Joint Ventures – Why?

Joint Ventures (JV) have their place and serve a purpose in industry. Just by definition, a JV can be an enabler for…” companies that choose to enter into a business transaction by sharing strengths, offsetting weaknesses, and minimizing risk to gain a competitive advantage in the market place”.  So why don’t we see more JV’s?

JV’s are not always what they are cracked-up to be.  It is mainly because the business plan, although conceptually developed to marry each other’s strengths, oft-times neglects to ensure that there is a one-minded strategy and corresponding set of objectives that benefit the partners in proportion to their respective contributions. Simply put – if either one or the other partner doesn’t get the benefits intended, becomes distracted with other interests or doesn’t live up to the commitments made in the contract, the JV could fail.  Consequently, all the effort that went into the formation and operation of the JV are opportunities lost to invest those same resources (people, time and money) elsewhere. Not all JV’s fail. However, most have one thing in common, they have a short life.  

JV’s - the good, the bad and the ugly…
I have lived through several different types of JV’s.  The entire cycle can be a daunting undertaking from concept to contract negotiations, formation, operation, ups-downs, discontinuing and dismantling the enterprise (beginning to end). I thought it would be interesting to reflect on my experiences; the good, the bad and the ugly and draw some conclusions that may help others. I will share experiences that may help you in your thinking about JV’s and perhaps lead you to think twice before choosing a partner and ultimately entering into a JV. 

It was too complex…
My first exposure to JV’s was when I was working for a U.S. company licensing its technology globally for the purpose of gaining market entry. To sell finished products, many countries mandated the licensor allow the licensee to manufacture locally. This mandate would satisfy the need to create local employment. The licensor and licensee had previously negotiated and implemented multiple agreements for track-type tractor and front-end loader technology. They had developed a good working relationship and trust in each other’s ability to fulfill their respective commitments. This led to the expansion of the relationship and yet another set of JV’s and license agreements.

The U.S. partner needed to expand the product range of its track-type tractors to include a larger horsepower tractor. The licensor lacked all the resources to undertake the project alone as it necessitated not only the tractor development but also the development of a larger engine and matching powertrain components. To gain a competitive edge, the U.S. partner chose the then current East European license partner who had the same desire to expand the relationship. The U.S. partner had the “know-how” and the East European partner the resources to develop the engineering documentation, the manufacture facility and the machinery to produce the tractor and related powertrain components (engine, transmission and torque converter). After months of negotiations and many trips to and from Eastern Europe a master JV was signed. (This is at a time when the use of the Teletype was the fastest means of written communications, fax machines were not yet in use and it was long before the Internet.)  Multiple locations and hundreds of people were involved in cross training to transfer know-how and coordinate the JV. 

You are probably wondering what happened? The mission was well conceived; however, the implementation was difficult. It didn’t take long to realize that the powertrain portion of the agreement was proving to be far too complicated.  Why?  “Too many cooks in the kitchen”… “Not invented here (NIH)” attitude… “Pride of authorship,”… personnel conflicts and you name it. Communications were arduous and protracted causing delays in the schedule to launch the tractor and being over 5,000 miles apart didn’t help.

After several years and changes to the scope of the JV, the tractor got designed, tested, developed, produced and launched to the marketplace and to this day, is still being produced and sold using the same basic know-how from the JV. 

The question remains - was this the best way for the U.S. partner to gain a competitive advantage? In hindsight, I question whether this was good for either of the JV partners. At the time, the U.S. partner had many choices; don’t expand the product line, fund the project internally, sell the division, sell the know-how and rights to the technology, etc. The results from the U.S. company’s decision to form a JV wound up benefiting the East European partner more than the U.S. partner. 

Why? Soon after formation of the JV, the partners lost control of their own businesses (destiny). The very people that lead the formation and operation were no longer the decision makers. Eastern Europe transitioned from a communist-planned economy to a free-market economy and the U.S. parent company came under financial pressure and ultimately sold off the division that owned the JV relationship. The new owner then formed a JV with another competitor that had little or no interest in supporting the acquired license and JV agreements. Therefore, the Eastern European company became free and independent to produce and sell the licensed products without restriction. 

Keep in mind that the initial partnership between the U.S. and East European company only lasted 10 years. The agreements continued for another 20+ years with different Eastern European and U.S. company partners. 

So what’s the lesson to be learned here? Needless to say, when contemplating a JV choose your partner wisely. Know that you will be able to have an open dialog to develop trust that reveals each other’s true intentions and clearly defines the scope, mission, strategy, objectives, timeline, expected results (returns), commitments (resources) and exit plan. Keep the strategy simple with a single purpose and set of objectives that makes it easy to manage. Keep the business plan uncomplicated and the desired results achievable in a relatively short time frame, The JV, although marginally successful, served its purpose.

I can’t stress enough the importance of knowing that JV’s are typically short lived. If they are complicated and difficult to put together it’s likely that they will not be successful. Therefore knowing this, ask why a Joint Venture.

Simple and purposeful…
The next example is a direct result of the first example above. This next JV was given birth out of necessity to defend and preserve license agreement contractual sales territory rights.  

Background: In the initial license agreements the licensor and the licensee agreed to protect home sales territories; e.g. the U.S. partner retained exclusive rights to the all “Western Countries” (Europe, North America, select counties in Central and South America, Australia, New Zealand, etc.) while the East European partner retained rights to sell the licensed products to “Communist Block” countries (Poland, USSR, East Germany, Romania, Bulgaria, Hungary, Czechoslovakia) and countries aligned to the aforementioned.  All remaining countries were non-exclusive.

As time passed, the East European company had opportunities to sell licensed products to Western Countries thus creating a conflict. To resolve the conflict and potential breach of the license agreements, the U.S. partner commissioned a team to develop a defensive strategy that would penalize the East European partner if such a breach occurred. It was of deep concern to the commissioned team that the U.S. partner might enact such severe penalties that it would cause the entire relationship to collapse. After all, a substantial amount of ongoing licensing fees and related collateral component sales could be at risk.

What resulted was a strategy that would enable the partners to better take advantage of such opportunities. The strategy - form a JV partnership headquartered in the United Kingdom that would be responsible for sales and after- sales support of all licensed products and other U.S. non-licensed products to a specified list of countries (exclusive and non-exclusive countries). Fund the entity equally (cash and in-kind contributions) and staff it with a diversified group of Brits, Americans and East European company employees, set-up a service parts operation and liaison office in Eastern Europe. 

This strategy created an avenue for the East European partner to sell its products for western currencies (cash, barter and broker transactions) into countries either not previously open or difficult to enter. It also gave them access to western style sales and marketing management and processes and systems that were necessary to operate in Western Countries.  Although thought to be a defensive strategy, the U.S. partner benefited greatly from new and increased sales of licensed and non-licensed products to countries heretofore either not open or difficult to enter.  It also facilitated the collection of fees and collateral sales for the on-going license agreements. 

So the lesson learned from this example is that the JV served its purpose and is a good example of a unified and simple strategy to perpetuate and manage the ongoing relationship. For the U.S. partner, what started as a defensive strategy turned out to be one of the best offensive marketing strategies. For the East European partner, it opened new markets and generated western currency sales that were badly needed to fund growth. This strategy and results turned out to be a win-win for both partners. The JV ended after seven (7) plus years. 

Choose the right partner…
I‘ll use yet another one of my experiences to illustrate how important it is to choose the right JV partner. In this example, I’ll reflect on what went wrong and why? It could be that it started by choosing the wrong partner?

A diversified U.S. company, which had built its construction equipment division business through acquisition, was faced with a critical financial decision. It needed to refresh and expand the product line portfolio to stay competitive. It either needed to raise substantial funds (millions) internally, exit the business or find a partner with a complementary strategy.  Timing was important as every day without a decision was putting the company further behind the competition. It was decided, find a partner!

It was not long before a partner emerged in the Far East with what appeared to be a complementary strategy. The Far East company didn’t have a strong presence in North America and needed help with people, facilities and distribution. The U.S. partner had all three and, seemingly, a JV marriage of equals was born. 

There were some overlaps in product offering and distribution, which were rationalized by adopting a dual brand – dual distribution strategy thus keeping both product lines and both distribution channels. On the surface this seemed plausible. It would enable the JV to take advantage of the back-end synergies; e.g. consolidated back office, common manufacturing facilities, volume for purchasing leverage and downstream common process and systems, etc.  Theoretically, this would generate higher profits through lower overhead and lower manufacturing cost, which in turn would provide funding for product portfolio development. All good stuff, right? All to benefit the partners, right? Not so fast, here is what went wrong and why!

During the initial start-up the Far East partner required that a significant number of its company employees reside in the U.S. working side-by-side with their U.S. counterpart (shadow managers). This seemed logical, as both partners could better exchange ideas and share each other’s knowledge. Early on this worked well. However, it became apparent that in some cases the Far East partner was using the shadow managers as conduits to report back to the Far East company HQ activities that might be disadvantageous. Even though the JV had established an Executive Committee (EC) to preside over all operations, oft-times decisions taken by the EC would get changed later after the Far East company HQ was informed by shadow managers. An example of this was when a major decision had been taken by the EC to cross-brand some of the products. They were subsequently introduced to the respective distribution channels. Sometime later the Far East partner reneged on the decision. 

You can speculate on what happened next. Distrust amongst the rank and file was rampant. The distribution channels were confused and disappointed. Customers were nervous and uncertain about the JV’s future.  It was the beginning of the end for the JV. So what went wrong and why? 

Hindsight is great! From the outset, this was not a marriage of equals. There was a grander plan.  For one partner, the JV was an exit strategy and for the other, a takeover strategy.  Now you know what went wrong and why. The lesson here is that the JV served its purpose but it was painful and a waste of resources. In hindsight, the Far East company would have been better off to negotiate a takeover at the beginning and avoid the six (6) years of lost time and resources. I know why they didn’t, which is the subject of another article on Business Ethics. The lesson to be learned here?  Choose wisely!