International Joint Ventures Essay

The objective of this paper is to highlight some of the important issues that must be considered prior to forming an international joint venture. Why is this topic important? The following quote summarizes the main reason: â€Å"Cross-border M&As, JVs and alliances seem to share at least two characteristics with marriage trends of the post World War II â€Å"Baby Boomers† generation: They have grown explosively during the 1980s and through the 1990s but – less fortunately – they fail about half the time.†[1] With this in mind, it is very likely that sooner or later you will be involved in an international joint venture, either in the process of forming one, dissolving one or working for one. The more you know about international joint ventures, the better prepared you will be to understand and contribute to the solution for the challenges they present. Most companies begin their expansion to overseas markets by exporting their products or services. Exporting products has minimal risk involved, especially if the proper steps are followed. However, in some instances exporting is difficult or expensive and companies use other methods to penetrate international markets. Forming an international joint venture with a foreign firm in the target market is, in some cases, the only avenue to accomplish the goal. An international joint venture is usually a progression in the investment level that companies are willing to commit prior to fully investing in a foreign subsidiary. What is the main difference between opening a subsidiary and forming a joint venture? According to Andrew Inkpen, a joint venture occurs when â€Å"two or more legally distinct firms (the parents) pool a portion of their resources within a jointly owned legal organization†[2] â€Å"The distribution of equity among the parent companies can take different forms, ranging from 50/50 IJVs between two companies, to reduced minority or dominant majority stakes.†[3] In contrast, only one company owns a subsidiary. Even though companies perceive IJV as less risky than opening their own subsidiaries, forming inadequate joint ventures can be risky and expensive. If managers are not careful in their analysis and are not aware of the potential pitfalls of international joint ventures then they can face some serious trouble. So far we have learned that culture plays a major role in business culture. Hence, culture will ultimately have a major impact in the international joint venture. Piero Morosini, one of the leading researchers in international joint ventures, explains the role culture plays in international joint ventures as follows: â€Å"Empirical evidence suggests that technical issues are less likely to lead to conflicting situations compared to relationship problems during the implementation of international JVs and alliances. Throughout this phase, too much emphasis is usually placed on setting strategic objectives at the cost of ignoring personal interaction aspects involving people from different national cultures. This has been cited as the most critical factor leading to unresolved conflicts and outright failure of an international JV or alliance.†[4] Companies some times enter into joint ventures with objectives other than to gain rapid access into the market. Some companies want to learn from other companies or like to combine resources in order to make a stronger company. â€Å"The need to combine strategic resource contributions and foster functional co-operation and co-ordination between the partners to create mutual advantages is at the heart of both IJVs and global alliances.†[5] As you read this paper, you will learn that most of the failures in joint ventures occurs due to the misunderstanding in the goals and the definition of the goals. Finnie Williams states that â€Å"half of all partnerships don’t work. Those that are successful share three characteristics with successful marriages: †¢ The actual and perceived potential benefits must be large for both parties. †¢ The partners must share a common set of values †¢ The key people must be committed to success.†[6] It seems that the most important aspect when speaking of international joint ventures, is that partners must share a common set of values. This is very unlikely to happen. The main reasons cultures are different is because they have different sets of values. For instance, some companies define success in terms of return on investment, others use market share, yet others define it in terms of customer satisfaction. These differences are critical and must be discussed early in the planning stage in order to lay a solid foundation for the partnership. It is important to keep in mind that even companies from the same cultural and business background have different plans to achieve their goals. Therefore, whenever we mix companies with different cultural backgrounds, the complexity level increases. People from different cultures perceive business in different ways. The rest of this paper provides examples of international joint ventures in different countries and examines some of the general observations related to such ventures and countries. China â€Å"Foreign investment in 1995 was $US38 billion (China Statistical Press 1996). International Joint ventures (IJVs) between overseas companies and domestic state-owned enterprises (SOEs) have been the dominant mode of entry. However, many JV investments have been less than successful.†[7] China â€Å"is now the world’s most active joint venture market.† [8] These facts are not surprising as â€Å"China is home to 25 percent of the world’s population and many western firms view the country as a prime target market.†[9] However, as we will discuss, not everyone venturing in China has been successful. For instance, a group of French investors dissolved their joint venture in China after 12 years of investment. The agreement was primarily between Peugeot and Guangzhou Automotive Manufacturing (GAM). It took four years of negotiations between French and Chinese investors to form the joint venture Guangzhou Peugeot Automobile Corporation (GPAC) in 1985 . Following are some of the major problems that Peugeot mentioned as key elements to the failure of their venture in China: †¢ The labor force from the Chinese partner had inadequate skills, which resulted in more time and money spent in training. †¢ Lack of suppliers in the Guangzhou area that could provide quality parts. As a consequence many of the parts had to be imported which raised the cost of the vehicles as compared to the competition. †¢ Guangzhou officials would not allow the plant to purchase parts from suppliers from other regions in China. Competitors who were located in other Chinese regions had access to quality Chinese parts and were able to build vehicles at lower prices. There is another side to this story, analysts believe that: †¢ Peugeot chose the Guangzhou area because the central government had little influence over the local government and there would be more management freedom. However, this backfired on Peugeot as the distance from Beijing acted as a barrier to access suppliers from other regions. †¢ Peugeot did not act fast enough to form a joint venture with a supplier in the Guangzhou region. Their competitors had formed such partnerships with their suppliers. †¢ Peugeot repatriated most of its profits and made few changes to their vehicles. Their competitors instead, reinvested most of the profits in the venture and to improve the vehicles. [10] I think there are several lessons to be learned from this example. One is that it takes a long time to agree on the terms of the agreement. Second is that even though both partners had agreed on the goals, unexpected deficiencies (labor and parts) put the company at a disadvantage with its competitors. It is amazing that after four years of negotiations, nobody checked if the skill sets were compatible and if the local suppliers could provide quality parts. Third is that even when companies believe that they are making the correct strategic move they could be doing the opposite due to lack of knowledge of the local culture. In this case, Peugeot was under the impression that distance from Beijing would be positive and in fact it turned out negative. Finally, companies that want to use joint ventures as means to have a quick entry into the market can get hurt. In this case, Peugeot was not committed to re-investing capital in the joint venture, which at the end made them completely uncompetitive in the market. You might be wondering who was the competitor to Peugeot that was being so successful in China. That competitor was also a joint venture. This time it was between a German company, Volkswagen AG, and a Chinese partner in the Shanghai area. As mentioned before, Shanghai Volkswagen was quick to form partnerships with suppliers to increase the content of Chinese parts in their vehicles and reduce the number of imported parts. Another important aspect is the fact that Shanghai Volkswagen was reinvesting their profits in order to improve their vehicles. Such improvements plus their commitment to the Chinese economy, allowed Shanghai Volkswagen to earn a better reputation among customers.[11] Another major corporation that has been successful in forming joint ventures in China is United Parcel Service. â€Å"UPS has been aggressively expanding its operations there. On Jan. 21 1999, the company announced an agreement with Chinese airline Sinotrans to expand UPS-branded operations to 18 additional cities in China, bringing the total to 21. The two carriers signed a memorandum of understanding that includes new investments to develop dedicated operations and more joint training and management efforts. In 1994, UPS opened representative offices in Shanghai, Guangzhou and Beijing, and by 1996 established a joint venture with Sinotrans in Beijing. Efforts to establish joint ventures in Shanghai and Guangzhou were temporarily put on hold with a change in government leadership.†[12] These examples provide us with some useful information regarding joint ventures in China. However, there are some other facts that you must know: †¢ Laws governing international joint ventures in China are different than the laws for Chinese firms. †¢ Laws may also be different depending on whether the Chinese partner is a state business, village or township enterprise. †¢ China’s legal system consists of guidelines for businesses and individual judges have enough leeway to determine what is right and what is wrong. †¢ Provincial regions can prohibit the sale of goods not produced on its own region. (this was the case with Peugeot suppliers). †¢ The need for government support is greater when the output of the joint venture is sold within China †¢ The local partner is critical when the output must be sold to the government instead of the general public. [13] A survey of 125 randomly chosen Sino-Western joint ventures, each with a minimum of 50 employees, and each in business for over one year, were surveyed in Shanghai. They surveyed mangers from both parent companies in order to compare results and the results were as follows: †¢ The goal emphasis of the two groups was substantially different. †¢ Chinese managers focused on things that they had not yet mastered such as technology, management skills, and capital understanding. †¢ Western managers focused on their own things to be mastered such as understanding the local market, government policy and the political system. [14] Japan The situation in Japan is mixed. While some researchers point that there are some major problems in forming international joint ventures, large multinationals have formed very successful joint ventures and the announcements of more and more joint ventures being formed continues. On one hand is the view that international joint ventures between Japanese and North American firms in the automotive industry have encountered many problems. Most of the problems are related to cultural differences and management styles. â€Å"Although it is overly simplistic to describe Japanese management as long-term oriented and American management as short-term oriented, the Japanese partner firms in this study appeared to focus on customer satisfaction and product quality rather than profit based performance. Japanese firms seemed less constrained by issues of share price and impatient board of directors than their American counterparts.†[15] On the other hand is the trend of new joint ventures being formed or existing ones being expanded, â€Å"Goodyear Tire & Rubber Co. and Sumitomo Rubber Industries announced the formation of four joint venture operating companies. The units will be based in North America, Europe, and Japan. Two U.S.-based service joint ventures will also be formed, one for global purchasing and one for sharing tire technology.†[16] This agreement between Goodyear and Sumitomo reflects some experience in forming joint ventures as they have clearly defined the goals of the different joint ventures. This joint venture seems to be headed in the right direction, it will be interesting to follow up in a few years to see if they actually become successful. â€Å"Dainippon Ink and Chemicals (DIC) and Eastman Kodak say they will combine portions of their Japanese graphic arts businesses in April to make a Japanese unit for their existing JV, Kodak Polychrome Graphics (Norwalk, CT). The combination will increase the JVs sales from $1.5 billion last year to $2 billion in 1999, Kodak says.†[17] Kodak seems to be having success in their joint ventures with Japanese companies as they are expanding their current joint venture. Dupont and Teijin announced that they will form a 50-50 joint venture to manufacture polyester films. The joint venture is expected to generate sales of $1.4 billion and represent 25% of the market. â€Å"Both companies say the venture will allow for the free flow of technology and will combine DuPont’s strengths in the U.S., Europe, and China with Teijin’s strengths in Japan and Southeast Asia.† [18] Once again, it seems that companies that invest time and effort analyzing and understanding the challenges of joint ventures get on the right track from the start. Companies that just want to do business as usual (the case in the automotive industry) will have a hard time making the joint venture successful. SPAIN Spain has seen less activity in terms of joint ventures than Japan and China. It seems that Spain is not perceived as â€Å"risky† country and most companies might be willing to spring into fully owned subsidiaries in Spain. Also, the barrier to enter the market might not be as high as in the case of the Japanese market. However, in some industries, such as the financial services industry, there is a need for joint ventures to penetrate the market. Spanish people look for names of familiar companies to invest their money. According to a London fund manager interested in the Spanish market, â€Å"The easiest way to break into the market is through joint ventures with local banks but there are not many suitable partners. We have looked around a few banks but we haven’t been able to come up with a deal we like the look of.†[19] There is one company that has formed a joint venture with a Fibanc in Barcelona, Lazard Unit Trust Managers. Although, the majority of the investment firms have decided to just open their own branches in Spain. Fidelity’s managing director for central Europe believes that â€Å"Spain has a big population, around 40 million so in terms of sheer size it is very attractive. It’s one of the markets we have to be in. Fidelity opened its office in Madrid this year and has put a sales team in place. We are aiming at creating our own distribution channel rather than any other form of strategic alliance or joint venture†[20] It will be interesting to observe which of the two firms becomes more successful given the different approaches to penetrate the Spanish market. Another recent joint venture in Spain is Spanair. Formed between Scandinavian Airlines (49%) and Viajes Marsan (51%). Due to the recent deregulation of the European airline industry, the two companies were able to establish the airline as a joint venture. Spanair is flying direct from Madrid to Washington D.C. and it is increasing the number of intra-Europe flights. Spanair is now trying to form alliances with United Airlines to gain market recognition in the United States. Spanair has a different approach to marketing, they consider themselves an â€Å"airline with humor†, in fact, they gave away 266 round trip tickets to the first 266 people to arrive at the airport wearing some type of costume resembling some aspect of the Spanish culture.[21] Although, it seems that this airline has had a great start, it will be interesting to find out how they do in the future, as the Spanish culture seems to be playing a mayor role in the way the airline is run. I think that if Scandinavian Airlines is fully aware of the differences in management style between them and their Spanish partners, this joint venture should successful. Russia Prior to 1987, Russia had major restrictions in the formation of joint ventures. Only Eastern Block countries were allowed to form joint ventures with Russian partners. However, after 1987 the opportunity for joint ventures with Russian companies opened up and the result was a flood of joint ventures along with problems, risks, frustrations, opportunities and rewards.[22] The following quote summarizes the joint venture situation in Russia: â€Å"Although more than 10,000 international joint ventures have been registered in Russia since 1987, only about one-fifth of those have actually begun operations. Historically, many Russian-foreign joint ventures fail in the first year of operation, with an average survival rate of about 2.5 years.† [23] Richard Reece has identified some myths about Russians, which he believes are key elements in the failure track of international joint ventures in Russia. Following is a summary of these myths and his observations regarding the myths and suggestions to consider when forming a joint venture in Russia. 1. Russian workers are alcoholics and have an inferior work ethic. Alcoholic consumption might be higher, there is no certainty in this remark, however, Russian workers are used to longer vacations in the summer time and this can create the impression that Russians are lazy. His suggestion is to learn more about the Russian habits and styles prior to committing to a joint venture and have unrealistic expectations. 2. Russians are ignorant, incompetent managers. It is important to remember that Russians are learning about the market economy. For many years they have not been exposed to open markets, so they are less familiar with issues such as pricing, receivables, cost analysis, financing, cash flow, and marketing. It is important to remember that this is one of the major reasons why Russians are looking for partnerships with western companies. Russians are eager to learn more about the western style economics. The best way to find out the knowledge level is trough interviews with potential partners. 3. Russian managers lack business savvy. This myth has some truth in it, however, the fact that the Russian economy is unstable, has given managers the ability to react quickly to changes and adapt to the conditions of the new environment. In fact it is important to understand that not all western style solutions will work in Russia and Russian manager are more familiar with the details on how to get things done in Russia. Richard Reece makes particular emphasis in communication as a key ingredient to a successful joint venture in Russia. If potential partners do not learn about each other, how can they expect the venture to be successful. General Guidelines to Select a Partner. In general regardless of the countries involved, William Myers offers the following guidelines to select an adequate business partner: †¢ Is your prospective partner a known entity? †¢ Have you worked with the group before? †¢ Do the organization’s culture and values match yours? †¢ Does your prospective partner understand how associations work? †¢ Will the organization be flexible in crafting workable deals? †¢ Can your prospective partner clearly define success in the joint venture? †¢ Does your prospective partner have a reputation for honesty, and will the organization define working agreements in writing? [24] Answers to these questions will give you a general idea on whether to proceed with the venture, do more in depth analysis or simply not go through with the process. Conclusion This paper presented examples of successful and unsuccessful joint ventures. It also highlighted important information regarding key aspects of joint ventures in different countries. Joint ventures are still popular and international companies are creating more every day. Therefore, the knowledge from this paper should assist you to better understand the challenges associated with most joint ventures. A topic that was consistent throughout the literature on joint ventures is the importance of cultural differences, patience and the comparison of joint ventures to marriage. Therefore, if you have been married for a while, you might be better prepared for a joint venture than you think. Another interesting observation is that joint ventures seem to be preferred when there are market barriers, such as the case with Japan, or when the perceived risk level is relatively high, such as Russia and China. The fact that there was scarce information on joint ventures between companies of developed nations indicates that joint ventures are not the main avenue of expansion for most firms. This does not imply that they do not happen or that are not recommended, it simply states that they are far less popular. Companies are more willing to establish their own subsidiaries or branches since the risk level is lower. If you are involved in a joint venture, use the guidelines presented in this paper. The authors who recommend them have been studying international joint ventures for several years and have learned a lot from them. ———————– [1] Morosini, Piero.1998. Managing Cultural Differences, Pergamon Great Britain. [2] Inkpen, Andrew. 1995. The management of international joint ventures, Routledge London and New York. [3] Morosini, Piero.1998. Managing Cultural Differences, Pergamon Great Britain. [4] Morosini, Piero.1998. Managing Cultural Differences, Pergamon Great Britain. [5] Morosini, Piero.1998. Managing Cultural Differences, Pergamon Great Britain [6] Finnie, William C. 1998. Strategic partnering: Three case studies. Strategy and leadership, 26 (4): 18-22. [7] O Connor, Neal; & Chalos, Peter. 1999. The challenge for successful joint venture management in China: Lessons from a failed joint venture Multinational Business Review, 7 (1): 50-61. [8] Si, Steven & Bruton, Gary. 1999. Knowledge transfer in international joint ventures in transitional economies: The China experience. Academy of Management Executive, 13 (1): 83-90. [9] Si, Steven & Bruton, Gary. 1999. Knowledge transfer in international joint ventures in transitional economies: The China experience. Academy of Management Executive, 13 (1): 83-90. [10] Harwit, Eric. 1997. Guangzhou Peugeot: Portrait of a commercial divorce. China Business Review, 24(6): 10-11. [11] Harwit, Eric. 1997. Guangzhou Peugeot: Portrait of a commercial divorce. China Business Review, 24(6): 10-11 [12] Traffic World 1999 UPS’s big stake in China talks. Feb 8: 37. [13] Si, Steven & Bruton, Gary. 1999. Knowledge transfer in international joint ventures in transitional economies: The China experience. Academy of Management Executive, 13 (1): 83-90. [14] Si, Steven & Bruton, Gary. 1999. Knowledge transfer in international joint ventures in transitional economies: The China experience. Academy of Management Executive, 13 (1): 83-90. [15] Inkpen, Andrew. 1995. The management of international joint ventures, Routledge London and New York. [16] Fleet owner. 1999. Goodyear, Sumitomo deal. March: 16. [17] Moore, Samuel K. 1999. Kodak and DIC develop another JV. Chemical Week, 161 (8): 22. [18] Westerlvelt, Robert. 1999. Dupont and Teijin take a joint role in films. Chemical Week, 161 (6): 19. [19] Marshall, Julian. 1998 / 1999. Retail Pioneers will gain in Spain. 118: 56. [20] Marshall, Julian. 1998 / 1999. Retail Pioneers will gain in Spain. 118: 56. [21] Guttman, Robert J. 1998. Spanair: The sky’s the limit. Europe, 380:16-17. [22] Reece, Richard. 1998. Successful joint ventures in Russia. World Trade, 11 (8): 42-44. [23] Reece, Richard. 1998. Successful joint ventures in Russia. World Trade, 11 (8): 42-44. [24] Myers, William. 1998. Picking your partners wisely. Association Management, 50 (10): 31.