Succeeding at a joint venture is challenging enough when it is developed between two companies in the same country. International JVs are even more challenging because of cultural factors that highlight differences.
By Belinda Jones
It is already time to call 2016 the “Year of Joint Ventures” as almost half of global CEOs in countries around the world plan to form international JVs.
As the globalization of markets has expanded, business leaders have come to appreciate the strategic opportunities that international joint ventures offer. They include expansion into new markets, and sharing the risks and costs of the effort.
However, like all good business deals, the opportunities are accompanied by challenges that must be overcome to succeed, and those challenges are enhanced when the JV is formed in international markets. Challenges include finding partners who are the right fit, successfully blending different organizational cultures within a particular social culture, and managing complex foreign regulations, to name a few.
Avenue into New Markets
Entering international markets is one of the primary avenues for multinational companies interested in doing business in foreign markets. Joint ventures bring many advantages beyond getting access to new markets, such as gaining access to innovation and technology, reducing production costs, expanding capacity, accessing new talent, accessing local knowledge of the international market, and improving the ability to manage change.
Unfortunately, many domestic and international JVs fail, and the reasons vary. Research into the failures found that, in many cases, the parent companies had divergent strategic interests and did not reconcile them during formation of the JV. When priorities are not aligned – such as profit versus growth or not agreeing on the markets to target – the JV is on a path to failure due to lack of cooperation and managers going in different directions.
With a history of thousands of JV failures now offering lessons in what to do and what not to do, it is easier to identify the primary challenges to overcome in order to set up the new organization for international success. In fact, many of the challenges causing JV failures can be rectified just by improving initial agreements and not moving forward until there is strategic alignment. A formal agreement brings the new partners together to hammer out critical organizational details and gives both sides an indication of the seriousness managers assign to different business aspects when assessing whether the participants are the right fit.
The Right Fit
The right fit in a foreign country is much more difficult to assess than a right fit in a domestic market. The local company the multinational chooses to pair with must share strategic goals, and those goals should be explicitly delineated in a formal agreement. This of course, is in addition to addressing the traditional business items of valuation, marketing and staffing, management control, competition, financial issues, and ownership and control.
Creating strategic alignment means the two companies define the specific targeted market, reinvestments, and the governance system. It is critical that both parties agree on the life of the JV, too, which can become a point of contention.
The association of companies from widely different cultures is a major challenge. Culture covers a broad area of social norms and customs, traditional business practices, and the regulatory environment.
Even dispute resolution is impacted by culture because different cultures have different perspectives on the best way to manage disagreements. For this reason, during the negotiation and planning stage, negotiators should define a formal dispute resolution process and get input from people at different levels of each organization. It is the only way to fully understand how decisions made concerning the structure and operations will impact the people producing products and services.
The reality is that U.S. and European countries have different cultural mores compared to many emerging and developing countries, especially in terms of politics, regulations, and ethics. In some countries, for example, it is common practice to bribe local officials, even if not legal. It is also considered acceptable to set up businesses that compete with the JV.
For example, Danone and Wahaha formed a JV in 1996 to manufacture yogurt. It failed in 2009 for a host of reasons, but cultural issues were a major element. The companies had an IP licensing agreement so that the JV could exclusively use the Wahaha trademark, but the agreement was not compatible with Chinese law. By 2007, Danone discovered the Chinese partnering company had established competing businesses and was using the Wahaha trademarked name. Poor relations escalated with Wahaha calling Danone imperialistic and Danone claiming contract violations. This is a classic case in which multiple elements of culture contributed to JV failure.
A Local Touch
There are many examples of successful JVs. In 2009, GlaxoSmithLkine partnered with Shenzhen Neptunus Interlong Bio-Technique Company, a small local company in China, taking a 51 percent stake. The JV gave access to government vaccine-procurement programs, demonstrating a way to successfully leverage culture and regulations to JV benefit.
Another example is Kellogg Company and Vilmar forming a 50:50 JV to manufacture, sell, and distribute food products in China. Vilmar contributes supply chain scale, infrastructure, and a distribution network in China, but just as importantly, the company contributes China market expertise. The JV is successful because Vilmar is small and able to contribute a critical local touch to the global megacorporation. That is critically important because Chinese food and taste preferences are quite different from those in the U.S.
International JVs have many of the same challenges as domestic JVs in terms of addressing specifics of the alliance. However, there are also unique challenges because of cultural differences. Failed JVs in the past have common reasons for failure, including inattention to details like competition and exit strategies, but even the ideal agreement can fail due to a lack of understanding of culture.
The lesson is this: Spend as much time researching and discussing cultural differences as is spent on business and legal specifics. It is well worth the extra time it takes to reach startup.