Firms Warming to Joint Ventures Abroad : Despite Culture Clashes, U.S. Multinationals Find Partners Can Be Assets
When Hughes Aircraft announced last spring the impending sale of a space satellite system to Japan, the big news seemed to be that an American telecommunications firm had, at last, cracked open a sealed market.
“It is sui generis-- altogether unique,” said John E. Koehler, executive vice president of Hughes Communications, who spent 18 months negotiating a contract unlike any achieved by a foreign telecommunications company.
But even more significant than the $300 million and 1,000 new American jobs that the contract will bring was the technique that helped Hughes to win it. Hughes formed a joint venture with two Japanese partners, C. Itoh & Co. and Mitsui, then presented its proposal to the Ministry of Posts and Telecommunications through the partnership. The joint approach worked.
Along with much of corporate America, Hughes is participating in a dynamic trend that is not only getting positive results but reflects a whole new outlook, at least for many of America’s most staid and long established companies: the international joint venture.
It is not a painless process. The failure rate is high and the aggravation is astronomical, American executives said in a series of interviews across the country. Most discuss joint ventures as if talking about personal relationships, in terms familiar to Dear Abby readers. For instance:
“With companies as with people, a torrid love affair can lead to marriage, but a bitter divorce may follow,” said Jervis C. Webb, president and chairman of Jervis B. Webb Co., a leading international maker of conveyors and other materials-handling systems.
Until recently, many multinational corporations stayed out of global joint ventures. Like bachelors, they enjoyed the efficiencies and latitude of being single--100% control of their foreign subsidiaries. Marriage was out. As for countries with strict “local participation” laws, which require a foreign company setting up a subsidiary to take a local partner, the markets on the whole were not worth the bother. In most cases, they could be reached almost as efficiently through exports.
But all that is changing.
“Markets ripen, risks improve, policies change,” said Alan D. Bickell, vice president in charge of Hewlett-Packard’s intercontinental operations. Today, some of the world’s most enticing markets are developing in “local participation” nations. And American-based multinationals are responding by lining up at the altar.
On the whole, a number of the interviewed executives made clear, they really would prefer to do business abroad in some other way. But the cost in terms of lost markets would be too dear. And done right, most seemed to agree, the international joint venture works; it is good for business and, with care, its perils can be sidestepped most of the time.
“It is the wave of the future,” said Jagdish Bhagwati, director of Columbia University’s International Economics Research Center. “The wave, in fact, has already started.
“The American company, through a joint venture, may not only enter an otherwise closed (foreign) market but do so with the protection and other advantages offered by a local partner,” he said. “The local partner, in turn, may have access through the foreign partner to technology, capital, other markets.”
International joint ventures have been around a long time. A number of them were established decades before World War II. But they did not begin proliferating until the 1970s when many more American companies found their old markets maturing and pressures building to find new markets.
In 1977, when the U.S. Commerce Department undertook a complete survey of foreign affiliates of U.S. corporations, American companies were partners in 6,937 joint ventures. More than twice as many--16,704--had wholly owned foreign subsidiaries. Now, the ratio of joint ventures to wholly owned ventures abroad is closing, a Commerce Department analyst said. Figures from a survey of 1982 are still being compiled, he added, “but the trend is definitely toward joint ventures.”
From industry to industry, company to company, reasons for entering international joint ventures vary. For some, it is the only viable way to reach a market. Others want to share risk, meet competition or simply have a partner who knows--and has influence--in the local culture.
For Hewlett-Packard, the worldwide electronics multinational based in Palo Alto, one appeal is that, in Bickell’s words, “as a joint partner, you are not a foreign body that will be rejected.
“We are participating in a global market, and strategic partnerships are key,” he said.
Until a year ago, Hewlett-Packard had only one joint venture, in Japan. Now it has them in South Korea, Mexico and China, where its partner is the Ministry of Electronics. Through a written agreement, Hewlett-Packard retains complete management control as it does in Japan.
“In Japan, our partner describes our relationship as two parents, with the Japanese side being the mother, providing home environment and children (the staff), and H-P being the father, providing the source of well-being (technology) and carrying out the discipline (management),” Bickell said with a smile.
Another convert is Procter & Gamble. Like Hewlett-Packard, it adhered to a policy of 100% ownership overseas, except for anomalous situations in Saudi Arabia and Greece. Then it decided to try manufacturing in nations that require local participation but would cede management control to P&G; and guarantee the company total independence, including freedom from export quotas.
“As basic policy, we continue to favor wholly owned operations, and most of our business operations are that way,” said P&G; International’s president, Edwin L. Artzt. “But we have accepted and been happy with a growing level of joint venture activity.”
In less than two years, the giant consumer products firm has established joint ventures in Taiwan and Malaysia. It is negotiating five others. China is a prospect.
Indeed, China, with its population of 1 billion, has added considerably to the joint venture momentum. Long closed to foreign capital, the world’s largest nation awoke in the late 1970s to discover what capital, technology and modern methods had done for Japan, South Korea, Taiwan and other neighbors. Almost as fast as it could read the Fortune 500 lists, it seemed, China began inviting corporate suitors from the United States, Japan and Europe to discuss joint ventures. Many have been formed, more are being negotiated. Of the 931 joint ventures that China now has with foreign firms, 741 were signed last year.
Even India may get into the swim. The world’s second-largest nation, with a population of 740 million, has long been notorious among U.S. companies for its high-handed treatment of foreign-owned subsidiaries. Such policies induced IBM and Coca-Cola to pull out and dissuaded many others from going in. But under the apparently more pragmatic rule of Prime Minister Rajiv Gandhi, India is sending out friendlier signals toward foreign capital.
Despite the opportunities, abstaining from joint ventures is still an article of faith with some U.S. companies. Sharing management control or exclusivity on hard-won technology is more than they care to handle. They will do almost anything to avoid a joint venture. When the New Delhi government insisted that IBM take a local partner, IBM pulled out of India. IBM is a loner.
Even when two American companies form a domestic joint venture, there often are difficulties despite a common language and national heritage. U.S. companies tend to be run by strong people unaccustomed to compromise. Corporations also tend, like people, to have their own values and idiosyncrasies. But when one partner is American and the other is foreign, alien heritages also meet. A hybrid household, with mixing of national as well as corporate cultures, can be explosive. It has been.
For Jervis B. Webb Co., the conveyors maker, the joint venture experience was too bitter ever to relive. Founded by the inventor of the overhead conveyor line, the company has designed and constructed materials-handling systems for factories around the world, including a new one in China. It attempted three joint ventures in Britain between the 1920s and the 1960s.
Under conditions that the Farmington Hills, Mich., company still considers scandalous, all three ventures failed. The first collapsed after the titled aristocrat who headed Webb’s partner went to jail for using the joint venture to defraud the British government. In the other two cases, Webb officials discovered that their British partners were maneuvering the joint ventures for their own profit. A fourth venture, in Mexico, also was dissolved, but amicably.
Now Webb owns 100% of a British subsidiary and 100% of a Canadian subsidiary; it services the rest of its global market directly or through licensees, which pay royalties.
“We don’t do joint ventures--not anymore,” said George Webb, executive vice president of the $250-million-a-year company.
Even with executives who have experienced successful international joint ventures, it is easy to sense that few, in their hearts, regard the process with much more warmth than a shotgun wedding, more as a result of circumstance than true desire. And for a company accustomed to making its own decisions unchallenged on how to handle cash flow, reinvest profits, deal with the government, reward personnel and other activities under the “management control” rubric, the idea of sharing decision-making is chilling.
“Even when you have a majority position--not just a 50-50 or a minority share--you want your partner to go along with your decisions, to keep him happy, to make things go smoothly,” said Robert Lockwood, General Motors’ director of worldwide product planning and a veteran of two year of GM service in Japan. “You live through it by persuasion, you don’t dictate.”
Because joint ventures come in so many forms, sizes and styles, no pattern exists into which all of them fit, even in a single industry--or even within a single company. A model for high-technology joint ventures, for instance, may make no sense at all in consumer products. A local partner may be another private company--or the government.
From nation to nation, equity requirements differ, too. In some countries, 100% foreign ownership is acceptable. Others limit foreign equity in a company to no more--and sometimes less--than 50%.
“Because of the risk factor, there are parts of the world where you don’t want 100% ownership. A joint venture is a device to share the risk or, at least, to provide you with a partner who can insulate you from political or other risks,” said Union Carbide Vice President A. Sherburne Hart.
(Union Carbide did not have such protection at Bhopal, India, where leaking gas from its plant killed about 2,000 people last December. That operation was not a joint venture: Union Carbide owned 50.9% and controlled management, but the other 49.1% of ownership had been sold through the Bombay Stock Exchange.)
Many executives say that equity size is not key to the way a joint venture is run; what really matters, they say, is the management agreement.
“If I can name or veto the chief executive officer, that is worth 25% (equity) right there, and the same power over the controller is worth another 25%,” said one American executive. “You can control from a minority position.”
It is not even strictly true that joint ventures fall into either the “shared management” or “dominant parent” categories, as is sometimes thought. Some joint ventures are independent of either parent, developing their own corporate cultures while pursuing their own interests only under the most general guidelines from their owners.
In fact, one of the budding success stories in international joint ventures is an “independent” set up by General Motors and Fujitsu Fanuc of Japan. The new company, GMF Robotics of Troy, Mich., is less than a half-hour’s drive from GM headquarters, but it seems to occupy another world. Unlike GM, it is small--360 people working in an informal, almost family atmosphere.
The company is less than 3 years old, but in that time it has become the world’s leading manufacturer of robots, according to Eric Mittelstadt, president and chief executive. The corporate offspring of the robotics divisions of General Motors and Fujitsu, its revenues amounted to $22 million in 1983, its first year. Last year, sales nearly quintupled to $102 million. This year, having recently won a record $80-million contract to make painting robots, GMF Robotics’ sales easily should soar.
“When we began this operation, our Japanese partner predicted that the child of the marriage would become mightier than either parent,” Mittelstadt said. “He was right.”
But often, international joint ventures are not such smooth sailing. At some companies, mishaps already are becoming part of corporate lore. With strained smiles, GM executives will talk about their early days in South Korea.
Like the rest of the auto industry, GM was a late comer to joint ventures, although its wholly owned foreign subsidiaries date back to well before World War II. But in 1972, GM entered a 50-50 joint venture with South Korea’s Chinjin group, a conglomerate with diverse interests outside the automotive field. The joint company was to make automotive parts and, eventually, cars and trucks.
Three years later, the Chinjin group became overextended on overseas construction projects. To secure a loan from the Korean Development Bank, it pledged its shares in the GM joint venture. Then it defaulted.
“Suddenly, we found ourselves partners with the Korean government, which owned the bank” said Barton Brown, GM’s vice president for Asian and African operations. “Actually, it wasn’t a bad relationship, but it wasn’t the bank’s bag and they got our approval to turn over their shares to Daewoo,” South Korea’s second-largest business group. Despite some early rough patches, the GM-Daewoo relationship continues today, and their plant will begin exporting Pontiacs to the United States and other markets next year.
Mention South Korea at Dow Chemical, however, and apparently nobody smiles. The Midland, Mich., chemicals and plastics giant refused two requests for an interview about a debacle cited by some experts as a classic example of culture clash.
Once the largest foreign investor in South Korea, Dow had established two petrochemical companies. One of them was a money-losing joint venture with Korean interests. The other was a wholly owned subsidiary, also in trouble from rising costs and a shrinking market. Dow wanted to merge the two but could not get the Korean members of the joint venture’s board to agree or even to meet on the subject. The deadlock lasted more than a year.
Frustrated, according to sources close to Dow, the company’s new chairman, Robert Lundeen, went to South Korea in 1982 to discuss the problem with President Chun Doo Hwan. Versions vary, but whatever was said, the dispute continued.
In Tokyo, Lundeen publicly denounced the South Koreans, asserting that Dow would never invest another nickel in South Korea until the issue was settled and advising potential foreign investors in Korea “to consider the situation very carefully.”
Shortly thereafter, Dow sold its South Korea interests to Koreans for $60 million. It left behind an estimated $195 million in capital investment and reinvested profits, as well as control of an exclusive electrolytic cell process never before shared or sold to another company.
“The Dow case shows a complete lack of understanding by the company of how to deal with Koreans, however strong the merits of the Dow argument--and they were strong,” said John Bennett, director of the Korean Economic Institute in Washington. “After you have personally met with the head of state, you don’t publicly make a statement as caustic as Lundeen’s. In a Confucian society, that is considered an insult to the whole country, a loss of face. It provoked the Koreans and they got mad.”
Asked what underlay the problem between Dow and South Korea, a Korean government official said simply: “Cultural differences.”
Yet having a local partner imbued with cultural sensitivity is supposed to forestall exactly that kind of imbroglio, according to proponents of the international joint venture concept.
It depends, of course, on the partner and how the American company gets along with it. Few U.S. companies have had as much experience in international joint ventures as Chevron, which has explored for, produced, refined or marketed oil in almost every country in the world. For Chevron, joint ventures, with both private and government companies, have led to results more good than bad, though there has been plenty of the latter, including expropriation.
“Our philosophy is to do a lot of talking with our partners,” said W. Jones McQuinn, a Chevron director and vice president. “As in a marriage, you usually try to head off an argument before you begin throwing rocks at each other.”
Like Dow, Chevron of San Francisco has had problems with its joint venture partner in South Korea, a member of the Lucky Gold Star group, which has equal shares of a refining operation with Caltex, Chevron’s domestic joint venture with Texaco. Mainly, the problems result from disagreement over profits, which Chevron would like to reinvest for tax reasons and which its partner would like to divert, tax free, to other members of the Lucky group.
“It takes a lot of hard negotiation and Caltex senior management time,” McQuinn said, “but both sides make a real effort to understand the other, and both sides see where the solution lies--in a lot of patience, a sense of humor and lots of flexibility.”
Selecting a foreign partner is for some American companies a process of extreme fastidiousness. At Procter & Gamble, candidates are evaluated against no fewer than eight written criteria before they are given serious consideration. After that, said P&G; International’s Artzt, only one in about three is selected.
“It is like two families evaluating each other before letting their son and daughter get married,” Artzt said. “The marriage may not work out, but at least you know you share the same ethical approaches and an understanding of what each stands for.”
In Taiwan, P&G; selected the company that had been its distributor for 16 years. Still, negotiations are now in their 21st month. The process involves meetings, visits, opening up each other’s operations, executives talking about their families and exchanging letters about their respective businesses.
“We believe in long courtships,” said Artzt.
All of this makes good sense, said Chevron’s chairman and chief executive, George M. Keller. “A mistake in choosing your partner can lead to mayhem,” he said. “If one partner is continually frustrated, it will poison the relationship over time.”
It is not only the foreign culture that needs to be understood. The American way of doing business, notably its obsession (by foreign standards) with law, legalese and lawyers, is puzzling, especially in Asia where the Confucian ethic places great store upon trust, faith and mutual understanding.
Before going to Japan several years ago to negotiate a joint venture on behalf of Chevron Chemical, Keller received advice from a Japanese friend who had studied at UC Berkeley and had a feel for the United States.
“George, there is one thing you must remember,” Keller quoted his friend as having said in a telephone call from Tokyo. “Don’t bring a lawyer. It will be regarded as an act of bad faith. Decide with the other side what you want to do, then tell the lawyers--let the lawyers act as scribes.”
Another problem American companies present is their insistence upon terms of dissolution in the basic joint venture agreement. “Your partner wants to know why you are talking about marriage and divorce at the same time,” said P&G;'s Artzt.
Yet Bickell of Hewlett-Packard warned that “a prenuptial agreement should include terms of divorce.”
Not all breakups are bitter. When one partner’s need for the other dissipates--the supplying partner is no longer a key to the distributing partner’s operation, for example--an amicable end to the relationship can result, usually with one partner buying out the other and retaining a relationship on a more distant basis.
At other times, the local partner may want the joint venture to enter markets already served by the American partner either directly or from another foreign subsidiary. Frequently, disagreement arises over the future direction of the joint venture and how profits should be reinvested. Because each partner may be subject to different tax laws, cash flow management can be a problem.
“Joint ventures end, sometimes bitterly, but it should not be held against the institution,” said Chevron’s Keller. “After all, marriages between people end, too. Of course, some marriages are not as well thought through in advance as a joint venture between companies.”