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Joint Ventures in Asia
Key insights on establishing and managing
successful JV’s in Asia, and avoiding
common pitfalls
8 years and more than 100 real life examples used
A Basis in Practice, Not Theory
Phase 1 – Focus on Asian markets Financial Services JV’sDuring 2004 – 2006, in depth field work was carried out to analyze the experience, success and failures of financial services JVs in Asian markets –and to derive a “Key Success Factors” blueprint for future JV’s that may be established
Field work involved 1-1 interviews with the CEOs and a range of senior executives of 10 JVs across the retail financial services sector, in each case the foreign party being a recognized multinational. The interviews and discussions were conducted in Beijing, Shanghai, Dalian, Tianjin, Guangzhou as well as Hong Kong.
Added to this, a range of other interviews with senior industry figures were also conducted. These included representatives of major corporate strategy and consulting actuarial business active in the Asian markets financial services market, and this was supported with extensive desk work was also carried out with annual reports, strategy presentations, analyst reports, press releases and industry publications searched and summarized for relevant content.
Phase 2 – Input From Due Diligence Projects – Multiple Industries and MarketsAs the decade unfolded, the number of JV’s in numerous Asian markets and across many sectors of the economy began to emerge within the M&A space as many of these had reached a level of maturity. JV’s covered the spectrum of being both the potential acquirer or consolidator as well as the target. Some were distressed or non performing, and some were experiencing excellent growth and returns. In some cases, global M&A activity was a catalyst, for example in forcing two newly merged former competitors to have to exit one JV in a market where regulation or business logic demanded this.
It became increasingly clear that the same range of issues and factors were at play in the success or failure of JV’s in other markets across Asia, and were relatively universal regardless of the industry category, effectively with minor, cosmetic differences.
Insights and experienced obtained from a range of Due Diligence projects conducted at first hand by the author, plus the active engagement of senior figures within the Investment Banking industry across the region were collated and provided additional depth, perspective and applicability of the study.
Phase 3 – Further Focused Research in DepthThe period 2008 – 2011 provided the author with the opportunity to study in depth the practicalities associated with JV’s in Asian markets, Japan and Malaysia and franchise/partner businesses in India, Australia, South Korea, Indonesia, The Philippines and Vietnam from a “hands-on” perspective on the inside of a large multinational.
In addition, the author was able to investigate in depth a financial services JV in Thailand, while being responsible for the establishment of a new financial services JV in India and consumer goods JV in Thailand using many of the insights gained from this research project
Building the foundations for success
Gold medals and wooden spoons
Getting a successful JV established
Exiting
About the author
I
II
III
IV
V
VI
Operating a successful JV
The Executive Summary
I. Establishing the foundations for a successful JV
I. Establishing the Foundations of a Successful JV# Topic Key Lesson Learned Implications
1 Strategic Alignment The strategic intent of both the local as well as the foreign party need to be clearly identified, articulated, and aligned
Need to have a clear and articulated view of strategy for Asian markets and able to identify partner that is able to align fully with this strategy.
2 Cultural Alignment The corporate cultures of the local and foreign parties need to be compatible, and in particular there needs to be a level of trust and personal rapport built between the Chairman and/or CEO of both parties
Need to identify and articulate culture; align with culture of proposed partner; ensure personal alignment/relationship between Group CEO/Chairman and local partner.
3 Long Term Commitment to Asian markets
A core long term (i.e. 20 year +) strategic commitment to Asian markets needs to be embedded within the organisation, articulated, and then demonstrated.
Need to have clear, articulated Asian market strategy. Should have Board-level sign-off and appear regularly in published material. Seek to demonstrate in practical ways targeted at the chosen market’s political and business elite.
4 Senior Management
Commitment to Asian markets
Senior management of the company (i.e. Chairman and/or Group CEO) need to commit to regular visits to Asian markets 2-4 times per year during the negotiation period and in perpetuity
Chairman and CEO need to personally commit to regular Asian market visits.
5 Strategic Investment
Strategy
If the entry path chosen is a strategic investment rather than a joint venture, the strategy behind this, including exit strategy, needs to be clearly understood and articulated from the outset
Need to decide whether active JV strategy or strategic investment strategy is chosen, and if the latter, a clear purpose for the strategy including preferred exit position.
# Topic Key Lesson Learned Implications
6 United Voice From Foreign Shareholder
A foreign shareholder that is part of a larger group must develop a consistent and co-ordinated group strategy for the market in question, rather than have different parts of the group undertaking different and potentially contradictory strategies
Should be seen and act as one company. There should be only one group strategy for each market; one point of contact; one focus for market regulators and bureaucrats to focus on.
7 Corporate Culture There is no consensus on the ideal corporate culture for a venture in an Asian market. There appears to be equal argument for running the Asian business as a “subsidiary” of the foreign company; a purely Asian company reflecting the culture of the local partner; or a newly created “hybrid” culture
Desired culture for the proposed venture should be chosen and articulated.
8 Personal Agendas Among Local Management
The foreign partner should not be surprised with the emergence of personal agendas among the management and Board of the local partner. This is not necessarily bad in itself and can be aligned with the interests of the foreign partner
Realistic expectations and contingency plans need to be drawn up, particularly when this may contravene policies and processes that are appropriate for the company’s home country context.
9 Early Mover Advantage
Early mover advantage – especially first foreign player into a geographic region – are seen in many instances to be an important ingredient in developing a successful JV however there is no clear correlation between such early mover advantage and success in the market
Care should be taken to ensure that if early mover advantage is seen as adding value, that this value is real and not illusory versus a more measured approach.
# Topic Key Lesson Learned Implications
10 Differentiation
Through Being
Foreign
Simply being a company with some claim to
partial foreign ownership is not in itself any point
of differentiation that is relevant to the local
market
Company must decide if it wishes to have a point of
differentiation and if so, what it is. Simply being foreign
will not have any particular resonance in the market by
itself.
11 Less Than 50%
Equity
An equity stake of less than 50% will almost
certainly mean that the foreign party will have no
realistic voice in the company’s strategy or
management and will be relegated to being an
observer, rather than a participant
Company must make a clear choice between s strategic
investment where it has no real control over the
business, or a JV – and this base decision will guide
future strategic choices.
12 Up-Front Capital
Commitment
Fully capitalising a business at the
commencement of business will test the resolve
of both parties to make the business succeed
Company should consider its own level of commitment
to the market as well as that of its chosen partner.
Committing capital up-front is an “acid test” of this
commitment.
13 Level of Capital
Commitment
Capitalising the business at the minimum levels
may create difficulties in agreeing to capital
increases by the local partner, however over-
capitalising the business may be inefficient
Company needs to establish an appropriate balance
between the minimum and maximum capital levels,
taking into account the cost of allocated capital.
14 Local Partner
Has Western
Business
Experience
A local partner who has experience of the ways
that foreign businesses operate – and ideally has
other true JV experience with a foreign partner –
will prove to be a much easier relationship to
manage
Company should seek to find a partner that has a level
of experience and comfort in dealing with and
understanding the foreign business culture.
# Topic Key Lesson Learned Implications
15 Foreign Partner
JV Experience
A foreign partner with institutional experience
in operating JVs, and particularly operating JVs
in different cultural and language situations,
will find forming and operating a JV in Asian
markets much easier than a company that
does not possess this experience
Company should seek to leverage off any
experience within the group in running foreign
JVs. Should this experience not be in existence,
the group should consider recruiting or
contracting such experience and ensuring that the
institutional knowledge is embedded within the
group in the future.
16 Foreign Partner
Clear Modus
Operandi
A foreign partner that has a clear business
model that is relevant to Asian markets and
can be easily cloned, “taken off the shelf” or an
easy turn-key solution proposed will find that a
successful JV in Asian markets is much easier
to achieve
Company should seek to develop and articulate a
very clear operating model for the proposed
venture, preferably one that can be demonstrated
as successfully operating elsewhere.
17 Tangible Value to
the Partnership
The foreign partner needs to be able to bring
very tangible items of value – such as a
localised IT system – to the venture
Company should seek to be very clear in
“bringing to the table” some key points of value
such as IT, product, operating models, personnel,
etc
18 “Cloning” an
Operation is
Easiest
Foreign companies that are able to copy or
clone a successful Asian operation with a
minimum of customisation find that forming and
operating in an Asian market JV is easiest
Company should seek to find operations of
elements of operations that can be copied and
adapted wherever possible rather than being
created from scratch.
19 Geopolitical
Realities
Asian governments may be sensitive to the
relative strategic importance of countries and
specific countries may be of greater strategic
significance than many other countries
Company must acknowledge the position of their
origin in this context and seek a partnership or
positioning that exploits a particular strength that
the company – or their origin – may possess.
II. Establishing a successful JV in practice
II. Getting a Joint Venture Established
# Topic Key Lesson Learned Implications
20 Capacity for
Expansion
Companies that have a local partner with the
established capacity to expand (e.g. national
distribution) have the ability to expand, when
allowed, faster and quicker than purely local
operation
Company should ideally seek to form a partnership
with a company that is able to leverage national
distribution at a future point.
21 Local Partner
Understanding of
international
Finance and
Reporting
standards
The local partner must be able to comprehend the
need for certain accounting and regulatory
approaches to be used even if they are not
necessary for their particular market
Company needs to take particular care to ensure that
the local partner understands (and is regularly
reminded) of the way that financial reporting may
differ from what they are used to at a local level
22 The Negotiating
Team
Both local as well as foreign representatives of the
foreign partner should form part of the negotiating
team
Company should have a negotiating team that
consists of both local and foreign members, of
appropriate seniority. The foreign members can be
excused for blunt and insensitive behaviour.
23 Seniority of Chief
Negotiator
Top management of local partners expect to
negotiate only with a person very highly placed in
the organisation
Company’s most senior hands-on negotiator must be
as senior as possible. The level of seniority of the
negotiator will be reciprocated by the local party.
24 Underlying Intent The underlying intent of the JV agreement and the
personal relationships between senior members of
the two negotiating teams may mean more than
the actual agreement wording
Company must ensure that there is as much
“common understanding” and accord on the
provisions and intent of each part of the agreement
as there is to the actual wording of the agreement.
# Topic Key Lesson Learned Implications
25 Reluctant Local
Partner
If a local partner is reluctant or under duress by
Government or some other party to form a JV, the
foreign party should exercise great caution
Company should decline to proceed with any partner
who appears to be going through the process with
any form of duress or reluctance.
26 Address All Issues
At The Beginning
Issues that have been overlooked, or have been
allowed to remain unresolved as part of the
negotiation process will not resolve themselves
and may become a major future problem
Perhaps allow 2-3 times longer for the negotiation
process than in any other culture, to ensure that
there is complete and detailed agreement on every
point. Should not move ahead if any doubts remain
27 Local Partner
Understanding of
industry
There is no clear pattern to success/failure based
on whether the local partner is or is not already
involved in the same industry as the foreign party
Company should ensure that if the local partner is
not exposed to their industry sector that they receive
the necessary assistance to help them understand
the business and financials. If they do have an
existing company, must ensure that this knowledge
will not impede the partnership.
28 Local Reputation of
Partner
The local reputation of a potential JV partner
inside the relevant markets is more important
than the reputation of that potential partner
outside Asia
Company should research the local reputation of the
proposed partner as much as its international
reputation.
29 Speed is Not Of
The Essence
Pressure to agree on a local partner according to
an arbitrary time frame is likely to cause a poor
decision to be made. The Asian opportunity is not
going to disappear tomorrow.
Company must be prepared to take “as long as it
takes” to get the deal right, and not be motivated by
external agendas or time frames.
III. Operating a successful JV
III. Successfully Operating a Joint Venture
# Topic Key Lesson Learned Implications
30 Asian people may
appear similar to
westerners, but
great cultural
diversity exists
Staff and other resources from other Asian
countries can assist markedly in the quick
establishment of another Asian operation
However these people – could be seen by the
local staff as even more foreign that the
“foreigners”
Company should not be lured into the trap that
sees all parts of Asia as culturally homogenous.
31 A JV is a
Completely New
Entity
Creating a JV creates a completely new entity
and one that is not a true subsidiary of either
company. The new management team should
have allegiances to both shareholders and
cannot be treated as a member of the normal
management team of either party
Company must understand that a JV will have as
much allegiance to the other shareholder as they
have to , and a JV will probably operate very
differently to a controlled subsidiary.
32 Operational
Management vs
Shareholder
Management
A good operational CEO may not be the best
person to also “front” the primary shareholder
relationship. Some models separate these two
functions within a JV
Company should carefully consider the two roles
of operational management of the business and
management of the shareholder relationship and
determine whether it is reasonable to expect the
same person to excel at managing both of these
issues.
33 Abdication of
responsibility
The foreign shareholder should not abdicate
responsibility and allow the local shareholder
to make key decisions or manage the business
as they see fit, because they have greater
market understanding
Language can create barriers, but it is dangerous
to allow the local partner to do what they like, as
this will often be to their own benefit alone. Such
a stance may also involve brand risk for the
foreign shareholder
# Topic Key Lesson Learned Implications
34 Differentiation and
Innovation
A number of companies do not feel that in a
growing and immature market like many Asian
countries, differentiation or innovation are
important qualities compared with faithful
execution of a proven business model
Company needs to form a view as to whether
differentiation and/or innovation should form a
part of the Asian market strategy, and if so what
are the most meaningful forms of differentiation or
innovation for the local market.
35 Development of
Local
Management
Capacity
There is a limited capacity of external staff to
adequately resource most Asian markets’ need
for qualified and experienced people, and
companies must devise ways to train, promote
and retain “home-grown” talent
Company must develop a viable strategy for the
identification and development of appropriate
local management talent.
36 Do Not
Underestimate the
Regulator
The relationship with the regulatory bodies –
and their power to create future problems for a
company – should never be underestimated.
Out of sight should never be out of mind.
Company should not underestimate the
importance to develop and maintain a positive
ongoing relationship with the regulator and all
relevant officials
37 Role of Chief
Representative
In a number of cases, the skills needed to be a
successful Chief Representative have not been
transferable into successful operational CEO
Company needs to form a view as to the role of
the Chief Representative once the venture moves
into execution and ongoing operations.
38 Staff Seconded
From Local
Partner
Staff who are seconded from the local partner
require a specific management strategy to
ensure that they are appropriately recruited
and managed.
Company must acknowledge and draw
contingency plans for the inevitable management
issues that will develop from staff seconded to the
business from the local partner.
# Topic Key Lesson Learned Implications
39 Multiple Levels of
Relationship
Shareholder relationships should be developed
and maintained at all levels from Chairman and
Group CEO down, to ensure stability in the
event of staff changes
Company must build a relationship with the local
partner at various levels that insulates the
relationship from personnel changes.
40 Customer Service A number of companies who do not feel it is
possible or necessary to differentiate on the
basis of product or distribution are
differentiating on the basis of customer service
Company should consider the role of customer
service in developing a point of differentiation,
particularly against local companies
41 Emulation of Best
Practice
Do not underestimate the willingness and
capability of a local company, if they are the
partner, to quickly copy best practice from the
JV and thus erode any specific value the JV
has to offer
If Company chooses to partner with company
already in the same business in their own right,
the threat of loss of intellectual capital to the local
partner should be factored into the equation
42 Brand Strategy A clear brand strategy needs to be adopted,
although there is no consensus of what model
is the best option
Company needs to address the brand issue, and
then develop and agree with the local partner on
a clearly articulated brand strategy
43 Use of Best
Practice
The local partner will be very much aware of
best practice and sensitive to the possibility
that the foreign partner may not offer this best
practice in the Asian context
Company must ensure that best practice from
within the group is demonstrated to the local
partner, and not treat the JV in an immature
market as being “just like our country was 20
years ago”. This may be quickly seen as
disrespectful
# Topic Key Lesson Learned Implications
44 Special
relationships
Senior members of the local partner may form
a particularly strong relationship with the CEO,
(or other senior roles) of the foreign
shareholder, however the business usually is
required to report to or work closely with less
senior roles in the foreign company. This is
often the cause of a great deal of tension
CEO or other senior roles within the foreign
shareholder should take care to manage the
relationship and not undermine functional
leadership responsible for the day to day
operation of the JV. If this is not done well and the
local shareholder has the ability to go direct to the
CEO and bypass normal channels, it will result in
a range of difficulties and complexities
IV. Exiting a JV
IV. Exiting a Joint Venture
# Topic Key Lesson Learned Implications
45 Do not ignore
JV’s in M&A
discussions
Asian JV’s are often quite insignificant in financial
scale for a large global M&A transaction and they
are often brushed aside as a detail to be sorted
out later by the corporate finance teams in New
York or London
Failure to adequately consider and address these issues can
be costly at a later stage and take a disproportionately large
amount of resource to untangle. Many multinationals are
valued on the basis of their Asian future growth prospects
and Asian JV’s may have greater significance for the future
than is realized
46 Maintain
open dialog
with the local
partner
Whether there is a requirement to exit the JV for
reasons beyond the control of either party (e.g. an
international merger requiring rationalization of
multiple JV’s in the market) or any other reason,
early and frequent communication with the local
partner is important, even if that is to say there is
no news
The local partner is likely to be particularly sensitive and
within many Asian contexts may interpret silence as
disrespectful or jump to conclusions that are not valid.
Regular and open communication is essential to defuse these
issues
47 Problems do
not fix
themselves
“Ignore it and it will go away” does not apply.
Unresolved issues or leaving things until a later
time will often compound the matter
Failure to act in a timely manner can cause significant
downstream issues of financial and reputational damage
48 Expect
Weakness to
Be Exploited
If you wish to exit whether by choice or necessity,
expect the local partner to take as much as they
can. They have little to lose and potentially a lot to
gain
Exiting a JV can be messy and often the best outcome is to
write off all investment to try and minimize liabilities. A weak
or inexperienced person managing this process can expect to
be fleeced
49 Reputation is
Critical
Preserving the reputation of the foreign partner
throughout the process is a critical factor that
should not be overlooked
It is important to think about the long term strategic
implications of the exit to your brand reputation, not just the
issues/numbers in the short term
V. Gold Medals and Wooden Spoons
Conducting first hand research into this topic, and speaking first hand to senior executives within both the foreign partners as well as
JV’s themselves across the Asian region has been a fascinating and illuminating experience.
In most cases the foreign partner was a significant multinational, and in the majority of cases was a global “Fortune 100” company with
well recognized and respected brands.
One factor was almost universal; the executives – whether they had been fully or partially responsible for the JV’s establishment or
had become involved later in an operational capacity – all stated that they or their companies made some fundamental mistakes in the
way they went about the exercise, and would do things differently if they were given the same task again. These comments were quite
consistent, and startling considering the range of different organizations, their global reach and experience, and the level of resource
most had to call upon. And considering the amount of financial investment involved, the comments were concerning.
How could it be that so many companies, with so much management talent and experience, willing to invest so much capital, would
admit they would do things differently in the future?
The answers are complex as are the reasons for these comments in some cases, and it is rare for anyone with the gift of hindsight to
not identify things they would wish to change or do differently. And in some cases the JV’s have performed well but still there were
some major issues or false starts to get to the current point.
However even discounting those factors there remains an unexpectedly large number of companies who admit to serious
shortcomings in the way they have established or operated their JV operations in China, and these are arguably companies that would
in the normal course of things be expected to do things well – whatever they do.
Analysis of the underlying cause of the self-confessed shortcomings of this group highlights some common themes
and these emerge as the most critical pitfalls to avoid, or conversely the most critical success factors that must be met.
Key common pitfalls
The most common underlying cause of failure or sub-optimal performance of the JV mentioned by the foreign partner
Strategic Misalignment
•“We just weren’t clear on what our strategy was for Asian markets, and we were all over the place with different parts of the company doing different things. It started as a mess and still is a mess”
•Since we set up the JV we have been through restructure and merger and our strategy is quite different now – and the JV really doesn’t reflect our focus any more
•“When our previous CEO retired impetus and focus was lost because his successor didn’t have the same vision and it wasn’t his idea”
•“The original strategy seemed to be more about planting flags in Asia than really finding a strategy that was workable”
Haste
•“We were given a fixed time frame to get the JV established and did our best within those constraints”
•“Our original negotiating position was weak because our proposed partners were aware we needed to do something … anything”
•“The JV structure was the only structure open to us at the time, and we took it. I wish we had waited”
Corporate Arrogance
•“We’ve got a corporate strategy area bristling with MBA’s but they lack the down-and-dirty street experience it takes to run a business like this”
•“We didn’t seek advice or employ anyone with real experience. We don’t need to. We’re Masters of the Universe. We know everything. That was the attitude”
•“Our CEO was approached directly with a proposal that he thought sounded good, and he was an expert on China as he once saw a Jackie Chan movie. The deal was done before we could take a breath”
Lack of Appreciation for JV Fundamentals
•“Believe it or not, even though we are a huge group we have practically no experience in working as a JV”
•“The Head Office guys just couldn’t come to grips with the fact that I don’t run a branch office – I run a separate company that is accountable to the local partner as much as them”
Excessive Interference
•“Our President has an ego the size of a football field and loves to come to Asia twice a year to manage the relationship and have his suits made. The trouble is he gets involved and takes calls from the local shareholders and we end up with two strategies for Asia – one where we have control, and the other for the JV’s that are the President’s pet projects”
Lack of Priority/Focus•“We get treated like a mad relative – a lot of trouble and no-one really wants to take responsibility. We get shunted
around and down the organizational structure and it’s clear we are really just a distraction to Head Office. Our local shareholder feels the same and is really disillusioned compared with their original expectations”
VI. About the Author
David Christensen resides in Melbourne, Australia, he has his primary office in
Hong Kong, and has business interests in a number of other countries in Asia.
He has an extensive career as a Management Consultant and Senior
Executive within multinational corporations spanning the Asia Pacific region in
the financial services and travel categories
Specializing in corporate strategy, capital raising and market entry projects, he
has undertaken assignments that have included working in Asian markets,
Hong Kong, Taiwan, Japan, South Korea, India, Singapore, Thailand, and the
Russian Federation as well as Australasia.
He is a Partner of Gravitas Partnership and works closely with McNeill &
Partners, a boutique investment advisory business based in Hong Kong. His
corporate experience has included regional senior executive roles within
American Express, Mercer, and AXA Asia Pacific.
He can be contacted by email at [email protected] and
an unlocked version of this presentation will be emailed upon request.
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