- 7 Keys to International Joint Ventures
The road to successful international joint ventures is littered with wrecks, many of which were caused by wishful thinking. If you are considering or planning a joint venture (JV), consider the following points carefully and honestly.
1. Understand your partner and its goals.
Do not assume that prospective partners want the same things you do. Learn the partner’s business and what it wants from the venture. To evaluate whether its goals are truly compatible with yours, consider:
- Does the partner want to build a long-term business or to exit quickly?
- Is the partner more interested in profit or market share?
- Does the partner want expansion, and will it contribute capital to fund expansion?
- Does the partner want your technology, and what will it do with the technology it gets?
- Is the partner looking for an important post for a (possibly under-qualified) relative?
2. Understand your own objectives.
Think beyond your “big picture” wish list – growth, market entry, sharing capital requirements and risk, or local capabilities. Dig deeper with key questions, including:
- What are your objectives for invested capital, profitability and growth?
- What are your HR objectives? For example, do you have excellent people to send to the JV, or must it find its own people?
- What are your preferences on risk and control? How much control of management decisions do you need? Do you need control of intellectual property? Or customer relationships? What about whether to reinvest or distribute profits, or how to fund losses?
3. You need to form a relationship, and therefore need to be flexible and reasonable.
This conflicts with your need to need to form a basis for your relationship that can withstand change and the pressure of business, and therefore to establish your rights. It is not easy to maintain friendliness and at the same time insist on the level of power you must keep. Your prospective partner will not make it easier. Know what rights you need and study polite insistence.
4. Important things will change.
Over decades in JVs, I’ve seen many changes outside the ventures that have had important consequences inside. These include losses in the partner’s main business, causing a sudden need for cash and generational change at a family-owned partner, leading to completely new priorities. Some changes bring opportunities, and others bring obstacles – your organization needs the strength and depth to deal with change.
5. When you’re entering a new country, you don’t know much about that place.
Many companies fail to recognize that their lack of knowledge often makes the partner’s knowledge and capabilities seem greater than they are. It is easy to overestimate how much a partner will contribute. Assess the partner’s strength, depth, and commitment. If the partner will provide goods or services to the JV, remember that it will be very hard to change providers if quality, service or price is bad.
6. Build your own relationships and capabilities.
Even if your partner is great at government relations, procurement, or trade associations, use the partner to build independent capabilities in your team and in the JV. The JV must not depend on the partner’s accountants, lawyers and other advisors. If your partner’s goals and yours diverge, even short of a fight, it will be critically important for you to have independent expertise and for the JV to have key capabilities in place.
7. Your partner can do things that you can’t do. Your partner can do things to you that you can’t do back.
Your partner may feel comfortable paying bribes, talking strategy with competitors, or skirting safety or environmental laws. You must figure out whether this is the case and, if it is, whether you can control your partner. In some places, enforcement becomes stricter when a foreign company shows up. Once you are in a JV, you are responsible for your partner. Your JV needs an effective approach to compliance, which will be impossible if your partner resists. If you are in a place where judges can be bribed, it may be hard to enforce your rights, no matter what your contract says.
- Understanding Your Partner and its Goals
This is part 1 of a series that builds on “7 Keys to International Joint Ventures.” The series will give you tools to help decide whether a joint venture is right for your business project, find the right partner, and negotiate a joint venture agreement that positions your partnership for success.
To have a great joint venture, start with a great partner. That sounds obvious, but is much easier said than done. Finding a great partner is harder than hiring a great executive, and more critical because a partner has a tremendous impact, and it’s difficult and expensive to change partners if you pick the wrong one.
Hitting it off with the prospective partner’s owner or CEO over dinner is nice, but won’t help you truly understand the prospective partner and what it will bring to – and take from – the JV. The business world is littered with the wreckage of JVs where a partner was chosen on the basis of personal chemistry, hope, or an urgent desire to get started.
Below are key questions that require research, careful analysis, and intellectually honest assessment. Use your results to choose your partner and to create a JV structure that works for both of you. Remember that you are part of “both of you,” and that you are entitled to have your interests protected.
Is the partner successful in business?
Your partner almost certainly looks successful, but we all know stories of seemingly successful businesses encountering difficulties, or even outright failing. Is your partner really successful? If so, is it successful in its own right, or does it depend on special relationships, a government franchise or monopoly that may not apply to the joint venture?
What makes your partner successful? Will these attributes contribute to a successful partnership with you? Or will the partner’s business strategies and tactics conflict with yours?
Does the partner (or an affiliate, or the owner’s sister-in-law) own other businesses that might compete with, sell to, or buy from the JV?
Will the partner’s eye be on the success of the JV, or on what the JV can do for the partner and its friends and family?
What are the partner’s goals for the joint venture?
In building a partnership, it’s critical to understand what the other party wants, and to assess whether it can, and is willing to, deliver. Many JVs have foundered due to inconsistent objectives of the partners. Here are a few key questions to consider (alongside your own objectives, which I’ll discuss in Part 2 of this series):
- What is the partner’s time horizon? Is the partner looking for long-term growth, or a quick exit? You can find clues in its track record with other ventures. If it is a one-owner or family business, how old is the leader? Is there a track record of stability across generations?
- Is the partner eager to expand beyond the original project? If so, is it willing and able to contribute capital to fund expansion? What if capital is needed to overcome early difficulties in the project? Many companies have been surprised by partners who insisted on maintaining their ownership percentage, but were unwilling to put in one dollar beyond their initial commitment.
- Is the partner more focused on profit or market share? A mismatch with your partner in this area can make life extremely difficult.
- Is the partner’s risk profile similar to yours? Understand how (and whether) the partner analyzes business and financial risk, and how much risk it is willing to take on. Does the partner expand its own businesses based on a “seat of the pants” feeling while you require a 20 year discounted cash flow analysis? Is the partner fundamentally more or less willing to roll the dice than you are?
Understand also the partner’s view of compliance risk and whether it is compatible with your view and the legal requirements you face. In many places, you will find prospective partners that are used to evading, or even flouting, rules and regulations. With enforcement increasing around the world, you will be legally – even criminally – accountable for many of your partner’s actions. Can the partner adopt the compliance culture you need to build?
- What are the partner’s goals for control of the venture? Does it expect to be in charge, either through formal arrangements in your agreement, or by having its people on hand at the venture while your team is an ocean away?
- Does the partner have goals for your technology, your brand and other intellectual property? Does the partner expect you to contribute these to the JV for free? Or worse, is the partner’s goal to be able to use or control these itself?
- What are the partner’s human resources objectives? Does it have highly skilled people who can be deployed in the JV? If so, would that be for the long term, or only until a new project comes along? Is there a cousin of the owner who “needs” an important job? Is the cousin a strong contributor – or a disaster?
As you learn, new lines of inquiry will become evident. Vet the partner. Talk with its partners in other JVs, and with people with whom it does business. Use online search. Check carefully for compliance problems. (More on this in Part 7 of this series.)
Build a solid understanding of whether this partner can contribute to success, working with your company and your people. This understanding will help you and your team decide whether to go forward with this partner, and how.
- Think Your Goals are Lined Up? Think Again.
This is part 2 of a series that builds on “7 Keys to International Joint Ventures.” The series will give you tools to help decide whether a joint venture is right for your business project, find the right partner, and negotiate a joint venture agreement that positions your partnership for success.
Conceptual goals often lead companies to seek an international joint venture (JV). They may want “to participate in growth in India, and get local knowledge to help,” or “to get into Brazil using the partner’s logistics capability,” or “to be in China because a big customer wants them there.” But many companies entering JVs fail to consider a deeper level of wants and needs from the JV.
Many expensive and infuriating JV disasters have been caused by companies failing to consider these components, even though they lie just below the surface of a partnership. In order to choose the right partner and create the right structure for your investment in a new place, consider what you want and need by analyzing the following questions:
Do you need control of decisions and risk?
- How much control do you need of the level of business risk that the JV takes day to day? Do you need a say in credit decisions? In warranties?
- Who will control sales and marketing strategy? If your company takes a new approach to global branding in five years, will you need the JV to adopt that same approach?
- Do you need to control the flow of dividends or the timing of reinvestment? What will happen if the partner wants dividends in circumstances that create a tax disadvantage for you?
- Will you have enough control of compliance risk? Failures in health and safety, environmental protection, or bribing local officials can have a huge impact on your company. Your partner may have a very different view of these risks.
Do you need to control resources?
- Who controls key personnel decisions? Can you fire a sales manager who infuriates your customer in a country far from the JV? What if that sales manager is your partner’s brother?
- Who will own patents and trademarks? If the JV has a local logo that incorporates your name and marks, will you be able to take it if the JV dissolves? If the JV’s local staff invents an improvement to your process, will the partner be able to hold you up for a big payment before you apply it to your other facilities?
What are your goals and needs for human resources?
- Who can you send to the JV? Is this an opportunity for great people inside your company to learn and grow, or do you want to enter a new market without sending first-rate people to the JV? Does your partner have capable people to assign to the JV, and if so, are they the people you want and need? In both cases, what will happen when these people return to their respective parent companies?
- Do you have a first-rate financial person to send to the JV to watch the money? Do you have a plan to always have such a person in place for the life of the JV?
- Do your senior leaders have the time and willingness to actively lead the relationship with your partner? JV relationships often become difficult when the local partner feels that it has no relationship with the people who matter in the foreign partner’s organization. If you give the responsibility to junior people, will you give them the authority they will need to have credibility with the partner and to act?
What are your real needs for investment, profitability and growth?
- Does your goal for the amount you will invest include a big enough contingency for currency fluctuations, cost overruns or startup difficulties? If more capital is needed, are you willing to invest it all, or do you need your partner to participate?
- If a big customer wants you to enter a market, are you compromising your standards on profitability? Sales personnel often say you can settle for low margins because a big global customer wants you in this place, but your shareholders and partner will quickly forget why lower margins seemed acceptable.
- Are you in a hurry to grow, or do you want to let the JV prove itself before committing additional resources? Does your partner see it the same way?
- If the JV is successful, what do you want to do with the profits? Can profits be repatriated easily, or are there high tax costs or currency controls that make this difficult? Can profits be reinvested easily? Do you have the right structure to preserve your options from corporate and tax points of view?
When entering, or considering, an international joint venture, think critically about your wants and needs and how they line up with those of your potential partner. Doing this will help you choose your partner wisely, allocate the right resources to the JV and create a sound JV structure on which to build a successful business.
- Competition and Cooperation with Your Partner
This is part 3 of a series that builds on “7 Keys to International Joint Ventures.” The series will give you tools to help decide whether a joint venture is right for your business project, find the right partner, and negotiate a joint venture agreement that positions your partnership for success.
The relationship between joint venture partners is a unique amalgam of cooperation and competition. Partners commit to a long-term relationship that inherently requires cooperation to achieve success. At the same time, each partner tries to maximize its individual net benefit from the venture, leading to competition.
Cooperation and competition begin as soon as you and a prospective partner start thinking about creating a JV together. Differences in your respective goals, discussed in part 1 and part 2 of this series, will drive competition. So will changes in the JV’s business and in the partners’ situations, which will be covered in part 4.
Balancing the need for cooperation and the reality of competition is your central challenge when building a JV. If you give up too much leverage in early negotiations, it is nearly impossible to recover. When partners are competing, and especially when they disagree, each will refer back to the joint venture agreement in order to use any advantage the contract provides. You need to have enough power to protect yourself over the life of the JV or you will pay a high price at the most critical times. On the other hand, if you drive the partner away in the negotiations, you will never get the deal.
What is the best path to this balance?
Understand and accept that your potential partner will be negotiating and seeking advantage from the very beginning. Don’t be tempted by the idea that you need to build the relationship by being very agreeable at first, and getting down to business only later. This view is naïve and dangerous. Of course you need to build a good relationship, but it should be the relationship of a respected friend, not an easy mark.
Learn to practice polite insistence. By being friendly yet firm, respectful yet respected, you can build a sound relationship for the long term. Keep the fundamentals of your proposed business in mind along with the following:
Preparation is everything. Many outstanding businesspeople want to have the first conversations with potential JV partners by themselves, to talk about “business issues” without the “complications” that lawyers and other advisors add. That often makes sense, but only with rigorous advance preparation with a business team that includes those legal, financial and tax people.
Necessary preparation includes analysis of the proposed business, the joint venture keys discussed in this series, and the basics of the business, legal and tax environment in the country. Find, vet and use trustworthy, capable local advisors to help you.
“It’s not the will to win that matters. It’s the will to prepare to win that matters.”
— Coach Paul “Bear” Bryant
Maintain healthy skepticism. Prospective partners will tell you about their goals and capabilities, and about the market, the country and their experience with foreign investors. Do not accept anything at face value, as you don’t know where your partner draws the line between acceptable “puffing” and unacceptable lying. In some cultures and for some partners, outright lies are normal and acceptable. Any time you are told something like, “everyone here always does it this way,” alarms should be blaring.
“Trust, but verify.”
— Ronald Reagan
Demonstrate respect for your partner. The concept of “saving face” is commonly associated with Asian cultures, but nobody from any culture likes to have his or her shortcomings amplified. Show respect for your potential partner by being polite in negotiations. If you are bringing technology to the JV, don’t belittle your partner’s technical efforts. Avoid NFL-style end zone celebrations when you win a point. Learn about and honor your partner’s national and business culture, but do not let them use culture to create negotiating leverage. Watch for traits that will present challenges later, and be sure to show respect in a way your partner will understand.
Regard “politeness as a sign of dignity, not subservience.”
— Theodore Roosevelt
Don’t Rush. Companies seeking international joint ventures are often in a hurry. You may be trying to beat a competitor into a particular country or region; you may want a public announcement this quarter; you may want to impress the CEO with your effectiveness. If you traveled for the discussion, you have a flight home to catch. Your potential partner may have more time, and the local culture may emphasize patience more than yours does.
When you’re inclined to rush, think about what the balance of negotiating leverage is at that moment, whether being in hurry is likely to have a cost, and whether the reasons for your impatience are really worth that cost. Be ready to delay the announcement, put off the groundbreaking, or cancel the flight home.
“He that can have patience can have what he will.”
Resist the temptation to respond to every question or argument. Emulate the best negotiators and embrace the power of silence. Sometimes, several seconds – or even minutes – of silence will speak far more powerfully than words. When silence is impossible, fall back on ambiguity. Learn from Japanese negotiators, who often respond “that’s very interesting” when they are thinking “hell no.” When you actually say “hell no” less frequently, you will find that each occasion has more power.
If you can’t say anything nice, don’t say anything at all.
— Your mother
Recognize the tension between cooperation and competition in any JV, and use polite insistence to build a solid relationship with your partner and maintain balance in your partnership. With this balance, you can build a JV agreement that will withstand a challenging and changing environment and enable the partnership and all of its partners to thrive.
- Important Things Will Change
This is part 4 of a series that builds on “7 Keys to International Joint Ventures.” The series will give you tools to help decide whether a joint venture is right for your business project, find the right partner, and negotiate a joint venture agreement that positions your partnership for success.
Imagine you’ve built a joint venture (JV) in a developing country on the strength of a relationship between your CEO and a local industrialist. The JV exports to a neighboring country, but your company decides to expand there itself, cutting out the JV. Your partner wasn’t happy that you took this opportunity, but didn’t start a fight. The incident blew over with nothing written down.
Two years later, your partner dies suddenly. His son, who your team saw – and treated – as a lightweight, is now in charge. “Junior” doesn’t like the JV and won’t support it. You start negotiating a buy-out at a modest valuation with a minority discount.
Then Junior mentions the corporate opportunity. Not an outright threat, just a subtle comment about how unfairly you treated his father. Your lawyers say he could have a claim, and a lawsuit would tie up ownership and decision-making for a long time.
At this point, you surely wish your team had not underestimated Junior, had anticipated the inevitable generational change when writing the JV contract, and had paid a bit more attention to the buy-sell mechanism. You might wish that you had confronted the corporate opportunity issue and hammered out an agreement when the partner was friendly, which probably would have cost far less than the premium you are about to pay.
Change is constant in all business. Change in joint ventures, across borders, languages, and cultures, brings extra uncertainty and impact.
Imagine: Your longtime JV partner suddenly wants a dividend. Now.
You had agreed to keep profits in the business for expansion. And dividends don’t fit into your tax planning, which your partner knows.
Why the sudden change?
There are many possible causes: from the ordinary – the partner’s investors want more cash flow or an affiliated business is in trouble, to the unknown – your partner is about to breach a covenant in a loan agreement you never knew about, to the personal — its owner is planning an expensive wedding for his daughter.
Even if the contract clearly says that there will be no dividends without your consent, you may face a relationship crisis if you refuse.
Change is especially difficult if your partner has troubles in its own business. At best your partner’s attention will be diverted from the JV, and more unpleasant outcomes are common. A partner who worked informally for years may look to the letter of your contract, or informal workarounds may now be used to claim you can’t insist on your contract rights. Your partner may stop performing functions on which the JV depends. And if it becomes insolvent, complexity and stress multiply — local bankruptcy law may be very different from the rules at home.
A state-owned partner might be privatized; a privately-held partner might go public.
Leadership succession at the partner can bring dramatic change. People you’ve worked with for years may be out and the new boss may not care about understandings you once had. Your people may face a challenge in educating the partner’s new team.
Any of these changes can dramatically increase or decrease your partner’s desire for liquidity, and can affect the overall dynamic, and ultimate success, of your JV relationship.
Some changes bring opportunities for you and your JV, while others bring obstacles. You should build your JV contract with change in mind to give your organization the strength and depth to deal with it at a moment’s notice. Be sure you consider how the following could affect your JV:
- Possible changes in control of the partner, including changes caused by bankruptcy or other legal proceedings.
- Management and ownership succession and corporate reorganizations – for both partners.
- Buy-sell provisions and transfer restrictions, including testing a variety of possible scenarios before you start drafting or negotiating.
Once the JV is in place, remember:
- Be decent to the people in the partner’s organization. You never know who will run the company, who will be promoted and be put onto the JV board.
- Before you resolve an issue with your partner informally, think through how the situation will appear if control of the partner changes, and whether it would be better to get it in writing.
- Have your own person on the ground with the JV, and be sure that person is savvy and senior enough to understand what’s going on at the partner and in the JV.
You can’t anticipate every change; but, with awareness and disciplined planning, you can be ready to deal effectively with changes that will surely come along.
For “Warning: Unintended Consequences” Image Pictured Above:
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© George Creal
- What You Don’t Know Can Hurt You
This is part 5 of a series that builds on “7 Keys to International Joint Ventures.” The series will give you tools to help decide whether a joint venture is right for your business project, find the right partner, and negotiate a joint venture agreement that positions your partnership for success.
Many businesses enter into joint ventures to gain local knowledge about a new country. You want a local partner to help you navigate and get established in its home territory. Unfortunately, in many JVs the partner fails to deliver this critical service.
Have you ever hired a guide for a vacation in a foreign country and been disappointed? The website made the guide seem like a fount of knowledge, but when you arrived he didn’t know how to get from place to place, the restaurants he recommended were awful, and he didn’t know all that much history. Worst of all, he didn’t listen to you to learn what you wanted to see, but instead took you to the places on his regular list, including merchants selling overpriced souvenirs.
It has happened to me – in vacations and in JVs.
When you plan a JV, the lack of knowledge that you’re (admirably) trying to address with a partner makes it difficult to pick the right partner. You don’t know enough to know what to ask.
To make things worse, a powerful cognitive bias leads you to act on your first impressions and makes it hard to seek information you need. In Thinking Fast and Slow, Nobel economics laureate Daniel Kahneman describes WYSIATI – “What You See Is All There Is.” He explains that “[t]he confidence that individuals have in their beliefs depends mostly on the quality of the story they can tell about what they see, even if they see little. We often fail to allow for the possibility that evidence that should be critical to our judgment is missing” (Kahneman, p. 87).
If a prospective partner who knows the territory much better than you do can tell an effective story, your mind rushes to believe it. This natural tendency is enhanced by distance and by differences in language and culture, which create obstacles to seeking better information. Your lack of knowledge makes the partner’s knowledge and capabilities seem greater than they are. As Kahneman puts it, “it is easier to construct a coherent story when you know little” (p. 201).
To maximize your JV’s potential for success, you must maximize the information that goes into building your story of how the project will develop. Fight the tendency to build your narrative around whatever facts a prospective partner provides. Use multiple sources of information to test that information and add to your knowledge base.
It is also easy to overestimate how much a partner will contribute to the JV once it’s up and running. In choosing the partner, and in designing the partner’s areas of responsibility and authority, it’s important to fight your WYSIATI tendencies. Assess the partner’s strength, depth, and commitment.
For example, it’s common for a local partner to take responsibility for government relations. However, even if your partner has great relationships in government, you need to test whether those are the relationships that the JV will need, whether the partner has the substantive government relations skills in the JV’s substantive areas, and whether the partner’s team will devote the resources to the JV for the long haul. Consider whether leaving government relations in the hands of the partner creates a corruption risk. In many cases, it will be better to give the partner a defined role in helping the JV build its own government relations capability.
If the partner will provide goods or services to the JV, remember that it will be very hard to change providers if quality, service or price is bad. It is naïve, or perhaps just WYSIATI, to assume that the partner’s ownership interest ensures it will act in the best interest of the JV. Do not build your JV structure on that assumption.
As in many areas of life, there is no sound path that avoids careful and disciplined preparation. As Kahneman says, the “voice of reason may be much fainter than the loud and clear voice of an erroneous intuition, and questioning your intuitions is unpleasant when you face the stress of a big decision.” He recognizes that “little can be achieved without a considerable investment of effort” (p. 417).
If you invest effort, if you and your team are disciplined about gathering and evaluating information, and if you are prepared to verify the appealing stories of prospective partners, you will greatly enhance your chances of a successful joint venture.
Of course, time and resources are limited. Gathering and digesting information from afar is difficult. And our cognitive biases are powerful. Take all this into account as you structure your JV, and give yourself enough flexibility and authority to recover from mistakes.
- Build Your Own Relationships and Capabilities
This is part 6 of a series that builds on “7 Keys to International Joint Ventures.” The series will give you tools to help decide whether a joint venture is right for your business project, find the right partner, and negotiate a joint venture agreement that positions your partnership for success.
Your joint venture partner, if you choose well, will significantly strengthen the business. Your local partner will especially add value in the JV’s locale, which of course is a key reason for entering into an international JV instead of just opening up on your own.
Don’t ever take your partner or its contributions for granted. Local partners who feel (often justifiably) unappreciated are a leading cause of problems between JV partners. Nonetheless, it’s essential that you strategically build your own local relationships and capabilities.
Failing to do so has tremendous costs. The JV landscape is littered with losses of capital, reputation and strategic advantage suffered by sophisticated companies that depended too heavily on a local partner.
Some of these losses are outright fiascos; others are subtle missed opportunities or failures to achieve a JV’s potential. Some are related to topics covered in this Series: differences between the partner’s objectives (Parts 1 and 2), failure to assess accurately the character and capabilities of the partner (Part 1), changes at the partner or in the business (Part 4), underestimating the challenges of the country or overestimating the capabilities of the local partner (Part 5).
Without investment in your own capabilities and relationships, the JV, and you, will be completely reliant on your partner. If the JV misses a few opportunities, this is a problem. If the JV suffers losses, or you find yourself in a dispute with your partner, or you need to exit the JV, it can be a disaster.
How do you do it?
Start by investing in human capital at your headquarters. You need people on your team who have real knowledge of, and a real relationship with, the partner, the JV and the country. Give these people real authority at the JV. When companies try to keep all the important relationships in the C suite, they stumble. Very senior people don’t have (or make) time to develop deep knowledge of the JV or its locale. Give some key roles, including on the JV’s board, to outstanding up-and-comers, and use top executives to provide support and, when necessary, a high-ranking presence.
Insist the JV develop its own team as well and doesn’t rely mainly on the partner’s people. As noted in Part 4, if the partner drops key people in to the JV, it may eventually need to pull them out. Confirm that the JV’s personnel planning is sound.
Next, determine the most strategically important capabilities and relationships. These are usually in money and financial management, government relations, business relationships, legal, tax and communications. Send some trusted employees to the JV to build relationships, and carefully choose advisors to build more. If your JV is very substantial, or you have several JVs in one country, consider establishing a local office of your own.
Build your own continuity plan for key people. It’s not healthy when someone on your team is ready to move to the next career step and you have no one ready, and available, to move to the country to take the position.
A few areas critical to the success of the JV require special attention:
Watch the Money.
It’s most critical for you to watch the money in your JV. For this, you need a capability inside the JV and relationships beyond it.
Place a financial person of your own in the JV, ideally as the CFO. You need someone senior enough to be independent, and who has or can develop language and cultural skills to be effective. Second, engage an accounting firm independent from the JV’s accountants. You will have questions and will be thankful to have your own person to answer them. Third, depending on the size and activities of the JV, and on whether you anticipate an eventual purchase or sale transaction, you might want to have a relationship with a local financial advisor.
No matter how capable and plugged in your partner is, you need at least rudimentary relationships with the government and the local business community. Start with the commercial officers at your home country’s embassy. Meet them early in your process, and keep up that relationship.
Know officials at the government offices and ministries that are relevant to your JV, starting with business development officials and continuing as high up as you can get. Your embassy can help you. Don’t be shy – governments usually like to build relationships with foreign investors, and those relationships may be important if you have an opportunity or a problem. Get to know carefully vetted government relations advisors.
Include your partner in some of your contacts so it doesn’t feel that you are constantly working behind its back. Make your own government relations a matter-of-fact part of your approach to the JV from the beginning.
Start meeting local businesspeople as you vet potential partners. It’s not hard to meet people, even in a new country. Your embassy’s commercial office can make introductions. Join the local American Chamber of Commerce. Your auditor, insurance broker, commercial and investment bankers, and lawyers can make more introductions. Keep up relationships with potential advisors who were runners up in your selection process – you never know when they will be good friends to have.
If the JV shares multinational suppliers or customers with your other locations, build good relationships with their local teams. Know what suppliers’ and customers’ local people are telling their headquarters about your JV. Consider building relationships with important local suppliers and customers. These relationships will help you understand the market and help build the “trust but verify” posture with your partner that is discussed in Part 5 of this Series.
Legal, Tax and Communications.
Get your own in-country legal and tax advisors. They should clearly represent you, not the JV, so that they can continue to advise you if there is a dispute. Consider adding public relations professionals to your team. They will help you to know the territory and will be good to know if an issue arises. Each advisor should agree in writing that it will not take on work (for your partner or that would prevent it from representing you in a dispute with the partner or the JV.
Making it Work – At a Cost that Works
Tallying the potential cost of these relationships and capabilities can be daunting. In my experience there’s a direct correlation between JV profitability and investment in building and maintaining local relationships and capabilities. And if your relationship with your partner becomes difficult, the investment will repay itself many times over. Consider the JV’s size and risks, and utilize your assessment of your partner, its goals, and the other keys in this Series, to allocate your resources strategically.
For “Businessman Team Spirit Teamwork” Image Pictured Above:
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© George Creal
- What Your Partner Can Do That You Can’t
This is part 7 of a series that builds on “7 Keys to International Joint Ventures.” The series will give you tools to help decide whether a joint venture is right for your business project, find the right partner, and negotiate a joint venture agreement that positions your partnership for success.
I’ve seen local JV partners open doors faster and better than the foreign business could have hoped to do on its own, and without compromising integrity. One partner in Spain, for example, helped the JV introduce the foreign partner’s new product, throwing the local partner’s reputation behind the product and the foreign partner very effectively. It used its knowledge and relationships legitimately and very effectively, adding substantial value to the JV.
A great local partner will steer the JV through local business culture. It will know the local market, act promptly and effectively, work constructively with the local government, and more. It will be invested in the success of the joint business. As noted in this Series, it’s important for you to understand and respect that partner.
And yet …
Carefully vetting prospective partners (as discussed in Part 1) and finding one who makes a great contribution does not guarantee a successful relationship. As we saw in Part 4, things will change. Beyond that, a local partner can do, and can feel very comfortable doing, things that will threaten the JV and your company. Even a well-intentioned partner can make serious mistakes. It’s up to you to be aware of the risks, and to manage your relationship and those risks in a respectful way.
A local partner could make local adaptations to a product, process or communications strategy that dilute your global brand and reputation or damage your intellectual property rights. Variations in your product that make sense for the local market may be great innovations that you adopt worldwide, but also could be unacceptable to multinational customers or dilute the perceived quality in the brand. Seemingly slight variations in a patented process or product can lead to a loss of patent rights. In today’s connected world, a local marketing or communications campaign can lead to global confusion. Stay close enough to the business to know what is going on.
A good partner will take good care of the expatriate employees that you send to the JV. There can be status and perks that will never be noticed back at world headquarters, which can be a great motivation for your expatriates. It can also lead those expatriates to “go native,” losing sight of their responsibility to keep you well informed and keep your objectives in mind. In extreme cases, this good treatment can amount to a payoff, and you can find your employee working toward objectives of your partner that contradict your own.
Perhaps most importantly, your partner may conduct business in ways that are acceptable and effective for a local but are not acceptable to you. Consider some examples:
- Law enforcement is relatively weak in many places, especially in areas like environmental and antitrust/competition law. But in most places enforcement is becoming more effective more quickly than some locals realize. I’ve seen examples where the local partner and local employees honestly believed that no environmental rule applied, when in fact they were doing something that was completely illegal, just as it would have been in Europe or the U.S. It was a challenge to get the partner to understand before the local inspectors arrived.
- Your partner’s business style may be challenging for some of the suppliers or customers that you bring to the JV. Or your partner’s approach may run counter to your global brand strategy. The style may be effective locally, in which case you have to balance local benefit against global detriment. Or the style has worked in other industries, but does not work in yours, in which case you have to try to convince the partner that it’s not a local issue, but rather an industry or market issue.
- If you form a partnership in or near the Middle East, your partner may be used to complying with the Arab boycott of Israel. If you’re an American company or an American national is involved, there are major civil and criminal penalties for actions that your partner may consider ordinary and necessary. Actually, it is not difficult to succeed in the region without violating the U.S. anti-boycott law, but it may take some effort to educate your local partner and local employees.
- In many places bribery is still common, and your partner might view bribing government officials (or purchasing agents of customers) as a normal way of doing business. Your company, and possibly your executives, will be responsible for your partner’s illegal payments. Anti-bribery enforcement by the U.S. and a growing list of other countries is vibrant. The cost of just being investigated is extremely high. Your partner may be astonished to learn that you object to bribery, but you are accountable for what your partner does.
These problems can occur while your partnership is strong and happy. If your partner wants to take advantage of you, or your relationship sours, the risks increase. Your partner can do things to you – things that you can’t do back.
- A local partner who controls the purchasing function can arrange kickbacks, siphoning money from the JV to the partner. (See Part 6 of this Series about watching the money.)
- In some places, most notably China, local partners often copy technology from a JV facility and use it in a competing business.
- If you want to open another business in the country, even completely unrelated to the JV, your local partner might use the government or business connections that you initially valued to slow you down until you cut him into your deal.
- If you have a dispute, your partner can sue you in local courts, even if your agreement requires international arbitration. That lawsuit might not be a winner, but the delay may give the partner leverage to extract value from you.
- People with experience in international JVs have seen local partners bribe judges and other officials in disputes with the foreign partner. It can happen to you.
Keep these risks in mind as you build a relationship with your partner; use the points discussed in this Series to help assess risks and develop risk management strategies. Remember that staying on top of a business is hard when the partner is there all the time and your contact is mostly over the phone — perhaps at inconvenient times because of time zones.
All this does not mean that you should treat your partner mainly as an object of suspicion and supervision. It does mean that you need to build your capabilities (Part 6) and your relationship with your partner. Work on making your partner a true partner and your venture a genuine joint venture. In a partnership, each partner is responsible and accountable for everything done by the other. The word “joint” means “shared,” “collective,” and “concerted.” If you and your partner work in concert, and understand that each is in many ways responsible and accountable for the actions of the other, you can build a joint venture, and not simply your partner’s business with your name on the door and your capital at risk.
If you build that plan, adapt it as things change, and invest in the human capital you need to implement the plan, you will maximize your chances of a successful relationship with your partner and a successful JV.
I wrote a book about JVs called, “Jaffe on Joint Ventures: Everything You Need to Know.” The title is longer than the book itself, which consists of a single word: “Don’t.”
Tongue-in-cheek? Sure. Flippant? Absolutely. Actually worthy of serious consideration? You bet your shareholder returns.
If you are confident that a partner in your offshore business will make a significant and unique contribution that you can’t make at a reasonable cost, then by all means find a partner. If you want to do business in a place that still requires foreign investors to have partners, then you need a partner. Use the keys in this Series to help you vet potential partners and build a sound, mutually-respectful and rewarding relationship.
But if you do the analysis and can’t develop that confidence, then you don’t need a partner; all you need is a team. Consider finding one or more consultants and a great local lawyer (who you need anyway) with experience developing business in that country. When the consultants are finished, perhaps richly paid, and gone, you will own the business and keep the rewards and the control.
Analyze your situation, compare the choices that you face in the real world, and make the best business decision you can.
I’d be pleased to send you a copy of Jaffe on Joint Ventures: Everything You Need to Know. Simply connect with me on LinkedIn or follow me on Twitter, post or tweet the link to this Series to your contacts with a nice comment, and send me an email at email@example.com asking for your copy.
For “Team Spirit Teamwork Euro Silhouette Businessmen” Image Pictured Above: https://pixabay.com/en/team-spirit-teamwork-euro-1544791/
© Gerd Altmann
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