CASE STUDY: BARGAINING PRICE WITH THE CHINESE

Overview

K. G. Marwin Inc. developed a particular technology in the 1980s, called the Trilliamp

Process, that the Chinese government sought to integrate into an ethylene facility in

Lanzhou, the capital of Gansu province. It signed a contract with Marwin, which in 1985

invited inquiries from U.S. and Japanese manufacturers for production of the machinery.

Marwin recommended the Japanese company Auger-Aiso as most capable of producing the

turbines, while the Chinese invited two U.S. companiesFederal Electric and Pressure Inc.,

which manufactured through the large Japanese trading company Mitsuboto compete for

the multi-million-dollar contract.

The Scene

To undertake the negotiations with the three prospective suppliers, six Chinese

officials and three representatives from the Bank of China were selected. The Auger-Aiso

chief negotiator was Todman Glazer, the company's Japan branch manager from the United

States who resided in Tokyo and was assisted by his Japanese colleagues. Glazer

remembered the tight deadlines he had faced on previous trips to China; now positions had

been reversed, with the Chinese facing the pressures and deadlines. He realized the value of

thinking like one's opponentseeing things as they do. This was the first potential deal with

China in the ethylene market, and Auger-Aiso faced stiff competition from Mitsubo, which

had already cornered the Chinese oil-processing market. At the first negotiation meeting in

Beijing, the Chinese insisted that custom required the visitorGlazerto make the first

presentation. This he did, even though he was accustomed to allowing his opponents to

speak first. Glazer began by addressing the excellence of Auger-Aiso technology, explaining

that the manufacturing would all be done in Japan to ensure product excellence. When the

Chinese offered no indication of their position or price, Glazer felt obliged to quote an upperrange

price that would allow flexibility. The Chinese still made no comment. In the afternoon,

the Chinese heard offers from the combined Mitsubo-Pressure team, then Federal Electric. By

the end of the day, Federal Electric had dropped out of the race, accepting that it could not

compete.

Revolving Doors, Changing Moods

During the first week of negotiations, a pattern emerged. The Chinese would meet

with Glazer and his colleagues in the morning and ask for a price, saying that their

competitors had already bid such-and-such a price, which was invariably lower than the last

Auger-Aiso bid. They would meet with Mitsubo-Pressure in the afternoon and use the same

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Professor Monica Casanova

approach, causing the latter to drop its price. Moreover, each meeting would end with the

Chinese saying, "We will call you tomorrow."

But, because they never called, both prospective vendors became panicky and visited

the Chinese office without notice to present an even lower bid. As the Chinese kept the

vendors guessing and in the dark, Glazer understood how the Chinese had earned a

reputation as master negotiators. At the second meeting, tactics changed and there were

different people representing the Chinese side. An antagonist would suddenly burst out in

loud Chinese and harangue the Auger-Aiso side for some fifteen minutes, complaining about

the quality of the machines they were offering. A protagonist would then intervene and,

apologizing for his colleague, would say he had been upset about the current situation.

Glazer regarded these outbursts as no more than arranged role playing, designed to make

the protagonist (the good guy) appear more trustworthy to the foreigners. But, Glazer

realized, all the participants were play-acting. Then there was yet another change. The

Chinese located the Auger-Aiso and Mitsubo-Pressure teams near the meeting room, in

adjacent rooms. Mitsubo-Pressure would be called in and asked for its best price. After the

team had returned to its room, Auger-Aiso would be called in, told the latest price, and asked

if it could beat this. When the prospective vendors could drop their price no lower, they

would add something to the package. Auger, for example, added oil gauges for its turbines,

effectively a three-percent add-on. Even so, the Chinese still would not commit to placing an

order.

When the Price Is Right

Glazer could hardly believe that he had lowered his price twenty per-cent that week;

to do so would have been out of the question in the United States. On the final day, Auger-

Aiso made another offerand, for the first time, the Chinese made a counter offer. Auger-Aiso

accepted, and agreement was reached. A few hours later, Mitsubo-Pres-sure came back with

an even lower price, but the deal had already been struck. Glazer spoke later about how

difficult it was to compete with Japanese trading companies, explaining that U.S. companies

had so many factors to bear in mind, including insurance and a variety of liabilities.

Meanwhile, Japanese trading companies, which had vastly different legal parameters [within

which] to operate within, could more easily focus on getting contracts and closing deals. He

believed that Auger-Aiso had been awarded the contract because it had been the preferred

supplier right from the start.

1- What can we 'assume' about the way Glazer did his due diligence? Evaluate the

approach

2- Name three tactics the Chinese used in the second meeting. Evaluate briefly

how Glazer dealt with them.

3- "Glazer remembered the tight deadlines he had faced on previous trips to

China; now positions had been reversed, with the Chinese facing the pressures

and deadlines.": What does this tell you about Glazer's preparation strategy for

the negotiation?