NES China - Case Analysis

NES China: Business Ethics Case Analysis

Introduction: For almost a year the Germany-headquartered multinational company NES AG was trying to get its application to the Chinese government approved to set up a holding company in Beijing so as to coordinate its investments in China but it was faced with ethical issues over bribery and gift giving. NES is one of the largest industrial groups in Germany. NES had businesses in more than 100 countries with over 120,000 employees. In China NES had completed more than 40 technology transfer and infrastructure projects. It had also setup 20 representative offices, six equity joint ventures and three wholly owned enterprises. In doing business in China NES strictly adhered to its business principle. This business principle was highlighted in the company’s code of conduct. It required employees to pursue the highest standard of business and personal ethics in dealing with government officials and business customers and to avoid any activities that would lead to the involvement of the company in unlawful practices. It was against giving immediate favors or rewards to individual Chinese officials and customers and instead relied on its advanced technology, management know-how and top quality products and services to give it an edge against it competition. NES already had a representative office in Beijing but Chinese legal restrictions severely limited the activities of this office. It was only allowed to engage in pure administrative activities such as conducting marketing research for the main head offices in Germany, scheduling meetings and trade visits and conveying price and technical information to Chinese customers. It was not allowed to engage in employments contracts with Chinese employees but instead had to go through a local labor service agency that overlooked all personnel issues including recruitment, compensation and dismissal. Hence the representative office was not able to effectively manage their Chinese employees. NES AG was now moving towards establishing a holding company in Beijing as soon as possible. Establishing a holding office was advantageous because a holding company had its own business license and could therefore engage in direct business activities as well as hold shares, co-ordinate many important functions for enterprises such as marketing, managing government relations and provide financial support. It would also unite the NES profile in China and strengthen its good name as a reliable business partner. Moreover it could hire its own employees and have direct control over them. NES had authorized the following three individuals in the Beijing Representative Office to take up the China holding company application issue: 

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Kai Mueller had worked for NES in its China operations since the 1970 and had experience in several big co-operative projects in the steel and metallurgical industries. He was to be the president Jochen Steinmenn was assigned to Beijing from Germany in 1996. He would be the financial controller of the holding company

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Dr. Jean Perry was a lawyer from France who had an indepth understanding of Chinese Business laws. He would work as a legal counsel.

Lin Chen was hired separately in March 1997 to act as the government affairs coordinator for the working team. She had worked four years for a Chinese state owned company and was familiar with the Chinese way of doing business. Once the holding company was successfully setup Chen would become responsible for the public affairs function. Chen was of the opinion that guanxi was important in China and that gift giving was part a norm Chinese culture

Problem Statement: “To give gifts to Chinese officials or not so that NES AG’s application for a holding company in China could finally move forward”

Issues: 

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NES had a strong code of ethics that clearly outlined that bribes or gifts were not to be given to government officials. The employment handbook states: “Employees are not to solicit, accept or agree to accept at any time of the year any gift of value which directly or indirectly benefits them from a supplier or a prospective supplier or his employees or agents, or any person with whom the company does business in any aspect. China’s culture required that guanxi be established with officials of the Central Department so that NES’s application for establishing a hold company could move forward. Guanxi that would only be established by giving gifts.

Solution: The company had already made an exception when Dr. Perrin allowed Chen to invite two of the concerned officials to an expensive dinner and present them with a CD player as a gift. It was this act of Guanxi that allowed NES’s paperwork to move forward and thus the official then gave his preliminary opinion about adjustments that needed to be done to the application. I believe that this act now serves as a precedent for steps that the company needs to take. It is clear that gift giving is the only pathway through which there is any successful progress with NES’s application process. Therefore the company must make an exception on the grounds that while in China things are done considerably differently and thus make gift giving an acceptable norm that should be practiced by the company when there are no alternatives while dealing in China. Under normal circumstances bribes and gift giving are immoral and unethical. At the core what bribes do is that they unfairly exploit the legal system so that the bribe giver gets undue benefits against the norm. In a country like China this philosophy is altered. In China the norm is to give gifts and bribes. Therefore when one gives a bribe there is no unfairness because the individual is accessing benefits that the rest of the population already has access to. The matter of unfair benefit is removed because

everyone is giving bribes and everyone is gaining from the benefit. This legitimizes giving bribes in a country that has norms like that of China. If this solution were not to be followed then NES holding company will not be setup within the allotted time frame window of one month so as to use the holding company’s registered capital. Hence the NES holding company would not be successful. Gift giving is a necessary evil to make the holding company a reality.

Alternatives: NES could contract out the job of getting the application successfully approved to a third person party. Thus bribing and giving gifts would be the headache of this third person so as get the application successfully approved. The contract would of course be covering the costs of steps that would need to be undertaken by the third party in order to get the application approved. In this way NES would not have to go through the moral dilemma of giving gifts because now they have somebody else who has taken responsibility of the entire task.