995, it had set up a department that was actively looking for joint venture opportunities in potentially high growth mar-kets. As David Thorpe, then responsible for the development of new and existing joint ventures and licensees for the PPG observed, "One of the goals of the joint venture department is to continually assess where T&N should expand. In the mid 1990s, we began to look at the ASEAN trading block and the Former Soviet Union (FSU)".
Among the countries Thorpe investigated was China, which industry observers believed was a po-tentially huge market. It was forecast that China's automotive component industry alone would be worth US$45 billion by the year 2005. Thorpe decided that the first product to be manufactured in China should be piston rings, since AE Goetze already had a foothold there thanks to its previous efforts to sell its equipment into markets where there was no threat to its position. Although it had succeeded in selling a number of machines in China, they had soon begun to gather dust, since they were too sophisticated for the untrained Chinese workers to operate. However, as Thorpe commen-ted, "It meant that AE Goetze already had good contacts in China, and these could be useful in fin-ding a suitable Chinese joint venture partner."
The Automobile & Component Industry in ChinaThe Chinese government established an automobile industry in the mid-1950s, a few years after the foundation of the People's Republic. Under the central planning policy then imposed on the country, the industry evolved slowly until the 1980s, when the succession of President Deng Xiaoping ushe-red (trad.: conduit) in an era of economic reform, characterized by a more "open-door policy." This encouraged a number of Western automobile manufacturers, led by the German company Volkswa-gen, to enter China, bringing with them capital, advanced technology and new managerial skills. By the mid-1990s and with the development of a new passenger car segment, the big global automotive players believed that the market was ready to take off (Exhibit 3 & 4) (trad.: décoller).
The components industry, meanwhile, had been slow to develop since the majority of vehicles pro-duced in China before the 1980s were cheap commercial vehicles, mainly trucks. Between 1981-94, total investment in the components industry accounted for only 30% of the total investment in the whole automobile industry in China. Even the later development of the passenger car segment made little difference to size of the components sector, which was incapable of supplying the higher qua-lity and technologically more sophisticated products required for the cars.
This situation changed in 1994, when the central government published its industrial policy docu-ment, intended as a guide to the automobile industry. This document recognized the importance of economies of scale for car manufacturing, set the thresholds (trad.: seuils) of local content for car projects, and prioritized the development of China's auto components sector. A further boost came with the government's ninth five-year plan for investment in the automotive industry up to 2001, which stipulated that 50% of the total investment would be allocated to components (Exhibit 5).
Foreign investors active in China's components industry at that time included SF, ITT, Delphi, Sie-mens and Bosch, and T&N's PPG was anxious to joint them and take advantage of this lucrative opportunity that had opened up. Having identified the market, the next step was to carry out "a stra-tegic analysis, in order to build up a picture of how and when the PPG could move into this new area."
Finding a Partner - Teikoku Piston Ring Co LtdBefore beginning the search for a suitable Chinese partner, Thorpe approached the Japanese com-pany, Teikoku Piston Ring Co Ltd, with the idea of collaborating on the project. As Thorpe explai-ned, a Japanese partner for the joint venture was important for T&N since:
"We had to access Japanese high technology if we wanted to compete globally, as a third of the world's cars produced are for Japan. Over the last six years T&N has developed a rela-tionship with Teikoku Piston Rings Co Ltd, one of the largest piston ring manufacturers in Japan. The two companies have already collaborated successfully in other parts of the world, so it seemed the logical choice for a trusted partner. It was interested in the idea of China - I couldn't believe it. This was a dream ticket for T&N, a front-running Japanese ring manufac-turer (trad.: le premier fabricant japonais de pistons) in partnership with a leading Western ring manufacturer. It was a winning team that together, could supply customers worldwide."
Founded in 1939, Teikoku Piston Ring Co Ltd (TP) manufactured and marketed engine parts, inclu-ding piston rings and cylinder liners for use in automobiles, ships, construction and agriculture ma-chinery. TP took pride (trad.: mettait un point d’honneur) in supplying high quality products with its company motto (trad.: devise de l’entreprise) of "the customer comes first."1. In 1997, its main customer in Japan was Toyota; both companies were part of the same keiretsu2. TP's headquarters were in Tokyo, with sales offices in the US and Europe. In 1995, its net income was 3,194 (000's)Yen3 on sales of 353,636, and it had a workforce of over 1,000 (Exhibit 6).
The President of TP, Mr. Hisatomi, shared Thorpe's optimism about the high growth potential of the Chinese market, and was eager to see his firm establish a foothold there. This would be TP's first manufacturing base outside Japan, and would therefore be the model for any future developments - TP was determined that it would succeed.
2 A vertically integrated group of suppliers, distributors and other firms centred on a major manufacturer such as Toyota
3 Exchange rate December 1995 for the Japanese Yen was, US$1=Yen99
In 1995, TP and the PPG set up an office in Shanghai. A local, Mr. Lin Yang, was appointed general manager, and a consulting firm hired to help find a Chinese partner. One of the first problems they encountered was the fact that most of the local manufacturers produced both ring and other piston products - whereas PPG and TP required only a piston ring specialist. Another concern was that all the factories available were State Owned Enterprises (SOEs) which would bring with them a range of attendant problems associated with SOEs such as a large, unsackable (trad.: non licenciable) workforce and huge financial burdens (trad. : fardeaux) (Exhibit 7).
There was also a time pressure associated with the implementation of the Chinese government's fi-ve-year investment plan. This included an import duty of 40% on all capital goods coming into the country; the only exceptions would be joint ventures signed before 1st April 1996, which would benefit from a one-year tax exemption. As Thorpe noted: "we couldn't afford to pay such a steep duty - so we had to find a partner quickly."
The Search for a Chinese PartnerBy the end of 1995, TP and the PPG had begun negotiations with a large Chinese SOE auto compo-nents manufacturer, Shijiazhuang Internal Combustion Engine Parts General Factory (SJZ). A stan-dalone (trad.: indépendante), long-established firm, it had good contacts and had held a previous license with Mahle, one of T&N's major competitors. However, progress was hampered (trad.: con-trecarré, contrarié) by the fact that the PPG's holding company, T&N, insisted that if technology was to be transferred to a joint venture then T&N (or T&N with a trusted partner - in this case TP) must remain the majority shareholder. Another obstacle was that T&N and TP insisted on full con-trol of export sales. These stipulations would make negotiations with any potential partner difficult, as Thorpe acknowledged:
"We visited a number of potential SOEs, but we encountered the same problems. They would welcome us with open arms, until they realized that exports would remain our responsibility, and after that they weren't interested. It was understandable, they needed foreign currency. The other problem was that there was an export commitment of 50% of total turnover. We could never agree to this. The combination of these factors usually killed any negotiations off.
Another big issue we had, especially with SJZ, was that it had a workforce of 3,000. But to produce the same number of piston rings as they were doing we would need only 200 em-ployees, and it wasn't just keeping them on the payroll (trad.: masse salariale) that we were concerned about, it was the cost of everything associated with an SOE - the schools, housing, hospitals etc. In addition, the products were of poor quality and we would have had to install a new manufacturing plant. This would have left us with the burden of a huge factory equip-ped with machines we didn't want, and too many employees."
The negotiations with SJZ were eventually abandoned when the two parties failed to reach agree-ment.
At the end of January 1995, PPG and TP became aware of another piston ring manufacturer further south in China - the Anqing Piston Ring Company (APR). Lin Pei, the general manager in Shan-ghai, visited APR's director, Mr. Zhang, and was soon convinced that it could be the suitable local partner. As Thorpe recalled:
"Even though we had little time, until the 1st April deadline, all the parties decided it looked good and were excited at the prospect. No one thought we could succeed in negotiating a joint venture with a Chinese and Japanese partner in eight weeks. TP's bank, Fuji Bank, even advi-sed us that the joint venture was 99% sure to fail. But we were still willing to try."
Anqing Piston Ring Company LtdThe Anqing Piston Ring Company Ltd (APR) was a Chinese State Owned Enterprise (SOE), origi-nally set up in 1953 as a store house. Situated on the banks of the Yangtze river to make transport links easier, it had gradually developed into a manufacturer of piston rings for agricultural machine-ry. Little emphasis was placed on the manufacture of automobiles until the late 1970s, when the change from a planned to a market economy and the subsequent expansion of the auto industry led to the production of automobile and truck piston rings. In 1991, APR bought land on which to build a new factory 5 kms away, and introduced new foreign technology and equipment into the old fac-tory. Production of rings for trucks began with the new equipment in 1993, followed two years later by the manufacture of piston rings for cars. As a result, the workforce was increased and factory shifts were stepped up from two to three a day.
Mr. Zhang, who had been assigned to APR in 1982 as a technician, was involved in the pioneering work to develop the factory. As a result, in 1992 he was appointed director of the factory by its for-mer head, Mrs Tan, then the Deputy-Mayor and a powerful and influential woman in the city. By 1995, as Mr. Zhang, explained:
"APR was running well, but it was under pressure, along with other Chinese manufacturers, to develop partnerships with the foreign car manufacturers that were beginning to set up ope-rations in China. There was also hope that China would soon be entering the GATT4. APR considered a joint venture partnership for a long time, but once the decision was made we wanted to move rapidly. Before T&N and TP's proposition, a US manufacturer became in-terested in APR, but before the negotiations began, a delegation from Anqing, including the governor of the province and myself, visited AE Goetze, in Germany. I was impressed by the technology, and was also aware that T&N and TP were interested in setting up a Chinese joint venture. At the time they were still in discussions with SJZ but I was determined, and in-vited them to visit the factory here."
At the end of September 1995, a delegation from TP visited APR, followed in January the next year by a group from T&N. By February 1996, negotiations were well underway between APR, TP and T&N.
The JV is Set up in Record Time"All the parties were in agreement, we had the green light. At this stage I was commuting to China every two weeks," recalled Thorpe. "Mr. Zhang is young and extremely enthusiastic
4 General Agreement Tariffs and Trade, was created in 1948 as a temporary framework for trade liberalization. It became the trade relations guide for 50 years, at the Uruguay Round, 1986-93, the member parties agreed to create the World Trade Organization (WTO) to serve as an umbrella administration for the GATT.
and was dedicated to setting up the joint venture. APR had a lot of support from the local au-thorities because they believed it was prestigious to have both a large western and a Japanese company interested in the region. We were wined and dined by the local government and trea-ted as important people".
The majority of joint ventures set up at this time tended to be located either near the coastal regions, or those where large automobile manufacturers were already located (Exhibit 8). Cities such as Bei-jing, Shanghai and Dalian, or the special economic zones such as Shenzen and Guangzhou were favored for logistical reasons, or because of the economic boom they had witnessed. Anqing, a small city with approximately 700,000 inhabitants was not. Thorpe observed: "the obvious choice for a joint venture because of its location, and the poor infrastructure in the province." However, these handicaps were to some extent offset by the favorable welcome offered by the local govern-ment.
Mr. Zhang warned TP and T&N that a minimum of one week was required to draw up the necessary paperwork. He also informed them that in China, any joint venture involving capital of over US$30 million needed the approval of the central government in Beijing. As this would have delayed the signing of the joint venture, so missing the 1st April deadline, the three partners agreed to set the investment level at US$ 29,9million. Consequently, only local government approval was required.
PPG hired lawyers to draw the contract up in Hong Kong, whilst (trad.: tandis que) its own lawyers in the UK, worked round the clock to meet the deadline. But by Thursday, 21 March 1996, the con-tract was still unsigned and time was fast running out, since to get the approval of the local govern-ment and be sure to have the contract ready for signing on April 1st, everything had to be agreed by March 22. This put the three negotiating teams under great pressure, as Thorpe recalled:
"1 arrived from the UK on Thursday 21 March at lunch time. We went through every clause of the agreement and I admit, I was the awkward one (trad. : maladroit), insisting on certain things. For example, at about 1.30 am there was a problem with trademarks - by 3am we had agreed there should be a separate trademark and separate royalties. Trademarks were impor-tant for TP and PPG because it was a useful way of getting money out of China. As we agreed to the new wording (trad. : formulation), it was faxed to our lawyers in Hong Kong. There, they had a team of people translating it back into Chinese, which was then faxed to us for Mr. Zhang to read. If he disagreed, the process would recommence. TP also had its own lawyers working with the Fuji Bank to protect its interests. The negotiations were conducted in Japa-nese, Chinese and English - it was unbelievable."
The negotiation process had begun on the eve of the lunar New Year, a respected holiday in China. As Mr. Zhang remembered:
"I had to ask my colleagues to stay at work exceptionally for the lunar holiday, it was unheard of to work on this day. But we made progress rapidly, simply because we were in negotiations day and night. What we achieved in a month would normally have taken three months. I was determined to create a miracle."
On 22 March 1996, at 7am the three partners were ready to sign the contract. What the PPG and TP representatives did not realize was that a ceremony had been organized for 10am at the Anqing
town hall in the presence of local government officials, and with the press ready to cover the story. Thorpe described how:
"We left the negotiating room and went to the hotel where there was a huge hall with banners all ready bearing the slogan 'Family of the Strongest and the Biggest'. At 10am the Governor arrived. Everything had been arranged -the Chinese never doubted that the joint venture would be signed."
The final terms of the joint venture, christened Anqing TP Goetze Piston Ring Co. Ltd (ATG), gave a shareholding of 35.7%, to T&N and TP respectively, and 28.6% to APR (Exhibits 9, 10). The pro-duction capacity of APR at the time was 20 million rings per year, and it employed 900 people (Ex-hibit 11).
Taking ControlO R G A N I Z A T I O N A L C H A N G E S
The first notable change was in the organizational structure. A few months after the signing of the joint venture agreement, Mr. Kondo, was transferred from TP headquarters in Tokyo, Japan and ap-pointed General Manager of the factory. A well-respected TP employee, he had begun his career there at the age of 15, and subsequently worked in various divisions of the company. Senior TP ma-nagement was confident that he had the necessary experience in management production and opera-tions to head ATG, and would soon lick it into shape (trad. (approximative) : fortement occupé par son activité) : As Thorpe explained: "the three partners decided that a TP General manager should be in charge of factory because its headquarters were nearer geographically, and support would be easier to send from Japan than from Europe. We were also confident that a Japanese GM would achieve whatever plan we agreed on. It was ideal for PPG.
Mr. Zhang, the ex-Director of APR, became Standing Deputy General Manager at ATG, reporting to Mr. Kondo. The position of deputy director was abolished, removing a layer in the organization’s hierarchy. Only the director, vice director and section heads remained. A TP executive based in An-qing, was responsible for finance, and was in daily contact with a T&N accountant in the UK. As Mr. Sun, who worked in the finance department, explained, with this change in personnel, the joint venture adopted accounting processes that were based on foreign practices. The State no longer had control over wages and recruitment." This was a significant change for the Chinese SOE. Five Ja-panese engineers were also sent out to ATG in order, Thorpe observed, "to get the factory under tight control." In addition, Mr. Kondo reported on a regular basis to his superior in Japan. The Board was made up of three Japanese, two Chinese and two PPG representatives, with Mr. Zhang acting as Chairman and Thorpe as Vice Chairman.
A N E W M A N A G E M E N T R E G I M E - M R . K O N D O A N D T H E J A P A N E S E T P M , 1 9 9 7 - 9 9
"Before I arrived at ATG I knew nothing about China, but it soon became apparent that there was a large difference between the two countries." As Kondo recalled, "it was a flashback to Japan 30 years ago when I stepped off the plane in Anqing airport. In some areas, APR are
30 or more years behind TP and in others, less. My goal was to shorten this gap. But I knew I had to be careful not to implement systems that would be unacceptable in China. "
One of his first challenges was to change the mindset of the Chinese workers. He wanted them to "think the TPM way", not an easy task given that the Chinese workers were accustomed to the 'iron rice bowl' of the SOEs (Exhibit 7). As he described "I have two main aims: first, to create a new en-vironment where workers will work well and be motivated by profit, and second, to encourage the staff to develop their own way of thinking." Such ideas were alien to the Chinese employees, used to working in a culture where profit was not an issue because the State had always paid their sala-ries.
During Mr. Kondo's time at TP, he had been involved in the development of the 'TP Management activity' (TPM), aimed at improving systems within the company's factories. Once he arrived at ATG and realized how much needed to be done to improve the factory, he decided that JPM could be instrumental in achieving this. He therefore issued a factory operational policy for 1997, setting out reforms in organization and management At the time, for example, each worker was responsible for one machine and this, he thought, led to low efficiency. The implementation of TPM could, he believed, help change this and other similar bottlenecks (trad.: goulot d’étranglement). He was convinced that one third of the improvements could be obtained through maintenance, and the rest by small, gradual improvements or Kaizen.
Among the Japanese management systems Kondo implemented was the 5'Ss', a set of rules and re-gulations that the workers were to follow (Exhibit 12). He considered this to be "one of the mana-gement technological monuments". These five rules were chalked up (trad. : inscrit à la craie) on blackboards throughout the factory as a constant reminder to the workers. They were: cleaning; tidying; improvement; clarification - what you have use for; and developing good practices/habits. Kondo was convinced that by introducing these more stringent (trad.: rigoureuses) practices, the employees would learn to maintain regular working habits and become more motivated. He also wanted to encourage them to take responsibility for the maintenance of machinery as this, he belie-ved, would lead to the production of higher quality rings. However, these Japanese working methods encountered strong opposition from the Chinese workers who did not appreciate, and were not accustomed to, Kondo's strict way of running the factory. The differences between the two wor-king methods quickly became apparent.
Kondo was also concerned by the lack of cooperation between ATG's management and engineers, who worked in separate rooms. He wanted to build a large office where all the staff would work to-gether, discussing and sharing ideas to improve the factory. "In the first three months I tried to in-form the workers about what we were doing, and explain my vision for ATG. During this period, Mr. Zhang and I exchanged ideas. I spent much time with the heads of the workshops and depart-ments so that they would understand my ideas." Kondo believed that after six months, more people would understand his plans, "and then the real work will start. This year I am reforming the organi-zation and the management, operational policy." Event though the workers resented his stricter dis-cipline and insistence on respect for the rules, it did have an effect on them as Mr. Yuan, who wor-ked in the quality department noted, "Before ATG existed, the workers were allowed to be five mi-nutes late to work everyday. Since Kondo introduced this stricter regime the workers are more like-
ly to be five minutes early." Kondo saw this as a positive sign, but failed to see the increasing hosti-lity to his ideas among the workforce.
T H E W O R K E R S U N I O N R E A C T S
"In the past the Workers Union was regarded as one of the most important features of the fac-tory. Any problems that arose always involved the union (trad. : le syndicat), which negotiated between management and the workers. Since the creation of ATG, however, the function of the union has been weakened, - it hasn't totally been removed - as yet."
The comment came from Mr. Jiang, the Chairman of the Workers Union, who had began work at APR in 1982, as the Deputy Administration Officer. Since the creation of ATG, he had been given new responsibilities, including supervising the implementation of the 5S's. He continued:
"I myself have a problem in adjusting to the new management system that Kondo has introdu-ced. If I can't change, then I can't expect the factory floor workers to accept these new rules. I tried to explain to Kondo that it will take time for all the workers to accept the new manage-ment system. It is a shock culturally for them. He should take into account that China is com-pletely different from Japan and Europe, and cannot change over night (trad. : du jour au len-demain). I appreciate that changes need to be made to avoid bankruptcy (trad. : la faillite), but the welfare (trad. : bien être) of the workers will always be my priority."
The workers were also angry about their levels of pay and the new bonus system. As Jiang explai-ned: "the gap between management and workers in terms of pay is increasing. The bonuses are pa-thetic and derisory at 50 RMB. This isn't helping the workers to accept the change from an SOE to a private company. The workers always believed that work should be shared and that they were equal, but this idea seems to be disappearing rapidly. Even the young newly recruited people are complai-ning" (Exhibit 13). Kondo introduced a new system of wage control by which the workers would be paid according to quality of the rings they produced. He hoped that this would motivate them but in fact, it merely antagonized them and underlined the cultural differences between the two partners.
Another innovation difficult for the workers to accept was the evaluation process. For the first time, they were being evaluated on their performance. As Mr. Sun explained, "there are continual assess-ments of individual performance, so that the workers can be encouraged and therefore work harder. This is a huge change from the SOE tradition. The concept of evaluation is alien (trad. : étrangère) to the workers, who have always worked equally together." Jiang also noticed that the workers were not convinced about the immediate effects and benefits of moving from employment in an SOE to a joint venture, for example job security. Although it was difficult for workers to be dismissed (trad. : licenciés), they were often retired (trad. : mis à la retraite) early at 45/50. With younger workers coming in, many of the older employees worried about whether their jobs were secure.
Kondo communicated with workers through notices on the walls and memos (Exhibit 13). He tried to explain to the workers the profit culture he wanted to create at ATG since he was convinced that this alone would motivate the workers. However, the change from an SOE mentality, where profits were unimportant, to a profit-driven culture, would take time to implement.
Despite the complaints, Jiang did witness changes in the attitude of some of the workers, and belie-ved that the factory would gradually improve:
"This is mainly due to the propaganda that Kondo and Zhang paste up around the factory. The workers are beginning to have a new 'consciousness' about the factory, and see prospects for the future."
Hans ArrivesIt was not until the end of 1996 that the PPG sent Hans Röller, its representative from AE Goetze in Germany, out to Anqing. "We couldn't send a novice to ATG," Thorpe explained, "TP had appointed a senior person, so we had to send someone of an equal level. It took time to find a suitable person. Unlike Mr. Kondo who was press-ganged (trad. : il n’a pas eu le choix) to go to China, Röller ap-plied for the post and went through the usual PPG recruitment process." Röller seemed the ideal candidate, an experienced production engineer, with no family ties. He was responsible for techno-logy and quality systems, and was appointed Deputy General Manager, below Mr. Zhang and Mr. Kondo in the hierarchy (Exhibit 14). Unfortunately, the three-sided partnership soon ran into diffi-culties, as Röller remarked:
"I quickly realized that not only is the organizational chart in China really important, but also the hotel you stay in and the car you drive, they are all signs of status. Although in theory I was supposed to be responsible for technology and quality systems, I understood at once that I had absolutely no power, I wasn't allowed to take decisions and had to fight for everything. I couldn't even vote at the board meetings. Zhang was amazed I was even allowed to attend them!"
While relations between Kondo and Röller became strained (trad. : tendu) almost immediately, Zhang tried to remain neutral. As he commented, "We (Kondo and myself) work separately and have divided responsibilities, but when we need to collaborate, we work well together. We are both trying to adjust to each other's cultures and practices. I am always ready to take into account all points of view." Kondo and Zhang's relationship was strengthened by their mutual interest in sport so, as Thorpe commented, "Röller was the odd one out."
Röller believed that the antagonism could have been avoided, "If we had set targets from the start and clarified each partner's role, then we wouldn't be in this situation. As it is, the handshaking and smiling soon dissolved into fighting." Thorpe was also aware of the problems developing between Kondo and Röller but, "T&N were happy with Kondo, we knew the money was being well looked after. The Board meetings were pretty volatile, but I tried to listen to all sides of the arguments."
Problems 1997-99The poor relationship between Kondo and Röller was heightened by other issues that needed imme-diate attention. Unfortunately, even when they agreed on the nature of the problem, such as the need to improve production quality, the two had very different approaches for solving it. At the root of the conflict was the way the joint venture had been financed.
"The financing of the joint venture was very conservative," explained Thorpe, "the gearing (trad. : taux d’endettement) was low with the debt equity ratio no greater than 10%. T&N and TP both in-vested US$10 million. In fact, we realized that it wasn't sufficient to create the facility (trad. : l’usine, l’infrastructure) needed to service Toyota in Japan, as we had hoped." A list of capital ex-penditure was drawn up eight weeks after the joint venture was created, setting out all the machine-ry required. Thorpe continued, "the German machinery we could have got was solid but expensive at 500,000DM, so we bought Japanese because we could get a 50% reduction. It was this or com-promise with Chinese machinery. Kondo knew that ATG did not have the money for the new Ger-man machinery, and T&N didn't want to invest so much."
This decision increased the tension between Kondo and Röller, as Thorpe noted, "Hans is very German. For him, piston rings manufactured under the Goetze name must be made using Goetze machinery. The Japanese were more pragmatic, and believed that ATG could reduce spending by investing in maintenance of the machinery, rather than purchasing new equipment." In Röller's view, however, "Kondo is just concerned with immediate profit for ATG. Everyone knows you can't make a profit in the first year of a joint venture. It takes time and requires investment for the future. All PPG and TP want to see is black numbers. You can't put a Chinese joint venture on an Excel sheet."
He believed that the initial investment by T&N and TP was too low, "I know it was because of the tax problem but unfortunately, it has led to problems now. We need capital for critical, investments such as equipment for the new factory, which must be of an international standard." The new facto-ry would be built on the site acquired by APR back in 1991, 5kms from the old factory. With new equipment and technology, it was forecast (trad. : prevue) that when the factory was up and run-ning, production for the OE market would increase from 70,000 rings per day in 1997 to 120,000 rings in 1999.
However, there seemed little prospect that Röller would obtain any support for his view. According to Thorpe, "The initial investment of US$10 million is large enough at this stage. We are under great pressure to spend more money to improve that factory but in my opinion, we should wait and see how ATG develops. One of the major problems we faced at the start was setting up the working capital and obtaining a credit line - this is a rapidly developing industry and we need to ensure we have money. But with the profit level 50% lower than the original projection, it's a miracle we aren't losing money."
It had originally been agreed between the partners that in the first year, TP and PPG would not re-ceive a royalty. In the event, as Thorpe commented, "It looks likely that even in 1996, we may be paid a royalty of 3%, split equally between T&N and TP. The trademark agreement between the three partners also enabled T&N and TP to move money out of the country, so as far as Kondo and Thorpe were concerned, the joint venture was making a profit, however small, and on paper was a success - so far.
"We soon realized that the 'hockey stick' sales (trad. : vente de crosse de hockey ; reference à une enterprise qui s’est trompé pendant des années sur ses previsions de ventes de crosses…) forecasts were very optimistic," recalled Thorpe, "In reality, sales figures were only 50% of the estimates we had been given, as we had walked into a depressed market. By the beginning of 1997, ATG was al-ready 25% off plan."
The Government announced that car production in China should increase by 15.7% in 1997, with a total of 1.54 million vehicles (Exhibit 15). It also estimated that in the future, only six manufactu-rers would be required. Since at that time, there were 123 car producers in China, 70 with a produc-tion capacity of over 10,000 cars per year, consolidation of the industry was clearly imminent.
Production in ATG's factory was 90% destined for the aftermarket (trad. : marché des pieces de re-change). Röller saw potential for growth here, as motors in China lasted only 60,000 kms because of "bad air filters and the poor condition of the roads." A more recent development was the sale of piston rings to Original Equipment Manufacturers (OEMs), in particular to Chrysler for its CA488 Cherokee jeep engines, and the 3-cylinder 376 Chrysler. It was planned that the new factory would concentrate on production for this market and attract new customers. However, to do this, or even to expand the present customer base, represented a stiff challenge, given the difficulties associated with distribution and the quality problems that had to be resolved before ATG could hope to compe-te in the OE market.
Developments in China's automobile market over the subsequent years would be key for ATG and the products it produced. Although the personal car segment was developing, as Röller commented, "personal cars are still very expensive, and private use will take time to develop. Taxis are still a large market, but this is not sufficient... in view of these facts, China will not be the selling paradise of the future as some analysts forecast. There is a huge risk for foreign investors in China. But what we need to ask is whether it would be a greater risk to ignore the Chinese market?" Kondo, howe-ver, was more optimistic about the development of the Chinese market:
"Currently OEM piston rings are mainly imported into China, so if ATG can gain competitive advantage in terms of quality and price, then the sales of OEM piston rings will increase. We should concentrate mainly on key OEM orders. The aftermarket, of course is also important for ATG's future. Now we are getting the equipment in the factory sorted out we can guaran-tee the quality required." (Exhibit 15)
Another opportunity for ATG was believed to be the motorcycle piston ring market, As Mr. Lu, the director of sales, noted: "China is the motorcycle kingdom, yet there is no factory that can produce high quality rings. We would have no competition if we moved into motorcycle rings." However, Thorpe was not convinced, "it will be hard to produce motor cycle rings because of the new techno-logy involved and the sheer (trad. : le faible) number needed." ATG had to attract new customer but it was unclear exactly where these would come from.
DistributionAlthough manpower costs and overheads were lower compared to those in larger cities, Anqing's remoteness (trad. : éloignement), 1000km from Beijing and 500km from Shanghai, meant that deli-
very times to customers could take up to four months. As Röller explained, "Once equipment arri-ves in China from Goetze in Germany, it has to go to Shanghai and then it is shipped down the Yangtze river. If it is sent by ship from Germany, it can take up to ten weeks and airfreight costs are far too high. Transporting equipment from TP is quicker and cheaper because of Japan's proximity, and thus reduces delays in supplying customers". Another problem allied to this was payment, as tax in China had to be paid when the invoice was written. Observed Röller: "if the delivery time is four months, ATG needs four months total production costs in cash. And we have problems with Chinese customs because of the 40% tax rebate."
The CompetitionATG's main competitors included the Shanghai Huizhong Automotive Corporation, SNP, which was part of the Shanghai Volkswagen group and supplied rings for VW and Audi motors and SJZ, the company with whom T&N and TP had failed to negotiate a joint venture. Another was the Dong Feng Motor Corporation Bearing Plant (SAW), which produced rings mainly for its own use in trucks and buses, but in the future hoped to supply Citroen parts. ATG felt it would be difficult to break into this market, as the SAW factory could supply its own rings. Yet a fourth competitor, Yizheng Shuang Huan Piston Ring Co Ltd (CYPR), had no foreign partner for technology, and sup-plied Iveco with parts.
At the time the joint venture was signed, APR was ranked N°5 in the domestic market. However, Kondo was optimistic that: "with the production line in the new factory, we will become number one." Mr. Lu believed that the advanced technology and engineering from AE Goetze, together with the management methods and systems from TP, would make ATG more competitive. But ac-cording to Röller: "We should not underestimate our competitors. Many own Goetze machinery and are supported by Goetze through license contracts."
In fact, as Thorpe admitted, ATG faced a very real challenge in "actually finding customers" for its piston rings. The Japanese auto manufacturers had already made it clear that because of quality concerns, they would only purchase piston rings from Japanese components' suppliers. The Euro-pean auto manufacturers would be equally hard to attract since, as Röller explained, "VW Shanghai has 50% of the market, but it will be difficult to get this market because they already have a protec-ted supplier. The original feasibility study was based on one customer, VW, which doesn't exist in reality. Because of this we need to review our strategy. If we get any business from VW it will be 10-20% maximum - which isn't enough. We have to catch all the new customers we can". However, before that could be done, the quality of the sales force needed to be improved.
The ATG Sales ForceDuring the years of the planned economy between 1949-79, SOEs had not been responsible for marketing their products; these had been the sole preserve of the government. Then, as a result of the 1979 reforms and the move to a market economy, responsibility for selling their products was handed over to the SOEs, forcing APR to create a sales department, a totally alien concept to its managers. The initial department often people had, by 1996, grown to 60 under the leadership of Mr. Lu.
An Anqing native and an engineer, Lu had worked at APR for 28 years after serving in the People's Army. He remembered that between 1981-2: "APR was in deficit due to the government's change in sales policy. We didn't know anything about selling." Added Mr. Yuan, head of quality control, "the
management knew APR had to change but they didn't know how to do it". The initial reaction was to diversify, and APR went into ship-building and the production of oil containers. Eventually the factory decided to concentrate on piston rings "because it was our key product, and we had ten years' experience in the production. We began to send people throughout China to look for custo-mers." Mr. Lu continued, "Due to China's size, we needed to build up a good sales network to cover it. We now have 29 provinces covered. The salesmen travel extensively throughout the provinces they are assigned to, giving information on new products and maintaining a rapport with them."
The sales department at the time ATG was formed consisted mainly of older employees, who were near retirement age. Kondo knew that if he wanted to increase sales, then he would have to build up and train a younger, more active sales force. But even more vital, if ATG wanted to develop and in-crease its market share, was the need to ensure production of high quality car piston rings at compe-titive prices for the salesmen to sell. And as Röller pointed out in every meeting, ATG had major problems in quality and productivity.
( C ) Q U A L I T Y P R O B L E M S
Before 1985, quality had virtually been ignored, as piston rings for agricultural machinery did not require the same standard as automobiles. However, once production of piston rings for cars began, quality became an important factor in the manufacturing process. But as Mr. Yuan, the Quality Con-trol Manager explained:
"The equipment we had in the factory was not capable of producing piston rings of the requi-red quality. It was old, and had been in use since the creation of the factory in 1969. In the 1990s we began to introduce new machinery in response to an increase in the market for chrome market piston rings, and this was bought from the UK and Japan. The Government was also involved in the purchasing process, and encouraged us to procure it from other countries."
In 1994, Japanese double-phasing grinding (trad. : meulage) machinery was installed, "We were making progress, but we were still a long way behind Japan". The problem was exacerbated by the increase in production, which rose from 80,000 sets in 1995 to 100,000 sets in 1997. Of these, 30,000 were sold into the OEM market, a new development since previously, they had mainly gone to the aftermarket. However, there were still major problems in quality and productivity.
Röller was particularly concerned about quality and more specifically, the high scrap rate (trad. : taux de rebuts) in the factory which, in May 1997, was 37%. "When the joint venture was announ-ced, ATG promised its customers technology and quality, not scrap. If we produce high quantities of scrap in China, it could have repercussions for AE Goetze in Europe and the US. We can't hope to gain any business from VW in China; because of the low quality rings produced at ATG. It's a sha-me, because there is a tradition that German manufacturers, wherever they are set up in the world, will look for German suppliers because they know they will supply high quality products. At a board meeting here, it was actually stated that the strategy was to produce rings of a quality 'good enough for China'. This is the worst expression I've ever heard. What will happen to Goetze's repu-tation with an attitude like this?"
Kondo and Röller agreed that quality was a major problem for ATG, and that action had to be taken. However, they disagreed on possible solutions. Röller believed that the factory should invest in new equipment from AE Goetze, which would ensure high quality piston rings and improve production. He commented, "I am always the bad boy who wants to buy expensive machines, but I'm not a sales person for Goetze, as Kondo believes. We need this equipment. You can't have perfect children from a defective mother". Kondo did not agree that the high investment would justify the gains. His solution was to implement Japanese working systems and to invest in the maintenance of the ma-chines, "AE Goetze people always think the solution is to introduce new equipment, I believe, it should only be introduced when we have considered the price, and analyzed the future development of the Chinese market. Quality will be improved by the people." Thorpe supported Kondo, "As far as T&N are concerned Kondo is doing a great job. It's only Hans who wants to supply Mercedes S class products. I have to take him seriously, but he can't have the money for new machinery."
Following a customer's request ATG began to look at obtaining an ISO9000 quality certification for the firm. However, as Röller described, "even for something that is the worldwide standard the board wanted to cut costs, and suggested that a Chinese institute be used instead. This, of course, would be absolutely meaningless, but it could be obtained more quickly. I was adamant (trad. : convaincu), and actually succeeded in convincing the board of the value of the ISO9000 certificate. It will take up to three years to meet the requirements, and after that ATG must maintain its stan-dards."
New procedures were introduced into the factory as Mr. Shen, who worked in the quality depart-ment, described, "every workshop (trad. : atelier)is asked to check the equipment, and Kondo even carries out inspections himself. There is a quality assurance department of 30 people and a quality control department, both of them staffed by women. There is a better concept now of what good quality is, and scrap rates have improved." Röller, however was not convinced "There is also a pro-blem with the Chinese telling the truth about quality. We need to ensure we have this equipment for the new factory and especially the furnace (trad. : four) which is important." It was anticipated that quality would improve further once the machinery was installed and production began in the new factory.
Environmental and Safety IssuesThe factory and its surroundings also concerned Röller:
"I was shocked at what I saw; the factory was a complete mess, so I told the workers to clean it up - especially the toilets which were an open sewer (trad. : décharge à ciel ouvert), and a health hazard (trad. : risqué pour la santé). The workers weren't motivated - for years they have just been coming to work for eight hours with neither pride (trad. : fierté) in what they were doing nor their workplace. I tried to introduce improvements, for example in the chro-mium area there were plans to keep water circulating consistently for environmental reasons. In the ground there is a big pool of water cooling, but what is really needed is a propeller or a filling system like a toilet cistern - but this was not acceptable to the management. So now the pool is filled up physically with cold water, which is a total waste of time and electricity. Ano-ther example is the filter system which wasn't renewed and so when it rains, the water runs into the street which environmentally is a nightmare."
Röller asked his translator to produce a banner in Chinese marked "Clean Up the Whole Factory", and this was pinned up (trad. : affichée) throughout the factory. He also introduced new systems to monitor and improve working conditions. Each section in the company looked for sources of pollu-tion and on this basis, cleaning was carried out. Daily, Mr. Jiang, the Union official, supervised the cleaning, and once a week there was a more thorough inspection, plus a monthly complete general inspection. The results of these inspections were chalked up on the walls with pictures to explain the sources of pollution, and a comparison made with the previous month. Jiang commented: "The-se changes were welcomed by the workers in the factory and Mr. Hans was respected because he improved conditions for the workers. Before his arrival, these had been ignored by management."
Safety was another issue that had been of little concern to ATG's management, resulting in low standards in the factory. Röller urged management to invest in a new furnace because the old one was life threatening. "I was once in the factory at 3am and suddenly, a 3 meters flame shot up be-fore me only 5 meters away." He insisted that safety rules were adhered to, and encouraged the workers to wear protective clothing and glasses. He introduced a system of organizing and labeling piston rings to encourage them to move away from the SOE mentality, and taught them tricks (trad. : astuces) to ensure that processes ran smoothly when they worked with the furnace and in the grin-ding area (trad. : zone de meulage). He showed them how to fill stacks (trad. : piles) in one smooth action to avoid spilling (trad. : que cela se renverse), and prevent accidents. His watchwords (trad. : ordres) for improving safety standards were 'order and precision.'
Hans and the WorkersIt was not just these changes that the workers appreciated, but Röller's "hands on" attitude to the factory. There was a mutual respect between the two, as Röller recalled:
"The workers are different from the management. Fortunately, I think they like me, which is great, because they are my responsibility. In January for example, we set up the first molding machine (trad : machine outil de moulage)- it was very cold at the time. I worked with the maintenance man because he didn't know how the machine worked. In return he showed me many tricks in the factory such as when, what and how to do certain jobs. We worked together for one and half weeks, and when we had finalized the installation, a Chinese engineer was standing on the machine with tears in his eyes. He told me he was moved (trad. : ému) be-cause it was the first time in 30 years in the factory, that he had seen a general manager wor-king a machine, and that if there were democratic elections, I would be general manager. This encouraged me, though, they knew I was not a soft touch -I wanted a full day's work out of them."
Röller believed that Kondo's way of communicating to the workforce "was autocratic and meant we lost time, because the Chinese resented the new ways of working he instigated." However, although Röller was popular with the workforce, his relations with the ATG senior management was less strong. Mr. Zhang admitted that, "I still do not understand Röller very well. He's a bit too frank."
TrainingKondo and Röller also had different ideas on training the ATG staff. Kondo believed that the wor-kers would benefit from Japanese training schemes, which focused on management practices. These were also less costly than sending people to Germany. However, Röller maintained that technical training, offered by AE Goetze in Germany, was more important, "the workers need to learn about the new products they will be producing and the technology that is being developed, it's nurture over nature."
The training budget for 1997 was US$0.4. This was used to send workers to Germany and Japan, and pay for technicians and experts to visit ATG. Kondo explained, "twenty people came from TP and five from AE Goetze. It seems unbalanced but in terms of expenditure it is the same." As Röller described, the workers were unhappy about training in Japan as the discipline was strict, and their behavior closely monitored. If they did not go to bed early or were caught in the red light district Kondo was informed. This once again antagonized the workers, who resented his strict control. Röller wanted to send the workers to Goetze to learn CAM mathematics; as he explained, "Zhang knows this is necessary, but he's scared of losing face with the workers when they return from Ger-many, saying how good Goetze is."
However, Röller feared that once the Chinese were educated, they would not share their knowledge, "they see knowledge as power. I have not yet experienced this at ATG, but I have been advised about it by people who work in other Chinese joint ventures. It can take up to four months to organize training for a Chinese person because of the administrative procedures in China. We have to ensure that it will be communicated throughout the firm."
CommunicationsThere were four languages spoken at ATG, English, German, Chinese and Japanese, which, as Röller commented, "makes discussions very slow and usually results in the translators being more knowledgeable on technical matters than the engineers. The time difference between Germany and China (seven hours in Winter and six in Summer) also made communications more difficult with Goetze, and caused delays in decision-making.
During the twice-weekly meetings that were held between Röller, Kondo and Zhang, there were two translators present; Mrs. Meng translated Chinese to German, and her colleague translated Chi-nese to Japanese. Röller explained: "there were only two people in the whole of Anqing that spoke German, the translator and her husband. As the meetings often become heated, and we usually end up shouting at each other, it is not an easy job for her. She asked for an increase in salary but it was refused, because management believed it was not necessary for me to have a translator. But she is vital for me, not only because of her translating skills but because she now has a good knowledge of piston ring manufacturing, and could be an asset for ATG in the future. She also knows the people at Goetze which improves communications between them and ATG." Röller continued, "We all need to make compromises in different areas but communication is virtually impossible, and it's not just a language problem."
The FutureThe joint venture was a success on paper, but there were still problems to resolve between the three partners, and, before action could be taken they needed to agree what these issues were.
Zhang remained optimistic about ATG's future. He believed that "the only real conflict is over the purchasing of equipment." Röller, however, disagreed, "there are many problems to be resolved if ATG is to survive." His initial contract at ATG was for two years but, given the frustration with his lack of power in the company, and the deteriorating relationship with Kondo, it was uncertain he would remain. If he stayed, it would be on his terms, as he explained, "We need to change the organization chart and there should be substantial investment in equipment so that I can do my job properly." If Röller returned to Germany, after this period, PPG would need to replace him and, as Anqing did not have the same facilities and standard of living as the other larger Chinese cities, this would not be easy.
Röller was also popular with the workers, if he resigned it was uncertain how they would react and could further underline the problem of motivating them. Despite Kondo's efforts to explain his plans for the company, the management style he adopted seemed to antagonize the workforce. If Kondo succeeded in making ATG a Japanese style factory, would the APR Chinese culture disappear com-pletely and in the long term what would be best for ATG? Röller was convinced "that it will be a fully Japanese company eventually, the whole country is changing. However, Kondo's contract is very ambiguous, he 'is here until the business is up and running.' Once he leaves a T&N person should be made General Manager. Zhang is the only person who really knows everything that hap-pens at ATG. He is the Vice Mayor's protege and has more power than we realize. Kondo knows, on the other hand, just what he needs to. Mrs. Meng, my translator, should have a responsible position in ATG. All the knowledge she has acquired and the contacts she has made could be an asset for ATG in the future."
There was also the new factory; if it was completed on time there was a risk of resentment from the workforce left in the old factory. The partners also needed to agree on who would be sent to the new factory and based on what criteria. The head of the new factory had still not been decided - Kondo, Röller, Zhang or someone new?
The battle continued over investment in new machinery, Röller remained adamant that long-term investment in new machinery was the key to ATG's long-term future, while Kondo was determined to make ATG profit-making immediately.
The cultural differences were far from being resolved, with Röller preoccupied by the environment, while Kondo chalked up more rules and regulations on the walls. Zhang's position was still unclear, torn between the old Chinese factory and the new market pressures, was he the real power in the factory, as Röller suspected? Kondo was still positive, believing that "the success of ATG was ac-tually in having a Chinese partner. TP and Goetze have different management methods but we shouldn't waste time discussing which is better or worse, but try and achieve a matching point in China." The workers meanwhile seemed confused as to where their loyalties lay, did they serve the state or the joint venture? Before the creation of ATG, the SOE culture meant that they were regar-ded as the masters, not simply the employees they had become.
In the end, and most important, even if ATG resolved its internal disputes it still needed to find new customers. If the Chinese automobile market did not develop as industry analysts had forecast, ATG would suffer.
Exhibit 1
1 9 9 6
£ M
Turnover 1956.0
Operating profit* 178.5
Profit before tax (388.3)
Earnings (400.8)
Cash from operations* 287.3
Net debt 200.3
Capital expenditure 114.3
Research and development 53.0
%
Operating margin (continuing businesses)* 9.1
times
Interest cover* 6.7
p
Earnings per share* 14.8
* Before asbestos-related costs. Source: T&N Review 1996.
Teikoku Piston Ring Co., Ltd. Sales and Net Income 1995-1999Y E A R S A L E S N E T I N C O M E ( 0 0 0 ’ S
J P Y )
1999 249,441 2,261
1998 245,186 3,177
1997 267,615 3,291
1996 291,61 2,411
1995 353,636 3,194
Source: TP Annual Report.
Exhibit 7
Chinese State-Owned Enterprises (SOEs)It is often claimed that the Chinese State-owned enterprises represented China's biggest economic and political problem. Accounting for approximately 42% of the country's GNP with an urban workforce of up to 125 million, SOEs dominated most of the heavy industrial and technological sectors in China. The SOE system had evolved during the founding period of Mao's Communist regime, after 1949:
Because Mao's forces were overwhelmingly of rural origin and imbued with Maoist-style socialist collectivism, SOEs fit the mould of their ideology: permanent jobs were viewed as a fundamental right rather than a contractual one that could be withdrawn during an economic downturn. Most im-portantly, as with collectivist farms, the workplace became the provider of virtually all welfare - the cornerstone of the "iron rice bowl" - including medical insurance, pensions, income security and even housing.
To enlist the political support of urban workers, whose allegiance to Mao was weaker than that in his peasant army -to get them to "join the revolution"- SOE management practices were designed to function in stark contrast to the nascent capitalist system of the past. Business owners and "fore-men", who were portrayed as all-powerful feudal bosses in Maoist propaganda, were degraded and thrown out, to be replaced by right-minded party operatives. This decisively shifted power in SOEs to the workers.
SOEs were designed to operate as cogs (trad. : dents) within the centrally planned economy; each "belonged" to the government branches that originally funded it. The government in Beijing set pri-ces, the levels of output quotas and determined wages of both workers and management. Production became a purely quantitative affair, which meant that the market and consumer preferences were for all practical purposes non-existent.
While each SOE evolved its own set of social norms, as a group they exhibited a number of organi-zational features. Employment guarantees became a license for workers to behave virtually as they
wished: choosing whether or not to come to work, refusing to pay attention to the managers' direc-tives, on occasion even using plant facilities for their own business purposes. If a manager persisted in his attempts to establish some authority - in effect to carry out his managerial duties - it could lead to violent assaults from workers or the destruction of his personal property. Unfortunately, the high personal cost of any attempt to do their job meant that many SOE managers neglected their responsibilities. Moreover, given the near-total lack of supervision, many SOE managers indulged in corrupt practices, stealing from their firms when the opportunity arose. The ideology of egalita-rianism removed incentives for employees to work hard or to improve the quality of their work. As a result, in spite of the early promise of their collectivist ideals, SOEs became bloated (trad. : glon-flée) with unproductive workers and increasingly inflexible, dependent for their survival on subsi-dies from the central government.
Exhibit 8
Map of China, Transport from Anqing (n.a.)Exhibit 9
Joint venture Certificate
PRC
Joint Venture
Approval Certificate
No. Of approval 080(1996)
Date of approval 25 March 1996
The Suhim People’s Government
25 March 1996
This enterprise has been approved and registered and thus it has a legal person’s status. It is allowed to start its business
Name ATGAddress 48Yang Jiang Road Beijing
Category ofthe enterprise J oint Venture
Business duration 30 years
Investment capital US$ 29.95 million
Registered capital US$ 28 million
APR of PRC US$ 8 million (28.6%)TP of Japan US$ 10 million (35.7%)TN of England US$ 10 million (35.7%)
Our joint venture has just started its business. Now the Chinese traditional holiday Dragon-boat fes-tival is coming. On this holiday occasion, I'd like to say 'Happy Dragon-boat Festival' to you all and I'll give ¥ 50 to you each as a festival token.
Let us work hard and make our joint venture prosper so that it has a very good beginning.
I wish you all good health and happiness to your family as well.
Kondo
General Manager (18 June 1996)
Source: ATG.
ANQING TP GOETZE PISTON RING CO., LTD.
Dear Staff Members,
How are you!
On this holiday occasion when you are celebrating the Mid-Autumn Festival I'd like to say hello to you all and your family members and give you ¥ 50 as a holiday gift. This amount of money is just a token indicating our (concern) intention on this occasion.
At present, ATG is just at its preliminary stage. When we are faced with variouskinds of work, we wish that all our staff members will unite as one and work hard,overcome difficulties and hold confidence in ATG so that we all strive to push this jointventure forward and make progress on a healthy and development track.Sincerely yoursKondo Operational Manager (25 September 1996)
