School of Business STOCKHOLM UNIVERSITY Master Thesis 10 p VT 2006 Negotiating Sourcing Successfully in China Authors: Adam Dahlberg Supervisor: Professor Tony Fang Åsa Sundqvist Abstract China has the past decade become the leading destination for companies looking to cut costs, due to the low cost labor and high-tech manufacturing, which have made China the “workshop of the world.” Thus, the importance of China as a key strategic market for sourcing is increasing rapidly. Despite the huge possibilities in China in cutting costs, many companies are still afraid of the physical and cultural distance enclosed with sourcing from China. Other western companies have tried to source in China without great success, due to lack of understanding of the counterpart’s values and socio-cultural characteristics. Academic research has paid much on negotiations with Chinese on the marketing side, however, there is a lack of research on negotiations with Chinese when it comes to purchasing. By means of case study research carried out in eight Swedish companies, in different industries and with different size and complexity of the product, this thesis is investigating the sourcing negotiation process and brings out factors to consider when doing business with Chinese. The purpose of this thesis is to develop new knowledge about how to conduct successful sourcing negotiation in China. Through the development of an own framwork influenced by existing theories from the marketing perspective we have found the interrelated varibles Sourcing Strategy, Negotiation Process and Chinese Business Culture and Negotiation Style as affecting the outcome of the negotiation with Chinese suppliers. Our framework suggests that successful sourcing negotiations can be achieved by managing three dimensions; business relationship adaptations, communication and control and buyer-seller interaction. Other major findings in this thesis include the greater difficulties and need for involvement a complex product and complex sourcing situation brings. Furthermore, the attitude towards culture on the purchasing side has more the character of seeing similarities which upon you can build a business relationship compared to the marketing side. What is important is a mutual understanding of objectives. Another finding is the importance of a long-term approach. Table of Content 1. INTRODUCTION ..................................................................................................1 1.1 Background .........................................................................................................1 1.2 Problem Discussion.............................................................................................2 1.3 Purpose................................................................................................................2 1.4 Research Questions.............................................................................................3 1.5 Delimitation ........................................................................................................3 1.6 Definitions...........................................................................................................3 2. METHODOLOGY..................................................................................................5 2.1 Scientific approach..............................................................................................5 2.2 Scientific perspective ..........................................................................................5 2.3 Qualitative or Quantitative..................................................................................6 2.4 Deductive or Inductive........................................................................................6 2.5 Research Strategy and Design.............................................................................6 2.6 Research process.................................................................................................8 2.7 Validity, Reliability and critics of the selected method......................................8 3. THEORETICAL BACKGROUND......................................................................10 3.1 Choice of Literature ..........................................................................................10 3.2 Business Negotiation Process Theory...............................................................12 3.3 The Negotiation Process ...................................................................................13 3.4 Sourcing Strategy Theory .................................................................................16 3.5 Chinese Business Culture and Negotiating Style..............................................21 3.6 Frame of Reference...........................................................................................27 4. PRESENTATION OF CASE STORIES ..............................................................30 4.1 Case study I: NCC.............................................................................................30 4.2 Case study II: AstraZeneca ...............................................................................32 4.3 Case study III: H&M.........................................................................................34 4.4 Case study IV: Ericsson ....................................................................................36 4.5 Case study V: Ostnor ........................................................................................38 4.6 Case study VI: Fagerhult...................................................................................40 4.7 Case study VII: China Production Partner AB .................................................42 4.8 Case study VIII: NCAB ....................................................................................45 5. ANALYSIS...........................................................................................................48 5.1 Negotiation Process...........................................................................................48 5.2 Sourcing Strategy..............................................................................................51 5.3 Chinese Business Culture and Negotiating Style..............................................53 6. CONCLUSION.....................................................................................................57 6.1 Major Themes ...................................................................................................57 6.2 Conclusions.......................................................................................................57 6.3 Academic Value................................................................................................59 6.4 Suggestions for Further Research .....................................................................59 References.........................................................................................................................60 Appendix A.......................................................................................................................64 Appendix B .......................................................................................................................66 Appendix C .......................................................................................................................67 1. INTRODUCTION This chapter serves as a background to establish the overall context and setting for our thesis. The background gives a brief overview of the area of research, which is narrowed down in the problem discussion. In addition, the purpose and research questions of the thesis will be discussed, as well as delimitations and definitions. 1.1 Background Some twenty years ago, sourcing was about acquiring material at the desired price with little interaction with the suppliers. Today, sourcing has become a decision incorporated in the companies’ operational strategies to stay competitive and grow through long term relations with their suppliers (Zeng, 2000). The suppliers have become an integrated part of the buying firm for a particular component or part they are to supply, as the firms move away from a transaction oriented marketing strategies and towards relationship oriented marketing (Sheth & Sharma, 1997). During the same time period production costs have raised to constitute approximately 50%-70% of the total cost of goods sold, making effective supplier management even more important (Zeng, 2000). It is obvious that firms restricting their perspective to a regional or national level will suffer by this change. Low cost labor and high-tech manufacturing have made China the “workshop of the world” and the leading destination for companies looking to cut costs (The Economist, 2002). Thus, the importance of China as a key strategic market for sourcing is increasing rapidly. The past decades China has gone from being an underdeveloped country to be one of the largest economies in the world, with a high and steady growth in GPD hovering around 10 percent yearly. In Figure 1 below, we have compiled statistics by Maddison (2001) showing China’s relative growth in GDP billion Geary-Khamis dollar compared to growth rate in the United Kingdom and the United States. Geary-Khanmis dollar is a method reflecting the relative category values and country purchasing power. Figure 1. Comparative level of China’s, the United Kingdom’s and the United States’ economic growth in GDP in dollars between the years