Joint ventures: Decisions, Dos and Don’ts

Rotorua Export Club28 Feb 2008

Mark Bayly

9A Sunbrae GrovePO Box 10361Mt Maunganui

+64 7 575 2575 [p/f]+ 64 21 385154 [m]mark@360strategy.com [e]

Contents

• Definition of JV. • Motivations for forming IJV• Success of IJV• The Mode of Entry (IJV) decision• Case studies

– SMART car– NZAS– Sandy Creek– Cebec

• Check lists– Decisions– Dos – Don’ts

• Discussion

SAN DY CR E EK

Definition

An entity formed between two or more parties to undertake economic activity together.

JV as a mode of entry

Exporting

Wholly owned subsidiary

Joint Ventures

Outsourcing

Franchising / Licensing

Strategic Alliance

Motivation, Success & Failure

Motivations

• Financial– Increased market size– Supply efficiencies– Access to investment funding– Overcome transport/production costs– Access to factor inputs

• Overcome cultural distance– Operations (production side)– Credibility with market

• Gain access to new competencies– Forward or backward integration (which may involve exports)– Access to technology / spillovers

• Political– Overcome barriers to trade (China and Russia)– Avoid tariffs

Success & reasons for failure of IJV

30-60% IJV fail• Cultural differences• Breakdown in trust• Issue with sharing control• Time differences (and getting things done)• Change in the economic/competitive landscape1

• Difference in expectations between the parties• Disruptive to [home-base] business2

IJV v other entry modes(Hollensen 2006)

Case studies

Case study

JV between Swatch watches + Mercedes Benz

Engineering and style (SMART)

Two strong companies with huge resources

BUT

Battles of management (design v engineer cultures)

Loss of €4 billion between 2003 and 2006

Swatch pulled out

Key points:

Governance

Get the culture right (national, industry, firm)

Case study

NZAS a JV between 2 (originally 3) major international organisations

Operating in a third country

Unequal shareholding

Key points:

Don’t have to have 50:50 shareholding

Experience in international ventures

Workable combination of resources (money, expertise)

Strong Governance and agreed objectives are the KSF

Case studyJV between retirement village property developer and Te Puke based kiwifruit growersBased on a 35 year friendshipJoint interests - Land-banking (long term) - Horticulture (short and medium term)Business practice issues (now resolved)

Key points:

Strong in trust (key success factor)Workable combination of resources (funding / expertise)Changes required to home-base business (systems, structure, staffing)[Ideally] still need to formalise the longer-term strategy

SAN DY CR E EK

Checklists

Decisions │Dos │Don’ts

Decisions

• Is the firm ready for international expansion• Is a JV the best option • What sort of JV is being considered (acquisition v greenfield)• What do [I] want out of the JV: What does my [JV partner] want – Are we

both happy?– Partner selection– Competencies, etc

(long term sustainability)• Reality check: will I be able to work with this partner (culture: national,

industry, organisational) • What do I need to contribute (and am I able to contribute it)

– Financial commitment– Time

• How is the IJV structured– Governance and control– Changes in competitive landscape/demand– Dispute resolution / termination– Clarity of vision (remember/articulate the reasons for the JV)

• Do I have to run my [home base] business differently?

Dos• Business plan for the JV

– Strategic purpose– SWOT– Key success factors

• Comprehensive due diligence– Partner(s) selection, and/or– Target (if acquisition)

• Understand the cultural context and how the parties are to work together

• Encourage strong dialogue (inc. financial /operational reporting) • Put in place mechanisms for resolving disputes

(termination/mediation/arbitration)• Termination options (buy-outs, mediation/arbitration)• Work towards building and maintaining trust/achieving financials &

other objectives• Appoint some local professional advice (accountant / lawyer)• Work on relationships

Don’ts

• Don’t take IJV lightly– Explore other options (exporting. Wholly owned

subsidiary, licensing)• Don’t gloss over planning stages

– Understand the strategy behind [your] IJV– Understand each parties contributions (and make

sure you are happy with the balance) and control– Put in place strong governance and dispute resolution

• Don’t assume your product / system in NZ will work [without any changes in other countries]

• Don’t be put off by high failure rates [of others] … done properly, IJV can be hugely rewarding.

Discussion