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NFC in Mongolia

Non-ferrous Industrys Foreign Engineering and Construction Company Ltd. or shortly known as NFC is a Chinese company originally involved in construction and preparation which extended to all aspects of the non-ferrous metals mining and production process. It had operations in Zambia, Iran and Kazakhstan before entering into Mongolia. Most of the prior projects were turn-key operations. Mongolia was the first country in which it had an international joint venture. The joint venture (JV) agreement was signed in 1998. This case presents the challenges a Chinese state-owned company is facing when operating in Mongolia.

A landlocked country within central Asia, Mongolia, is a country rich in natural resources. It has ore deposits of copper, gold, uranium, coal, oil and more than 80 other valuable minerals. This abundance in resources had attracted many foreign investors looking to harvest Mongolias natural resources. Investment projects mainly included mining, light industry, livestock-related industries, construction and the commercial sector. Mongolias biggest and most important trade partners are Russia and China. Throughout these trading and investing activities a Chinese State-owned company came to Mongolia named NFC.

NFC is the large industrial organization China Non-Ferrous Metal Mining (Group) Co. Ltd. NFC originally involved in construction and site preparation but gradually its scope of business grew to include all aspects of the non-ferrous metals mining and production process. When NFCs International projects go beyond site construction and into mining operations management, then it normally enter into a JV with local companies or even the host countrys government. In Mongolia NFC got the mining project and formed a Joint Venture (JV).

The JV was formed in 1998 between NFC and Metal Impex Ltd naming Tsairt Mining Ltd. The JV was responsible for the development, construction and operation of the new Tomortiin Ovoo zinc Mine project. A 15 year stability agreement between NFC and the Mongolian government was signed in 1998. In the agreement Tsairt secured favorable taxation providing no corporate taxes for the first five years of operation, followed by 50 per cent of the normal corporate tax rate for the next five years. The JV made a loan from The Export-Import Bank of China in the condition of NFC to hold a 51 percent stake in the JV and Mongolia Metal Impex the remaining 49 percent. Since Mongolia lacked basic materials to build mines the JV had to import all the materials from Chinese border town Erlian into Mongolia. To ensure the materials comes safely into site from 500 kilometers away Erlian,
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NFC in Mongolia
they had to use satellite telephones which were too much costly at that time. Tsairt Mining Ltd. had both Chinese expatriates and Mongolian employee.

There were almost 100 Chinese nationals working at the mine in Mongolia, with only eight of them being assigned by headquarters. The remaining had been hired through other channels such as subcontractors. NFC assigned Chinese expatriates to Tsairt based on three criteria- i) Loyalty to NFC is top priority, ii) Experience in working abroad, iii) The ability to operate independently. In NFC performance evaluation differed at each level of seniority but was the same across departments. Evaluation was top-down, with managers evaluated by the headquarters and project staff members in turn evaluated by the project manager. NFC employees considered a position abroad could lead to faster career advancement. Much of the experience gained in one position could be transferred to a posting in another region or country. Though, expectations of domestic positions upon returning from foreign projects were often adjusted downward.

The JV started to recruit and train Mongolian workers in 2005. As of 2006, there were 200 local workers at the NFC Zinc Mine. After failing to imply Chinese HR practices in Mongolia the general manager Zhang understood that Mongolian workers culture is predominately nomadic. They wanted identical salaries if the jobs were the same. To get thing straight with Mongolian employees Zhang decided to alter some policies to suit the local culture. All the Mongolian workers were required to join a three month paid training. Salary payment schedule was changed to weekly from monthly. The Mongolian workers were very energetic and had a culture that was very physical in nature. The company built an appropriate working environment for them with many facilities.

Life in mining site was rough and scarcity of water made it worse. Vegetables were in such high demand that the supply was often too low. Daily life was also a bit lonely for the average Chinese worker. Their lives were simple; they slept, ate and played whenever they were bored. Calls from their family were one of the few things that raised their spirits.

The real crisis started in 2007. Previously in 2006, a labor union was formed and 75 percent of the local employees joined the union. The union immediately entered into negotiations with the management and at the beginning of 2007 a salary increase of 10 percent was awarded to the workers at the mine. Then once again the manager had to face immediate
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NFC in Mongolia
pressure to address salary levels. Moreover a new problem arose with the local transportation agency. NFC had a contract with a trucking company based in Ulan Bator to handle the transportation of the Zinc. A portion of the zinc transportation was sub-contracted at the same rate to locally based truckers, providing much-needed employment in the area. After a period of normal transport operations, the local trucking contractors withdrew and demanded an immediate 30 percent increase in payments. The press exaggerated and misreported small incidents at the mine & also fabricated stories with no factual basis. The local trucking contractors used this in their negotiations. Threats were made to put barriers to Tsairts effort of contracting other transportation company and publication of additional negative stories if NFC didnt meet their price. If NFC had to use local trucking company it would drive up their transportation costs as they use smaller vehicles.

Also regulatory changes in the mining law amended by the national assembly revealed that Tsairts favorable five-year exempt and five-year 50 percent income tax terms in the original stability agreement would be evoked. That meant that not only would Tsairt need to pay full income tax in 2007, but also it had to pay the tax exempt amount for 2005 and 2006 which could potentially mean tens of millions of dollars in added expenses to the company.

Zhang Shili, General Manager of Tsairt Mining Co. Ltd. was appointed by NFC. The company saw in him the skills need to go abroad and handle the unforeseeable, to find local solutions and to keep the JV on track. After his departure in Mongolia he made many important decisions regarding HR related issues. Now the problem is much more complicated. He have to deal with compensation issues, transportation contracting and tax payment- all are related with companies increase in expense.

To cope with the situation the general manager Zhang Shili might consider these issues. The labor union consists of 75 percent of local employees and it is important that you keep your employee satisfied. On the other hand a profitable company like this should not handle labor unions by raising salary like this. An effective negotiation is needed where long term commitment from the labor union must be achieved to deal with compensation issues. The law amendment is sudden and unexpected. The JV might not be able to do anything about that. It can reduce its costs in other ways or recheck its expenditure sources. If contracting with the local trucking agency is inevitable then the JV should add the condition of using adequate vehicle to support transportation of Zinc.
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