Background of the Case

Shui Fabrics (“Shiu”) is a joint venture established by Rocky River Industries, a US textile
manufacturing company, and Shanghai Fabric LTd, a company based in China. The joint venture has been
operating for ten years with the goal to produce, dye and coat fabric for sale to both Chinese and
international sportswear manufacturers. For the past three years, Shui’s performance has shown a five
percent (5%) annual return on investment (ROI). Chui Wai, the Chinese deputy general manager is
satisfied with Shui’s current performance and proud of the joint venture’s contribution to the Chinese
economy by employing approximately 3,000 people and meeting the expectation of the Chinese
authorities by having the right amount of profit. On the other hand, Paul Danvers, the president of Rocky
River, deems Shui’s five percent (5%) ROI as too low and expects that it should be around 20 percent by
now. He informed Ray Betzell, the general manager of Shui, with his plans that he wants to introduce
sophisticated technology and reduce workforce to bring Shui’s ROI to acceptable level or end the joint
venture and consider other options.

I. POINT OF VIEW

A. Point of View

We are taking the point of view of Ray Betzell, the general manager of Shui Fabrics because he is in
the position to address the concerning matter regarding ROI expectation of both parties, the Shanghai
Fabrics and Rocky River.

B. Rationale

As the general manager of Shui Fabrics, Ray is involved in the management of operations and decision-
making within the joint venture. He is caught in the middle of two differing motives and expectations
between the management of Shanghai Fabric and Rocky River where the Chinese company is satisfied
with the joint venture’s current 5 percent ROI and its contribution to the Chinese economy, while the US-
based company is expecting an ROI close to 20 percent. He is in the position to decide on how to improve
the ROI of the joint venture and at the same time protect the interests of the two investing companies.
Furthermore, he understands the socio-cultural differences and expectation between US and Chinese
businesses. He is also knowledgeable on the political and economic landscape in China where the joint
venture operates.

II. PROBLEM ANALYSIS AND PROBLEM STATEMENT

A. Problem Tree Analysis

The identified core problem is the low level of return of investment (ROI) for the past three years of
Shui fabrics. The direct cause to this concern is high number of workers and inefficiency of the operation.
Both of them contribute to higher production cost resulting to lower profit or below the acceptable level
as viewed by the US counterpart.
 On the other hand, another cause is in the aspect of socio cultural factors such as having different
views on both parties level of ROI expectations. For the Chinese, 5% level of ROI is acceptable level
considering the strict implementation policy of their authorities for foreign investors. This conservative
level of earnings expectation is dictated by their cultural way of thinking that much profit is viewed to be
exploitation or domination of Western companies. However, US counterpart has different view in terms
of their expectation of acceptable ROI level as high as 20%.

The overall possible effect or consequence of the main problem could be withdrawal of the US
counterpart and later on long-term challenges on establishing trade negotiations between two countries
considering the existing policy of the Chinese authorities and the red tape considerations in their country.

Distrust on Chinese company and weakening of ties between the US

and Chinese companies for future business endeavor

EFFECTS
Withdrawal of the US company and
dissolution of the joint venture

CORE Low return on investment (ROI)

PROBLEM

ROOT High number of workers and Conservative expectation of the management of

inefficiency Chinese company on the level of ROI
CAUSES

Expectation of US and Chinese

Strict government policy on foreign
companies in terms of profit and ROI
investment in Chinese territories
are not aligned
 B. Problem Statement

What actions should be taken by Ray, the general manager of Shui Fabrics, to address the concern of
low return on investment and unmet expectations of the US company counterpart while protecting the
interests of US and Chinese companies?

III. FORMULATION AND EVALUATION OF ALTERNATIVES

A. Decision Criteria

The problem identified in this case is the low return on investment of the Shui and protecting the
interests of the US and Chinese companies. The decision should be based on the alternatives that would
be able to address these concerns. Hence, the alternatives will be evaluated based on the following
criteria:

a. Return on investment - the ability of the alternative to increase the ROI to an acceptable level in
accordance to the US company standards
b. Production efficiency – the ability of the alternative to increase production with the least amount
of resources
c. Retain Labor workforce – the ability of the alternative to at least sustain the current workforce
d. Ease of implementation – the ability of the alternative to integrate the changes or new processes
to the current business practices, with high degree of ease to carry out and less reluctance from
the people within the organization to accept the changes

B. SWOT Analysis

External Factors

Economic Environment Factors. China is viewed as the second largest economy in terms of gross
domestic product (GDP) and one of the fastest-growing economies around the world. Along with this, the
economy of China exhibits a high purchasing power among the Chinese people. This means that there is
a huge potential of Chinese market and an opportunity of the joint venture to expand its market share,
increase sales and boost its ROI.

On the other hand, China has registered a high unemployment rate for the past years. This means
that there is a high supply of labor and it enables the joint venture to have an access to the cheap labor
market in China.

Legal and Political Environment Factors. The Chinese government implements a strict policy on
foreign investment and involve a lot of red tape in the corporate businesses. There are laws specific to
the joint venture that impose rigid requirements from business registration to operations such as securing
approvals from different bureaus and ensuring that the joint venture contributes to the Chinese economy
and social development. This scenario serves as a threat to the joint venture as it will limit its activities to
expand its business and impedes its growth in market share.
 Another factor is the uncertainty on US-Chinese textile trade negotiations and dynamic US tariffs
and quotas regulations, which could pose challenges to the joint venture in strengthening its international
market.

Socio-cultural factors. Most, if not all, of the business dealings and relationships with Chinese
companies are built on trust. There is a concept in China called “guanxi” which refers to the tight social
networks that has shape both Chinese society and businesses. From the Chinese point of view, a foreign
entity should earn trust first before making business with Chinese companies. This imposes a challenge to
the joint venture to expand its distribution networks and creates ties with other Chinese companies and
eventually limit its business expansion.

Competition. Shui Fabrics operates in an industry where competition is high. There is a strong
presence of other US-Chines joint ventures which may offer competitive products to the Chinese market
and have the same goal with the joint venture by increasing market share and expanding its distribution
networks within the Chinese territories.

Internal Factors

Partnership of Rocky River and Shanghai Fabrics. The US-based company has already established
a tie and distribution network with the Chinese company. This is considered as a strength by the joint
venture as it can use its connection with Shanghai Fabrics to expand its distribution networks and expand
its market share.

Technology and Resources of Rocky River. The US company has an array of technology and
resources which could be incorporated to the Shui’s operations to improve its efficiency and production.
The US company is equipped on operating these technologies and can help on the implementation of
these new process to Shui’s business processes.

Labor Workforce. The joint venture has existing large number of workers, which has brought
social contribution to the Chinese economy by alleviating the unemployment rate in China. However, this
leads to less efficiency in production and business operations. Coupled with the introduction of
sophisticated technologies into the joint venture’s operations, this large labor workforce would be able
to meet the huge potential market in China.

Conflict of both parties to the joint venture. The management of the US and Chinese companies
have different expectations in terms profit and return on investment. The Chinese company is satisfied
with the current level of ROI of five percent (5%) while the US company believes it should be close to
twenty percent (20%). Furthermore, the Chinese company thinks that the joint venture has a great
contribution to the Chinese economy as it employs large number of people, on which the US company
view them as inefficient with respect to profit and ROI. These different and unmet expectations have
impact on the growth of the business and ability of the joint venture to generate more profits.
Based on the analysis of the external and internal factors surrounding Shui, we have identified the
following relevant strengths, weaknesses, opportunities and threats:

Strength

a. Presence of distribution network/ties with the Chinese company through the joint venture
b. Availability of large number of manpower or labor force
c. Existing technology and resources

Weakness

a. Conflict in business expectations in terms of profit and return on investment

b. Less efficiency in production

Opportunities

a. Strong market demand from Chinese

b. High labor supply due to high unemployment rate

Threats

a. Strict policy by the government on foreign investments and red tape

b. Uncertainty on US-Chinese textile trade negotiations and dynamic US tariffs and quotas
regulations
c. Presence of trust culture within Chinese companies against foreign investors

C. Alternative Solutions to the Problem

Based on our SWOT analysis, we have identified the following three alternatives

1. Incorporate sophisticated technology to the operations, maintain the current labor workforce and
develop a marketing strategy to expand the joint venture market share and increase sales.
2. Incorporate sophisticated technology, maintain the number of workers but reduce working hours
of some employees as they work on a part-time basis
3. Incorporate sophisticated technology but reduce the number of workers
 D. Evaluation of the Alternatives

We evaluate our alternatives based on each pros and cons:

Alternative 1. Incorporate sophisticated technology to the operations, maintain the current labor
workforce and develop a marketing strategy to expand the joint venture market share and increase
sales.

Pros Cons
More efficient production due to incorporation of Requires capital outlay and high production cost
technology few years of implementation of but will generate
cost savings in the long run
Huge potential of increase in profit and return on Challenge to penetrate new market due to high
investment due to market expansion and competition in the industry
increase in sales
Satisfaction of Chinese counterpart because the Workers might be reluctant to the incorporation
current workforce is sustained of new technologies to the operations

Alternative 2. Incorporate sophisticated technology, maintain the number of workers but reduce
working hours of some employees as they work on a part-time basis

Pros Cons
More efficient production due to incorporation of Possible resistance on Chinese employees to
technology work on a part-time basis

Maintans the current number of workers Employees have divided attention to the work as
they tend to find other jobs to compensate their
working hours in a week
Likely to achieve the acceptable level of ROI by Workers might be reluctant to the incorporation
US company through efficient production and of new technologies to the operations
lower cost
Alternative 3. Incorporate sophisticated technology but reduce the number of workers

Pros Cons
More efficient production due to incorporation of Dissatisfaction on Chinese company and possible
technology loss of trust in doing business due to reduction in
workforce

Likely to achieve the acceptable level of ROI by

US company through efficient production and
lower cost

IV. DECISION/RECOMMENDATION

A. Decision

We have arrived at our decision based on the following criteria we set at the first part of this
analysis:

1. the ability of the alternative to increase the ROI to an acceptable level in accordance to the US
company standards
2. the ability of the alternative to increase production with the least amount of resources
3. the ability of the alternative to at least sustain the current workforce
4. the ability of the alternative to integrate the changes or new processes to the current business
practices, with high degree of ease to carry out and less reluctance from the people within the
organization to accept the changes

We are proposing the alternative solution 1, where Ray should take actions to incorporate
sophisticated technology into Shui’s operations, maintain the current workforce and develop a marketing
strategy that would drive a growth in its market share and eventually increase sales, improve profit and
elevate its return on investment.

B. Rationale

We chose the alternative solution 1, which is incorporate sophisticated technology to the operations,
maintain the current labor workforce and develop a marketing strategy because of the huge potential in
the growth of the business in terms of market share, profit and eventually increase its ROI. This alternative
would be able also to increase efficiency and productivity and sustain the current workforce. Even though
the management may face challenges on ease of implementation on its workers, this can be mitigated
through proper training.
 C. Implementation Plan

Incorporation of Sophisticated Technologies to the Joint Venture Business

1. The management of Rocky River, Shanghai Fabrics and Ray should set a meeting to discuss on the
implementation of new technologies to the joint venture’s operations. He should highlight during
the meeting its impact on the efficiency and productivity within the operations. To satisfy Chinese
expectation, he should clearly communicate to the Chinese company that the current labor
workforce shall be maintained.
2. Ray, with the help of both management of US and Chinese, should implement a detailed training
plan on the introduction of these new technologies to the workers day-to-day tasks.

Marketing Strategy

1. Implement a marketing campaign to penetrate the potential markets within the Chinese
territories by maximizing the distribution network and ties the joint venture built with the Chinese
company counterpart. Strengthen its brand to the Chinese consumers.

V. CONTINGENCY PLAN

A. Alternative Solution

In case the chosen alternative will not work, we propose to incorporate the same technology but
reduce the number of working hours of some employees.

B. Rationale

We choose the second alternative which is to reduce the number of working hours of some employees
but maintain the same number of workforce, in addition to the incorporation of the technology. This
alternative will still drive the efficiency on the production and bring an ROI to the acceptable level.
However, the Ray should address the potential issue that will arise on the part of employees in terms of
working on a part time basis.

C. Implementation Plan

1. Ray should conduct a meeting with the management of the US and Chinese company for the
incorporation of the new technologies into the joint venture’s operations, along with the detailed
training plan to the workers.
 2. Communicate to the workers the plan to change employment contract of some employees to part
time basis and prepare a written contract for that kind of employment to create cleare
expectations between the employees and the management. Highlight to the employees the
potential of the business to expand its operations and that there is a possibility of employment in
the future.

VI. OVERALL ANALYSIS

The case entails a dilemma on the low return on investment as a result of less efficiency due to high
number of workers and different expectations between US and Chinese companies. The general manager
of the joint venture needs decide what is the best action to take to address these concerns. We identified
criteria which will guide Ray to take the best action which include the ability to increase return on
investment, improve efficiency, sustain current labor workforce and ease of implementation on the
courses of actions taken. To help us identify the best strategies to address the core problem, we looked
at the external and internal factors which enables us to identify the strengths, weaknesses, opportunities
and threats of the joint venture. With the huge potential market in the Chinese territories, the ties built
with the Chines company and existing of the resources of the joint venture, we come up with a strategy
to expand the joint venture’s market share and increase its efficiency. We also propose to maximize the
distribution networks and ties the joint venture has with the Chinese company to penetrate the potential
Chinese markets. Overall, we believe that with this alternative, the joint venture will be able to increase
its profits and return on investment and shall be sustainable in the long run.
 SHUI FABRICS

A Case Analysis Presentation

Prepared by:

Carlo V. Caceres

Kelvin Michael A. Crystal

MGT 201