Dell’s Dilemma in Brazil. Negotiating at the State Level. A Negotiation Case Study Analysis

1 EXTERNAL CONTEXT

Dell Computer Corporation (Dell) turned to be the second largest PC maker worldwide in 1999 and drove an expansion strategy, especially towards emerging markets in Latin America. One major goal of Dell was getting a first foot in the door by setting up a manufacturing plant in one of the Mercosul countries - the South American customs union - for export tariff reduction reasons. Keith Maxwell, Dell’s Senior Vice President for Worldwide Operations, was planning a heavy foreign direct investment (FDI) to build a site in Brazil as it was the largest and fastest growing market in the Mercosul union for computer industry in 1998. Negotiations were successful with the State Government of Rio Grande do Sul (RS), mainly due to enormous ICMS tax¹ reductions and generous bank loans offered by the State Government. It was common practice among Brazilian State Governments to attract FDI in the particular State by offering profuse financial incentives. Overbidding other states with even higher incentives is also called Guerra Fiscal - taxation war among Brazilian states.

Having the deal signed, Maxwell found himself in the beginning of March in a complex renewed political environment. The socialist Olívio Dutra from the Worker’s Party was elected the new governor of Rio Grande do Sul (RS) in the beginning of 1999. Dutra was strictly against the common practice of offering extensive ICMS reductions and underperforming bank loans to transnational corporations (TNCs) seeking to invest in sites in Brazil.

Dutra demonstrated standing his position from the campaign by fighting against the ongoing Guerra Fiscal and fighting the “exploitation” of Brazilian states by TNCs. He nullified not only the contract with Dell but also with Ford Company. Like Dell, Ford was planning a FDI in the state of RS. Dutra’s unsuccessful attempt of renegotiating with Ford lead to the company’s investment in another Brazilian state. Consequently, Dutra was facing pressure from the society, the press and the political opposition which set the stage for renegotiations with Dell about FDI in the state of RS.

2 RESEARCH QUESTION

This paper aims to examine the setting for cross-cultural renegotiations between Dell and the RS State Government and to propose how Dell should prepare for and move forward with the new counterpart to improve the bargaining power while facing fundamental changes in the political and ideological negotiation environment.

3 NEGOTIATION ANALYSIS

3.1 PARTIES, INTERESTS AND RELATIONSHIPS

The renegotiation about the construction of Dell’s new manufacturing plant in Brazil is mainly characterized by ideological than cultural differences after a political change on state level and a power balance between Dell and RS State Government. What must be taken into account in the following interests analysis is that Dutra holds the ultimate power in the negotiation for his party while Maxwell reports to Dell’s CEO Michael Dell.

Besides building a site for inland production it is Dell’s further primary goal to build a long-lasting relationship with Brazilian Government on national and respective state level. Thus, the overall substantive interests of domestic production in a Mercosul country and the relationship interests with Brazil can be described as instrumental towards the overall mission of Maxwell (Lax and Sebenius, 1986). At the same time, the RS State Government pursuits more diverse interests. While Dutra decides for his own goals in addition to those of the RS State Government, Maxwell acts on behalf of Dell. Not getting the deal will most likely not cost Maxwell his job, whereas a second aborted deal might decrease Dutra’s personal chance for reelection after four years. Thus, Dutra as an individual has intrinsic interests in principle for political survival to stay in power and to appear honorable holding up his reputation by showing firmness against extensive tax exemptions (Brett, 2007; Saorin- Iborra, 2006). As a Governor, Dutra has the following substantive, instrumental interests to achieve the parties’ socialistic interests in principle of contributing to a more egalitarian society: adding jobs to the labor market of the region, strengthen the local economy by local production and improve the commercial balance by exporting to other Brazilian states and Mercosul countries (Brett, 2007; Saorin-Iborra, 2006).

José Cesar Martins, the president of RS’ fully private foreign investment promotion agency Pólo-RS (Pólo), played a key instrumental role as intermediary during first successful negotiations. The agency was targeting Dell as potential investor for a plant in RS, understanding Dell’s specific needs and communicating efficiently. A further goal of Dell is therefore to retain a good relationship with Pólo and also with pro-business Brazilian state agency SEDAI to create an alliance that is pro FDI. These agencies are even more relevant in the situation at hand since SEDAI’s president Proença was a former executive for IBM in Brazil and speaks the “same business language” as Maxwell.

Similar to Pólo during first negotiations, Dell’s new Corporate Affairs Director in Brazil F. Loureiro might play a key role on Dell’s side in forthcoming negotiations as he is local, knows Brazilian business and its structures, bureaucracy and high-context communication styles. Additionally, speaking Portuguese during business negotiations in Brazil helps building bridges (Katz, 2006).

Besides the mentioned key players further parties are observing actors like political opposition parties, the Brazilian society, the media, labor unions or other TNCs. These play a passive role and can somehow indirectly influence the negotiation. For instance, since attention in the media is high, the political opposition is querying Dutra’s work and Brazilian workers are complaining about the aborted Ford deal, pressure is put on Dutra to gain results. Even other TNCs might be interested in the outcome of the Dell renegotiations as these are path-breaking for further FDI.

3.2 NATURE AND CONTENT OF NEGOTIATIONS

The nature of negotiation in prior negotiations can be described as integrative because of the created win-win situation of the first closed deal. Dell got his favorite location for the new plant and high financial incentives. Britto (the former governor of Rio Grande do Sul until 1998) was successful in his aggressive acquisition strategy of FDI in his state and got the guarantee for a high number of local workers and a specific amount of Dell’s R&D expenditures in Brazil.

Although Dutra had claimed for stopping the enormous concessions made to TNCs, he showed interest in renegotiations which is a good starting point for Dell. By analyzing the bargaining mix (see appendix A) it becomes apparent that there already exists a large amount of issues that are to be renegotiated. Here, the bargaining mix analysis is derived from Brett (2007) and adjusted to fit the case at hand. An even larger bargaining mix might facilitate trade-off decisions on both sides and the joint overall result might be better the more issues are being taken into consideration (Lewicki et al., 2011; Naquin, 2002). Hence, from Dell’s and RS State Government’s point of view, it still makes sense to create more value for the socialist ideology of the new State Government to attain another win-win situation. Regardless who opens the negotiations, anchoring in the beginning of Dell’s executives might open space for further creative solutions by expanding the pie (Bazerman et al., 1985; Galinsky and Mussweiler, 2001). However, a too high opening bid by Dell might backfire. If RS State Government gets offended the Brazilians will rather hold a persistent position since tit-for- tat acting is common in Brazil’s honor culture (Katz, 2006; Brett, 2007).

Besides different priorities of the issues differences in time preference exist as well. Dell is mainly interested in the gains of a long-term strategy, hence at least seven years, whereas Dutra’s legislative period ends after four years in case of not being reelected (Lax and Sebenius, 2002). In addition to this, Brazilian society scores high on uncertainty avoidance and thus, desires predictable and sustainable economic development. Therefore, Dell needs to demonstrate commitment towards both, short-term wins for the State Government as well as long-term gains for RS and Brazil.

3.3 POWER ANALYSIS

Dell’s position of power is mainly given by its strong best alternative to negotiated agreements (BATNAs) and its likewise strong relationship-based and environmental power (Fisher, 1983; Lewicki et al. 2006). Besides good relationships to Pólo and SEDAI, connections to the State Government of Minas Gerais (Minas) and its state agency INDI enable further negotiations based on the already provided beneficial offer for a FDI in this state. Although RS was considered to be the best option for the investment, investing in Minas is still a reasonable backup plan because it also scored high after RS in primary decision criteria like financial incentives, well-educated population and industrialization level after RS. In addition to this, since construction of the site in RS has not started yet, there are no sunk costs for Dell to take into account. Dell might even improve the BATNA by considering other Mercosul countries for negotiations. In addition to this, pressure is put on the RS State Government since the public and the media is somehow involved to ‘observe, critique, and evaluate the negotiations’ (Lewicki et al., 2011, p. 199). After the recent aborted deal with Ford the strong media presence for the upcoming negotiations with Dell heavily pressurized RS Government which results in a better environmental position of power for Dell. Finally, because Dell’s site selection team assessed RS to be the best state in every decision criteria except free land2, it is not easy for Dell to leave the negotiation table. This relativizes Dell’s power compared to RS State Government.

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¹Impostos sobre a Circulação de Mercadorias e Serviços (ICMS) are taxes collected by the State Government of usually 12% on company’s sales.