Asian Joint Ventures Keys To Success

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.


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.


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


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.


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


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


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.


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


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


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.

www.nextfsasia.com

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