Tucker Graphics Inc. (TGI) and Dai Nippon Technology (DNT)*

Tucker Graphics Incorporated (TGI) specialises in pre-press color separation and graphics work for advertisements to be placed in glossy magazines. TGI's offices and single plant are located in Chicago, Illinois in the U.S. It has consistently maintained a market share of approximately 28% against four competitors in the Chicago market, its principal niche, producing an annual gross income during the past nine years of $20+ million.

Dai Nippon Technology (DNT) manufactures high-technology scanning and printing equipment, with several factories located throughout central Japan. It is a leading manufacturer of this equipment, with gross annual income regularly topping $150 million, and has sold its goods exclusively to Japanese companies.

DNT recently developed a new digital printing technology, well ahead of its competitors' capabilities, that could be used efficiently for small print runs of 2,500 to 5,000 high quality copies for a given document. It featured this technology at a trade show in Los Angeles in November 1999, and caught the eye of Bruce Davidson, TGI's CEO. Davidson was looking for new market opportunities, and this technology seemed to promise the chance to enter the financial services market for companies targeting small groups or potential clients, requiring small print runs of specialised color documents. DNT was likewise interested in breaking into the North American market with its technology.

A technical team from TGI traveled to Osaka for a demonstration in December 1999. They were greatly impressed with the equipment, but were concerned that small print runs (of 1000 or fewer copies) could not be handled efficiently, and so would become uneconomical, without a digital processor running substantially faster than in DNT's current model. Assured by executives at DNT that this concern was already being addressed by their engineers and would be remedied within six months, the TGI team contracted immediately for one digital printer at a cost of $1.5 million, to be delivered within six months. One-third of the purchase price was paid at signing of the deal, one-third would be due on installation of the equipment in Chicago, and the final third would be due six months after installation. TGI also agreed to purchase all the printer's consumables from DNT for a period of five years (anticipated to be in the range of three to five times the cost of the printer itself).

The purchase price and all costs were specified in U.S. dollars, with no formal provision for exchange rate fluctuations. The contract also failed to specify performance criteria beyond the clause that the printer would be expected to perform "in accordance with the specifications jointly agreed by the parties within one month from the date of the contract, or as from time to time revised by the parties."

TGI heavily promoted this new technology to prospective clients in the Chicago area, and was able to identify specific needs they might have. It became clear that the thinner type of paper preferred by Japanese users for which the printer was made was inappropriate for the U.S. market, where heavier and glossier paper was required, and a larger number of paper sizes was requested than the printer was originally set to handle. Thus, TGI contacted DNT in February 2000 with the need to modify the printer accordingly. Confirmation was requested concerning these changes, which was duly received in early March. TGI began lining up customer orders for production runs beginning in July.

Because of engineering delays in upgrading the printer's processor, the printer was only finally delivered and installed in November 2000. TGI then discovered that while a faster processor had indeed been prepared for the printer, the inefficiencies attending small print runs remained. Too, while a larger variety of paper sizes could now be accommodated, the ink on heavier papers tended to smear, leading to complaints by TGI's customers. Many were also requesting higher resolution graphics: the printer currently produced only at 600dpi, a resolution they could get off desktop computer systems at much lower costs. By January 2001, TGI was experiencing a range of technical problems that led to significant off-line time. It was thus losing money and customers from its inability to process orders, its need to reduce prices to other customers as compensation for smears or poor quality resolution, and technicians' time attending and adjusting and tinkering with the new machine.

DNT sent out several teams of its engineers to work with the printer, both during initial delivery and installation in November, and again in December and January. During their last visit, the DNT team suggested that many of the problems could be traced to incorrect maintenance and human errors on the part of TGI's technicians. Davidson was enraged at this claim, saying that his people had followed the printer's manual 'to the letter'. He said TGI was not prepared to make any further payments to DNT for its printer until the machine was working 'as per agreed specifications' and was producing graphics at resolutions equivalent to 1200dpi. (DNT's engineers said this alteration could be made at a cost of $450,000; Davidson demanded that they make the alteration free of charge as compensation for TGI's difficulties.) For its part, DNT demanded through a Chicago-based law firm that TGI cease making unreasonable demands and to pay the second installment -- now past due -- as contractually required. Concerned that legal fees would only cut more deeply into TGI's bottom line, Davidson arranges to send a team back to Osaka to meet face-to-face with DNT's people to attempt a settlement.

You are members of the negotiating teams for TGI and DNT. Can you work out an agreement that settles these matters for the parties?