NES AG – Gifting in China Essay Example
NES AG – Gifting in China Essay Example

NES AG – Gifting in China Essay Example

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  • Pages: 5 (1260 words)
  • Published: December 20, 2017
  • Type: Case Study
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NES AG’s problem is that needs approval to become a holding company in China. However, its code of ethics conflicts with the local custom of gifting to as a way of achieving certain outcomes. The problem in the short term is that the company needs to obtain the approval within a month. In the long term, not getting the approval would hurt shareholders or, if NES AG gives gifts to officials, it will violate NES’s ethical code.

The strengths of the company are that it is established and experienced in China with a strong reputation for its high technology expertise, quality, and professional management. The weaknesses are the absence of license to conduct business directly as a holding company, inability to manage workforce, lack of control over some management aspects. Employees may not be performing well knowing they cannot be fired and government


restrictions on the office currently threaten the company’s flexibility and impair future planning and expansions.Gaining holding company status would give NES AG more opportunities, flexibility and lower its operational risk in China.

Knowing that a practice does not comply with company’s standards, I believe that it would be in the company’s stakeholders’ best interest to give the gifts to the officials. While reputation is definitely important, the Chinese market is the largest in the world and giving it up over several gifts would be considered unacceptable service to the shareholders. Gift-giving is common practice in China and without it; it is unlikely to get approval for the application.This is especially true considering the one-month time limit to obtain the approval.

If we do not give the gifts, Mr. Zhu will lose face and will b

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unlikely to help us in the future. Furthermore, not receiving Mr. Zhu’s help will make approval process longer and more cumbersome. If the gifts are given, we might have to wait up to a month for approval, after approval the company would have a business license in China and be allowed to engage in direct business activity.

Obtaining a license will benefit the stakeholders in both China and Germany.As a matter of fact, that will only positively reflect on Chinese economy and society since jobs will be created, taxes will be paid and investments will flow in. However, there is a disadvantage of this practice – violation of code of ethics. Giving a gift to a government official will very unlikely end up in a court room as it`s a standard practice. More importantly, NES AG is not engaged in illegal business activity; the company has submitted applications according to all and regulations and thus is not violating any local laws.

In the Western world companies spend considerable sums of money on client relationships and business development. Western companies also have government officials receiving appropriate salaries. Lastly, people earning little money are paying considerably lower taxes and can receive help from the government, which is funded by taxes of other individuals. In China, low paid workers have to take care for themselves, instead of relying on help funded by taxes. Giving out gifts and paying lower taxes should be regarded equally as paying high taxes and not giving gifts away.

I will do all in my power when dealing with the officials and cooperating with Mr. Zhu to ensure that the application will get approved. Regarding reputation of

the company, giving gifts does represent a certain risk. Most business decision requires a degree of uncertainty to be taken.

It should be in hands of shareholders and management to decide whether this risk is worth the benefits. Therefore, giving the importance and size of benefits the company will gain, I think we should go forward with this choice.The decision we are facing is difficult. The decision to give gifts will undermine NES’s ethical standards. However, it is not always right to refer to Western morals in other parts of the world. Losing China’s market because of rejection to accept the local culture would be difficult to explain to shareholders back home.

However, giving gifts would make stakeholders back in Germany and other Western countries suspicious of NES’s practices and the company’s name and quality of management.The other possible alternatives I considered were:

  • not to give the gifts, but push for a deadline extension,
  • give up on the holding company license and operate as a representative office.

The criteria I considered when making my decision was the timeliness, legality, added value of implementation and risks associated. Alternative #1 would be to not give gifts, while asking the head office of NES for an extension.

This will allow NES to behave ethically according to its standards and potentially get the approval for the holding company.The advantages of this alternative, if a deadline is extended and if the holding company gets approved within the new time frame the company will reap the benefits of China’s market and will be able to sleep well at night knowing that code of ethics was not violated.. However, the company would be risking not getting

its license and/or delaying the process to the point where investment would not be appealing any more as well as embarrassing Mr. Zhu and ruining possible expansion plans of the future.

Alternative #2 is to continue operating as a Representative Office and abandon the holding company. This would be very quick to implement, free up the $30 million of capital waiting for the holding approval, be a legal and ethical choice. The risks would be hurting our reputation as a successful company that can penetrate strategically important markets, which in turn may give opportunities and significant advantage to our competitors that do follow the Chinese way of conducting business.Operating as a Representative office has restrictions on it, such as the inability to engage in indirect business and the restrictions on all personnel issues. This alternative does not add value to the company and thus should be rejected.

To implement the recommended alternative, you should allow me to take the two individuals who are handling our case to a dinner again, just like it is done in all Western countries, and give them gifts for the suggested amount. The gifts could be shares of the company, however cash would be impossible to trace and thus will be the lowest risk alternative.Hopefully, this will develop the relationship well enough that our holding will get approval by the end of the month. I will attempt to ensure this at dinner. We will also meet with the officials to explain to them why they should approve our holding from a business perspective. Although this practice may be unethical in Germany, it is perfectly common place here in China, and NES cannot

hope to do business in other countries if it always sticks to the values of its home county because cultures vary widely around the world.

Of course, the risks involved in this are possible failure to get approval quickly enough and the stain on NES’s name if the gifting is heard of in the West. I personally would like to know if that is possible and why would officials want to disclose such information. However, this is what my logic is. I think we have to revert back to business fundamentals and risk taking. It is quite clear to me that the value added to the company significantly outweighs the risks. Our success in this operation would be measured by whether we get approval within the specified deadline or not.

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