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.
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Epilogue
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 protected] 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
You can read the entire Keys to International Joint Ventures series by clicking here.