International Joint Venture Mismanagement: A Fatal Mistake of International Business

PRA GLOBAL │WHITE PAPER OCTOBER 2020

Introduction

What factors affect the success or failure of an International Joint Venture (IJV)?

As companies grow and begin to reach maturity in their domestic market, a common growth strategy is to cross national borders.  As they venture into foreign countries, one aspect of this corporate strategy is to cooperate with a local company in establishing an international joint venture (IJV). In fact, IJVs are now the most widespread form of American investment abroad. In contrast to wholly owned subsidiaries, IJVs allow a company to access a new market without having to allocate the significant time and resources needed to manage the business on its own.

As attractive as IJVs may appear, they don’t come without great risk. In fact, research has consistently shown that roughly 50% of all IJVs fail to deliver desired results. Why is this? Some degree of failure is inherent in any business venture, but why do as much as half of all IJVs fail?

Unfortunately, there is no clear recipe for success due to many factors that come into play. However, most IJV failures are rooted in one of five common causes. These five common causes include:

  • Improper selection of a strategic match for your JV partner

  • Lack of coherent and motivating leadership

  • Differences in corporate cultures and values

  • Differences in national cultures and values

  • Mistrust

This white paper will illustrate how these common root causes can affect the outcome of your international partnership, provide lessons learned from the failures of other companies, and outline practical steps to set your IJV up for success.

Common Causes, Examples, and Solutions

Improper selection of a strategic match

Maintaining progress and agreement on strategy is not easy when partners have misaligned goals and focus. Research shows that 69% of joint venture partners are at odds on long-term strategy, and 58% cannot agree on the upcoming annual budget (Water Street Partners, 2016). These disagreements often create conflicting messaging to employees and force management to spend more time overcoming internal confusion than growing the business.

An example of a poor match is the Fiat-Nanjing IJV in 1996. Italian automaker Fiat entered China through a 50-50 joint venture with Nanjing Auto. The JV was a fairly standard deal based on combining foreign capital and technology with local operations and government expertise. Over six years, the JV produced only four models and averaged 30,000 cars annually from 2002 to 2006, which were only a small fraction of the sales of its competitors at the time.

Fiat was looking for Chinese government support and high productivity, while Nanjing was seeking to increase its global presence. Essentially, the objectives of each company were never in line from the beginning. “The two parent companies of the joint venture disagreed on many things, which made the company’s response to China’s fast-changing market much slower than competitors,” Yale Zhang, director of Greater China Vehicle Forecasts for US auto industry Consultancy CSM Worldwide Corp.

To avoid this common mistake, it’s very important to conduct a thorough due diligence process when choosing a strategic partner. During this process, using misalignment scenario planning, defining where the JV will play, and pre-agreeing on a multi-year business plan and budget can help to uncover frictions and test compatibility before an agreement is signed.

Lack of coherent and motivating leadership

When joint ventures are created, there is often a vacuum of centralized leadership arising from an unclear chain of command. As two or more parties lobby for individual parent needs, messaging from each side can derail collaboration and motivation. Time after time we see IJVs with great potential fail due ineffective leadership.

Building an effective JV management team is key to providing the communication and coherence needed for success. Key steps include:

  • Recruiting and retaining top secondees from the parent companies to jointly lead the company
  • Developing a compelling employee value proposition for those working directly for the venture
  • Delegating sufficient authority to JV management to be able to run and grow the business
  • Insulating the JV from shareholder overreach into operational details

Joint ventures that follow these steps will have an easier time getting buy-in from employees and moving the ship the in the right direction.

Culture, Culture, and Trust

When a joint venture is formed, it is an attempt at blending two or more cultures in the hope of leveraging on the strength of each party. Lack of understanding of the cultures of the individual parties poses a problem if not addressed. Analysts agree that gaps in corporate cultures arising from a wide variance in national business cultures is the main culprit of IJV failures.

The DaimlerChrysler-Mitsubishi alliance in 2000 is a prime illustration of how ignoring cultural differences leads to disaster. In this case Daimler, a German company, failed to acknowledge the local practices and principles of Mitsubishi’s Japanese business culture. Japanese culture values personal relationships more than facts, which differs greatly from the German pragmatic, data-driven approach to decision making. Nevertheless, Daimler appointed German managers to the IJV that did not hold trust and attention to others’ feelings in the same regard as their Japanese subordinates.

Not recognizing each other’s distinct goal orientation also hindered their ability to come to agreements on financial decisions. DaimlerChrysler, like many Western businesses, was more short-term goal oriented, while Mitsubishi strove for long-term goals. As a result, the financial difficulties which the Mitsubishi Motors JV experienced were perceived quite differently by the by two companies involved. Mitsubishi viewed their financial difficulties as an obstacle to overcome, whereas DaimlerChrysler refused to make any further investments when they did not realize their desired short-term profits. At this point the little trust that remained deteriorated, and the partnership soon dismantled. In summary, their inability to establish proper communication, build trust, and recognize each other’s goals played a significant role in the end of the partnership.

Cultural differences, rather than being reactive after-thoughts, need to be addressed early and often. Trust and communication are the foundation of any successful partnership. Clearly recognizing and respecting cultural differences will help to establish this foundation and can ultimately lead to a successful IJV.

Conclusion

The key to a successful JV lies in fully understanding the culture and business practices common to the local country. Once you understand these basics, you can then plan what you want from the relationship and how best to create a win-win situation. Like all other aspects of international trade, success lies in the careful planning of the whole process, careful selection of strategic partners, establishing and empowering strong leadership; all while taking into account cultural, economic, and local business factors.