By Olga Annushkina, SDA Professor of Strategic and Entrepreneurial Management.
The need to rapidly grow on new markets is leading many firms to search for local partners and to form cross-border equity joint ventures. Among other entry modes to the foreign markets based on an equity investment, the joint ventures, at the first sight, possess many advantages: possibility to share risk and investment with the foreign partner, access to the local knowledge, distribution, partners and authorities via foreign partners' networks. In some countries forming a joint venture is requested by the local legislation and represents the only way for a company to enter the market. For example, 6,5 mln out of 22,2 millions of passenger cars sold in 2013 in China were produced by the international joint ventures formed before 2005 between Chinese automotive producers and main global brands.
The apparent ease of forming a joint ventures is leading many managers and entrepreneurs to undervalue the significance of the preparation phase to the joint venture formation. The sources of tensions and conflicts for the joint venture partners can be really many. In fact, the joint ventures are considered to be one of the most unstable entry modes to the foreign markets, and the uncertainty about the joint venture’s competitive performance seems to be just one of the many factors potentially hindering its success.
The role of the local political system and regulation
In the first place, the state intervention can be the main obstacle to founding the joint venture or to launching it in the correct way. In the famous Danone-Wahaha deal the state authorities did not authorize the transfer of Wahaha brand to the joint venture as one of the parties’ equity contributions, creating the basis for the following conflicts, disputes and a joint venture dissolution.
Another issue can be the antitrust regulations, as in the major deal by BHP Billion and Rio Tinto which never took off. The political instability in Russia due to the crisis in Ukraine led some firms to abandon their future investment plans and to scrap the joint venture plans, as in case of German’s Fresenius and Russian JSFC Sistema.
Internal political tensions, in particular in case of large deals, are to be taken into serious considerations as the compliance with the local legislation and the political approval of the international joint venture is an the first factor for its foundation and survival. The importance of the political approval was experienced by Dow Chemical, an American corporation and one of the global leaders in the chemical industry, in its deal with the Petrochemical Industries Co, owned by the state of Kuwait. The parliamentary opposition to the deal became a major problem for Dow Chemical planning to use the cash proceedings for another investment ]. In 2013 an international arbitrage court awarded one of the largest settlements of USD 2,2 billion for a failed joint venture between Dow Chemical Co. and Petrochemical industries of Kuwait.
The restriction on the foreign ownership in wholesale and retail trade sector in India forced WalMart to seek a joint venture partner in India. An alliance formed in 2007 with Bharti Group, one of large Indian conglomerates, allowed the US retail giant to enter the cash-and-carry business in India, while waiting and lobbying for the legislation that would allow the foreign ownership of multibrand retail stores. After several years of the joint venture’s growth, the WalMart’s Indian subsidiary got into the attention of the Indian authorities as apparently 40% of cash-and-carry sales went to the retail subsidiary of Bharti. The US WalMart headquarters were also eager to make sure no rule imposed by the US Foreign Corrupt Practices Act was violated. The decision to abandon the joint venture was a costly one: WalMart’s estimated loss was of USD 151 million.
Lack of a shared vision and mismatching goals
Secondly, the international joint venture partners have to agree on their common vision and strategy for their joint business activities as the eventual disagreements on the fundamental principles of the joint venture’s business model may eventually lead to its termination.
Shared-VisionAn example is the joint venture between the Japanese online retailer Rakuten and Indonesian’s Media Nusantara Corp. (MNC) that lasted only two years. Rakuten was interested in growing on the Indonesian market by replicating the core principles of its business model, an online marketplace for merchants, to the joint venture’s Rakuten Belanja Online website. The company chose MNC as a partner being well aware of the importance of the advertising in all kinds of media during the launch phase. The reasons of the split have never been commented by either of companies but their subsequent moves on the market spoke for themselves. Rakuten Belanja Online continued in Indonesia with its B2B2C business model while MNC stipulated a joint venture agreement with South Korean TV home shopping company GS Home Shopping to create “MNC shop”, an online shop that became also one of the important TV home shopping businesses in the country leveraging on MNC’s strength in the media industry.
Another example is the strategic goals clash, one of the factors leading to the split between of Russian-British TNK-BP joint venture. British Petroleum (BP) entered Russia in 1997 via acquisition of a minority stake in Sidanco. In 2003 BP’s shares in Sidanco became one of BP’s contributions to the joint venture with a group of Russian businessmen represented by Alfa-Access-Renova group. TNK-BP’s performance was seen as positive but in 2008 the partners experienced their first serious disagreements. The differences about TNK-BP strategies were among a number of factors cited in the press as the reasons of the partners’ conflict. The Russian part of the joint venture was looking to expand its business on the international markets, attempts apparently blocked by BP. On the contrary, BP was more interested in the opportunities in Russia. In fact, in 2011 BP’s intended deal with the state-owned Rosneft to explore Arctic for oil was blocked by a court decision. The conflict worsened and in 2013 Rosneft completed the acquisition of the both parties’ shares via two separate agreements. The deal brought USD 16,6 mln in cash and 12.84% shares of Rosneft to BP.
Going beyond the handshake
Joint-ventures are apparently even more tricky than cross-border acquisitions. To mitigate the possible risks of future conflicts during the preparation phase the partners should understand their mutual long-term goals, develop a joint strategy and organization for the joint venture, carefully prepare the legal contract, attentively evaluate the non-monetary contributions to the joint venture (e.g., if a partner is transfering its technical know-how and marketing knowledge, while the other partner is contributing its access to the distribution networks, how should these contributions be evaluated?), discuss the decision-making process, agree on the non-competition clauses for the joint venture and for its participating partners.
The joint venture partners should also keep in mind that statistically in the mid-long term a large part of joint ventures is either changing owners or dissolved, so a joint agreement on the possibile exit strategies can be of a great help in future eventual tensions.
In addition, the stipulation of an international joint venture agreement also requires of a manager to have the ability to read between the lines about the partner’s expectations. The importance of cross-cultural aspects should not be unterestimated. While handshakes seal positive intentions, they do not protect from the intention-action gap.
Related Program: GLOBAL ADVANCED MANAGEMENT PROGRAM, GAMP®
Source: Ideas of Management on Strategy & Entrepreneurship - SDA Bocconi School of Management