Partnering up the smart way
The growing acrimony between John Deere, an American industrial equipment manufacturer, and China's Xuzhou Bohui Construction Machinery Group illustrates well the promises and pitfalls associated with strategic alliances, especially when they involve partners from different countries.
In early 2008, John Deere formed a joint venture with Xuzhou Bohui by acquiring a 50 per cent stake in the latter's excavator machinery subsidiary. John Deere hoped that the joint venture would accelerate its access to the mainland's large and rapidly growing excavator market. In turn, Xuzhou Bohui hoped to benefit from John Deere's strengths in management and excavator technology.
Three years into the partnership, neither John Deere nor Xuzhou Bohui have much to show for the value created by their joint venture. The two companies have been engaged in constant warfare on issues such as transference of technology, use of brand names, further capital investments into the venture, and seats on the venture's board. As a result, the joint venture failed to exploit the booming market for excavators on the mainland. In a June 2011 interview with China Daily, Chen Gang, general manager of Xuzhou XCG John Deere Machinery Manufacturing, the joint venture, was quoted as saying bluntly that 'we've been suffering from this failed marriage with John Deere. And now we're really tired'.
Despite the potential challenges, why do companies form a strategic alliance in the first place? There are four primary reasons.
The most common one, illustrated by the John Deere-Xuzhou Bohui case, is that they complement each other - the other company has what you need and don't have, and vice versa.
The second most common driver of strategic alliances is government regulation, such as the 50 per cent cap imposed by the Chinese government on the equity stake that a foreign car company can hold in its operations in China.
The third driver is risk pooling. This motivation comes into play in those contexts where both capital commitments and the risks of losing it all are high. It is precisely for this reason that oil companies routinely partner each other in oil exploration ventures. Partnering permits a finite pool of capital to be spread across multiple bets.
The fourth driver is the imperative for industry-wide standards. This is the reason why Google has licensed its Android operating system to mobile phone makers such as South Korea's Samsung and Taiwan's HTC.
As with all marriages, the potential for synergy does not in any way guarantee that the partnership will be productive, blissful, or enduring. To cite a few examples: the tussle between John Deere and Xuzhou Bohui, the acrimonious break-up of the joint venture between French food firm Danone and Chinese beverage maker Wahaha, and the ongoing tensions between internet players Alibaba Group of China and Yahoo of the US. Research tells us that more than 50 per cent of all strategic alliances fail within 24 months - a failure rate as high as that of global mergers and acquisitions. The most common challenges that cause strategic alliances to fail pertain to either strategic and/or cultural conflicts.
What can companies and their leaders do to minimise the risk that a strategic alliance will fail to deliver the anticipated value? We propose the following four guidelines:
First, define the charter of each strategic alliance narrowly rather than broadly. Narrow charters enable focus, reduce organisational complexity, and permit companies to collaborate with different partners for different strategic goals. Japanese carmaker Honda provides a good example. When Honda entered India in the 1990s, it picked different joint venture partners for different businesses: Hero for low-end motorbikes, and Siel for cars and power equipment such as portable generators.
And even though Honda and Siel are joint venture partners for cars and power equipment, they have structured these as two different joint ventures, such that each alliance remains focused.
Second, have a bias for picking alliance partners with a low risk of strategic conflict. The risk of such conflict tends to be high when the partners already are, or are likely to become, competitors.
The ongoing tensions between John Deere and Xuzhou Bohui provide an obvious example.
Strategic conflict makes it difficult for the partners to build trust, a key requirement for them to treat the alliance as a win-win rather than win-lose proposition.
The long-lasting joint venture between SAB Miller, the world's second-largest beer company by volume, and China Resource Enterprises, a China-focused investment company, for the mainland beer market is an excellent example of a high degree of both companies complementing each other with little risk of strategic conflict.
Third, let strategic logic rather than ego drive key decisions in the alliance. Dow Corning, a global leader in silicones and a highly successful joint venture between US firms Dow Chemical and Corning, provides an excellent example.
Corning scientists did the original research regarding the invention of silicones, materials that would combine the advantages of glass and plastics. For its part, Dow Chemical brought downstream capabilities in manufacturing and marketing.
In setting up the joint venture, Corning asked for a 50 per cent share but chose to let the 'Dow' name come ahead of 'Corning' and to let leaders from Dow Chemical run the operations. Corning rightly took the position that value creation depended heavily on Dow Chemical's commercialisation capabilities and that a 50 per cent equity stake would enable Corning to capture the economic value embedded in its technologies.
Fourth, be mindful that an alliance is not just a partnership between companies but also a relationship between people. It takes time for people to get to know each other and to begin trusting each other.
Thus, in the early stages, it is particularly critical for the alliance partners to focus on measures that will build mutual confidence and trust. In most discussions, it is also critical for all sides to focus first on 'integrative' decisions that will help maximise value creation by the partnership; only then should discussions focus also on 'distributive' decisions regarding how each party will capture its share of this value.
An excessive or premature focus on value capture will lead to fighting over the crumbs rather than on maximising the size of the pie.
Last but not least, it is important to remember that, with rare exceptions, strategic alliances almost always come to an end - via either a complete merger or a break-up. Thus, smart partners take pains to establish clear formal agreements upfront about how the endgame would be managed as and when it becomes necessary.
Upfront clarity on how the endgame would be handled often goes a long way towards reducing mutual suspicion and mistrust when the partners actually start working together.
Anil K. Gupta is the Michael D. Dingman Chair in Strategy and Entrepreneurship at the Robert H. Smith School of Business, The University of Maryland and a visiting professor in strategy at INSEAD business school, which has campuses in France, Singapore and Abu Dhabi.
Haiyan Wang is managing partner of the China India Institute.
Is the year-on-year percentage increase of Dow Corning's net profit of US$866m in 2010. Sales in 2010 rose 18 per cent to US$6b