Volume 1 Issue 1

Decoding the Joint Venture Double Helix

Leveraging Human Capital To Build Successful Joint Ventures in Emerging Markets

Introduction

Corporates around the world continue to look at emerging markets for driving both revenue and profitability growth. One of the vehicles of gaining entry or expansion in these markets is through the Joint Venture (JV) route. The JV route of expansion has many advantages over say an acquisition or Greenfield buildout, especially in Asia Pacific emerging markets. Aside from the fact that a JV partnership often times is the only way to enter a market due to regulatory realities, there are many other sound business arguments for the JV route. For example, local JV partners can help overcome any gaps in unfamiliar markets, and can provide a smooth runway for growth in complex markets, such as China or India.

Furthermore, the JV partner can bring significant distribution or after-sales reach. The JV partner’s experience in navigating the bureaucratic landscape is typically invaluable. JV partners also understand the talent landscape and typically operate off a low talent-cost base, which provides leverage (as well as some issues). These reasons make strategic alliances and JVs an increasingly popular vehicle for corporate development in emerging markets. According to a KPMG report entitled “Joint Ventures – a tool for growth during the economic downturn”1, JVs were not rated as the most preferred route to growth due to difficulties encountered in managing and delivering operations and strategies. This perception is now changing as JVs are delivering on their promises.

JVs require a different mindset to M&A, which inherently involves posturing for the highest selling price and the lowest buying price. On the other hand, JVs require genuine collaboration to be successful. In that respect, trust is fundamental.

Other observations of the survey results include:

  • Over 60% of the survey respondents considered access to new markets as the most popular motivation for a JV.
  • 40% of the respondents stated that a JV helps reduce costs.

While sometimes the JV route may be the only reality, and notwithstanding its advantages in emerging markets, it’s fair to forewarn uninitiated business leaders that it can present a minefield of issues on the human capital front. In fact, these human capital issues ultimately can make or break the JV, even if all else falls into place.

Given the strategic criticality and the time, money and effort investment in JV’s, it is a burning platform for business leaders. Aon’s research and experience show that in successful JVs, the business leaders often lead the strategic initiative with their HR leaders, rather than looking to HR leaders to solve the issues for them.

Let’s explore the opportunities, challenges and a framework to build successful JVs in Asian emerging markets like China and India, focusing on both the common and unique issues.

The Contours of the Challenge

To build successful JVs, we need to understand the contours of the issue landscape. It’s very important to begin at the altar of business rationale. The second aspect is the right framework to apply to uncover the issues that are relevant to this particular JV, as well as the generic issues. It’s critical to clearly articulate the strategic and operational goals behind the JV, then understand the linkage to HR systems, and surface the possible HR operational considerations that are paramount to achieving these goals.

There could be a myriad of key strategic goals that a JV may be driving. Some examples are new market or product expansion, localized product development and marketing, a critical link in the global supply chain for operational efficiency and cost plays, a R&D play, a pricing play, etc. But whatever the goals, they can be distilled into some key business considerations and critical decisions that will ultimately dictate success. Some of these critical decisions are as follows:

  • Degree of autonomy from the parent organization;
  • Uniqueness of JV identity;
  • Nature of the employment relationship for employees;
  • Disruption tolerance;
  • Duration of the JV agreement and exit strategy.

It's critical to understand what some of the fundamental strategic issue and factors at play are, and the logic tree that connects them to HR implications, and the possible resulting HR operational issues. The chart below lays out an example of a probably framework.


Let's examine a few of the differences that our research and experience suggest MNC firms grapple with when they consider local JV partners in emerging markets (such as India and China).

  • High apetite for risk by local partner;
  • Lack of adherence to governance structures;
  • Centralized and quick decision making;
  • Incongruous and fluid organizational strucure and roles;
  • Possible maturity of business-linked processes, but not limited maturity of e-enablement of HR systems;
  • Wide variance incompensation and bands within the organization;
  • High connect with leadership team and lack of leadership scorecards and delegation of KPIs;
  • Frequent cross-functional career movements.

These differences offer both an opportunity to leverae some great practices and DNA that the local partner will offer, and also the ability to create natural friction points. It's very important to leverage the strengths of the partner that your organization may lack and to proactively manage the potential frictional points.

Let’s  examine  some  the  areas  where  foreign  partners  can  gain  immensely  from  the  local  partner’s  strengths.

1. Strong  local  brand

This  can  be  leveraged  for  both  consumers  and  prospective  employees.  A  recent  example  of  this  is  the  TATA-Starbucks  JV where  Starbuck’s  China  and  Asia  Pacific  president,  John  Culver,  acknowledged  the  strong  asset  the  TATA  brand  brought to  the  table.  Culver  told  the  reporters  of  livemint.com,  “We  will  look  at  expanding  this  partnership  as  a  long-term relationship....We  are  excited  about  building  an  enduring  company  that  has  a  positive  impact  on  India.”  He  went  on to  describe  this  JV  as  a  “unique  partnership  which  will  launch  some  co-branded  products  under  the  Tata-Tazo  brand.” This  is  quite  an  accolade  in  view  of  the  fact  that  Starbucks  is  already  a  highly  visible  global  brand  in  its  own  right.  Such global  name  recognition  can  be  very  critical  for  market  and  employer  branding,  especially  if  the  foreign  partner’s  brand is  relatively  unknown  in  highly  competitive  talent  markets.

2. Strong  supply  chain  and  procurement  skills

This  can  provide  strong  business  leverage  for  a  foreign  player  who  is  unfamiliar  with  the  local  market.  This  also  extends to  the  talent  supply  chain,  as  this  is  most  often  a  critical  component  of  the  success  plan,  but  not  always  understood  all that  well.  One  caveat  on  the  talent  supply  chain,  however,  is  that  an  optimal  balance  between  local  prevalence  and  the
foreign  partner’s  needs  has  to  be  architected.  Otherwise,  you  run  the  risk  of  creating  an  imbalance  between  the  talent quality  and  cost  needed  for  the  JV.

3. Globally  competitive  project  management  and  growth  principles  under  considerable  constraints.

This  is  a  unique  strength  that  many  of  the  Chinese  and  Indian  private  sector  firms  possess  that  has  made  them successful,  and  will  now  stand  them  in  good  stead  as  they  go  global.  As  an  example,  the  book  “The  Indian  Way”,  written by  Professors  Peter  Cappelli,  Harbir  Singh,  Jitendra  Singh,  and  Michael  Useem  from  the  Wharton  School,  beautifully articulates  the  constructs  underlying  the  concept  of  how  Indian  businesses  manage  to  succeed,  often  within  severe constraints,  suboptimal  bureaucratic  environments,  and  limited  resources.  They  do  this  by  drawing  on  improvisation, adaptation,  and  resilience  to  overcome  endless  hurdles.  This  book  presents  some  great  lessons  that  global  organizations can  learn  to  leverage  as  they  partner  with  firms  in  India  and  China.  Professor  Harbir  Singh,  explains  that  in  the  Indian
business  landscape,  firms  are  treated  as  organic  enterprises  where  people  are  viewed  as  assets.  Developing  a  working culture  and  sustaining  employee  morale  are  both  critical  to  their  success.  The  presence  of  a  strong  inclination  towards improvisation,  as  well  as  an  organizational  receptivity  to  change  with  a  social  connotation,  are  India’s  contributions  to
the  global  business  landscape.

A  pertinent  example  is  of  the  two  Reliance  groups  and  their  inherent  project  management  and  execution  skills  that both  have  demonstrated  across  petrochemicals,  telecom,  and  financial  services.  Reliance  Industries  Limited  (RIL),  under the  chairmanship  of  Mukesh  D  Ambani,  has  successfully  built  a  strong  foundation  for  greater  future  expansion  and growth  in  the  diverse  lines  of  business  that  it  operates.  RIL’s  interests  range  across  petroleum,  petrochemicals,  power, and  infocomm.  On  the  other  hand,  Anil  Ambani,  chairman  of  Reliance’s  ADA  group,  has  been  able  to  grow  apidly  and become  a  leading  player  across  multiple  industries  in  a  very  short  span  of  time.  The  interests  of  the  ADA  group  also range across telecommunications,  power,  and  financial  services.


4.  Driving  operational  efficiencies  and  the  concept  of  “frugal  management”.

Both  Chinese  and  Indian  firms  have  strong  management  practices  wherein  they  do  more  with  less,  as  compared  to  their western  counterparts.  The  concept  of  “frugal  management”  sometimes  provides  inherent  competitive  advantages  that can  be  leveraged  in  a  JV  to  drive  future  growth  and  profitability.  As  an  example,  GVK  Industries  in  India  has  a  great  track
record  for  venturing  into  unfamiliar  industry  segments  like  infrastructure  (airports,  power  etc)  and  now  resources  (the Hancock  deal  in  Australia).  They  have  delivered  consistently  on  all  strategic  success  parameters  of  these  forays,  while  still maintaining  the  concept  of  “optimal  management  frugality”  driving  both  growth  and  profitability.  They  now  rightly believe  this  to  be  a  competence  they  want  to  leverage  and  embed  in  their  new  ventures,  both  in  India  and  globally.

Apart  from  operational  goals  and  strategies, this  concept  is  equally  applicable  to  managing  human  capital  assets  and resources.  It  can  be  used  to  drive  growth  in  the  face  of  uncertainty  and  can  foster  a  bigger  “bang  for  your  buck”,  and with the same  human  capital  costs.

That said, there  are  also  points  of  friction  and  issues  that  a foreign  partner  needs  to  evaluate  and  proactively  manage. Some  of  these  are  as  follows:

  • Lack of data availability/standardization and data veracity; multiple  stakeholders  –  both  from  a  data  provision perspective and a decision-making perspective;

  • Compliance issues: Gray areas are the norm as interpretation  of  the  law  can  have  a  wide  range. Foreign Corrupt  Practices  Act  (FCPA)  and  anticorruption-led  issues are  a  risk  for  US  and  European  companies  due  to  inherent corruption  in  some  of  the  bureaucratic  systems.

  • Mindset issues against and a lack of oversight and governance  along  with  centralized  decision  making.

  • Culture alignment integration: Presence or lack of this can define  success  or  failure.

  • Reward structures and pay level differences and rudimentary  HR  systems  that  don’t  enable  efficiency,  lean HR  and  governance.

Framework  and  Markers  for  JV  Success

The  backdrop  laid  out  above  on  the  landscape,  key opportunities  and  challenges  underscores  critical considerations  when  crafting  successful  JVs.  Now  let’s  discuss some  of  the  markers  for  success  that  foreign  firms  should embed  as  they  look  to  select  JV  partners  and  set  up  JVs  in
Asian  emerging  markets.

  • Do  a  thorough  diligence/as-is  assessment  on  both complementary  strengths  and  friction  points.

It’s  imperative  to  do  a  structured  diligence/assessment  of the  as-is  state  for  both  organizations  (yours  and  the  local partner).  Our  research  and  experience  show  that  clients who  invest  time  to  conduct  a  value  driver  tree  analysis and  follow  up  with  a  thorough  as-is  assessment,  ultimately enjoy  a  much  higher  rate  of  success.  The  value  driver analysis  has  a  three-step  process:

  • start  with  business  goals  for  the  JV,
  • drill  down  to  critical  decisions  needed  to  drive  those goals,
  • and  finally,  determine  the  HR  strategy  implications  in order  to  enable  those  decisions.

The  second  key  differentiator  is  that  these  clients  also  focus on  quantifying  these  goals,  establishing  benchmarks,  and embedding  them  into  their  organizational  and  individual leader  scorecards.  This  aligns  goals  up  front  between  the various  stakeholders.

  • Prioritize  your  action  plan

Successful  clients  prioritize the  initiatives  that  will  create  maximum  impact  and  have complexity  that  will  impact  the  JV’s  end  goals.

  • Evolve  3rd  culture  and  systems

Leading-edge  clients understand  that  they  cannot  force  one  organization’s culture  and  systems  onto  the  other.  Rather,  they  build  a new  organization  with  a  new  and  distinctive  identity  that
combines  the  best  of  both  worlds.  Once  understood,  they embed  the  partner’s  strengths  and  their  own  strengths in  the  way  that  the  new  organization  is  structured,  the operating  model  adopted,  and  the  people  systems. It’s  critical  to  move  employees  quickly  to  a  stand-alone
company  mentality,  while  retaining  a  focus  on  program aspects  that  work  well  in  either organization.

  • Focus  organization  design  and  governance  focus

As a foreign  partner,  you  may  well  have  to  rely  on  your  local partner’s  talent  and  market  knowledge.  However,  it’s  very critical  to  have  a  strong  say  and  active  involvement  in  the JV  organization  structure,  staffing  of  key  executive  roles, and  governance  structures.  Smart  clients  will  institute a  structured  process  for  evolving  the  new  organization structure  and  assessing  leaders  (from  both  organizations and/or  externally)  to  fit  critical  roles.

It  is  important  to  note  that  apart  from  strategy,  the financial  model  for  the  JV  (e.g.,  are  there  other  equity partners,  how  much  debt  are  your  raising,  is  the  partner  a State-owned/public  sector  enterprise),  and  the  structure  of the  JV’s  operating  model  (e.g.,  is  it  an  integrated  market opportunity  involving  multiple  business  divisions/products) have  profound  effects  on  how  you  structure  and  build governance.

Finally,  we  also  find  that  success  is  highly  dependent  on a  strong  focus  on  developing  the  right  management governance  structures  and  processes  that  evolve  from  the organization  structure.

  • Enabling  reward  and  key  HR  systems

Successful  clients tend  to  closely  link  rewards  and  other  key  HR  systems,  such as  goal  setting,  performance  management,  and  career development  to  enable  the  new  structure  and  operating model,  governance  mechanism,  and  strategic  goals.

  • Over-communicate

Another  aspect  that  differentiates successful  JV  partnerships  is  the  degree  of  communication
and  transparency  that  characterizes  all  the  major  themes  of the  new  organization,  i.e.,  its  unique  identity,  opportunities and  challenges,  new  structure/operating  model,  and expectations  of  employees  to  enable  the  JV  to  succeed.
 
It  is  pertinent  to  note  that  as  a  foreign  partner,  if  you  are  at odds  with  your  local  partner  on  how  to  address  many  of  the key  issues  that  a  value  driver  analysis  throws  up,  it  may  well
be  prudent  to  even  consider  walking  away.

JVs  in  emerging  markets  are  not  easy  to  execute  and  we  have seen  many  failures.  But  our  experience  and  research  clearly suggest  that  some  “genetic  markers”  embedded  early  and
appropriately  in  the  JV  design  and  setup,  can  dramatically increase  its  chances  of  success.

References:
1 Joint Ventures fuelling growth during the downturn, KPMG, 2009

Written by:
Sharad Vishvanath
Asia Pacific M&A Market Leader, Aon Mergers & Acquisition Solutions, Aon Hewitt

Get in touch
Faiza Khan
Faiza Khan
Mumbai, India