The Red Dragon Hotel Case Study


(guanxi) based planned methods of hotel management to that of the more market ... In recent years, the hotel business environment in south-west China has ...... individual in the state bureaucratic system and is lodged is where the person ..... when a foreign company commences any form of joint project with a mainland.

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

Guanxi Neglect at the Roaring Dragon in South-west China: The demise of an International Management Contract Stephen Grainger1 University of Western Australia ‘guanxi neglect – neglecting opportunities to show respect towards guanxi relationships’

Abstract This paper introduces the concept of guanxi neglect through a case study that describes the takeover of a formerly Chinese managed hotel by a western based, international hotel management company. Specifically, it covers the cultural conflict that occurred for employees trying to adapt from the former Chinese relationship (guanxi) based planned methods of hotel management to that of the more market oriented, management company. Conclusions that are drawn highlight cultural characteristics and issues that companies taking over or approaching joint-ventures with SOEs, are advised to be aware of. In recent years, the hotel business environment in south-west China has undergone significant changes. China’s opening-up has encouraged an outbreak of new hotel construction and property speculation as companies and investors hope to cash in on the domestic and international exposure of the unique region. Prospects for growth in the number of tourists and investors visiting the region in the future were good.

1

Correspondence to:

Stephen Grainger The University of Western Australia Perth, W.A., AUSTRALIA Email: [email protected]

Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

-1-

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

The Roaring Dragon Hotel, was a famous 40 year old-Chinese SOE. In the second half of 1999 an international management company set about transforming the culture within the hotel from a Chinese hotel that was relationship based environment to a modern market oriented organisation. Following story describes the experience during the transition from a planned to market economy.

Methodology From May to December 1999, June to July, 2001, and November to December 2002, research into the modus operandi of guanxi was carried out at a four-star hotel (referred to here as the Roaring Dragon Hotel) in south-west China. The hotel employed more than 670 people. Interviews were recorded with 35 middle and senior managers from the hotel and a group of 11 officials, academics, and businessmen from this environment. 15 participants were interviewed on more than one occasion across the three research periods. Un-attributed, direct quotes used throughout this manuscript are taken from verbal transcripts of these interviewees. In addition, a 65-item written survey was conducted with hotel staff the week before the takeover and again three months after the takeover. 439 completed the first survey and 144 the second. Some findings from this survey are acknowledged in the following.

The Roaring Dragon Hotel The Red Dragon2 Hotel had been the first four star hotel in the city and since the early 1960s had enjoyed a reputation as the most famous accommodation-provider in the region. Being a state owned enterprise (SOE) with a long and colourful history, it was 2

The names of all people and places have been changed to protect the research sources.

Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

-2-

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

the region’s premium guesthouse for visiting government officials, dignitaries and guests. To staff the Hotel at its commencement, employees had been transferred in from other SOE or government departments primarily on the strength of their guanxi or connections. Having gained a position from the opening of the Hotel, Roaring Dragon employees felt ‘excited’ and ‘very proud’. Some recalled ‘if your relatives or your friends knew that you were working in Roaring Dragon, you would be admired’, ‘it was a good work unit - danwei’, and ‘you were lucky if you worked there’3. The original Hotel was a four-storey, rectangular, grey structure built in 1960 in a dull Russian style. By 1993, the provincial government had funded a new extension and the Hotel now consisted of two parts: the old four-storey section joined by a modern sixteen-storey extension perched on a hill behind the old Russian. There was a contrast in the standard of accommodation. Room rates were cheaper in the old section and so it attracted Chinese visitors searching for quality economy accommodation. Visiting government officials and higher-end customers on the other hand felt more comfortable in the newer and naturally more expensive section. There were two guarded entrances to the Hotel, one on each level. A series of stairways, elevators and a warren of banquet rooms, hallways, storage areas, offices, cafeterias, and a laundry untidily connected the two buildings.

Reflection on a 1993 Experience The Roaring Dragon was a Chinese managed SOE until the opening of the new extension in 1993 when the provincial government decided to contract an international company to manage the Hotel with the objective of improving the quality of customer service. KYZ Corporation was identified as a suitable international management organisation and was contracted to manage the Hotel. Their representative, Mr. Meyer, a Mandarin-speaking German, became the Hotel’s new

3

These quotations are taken directly from the 35 interviews with Red Dragon Hotel employees.

Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

-3-

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

General Manager (GM) with the former Chinese GM, Mr. Wen, becoming second-incommand. After a short time under the new management, Wen began complaining that he had lost his privileges. He could ‘no longer enjoy practices such as inviting someone to the Hotel for a complimentary dinner or reap other benefits without first gaining approval from Meyer the KYZ GM. For Wen and his former management staff, the change of management was an issue of great concern as most of the privileges they had previously enjoyed had been discontinued. This loss of benefits resulted in the Chinese managers’ being reluctant to embrace new management practices as ‘in their hearts the Chinese employees did not want to be managed by Meyer or the KYZ Corporation’. In terms of incentive or financial reward, there were few, if any, reasons for the Chinese employees to make the new arrangement work. ‘Employee salaries had not changed’ and ‘the foreign management did not know the Chinese way’. From the time KYZ took over the management of the Hotel, business gradually declined. After three months, occupancy was very low’ and the recently opened extension was only in operation above the seventh floor. Finally, after a year of poor performance, the Chinese provincial government told KYZ that they were not performing well and that they wanted to end the contract. KYZ did not receive this notification well and commenced proceedings to claim damages in the courts from the provincial government breaking the contract. The provincial government had guanxi with the local judges and was confident the damages would be minimal. After a year of apparent non-cooperation and turmoil, the KYZ management left in November 1994 and Wen, the former Chinese GM resumed control. With Wen’s reinstatement came the resumption of the former organisational culture including the practices of nepotism and favouritism. Guanxi cliques in the Hotel resumed operation and the re-establishment of relationships with the local tourist agents resulted in the occupancy levels returning to their former levels.

Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

-4-

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

The Roaring Dragon Hotel was eventually required to fund the resulting lawsuit compensation to KYZ. To Wen and the employees it did not matter as ‘the provincial government would pay the damages’.

The 1998 Story By 1998, the provincial government had again become dissatisfied that the potential of the Hotel was not being realised, especially as the Roaring Dragon was situated in a famous tourist location. Since the Chinese management’s resumption of control in 1994, the financial performance was still well below its potential. At times, the Hotel was losing money and the provincial government ‘was not happy with the way it was being managed’. Under Wen, management practices remained outdated and ‘the staff were not developing or expanding the Hotel business’. Among the employees, there was an atmosphere of little concern as their salaries, although ordinary, were secure and they were content in the knowledge that the provincial government would cover any of the Hotel’s losses. The Hotel danwei was highly ranked4 which meant that the working conditions and benefits were good when compared with those of the rest of the population (Walder, 1986). The ‘580 yuan per month paid to a barman’ or the ‘1500 yuan per month paid to a manager’, combined with the easy work, neat and tidy uniforms, complimentary meals, accommodation and fringe benefits made the Hotel an attractive and respectable place of work. The organisational culture was very relaxed with many employees finding time to read newspapers and enjoy a green tea during working hours. For some managers, conducting private business was easy and from time to time they could be seen leaving the premises for a few hours to attend to ‘other business’. One example was the Hotel’s Head of Training who had a restaurant just a few blocks away. In the afternoons, he would make regular visits to ensure operations and supplies at his

Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

-5-

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

restaurant were flowing smoothly. It was easy as the Hotel was overstaffed, jobs were secure, and besides no Chinese manager wanted to be responsible for firing potentially well connected, lazy or unproductive employees. As Rofel (1999: 108) identified, this type of SOE, as having work cultures that still operated largely under the shadow of the Cultural Revolution and carried employees who ‘did not have commitment’ or a ‘sincere working attitude’. The Roaring Dragon Hotel employees did not want to work hard and were not concerned about the Hotel’s steady decline in popularity and income. China’s new market economy demanded that organisations become profitable, yet the Roaring Dragon’s Chinese management showed little concerns for generating profit and basically did not comply. During the same period, competition arrived as new hotels opened their doors and as this competition grew, the financial fortunes of the Roaring Dragon Hotel declined even further. As a result, in 1998 the provincial government was again tempted to contract an international management company to arrest the declining fortunes of the Roaring Dragon. They identified Nothill as an organisation with the right international reputation, credentials and brand name to take up the management contract. They felt confident that under Nothill’s management, the Roaring Dragon Hotel’s potential would be realised. In March 1998, negotiations commenced with the globally respected Nothill Company to take over management of the Roaring Dragon. By mid-1998, it was agreed in principle that Nothill would take control of the management of the Roaring Dragon and, to save face, the incumbent Chinese GM, Wen, would be installed as the GM ‘of a new company, the Roaring Dragon Limited’. The role of Roaring Dragon Limited would be to oversee the activities of Nothill and ‘act as a conduit through which Nothill communicated with the Hotel’s Board’.

4

Each danwei receives a ranking from the government which determine its status in the Chinese community. This status directly influences the benefits and advantages the danwei is able to gain for its Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

-6-

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

Nothill and Harvey’s arrival To negotiate the finer points in the contract and help prepare the Roaring Dragon for a complete management takeover, Nothill sent one of their Australian Managers, Mr. Harvey, to complete the negotiations and initially co-manage the Hotel with Wen from May 1998. It did not take Harvey long to realise that a management takeover would involve changes in the Roaring Dragon’s organisational culture. Entrenched guanxi practices, the poor quality of customer service and at times significant annual losses had to be converted into more accountable, quality service practices with employees who were prepared to strive for excellence. Harvey’s mandate included identifying efficient and effective staff who would be able to help develop the Nothill standard of excellence at the Hotel. He realised that this might not be easy as many of the existing staff had been employed there for fifteen years or more. During that time the majority of them had experienced little or no training, and had developed only a limited understanding of the concepts of western professionalism or efficiency. Harvey faced the challenge of transforming a large group of relaxed family-based employees, working under an ad-hoc management style into a professional group of employees operating under a structured international commercial culture. From the time of his arrival, Harvey ’mixed easily’ with the Chinese people and regularly attending important functions, giving presentations and speeches’, playing tennis with the Governor, and sometimes even chatting at the nearby English Corner. Nothill’s Austrian born Head Chef Thomason, arrived five months after Harvey to take charge of the Roaring Dragon’s Food and Beverage (F&B) Department. Notified of his appointment in England, Thomason had flown into China without a visa and was met at the airport by a provincial government representative. After a few questions were asked, he ‘was given a 24 hour temporary visa for 100 yuan’. The next morning, ‘a government official took his passport and secured him a long term visa’. He encountered a ‘similar process with his Immigration Health Certificate’. The ease members. Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

-7-

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

with which the two events were taken care of highlighted the advantages of having powerful guanxi within the provincial government. A few months later, problems began to surface. Although officially Nothill’s representative, Harvey could not make any major decisions in the negotiations without consultation and approval of Nothill’s Regional President in Singapore and the Corporation’s Vice President in Beijing. Even though Harvey had negotiated most of the details of the Nothill takeover contract, he was never really in control. As one Chinese manager commented, ‘all the important decisions were made in Singapore and Beijing’. After ten months, Harvey returned to Australia. There was speculation that he had left because the ‘weather was not good for his health’, but many employees believed that ‘he was fed up with the frustration of nothing happening’. Others believed that ‘the Roaring Dragon Hotel board were against him ‘from day one’ and that was the reason ‘why his management lasted less than one year’.

Erhi T Erhi T was a large SOE that had accumulated significant wealth in the region through its tobacco production. To help eliminate the Roaring Dragon‘s seemingly ever growing debt, the provincial government ‘told the Board of Erhi T to buy the Roaring Dragon Hotel’ so the resulting funds could be used to repay the debt. This request was made soon after Nothill’s arrival. Reliable sources claimed that ‘the Erhi T board was reluctant to make the purchase’ and this was reflected in their delays in signing the contract. Fortune reported that ‘eighty points in the original agreement had to be renegotiated’ between the Roaring Dragon and Nothill after Erhi T had arrived. By March 1999, after difficult negotiations, Erhi T had ‘purchased sixty percent of the Roaring Dragon Hotel for an estimated twenty million yuan’5. The final contract 5

No where was this sum officially printed or stated. However trusted informants who worked in the Red Dragon Accounts Department indicated that this figure was correct. Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

-8-

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

stated that Nothill would manage the Hotel and Roaring Dragon Limited would continue as the Chinese management arm. This was the first official agreement between the two parties and it had proven a cumbersome task. At the first meeting between the new Chinese shareholders and the Hotel employees, an Erhi T manager made the comment that they ‘did not really want to buy the Hotel’. That seemed to signal an inauspicious beginning and was perhaps, an indicator of the troubles to follow.

The Provincial Government As the former government guesthouse, the Roaring Dragon Hotel’s relationship with the provincial government was very important. To nurture important government relationships, Hotel managers would regularly invite officials to dinner and to enjoy gifts such as moon-cakes and glasses displaying the Roaring Dragon logo. In addition they would arrange meetings with them to drink tea and offer to assist them in resolving any problems they might have. From the Hotel’s beginning, ministers had been the only government representatives who could afford to stay at the Roaring Dragon. As the only four-star hotel in the city for more than thirty five years there had never been a problem as far as low occupancy was concerned. However, that began to change from late 1998 when the number of hotels with the capacity to receive government and four-star accommodation guests increased from one to three, with a further two more competitors due for completion in mid-1999. Government officials and those who could afford it now had the choice of staying at a hotel that could offer them modern facilities and services at a competitive price.

Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

-9-

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

April 1999

Fortune arrives Following Harvey’s departure, Nothill searched for a new General Manager and found their candidate in their African operations. Mr. Paul Fortune arrived in April 1999, two months after Harvey had left, to finalize the contract and resume preparations for the Roaring Dragon to complete its transition from ‘co-management by Nothill and the Roaring Dragon Limited to full management by Nothill’. This was contracted to begin from the first day of August 1999. Almost immediately Fortune established a pre-opening budget with the Roaring Dragon which ‘covered Nothill’s expatriate pay roll with effect from August 1’’. He also identified that ‘cash flow was going to be the main issue confronting the Roaring Dragon’. Erhi T may have to come up with working capital for at least the first two or three months before the newly managed Roaring Dragon could generate enough income to operate independently’. With the contract finalised, the Hotel’s Board of management suddenly expanded from four to twenty members. Among the new additions were ‘the local Communist Party Chief, the Chief Secretary, the Union representative, and eleven Erhi T representatives’. Fortune believed ‘everyone was trying to get a seat on the Board to keep an eye on Nothill’. As was the norm in Chinese management situations, ‘connections and relationships’ had played a key role in deciding all the positions on the Board. Fortune soon realised that it was ‘politically correct to include the Hotel Workers Union and to pay respect to them so as to minimise any problems they may cause’. In a push for information and to stamp its authority, ‘the Board proposed Nothill supply them with a copy of the Roaring Dragon’s accounts every week’. Fortune politely refused. Fortune and Nothill’s real concerns were ‘whether all the negotiated contractual agreements were going to be met’ and that their ‘brand name would not be brought in and thrown on the building’ with all other contractual agreements falling by the Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

- 10 -

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

wayside or encountering delays. As insurance, it was stipulated in the contract that Nothill would take over the management of the Hotel. However, the Roaring Dragon would not be re-named as a Nothill hotel until such time as significant progress had been made towards improving the quality of service, and that construction was underway on a proposed new five-star wing in place of the old Russian building. Once the old section had been demolished, and the service quality in the modern extension brought up to Nothill’s international standard’, the Hotel would be “rebranded the Nothill Roaring Dragon Hotel”. The demolition of the old section of the Hotel was to begin by January 1, 2000 and so it was planned that the new five-star accommodation wing and function centre would be completed ready for opening in late 2002. Fortune felt ‘confident that in two years, his team would be able to develop the local Chinese employees to a level whereby they could reproduce Nothill’s world class standard of service’. The old section of the Hotel was closed and stripped for demolition and all that remained open for guests was the modern, more expensive section of the Hotel. Left with a smaller number of rooms to service, redundancy was going to be an issue that Nothill was going to have to deal with. The remaining 675 employees were well in excess of the 350 employees Nothill estimated would be required to run the reduced number of rooms at capacity. Many staff would need to be re-employed elsewhere or have their redundancy paid out. In contrast, Nothill ‘planned to bring in eight expatriate staff to manage the takeover’ and later, when the time was right, expand their management team to include ‘pastry chefs, an executive chef, food and beverage managers, and a much stronger professional team’. In preparation for the forthcoming changes, Fortune publicly announced that all employees would undergo a two month training period following which employees would be chosen to be retained by Nothill based on their attitude and ability. Previously valued guanxi networks would supposedly become irrelevant and powerless. Erhi T or the former Chinese GM would have no control over the selection process and Erhi T would resolve any redundancy issues by paying out existing employee contracts or finding them positions elsewhere’. There was excitement

Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

- 11 -

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

among the young staff who could see opportunity working with an international hotel and concern among the older staff for the security of their position. As none of the employees had ever experienced a redundancy program before, many were unsure as to how this exercise was going to be handled. Fortune quietly suspected that ‘when the redundancy lists were decided, Nothill would see guanxi connections come out of the woodwork’ in an attempt to save some unproductive yet well connected employees from losing their jobs and face6.

Emerging competition Meanwhile in the local cityscape, new four and five-star hotels were nearing completion to commence operations that were in direct competition with the Roaring Dragon. These hotels were operated by international management corporations and enjoyed the advantage of recruiting their employees based on qualifications, appearance, efficiency and ability with no concern for guanxi relationships. The new competitors had hired international recruiting firms to sort through the hundreds of applicants who had applied for positions to identify the best recruits. In contrast, Nothill had inherited an untrained staff, a high percentage of whom had gained their positions through connections. Those with good guanxi with the HR Manager were usually able to find sons, daughters, relations and members of their guanxiwang7, a position without much trouble. An introduction or a recommendation to the recruiting staff always gave their ‘applicant’ the added advantage. Most of the existing employees had been ‘introduced to the HR Manager at the Roaring Dragon‘ and this ‘introduction’ had usually resulted in them securing a position. Another reason given was that when a parent retired or passed away their son or daughter legally had the right to secure a position as a replacement in the SOE.

6

For a deeper investigation of ‘face’ see Brunner and Koh (1988: 39), Chen (1995: 54), Hofstede and Bond (1988), and Yeung and Tung (1996: 57). 7 guanxiwang (‘guanxi net’) means the whole network of guanxi through which influence is spread’ (Ambler, 1995). In China, these networks are like a complex web of trusting relationships. Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

- 12 -

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

Historically, the Roaring Dragon’s recruitment policy has been very relaxed. Under former planned economy conditions, there was little need to consider generating a profit, as ‘all costs were financed by the provincial government’. Hence on a regular basis, more employees than were necessary were hired. Fortune realised that the Roaring Dragon’s nepotistic history had the potential to be one of Nothill’s obstacles in trying to choose the best employees to remain at the Hotel. At one time or another there had been as many as 32 families with more than one family member working at the Hotel. The kitchen had more than 70 chefs, many of whom did very little productive work. Departmental workloads were unbalanced with young employees stationed at the Front Desk and in the Restaurants working harder than older employees who worked ‘behind the scenes’. After older, more experienced, employees had finished their work duties on any given day they would ‘talk, play cards and read the paper and just complete a few extra minor tasks during working hours’. Nothill wanted to change some deeply entrenched behaviour. Nothill was inheriting the Roaring Dragon’s staff and it was proving to be a very different game to choosing a totally new staff from the beginning. Fortune admitted that Nothill would ‘have to make the best of the given situation’. July In early February 1999, Nothill and the Roaring Dragon had agreed to a freeze on the recruitment of any new employees. However the hiring of new employees by the Chinese HR Department continued even after the agreement was struck, as the managers’ wanted to provide opportunities for the younger members of their guanxiwang to work for the ‘world famous Nothill Hotel’. During the time between Harvey’s departure and Fortune’s arrival, Nothill did not have a General Manager on site. The Chinese managers took advantage of the moment by hiring some extra young employees with the thought that it would go unnoticed. Fifteen new employees chosen during this period were told they ‘would start work in July 1999, after completing their schooling’. These new appointments faced ‘no evaluation or interview process’ and a training manager’s comment was ’maybe we will just ask a

Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

- 13 -

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

few questions’. Thomason, remained the only Nothill employee at the Hotel during that period. He noticed some new faces in his department one day and was told ‘these are your new employees’. He was a little angry that this had been done behind his back as ‘he had no control over who was chosen, their calibre, education, or ability’. Fortune registered his complaint with the Chinese managers and Erhi T. In late July, Nothill’s international managers arrived to take charge of the F&B, Front Office, Accounts, Housekeeping, and Supply Departments. Fortune confirmed that between August 1st and October 31st, employees would be assessed on their ability and their quality of service. Nothill management would be working with them day in and out to assess their performance under strict, demanding conditions and to determine ‘whose eyes were sparkling’ and ‘who was comprehending and adapting well to the new system’. Any employee who failed to meet the new higher standards would be asked to leave. When Nothill’s international HR Manager arrived, she was surprised to discover that the Hotel had kept ‘very limited records on employees’ personal details, schooling, and experience’. Her immediate task was to set up and develop accurate files on every employee. This illuminated the difference in standards of professionalism between the old and the new methods of HR management of the Roaring Dragon Hotel. The take over from August 1st caught the imagination of the younger employees as they glimpsed the prestige that they would gain from working for an international hotel. Recalling the KYZ experience of 1993, older employees agreed that ‘Nothill was more famous’ but cautioned as they ‘were unsure of what the new management would be like’, ‘who would be laid off’ and what future those made redundant would face. Redundancy was a new concept in south-west China and one Chinese HR manager explained that ‘it would be difficult to ask someone to leave their job without a good reason or explanation’. Preserving the ‘face’ of employees made redundant was an issue that would need to be addressed. A significant event occurred in the same month. NuFu Travel was an agency that had in the past provided much business to the Roaring Dragon. In late July, they offered Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

- 14 -

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

the Hotel a touring Japanese group that required a small banquet at the Hotel as part of their tour package. Nothill Head Chef Thomason, arrogantly told NuFu Travel that their package price ‘was too cheap’ and refused to accept their offer stating he ‘wanted a higher price’. The former Chinese Head of F&B, Madame Fang advised him that ‘if he refused the offer he would effectively be excluding Nothill from any future bookings from NuFu’. Thomason refused to agree on the cheaper price package and as a result, NuFu retaliated by canceling all future’ tours booked to stay at the Hotel. Madame Fang complained that Thomason‘s ‘management was not Chinese and he does not understand’. The relationship she had painstakingly spent years building up was destroyed in one telling blow by his refusal. In a disappointed tone, she claimed ‘we are in China and must respect the Chinese way’. The guanxi she had developed between the Roaring Dragon and the NuFu agents was seriously damaged as a consequence of Thomason’s lack of understanding of the guanxi dynamic and his guanxi neglect. This resulted in the loss of all business coming from the NuFu at a critical time in the Roaring Dragon’s transition when hotel competition in the region was growing. The damage to the relationship between the Roaring Dragon and NuFu was of no consequence to NuFu as they could now send their customers elsewhere. Agents in general now had more quality accommodation to choose from, with cost reductions and fringe benefits being offered by competitors that were equal to or better than those offered by the Roaring Dragon. It had become a buyers’ market and hotel Sales departments now vied with each other to offer the best package deal to NuFu and other agents in order to attract their business. Aside from Madame Fang, the long-serving top Chinese Chef of the Roaring Dragon Mr. Wang, was also unhappy with Thomason’s management and complained directly to Wen, the GM of the Roaring Dragon Limited. Thomason’s questionable ‘people to people’ skills were feared by everyone who worked in the F&B Department especially when he would ‘stare and yell’. The ‘Chef in Charge’ resigned after Thomason transferred him from the Chinese Kitchen to the Western Restaurant against his wishes and Thomason’s personal secretary “could not stand his bad temper” and resigned soon after.

Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

- 15 -

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

Using guanxi to transfer out After a short time under Nothill’s co-management, employees realised that they had to work much harder. Those who had strong guanxi with Wen and who ‘did not like to work hard’ or for Nothill or ‘were likely to be laid off’ used their relationship with him to transfer to the Roaring Dragon Limited. For these transferees, working under Wen would be easier and their employment would be secure. As such, those who enjoyed good guanxi with either Wen, senior management in the Roaring Dragon Limited hierarchy or high ranking government officials were able to transfer out of the Nothill-managed part of the Hotel and into the Chinese-managed Roaring Dragon Limited. Wen was able to find new positions with lighter workloads for these members of his guanxiwang or network. Other unhappy staff used their guanxi to gain transfers to new positions with either Erhi T or other associated companies. Not everyone had strong enough guanxi to transfer to another organisation. Those able to ‘pull’ guanxi and transfer to the Roaring Dragon Hotel Limited now worked under very little pressure in an air-conditioned office on the seventh floor of the building adjacent to the Hotel. In contrast, those remaining under Nothill’s management, were working under greater demands and pressure and the fear of redundancy for employees was beginning to grow. Just prior to Nothill’s takeover, ten employees had transferred to the Roaring Dragon Limited and in the month that followed, another seventeen transfers took place. Although Nothill was glad to see staff leaving the Hotel voluntarily, there was a down side. Those who left took with them their critical industry contacts and guanxi connections. Guanxi is difficult to transfer and usually the connection with an organisation ends with an individual’s departure. As Nothill consolidated further, one of the oldest members of the Chinese management team, the former Head of the F&B Department, Madame Fang, decided to leave, taking with her a large percentage of the guaranteed income generating contacts for the Hotel. After witnessing for herself Thomason’s style of management, she had decided on a transfer to the Roaring Dragon Hotel Limited. Whether Nothill was aware or not, it had allowed the number one guanxi holder to leave and this proved to be a costly example of guanxi neglect.

Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

- 16 -

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

Agencies and competition To generate occupancy in the new and much more competitive market, the Roaring Dragon Hotel’s sales staff now had to work much harder to develop and maintain good relations with their travel agents. The record of poor treatment of NuFu by Thomason, combined with Nothill’s refusal to offer any discounts meant that it was proving harder for the sales team to develop any new business. As competition got tougher, competitive pricing became the number one priority. Nothill, somewhat arrogantly, banked on its international reputation to attract bookings and refused to partake in any discounting. Nothill would instruct Roaring Dragon sales team to offer agents ‘rooms for US$32 per night for group bookings’ whilst ‘competitors could provide the same for as low as US$20’. The reality was that Nothill’s global fame was of no importance to booking agents when they were searching for the most competitive price. Developing supportive guanxi links with tour agents had become critical to business survival and the new hotels were performing this task better than the Roaring Dragon. By the end of July, the combination of in-house rumours and the tougher work standards set by Nothill had taken effect. The level of job security felt by employees had begun to deteriorate. In a survey of Roaring Dragon employees conducted a week before the full Nothill takeover, only 41 out of 437 (9.4%) respondents believed their position to be ‘secure’. Uncertainty existed, as employees knew little about their new expatriate managers or Nothill’s objectives and wondered if their good standard of work and past record of employment would guarantee their job security. August On the first day of August, all employees were issued with a short-term contractual agreement guaranteeing ‘they would retain their position for three months, two months of which would be spent on training followed by a month on probation’. During that time, each employee’s ability, attitude and approach would be evaluated in preparation for ‘the number of Hotel employees being reduced from the existing 685 employees to a total number of 350 employees. Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

- 17 -

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

Nothill estimated that 320 employees with long-term contracts would need to be made redundant. Employees were told ‘this reduction was necessary because the old Russian part of the Hotel was being demolished’ and that ‘the number of rooms requiring service would be significantly reduced’. Once the new Hotel wing was completed and demand increased, Nothill planned to recruit new employees. However, there were no obligations on them to re-hire any of the old employees. The old section of the Roaring Dragon Hotel sat stripped of assets in readiness for demolition. From then on, the Roaring Dragon had no conference hall or Chinese Banquet restaurant to service even their faithful long-time customers. In the past the Roaring Dragon had enjoyed good relationships with government departments and agencies such as the NuFu and the Foreign Tourist Company (FTC). Both had regularly booked large buffets, banquets and events in the old banquet room. The closure meant large meetings and banquets were no longer available to guests. The empty halls echoed the Roaring Dragon’s witness to many famous meetings and banquets. The remaining modern restaurant in the new wing did not have a Chinese ambience and agencies were reluctant to hold their banquets there. Fortune believed business would only start to recover from 2002 onwards after the completion of the new wing. Demolition was already behind schedule and the relationships between management from Erhi T, the Roaring Dragon Limited, the provincial government and Nothill were not developing well. As part of the changes in organisational culture and conditions at the Roaring Dragon, all managers and supervisors now had to work an eight-hour day and the opportunity to take long tea breaks or conduct private business during normal working hours was eliminated. Leaving the hotel site was no longer easy as Nothill managers’ made sure that everyone trained hard whilst they were being assessed. This change in policy and procedures at the Hotel caused upheavals in organisational culture. The Roaring Dragon’s method of service delivery and style of administration were changing beyond recognition. There was fear among many of ‘the old staff that they would not be able to adapt’ to Nothill’s new management style. Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

- 18 -

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

September At the beginning of September, the group of fifteen young employees who had been illegally recruited by the Chinese managers, after the agreed freeze on hiring, became the first redundancies. In order that they did not lose face, they were told they were being ‘given the opportunity to resume their studies’. There were tears among these young employees and they were not entitled to any redundancy payouts due to their short period of service. For the contracted employees with less than five years service, a voluntary redundancy package was drawn up offering 1000 yuan for each year of completed service. Retrenching younger employees was seen as a more attractive option as the redundancy cost for those with only a few years service was significantly less than the larger sums needed to pay-out long serving staff, some of whom had more than thirty years service. Nothill re-confirmed that there was to be no new hiring for some time and seventeen employees accepted the redundancy package on offer, as they did not like the new system. The challenge for Nothill was to transform a relaxed, Chinese working environment that was not focussed on quality, into one with Nothill’s dynamic, international standard of excellence. Employees needed to become sharper, brighter, and more receptive in order to survive whilst the culture and chemistry of the organisation began to change. Employee’s who used to ‘sit around smoking and reading the papers’ in May, were now busy all the time or, if an opportunity arose, they were relaxing out of sight. As new management practices were introduced, several observers wondered if this could last? Would the growing dissatisfaction among employees’ work against Nothill in the long term? Chinese managers agreed that ‘the tables, chairs, windows and appearance of the Roaring Dragon had changed but in the hearts and minds of the employees, there had been little change’. A skilled bar tender was still paid only 580 Yuan (US $75) per month for a 40-hour week with no annual holidays. Although now under Nothill management, the Roaring Dragon remained Chinese in most other aspects. Old

Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

- 19 -

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

practices survived but had gone ‘underground’. Captains still ‘hid in the “out of order” guest rooms to watch TV, sleep, or play cards’. One change that evolved was that someone was now on watch at all times because if one was caught it meant immediate dismissal. With the onset of the winter months, the number of tourists dwindled. With the peak season over, hotels now relied heavily on their relationships with agents, the discount rates they were prepared to offer to provide them with a steady trickle of customers up until the beginning of the next peak tourist period. Several of the managers with important guanxi retired or moved on as the news spread regarding the Hotel’s forthcoming downsizing. Members of the provincial government were still scrutinizing Nothill’s performance closely whilst the rumblings of discontent were beginning to increase in volume. October Preceding Nothill’s arrival, government officials wishing to enjoy the finest local cuisine, negotiate some agreement or impress some important clients, would always take guests to the Roaring Dragon to visit a trade fair or enjoy a banquet. Now government representatives had to hold their banquets and entertainment activities elsewhere and a sense of emptiness and gloom pervaded the once grand old Hotel. The old wing still lay empty and idle - stripped, gutted, and ready for demolition. However, if one took a closer look, some businesses were still operating offices on the ground floor under ‘private arrangements’. There was still no confirmation from Erhi T that money would be made available to begin the construction of the new building in 2000. From the human resource perspective, the number of voluntary redundancies continued to trickle in. This had taken a negative turn for Nothill when five talented young staff from the Front Office and F&B departments gave notice in October to seek better opportunities elsewhere. Some had secured positions in other Chinese

Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

- 20 -

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

hotels or at a foreign-managed hotel where ‘guanxi connections did not hold all of the power’. Nothill’s managers maintained the increased pressure on employees to perform. The new standard of work being demanded meant that some employees were unable to cope with the faster and more demanding pace of the job’. Many old staff with simple backgrounds had difficulty relating to the concept of five-star service and working under managers who ‘spoke’ a different language. The employees who ‘used to go to the cafeteria for lunch or dinner with one of their work associates’ now ate alone as the new roster completely eliminated this guanxi building activity. The atmosphere that now prevailed in the cafeteria contrasted markedly with that of previous years. Employees who had shared lunch with their fellow workers for more than ten years had difficulty understanding why they now had to eat alone. Fortune had begun to receive some interesting telephone calls about future downsizing and enquiries about who would be asked to leave. All the employees who wanted to go of their own free will had now departed. The next phase of the downsizing was ‘to release about sixty workers per week from the beginning of November’. Fortune said ‘it would be done as quietly as possible with a few from each department being made redundant each week’. A few existing staff had been told their positions were secure. Although there were few guests at the Hotel, employees who wanted to maintain their positions continued to train hard. As part of Nothill’s strategy to improve its limited facilities, the Hotel disco was renamed, re-staffed, re-furbished, and re-opened but it was still unable to attract more than a few customers on any given night. The new Chinese restaurant, tentatively ‘planned to be open in a month’, was scheduled for fitting out. However, employees doubted this deadline would be met as ‘contractors were rarely on time’. Before work on the restaurant could begin, contractors first had to build a bridge as well as fill a large hole in the external wall. For Nothill, keeping to their tight schedule was at

Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

- 21 -

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

times difficult as the quality of the relationship between them and the service provider would often determine the timeliness of the work provided. November With limited guests and with only two restaurants open, business for the F&B Department was slow. No further bookings came from the NuFu agency. Other agents were also looking elsewhere and the Chinese customers did not like the restaurants in the modern section of the Hotel. ‘They were too open to the public and offered little privacy for banquets or meetings’. Business was very quiet and for eight days, the only people who ate at the Hotel’s Western restaurant were Nothill managers as part of their contractual agreements. In an attempt to stimulate business, Nothill managers’ began notifying other Nothill hotels in the region of the Roaring Dragon’s facilities. Whilst several of the expatriate managers attended a four-day training program in Nanjing, Nothill hosted a conference for marketing managers from other Nothill hotels in Asia. In spite of these strategies, the flow on was very limited and the occupancy level of the Hotel remained low.

The four Mondays Following the completion of the three-month training program, the schedule of redundancies began. On the first Monday in November, a group of workers were given their redundancy payouts late in the afternoon. There was no prior warning given to these employees, as Nothill feared that if given advanced notice, some of them ‘may damage or steal equipment before they left’. Employees made redundant were told to proceed to the salaries department to collect their pay out, leave the building, and not report for work again. For those who had given many years of service to the Hotel, it seemed a very sad, sudden and disrespectful ending.

Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

- 22 -

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

No reason was offered as to why these ‘employees were no longer required’ nor were they ‘thanked for their years of service’. In the locker room where they handed in their uniform for the last time, many murmured and voiced their complaints. Several senior managers commented that ‘if the Chinese managers had been in charge of the redundancy process, they would have handled it differently’. What transpired was a market driven action by Nothill. However, it contrasted significantly to the ‘Chinese’ way of dealing with people. Many of the employees made redundant had hoped to continue working at the Hotel for a long time. Suddenly their dream had been taken away, there was ‘no job tomorrow’ and there was the serious issue of their loss of ‘face’ to contend with. What would their families think? Would they ask ‘why will you not go to work tomorrow?’ ‘What did you do to be asked to leave?’ What would our families and friends think of this? As downsizing continued, more negative information about the Hotel redundancies and Nothill’s management filtered out. News of what was happening at the Roaring Dragon reached the Provincial Labour Bureau (PBL) which was responsible for holding the employment documents or dangan8 of all unemployed citizens. They started receiving large numbers of dangan from the Roaring Dragon and had heard rumours that more would arrive later in November. Immediately, the PBL put a ban on receiving any more of the workbooks of those made redundant. This situation needed to be managed with sensitivity, as the Roaring Dragon needed the PBL to accept all of the workbooks of the employees being made redundant. To placate the PBL, HR Manager Madame Dong and some other senior Hotel staff invited sixteen members of the Labour Bureau to enjoy a banquet at the Roaring Dragon. This gesture restored the guanxi between the PBL and the Roaring Dragon and the large number of workbooks waiting to be cleared were accepted.

8

the danwei controls the dossier, or dang’an, on personal matters. The dang’an represents the individual in the state bureaucratic system and is lodged is where the person legally belongs. The danwei, in that sense, owns the individual through its possession and control of their dang’an. For more see Lu & Perry (1997: 5 – 13) and Davis and Vogel (1990). Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

- 23 -

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

On each Monday in November the redundancies continued. There were tears, sadness, surprise and anger at the ‘pay-out window’. With the onset of the redundancy process and the change in organisation culture, the work atmosphere became very uncertain. Employees began to think ‘if I can get paid out, why not take it? They had lost confidence in the Hotel and some that had given many years of service no longer feared redundancy. Others looked at their payout as a chance to make a new beginning. The employees had been warned of the possibility of redundancy when Nothill took over and many were prepared for any outcome. Upon receiving their payout, some commented that the Roaring Dragon’s ‘once friendly and supportive atmosphere no longer existed’ and with many employees leaving the Hotel, the work environment had become ‘very sad’. Few said that that they ‘would go back to working in the hotel industry’. As more employees were made redundant, the level of respect between Nothill and Chinese employees began to fall. One manager summarized by observing that each employee now ‘wore’ two faces, a ‘fake’ smile for the international managers and a worried frown in reality. Occupancy levels continued to decline. The Roaring Dragon was a large Hotel with 300 rooms in total and on one night there was only one paying customer staying in the entire Hotel. By late-November, concern was growing that the Hotel did not have sufficient funds remaining to pay operating expenses, let alone wages. All advanced tour group-booking contracts had expired and no future bookings were confirmed. The tourism industry in this city had now had time to assess Nothill and from the Chinese perspective, their conclusion was not very good. By the end of November, many of the Hotel’s young workers had been made redundant whilst older staff remained as some of their redundancies were worth up to thirty five thousand yuan each. Erhi T was directly accountable for financing redundancies and understandably its Board was not happy. Limited progress continued with the construction of the new Chinese Restaurant. Although the grand opening was planned for the last week in December, Nothill were not prepared to sign off on developmental stages of the new Chinese restaurant until work was completed to specification. Contractors would do such things as to ‘order Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

- 24 -

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

the new doors but not new locks’. The karaoke rooms on the second floor had no doors and Nothill had to request the installation of automatic doors to seal off the rooms as the major function centre downstairs was in direct sound range. There were problems between Nothill and the company in charge of construction and getting tasks completed became slow and cumbersome. Still no agreement had been reached between Nothill and Erhi T regarding the funding of the demolition of the old Russian section of the Hotel, leaving the old building still sitting empty and idle. Paying for the purchase and installment of the new computing system was causing some problems, with both Nothill and Erhi T expecting the other to pay. Nothill wanted to install a modern, near state of the art IBM system but Erhi T was reluctant. Erhi T argued that Nothill should pay for the cost of the system. Nothill blatantly refused and negotiations dragged on. The proposed time of installation had passed seven weeks earlier and still there was no sign of progress. Nothill’s computertraining team, who had planned to arrive at the Hotel at the beginning of October for training purposes, now postponed their arrival indefinitely. After a ten week delay, it was finally agreed that Erhi T would pay for the new computing system. Fortune admitted that ‘every day is a struggle but we are making progress’. It was planned that by the end of December, all of the old employees who were no longer required would have been released and their contracts paid out. A potential guanxi conflict concerning downsizing was looming. Fortune expected to take to the Board the final list of old employees who were to be made redundant and expected complaints and some negotiating to take place. They were a lot of well connected, inefficient and ineffective staff who did not fit the Nothill mould but who had the connections on the Board to protect their positions. Fortune admitted that he was prepared to make a few changes to his list but did not want to end up with ‘a lot of useless staff’. The Roaring Dragon continued to have a very low occupancy rate and was losing money. Nothill had an Accounting Manager, a Marketing Manager, a House Keeping

Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

- 25 -

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

Manager, two F&B Managers and a Reception Manager working full time at the Hotel and being paid exorbitant international rates. Erhi T did not like to have to meet the cost of having these ‘foreigners working in their empty Hotel’. The original objective of improving the quality of service at the Roaring Dragon was fading and the disgruntled echoes among the Erhi T Board members were growing louder. The majority of remaining Roaring Dragon employees had now lost their motivation to work or attend training classes. Some of the remaining employees likened the empty Hotel to a ‘morgue’. Under the former Chinese management, the more affordable old Russian section had attracted a lot of guests seeking economy room rates and there was usually a busy atmosphere in this part of the Hotel. The three star market segment accommodated there had generated a small yet reliable profit. This segment could no longer be accommodated at the Roaring Dragon. Now with the old section closed, the number of customers prepared to pay higher room rates in the modern section was very small. Nothill’s rate of 800 Yuan per night for a double room was not competitive. Nothill’s Marketing Manager visited Beijing, Shanghai, and Taipei in another attempt to generate a flow-on of tourists from other Nothill hotels in the region. These expensive and unsuccessful journeys further fuelled the frustration of the Erhi T Board. The small cash reserve, which had been accumulated by the Roaring Dragon over the last decade, was rapidly being used up and rumours began to circulate that for the next pay period, the Hotel did not have the money to pay employees’ wages. Since Nothill’s arrival, a previously happy, polite, well-mannered work force had by now lost its initiative, sparkle and drive due to the lack of customers, the demanding Nothill management, the redundancy schedule and the negative work environment. Fear prevailed and some employees in private even showed their anger. A couple of minor incidents had occurred in the disco after some employees had stayed at work after their dismissal, but Fortune commented that ‘generally everything was proceeding steadily’.

Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

- 26 -

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

Some of the remaining employees were now being told that their ‘jobs were secure’ yet there was still an air of depression in the work place. Fortune left for Hong Kong for discussions with regional Nothill Managers regarding their company’s China strategy for the next five years. At the Roaring Dragon, occupancy was averaging just six percent with most other competing hotels in the vicinity enjoying twenty- percent occupancy rates. December The Hotel’s reserve fund was now exhausted and there was insufficient money left to fund the payroll. Nothill’s Training Manager and the second in charge of F&B both went to collect their wages at the end of the month and were told that there were no funds left to pay them. Erhi T were now being asked to spend over one hundred million yuan. This was to finance the construction of a new five star wing, fund the wages of more than three hundred employees, pay the redundancies of more than three hundred employees, and cover the salaries and expenses of nine expatriate Nothill managers. Income generation at the Hotel was low and the Erhi T Board of Management did not like being saddled with these unwanted expenses. The provincial government held the power and the easiest option had been for them was to use Erhi T’s financial resources to support the ailing Roaring Dragon Hotel. Development projects planned by Nothill were now stalled as the flow of money from Erhi T had dried up. The new computers had been installed but were not yet paid for. There was fear that ‘employees would not get their December wages’ and it was rumoured that ‘employees may have to take a pay cut’. An increase in workload had become the norm for all employees. A Chinese manager felt that ‘one employee now was doing the work of three employed under the former Chinese management’. The remaining young employees could still see guanxi networks providing protection and allowing employees to retain their positions due to their connections and not the quality of service they were able to provide. Good guanxi with those in power remained the most important criteria to insure the positions of such employees.

Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

- 27 -

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

In late December, the Erhi T Directors and provincial government officials held a critical meeting to discuss the Roaring Dragon’s and Nothill’s future. By originally inviting Nothill to manage the Roaring Dragon, the provincial government had felt that they had made the right decision and expected to see improvements in the number of customers coming through the door. Some expected the tap to be ‘turned on’ and the Hotel to be ‘full of guests’. After five months of observation of Nothill’s management and the development of the Roaring Dragon’s financial crisis, both Erhi T and the provincial government wanted to end their association with Nothill. Politically, the Roaring Dragon Hotel needed to survive as the provincial government could not be allowed to lose face on this issue. The Hotel had stopped paying its debts, bringing a flood of suppliers to Wen’s door pleading to be paid for their goods and services. Erhi T injected half-a-million yuan into the Roaring Dragon account and it was used in a week to cover operating expenses, accounts payable and basic four-star Hotel requirements such as air conditioning and power. Two of the three passenger lifts had been taken out of use and the air conditioning was turned off in the evenings. Before leaving for Christmas in Europe, Fortune met with the Chairman of the Erhi T Board to arrange for more funds to be released to finance the improvements planned for 2000 and beyond. Following his mandate, Fortune had embarked on a costly ‘long term program to develop the Roaring Dragon into a five-star hotel’ whilst Erhi T had ‘expected the Hotel to be self-funding much sooner’. They did not expect to face the need to provide such a large amount of extra funds to maintain basic operations and had become reluctant to continue injecting more money into the Hotel’s operations. From early September they had even refused to accommodate their own visiting guests at the Hotel. The Erhi T Board was not happy with having to pay large redundancies to longserving staff who had only been placed under their responsibility for a period of six months. The provincial government and the Erhi T dominated board waited for Fortune to depart to Europe for Christmas and immediately ordered the delay of the planned redundancies of the final thirty long-term employees. Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

- 28 -

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

The provincial government’s experiment with KYZ had cost them nine million-yuan in one year and it was estimated that Nothill had lost more than ten million yuan in their first four months. With the excitement at the beginning of both takeovers it would have been difficult for the provincial government to imagine such poor outcomes on both occasions. Some commented that the lack of respect for guanxi and mianzi shown by both KYZ and Nothill were just two of the incompatibilities that could have been better managed. Here is another example of guanxi neglect. From the moment Nothill had taken over, Wen had watched from the sideline. As GM of the Roaring Dragon Limited he had installed an executive suite on the top floor of the administration building adjacent to the Hotel and used it as the office for their employees. The Roaring Dragon Hotel accounts were contracted to cover the costs for these facilities and by now more than 30 personnel had used their guanxi connections to gain transfers from the Roaring Dragon Hotel to the Roaring Dragon Limited. Fortune commented how they ‘had a staff of thirty when they really only needed six’. With Nothill’s rumoured departure, some Chinese managers began to conduct their private business again. As if to admit the inevitable, Nothill’s expatriate managers began taking extended lunches. Communication between the Roaring Dragon employees and Nothill’s managers decreased to become minimal. The futures of the Nothill expatriate managers had been decided. The accountant was now only present for just one week out of three as he serviced Nothill’s other hotels in China. The Nothill Front Office Manager was leaving to take a new position in Europe and the assistant F&B Manager had been appointed to a position for Nothill Dalian. Thomason had plans to marry a local Chinese girl and had accepted a position at the Nothill Singapore. Nothill’s management contract had ended. In mid-January 2000, Nothill’s Board of Directors in Europe received official notification from the local provincial government that they wanted to conclude the contract. It appeared on the surface that Nothill had only made a few mistakes, however these were critical. Apart from their misunderstanding of the importance of face and relationships, they had pursued their goal of transforming the Hotel’s culture

Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

- 29 -

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

and organisational capacity with unabated vigour. Some employees claimed that Nothill was never serious about making the Roaring Dragon Hotel their own or never wanted to use their brand name on the Hotel, however, many acknowledged the Hotel’s improved standards of facilities and service. Speculation emerged that Nothill had used the Roaring Dragon as a training ground to familiarize their managers with the Chinese organisational and cultural environment before setting them up in Nothill’s growing chain across China? Were they using the Roaring Dragon to prepare their international managers to staff Nothill’s new hotels being constructed elsewhere in China? Whatever the reasons, Nothill’s management had lasted just six months.

Discussion Although Nothill had inherited many inefficiencies at the Roaring Dragon, could they have planned for and managed the transition more effectively and smoothly? The main negative effect of their downsizing policy had been the loss of almost all their young, talented, and educated employees. Nothill did re-employ a few young staff at their other hotels in Asia; however there were few other realistic options. When making decisions about downsizing, the related social and workplace upheavals that occur must be a common problem faced by managers reforming SOE in China. At the Roaring Dragon, this situation was made worse as a consequence of the illegal late recruitment drive undertaken by HR Department that eventually resulted in those fifteen new recruits being the first targets of retrenchment.

From a Chinese

perspective was this corruption or a culturally accepted norm? A large number of the redundancies were among young employees with only a few years of service. By retaining the old staff, Nothill reduced the youthful vibrancy within the Hotel. If the reduction in the number of older staff had commenced at the beginning of August, Nothill would have been compensated for some of the extra cost of these early redundancies through having to pay the younger employees

Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

- 30 -

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

significantly lower salaries. Overall, such a strategy would have helped maintain a more dynamic and youthful service environment. Job-sharing, which would have been a socially acceptable method of reducing the excessive size of the Roaring Dragon’s work force. As job-sharing does not exist in south-west China, the introduction of this concept would require a shift in traditional Chinese management practice. If job sharing could be accepted into the context of downsizing in this part of Chinese economy, it would help to maintain community harmony and reduce the number of unemployed. Two beneficial outcomes of jobsharing at the Roaring Dragon would have been Chinese employees preserving their face or mianzi, and more importantly being able to maintain their employment status. Economically, having their hours reduced would have eased the burden of the potential loss of income for each employee’s family and created opportunities and provide support whereby legally employees could conduct their own private business outside of working hours. For any management venture in China, a strong policy must be developed aimed at outlawing illegal activities that take place during working hours. This was one objective that Nothill did succeed in achieving. Nothill’s method of terminating employees showed little respect for face. Each Monday, in November at 4pm, employees who were told to proceed to the payout window. In the queue they would joke nervously and laugh among themselves as they waited for their pay envelope. One could feel the uncertainty. Employees whose jobs were secure would glimpse those made redundant as if another class of the unemployed had been created. Among those saying goodbye there were tears, the loss of dreams and more acutely, the loss of face. Any respect or status those employees had enjoyed within the Roaring Dragon organisational culture was suddenly gone. In its place was the realisation that uncertainty lay ahead. Could Nothill have planned and conducted this process in a more sensitive and private way? The fact that Nothill expatriate managers had only been there for such a short time before the redundancy process began meant they had not been able to develop strong working relationships with employees. For the Chinese managers this had been an advantage in that the Nothill’s managers bore the full brunt of responsibility for any redundancy decisions taken. When they left they could take the blame with them. If

Grainger, S., ‘Guanxi Neglect at the Roaring Dragon in South-west China: The Demise of an International Management Contract.'

- 31 -

Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA)

Less than a year-and-a-half after it opened, the Lucky Dragon is in bankruptcy.

Lucky Dragon developer Andrew Fonfa pushed the off-Strip, Chinese-themed resort into Chapter 11 protection Friday, less than a week before the property’s scheduled foreclosure auction this Thursday, court records show.

The resort employs 98 people and filed for bankruptcy “to preserve jobs, pay its creditors and provide certainty to the market,” according to court papers.

Management expects to run a “quick” but “thoughtful” auction and believes that a sale through bankruptcy court “is the best opportunity … to preserve and maximize” its value.

Lucky Dragon was the first resort built from the ground up in Las Vegas since the recession, and its bankruptcy is the latest of several problems that overall amount to a brutal start.

The boutique hotel has shed staff and struggled to draw big crowds, and its lead building contractor claimed that it was owed millions of dollars for unpaid work. It also temporarily closed its casino and restaurants last month and faced foreclosure after a $90 million loan went into default.

Fonfa, founder of ASF Realty and Investments, could not be reached for comment Monday.

There typically is no disruption in day-to-day operations when a Las Vegas casino goes bankrupt, though sometimes management may look to reduce hours or close some amenities, Union Gaming analyst John DeCree said.

DeCree said Lucky Dragon “caters to only one customer segment,” making it difficult to generate enough gambling revenue to cover its costs. As he sees it, a successful buyer “could try to broaden” its target market.

Working ‘diligently’

Lucky Dragon’s bankruptcy lawyer, Samuel Schwartz, said in an email to the Las Vegas Review-Journal that the resort “is working actively with its investment bankers and attorneys to refinance or restructure its debt.”

He said Lucky Dragon and lender Snow Covered Capital, an obscure company linked to San Francisco real estate investor Enrique Landa of Associate Capital, are striving “diligently to achieve a solution to best protect” the assets and investors.

Snow issued the $90 million loan, Clark County records show. According to bankruptcy court filings, Snow doled out “an initial” $30 million construction loan and a $15 million revolving loan.

Schwartz said that Snow recently agreed to a two-week extension of the foreclosure sale to let negotiations continue.

“Presently, we do not anticipate the bankruptcy filing will affect operations, as the hotel is still open and operating,” Schwartz said.

Landa did not immediately return a call Monday seeking comment.

Bob Olson, Snow’s lawyer in the case, said he does not “have authority to comment.”

According to bankruptcy papers, Lucky Dragon was appraised at $143 million last fall, and about 179 people invested $500,000 each, or $89.5 million total, in the project through the federal EB-5 visa program.

Foreigners can obtain U.S. residency through the EB-5 program if they put at least a half-million dollars into a business venture and the funding creates at least 10 full-time jobs.

Early stumbles

Lucky Dragon, at 300 W. Sahara Ave., just west of Las Vegas Boulevard, consists of a nine-story hotel and a 27,500-square-foot casino in separate buildings. It debuted in November 2016. The 2.5-acre resort was designed to cater primarily to Asian-American and Asian immigrant customers.

Just a few months after opening, the resort closed a restaurant and axed about a hundred workers to save costs, the Review-Journal reported.

Chinese gamblers playing at other casinos indicated last year to the RJ that the problem was not Lucky Dragon’s food and entertainment offerings but its comparatively stingy gaming and comp policy.

The hotel initially was scheduled for a Feb. 6 foreclosure auction, but that morning, the auctioneer announced that it had been postponed to Feb. 22.

Derek Stevens, owner of the D Las Vegas and the Golden Gate, was in the crowd on Feb. 6. He told the RJ that the Lucky Dragon is “very nice” but sits “in a pretty tough location” with little pedestrian traffic.

The Chapter 11 case was filed in U.S. Bankruptcy Court in Las Vegas by Lucky Dragon Hotel &Casino LLC, the resort’s operating entity. Its real estate is owned through Lucky Dragon LP.

Contact Eli Segall at esegall@reviewjournal.com or 702-383-0342. Follow @eli_segall on Twitter.

0 thoughts on “The Red Dragon Hotel Case Study”

    -->

Leave a Comment

Your email address will not be published. Required fields are marked *