The Design and Management of Interna-tional

Joint Ventures (JV)

Author: Paul W. Beamish

About the Author

• Paul Beamish is a Professor of International Busi-ness at Ivey.

• Author or co-author of over 50 books, and 100 ref-ereed articles.

EXPERIENCE • Full Professor, since 1996; Tenured, 1990.• Associate Professor• Proprietor : Nomad Trading Company

Manager : Comptroller’s Division The Procter and Gamble Com-

pany of Canada

EXPERTISE• Joint Ventures and Alliances• Business Strategy,• Emerging Markets: China/Japan/Asia• Exporting, International Management

Table of Content

• Introduction

• Joint Venture Definition

• Equity Joint Venture

• Why Companies create International Joint Ventures?

• Requirements for International Joint Ventures

• Joint Ventures Checklist

• Summary

• Discussion

Introduction

• Competitive Advantage • Introduce products or services to new Markets• Scarce Capital• Organizations Collaborating

What is a JV?

• A formal agreement sign by two or more organizations with the objective of do certain business together and share between all the parties the profits and the losses of the agreement.

• International• Domestic

Types

JV Specific Forms

Joint VenturesForms %

Minority Less than 50%

50/50 JV 50%

Majority More than 50%

Can you Remember ?

Joint Ventures

Forms

Form Denomina-

tion %

Cameron Auto Parts

TCL MultimediaAnother JV of your knowledge?    

Minority 40/60

Majority 67/33

50/50 % 50/50

Effect of Foreign Equity Holding on Subsidiary Mortality Risk.

Types of Strategic Al-liances

Lessons Learned from Joint Ventures

• 50% of Companies with Joint Ventures were dissatisfied with their venture performance. • Reputation of Being difficult to manage.• Failure exist and are publicized

Examples:-As an example what lessons do we learned from TCL JV:

- Different Cultures. - Different Strategies Orientation. - Different approaches

Association of Strategic Al-liance Professionals (ASAP)

• Established in 1998, ASAP is the only professional member-ship association dedicated to alliance formation

Motivations for International Joint Ventures Formation

Exis

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kets

New

Mark

ets

To Take Existing Products to Foreign Markets

To Strengthen the Existing Business

Existing Products

To Take Existing Products to Foreign Markets

To Diversify into a New Business

To Bring Foreign Products to Local Markets

New Products

TCL

TCL

Cameron Auto Parts

Codetel-Verizon

Strengthening the Existing Business

This type of Joint Venture allow firms to acquire par-ticular technology and Know How, reducing financial risks of major projects.

Exis

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To Take Existing Products to Foreign Markets

To Strengthen the Existing Business

Existing Products

To Take Existing Products to Foreign Markets

To Diversify into a New

Business

To Bring Foreign Products to Local Markets

New Products

New

Mark

ets

Achieving Economies of Scales

• In Raw Materials

• Component Supply

• Research and Development

• Marketing and Distribution

• Achieve Divisional Merge

Raw Materials

• Obtain Raw Materials • Jointly Manufacture Components (e.g. Auto Makers)

Research and Develop-ment

• Save Time and Money• Collaborating and Combining Efforts of HR• Incredible Outcomes

• Simply Coordinate Efforts and Share Cost• Set up a jointly owned company.

Two possible Forms to ac-complish R&D JV:

Marketing and Distribu-tion

• Not a Common Form of JV.

• Anti-Trust feelings emerge.

• Achieving Economies in Marketing and Distribution

• Cover Market at Lower Cost

• Loss Direct Control of Sales Force

• Slower Decision Making Process

Divisional Mergers

• Combining “Too Small” companies

• Practice when both organizations are performing poorly

• Allow firms graceful exit from a business in which is not longer

interesting

Acquiring Technology in the Core Business

• Through License Agreements

• Through developing the technology themselves

• Giving access to Patent Rights

• Having employees of both organizations working shoulder to shoul-

der

Reducing Financial Risks

• Split the cost for searching new field

• Reduce Complexity of find resources (oil companies)

• One partner take the lead role.

• Manage day-to-day basis.

• The rewards of the venture are easy to divide between

partners.

Taking Products to Foreign Markets

Firms with Domestic developed products have the opportunity to success in foreign markets.

Options:

• Produce the product at home or export it. • License Technology• Establish Subsidiaries in Foreign Markets• From Joint Ventures

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kets

To Strengthen the Existing Business

Existing Products

To Take Existing Products to Foreign Markets

To Diversify into a New

Business

To Bring Foreign Products to Local Markets

New Products

New

Mark

ets

Following Customers to Foreign Markets

• Reduce Risk• Follow firms that are already customers at home• Learn from knowledge transfer • Tap into growing markets.

Investing in “Markets of the Future”

• Taking early position in Emerging Markets

• Possible source of Low-Cost

• “Know the Ropes” JV

• Government regulations

• Currency Exchange

• Unfamiliarity with the local culture

Bringing Foreign Products to Local Markets

Exis

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kets

To Strengthen the Existing Business

Existing Products

To Take Existing Products to Foreign Markets

To Diversify into a New

Business

To Bring Foreign Products to Local Markets

New Products

This is the complementary effect that makes JV possible, for every firm that uses an international JV to take its product to foreign market, a local company sees the JV as an attractive way to bring a foreign product to its existing market.

Using JV for Diversifica-tion

Exis

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kets

To Strengthen the Existing Business

Existing Products

To Take Existing Products to Foreign Markets

To Diversify into a New

Business

To Bring Foreign Products to Local Markets

New Products

New

Mark

ets In the previous example we have illustrate, many JV where one par-

ent knows well the product and the other parent knows well the market, but when we talk of diversification JV we are referring to a new ground and move one or both parents into products and markets that are new to them.

Enter New Product, New Market with a New Partner = (.8 x .8 x.8 ) about 50% !

Requirements for International JV Success

“Permanent solutions to temporary Problems”

Measuring JV Performance: The Search for Congruity

Foreign Partner

1. Profitability – 20% ROS (within 12-24 months)

2. Require limited senior man-agement time

3. Maximize local sales4. Exploit peripheral or mature

technology

Local Partner

1. Profitability (within 9-12

months)

2. High paying salaried po-

sitions

3. Opportunity to export

4. Obtain newest technol-

ogy

JV

1. Partnership and Fit

Does the partner share your objectives for the venture?Does the partner have the necessary skills and resources? Will you get access to them?Will you be compatible?Can you arrange an "engagement period"?Is there a comfort versus competence trade-off?

Shape and Design

Define the Venture´s Scope of activity and its strategic freedom vis-a-vis its parents.Lay out each parent´s duties and payoffs to create a win-win situ-ation. Ensure that there are comparable contributions over time.Establish the managerial role of each partner.

Doing the Deal

How much paperwork is enough? Trust versus legal considerations?Agree on an endgame.

Making the Venture Work

Give the venture continuing top management attention Manage cultural differences Watch out for inequities Be Flexible

What others Cultural Differences?

•Small Firms vs. Large Firms

•Firms working with two partners from the same country (e.g. Rural Japan from Tokyo dun business)

•Cultural Differences between managers within in different functional areas.

The True Joint Venture versus the Pseudo Joint Venture

  The True Alliance The Pseudo Alliance

Planned level of parent input development and involvement Continuing One-time

Distribution of Risks/Rewards Roughly even Uneven

Parent attitude toward the JVA unique organization with unique needs One more subsidiary

The Formal JV Agreement Flexible guidelinesFrequently referenced

rulebook

Performance ObjectivesClearly Specified and

CongruentPartially overlapping/

ambiguous